3 IPOs, 2 Very Different Stories

MarketsMotley Fool

In this episode of MarketFoolery, host Chris Hill talks with Motley Fool analyst Jason Moser about the market's biggest stories. While Uber and Lyft rush to go public with lofty price tags and no path to profit, investors need to remember that Wall Street and Main Street are very different beasts. Pinterest, meanwhile, could have something going for it. Listener Nod wrote in about a strong competitor to Afterpay, a promising Australian installments company, and the guys take a closer look at the privately held Klarna. Jason shares what he'll be (less than eagerly) watching for at Apple's (NASDAQ: AAPL) event today, and what Apple's changing business model means for the business in the long run. Tune in to hear more.

A full transcript follows the video.

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This video was recorded on March 25, 2019.

Chris Hill: It's Monday, March 25th. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Jason Moser. It's one half of the old Monday crew!

Jason Moser: I know. I think about that from time to time. Those days back when...

Hill: [laughs] Well, thanks for being here!

Moser: Listen, man, it's always a pleasure to be here with you!

Hill: Particularly in the wake of your school's loss over the weekend.

Moser: [groans] As much as I got out there and just screamed about it all season, all good things do have to come to an end at some point. I will say, as disappointing as the game was, lost to Kentucky, I think what those boys proved time and time again this year is that Wofford is clearly a top 20 team. I think they were probably closer to top 10, to be honest with you. They could play with anybody. They have nothing to be ashamed about. They can hold their heads high. The only word I could come up with was "magical." It was a magical season. I thank everybody involved with that program for giving us a wonderful, wonderful basketball season.

Hill: Speaking of magic, we're going to talk about unicorns. We're going to get to the Apple event, we're going to get to the global war on cash. But we're going to start with unicorns.

Let's start with Uber, which is making headlines today. Uber is buying Careem Networks, which is a ride-sharing business based in Dubai, for just over $3 billion. This is one of those things where it hasn't been finalized, but there are all kinds of reports out there. Uber's getting ready to go public in a few weeks. They're apparently just looking to lock up as much of the global market as they can.

Moser: Beef up before they get out there and really make everything public. I think it makes sense for Uber to knock this out pre-IPO [initial public offering]. What they want to do is avoid some of the skepticism or the questioning, really looking at things under a microscope, that we would probably do more of if this deal were announced post-IPO.

We've got Lyft getting ready to go public, Uber shortly after. Really, this market today is all about getting your network as big as it can possibly be, then ultimately down the road figuring out all of the different ways that you can leverage that network. It's more than just ride-sharing now. It's ride sharing, food delivery, there's going to be something in regard to package delivery; you have to believe that'll become a bit more permanent. Self-driving cars are just down the road here, apparently. So I think, really, it is getting out there, becoming as big and global as you can, and then figuring out all of the different ways you can leverage that big network.

Hill: You mentioned Lyft; Lyft is going public this Friday. [groans, laughs] The numbers are staggering to me. Lyft is looking to go public at a range of $62 to $68 a share. They'll raise a couple of billion dollars. I have no problem believing that they're going to be able to do this. The valuation right out of the gate is going to be somewhere in the neighborhood of $20 billion to $25 billion. I look at that, and I wonder: How many individual investors are going to get in on that in a big way? For all of our talk -- and we talk from time to time about, stock splits don't matter, it's really how many slices of pizza you want, do you want eight or 16, the size of the pizza doesn't change -- I get all that. But I think the gut reaction for a lot of investors -- and I'm including myself in this -- is that initial price, for whatever you think of the business, particularly with an IPO, right out of the gate: That has to be intentional, right? That they're saying, "Look, we only want people who are going to clear that hurdle"?

Moser: I'm sure that they feel like the optics are better with a $60 or $65-a-share price as opposed to a $5 or a $10 share price. Your point is spot-on, though. It really is the size of the pizza that matters. When you look at the size of these two companies, Lyft is going public somewhere in the neighborhood of a $25 billion market cap; Uber [is] talking about something like $130 billion. Maybe a little bit more, maybe a little bit less. Either way, the Uber question is: Has the low-hanging fruit already been picked? How big can a company like that get in the near term? I'm not disputing its potential there, but part of investing is looking at that time line and trying to figure out if that risk-reward scenario makes sense. And these businesses are massively unprofitable. You have to take all that into consideration.

I feel like they're not going to have any problem selling the shares. But I would strongly encourage individual investors, like the ones that we're talking to every day, [to] step back, take it with a grain of salt, look at the filings, get a better idea of the business that supports these valuations. My bet is, there's going to be a time somewhere in the near future where we'll be able to get these shares for a lot cheaper than they go for in these IPOs.

Hill: Think back to last week, when we were talking about Levi Strauss going public. The range for Levi going public was like $14 to $16 a share, that sort of thing. It was up 30% the opening day. Part of the story that we saw was an increased demand on Wall Street for this type of IPO. And they're just selling jeans. So, to dovetail with what you were saying: Look, it's exciting, it's interesting, but one thing we have to remind ourselves of is, what's happening on Wall Street with these financing events -- and that's what these are, these are financing events -- is different than what is happening for us as individual investors. There are fewer public companies today than there were 10 years ago, 15 years ago. So, part of the demand that we're seeing not just for [laughs] Levi Strauss selling jeans, but for Lyft and Uber, Lyft going public north of $60 a share, part of it is just, there's increased demand on Wall Street, and that's hard for us to separate as individual investors. But we kind of have to do that.

Moser: That's our job, right? That's why we exist. That's why we're talking to the audience that chooses to listen to us. I think back to what we were talking about on Motley Fool Money last Friday. Emily really hit on a great point there, in that it seemed like there were some very lofty expectations baked into that Levi's IPO. It strikes me that probably, Wall Street's just really hungry for IPOs. It doesn't matter the company behind it, they just want some new action. They're playing a little bit of a different game. The banks that are underwriting all of these IPOs, they're making money doing that. That's business for them. For us, we have nothing to do with that. The game that we're playing is finding good businesses and investing in them.

So, yeah, you look at something like Levi's, you think, "Man, that just doesn't make sense at all." You have to take that mania, understand why it exists, and see if you can't make that your edge. When it comes to Lyft and Uber, that mania still exists. I would argue [that] they're better market opportunities than jeans. I think that Lyft and Uber stand to do very well --

Hill: By the way, we're not knocking jeans.

Moser: I'm not knocking jeans! I'm wearing Levi's right now, as we speak!

Hill: Jeans are fine!

Moser: They're great! I love them! That's beside the point. Yeah, again, I think Wall Street is looking for IPOs, period. We enjoy IPOs because we get to talk about them, but really, it does all boil down to the fundamental businesses that support those IPOs. Again, I think with Lyft and with Uber, two companies I'm very interested in learning more about, and I could see wanting to own them, but man, oh, man, at these valuations, given the state of their financials today...I don't want to say I'd bet my life on it, but I'm pretty darn close, Chris. I am pretty certain that we will be able to get those shares significantly cheaper at some point the next couple of years.

Hill: Real quick, one more unicorn. Pinterest is going public in a few weeks. They dropped their S-1 on Friday of last week. Help me understand this.

Moser: [laughs] You seem more skeptical of this.

Hill: Well, it's an ad business, right?

Moser: Yeah.

Hill: They took in about $750 million in revenue last year. It looks like the bulk of that is brands promoting their brands, paying Pinterest to promote their brands on the platform. Look, yes, I'm skeptical, but Pinterest appears to be closer to profitability than Uber and Lyft.

Moser: Sure. I think that was probably the pleasant surprise from this S-1, is getting a better understanding of the underlying business. And it's actually not a bad one. Maybe that's because they've been around for a little while and they've waited to this point, where the business was a bit more mature and established, so they're not throwing out those brand-new start-up-type financials.

But I think where Pinterest has really executed over the course of time, they know their audience. I think there's a business there. It's growing. They know their audience, they understand why the audience uses the platform for the most part. When I say that, it is a platform that seems to work a little bit better from the commerce angle. It's an ad business today, but there's also plenty of data out there that supports the notion that consumers are much more likely to use Pinterest to shop for products than any other channel -- Facebook, Snapchat, Twitter, whatever. So, from that perspective, I can see why certain brands would want to be affiliated with Pinterest on an ongoing basis.

It's really interesting, also, to take note here -- 97% of the top 1,000 most popular searches on Pinterest are unbranded. In other words, someone's going in there and saying, "I want to find a pair of blue jeans." They're not saying Levi's blue jeans. That, I think, also opens it up for particular brands out there that want to pay for their product placement a little bit more, because they know their audience.

I never really had used Pinterest before. Now, I say "had." My dad and I like to paint watercolors, and he showed me, he uses Pinterest all the time. This is a 76-year-old doctor [laughs], and he uses Pinterest all the time to look up different artists and all of the paintings that they do, to just see their paintings, to learn new things, try new ways to paint and whatnot. I found, actually, Pinterest to be a very useful tool from that regard. So I've used it more lately than I ever thought I would, which makes me maybe a little bit more interested in the business.

But having gone through the actual business itself, I'm going to keep digging. I think there probably is something there.

Hill: Got an email from Nod Muller in Namibia. You had mentioned Motley Fool Money. He writes: "I really enjoyed listening to Joe Magyer on Motley Fool Money. He mentioned Afterpay and the strides they're making in the United States. I also believe we'll be hearing more about these sorts of disintermediated payments, but the mentions on conference calls will be Klarna and not Afterpay."

I was completely unfamiliar with Klarna. I don't know if you are familiar with them.

Moser: No.

Hill: He included a link. This is a payments business based in Sweden. One of the things they have on their site is a side-by-side comparison of Klarna and Afterpay. Best I can tell, Klarna is not public yet. But if the business is that strong -- they have some investors, I believe Sequoia Capital is one of them. I don't want to put words in anyone's mouth, but it wouldn't surprise me if Klarna was public in a year or two.

Moser: It wouldn't shock me. I had not heard of this business until now. I know of the concept, with Joe talking about Afterpay, and Square is getting into that line of work with their installments product as well. I did a little bit of digging into Klarna. Founded in 2005 in Stockholm, Sweden. Now headquartered out of Columbus, Ohio, of all places, birthplace of Jack Nicklaus. Fore!

Listen, the idea back in 2005 --

Hill: See, that's the difference between you and me. You went straight to golf. I just thought, "Wait, were there people living and working in Stockholm who then got the news? 'Hey, guess what? You have to move to Columbus, Ohio.'"

Moser: Jack's the Golden Bear! Globally known. The business was founded back in 2005 as technology was really just taking off. It's had a chance to evolve as technology's evolved. Total end customers, 60 million. They're in 14 countries. Total number of merchants using the platform, 100,000. Number of transactions per day, 800,000. That's not insignificant.

The basic idea is giving customers a chance to pay in installments. You see something that you like, it's $500. Maybe you don't have all of that on you at once. Companies like Klarna are giving you the opportunity to buy that product and pay for it in installments. Typically, predictable interest-free type deals that are aimed at giving their merchant customers a better opportunity to sell more stuff, and consumers a better opportunity to pay for them in a little bit more of a reasonable way.

I do like that feature. I really do. I tell you who else likes it: Visa. Visa is invested in Klarna, as well. Again, go back to other businesses that are doing this. Square, definitely doing this. They've mentioned their installment business in the most recent call. I thought this was pretty fascinating, in the third quarter, and this is a brand-new product for Square, by the way. They still consider themselves very much in the test-and-learn phase here. They saw 10 million transactions through installments on Square that were greater than $250. So, you think about the dollar volume that that's helping their merchants flow through their networks, giving consumers a little bit of an easier way to buy things.

The nice thing about these types of companies, they are founded on technology, they're using that technology to make wise decisions. It does seem like a win-win for consumers and merchants. I wouldn't be surprised to see Klarna continue to do well.

Hill: Afterpay is a public company. I think the market cap's around $4.5 billion. It'll be interesting to see, particularly with Visa as one of the investors, if Klarna ends up going public, or if, in the same way that PayPal snapped up Xoom, that Visa decides to make a godfather offer to Klarna and just bring them completely in-house.

Moser: Based on these numbers, that wouldn't shock me at all. We've talked about how MasterCard and Visa are trying to figure out every little way they can add a little incremental value to their networks, because they're so big now. They're kind of like Buffett in that they're having a hard time finding the meaningful acquisition. But you can still win by making a lot of good small acquisitions. While Klarna might be a small one, it would plug into a very big network with Visa, so it wouldn't shock me at all to see that happen.

Hill: In about an hour from now, Apple is going to have their event, making this, I don't know, the 20th event in a row that Apple has had that they did not extend an invitation to us. That's fine. We're not bitter.

Moser: Thanks a lot, guys!

Hill: What are you expecting? What are you going to be watching for? I know what I'm going to be watching for.

Moser: I have to say, and this comes from a person who likes Apple -- I have an iPhone, I've been using an iPhone for many years, and I think I'll probably use one until I'm gone. But I am very prepared to be extremely underwhelmed by this event today. And I'm really not saying that to be rude or critical. Primarily, it seems like this event is going be focused around a TV offering. And when I think about that, and I think about ways that they might be able to get in there and change up the TV space at this point or disrupt the TV space, it's very difficult for me to understand what the value proposition they can offer could possibly be. If you're talking about original programming, who cares? I mean, you have so many, so many companies out there doing that now that are good at it. Apple is just getting started with this. Just because they're Apple and they have money doesn't mean it's going to be good. Netflix, just because they have all that data doesn't mean they can automatically make good content. Good content is difficult to make, that's what makes it special.

You can spend all you want -- they're projected to hit $4 billion in content spend by 2022. You know what I call that? I call that a start. When you're going up against Netflix and Amazon, for one, those companies are spending a lot more already today. By 2022, that will have compounded significantly. I just don't see money being the only hurdle when it comes to content. Whether they're bundling or unbundling, I don't know what they think they can offer that isn't already out there today.

Remember, they did have a TV app a while back. It was something where they thought you could just have all of your stuff in one place. I appreciate that. But all you have to do is start a button on your iPhone, and you can put all of your streaming apps into that one button, so you've got all your things in one place. That's already done. I just don't understand what the value proposition is that they're going to offer here.

That said, I think that they need to do something because if they're going to be more and more a service business, they have to come up with ways to give people something beyond just the iPhone. I think that between streaming video and music and the potential revamp to this news service -- which, I think everybody has their own way of getting their news; some people will use Apple News, most people probably won't. Whereas the iPhone has given them a lot of money from one product, they're going to have to figure out a way to get a little bit of money from a lot of different offerings now, between the services side of the business and these other little hardware contributors like AirPods and the Watch and whatnot.

Hill: I've seen some reports around gaming. It'll be interesting --

Moser: I'm glad you brought that up.

Hill: -- to see if they do something in that direction. To your point on the content, that's the thing I'm going to be watching, specifically to see if we get some specific names above and beyond just the amount that they're spending. We've seen varying reports on that. I think it would be noteworthy if Tim Cook brings out, whether it's high-profile showrunners, or it's an announcement about intellectual property. It's, "We've bought the rights to ____," whatever that is. In that sense, it's not nearly the same, but it is at least, I would argue, in the ballpark as years ago, when Hasbro made the deal with Disney, basically outbid Mattel for the Disney properties. It's like, well, only one toy company is going to get that deal, and Hasbro went big for it. In the same way, Apple has the ability to lock up some high-profile IP [intellectual property]. We'll see what happens.

Moser: That would give them the best bang for their buck, if they did lock up some IP that's already somewhat proven. Trying to develop your own and then get a life behind it, that takes a lot of time and money, and it's still no given that you'd be able to pull it off.

I'm glad you brought up the gaming part. To put everything in context here, Google just came out with that big announcement regarding Stadia and its streaming gaming service. I look at something like this -- I'm not saying short one stock and go long the other, but in our parlance, I'm saying I am long Google Stadia and short Apple video streaming. I'm much more excited about the potential with Google's gaming service than I probably will ever be regarding Apple's TV service. Unless they just wow me -- and that's totally possible, I'm not saying they can't -- I just don't think they will.

Hill: Real quick, what's coming on today's episode of Industry Focus?

Moser: Today is going to be pretty awesome because last week, I had the chance to interview Sallie Krawcheck. I know a lot of people out there have heard the name. She's had a tremendous career on Wall Street. She is now helping lead Ellevest and The Ellevate Network to new heights here. It's advocating for women in the workplace, women investing, really just more equality all the way around. That's the whole point of it all. Great interview with her. It'll be about 30 minutes, but I think it's one that everybody will really enjoy.

Hill: Jason Moser, thanks for being here!

Moser: Thank you!

Hill: 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. That's going to do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors.

Chris Hill owns shares of AMZN, PYPL, and DIS. Jason Moser owns shares of GOOG, AMZN, Apple, HAS, MA, PYPL, SQ, TWTR, V, and DIS. The Motley Fool owns shares of and recommends GOOGL, GOOG, AMZN, Apple, FB, HAS, MA, NFLX, PYPL, SQ, TWTR, V, and DIS. The Motley Fool is short shares of HAS and has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple. The Motley Fool has a disclosure policy.