← Motley Fool Hidden Gems Investing
Motley Fool Hidden Gems Investing
Paypal to Stripe: You’re Going to Have to Do Better Than That
00:25:05
Loading summary
Transcript28 lines
- [00:02]
A
The price for PayPal's buy up just went up today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe and today I'm joined by longtime fool contributors Lou Whiteman and Matt Frankel. We are deep into earnings season so far. We had several companies posting today, but of course we can't get to all of them. We're going to cover Boeing's earnings and we're also going to hit the mailbag. But to say start. Lou, you said on our last Thursday show that PayPal was one of the earnings calls you thought was actually worth watching. Well, we have it Now. Shares of PayPal are up about 4%, maybe a little bit more as we're taping this right now. So I'm guessing that you liked what you saw as much as the rest of the market did, right?
- [00:49]
B
I mean, of course there's a lot more than just an earnings call here, but we can get into that. But yeah, the quarter was fine. My takeaway is that this is a healthy, stable company that I have no desire to invest in, to be honest. Revenue is up 5%. Earnings per share down slightly, but beat estimates. Total payment volume was up 10%. But look, some of that is holding serve in an ever growing market. I don't know if even like double digit growth there really impresses me. PayPal is a single digit growth story with great free cash flow. They continue to buy back their shares. The share count is down about 10% year over year. It can continue to do that or it can go private and use that cash to pay down the leverage. It each is fine. But going into this we were interested because looking at the potential buyout here, look, nothing else. There's nothing in this report to suggest they should scramble and take a bargain price just to get out of the game.
- [01:41]
C
Yeah, I mean as Lou said, the numbers, especially the headlines, they were fine. The fact that Venmo is responsible for the lion's share of the growth, it's worth noting 14% of that payment volume growth year over year was from Venmo. Buy now, pay later. Volume was up 26% year over year. So it's nice to see that part of the business start to get real traction. It's still a very profitable company. $1.83 billion of free cash flow in the quarter. As Lou said, they're buying back stock hand over fist. They're spending roughly $6 billion annually on buybacks and still have leftover cash flow to invest in their own growth. I mean, one interesting point from their earnings, the presentation they revealed was that they actually mapped out a three year growth plan for this year all the way through 2028, based on when investors should expect to see some of their growth initiatives and cost reduction plans actually show up in the numbers. So I found that really interesting too.
- [02:40]
A
Matt, I want to back up for a second. We're talking about Buy now, pay later volumes, Venmo being a lot of the total payment volume gains here. Looking at this business, does it really matter, like depend, does it really matter that much? Which of these business grows the most? Is like, if you're looking at PayPal on the whole, is there one part of the business where you're like, if this one succeeds, it's going to do a lot better than, you know, some of its other parts? I don't know either. It's high margin, whatever sort of trait it is. Is there any particular part of PayPal where you're like, if this is doing well, it bodes well for the company as a whole?
- [03:19]
C
Yeah. Well, I mean, think of any business where there's two sides, one of which is still in the earlier stages of monetization or realizing its growth potential. I don't want to compare it to like an AWS and Amazon's E commerce platform, but you know, one side of that business is growing faster than the other and that's like the real story, even though it's the smaller and less mature part of the business. So I would put Venmo kind of in that category in the sense that they're still just figuring out how to properly monetize it. How to, I mean, a lot of Venmo transactions are free. They haven't really figured out how to monetize the platform to the extent They've monetized the PayPal consumer checkout program. So there is a lot of monetization to unlock in the platform. And Buy Now, Pay later is another good example. As you just brought up, that's something that is upfront fee income that they get. They generally sell the loans to third parties. It's a really good way to add extra monetization on top of a kind of a legacy, as Lou said, a very, a single digit growth platform. And the idea is that as Venmo, which has almost as many users as PayPal itself, can get their monetization to that level, if that's growing at a high rate, then the overall, it becomes more of a part of the total and the overall top line growth rate could accelerate.
- [04:33]
A
Lou, part of the reason we wanted to bring up PayPal was specifically the acquisition deal. And the original offer that Stripe and its private equity kind of partner here made was for about $60 a share. And as we're taping 50, $58 a share, that's not much of a premium. Normally if you're going to do a take private deal, you got to, you know, pay, pay investors a little bit more than that. So did you know, based on where we're at right now, did this quarter or anything else, aside from the fact that, you know the price change, was there anything that really changes the math on how Stripe could actually do or could do a deal here?
- [05:13]
B
So to be fair, the non affected price is somewhere in the 40s, so that is a premium to that. But like I said before, I thought it was too low. I still think it's too low. Again, the only thing that could have changed in this quarter is was there something where wow, this business isn't working. So therefore they need to take a bargain deal. That wasn't it. I don't know if this company can ever grow. I mean, good luck monetizing Venmo. The reason we all use Venmo is cause it's free and there's a lot of options if they changed that. But look, here's the deal. I think the price is too low. I'm not sure if there's a higher one coming though because right now Stripe and the private equity firm Advent international are exactly 50, 50. I don't know how important that is that they keep the 50 50, but it was worth for them to do at that time. I'm not sure how much more Stripe can contribute here. So I don't know if they can really boost this deal price and still keep that ratio. The way is it's possible that their interest has kind of put PayPal in play. I think a go private deal makes all the sense in the world here, but only if the price is right. The investor base is increasingly treating this as a yield company. I think that's correct. But that investor base that kind of understands the free cash flow, understands just the potential to pay down the, the buy down the stock price and just run the business. They're not going to to give in to a low price. That's not their nature. So I really think PayPal just stays independent from here. That's my kind of default.
- [06:49]
C
Yeah. And I mean on the conference call, Enrique Laura, as PayPal's new CEO, he didn't specifically comment on the Stripe offer. And I didn't expect him to, but he did say that the board remains open to evaluating any path that could, as he put it, create more value for shareholders than simply executing on their growth plans. So he clearly would expect more than more of a premium than they're getting. And the strong second quarter results kind of give the company more grounds to hold a line at what they consider to be a more attractive offer. Several reports have said that they want about $70 a share to seriously consider any offer. But who knows if that's true? It might not come from Stripe, someone else could swoop in and make an offer. But the fact that he had neutral comments as opposed to saying something like, we're not for sale, it shows that we still could certainly see a deal, just not at the $53 billion that they're currently offering.
- [07:43]
A
Yeah.
- [07:44]
B
Now to be fair, if he said no way, we're not going to consider it, I'll lead the shareholder lawsuit. So I don't know how much you can really read into that, but yeah, I think, look, a lot of their institutional investors want something closer to 80 than 70. Even so I think there's a huge gap here. Again, that's why I come back to. I think it's going to be a yield code from here.
- [08:04]
A
Coming up after the break, we're going to dive into Boeing's earnings. Introducing Fidelity Trader plus, the next generation of advanced trading from Fidelity. Customize your tools and charts and access them seamlessly across desktop, web and mobile for faster trades anywhere you go, try the all new Fidelity Trader Plus. Learn more about our most powerful trading platform yet@fidelity.com TraderPlus investing involves risk, including risk of loss. Fidelity Brokerage Services LLC member NYSE, SIPC. Kind of similar to PayPal. Shares of Boeing are up about 4% today as we're taping after the company's results came in. Slightly better than expected. Setting aside the continued challenges that they've seen of this Air Force One contract and trying to get this program, I think it's been in the planning or at least for at least five years now. That seems to be the big challenge. But otherwise everything looked pretty good, right?
- [09:08]
B
Yeah, I think so. I mean, look up 4% to put it in perspective, just a week ago, Lockheed Martin was up 10% plus post earnings. So I think, you know, a positive but muted reaction feels about right. It's still a loss, but the loss is better than expected. The loss mostly due to charges like, as you say, the new Air Force One. But there are other programs too that just we know about these are existing issues that are just going to take forever to get off the books. The thing to look at here is commercial. Commercial is the most important part of the business. Operating margin of only 2.7%. But that's good to see because we were expecting a slight loss on defense. Look, they're not set up the same way as Lockheed or Northrop Grumman to kind of benefit from this munitions restock to the extent that their rivals are. There are opportunities for growth, but there's just not the near term catalyst. So I think holding serve here is fine.
- [10:01]
C
Yeah, I mean if you forget about that Air Force One Ms. Revenue grew by 8% year over year, handily came in above expectations. Commercial deliveries, as Lou mentioned, is the most important thing here. That was up 14% year over year. We saw 737 production stabilize, which it's been a while since we used stable and 737. In the same sentence on the conference call, their CEO Kelly Ortberg said that the uncertainty in the business is, is going away. So it was a solid quarter. Overlook the Air Force One stuff and it's a really solid quarter.
- [10:37]
A
I feel like the 10, 15 years that we've all been together doing this, it's been a very long journey for Boeing trying to fix the myriad of things that have ailed it over the years. And I think it is fair to say it's starting to show the fruits of those efforts. Not exactly a linear trajectory, but it's getting better. Right? So with that kind of in mind, like it's getting better, it's improving. Some of the worst egregious errors that the company have does seem to be a behind it. Is this company finally looking like something worthy of an investment or is it just kind of another step in the very, very long journey towards earning investor trust?
- [11:17]
B
If they can get their act together, especially on the commercial side, the stock is undervalued, period. It is undervalued. And knock on wood, we now have a few consecutive quarters that operations look fine, strong. I think that it does go up from here, but I wouldn't be in any rush to buy in. They still have 45 billion dollars in debt. In 2019, they had less than 10 billion between Covid and the 737 max crisis. They leveraged every piece of equipment. They probably have loans on some staplers, using staplers as collateral. They just took in all the debt they could to make sure they survived. But you have to pay that down, that 45 to less than 10. That's a good of how long this turnaround is going to take. They're slowly ramping deliveries. As Matt said, they're on track to get to 47 per month on the 737 soon. Pre crisis they expected to be in the mid-60s right now. So that's just some perspective on how far they have to go. But more deliveries does mean more cash flow, which over time will mean less debt. I think they have re earned my trust. I think they're on the right path. The question is what is the opportunity cost of waiting on a turnaround that really honestly they might not be back to 2018 levels until almost the end of this decade?
- [12:36]
C
As Lou just said that Boeing has re earned his trust. But I think on the other hand it's fair to say that Boeing hasn't really re earned the market's trust completely yet. The market hasn't totally bought into this turnaround even after today's increase. Boeing is still down over the past year and I would argue that the numbers look a lot stronger and more stable than they did a year ago. But things definitely appear to be moving in the right direction. I mean Lou mentioned the debt load which is years away from being meaningfully reduced toward previous levels. But on the other hand, we are seeing clear signs of the company turning a corner. Just another thing to mention, the FAA restored Boeing's self certification authority on July 20th. That's a big sign of regulatory trust after years of additional oversight. So I'm not investing just yet. Kind of like how lou said with PayPal, it's a cash flowing business that he doesn't want to touch. Boeing's kind of that for me, I'm not investing yet, but it's starting to look like the instability is clearly calming
- [13:34]
B
down just on where the market is. It's kind of worth noting that on an enterprise value basis we're finally back to where we were at 2018. Again, I think it's mostly the debt. Again, debt is taking what should go to equity holders right now as they pay down that debt. That is the opportunity.
- [13:53]
A
What I find actually most fascinating about following Boeing, not necessarily because I'm like super jazzed to find out when I need to buy into the turnaround. But Boeing and basically Airbus, I mean yeah sure comac but not really these two companies, Boeing and Airbus are the gatekeepers of the commercial aerospace industry. There are dozens, maybe even hundreds of I would consider great businesses whose prospects kind of wax and wane with more or less how much Boeing and Airbus have their act together at Any given time, you know, there's a bunch of original equipment manufacturers and you have all the aftermarket parts and services companies. Depending on where Boeing and Airbus are at in any given moment, you know, you could have incredible companies kind of either going through a lull or absolutely doing very well. So did today's results. Thinking about kind of the downstream effects of what we're seeing here, does it make any connections that made you say I need to check in on blank stock?
- [14:54]
B
From a supplier perspective, the big question is when the music will stop. Boeing's commercial book to bill in the quarter was 1.4x. They booked a buck 40 in future revenue for every $1 they built. That's good. It's not great. But the problem with the suppliers right now is valuations are so high across the board, 40, 50 times future earnings on a lot of these, that is probably too much to pay, especially when just simple capacity constraints limit growth from here. But I see no sign the music is going to stop anytime soon. I don't think it's time to take your gains. I think you can get just market tying, if not slightly market beating gains from here. I just don't know if they're the greatest. It's the greatest time to buy in.
- [15:40]
C
Yeah, I mean there are a few Boeing suppliers on my radar and Lou's right this, some of the suppliers that could benefit most from this are trading for kind of nosebleed level valuations right now, just to name a few. Like ge, Aerospace, Helmet, Aerospace, Transdigm, they're all Boeing suppliers that are on my list and if they experience any significant price weakness, I might take a look. Moog is one that I still kind of like at the current valuation. It's spelled Moog, it's pronounced Moog. But that's one that looks pretty interesting right now.
- [16:09]
A
Just a quick follow up on this though, because as you were saying Lou, the original plan like pre Covid was for 737 deliveries to be somewhere in the 60s instead of 47. And part of the reason that so many of this supply suppliers are capacity constrained is because Boeing isn't quite up to what its expectations were. If we were to see Boeing get to that 60 deliveries a month to 7037s, 787 Dreamliners ramping up as well and they get the 777X sort of up and running, does that change the equation for some of those companies?
- [16:41]
B
Kinda, but for one that's gonna take a long time. We are now debating going from 42 to 47 and what that entails. And that's a slow six month process. So you know, hurry up and wait on that. And kind of as Matt said, it's because some of the names he mentioned helmet's trading at 56 times expected earnings. GE Aerospace 45 times expected earnings. I would argue that that's already priced in.
- [17:05]
A
Coming up after the break, we're going to hit the mailbag.
- [17:10]
D
Whether you're trying to analyze market or business trends, or dig through hundreds of pages of quarterly reports, the sheer volume of data can feel overwhelming. Lately I've been using Claude's Deep Research feature as my ultimate thinking partner. I hooked it up to my Google Workspace tools and it was able to run a reliable, comprehensive analysis across dozens of different financial sources in minutes, helping me spot long term connections that on my own, it may have taken me hours or even days to see. Claude is the AI for minds that don't stop at good enough. It's the collaborator that actually understands your entire workflow and thinks with you. Whether you're debugging code at midnight or strategizing your next business move, Claude extends your thinking to tackle the problems that matter. For problems worth solving, get started with Claude at Claude AI fool. That's Claude AI Fool. And check out Claude Pro, which includes access to all of the features mentioned in today's episode. Claude AI Fool Support for the show comes from Fundrise. For the past 70 years, there's been a room in finance most people couldn't entertain. A room where you could have invested in some of the biggest names in tech companies like Airbnb and Uber before their multi billion dollar IPOs. I'm talking about venture capital. Fundrise recently took a sledgehammer to those closed doors by launching a venture capital product that's available to anyone. Their mission is to give everyone the chance to invest in the best tech and AI companies before they go public. You can visit fundrise.com fool to check out Fundrise's venture portfolio and get in early today. All investments involve risk, including the potential loss of Princip. Past performance is not indicative of future results. This is a paid advertisement.
- [18:51]
A
Today's email comes in from Avinash Asar and has related to electric vehicles. Hi Motley fool team. In your opinion, why hasn't the EV vehicle revolution caught up with consumers? Especially considering the volatile oil prices? EV vehicles providing good alternative reducing gas bills. I'd also like to know some of your opinions on some like specific EV makers especially. I'm guessing lucid ticker is lucid. Do you think this particular company is going to survive as a company kind of regards. So I, I'm going to give a quick premise here because full I actually live overseas and I got to say, EV adoption rates of where I'm living and other places I've been in Europe, much, much higher than we're seeing in the us. So maybe I might even turn the question a little bit to you guys is like adoption rates in the US are considerably slower. So what might be causing that? And then we'll get to the question specifically about lucid.
- [19:48]
B
All right, so global EV, worldwide adoption, okay, it is up in the 20s, but it is still only 20%. It hasn't replaced ICE. And to be honest, it's still early generation technology people can talk about recharging isn't so bad, but it adds friction and change doesn't tend to accelerate past early adopters if there is added friction to making the change. We want things to be like for like before mass market appeal comes. The other element is we're not. This isn't a binary decision. Hybrids, greener, internal combustion engines, all of these things are bringing up gas mileage stats. They are credible alternatives to the status quo. Consumers can save on fuel relative to a decade ago without going electric. So why will the. What, what's the real motivation to commit to all EVs? I think many options in between, like yesterday's engines and today's electric are taking up a lot of the share here. As for lucid, do I think it'll survive? Look, the automotive business is brutal. Even when times are good, these companies tend not to be great investments. Tesla is the exception in the fact that they made it, but they're not the rule. I think most auto startups are destined to not be independent. Over time, the best of them will be acquired, the worst of them will just kind of fade into nothing. Lucid, I fear. I don't know if they'll be able to find a buyer, but I don't think they will be an independent company a decade from now.
- [21:12]
C
So a little pushback. But Lou is right that EVs are still a new technology. Very much so. That's the primary reason I broke my financial planner rule and actually leased a car when we bought our first EV. The tech is evolving so quickly, who knows what EVs are going to look like in three years. There's that range anxiety. We took it on one road trip and that's going to be the last road trip we take in this car. So we didn't want to get Locked into what could be a different product in three years. There are a few practical reasons why EV adoption hasn't been higher in the us. To answer Tyler's question, the federal EV tax credits that went away right around this time last year, at a time when EV rollouts were really starting to accelerate, that was a big hit to the industry until the Iran war. Remember, gas prices were not especially high when you compare them to the last 10 to 15 years. So people really weren't in a hurry to adopt them when the tax credits were friendly. And outside of major metropolitan areas, charging infrastructure really hasn't been built out as much in places like where Tyler lives. So as far as Lucid goes, I think that the company will survive in one form or another, whether they get acquired, whether they're independent but common shareholders could ultimately be wiped out or essentially diluted out in the process. I think Lucid's down something like 99% since it went public. On an adjusted basis, there's no doubt that the product is great, but the company is bleeding cash and it could make more sense as part of another company. It's got great technology. My top EV play is General Motors. I like the boring approach. Unlike a company like Lucid, they're funding their EV expansion from a position of financial strength. The EV business itself, if it were a standalone business, it would be on track to achieve cash flow break even by the end of this year. Now the clear number two market share of EVs in the US, only behind Tesla and GM, has something that other EV makers don't in that growing software revenue stream, their Super Cruise technology. It's becoming kind of commoditized in the self driving world, but it is creating a nice software revenue stream that helps boost margins and companies like Lucid don't have that. So I like the advantages, I like the valuation better and I like the fact that they're probably still going to be an independent General Motors in five years.
- [23:33]
A
I do remember, I think pre2014 was there was a lot of initiative and market change around hybrid vehicles and real pushes towards gas conservation and stuff like that. Because we were in 1 10, $120 barrel of oil for a four or five year period. And then we had this long tailed shale oil. The price of oil dropped from the mid-20s, you know, from like 2014 onwards and it basically completely changed buyer behavior in vehicles. I will be interested to see if we do have a period of sustained high oil prices, high gas prices, basically fuel costs for anybody, if that actually does change. Consumer behavior in the United States to what you were saying, Matt, There hasn't been enough of a pain point at the pump to really incent anyone to make that shift yet. But if you were to see sustained high prices, there might be a little bit more consumer appetite relative to other places around the world. And to that whole point, gas prices outside of the United States and a lot of other places are much higher, especially Europe. And that's part of why they have been adopting at a much faster rate. As always, people on the program may have interest in the stocks they talk about, and the Motley fool may have formal recommendations for against so don't buy or sell stocks based solely on what you here all personal finance content follows Motley fool editorial standards, and it's not approved by advertisers. Advertisements are sponsored content provided informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to producer Dan Boyd and the rest of the Motley Fuel team for Lou, Matt and myself. Thanks for listening and we'll chat again soon.