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Uber, Lyft Drive Straight Into Debt Mountain

Chris Hill, The Motley Fool

In this episode of MarketFoolery, host Chris Hill and analyst Seth Jayson take a look at some of the market's biggest news.

Overstock (NASDAQ: OSTK) falls again after more disappointing earnings, and the long-term picture looks pretty bleak. Lumber Liquidators (NYSE: LL) reported another rough quarter as the company struggles to gain its footing against market headwinds, a brand problem, and a lack of greener pastures.

And, of course, in light of fresh IPO details from Uber and Lyft, the guys analyze the business models, explain why we haven't seen a Ford ride-hailing service yet, speculate how e-scooters may come into the picture, tell investors what to watch in Uber's S-1, and more.

A full transcript follows the video.

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This video was recorded on March 18, 2019.

Chris Hill: It's Monday, March 18. Welcome to MarketFoolery! I'm Chris Hill. Joining me in studio today, Seth Jayson.

Seth Jayson: Hey, hey!

Hill: We both survived St. Patrick's Day. 

Jayson: I didn't even know it was happening. 

Hill: I was going to say, we weren't really at risk.

Jayson: I quit drinking, so I don't know any, since all holidays in the U.S. now seem to involve getting completely plastered. 

Hill: Not all of them!

Jayson: Not all of them.

Hill: But, any port in a storm, I suppose. We're going to dig into some "earnings," earnings in air quotes. We're going to talk Uber and Lyft, which are gearing up to go public next month.

Jayson: [laughs] You need double, triple air quotes for earnings there. 

Hill: Yeah. Let's start with Overstock. Fourth-quarter results were such that the stock is down around 12% this morning. 

Jayson: Down a long way over the last couple of years. 

Hill: When I first saw this, my first thought was, "Oh, I think I had forgotten that Overstock was still around." Overstock, once upon a time, had carved out an interesting at least attempt at a niche, which is, "Look, people are selling stuff online. People are buying stuff online."

Jayson: "Let's do that, too."

Hill: "We're going to do that and we're going to sell stuff at a discount because inventory management is hard, and you end up with stuff being overstocked."

Jayson: And it never really ended up being that business. That was a microsecond. It just turned into a regular online retailer. Third-party fulfillment is the way everyone has gone, so you're competing with, oh, I don't know, eBay, Amazon, AliExpress, Alibaba, everybody. That's a tough business. Not helping Overstock is Mr. Byrne, my good old friend. We have such a colorful history together. 

Hill: [laughs] Patrick Byrne, CEO.

Jayson: He has attempted to destroy me for a long time. I can't wait for the email. 

Hill: Let's not break that record today. 

Jayson: He can't seem to decide what he wants the company to be. Now, he always tried to get points for direct communication. The "my fellow shareholders" from this release has earned some of that. Let's see... "Our retail arm lost money last year because I gunned things in an attempt to create a conventional high-growth, money-losing e-commerce business, but the losses were nauseating, and we reverted back to the philosophy of profitability." They're also trying to shop the online business. Maybe trying to gun the accelerator and sell more stuff and lose money on it was hopefully a way to attract a nice price for that. But it didn't work out very well. They spent a lot, if you go through the 10-K, on advertising. It didn't translate into very much of a top-end growth figure.

They're going back to trying to eke out some cash flow profitability. In the meantime, all of this Bitcoin-ish stuff they've been doing, blockchain-ish stuff...it's not even the trend anymore. That's all housed in something called Medici Ventures, which is, for those who aren't familiar, described in the filings as, the strategy is to develop and advanced the concept of government-as-a-service, a technological stack for civilization. Now, history note, the Medici were never so interested in government-as-a-service. [laughs] It's like government-as-our-service, but you don't really realize it. They've got some interesting ideas, and some of them even sound almost altruistic, about helping Peruvian indigenous people stay on the land and not let the mining companies have it. But in the meantime, it costs a lot of money, and doesn't make any money, and that's where Overstock finds itself right now. "Maybe we're going to sell a retail business, maybe we're not," it still says in the filings. If you buy Overstock stock, you really don't know what you're getting at this point. 

Hill: So, they hired Guggenheim Securities to help them sell off the retail arm. 

Jayson: Maybe.

Hill: As you said, this is an online retail company that's trying to pivot to being a leader in blockchain technology. 

Jayson: Which is so three years ago now.

Hill: [laughs] And oh, by the way, they also announced they're laying off 250 people, which may not sound like a lot, but it's more than 10% of their workforce. 

Jayson: Yeah, it's a little bit of a mess, but some of us wouldn't have it any other way. It's good old Overstock. As an investor, it's more fun to watch than own, I'll bet.

Hill: [laughs] Do you think there's a price at which someone buys the retail arm? I wouldn't say Overstock.com is a tarnished name in the eyes of consumers. It might be, in the eyes of investors, and maybe a lot of investors, but to the eyes of consumers, I don't look at that as a tarnished brand.

Jayson: No, but what are you going to pay for an outfit that can return $10 million in operating cash flow a year? That's what they say they want to do in the retail unit in 2019. What's that really worth? Probably not growing $10 million in operating cash flow a year. Not free cash flow, operating cash flow. It sure ain't worth a few hundred million dollars. 

Hill: Let's move on to Lumber Liquidators. Another fourth-quarter report featuring a loss. 

Jayson: Yet another kick right in the you-know-what.

Hill: [groans] Expenses up 65%.

Jayson: Well, they have a whole lot of bad stuff going on. They put a lot of it behind them. Settled with the Department of Justice. Now the SEC settlement and another lawsuit. That's going to be $97 million total. Some of that's already, on the balance sheets. Not all cash, but it's still a big number. It's another $40-some million. They've got the liquidity with borrowings to cover it in cash. They should be able to get it through. 

All this, you remember, comes because they were supposedly poisoning everyone with formaldehyde. The little tidbit you get in the latest call is that of 83,000 test kits sent out to test this formaldehyde exposure, guess how many of them came back as exceeding those World Health Organization standards for safety? 

Hill: 1%?

Jayson: 0! 0! So, you might say that this was much ado about nothing, except that the stock got killed because the brand got killed. It's still being killed. Nowadays, it maybe should be called Vinyl Liquidators, because that is the trend, apparently, in flooring. Vinyl plank flooring. Which I love, by the way. It looks like pergola laminate. It looks like that kind of stuff, but I think it's a little more durable. It's easier to put down.

Price points are lower. Luckily the margins are good, but they're selling a lot of that. In the meantime, you got a pretty crummy housing market, not helping. Home Depot not helping. Tariffs, you have a 10% tariff, maybe going up to 25%. I'm sure the folks at Lumber Liquidators are tired of all that winning. In the meantime, you've got really not much top-line growth at all. You got some installation services growth, but you have a drop in merchandise sales, and a drop in the comp. They're still opening stores. The story isn't good, there. They're trying to have a high-touch flooring model at a low price. For a while, they were doing great with it. Then everything fell apart. And maybe that's just not a business. Maybe you've got Home Depot and maybe you've got higher-end. They're trying to be higher-end as well, but it hasn't worked for a few years. My stock is way down. But sometimes things happen. Sometimes stuff outside your control happens like somebody sues you and claims you're poisoning people even though you're not. And sometimes a business just doesn't work. Maybe we have both here.

Hill: When you look at Lumber Liquidators, and this is a stock that five years ago was around $100 a share, today it's around $9 a share, it seems like there is a path forward, but they'd better get there pretty quickly, I don't know how many more quarters like this ... even if you take out the one-time legal charges --

Jayson: Those are huge right now. You get rid of that, you should be able to eke out a small cash flow situation going forward. And they do a pretty good job selling this stuff when people come in the door. But folks aren't coming in the door for various reasons. The market, the reputation, all of those things. I don't see a lot of growth. I still own the shares, but they're just in the deep freeze.

Hill: Two quick questions. One, is opening more stores the answer? Two, how badly do they need a rebrand?

Jayson: Lumber Liquidators sounds like a terrible name, but people do know it.

Hill: Well, they know it, but it made more sense when the business was lumber.

Jayson: Well, it was never really that.

Hill: But, as they move to the vinyl option, maybe that's the move?

Jayson: I don't know. I think you have to keep the name because it's all you have left. I don't know, I think it's just on a very low simmer, and you see what happens. I certainly wouldn't be buying shares right now. It's tough for me to imagine that they're suddenly going to kick-start growth. I mean, who would you expect to kick-start growth in this segment? We had Tile Shop, that was another old Hidden Gems pick that was doing great for a while. Also just, [buzzer sound]. Flooring is a tough business. Lots of competition. You're competing with locals or you're competing with Home Depot. These chains that did well for a long time all just ran into a wall.

Hill: We talked a little bit about this on Motley Fool Money over the weekend. I wanted to get your thoughts on this. Presumably, in the month of April, we're going to have both Lyft going public and Uber going public.

Jayson: Hooray!

Hill: As someone who has to come into a studio and talk every day, I'm saying hooray. I'm excited about this. Now, not necessarily running out to buy the shares. But from a content standpoint, I'm excited to talk about this. [laughs] 

Jayson: This is all we're going to talk about. 

Hill: [laughs] It's not all we're going to talk about. But I am struck by the fact that Lyft, yes, they're a smaller company, they appear to be a little bit more conservative in what they're trying to do --

Jayson: Like one-fourth or one-fifth the revenue right now.

Hill: One-fifth. Uber is looking to go public at a valuation of $120 billion.

Jayson: Lyft is looking for around $20 billion.

Hill: Yeah. Look, God bless the people at Uber if they earn the valuation of being bigger than Costco or Amgen

Jayson: While losing a lot more money. 

Hill: Well, yeah. Also, as investors who like to see a runway, and hopefully a runway that goes for a long time, it's hard for me to get excited about any IPO that's already that big.

Jayson: It's tough for me to get excited about this business because so many others who have advantages along the lines have also been able to make cars have looked at this and said, "We can't really make a ridesharing service work economically," and they've gotten out of this business. So, you get this weird situation where you have large companies with some interesting technology and other advantages who are saying, "We're not going to touch this." And then you have these companies like Lyft and Uber that have been burning venture capital for years, and everyone's all excited to plow IPO money into them. The end of the cash-burning is nowhere in sight.

I mean, it's a pretty tough decision to make. I envision them as running a race in a fog. You can't really see in front of you. You don't know if you're going straight ahead and someone's going to hand you a wad of money, which will be great, or if you're just going to run off the edge of a cliff. That's what investing in one of these looks like to me.

To talk about Lyft, who has a registration statement out at least, you can get a few numbers at this point. Riders and revenue per active rider has been improving nicely. You're looking at like 18.6 million riders. That's just U.S. $36 a rider. Their revenue is about $2 billion. Uber's revenue, almost $12 billion in 2018. But they're both losing a lot of money, and those losses are getting bigger. They're both trying to get into this bike and scooter thing, which has its own challenges, not the least of which is, if nobody washes a rental car, you ought to take a look at what happens to these scooters.

I read somewhere that the average life of those scooters was 45 days or something. Hey, you environmentalists out there who are totally into that, if that's true, that is the biggest waste I have ever seen.

Hill: Let's put a pin in this for a second. Can I just say -- we've got, in the greater DC area, a bunch of these scooter rental things. 

Jayson: And many have already pulled out. 

Hill: Well, the thing that strikes me about them is, not to sound like an old man, but the lack of helmets. 

Jayson: Well, you have to tell the app that you're wearing a helmet and that you know not to ride it on the sidewalk, which everybody does --

Hill: Do you?

Jayson: Yeah, apparently. And then you just proceed to ride it on the sidewalk with no helmet. I have never not seen somebody on the sidewalk with one of these things. 

Hill: Well, to go back to how we started this episode, with St. Patrick's day yesterday, going down the main drag here in Old Town Alexandria, a guy who looked and sounded like someone who had had a couple of drinks on his scooter -- not on the sidewalk, right there on King Street.

Jayson: That's where he's supposed to be, at least.

Hill: One hand on the steering, the other hand holding the six pack that he was transporting.

Jayson: As a guy who builds a bike or two, I've never really liked scooters of any kind because they're really, really twitchy and easy to crash. So, I have to wonder about what's going to happen with those. They're trying to get an encompassing ecosystem. So while the goals that they put forward in the registration statement, speaking about Lyft here, sound laudable, at the same time Lyft is trying to democratize ridesharing, one corporate dictatorship at a time is what came to mind today. Of course, the founders are going to control 50% of the shares by having special shares that give them 20 votes. Everybody seems to just accept that, but it doesn't always work out great when your founders get to do whatever they want, because they fear no repercussions. I'm thinking about Under Armour, you had Kevin Plank steer that business into the dirt. You read later on, "He was making a rye distillery, he was petting racehorses, doing all this other stuff," and you go, "Wait a minute, I thought you were trying to make Under Armour a better company." I'm not really a fan of those kinds of arrangements. 

Hill: Is Lyft doing the move that Evan Spiegel did with Snap, where they're going to go public with dual class shares?

Jayson: Got A and B, yeah. From what I understand from going through it quickly today, the founder shares will have 20 votes per share, and everybody else will get one vote. That equates to roughly 50% of the voting share to the two founders. Somebody correct me if I'm wrong, but that's what I saw. It's not as high as some, I would say. 

Hill: Absolutely. Uber has not filed their S-1 yet, so we haven't seen their numbers. What is something that people should be looking for when that S-1 comes out? That seems like documentation that a lot of people are going to want to get their hands on. What is something, not necessarily like, "This would be encouraging," but what's one or two sections of the S-1 that people should check out?

Jayson: It'd be interesting if they broke out a little bit better how these new businesses, like the bikes and scooters, how much those are sucking out of the company. There's a couple of pretty large companies, including the largest food delivery outfit in China, that said, "We're not doing that scooter thing anymore," or bike thing, whichever it was. I would be interested in knowing that because I feel like that's a business that has to disappear eventually.

I like seeing the dollars per rider. I think that's interesting. What's missing is -- and it'll probably remain missing, but maybe you can find enough clues -- a road map to some kind of profitability. In other words, if you've got $2 billion in revenue, but it's costing you $800 million in advertising, that's not sustainable over the long term. Presumably, at some point, you don't have to advertise the rush for members. The market share grab will hopefully end at some point in time. But it shows no sign right now. The fight is still going on. 

Then, in the future, it's easy to say, "Well, between the two of them, they've already split up the market." There's a couple of small competitors, but we're going to have Waymo and some others try to come out with autonomous rideshare programs which would conceivably get rid of one very large expense, which is paying drivers. So, there's an entirely different kind of competition on the horizon. I guess you'd argue for Uber that they have their own self-driving car initiative, but I think they're probably one of those last-place positions there.

Hill: Thanks for being here. 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 MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow. 

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of AMZN and UA. Seth Jayson owns shares of Lumber Liquidators. The Motley Fool owns shares of and recommends AMZN, COST, TTS, UAA, and UA. The Motley Fool recommends AMGN, EBAY, and HD. The Motley Fool has a disclosure policy.