Mary Long (3:56)

Traded company that is more implicitly involved here, really only because of its connection to Elon Musk. Is Tesla a common refrain in during the 2022 Twitter X purchase roller coaster, if you recall that was that Tesla shareholders ought to want Musk to focus on Tesla, not another company, not these other distractions. It's 2025 now and Musk has a lot more than just X as an extracurricular activity on his plate. If you're a Tesla shareholder, are you rooting for or against Musk's new business pursuits, including potentially an OpenAI takeover?

Jason Moser (4:33)

So I'm not a Tesla shareholder. It just is not really something I've ever been fully compelled by. I think to Musk, I mean, he's a pretty amazing human being, right? It does seem like he's doing all sorts of things. If I were a Tesla shareholder, I would absolutely be concerned with how thin he's spreading himself now. That said, it also feels like we've been talking about this for many, many years and he still continues to make it work. I think you got some people that have hobbies, Mary. I like to paint, I like to play golf, I've got music. Other people, their hobby is just more work. I think in Musk's case, his hobby is just more work. I don't know that I necessarily would hold that against him. But that single point of failure, that spreading yourself too thin risk, it seems like it's just going to perpetually be there in regard to him ventures.

Mary Long (5:27)

I'll take this as an opportunity. While we're kind of on this Tesla point to highlight Chinese automaker byd, they announced earlier this week that it would be rolling out. This name is kind of freaky to me, so bear with me. But God's Eye technology, and that'll be available for free in all of its vehicles, even its budget models. Basically what God's Eye does in this context is enable autonomous driving on roads and it also allows drivers, though maybe the proper term for them in this case would be riders, to use their smartphones to park remotely. BYD also announced that it's planning to integrate Deep Seek, you remember them, software into their cars as well. If you're a Tesla employee today and you're kind of waking up to all this news that's out about BYD earlier this week, what do you make of that?

Jason Moser (6:11)

I think that in regard to full self driving and the technology that BYD is putting out there, it's, it's amazing technology. I think we all agree that we're headed towards that idea of automation. When you think of Tesla, Musk has been very clear on earnings calls. You need to think automation is the future for that business. In regard to BYD specifically, I have a hard time seeing that really getting beyond their domestic market. It certainly spur more competition and ultimately improve that technology. I don't know that I would be too terribly worried about it in regard to Tesla today, but certainly something to keep an eye on.

Mary Long (6:53)

We'll move on to another story, this one on a company that just reported its earnings yesterday and saw a big spike in its stock as a result. That company is upstart. But before we dive into what, what caused the spike and what those earnings actually were, I'm going to ask you something that I promise is not a trick question. Once upon a time, when Upstart was near its peak of like $390 a share in late 2021, there was an investor interviewed on CNBC the very simple question of what does this company do? And he infamously stammered and could not fully answer the question. So I promise you it's not a trend. But I'm going to turn that exact same question to you. What is it that upstart does?

Jason Moser (7:34)

Well, I just, I went to the source here for this. So I mean, upstart is an AI powered lending marketplace. It connects consumers to, to banks and credit unions that use upstart's AI models into lending software in order to be able to deliver credit products, right? And so I mean if you're thinking of things like personal loans, there's aut, automotive, the retail refinance loans, home equity lines of credit, small dollar loans. And revenue is primarily comprised of fees paid to upstart by Their lending partners and institutional investors.

Mary Long (8:07)

AI lending is a phrase that feels pretty buzzworthy to me. But the results that upstart posted the other day put some numbers behind a buzzworthy topic again. Stocks up almost 30% this morning after strong Q4 earnings. Some highlights from that report. Fourth quarter revenue up 56% to $219 million. They posted a gap loss, but it is making impressive progress towards profitability. They shrunk operating loss by 22%. Cut gap cut their gap loss in half over the course of a year. Also bringing in new capital commitments from some lending partners that total $1.3 billion in the past fiscal year. That kind of demonstrates, okay, there's lender demand for the product. They trust the upstart platform. What are these results? Whether it's what I just mentioned or something else from the report, what does that tell you about upstart's long term story?

Jason Moser (9:01)

I think you used an important word there that is central to what upstart needs to do to continue to succeed and that is trust. You said the word trust and I think that's something that it's customers, right, and consumers that use those products. Trust what upstart is doing. And the more that you build that level of trust, the more people will come back to continue using your services. And I think one of the more impressive metrics I saw from this quarter, the conversion rate was 19.3%, right? That's, you know, customers ultimately getting their loans. I mean it was 19.3% this quarter. That was up from 11.6% from a year ago. So significantly improved conversion. You mentioned the word trust there. I think that that really kind of flows into that, that optimistic guidance that they gave for the full year. And it's, it's clearly got the market.

Mary Long (9:59)

Excited about the stock once upon a time. In late 2021, shares of Upstart peaked at $390. Today, even after this 30% bump, they trade closer to $85. So let's do some expectation setting. You mentioned the importance of trust and that to, to continue to improve and grow, upstart needs to continue to build that trust with its le. Specifically can upstart do to deliver the value that investors once saw in it? Clearly they continue to see value ahead, but it's not quite at that $390 a share point. So what's the path to get back there, if it exists at all?

Jason Moser (10:38)

Yeah, there was some unbridled enthusiasm there in regard to the stock. And I mean that wasn't an upstart specific thing. I mean, I think it was one of those many companies that just a lot of people kind of got a little bit ahead of themselves on that one. But I think that with upstart, I think it can get back there one day. I mean, it's something that probably take a lot of time. But for me, when I look at upstart, the interesting thing is the market opportunity. Look at this personal loan market. They estimated around $155 billion in total addressable market, where Upstart's annualized volume there is around $8 billion. Based on these numbers, I think there are big opportunities in regard to auto loans and home equity lines of credit. They've seen tremendous growth, but still represent a very, very small part of upstart's overall business. You look at auto loans, that's somewhere in the $675 billion range. U.S. homeowners have $35 trillion in home equity. There is a lot of opportunity for them to tap. I think if they keep on doing what they're doing, they continue to build that trust and build out ancillary services and products for their consumers. I think chances are good they'll get back there one day.

Mary Long (11:45)

But there are still a lot of folks who are betting against the stock. Do want to note that more than 20% of the float is short interest at Upstart. How does that aff. Foolish investors ought to think about this stock.

Jason Moser (11:59)

I think that's a really good point there. Short squeezes are always something that can create some value in the near term when they start putting out good results and those shorts need to close their positions. And that just creates a lot of upward pressure on the price. That's temporary in nature, but I think when you look at short interest, it's worth paying attention to that number. As time goes on, if that number starts coming down consistently, it absolutely can imply more optimism regarding the actual outlook for the business and the perspective that investors are taking. Definitely keeping an eye on that number over longer periods of time I think can be a good indicator.

Mary Long (12:39)

We'll move on to a story that I'm sure caught your attention because I know you follow this industry very closely. We got some news in the buy now, pay later market. JP Morgan struck a deal with Klarna. That's the Swedish buy now, pay later provider. Basically, the crux of this deal is that JP Morgan's payment platform will now include Klarna services. Jima, what do you make of this? This a better deal for Klarna, for JP Morgan. Good for both of Them. What are you thinking?

Jason Moser (13:03)

I think it's good for both, but I think this is far, far and away a much bigger deal for Klarna. You consider the fact that JP Morgan Payments processes more than $2 trillion in payment transactions annually. I mean, this is a real opportunity for Klarna. So I think it's always nice to see smaller companies that are kind of trying to get find their way. When they plug into these big networks, then we really see what they're capable of. So I'm going to be fascinated to see how this works.

Mary Long (13:32)

In an interview with Bloomberg, in announcing this deal, the Klarna CEO said, we are a bank. So this is the natural evolution that stuck out to me because I don't typically think of Klarna as a bank, though I suppose technically they are. They've offered savings accounts in Germany since 2021. They just rolled that out to US customers last summer. What makes Klarna different than a traditional bank?

Jason Moser (13:54)

There are some differences there, I think. You look at traditional banks, they focus heavily on things like deposit accounts and loans. Klarna's main focus is providing convenient ways for consumers to pay, mostly through that buy now, pay later option. The business models are a little bit different. You see, banks typically make their money through interest on loans and fees. Klarna typically generates revenue from merchant fees when customers actually use those BNPL options. There are some interest dynamics to the business model as well. In regard to customer relationships, traditional banks try to reel you in for the long haul. We talked before about how difficult it is to switch banking relationships because you get so many things going through those accounts. It becomes a lot more work than it's typically worth. With Klarna, it's much more transactional. It is absolutely more transactional and focused on specific purchases and payment plans. And I think that's interesting too, because it gives them a lot of data regarding consumer behavior in what consumers are purchasing and what they might purchase in the future.

Mary Long (15:03)

Klarna has a competitor, a firm that's publicly traded, available on public markets. This is a buy now, pay later company that increasingly is focusing on expanding its debit card offering. In fact, it announced just the other day a deal of its own with a fintech company, fis That'll be an attempt to bring even more users to the affirm card and the Affirm network. Why is a firm focusing on debit so much?

Jason Moser (15:27)

Ultimately, it's a way for them to expand the relationship, to grow the relationship with their customers and kind of going back to what we were just talking about in regard to being very transactional in nature. The longer term focus for the business is to try to develop that relationship, a longer lasting relationship with the consumer. And meeting the consumer on the consumer's terms, I think is the easiest way to do that. We use debit cards, virtual or physical, all the time. It gives them an opportunity to build up, going back to that word trust. I think it gives them the opportunity to continue collecting more data in regard to consumer behavior and it absolutely can differentiate themselves from other Buy now pay later providers. You see them as more of a reliable, trustworthy source as they continue to expand that financial services portfolio.

Mary Long (16:20)

I know you follow this space pretty closely. Buy Now Pay later in particular is still, still pretty much in the beginning stages. There's not much regulation towards it in the in the U.S. quite yet. Klarna is allegedly gearing up for an IPO in the U.S. again, you follow this space pretty closely. You're, you're interested in fintech and Buy now pay later technology. What needs to be true for you to be buying Klarna shares once they're available?

Jason Moser (16:44)

I think for me it needs to be more than a buy now, pay later story. I think that we're seeing them planting the seeds to become more than just that. I'm optimistic that they will be, but for me, I would need to really have some confidence that this is going to be something more than just a Buy now pay later story.

Mary Long (17:06)

Jason Moser, always a pleasure to have you on. Thanks so much for joining us today on my full money.

Jason Moser (17:11)

Thank you.

Mary Long (17:18)

When you hear the words composite decking, do your ears perk up? No, not even a little. That might change if you knew a bit more about the company that makes composite decking. Up next on and Chocoloo hosts full contributors Jason hall and Rick Munieres for a scoreboard episode breaking down tracks.

Anand Chakabalu (17:39)

Welcome to the latest Motley fool scoreboard. I'm on in chocolate. And we've got longtime fools Jason hall and Rick Minares giving a 1 to 10 rating to the Kleenex of alternative decking. It's tracks ticker symbol T. Rex will hit the business first rating its business including factors like industry and competition. A 10 is invincible. A 1 is hopeless. They're giving high scores. Rick's at a 9, Jason's at an 8. We'll start with Jason.

Jason Hall (18:06)

Yeah, I wanted to go higher and I can make the case for going higher. But the reason I'm dinging it is despite the fact that this is the leader in its industry, most profitable company has the largest market share and also still has a ton of room to continue growing. I'm going with an 8 because there is a lot of seasonality and cyclicality in the business, in its industry, and because of that, it keeps it from being the perfect kind of business with recurring steady revenues at all states. That's the only reason I'm digging it. Everything else is wonderful. Incredible culture, great leadership. They absolutely know who their customer is and they know how to serve them really, really well.

Rick Munarez (18:41)

I went with the nine that Jason left behind. To me, it all started with a park bench made of sawdust and plastic bags. Today, Trex is the undisputed leader of composite decking. It's a win win for a premium price product. Environmentalists obviously enjoy that a product that consists of 95% recyclable materials is good for the planet. And I don't mean to knock on wood, but homeowners looking to extend their outdoor living space, they're paying more upfront for a Trex product, but they know unlike wood that has to be maintained every year, they're having this essentially maintenance free outdoor living space. There are cheaper options than composite decking and even within composite decking, the Trek, but it's a leader and it's seemingly the only brand in this market that's a household name.

Anand Chakabalu (19:21)

It's made for me. Let's talk about management. A 10 is Warren Buffett. A 1 is Homer Simpson. Rick's at a 7, Jason's at the higher 8.

Jason Moser (19:31)

Yeah.

Jason Hall (19:31)

The thing that's so impressive to me about Trax is if you go from the founding of the business and into the mid 2000s, it was a company that became very troubled. They had issues with the product. There were some, some big lawsuits that they dealt with. And Ron Caplan came in and turned the business around, sa the business and really began doing all of the things that Trek should be able to do well and also making it incredibly profitable and a great investment at the same time. There have been three CEOs since Ron Kaplan retired. The performance of the business, like the key things that they do really well have continued. That says a ton about the strong culture they have of finding the right people, training and empowering them, and then doing what I think is probably this, maybe the second hardest thing for a company to do behind good capital allocation. And that's really good succession planning. It is so rare for companies to do it well over and over again. Another thing I like too about management is they've been willing to kind of take some big swings to grow and expand. They haven't been successful like the commercial railing business they were in for a few years and they exited. They made an initiative to sell recycled poly pellets like use their process to sell excess material. Neither of those panned out. But they were not business risking. They were low risk, high potential upside bets. That says a lot about management. They're willing to take those bets but not risk the company when doing it.

Rick Munarez (20:51)

So Brian Fairbanks, he's the latest, he's the president CEO. He's been there since April 2020. The stock's up about 50% since he got there. So okay, performance again. I went with a seven here. So he's been at Trex for 20 years. So to me he's been working in leadership positions across various segments of the company. I like to see that when it's an insider that sort of had a taste of everything. The longtime CEO that he succeeded, James Klein, is still around as the board chairman. The only reason I didn't go higher is because Fairbanks only has a 62% CEO approval rating from employees on Glassdoor. And I'd like to look a little.

Anand Chakabalu (21:21)

Closer into that financials time. A ten is a fortress. A one is. Yikes. Both of you have an eight. Go for it, Rick.

Rick Munarez (21:29)

Yeah, so revenue is going to be volatile. It's a cyclical industry. But Trex is surprisingly steady on the bottom line. This is a company that's been profitable for 13 consecutive years. Net income has moved higher in all but one of those years. And Trex, it also isn't afraid to eat its own sawdust. Its diluted share count is declining for the 11th year in a row. It's reduced the share count by 20% in that time. So it's been little nipp sibling. But I definitely like to see a company that believes in itself in that way.

Jason Hall (21:54)

Yeah, it's really hard for businesses that are as seasonal as outdoor decking sales is with the cyclicality that it's hyper focused on the housing market, which is a very cyclical market to deliver those kind of financial results. And the key is that you look at what they do. They're rigorous about costs, managing those costs, leveraging their pricing power in ways that they can to be the most profitable in their segment. They're really, really good at that. But they're also smart at managing working capital. That's a key to getting through the seasonality of the business, using debt to manage as a big part of their working capital when they're going through inventory build, actually selling in the spring and through the summer. It's a really smart way to manage the balance sheet. And if you look at the balance sheet, it's really lean. One thing that continually grows is their inventory. Over the long term, they keep a minimal amount of cash because they use that revolver for their working capital. And they're pretty smart about keeping that debt pay down as low as they can and not carrying it over from year to year and increasing the expense to manage that debt. Really, really strong financials management does a good job of keeping the balance sheet strong.

Anand Chakabalu (22:59)

All right, Jason, let's move on to valuation. How well will Trek stock do over the next five years and how safe is it? 10 is a sure thing. One's a lottery ticket.

Jason Hall (23:07)

My safety score is a seven here. I think it's relatively safe. Again, the cyclicality and the seasonality keeps me from scoring it higher because five years is a long time. But if we're in a housing downturn in five years, that could really hyper hit this sort of stock a lot. I love the business. I'm expecting 10 to 15% returns, some tailwinds. Rick talked about the things with the environmentally friendly product, the tailwinds for an aging housing stock. People need to spend money to maintain and improve and replace decks. I think those things are really positive for it. They've done an incredible job and they continue to build a deeper and bigger distribution network, especially focused on the professionals in the decking industry. I think you put all that together and that's where I come to that 10 to 15 and that seven for the safety score.

Rick Munarez (23:52)

Yeah, I'm close. I'm at the 10 to 15% that Jason is. I went with an 8 for my safety score. So Trex, they're coming off a rough quarter. It reported a 23% decline in revenue in its third quarter. But that's entirely the handiwork of a $70 million channel inventory reduction. I like Trax. Over the next five years, interest rates are finally starting to move lower and that should breathe new life into the housing market. And that's good for Trex. When the Turk. When there's turnover in the residential real estate market, there are people saying, you know, what would really make this backyard special? And that's where Trex comes in. They have some short term debt and some, some lease obligations, but it really has no long term debt that I'm really concerned about. So I like Trex here and I feel it's safer than people think.

Anand Chakabalu (24:30)

It's top at time. Jason, is there a company in Trex's space You like more?

Jason Hall (24:34)

Yeah, in the niche there's not a company that I like more. Trex is the best. There's no getting around that. But I think investors who like Trex should look at Azek 2. It makes TimberTech. That's the second biggest brand in composite decking by market share and a really great product. But it also makes the Azek brand of composite and PVC building products. Those are lower margin but I like the diversification. And again the aging housing stock, all of those tailwinds are really good. I've used some of the Azek products in my own 30 year old house. I think those are things that are really favorable for Azek and it should get a look too.

Rick Munarez (25:06)

Yeah, in my case again, Trex, I love companies that have differentiated products and command premium premium prices. So I can't think of anyone better in outdoor living or flooring stock than Trex. But if I was about to use those same traits and sort of look at the real estate recovery where people are going to want to, you know, spruce up their homes and get new things because of the recovery. A company with similar traits I like is Sleep Number. This is the maker of the premier premium air chambered mattresses with adjustable firmness settings. A more volatile stock, a more riskier stock, far more highs and lows. But it also has and it lacks the bottom line consistency that Trex has. But it has been far more aggressive in buying back its stock over the past decade. Not the only measuring stick obviously, but to me I think it's. If I was going to say, well, not Trex. Sleep Number is one. I think it's really been depressed for a while and I think it can snap back with the next a recovery in the real estate turnover market.

Anand Chakabalu (25:57)

So hoping one of you would mention pine trees or something like that, but I guess next time. Thank you to both Jason and Rick. They've given Trex an Overall score of 7.8 out of 10. Just short of that 8.0 that would force me to own shares. I wouldn't have been sad. It's. It's always on my radar.

Mary Long (26:23)

Every now and then we share scoreboard episodes on Motley Fool Money. But premium Motley fool members get access to all scoreboard episodes which drop every weekday at 7pm Eastern. To become a Premium Motley fool member and join our flagship investing service, Stock Advisor, head to www.Fool.com signup. I'll drop a link in the show. Notes, as always, people on the program may have interest in the stocks they talk about and the Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and are not approved by advertisers. The Motley fool only picks products that it would personally recommend to friends like you. For Jason Moser, Anand Chakabalu, Jason hall and Rick Munarz, I'm Mary Long. Thanks for listening. We'll see you tomorrow.