Shopify Shines and Uber Declines

0:01Travis Hoium:It's earnings season and we're jumping in with both feet. Motley Fool Hidden Gems Investing starts now.

0:09Travis Hoium:Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium joined today by Lou Whiteman and Rachel Warren. And Rachel, we got a lot of earnings to cover. We're going to get to Shopify, one of the stocks that I'm sure a lot of foolish investors own. That's having a phenomenal day today. We're going to start with Uber. Not such a great day, down about 5 % as we're recording early in the day. The numbers weren't terrible. 22 % increase in the number of bookings. Trips were up 18%. Revenue was only up 12%, but that was actually due to a little bit of an accounting change on the way that they account for the revenue.

0:44Travis Hoium:So the bottom line is maybe a little bit more important. And that was up, operating income at least, was up 40%. What do you think Wall Street is having such a negative reaction for? I honestly think that Wall Street and the market are being unnecessarily hard on Uber. They reached a major milestone, trailing 12-month free cash flow surpassed$10 billion for the first time ever. Gross bookings jumped 24 % year over year,$58 billion total. The CEO noted that they had a wave of growth linked to the FIFA World Cup. There were more than 8 million tourists that utilized the Uber platform across the North American host cities during the tournament.

1:24We saw in July that Uber has agreed to acquire Germany-based Delivery Hero in a nearly$15 billion deal. This is really important to expand their market share in international food and grocery delivery. The thing that I'm really interested in right now is the way in which they're investing in their AV Labs division. You know, Uber is committed to spending more than$10 billion over the coming years on this new division. Their CEO has said as the industry is moving from testing tech into mass market deployment, they really want to position their network as the commercialization engine for every player in the space.

1:58And this is really interesting, right? I mean, we've seen the kind of changing dynamic with Alphabet's Waymo. We had that announcement a little while ago that they're ending their exclusivity agreement in Atlanta and Austin by early 2028. And Uber is really looking to mitigate any reliance on any single provider. In their earnings remarks today, management was talking about their rapid expansion with a UK-based company called Wave, which just secured critical private hire vehicle licenses to launch automated rides on Uber in London. They've got integrations with other companies like WeRide, Azooks, which of course is owned by Amazon, Nuro.

2:35They also have a multi-year deal to put 10 ,000 custom Rivian R2 robotaxis exclusively on the Uber network by 2028. So I think there's a lot of exciting things happening with this company. I don't understand why the market is so hard on it.

2:50Travis Hoium:Yeah, Lou, this is, full disclosure, this is one of my bigger holdings because I think generally the market has this wrong. The disruption story is not necessarily going to come for Uber. And Rachel touched on it. The autonomous vehicle story is really something I think a lot of investors are thinking about. But one of the numbers that stuck out to me is they're expecting to have operations, autonomous operations up in 15 cities by the end of this year with more in 2027. So it seems like the strategy that Uber has laid out over the past year or two is really starting to come to fruition. And we may actually be reaching an inflection point.

3:25Travis Hoium:But does that just not matter right now?

3:28Lou Whiteman:Well, I think we have to see it and not. I mean, it's one thing to say it. It's another thing to actually do it. So go ahead and do it and then say. I think, look, maybe it's just because of maybe it's Tesla's fault. But I think there are a lot of people who want to see these robo taxis out there and not just believe it's coming. I mean, look, with all respect, partnering with Rivian to because Rivian is going to be out by 2028. I'll probably take the over on that. All right. Yeah.

3:55Travis Hoium:Rivian does not actually have an autonomous, fully autonomous vehicle, even in testing yet.

3:59Lou Whiteman:Right. Exactly. But yet. So I think there's a lot of that's sort of where we are. I mean, what went wrong here? What's going on? I mean, I'll take the other side of the argument just to do it. They did miss on revenue. The guidance was underwhelming. Maybe that's accounting. Maybe that's you can blame the analysts more than you can blame the company there, maybe. But it wasn't. And they need to communicate that better or figure it out because I think the guidance was especially, I don't know, disappointing for Wall Street. But yes, this is a 35 percent revenue growth company drifting towards a 20 P.

4:35Lou Whiteman:Something has to give here. And if you are right, and if we are just on the verge of this autonomous breakthrough, then yes, this is undervalued. If we're not, though, what is going on? This divorce with Waymo is getting messier by the day. They're trading pot shots. Apparently, Uber doesn't do a good enough job cleaning the cars now. Is that, I mean, this is like when the relationship is over and couples fight about stupid things, that's the level we're on. I mean, congrats, the people came to the World Cup and used your vehicles. That's not sustainable. That's a novelty piece. There's a lot of noise, a lot of moving parts.

5:16Lou Whiteman:And if they can actually come through and answer the biggest question out there is that, you know, where do you go in a post-Waymo world? If they can answer that with demonstrations, with facts and not projections, I think the market will, I think this would have been a great opportunity. If they don't, it's just going to keep drifting down the way it has.

5:41Travis Hoium:Yeah, this will be an interesting one to watch. It reminds me a little bit of Alphabet a couple of years ago when it was trading for mid-teens price earnings multiple, which is about where Uber is today. if they do prove this as Alphabet proved that they were not going to be an AI loser, you could see not only that revenue growth continue at a 20 % compound annual clip. That's another thing to keep in mind is this is still a company growing revenue at a rate that most companies are envy of. But that could also lead to multiple expansion and what you would call a re-rating of the stock. Maybe the stock is a 30 price earnings multiple.

6:16Travis Hoium:That's where you get the big winners as investors. So definitely one that we'll be covering in the future. When we come back, we're going to get to the latest at Disney. You're listening to Motley Fool, Hidden Gems Invest.

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7:21Travis Hoium:Welcome back to Motley Fool, Hidden Gems Investing. Disney also reported this morning, and Wall Street seems to be a little bit happier with their results. The stock was up at least early in trading. Revenue was up 7 % for the quarter. Segment Operating Income, which combines their three main segments, Entertainment, Sports, and Experiences, was up 21%. But that was really driven, Rachel, by the Experiences business. Revenue up 10 % in Experiences in the quarter. and operating income was up 20%. And I could tell you from experience, because I spent some money at these parks last quarter, a lot of them have major construction projects going on.

7:58Travis Hoium:So is this the kind of business that can keep compounding as they build more cruise ships, as they add more space to their parks? Maybe keep compounding at double digits for the foreseeable future. I think that's very much a possibility. And I think a lot of that goes back to the tech strategy that CEO Josh DeMauro outlined more in this earnings call, which I'll get into in a minute. You know, this was the first full quarter of earnings, right, since he took the helm earlier this spring. And you noted some of those key numbers. You know, Disney delivered$25.25 billion in revenue, beat Wall Street profit forecasts.

8:36Streaming operating income actually more than doubled from a year ago to$712 million. Their studio revenue was really anchored by the theatrical success of Toy Story 5. That crossed the$1 billion mark at the Global Box office. It's interesting. There were a few updates. Disney is moving the vast majority of its consumer products and merchandising division out of the experiences segment. They announced this today. They're merging it directly under the studio's umbrella. And this is really designed to place physical retail licensing directly under entertainment content creators, really maximize their IP monetization efficiency there.

9:10They also are going to be selling their 50 % stake in A &E Global Media to Hearst Corporation for$1.2 billion in cash. And Disney's going to, you know, give those proceeds right back to shareholders. They actually raised their share repurchase target for the year to about$9 billion. But one of the things that really stuck out to me was Josh Tomorrow outlined their strategy. It integrates AI as well as other tech investments, you know, their proprietary tech and data system, they're really ramping up their tech infrastructure to streamline their Imagineering division, global attraction pipeline, they're going to be utilizing advanced simulation and software tools to try to slash some of the park development timelines to enhance some of the digital to physical guest personalization.

9:56They talked about their proprietary AI that they're also utilizing. And these rollouts. So kind of interesting to see how this continues to be a really key focus under the leadership of Josh DeMauro.

10:08Lou Whiteman:I feel like I've seen this movie before. Is this just a sequel? Is this the third or fourth? Is this, I mean, is it a tired Marvel franchise? Because look, so what you're telling me is the parks are great and everything else is meh. And that's basically been the story for the last decade. Yeah. I mean, the beat is great. It's because Toy Story 5 is a hit. Congratulations. All you need to do is have a blockbuster every quarter and everything is fine. I'm cynical.

10:35Travis Hoium:They do have Spider-Man right now. I mean, that is a Marvel property. It's produced by Sony.

10:39Lou Whiteman:Yeah, good. Maybe you can do it. But if the business plan is to run the parks that are awesome and have a blockbuster every three months, I don't know about that. And looking around the portfolio everywhere, sports missed because the NBA playoffs, teams weren't good enough. This didn't go long enough. This is just nothing works here but the parks. And yet we're still supposed to look past this. If the parks is what works, figure out the parks and do the parks and get rid of the rest of it. Yeah, we've talked about this before.

11:14Travis Hoium:Should that be what we're looking for over the next, let's say, year? Where maybe ESPN doesn't fit. By the way, they started reporting the sports business in a different segment under the theory that they would eventually spin it off. Sell it, have an IPO. You're now brought, the NFL is one of the owners of that business. Doesn't that make sense? Maybe get rid of that, at least under the Disney umbrella. Same thing with ABC and the cable business, which is kind of a disaster for everybody.

11:44Lou Whiteman:But that's not enough. Yeah, Comcast tried that, and they learned that's not enough. If you want to be bold here, and we've talked about this before, Netflix is out there searching for content. Work out a deal with Netflix. Let Netflix take over your streaming. Get a perpetual license on the IP, and just run the thing for the parts that work with the assets you have. Figure out a way to do this. Congratulations. Congratulations, the stock is up, so it's still like flat for the last 10 years. They're buying back stock. How is Disney's share count up 10 % over the last, you know, so far this decade?

12:19Lou Whiteman:I know some of that is deal making, but like nothing about this is exciting. It's the same thing every month or every quarter. It's either a beat or a miss and promise of the future based on whether or not the latest movie was a hit or not. And by the way, the parks remain awesome. So figure out how to focus on those parks remaining awesome and monetize the heck out of that and find a better answer for everything that isn't working as well, period.

12:47Travis Hoium:That does seem to be slowly where Disney is going. It's just focusing on the parks. That's why Josh DeMauro, who was running the parks, was promoted to CEO. So we'll see if any of these other deals that Lou is suggesting end up happening. When we come back, we're going to get to a huge quarter from Shopify. You're listening to Motley Fool, Hidden Gems Investing.

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14:38Travis Hoium:Welcome back to Motley Fool and Jim's Investing. Shopify, probably a stock that is in a lot of people's portfolios listening to this show. And they had a phenomenal quarter. Revenue was up 34%. Free cash flow margin increased a couple of percentage points to 18%. Management expects over 30 % growth next quarter. What's like out to you, Rachel? Yeah, I mean, the market seemed to be happy. The stock was up more than 20 % in early trading. I'll also note their operating income jumped 68 % in the quarter. It's interesting as well. I mean, I think this was a surprise for a lot of investors. Now, I'll note, I'm a long-term shareholder of Shopify.

15:15So this is a business I've generally been bullish on. So just a bit of a disclaimer as I get into my discussion here. But I mean, we've seen Shopify shares be, you know, facing investor ire this year. I think a lot of the market has been worried that free AI tools for small businesses from the likes of Meta would steal Shopify's customers. I think there's been a lot of concern about how they're going to succeed in the age of AI. But, you know, we saw their gross merchandise volume jump 32 % in the quarter. And Shopify has really been leveraging a lot of AI tools for their merchants. And it is really leading to significant growth for them, you know, because of course, when their merchants succeed, so does Shopify's platform, you know, their merchant services climbed to just shy of$3 billion for the quarter software subscription revenue reached more than$800 million.

16:04So Shopify, they have a built in AI assistant called Sidekick. And it's not just for writing, you know, basic texts or emails. If you're a merchant, it can actually run your business operations behind the scenes. So merchants are using Sidekick to perform a complex data analysis, like maybe they want to find who their highest spending buyers are and cater toward them. It can write code, create backend automations right inside the dashboard. I mean, this is really where I think a lot of the value is in these AI tools. When you look at a company like Shopify, it's helping their merchants sell better, be more profitable.

16:36And of course, that leads to better growth for Shopify. They are kind of preparing for a world where humans use AI bots or agents to do their shopping for them. We've talked about this on the show earlier in the year. I'm still a bit skeptical that people are actually going to use AI agents to do their shopping. But that's kind of the pitch that management is putting forward here. They've really, you know, we've seen integrations with ChatGPT, Gemini. We'll see how that looks as we get into the coming months and years. But bottom line, this was a fantastic quarter for the business. I think it underscores the strength of their platform, that value proposition that they're providing to small businesses, but also larger companies around the world.

17:17And it's leading to really record profits and revenue for them.

17:21Lou Whiteman:Yeah. I mean, it was a fantastic quarter. Gross March volume, it was impressive. I don't know what to make of that, though. Is that a macro sign or a company-specific sign? Somewhere in between, probably. But look, revenue up 33%. Free cash flow up 50%. So they're doing great. We're still not back to where we were in December, though, even with this huge gain today. I own the stock. I haven't been tempted to buy it because like, I'll be honest, I don't know if I, I don't know if I buy the bear case, but I understand the bear case. The bear case is the law of large numbers is beginning to catch up that there are only so many retailers out there with churn and that this is settling into being a dominant business in its field, but it's not going to be the story it was for the first decade.

18:13Lou Whiteman:we're not there yet and long may we be not they've done some pretty good things just kind of moving upstream but i do sort of respect the bear case enough that i'm personally just holding on to my shares um i don't know today that looks like a bad move so maybe maybe there's a lot more growth to

18:33Travis Hoium:come than than i'm giving credit for this does seem to be one of the areas where the debate over is artificial intelligence a sustaining innovation or a disruptive innovation is playing out and it certainly looks like building these tools into Shopify is going to be a sustaining innovation for them rather than just people vibe coding websites and apps from Claude or whatever it just seems like having that infrastructure is so valuable especially when you're not talking about a huge subscription dollar if you're if you're running a website you know screwing up one thing is just is not worth trying to vibe code it yourself when you could just build on Shopify and have more reliability.