DoorDash (DASH -0.72%) shares rise on an international acquisition. Coinbase falls as trading activity in the third quarter was lower than expected. Motley Fool analyst Asit Sharma analyzes those stories and more.
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This video was recorded on Nov. 10, 2021.
Chris Hill: It's Wednesday, November 10th. Welcome to Market Foolery. I'm Chris Hill. With me, Mr. Asit Sharma. Thanks for being here.
Asit Sharma: Chris, thank you for having me as always.
Chris Hill: We've got one of the biggest IPOs of the year on deck, and we will get to that, but we're going to start with some earnings. For this first one, earnings is in air quotes. The loss that DoorDash posted in the third quarter was larger than expected, but shares are up 12 percent this morning. After DoorDash announced that it is buying international delivery platform Wolt, for just over eight billion dollars in stock. I guess this is what? This is a growth company. We like our growth companies to grow and so we don't care about the loss. We collectively, the investing community are applauding DoorDash for using some of their stock to go out and get bigger on a platform that's operating in, I believe, 23 countries.
Asit Sharma: Yes, we are counting on DoorDash to prove out the proposition that achieving scale is going to lead to profits eventually. I actually like this acquisition, Chris, because it is in Europe. The cities are denser. They have a much more amenable system to delivering not just food, but all consumables, more so than we do in this big, wide-open spread across land that we call the United States of America. Those dense footprints lend them a little bit better to high efficiency models. In other words, if you've got a driver who's out, he or she is probably going to be occupied most of the day within a city. I think utilization rates in Europe have proven out that that model might be able to work with some scale. We still don't know, but I like this. There's something else I saw earlier this year was that DoorDash took an interest in accompany called Flink, which operates in Germany. This is a very interesting service. You essentially can order one or two items from a list from a local grocery store and those are delivered to your door within 15 minutes, almost without fail for a very nominal fee. Now, you and I wonder how in the world can something like that ever make money, but apparently because of the configurations of cities in Europe, it's possible.
Let's be honest, DoorDash and the other food aggregators need to get to this model where they're delivering more than just food to make the models work, but like you, Chris, I look at this and I think this is not a business I'm quite interested in investing in today because there is an opportunity cost. There are so many great companies that scale and in other industries with a clear path to profitability with better margins. Just really briefly today, decent report revenue was up 45 percent year-over-year to 1.3 billion. They did see a bigger net loss, more than double versus this period last year. They lost $101 million in the quarter versus only losing $43 million in Q3 of 2020 when they had a lot more orders that were associated with COVID pull-through. Anyway, I will stop here and get your thoughts on both DoorDash as a business model and this tie-up with Wolt.
Chris Hill: The kidding aside that I did at the top of the show. This does seem like a smart acquisition. Like you, I look at this, I think, "Okay, expanding in Europe, this makes sense to me." With the move in the stock, DoorDash is closing in on the size of Uber. Just like you, DoorDash is not on my watch list. There are better ideas out there for me personally, but I am more bullish on what DoorDash is doing as a business than I am Uber and Lyft. I feel like the delivery of food and stuff has a brighter future, or I should say, a more lucrative future for investors, as far as I can tell, than the delivery of people.
Asit Sharma: Yeah, I think the management of Uber might agree with you, Chris, not on the viability of investments, but the idea that getting past delivery of people and going to delivery of items is maybe a good business model to invest in. Of course, Uber has put so much money into Uber Eats and that actually is in many quarters a faster-growing business. As we talked about on the show with any kind of delivery service when we were discussing Lyft, you've got to have utilization of drivers and you're always trying to recruit more drivers for that platform. I think the business model on the food delivery and consumables delivery side is a little more stable. We'll see. This is again an industry which has been signaling for a long time that it can make money but still smoke signals or semaphores that you're looking at from a distance. Nothing that vivid that would pull you out of some other good companies or pull cash from your portfolio into these models, at least not mine, I should speak for myself.
Chris Hill: Shares of Coinbase (COIN -3.17%) are falling five percent this morning. Third quarter revenue for the crypto currency exchange was lower than expected, and I'm not surprised by this. Are you, after what we've seen recently from Robinhood and others coming out and to accompany all of them saying, "Yeah, crypto activity was lower this quarter?"
Asit Sharma: Well, Coinbase told us in their prospectus before they went public that their model was dependent on rising volumes of trading. They made a correlation, that's when Bitcoin especially is rising. That tends to stoke interest in the cryptocurrency market. I would argue that probably Ethereum does as well when it's going up, but that's not a one to one correlation day in and day out. The price of Bitcoin has been rising recently. It will be interesting to see if Bitcoin maintains its recent momentum, what the next quarter looks like, but look, interest in crypto-currency in digital assets, it is growing its cyclical in the microscope of these initial quarters. What I think is going to be a really long period of growth for this asset class, it's a tricky class to invest in. You have to be careful. I think that over the long term, maybe it's good for a business like Coinbase in that that market is so huge, but in the short-term, it's going to be volatile. Their results will be volatile as people get into crypto-currencies, forget about them, get back in. The other thing you have to look at this is, the business model is based on activity. It's based on also its pricing power. This is what bothers me about Coinbase in the future.
We've see every other type of monetary platform that acts as a brokerage become basically a commodity business over time. This is something Coinbase management is well aware of. They have other ways to monetize their platform, which include getting people interested in non-fungible tokens, NFTs, also the decentralized finance world. They have a lot of DeFi assets on their platform, so there are some counter strategy to this, but Coinbase is just, it's a complex business to try to judge and figure out if it's a persuasive idea to invest in. I am on the sidelines with this one. Chris, you and I talked about this I think maybe shortly after they went public. I still feel that while Coinbase will be able to see revenue growth and probably tremendous revenue growth over several years, it's a volatile proposition. We should point out though, in a good month, in a good quarter, they can be profitable. We'd do them a disservice not to point out, they pulled in $1.2 billion of revenue and they had net income of 406 million during the quarter. That's not bad business, it's just that it's so volatile.
Chris Hill: You look at the trend line for crypto adoption, even just things like comments from CEOs in other industries, in some cases, the general warming up to the idea of crypto. The trend line works I think in the favor of businesses like Coinbase. With the drop in the stock today it's basically where it was when it IPOed earlier this year. It's not like this thing has taken off, but I'm still not there as an investor.
Asit Sharma: Yes. I think that the optional in the business model means that we shouldn't count it out. Over time there could be a revenue stream that emerges that they are really able to monetize whether that's in one of these less mainstream but growing spaces like NFTs or decentralized finance. We don't and shouldn't count Coinbase out. But again, yes, we grant this is a revenue growth proposition. It's just how the company can continue to bring that to the bottom line in a more predictable fashion. That's the rub that I think investors grapple with. Even though you've got a company, again, which can churn out 400 million dollars out of net income in one business quarter on 1.2 billion in revenue, there are many businesses that if we looked at that sight and seeing the rest of it, we would be very interested. That's a tremendous net income margin. But it doesn't tell us a lot about the future evolution of the platform, about adoption, about what will turn into bottom-line profits, let's say a year or two, or three years from today.
Chris Hill: Last thing before we move on, I want to key on something you just said there because you used a word that I think is so important, not just with Coinbase but with businesses in general. That's predictability. On some level, that is what all investors, institutional and just everyday folks like you and me are looking for. They are looking for some measure of predictability for how a business is going to do. In the case of Coinbase or any business that has been public for a short amount of time, you don't get the benefit of the doubt because you haven't earned it yet.
Asit Sharma: Yeah, and this is such a fascinating topic, Chris. Wish we had more time to plum this. Some companies get a pass because of their uncertainty, the uncertainty of their cash flows means that there's potentially huge reward down the road. The more stable the cash flows, the better the business, the easier to value, the better place to park your money and watch it grow. There are tons of stable businesses and growing businesses that make wonderful investments over time, but we're drawn to companies which throw off uncertain cash flows but show a super amount of potential in the future. So many technology companies, so many biotech companies I can think of. But then there are other companies which show the same uncertainty, the market doesn't give them that pass. As you're saying, the market scrutinizes the model and says, "Man, it just bothers me." [laughs] I still can't wrap my head around projecting your business out more than a quarter or two, and hence I'm not as interested. You can pay that penalty, even though your model may say there is a possibility that we make it big. It's very funny what investors alight on, and where they give a pass and bid up a stock to crazy multiples which has uncertainty cash flows and where they say, "I think I will for now just stay on the sidelines."
Chris Hill: Two quick programming notes. First, it's a short week for us on Market Foolery. We're off on Thursday, but we will be back on Monday. By all means check out, Industry Focus, check out Motley Fool Answers, checkout Rule Breaker Investing with David Gardner. On Motley Fool Money this week our guest is best-selling author Ben Mezrich, so check that out on Friday or sometime over the weekend. I've tried to stall to talk about Rivian Automotive (RIVN -2.78%), the electric vehicle maker, because Rivian is going public today. This is going to be one of the biggest IPOs of the year. They price this stock at 78, which would give Rivian a valuation of about $66 billion. I've got CNBC up live on one of my screens. The price hasn't come public yet. Again, they priced it at 78. Right now, the indication is it's going to open it 120. [laughs] Can I interest you in $100 billion market cap for a vehicle maker that at the moment doesn't really have any vehicles on the road?
Asit Sharma: Well, first of all, we should say how bonkers is that. But it just show you the potential of the electrical vehicle market. I do believe they have a few vehicles that are now in production over the last few weeks though. It's very recent. You may be right, Chris, that those vehicles aren't on the road yet. But here we have a company that was started, as its founder said, with a clean sheet design. This is a company that had a very tricky evolution. They started out wanting to do sports cars and finally figured out that the best place they could impact the market was just to focus on the electric trucks, cheap SUV type vehicles and EDVs, electric delivery vehicles. What has people excited is this big order from Amazon for 100,000 EDVs that will be delivered in the next few years. But I also like that they have a really nice platform for vehicles which they expect to produce at the rate of about 55,000 per year and then ramp that up. Their assembly plant is a vertically integrated production facility out in the Midwest. I think it's very Tesla-like in the ingenuity of the design. I think they'll will be able to meet their production targets. These aren't going to be cheaper vehicles. They will compete in price level with Tesla's, although it's a slightly different market. I think that there is a large part of this market valuation that I'll buy.
That last 30, 40, 50 billion Chris, we're going to have to wait a few quarters and get some better numbers from Rivian. But just the investment from Amazon tells you that some very smart executives have gone and kicked the tires on this vehicle. Maybe not literally, but maybe they kick tires on a prototype. Amazon understands delivery, production, logistics better than probably any company on the planet. I'm trying to think of a handful that can compete. To me it says that they have a pretty decent idea that Rivian is going to produce on schedule those 100,000 vehicles. As investors, we can understand that the on-ramp for their personal vehicles will follow a similar path, unless they run into some unforeseen production problems. The other thing that I want to say about this, Chris, reading through the S-1, the company's designed their business to have some nice alternate revenue streams. They have a fleet revenue management component. They even have some insurance aspects, it's a direct-to-consumer model. There are software packages that customers will be able to buy beyond the basic software that runs the vehicle. I think there are some nice margin enhancements we won't know. As you point out they're pre-revenue for a few quarters, what that actually looks like. But there is something here behind the hype. Now, again, opinion from you. Look, is 100 or $120 billion for a car company that's basically pre-revenue, does that even make sense? Or is it something that you see might have some staying power? Look, Tesla is a trillion-dollar company, so maybe 100 billion bucks is not so big for Rivian.
Chris Hill: This would be more bonkers to me if we hadn't just gone through what we went through with Tesla over the past decade. I'm hearing criticisms in the financial media of Rivian that sound very familiar. Now, I'm not saying this is going to be the next Tesla, but even the joke I made like, "They don't really have any cars on the road." That is a common criticism of Rivian. Well, they're not really projected to produce that many vehicles anytime soon. That's like, "Well, that was a knock on Tesla early on." It's important to point out Amazon has a 20 percent stake in this company, Ford Motor has a five percent stake in this company. Amazon's order of, I believe it's 100,000 vehicles granted that's spread out over an eight-year period. But I think that goes in the bullish column. It would be one thing if Amazon just made the investment and had the stake. The fact that they've also committed to buying 100,000 vehicles over the next decade, I think that's leading to some of the bullishness for Rivian, and it's warranted. They'll have their big event today, they'll they'll pop some champagne. In 2022, we'll see what they can actually produce.
Asit Sharma: I agree. Last point that I want to make, to your point that criticism in the financial press sounds a lot like the criticism of Tesla. What else reminds me of Tesla is the way that this company has designed a lot of stuff in-house. I mentioned their production, they are writing their own software, they've designed their own hardware, their vehicle electronic control units are done in-house, battery packs. Everything here has been designed to be highly configurable, highly adaptable, without relying on external parties. That is very familiar because that's exactly what Tesla did. We saw during the worst of the supply chain crisis how Tesla was able to rewrite the software that controls its chips, and exceed some production targets. This company has been designed very well from the ground up. Like I said, it was a clean sheet design without any assumptions that were tied to the ICE world. We'll need to pay attention to this one very closely in the coming years. Now you have to wait a quarter, 2, 3, 4 to start getting a true picture and for some numbers to fall in, but we'll be patient.
Chris Hill: Asit Sharma, always great talking to you. Thanks for being here.
Asit Sharma: Always a pleasure, Chris, thank you.
Chris 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 Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill, thanks for listening. We'll see on Monday.
