Goodbye, Project Titan

In this podcast, Motley Fool analyst Asit Sharma and host Dylan Lewis discuss:

• Apple's automotive ambitions waning now that "Project Titan" is seemingly being wrapped up, and what it means for the tech company.
• Beyond Meat's short-squeeze-fueled 40% spike, and why shorts are getting greedy with Beyond and some other companies right now.
• Coupang's continued rise as the major player in e-commerce in South Korea.

Plus, Motley Fool host Deidre Woollard talks with Carrie Sun, author of the new memoir, Private Equity, for a behind-the-scenes look at life at a hedge fund.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Feb. 28, 2024.

Dylan Lewis: Apple's Project Titan isn't as monumental as the name implies. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Asit Sharma. Asit, thanks for joining me today.

Asit Sharma: Dylan, thank you for having me.

Dylan Lewis: We've got a double-stack short squeeze and the inside scoop on the world of hedge funds. But we're going to kick off today talking about a long-awaited car that it appears will never arrive. Asit, after almost a decade of speculation, Apple is apparently abandoning its vehicle efforts. Word out this week that the tech giant will be shifting employees working on its auto ambitions, code-named Project Titan, over to other projects, including those focused on artificial intelligence.

Asit Sharma: This comes as little surprise, maybe to some, just because Apple has been working for so many years on this effort, it hasn't been able to come to fruition. So perhaps this writing was there on the wall. But before we get into maybe some of the implications of the not-so-great part of doing this investments for so many years. I just want to say that Apple has so much in terms of engineering talent on hand, so much on its balance sheet, so much time to innovate that it can do Skunk Works projects like this, that for any other business would be existential and just pull off, and that's maybe not necessarily a bad thing.

Dylan Lewis: This truly was a Skunk Works project. I'm glad you drop that word there because so much of our understanding of what this project was and even what Apple's ambitions were when it came to the cars, really came by way of following permits, following patents, following acquisitions the company had made and sources that reporters had that were willing to spill a little bit about what was going on. The company itself did not give very much on what was happening behind the scenes and what it was trying to do in automotive, which even in trying to process this information makes it a little hard. Because I think we'd wondered for a while, does the automotive ambitions here mean hardware in the conventional sense? Or is there something else at play, even knowing they're going to be diverting some resources away from that, we're still not really sure.

Asit Sharma: I agree. I think most of us thought at the end of the day that Apple was trying to find the next great delivery vehicle, no pun intended, [laughs] or pun intended, for its software services. The car would be a place where you would have access to all of Apple's great software. So in terms of what this was, well, it was R&D, research and development. So much of the time we think of research and development is being innovation or improving products. But it's also tinkering. It's trying to figure out what could be the next thing that gives us access to this wide, wide path of revenue. For Apple, there were some limitations here in that they were trying to develop something in an industry which itself was undergoing so much change. We still don't know today from a consumer perspective, if we want to drive EVs. From an industry perspective, if it should be conventional vehicles, EVs, or hybrid vehicles, are we going autonomous or not? Apple was trying to build a car during a time in which no one really understands what the future is going to be like out on the road and this made it doubly hard. Throw in the idea of maybe having an AI-enriched product that would be superior to anyone else's software where you have Tesla, which has been building a supercomputer and grabbing data from its cars on the roads for many, many years. Trying to compete with this type of technology itself is just another Skunk Works project, I think at the end of the day, Apple called a really good play, which is to exit and say, look, we've got some learning here. We can transfer this to other parts of the business. But this is the best place for us to capitalize on our strengths and because they're so big and so successful, really not going to hurt them. At the end of the day, they'll shuffle some good people around and move on to the next great idea.

Dylan Lewis: I think I follow you on that take there, Asit. I wouldn't be terribly surprised if some of the work, some of the investment, the research and development that went into this project winds up showing up somewhere at some point, just maybe not in the way that we would have expected. I was always a little skeptical that it was going to be cars as hardware and felt like we were going to see something more in the software lane. It's not out of the realm of possibility that some of the work that was done here winds up showing up in cars at some point, just maybe in a way we haven't quite thought of before.

Asit Sharma: I agree, and in the requests to other parts of the company, when you're in a unit like this, which is out there on your own developing a technology. There is a lot of intellectual reach that goes on. So you request of the chip team, could we design a chip that would do X? You requested the AI team, if I had to train this neural network to take a left turn suddenly here, how would we do this? Not having that technology in-house. So all of these requests that the unit would give to other parts of the company can be expanded upon and put to other uses. So I don't think all of this is wasted effort. Did they lose a lot of time? Sure, Dylan. I can remember, you probably don't, like seven or eight years ago when I was a writer for Motley Fool and you were an editor, you asked me to do a small report on the then-Project Titan, I don't even know if it was called that again. This is how old it is, two or three positions ago, almost a decade ago, I remember you asked me about this. So yeah, it's something that only a few companies around can afford to spend more than 10 years on. But I do think that's still before I move on to the next topic, maybe comes back to that ever-present existential question for Apple, what next after the iPhone and it's not going to be cars, clearly.

Dylan Lewis: We're still waiting for Apple's next chapter, it turns out. From cutting-edge tech over to cutting-edge food, shares of Beyond Meat, the plant-based protein maker up huge today and it followed earnings, Asit. But if you look at the earnings results on the surface, not all that impressive. Sales down 8%, company continued to log huge losses. But I think as we tape, shares up 40% and that is due in large part it seems, to the shorts out there that have interest in this company.

Asit Sharma: Certainly, Dylan. When I looked this morning, I was surprised to see how high that short interest is, it's something like 38% of shares outstanding are now sold short and it's going to take several days to cover those shares. I think the days to cover is something like eight days. So that shows that there is a phenomenal amount of short pressure there. And perhaps any small good news would cause a reaction like this. The interesting thing, looking at the trail of this short interest is people being negative on Beyond Meat for a while. I went to a free site that shows data for a couple of years and for the last two years, on any given day, the short interest has been 40%-plus. It looks like some short-sellers have ridden this successfully down all the way from, I think like $26 a share down to the previous day's close, let's let's put it that way. So it's been a decent trade if you're a short-seller for a long time and maybe some people got lulled into thinking this just keeps going on until the stock goes to zero.

Dylan Lewis: Yeah. I look at Beyond and I say this is clearly a company that has struggled. I think their losses were twice their top line or their operating losses were about twice their top line. So this was a business that was having a very hard time finding its footing, finding the correct pricing for consumers out in the marketplace. I think in reality, I probably agree with a lot of the points that would be in a short thesis for this company. That said, you mentioned, it doesn't take much for a company like this to turn things around or to rise a bit when there's such high short interest in the earnings report that we saw from this business, management said we're expecting gross margins in the mid-teens for 2024. Right now, gross margin's negative 20% in 2023. So that was the news that sent this company flying. I look at short interest in general and when you see mounting bets against the business like this, I have to say over the last couple of years, we have seen this go the wrong way in very high-profile ways for so many investors. I continue to be amazed that investors can be so greedy piling into something that's so heavily shorted.

Asit Sharma: I totally agree. The people who are short as of yesterday, I think they're in two camps. One, they know exactly what they're doing. No. 2, they don't know anything about what's they're doing. [laughs] So the first camp is taking a risk. The shares are now down to $6, that this is going to zero. They have an idea that Beyond Meat made a fundamental misreading of the market and the shelf space that they could acquire globally, and that's been their problem. You cite the negative margins and they believe that there's no way this can be turned around. The other camp is following the herd getting in because the narrative's so bad. But just looking at your point here, Dylan, the balance sheet, while it's not great, has shown some improvement in one important area over the last year, inventory has gone down from $236 million to $130 million. When you combine that with what is going on in the statement of cash flows, a cash burn that went from $320 million in operating cash to a burn of $108 million in 2023 year over year. There are some signs there that maybe if gross margin went positive and costs were cut drastically, this company could stick around for a few years. So why do we have short interest still at 38%? It comes back to, I think a key word you just uttered, greedy. There's some greed going on here that's getting punished today.

Dylan Lewis: Yeah, and for what it's worth, there are some other big names out there with pretty high short interest getting above that 30% range. You look out there, Novavax, Trupanion, Upstart, Carvana, C3.ai, Lemonade, Plug Power. I'm not making a judgment on whether those are quality businesses, but I do think if you're seeing it creep up like that, that is a sign that it won't take very much for you to go upside down on your short bet.

Asit Sharma: I agree. So if you're going to be part of that 30% plus, I beg you, people, read the narrative but also look at the numbers. Just make sure that an unexpected piece of good news doesn't cause you to raise to cover and maybe face a window of eight days to get there.

Dylan Lewis: All right, Asit. That story with Beyond was earnings adjacent. We're going to wrap our news rundown with a true focus on company results. Coupang, the leading South Korean e-commerce company, reported this week, shares up 5% after the company posted its best sales growth since 2021. What's driving the company forward?

Asit Sharma: Dylan, the company is really benefiting from the investments that it made in its pre-IPO phase when they were fueled by crazy money by a number of investors, so they were able to invest billions into infrastructure in South Korea, which we've talked about on this show, has a really interesting topography. The geography of South Korea is very interesting, so it's really hard to build a logistics business. They went there, they raised some public money, built out a logistics and fulfillment arm, and now between their delivery service, services like Coupang Eats food delivery, and a service which lets small merchants operate like third-party sellers on their platform, much in the way that the Amazons and Shopifys of the world do here in North America, they were really starting to get some traction. Net revenues were up 23% year over year to $6.5 billion in the last three months, and the company made a profit of a billion bucks on that. So we're starting to see some traction in this model. It's not quite optimized yet, and I do think that growth might be lumpy and hit some challenges, but at least the narrative that Bom Kim, who is a really great entrepreneur, brought to the market is starting to play out. Plus, they're expanding into Taiwan, which gives some of the bears on Coupang, some food for thought. This was always seen as a one-shot play in the e-commerce market of South Korea. Coupang's actually retraced a bit from some other geographies has tried to expand into, but it is starting to see a little bit of success in Taiwan, which itself has a great market, so maybe there's a silver lining there for revenue. I really like these numbers, I think that the company has mastered this hard logistics delivery equation in South Korea. They do it profitably and they are investing in some other areas of the business, those are losing money right now. It's just some small bets on things like fintech, but they represent growth areas. Last I wanted to say just in summary here I like that the total active customer count is still rising. It was up in the mid-teens, again, trying to saturate that South Korean market where they've sort of eclipsed competitors. Now, it's their mission to get as much of that market as they can. You do that by growing customers and making sure they're spending a little bit more, which the average spends per active customer is also up about 6%. So just a well-rounded report, and I think the stock is performing accordingly today and probably should be a decent, interesting company for people to research in the coming years, those who are looking for a retail story.

Dylan Lewis: Asit, you mentioned the international expansion for them and looking to get into other markets. One of the other ways this company has been looking to grow is through its acquisition of Farfetch, which is more on the luxury side of apparel and retail. They spent around $500 million for that acquisition, and I think at the time it was kind of controversial in terms of its strategic fit and its use of capital. I'm curious, do you feel like we're in a position where we can grade that yet or are we still waiting to really see how that shows up?

Asit Sharma: Yeah. I think we are OK to wait. Actually, Bom Kim, the CEO said, look, we just bought Farfetch. We did this because it has $4 billion dollars in gross merchandise volume passing through its platform every year, and that's really what we're after. But he also said it's really too early to talk about it. We think it's going to be a great decision, but we're still looking on how to capitalize this, and I think investors can spot Coupang some time here because their strength is distribution, they've proven that. This was one of the problems with Farfetch. While it really brought a lot of small luxury players together in the market, it could never solve the problem of how to give them the tools for them to sell to a wide audience, and then make money at the same time from the take on the platform, the fees that were charged. Coupang is really good at this, that's a strength of theirs. They just haven't done it in high-fashion mode, like a luxury type of distribution model. So I think letting them tinker around and figure this out is fine, as long as the rest of the business is really firing away as we just walked through and generating a lot of free cash flow, a lot of profits. I'm willing to wait a few quarters to see what they can do with Farfetch.

Dylan Lewis: All right. Asit Sharma, thanks for joining me today.

Asit Sharma: Thanks so much, Dylan. I had a lot of fun.

Dylan Lewis: Coming up. Hedge funds control over $5 trillion dollars in assets. What's it like to work for one? Up next, Deidre Woollard talks to Carrie Sun, author of the new memoir, Private Equity, for a look into the power, pain, and privilege in the world of hedge funds. Just a programming note, some of the answers have been trimmed for length and clarity. Enjoy.

Deidre Woollard: Well, there's such a mystique around the world that these funds, but in the beginning of the book, you point out that while the average stock hedge fund beat the S&P total return by over 5% in the years 1990-2009, it's been a different story since then. BDS talked about that a lot, but there's still so much money, billions of dollars flowing to these funds. So what is some of the allure of that world?

Carrie Sun: I just think the thrill of the possibility of extremely high returns to outperform the market is just so not only is it so American, but I think it gives people so much hope for the future, and I think that possibility itself of just beating the market is just so alluring to many people. As you mentioned, in the last decade and certainly during the 2010s, bull market hedge funds have broadly underperformed routinely. I think that thrill of possibly picking a winning hedge fund and sticking with them through years and compounding those returns is just so exciting for a lot of people. I think also by investing in hedge funds, I think people are investing in a certain type of exclusive access. By that I mean, so if you're investing in hedge funds as an asset class, you are investing in their ability to get themselves in front of company management, CEOs, CFOs, fighting for these corporate meetings that provide more information than say, in financial statements. So you're getting access to the ultimate companies you're investing in. But also many of these funds have investor days, LP conferences, and just to be on the inside to be an LP. Some of these very exclusive high-performing hedge funds that itself is such an elite exclusive clubs such that if you're at an investor day at one of these top exclusive hedge funds, you can meet not only people who hold and invest your money, but you can meet other LPs and just get a lot of connections and access that way. So I think for hedge funds itself, there's the promise of extremely high returns which still happens today. Even though historically, recently, they have been lagging the market. But just also to be a part of this very exciting, secretive club.

Deidre Woollard: It's interesting in the book 'cause you go from the analyst side at Fidelity and then you take a break and you go into private equity, so to adjacent, but it seems very separate world. So what really surprised you about that shift?

Carrie Sun: It was totally different, and when I was working on the analyst side, I wasn't investment side working in quantitative equities at Fidelity Investments. So and then I worked in the private equity, private funds, hedge fund side for my billionaire boss who is the founder of this large firm. I was more in a support role, but I also definitely did a lot of research for him, and I provided both administrative but also operational and research leverage to him. I think what surprised me was less so much going from the investment side to a support role, but rather just the whole industry going from quantitative investing to more fundamentally driven investing. The difference was just so stark. So at my former job, quantitative in nature, I just sat in front of my computer and I was coding all day. I was analyzing datasets, pulling datasets, cleaning them, trying to get them to work in order to build multifactor models from them for stock selection. It was sitting at my desk, analyzing data, doing a lot of coding, reading research papers, trying to find new factors that might work in quantitative and investing. I could go a week without talking to anybody except my boss for maybe 15 minutes, 30 minutes to just catch up on the work I did throughout the week. In the private equity side, I learned it was much more of a human and high-touch storytelling aspect to investing. That is to say that my phone rang every five minutes. I was also answering the phone on behalf of my boss. But also many people just called me to try to strategize how to get to my boss. So my phone was ringing all the time. I was talking to people all the time and yeah, I was having hundreds of little conversations every day and there's this line in my book about my boss saying he got 7,000 emails a day, and this is in the 2010s.

On the quantitative side, my phone pretty much didn't ring. I was dealing with numbers, I was dealing less with people. So I think what that is also showing is that on the quantitative side, the decisions were mostly made. I would say what we were doing was more quantamental, which is a mix of quantitative and fundamental. But the decisions were made mostly by the computer, sometimes with human discretion to override some of those decisions. But ultimately, at the end of the day, there was no sense of urgency to a lot of the investment decisions that were being made. But then on the fundamental side, at the hedge fund, everything was urgent because news happens and then if news happens, you have to update your models for your investments. This was especially urgent during earnings season, for example. You were just always on the clock responding to news. So everything was urgent every minute of every day versus a more, at Fidelity, I really worked 9-5 sometimes six, five days a week. Of course, after that though, overnight, I was letting my models run and I was doing back-tests and simulations. But I really just sat on my desk and did coding for much of the day there. It was a lot more, the pace was just less everything is a fire and urgent and needed to be responded to instantly. So that was the biggest change from moving from one place to another.

Deidre Woollard: The pace that you described in the book is certainly, it's brutal. It's hard because part of what you're talking about is access and information. You've got this great line in the book that I love about asymmetric knowledge being asymmetric power. So for the fund that you talk about in the book, so much of that is knowing things ahead of the news cycle. I'm wondering, even in the past decade since your experience, it seems like maybe there's a little more, everything becomes widely known. I don't know if you think that the value of that information has shifted to some extent.

Carrie Sun: That's a great question because I think that yes, in general, I'm happy about the democratization of knowledge and financial knowledge and data itself. What I mean by that line, asymmetric knowledge is asymmetric power is, I think, certainly, these massive investment funds, they have ways of getting information and I'll say it's sometimes that can have a certain connotation, but I'll say there are interesting ways to get legal information before all other people. It's all about information, advantage, an edge. So like you say, even though I think the line has been moving about what information is easily obtainable versus more difficult to get, I think what many of these massive funds tried to do is it doesn't matter where the line is. They're going to try to just get right up to the line and get before it. So it really just doesn't matter, the line will and has been moving. But they will always try to be one step ahead of it. I think it's not even just purely in terms of information, but even in processes are ways to get information. I'll give you one tiny example and these examples I think accrue in just the ways you're able to get information. But when I started work at this fund that I write about in my book. So many people there, so I was born in China. I speak Mandarin and I got to the firm and so many people there spoke fluent Mandarin. Just from the looks, they were not of Chinese ancestry or descent. That might seem like a small thing. But if you're in these investor meetings and if you're in these if you're trying to do your due diligence on a company and meeting with management, being able to just have that rapport in a native language could be really helpful. They were, I think, really early to that, such that the people there were more fluent than I was and also reading Chinese.

Dylan Lewis: As always, people on the program may own stocks mentioned, and The Motley Fool may have formal recommendations for or against, so don't buy or sell anything based solely on what you hear. I'm Dylan Lewis. Thanks for listening. We'll be back tomorrow.