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IPO Fever, Big Auto Blues, and the Future of Self-Driving

In this episode of Motley Fool Money, analysts Emily Flippen, Aaron Bush, and Ron Gross discuss some of last week's biggest business news.

Stay tuned for an interview with senior auto specialist John Rosevear about the GM (NYSE: GM)/UAW strike, self-driving and electric cars, and what investors should be watching in the auto industry.

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This feels different for a few reasons, not the least of which is the fact that Fred Smith, the CEO, in the past basically downplayed Amazon (NASDAQ: AMZN) as a competitor in the shipping space.

Amazon actually pulled out of their agreements with FedEx both for their air transport and ground transport earlier this year.

And then, when they reported this week, it was very much a different tone, saying, 'Oh, the escalating trade war plus Amazon really hampered us.'

And they hampered them to the tune of a 20% decrease in their earnings estimate for this year, which was already a year over year decline.

Flippen: Actually, if you look at what FedEx painted in a positive light during the call, they're saying, 'Hey, we're operating in a growing space.'

They're saying that 90% of total market volume growth is going to come from e-commerce through 2026.

So really, all investors took away from that was, 'Oh, they're in a potentially growing industry, which would indicate maybe they're still a bellwether stock, but they're losing their market share to Amazon.'

Aaron Bush: One of my pet peeves, I'm learning, as an investor is when management says something isn't a problem, and then a quarter or two later, it's a problem.

We saw that last year within Nvidia, when they were like, 'Our inventory concerns aren't a problem with crypto,' and suddenly, it's a massive problem.

It's probably going to force them to raise prices on their core consumers, which now have a lot of third-party options.

I look forward and I think, 'FedEx probably is not going to be as important for the next 10 or 20 years.'

Hill: Shares of Microsoft (NASDAQ: MSFT) hit a new all-time high this week after the board of directors approved a stock buyback plan to the tune of $40 billion, Ron.

Between 2017 and 2019, the fiscal years the company repurchased $35 billion worth of stock.

but put into context, when you have some $130 billion on your balance sheet, when you produce $40 billion in free cash flow and growing it every year, this isn't a drop in the bucket.

Hill: This week, Apple launched Arcade, a new video game subscription service with access to 100 games.

This is a company that made its bones charging premium prices for premium products Bush: A little bit.

It's estimated that they've invested about $500 million into the initial slate of games, which is a pretty significant sum of money.

People were really excited about the Disney+ offering, and they came in with this much lower price, because I think both companies realized that you have to change habits when you come out with these new products.

Gamers for a long time were not used to consuming games on a subscription style basis.

Bush: I think consumers have almost forgotten, especially as we see things like cable become unbundling, bundling is actually a pretty great thing for consumers because it gives you more at lower prices.

I think we're starting to see some of these companies come back and start to rebundle again in new ways, and that ultimately is good for everybody.

Games are such an important piece of the App Store, and the economics of games and being able to scale over their costs is significantly better than what we've seen in some of the other services like Music.

It might take some time to scale up and they'll definitely invest more in other games, but I do think it will be impactful.

What allowed them to eke out a profit was, they had some good pricing and sales mix that impacted margins to the positive.

You have to grow those top line numbers, because you're not going to be able to continually expand margins, widen margins on price and mix for long.

Flippen: When investors think about General Mills, they probably don't think about pet food, but that makes up about 10% of their total revenue.

I also think investors appreciate the fact that they reaffirmed guidance for organic growth of 1% to 2% for the year.

But what they've been able to do differently is continue to add new features, go into new areas, and then bundle things together in a way that makes it extra convenient for teams and developers to use.

Their dollar based net retention rate, which shows how existing customers are spending more money, over the past year, that's clocked in at 146%, which is about the best I've seen since maybe Twilio a couple years ago or so.

While we are still waiting for those documents to get a sense about the pricing and the business, their most recent valuation was in September 2017 at $31 billion.

That's saying something because the company, as of the most recent numbers we have, which I believe was the end of 2018, only was doing about $1 billion in revenue, which is great, but when you look at a 2017 valuation of $31 billion, it does testify to the value of maybe just the name brand that's being perceived in the market right now.

It's not inconceivable that, depending on any number of outside factors, Airbnb goes public, and it is automatically a bigger corporation than Marriott.

In reality, a lot of these businesses are expanding their market by making -- hotels, for instance, staying at someone's house, more accessible.

Not only are they competing with the Marriotts of the world, but they're increasingly competing with the Expedias and Bookings of the world, almost a hybrid, unique form that we're seeing at scale for the first time.

There was so much writing on the wall here that certainly, the $47 billion initial valuation was going to be ridiculous, and perhaps they needed to rethink some things such as corporate governance, which they have done.

SoftBank was willing to buy $750 million worth of stock in the IPO to help soak up some of that excess supply, because it wasn't going very well.

I think they probably need to bring in someone who is more of a professional manager and then kick him upstairs and allow him to be the co-founder.

Brands empire, Pizza Hut is finally showing some momentum in terms of growing sales in the second year of its partnership with the NFL.

The Stuffed Cheez-It Pizza includes four large squares of a crust infused with the sharp cheddar flavor of Cheez-Its, a popular snack made by the Kellogg Corporation.

Hill: I am pretty confident this is going to move the needle for average ticket price in the next couple of quarters for Pizza Hut.

Hill: Earlier later this week, producer Mac Greer caught up with John to talk about investing in self-driving cars, the future of Ford Motor, electric vehicles, and more.

The two sides have been meeting to hammer out a new contract as 46,000 union workers continue their nationwide strike.

In particular, a big factory in Lordstown, Ohio, which made the compact Chevrolet Cruze sedan, which has been discontinued, was set to be shut down.

Another issue, GM has been using temporary workers as a portion of their hourly workforce to try and increase flexibility.

UAW wants to reduce that percentage and give the contractors a path to becoming full-time employees getting the UAW scale, and so on.

We should note that the national average for family healthcare coverage, the average U.S. worker contributes about 29%.

We know that the auto industry is moving toward electrified propulsion, more and more computerized assistance, artificial intelligence assistance, with driving.

But they're restructuring the company to maximize their profits from their old business -- selling cars, trucks, and SUVs, particularly trucks and SUVs, which generate good profits -- to fund this transition.

If, in fact, the world goes the way they think it will, toward more electric vehicles, toward more connected cars, toward more self-driving cars, they are right now in a good spot to be out in front when that happens.

You can invest in Alphabet, but the portion of Alphabet's revenue and profit that's likely to come from self-driving cars over the next decade is relatively small in the grand scheme of Alphabet.

But again, right now and in the next five years or so, the portion of GM's top and bottom lines that are going to come from Cruise is fairly small.

News out this week that Amazon is placing a new order of 100,000 electric delivery vans from Rivian, which is a rival to Tesla.

In fact, Ford's manufacturing chief Joe Hendricks sits on Rivian's board, which is some assurance that those vehicles will actually be able to get manufactured.

But the scale of this transition that we've been talking about, from gasoline powered, human-driven vehicles to electric, at least partially, if not fully, self-driving vehicles, is just massive.

There's a whole supply chain that has to come into existence, right down to -- one of the reasons that we don't have millions of electric cars on the road right now is, two or three years ago, there was not enough lithium coming out of the ground to make the batteries to power all these cars.

needs to understand that there are four or five years' worth of events that have to happen -- some of which have already happened, we are down that road -- on a huge scale, for Ford to bang out an electric F-150 every 53 seconds like it does with the gasoline F-150s.

He has brought to Ford this idea that they need to redesign their business both to thrive in the existing world and to be ready for this upcoming world that we've been talking about.

How will buyers react to the new products Ford is bringing out to fill in some of the spaces that are being opened by its decision to discontinue lower-profit models?

They are doing this really interesting self-restructuring that was not dictated by urgent financial need, but was dictated by what they saw as a need to prepare for the future.

Question from Matt Riley, who asks, 'Do you think the hype around artificial intelligence is similar to the hype that surrounded 3D printing?

He thinks AI is already doing much of what's been promised, especially with machine vision, natural language comprehension, and machine and deep learning.

You won't hear an Intuit talking about 3D printing, for example, but you'll hear lots of companies talk about artificial intelligence.

the problem there was, the hype cycle got to the executives and they just lit money on fire on terrible deals.

They are the largest operator of rural lifestyle stores in the U.S. 2016 acquisition of Petsense gives them another avenue of growth.

Gross: Actually, growing up, we had quite a big backyard, and I had a Deere tractor, and my dad taught me how to mow the lawn, and I loved it.

It'll be really interesting to see what they report, especially given all the noise around China right now in this slowing economy and maybe some of the tariffs that are coming in place, especially on vehicles.

Bush: Let's fly back across the ocean to another part of the world and look at MercadoLibre (NASDAQ: MELI), MELI, which is the dominant e-commerce company in Latin America.

The stock is down a bit, but frankly, I have a hard time seeing how this doesn't become a much bigger company in the long term.

The Motley Fool has the following options: long January 2021 $60 calls on DIS, short October 2019 $125 calls on DIS, short January 2020 $155 calls on Apple, long January 2020 $150 calls on Apple, and long January 2021 $85 calls on Microsoft.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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