Uber’s New Acquisition and GE Aerospace’s Search for Parts

0:01Who ordered the Uber acquisition today on Motley Fool Hidden Gems Investing?

0:12Welcome to Motley Fool Hidden Gems Investing. I'm your host for today, Tyler Crowe, and today I'm joined by longtime contributors Jon Quast and Matt Frankel. Earnings season is starting to heat up. Not as many companies are rolling in. We're going to start to see that later in the month in early August, but we do have some early trickles in. Notably today, we had GE Aerospace. We'll also get to our mailbag where we have some listener questions, but we want to start today with the big announcement from Uber Technologies, who announced that they are going to acquire German delivery company, Delivery Hero, in a$14.8 billion deal.

0:46Now, this has been telegraphed a little bit. Uber already had an outstanding stake in the company, and they agreed to acquire from, I believe it's a mispronouncement. I hope I don't pronounce this wrong, but Prosus. They had a stake in the company and they've agreed to sell it to Uber. So Uber is going to have a 53 % stake with this and then do a voluntary, hey, who wants to sell their shares to us? We'll buy them at a set price. That's kind of how the deal is structured. There's also a little bit of sell some of Deliver Heroes assets in certain countries to avoid any jurisdiction, regulatory, antitrust sort of issues.

1:22But I think the big thing to me, And Matt, I want to reel you in on this here. When I think of Uber, we always think of like ride hailing more specifically than delivery. And so this$14.8 billion deal seems to be like a, hey, we really want to be much more in delivery than we do just the ride share part. Yeah. So most investors don't realize it, but Uber's mobility, which is their name for the ride share business and their delivery bookings are almost dead even, almost 50-50 when in terms of booking volume. Now, the average person spends more on a delivery order than on a mobility order. You know, you might get an Uber ride somewhere for$10, but the average meal you have delivered might be$50 or$60.

2:06Both grew about 25 % year over year in the most recent quarter, but ride share is still Uber's biggest revenue source by a significant margin. They take a roughly 50 % larger cut from bookings on ride share versus delivery. So this deal will make the delivery business significantly larger by bookings compared with rideshare. The bigger question here, as you mentioned, is why? So Delivery Hero has an established presence in several markets already. So this allows Uber to expand its physical reach without building market by market, which is expensive and kind of a risk. It roughly doubles the number of markets where Uber will offer both delivery and rideshare in its app, which is a big competitive advantage.

2:49And speaking of competitive advantages, this is really a response to DoorDash, which has been aggressively expanding internationally and is really trying to outcompete Uber. John, not to like completely discount it too, but in addition to rideshare delivery, which is kind of creating this ecosystem, they're also, they do have a rather versioning advertisement business as well that, you know, can layer onto this rather well, right? Yeah, I think that there's absolutely an angle here that we need to consider with advertising. Not to discount anything that Matt just said. I mean, there is a competitive angle here to this acquisition of Delivery Hero.

3:26Certainly DoorDash figures into the equation somewhere. But as you think about what Uber is, people don't realize how big and important the advertising business is. Really, it was the launch of advertising that propelled Uber to become a profitable business a few years ago and really just changed those economics considerably. Now, if you think about what does it take to build a digital ad business, you really want platform adoption and interaction with that platform so that you can display the digital ad to the user, to the eyeballs, if you will. So if it can get people adopting the platform more, the Uber platform, if it can get people interacting with the platform more, that's a greater chance for digital advertising.

4:13And so, yeah, you want to grow both the mobility, the ride sharing, but also the delivery, the meal delivery, because that's another, if you will, just another touch point with that end user. And so I think that as you're considering, hey, how do we build this food delivery or grocery delivery even more than what we have today? I think that there is an aspect that the management team is thinking, how do we get people interacting more with the platform because we want to show them an ad because that's really good for our business. Yeah, it's funny. You know, they say bad news comes in threes, but I just want to say like news in general comes in three because Matt, you, myself and our Tuesday potting buddy, Lou Whiteman, we actually had a member live Q &A earlier this week and Uber came up specifically related to a lawsuit or kind of a legal fight that they're picking with Alphabet's Waymo.

5:08And it's related to autonomous taxis in Washington, D.C. area. We don't have to get into the details, but it's basically like Uber saying, hey, you know, you need some humans every once in a while. And we're not saying, no, you don't. But look, the broader point was, as I think a legal fight exposed that, you know, these ride hailing or ride sharing apps, whatever we want to call them, may not necessarily have that sticky network effect as much as people have initially believed. But does that same problem kind of show itself in the food delivery segment, you know, Ubers, delivery, DoorDash, does that segment of the baby just you know is it as sensitive to this network you know that well i can take pick whatever app i want and it's not quite as sticky as you know maybe food delivery is well it's not an easy answer so one conclusion that we drew in the discussion that you're talking about is that waymo doesn't really need uber's app to dominate a market it certainly helps especially at first but it isn't totally necessary on a long-term basis riders are simply going to gravitate toward the largest and most liquid booking marketplace in their area.

6:14With delivery, there's even less stickiness in a lot of ways. Most people have two or three delivery apps on their phone. Many restaurants are on multiple platforms, so it's not exclusive. Usually at least DoorDash and Uber Eats. And customers can price compare between the two apps. Some run fee specials on one app, but not the other. So it's really not a sticky platform. But on the other hand, the Uber One membership platform that covers rides and delivery, that can be a competitive advantage when it comes to customer loyalty. You know, DoorDash doesn't have the ride share aspect of that. But the acquisition shows that scale and market density are really the true cues to winning in this business, not a sticky customer base.

6:52I just want to add on here a little bit. When we talk about network effects, I think that Uber does have a network effect and it is a big deal. So you think about what does it have? It has a two-sided marketplace. You have the consumer on one end, the person who needs a ride, but then you also have the driver on the other end. These are people voluntarily coming to the Uber platform saying, I'm going to offer my services here because there are potential customers on the other side of that marketplace and vice versa. That is really powerful. And I think that when you are a brand such as Uber, that is ubiquitous in many regards, that makes it a big deal.

7:31But what Waymo does is it's actually disrupting the game in an important way. It's not a two-sided marketplace. It's a one-sided marketplace. And so can you gain that ubiquity with the one-sided business model? Because you don't need the driver. That's my point. You're having the driverless cars. So really, it's just the proliferation of the vehicles themselves in those markets. So it's disrupting the game, Not that Uber doesn't have a powerful network effect. And if we're playing the two-sided marketplace game, that's really important. But if autonomous vehicles are able to change the rules of the game by offering the one-sided marketplace, I think that that's where, yeah, this does get a little bit disruptive.

8:11All right. So we've got burgeoning advertising business that's layered on. It's creating profitability. It's growing market share and overall revenue and deliveries for all that's part of the apps. But, you know, we're talking about the risks here. I want to put you a little bit both on the spot with our last question here. Shares of Uber are more or less flat for a little over two years now. And I think they traded like last, I think when I checked this morning, it's like 18 times earnings. Is this deal for Deliver Hero enough of a move, the needle kind of deal for this company? Or do you see this as like a, yeah, it's just still kind of treading water.

8:45I can't say I'm too interested in the stock right now. For me, the answer is not really. And for two reasons. So for one, this feels like more of a defensive move to me than an offensive growth strategy. And number two, the multiple compression we've seen in Uber lately. Yeah, you mentioned the stock's been flat for like two years, even though the business has grown. It's primarily from worries about the rideshare side of the business, specifically Waymo, as a real threat to that part of the business. So for those reasons, I don't think this is going to be a needle mover, but it's going to, you know, be a preventative move.

9:14Yeah, this is just a hot take from me, but I'm pretty lukewarm on this deal for Uber, mostly because it already has this really large international presence as a brand. I think it has incredible brand recognition globally. So then to acquire these assets from Delivery Hero and Uber CEO saying that he really appreciates some of these assets, I don't see that these assets are superior to its own. I think that Uber has a superior asset. So to spend this much money to acquire what I would consider inferior assets in international markets, that doesn't make a lot of sense to me. So I'm lukewarm on this deal right now, still processing it, but that's how I feel.

9:57All right. Fair enough. coming up after the break we're going to talk about ge aerospace's earnings

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11:21The company's results beat expectations, management raised guidance, but as we're taping this show right now, shares are down about 3.2%. So guys, kind of help me connect the dots here, at least as far as I saw it seemed pretty good. I mean, for one thing, and I know John has some thoughts about this, the market clearly had high expectations going into this. I was trading for about 50 times forward earnings before this report. And even though management raised guidance, they still flagged a few things that kind of represent uncertainty, like elevated jet fuel prices, the macro environment, things like that.

11:56Demand is clearly outpacing supply here, which is good for pricing power, at least in the short term. But it also means that GE can't fully capture its opportunity right now. And I think that's a little bit of what investors are reacting to as well. Yeah, I would definitely double down on the valuation component here. You think about stocks that outperform the market. I mean, usually growth is a very big component of that outperformance. And you look at how big and mature GE Aerospace is at this stage of the game. It's hard for me to imagine it's sustaining above average growth over the long term from here.

12:33And to Matt's point, I mean, trading right now at, I believe it's 43 times its earnings, that's quite elevated relative to the average valuation of the stock market right now. I mean, I think that even if the stock, I think there's a case where the stock could drop further to come down to a reasonable valuation. But even if it doesn't, I think that it's going to have to sustain some really powerful, impressive growth over the next several years just to justify where it's at right now. So I think that even though it did deliver that double beat, I think that investors are saying, maybe this is a little bit too hot to handle right now and we'll just trim our position.

13:11The thing that kind of stood out to me, and this is kind of taking it in a slightly different direction, kind of thinking a little bit more of like supply chains and in what's going on in the manufacturing world of America right now, is that commentary from management about that availability of material for spare parts, it wasn't just like we're running a little short on something. It was specifically like material because, you know, there happens to be another major turbine maker, G.E. Vernova, who also is building way more turbines than they can basically fulfill right now. They've got a five-year backlog on what they need to do.

13:46And I don't want to sound like a broken record, you know, to very, like, I would call it like the super niche, only maybe five people might get this joke. But whenever I say AI infrastructure, I almost feel like Pee Wee Herman, who's like, ah, you said the secret word, because we seem to do it every single day now. But, you know, that AI infrastructure build out and the AI infrastructure's ability to kind of hoover up every spare dollar of capital or spare part out there. The capital expenditures that are going into this are crowding out a lot of other spaces. And as we think about GE Aerospace and like supply chains and disruption and like AI kind of being the whale of the manufacturing industry and gobbling up everything it can, is there a real risk for these non-AI companies like GE Aerospace that could run into supply chain crunches and cost inflation from AI taking up all its spare capacity.

14:39Well, I mean, I want to kind of just try to illustrate a little bit the tension that you're bringing out here, Tyler, and that's, this is a complicated supply chain story with GE Aerospace. If you recall coming out of the pandemic, the pandemic certainly disrupted supply chain immensely. And a huge part of this business is the spare parts business, the repair business, right? That maintenance revenue. And if you look at what it just did in the most recent quarter GE Aerospace, I mean, record internal shop visits. And so it is fixing stuff at some record volume here. And so that's a really big deal.

15:16It is coming out of those supply chain constraints from the pandemic, breaking records in some places. But then at the same time, it said that material availability restraints grew 20 % from the previous quarter. And so on one hand, I would say that GE Aerospace is getting it done operationally. It is definitely doing a lot of work and fixing supply chains where it can. And at the same time, as you highlighted, the AI market just kind of sucking up all this demand out there from so many places. So it is still kind of struggling to keep up with supply chain needs. And so it's a complicated story.

15:56Yeah. I mean, spare parts demand is exceeding available supply. They have a$210 billion dollar backlog. They can't get materials fast enough. The parts that go into turbines and data centers aren't identical, but they do use the same universe of specialty metals manufacturers. And it's totally possible we'll see costs and lead times here get worse before they get better. Yeah, well, it'll be an interesting thing to see, like, again, because it is hard to underestimate that ability of AI infrastructure to just kind of suck up all the available resources considering, you know, you can go like four or five levels down the supply chain right now.

16:33And they're like, oh, we're strained and our backlogs are growing like crazy. It'll be curious to see if anyone that's not AI related can end up getting the parts they need because it could be a challenge down the road. Coming up after the break, we'll jump into the mailbag.

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18:09All of us know somebody with psychopathy. To hear the science behind who actually does the most harm, check out episode 1293. It might change how you see everyone around you. hey everyone just a quick reminder if you want to get a question into us you can email us at podcasts at fool.com that's podcasts with an s at fool.com it's also in the show description if you need a link our three requests when you do it are number one keep it foolish two keep it short enough we can read on air and three we can't give any personalized advice so try to keep it as general as possible today's question comes from Suleiman in Saudi Arabia and the question is hello fools I found your podcast my first week of the job in 2024 and I haven't missed a single episode since Well, hey, thanks for that, Salim.

18:48That's awesome. I learned so much how to analyze companies and ask the right questions. The question that he had was, with many new emerging industries, there are some companies that are leading a small market with huge potential for expansion. And the one that he was specifically talking about here is deep sea mining. However, the industry is still facing legislative obstacles and operational uncertainties. Is this considered a foolish investment or an unnecessary risk? And there's one company that he asked about specifically, and that's the Metals Company, which is ticker TMC. So guys, I'm going to let you take a swing at it, and then I'll see if I can wrap it up at the end here.

19:25Yeah, this is a great question. And I think that emerging trends are pretty difficult when it comes to investing. And that is because they are so grounded in the future. None of us are very good at predicting the future with certainty. We all are limited in time space. So it's challenging. There are three questions that I would ask as I approach an emerging trend. So here's the first question. Will it emerge? Second, when will it emerge? And third, how will it emerge? So will it, when will it, and how will it? And those are really three important things to answer if you're going to start investing in a trend.

20:06So to the first one, will it emerge? I can rewind the clock to 3D printers when this was just coming out onto the market. I don't even remember how long ago anymore, but it was probably over 10 years ago. I really was a believer that these were going to be in every single home in the United States, in the world. It was going to be completely like a TV in your home. You're going to have a 3D printer. Alas, it did not play out that way. 3D printing is bigger today than it was 10 years ago, but it didn't play out the way that a lot of us were thinking about at the time or a lot of people were talking about.

20:39So did it emerge? Not really. Second, when will it emerge? Now, quantum computing is another example we can use here. Yeah, it's a huge, in the public awareness right now, quantum computing is big because there's publicly traded companies and stocks are doing well. But those of us who have followed the quantum computing space for much longer, I think 20 years or so, I mean, this has taken a long time to play out. Directionally, I think it's still right, but the speed at which it is being adopted and coming to fruition is way behind what some people would have projected years ago, and maybe there's still a long time yet.

21:15So when will it emerge? Hard to say. But finally, how will the trend play out? Because you can theoretically be right about a trend, and you can be right about a timeline, but it might take a different route or go down some different train tracks than you anticipated. And therefore the opportunity is in a place that you didn't really expect when you started investing. And I would use e-commerce as an example here. Did e-commerce play out and very quickly? Yes, it did. But think about how many of the physical retailers were able to lean into omni-channel and now e-commerce played out maybe differently than we thought.

21:53So maybe we thought that Walmart would be completely disrupted, but in reality, Walmart's become one of the largest e-commerce players in the world because it leveraged its existing store base as a distribution center network through Omnichannel. So it played out quite differently. And I think that you would have invested a little bit differently depending on if you could foresee how it was playing out. Yeah. So I want to expand on what John just said about how you can be directionally right about a trend, but the investment opportunities might be a different story. So think of the dot-com era, which is right around when I started investing.

22:25Being right about the trend and which companies will be the biggest winners from a trend are two completely different things. The internet changed the world. No doubt. It's been the biggest technological change in our lifetimes, period. But I mean, some of the highest flying stocks of the dot-com boom, pets.com is a good example. And if you just said who, that's kind of my point. um you know it went to zero and investors lost a ton of money but amazon survived and thrived it had a true cost advantage it was building a scale advantage you know business fundamentals that apply no matter what the trend is uh so i'm not well versed in in deep sea mining at least not enough to intelligently comment on the opportunities there um but quantum computing has a lot of parallels should you invest in the pure play quantum stocks with impressive technologies or the established businesses with deep pockets and just happen to have quantum divisions like Cisco and IBM.

23:20The market misjudging timing and market size with emerging industries is a common pattern. John mentioned 3D printing. That's exactly what happened there. So keep that in mind when it comes to position sizing and the real possibility that some of the most hyped stocks in any trend could go to zero. And with this question regarding deep sea mining in the metals company, let's say that you have satisfied yourself with the answers of will it, when will it, and how will it. The other thing to consider here is the economics. Assuming that deep sea mining plays out as a trend in the timeline that you think the metals company is a leader in the space, are the economics of that business at scale ones that are intractive for an investment?

24:03Because oftentimes mining isn't a very compelling investment venture from an economic perspective, the economics are complicated, not always the most attractive. So that would be the further question that I would ask once you've answered the other three. Yeah, John kind of stole my thunder a little bit here because I might be the only deranged person who follows materials and mining of the three of us a little bit. With a lot of these speculative mining companies that are pre-revenue and they put all these things like, man, if we could mine all of this, it's trillions and trillions of dollars worth of revenue.

24:33Number one, they always tend to over inflate how much is actually like available for them to recover number two they always underestimate the costs they always tend to overestimate the profits with you know the cost of metals at the time that they're acquiring it so the on paper and in the investor decks it looks spectacular but then when the you know the rubber hits the road and all the capital that needs to go into these things they tend to not turn out great now i'm not saying that the metals company is exactly going to go this way but i i feel like i've read 40 or 50 investor decks that looked a lot like this.