With the Securities and Exchange Commission (SEC) taking a closer look, what does the future of payment for order flow look like? Joining host Chris Hill, Motley Fool analyst Bill Mann addresses that question, looks at Uber's uncertain path to profitability, and discusses ARK Invest CEO Cathie Wood. Finally, Chris and Bill react to a fantastic arrest in New Zealand.
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This video was recorded on September 21, 2021.
Chris Hill: It's Tuesday, September 21st, welcome to MarketFoolery. I'm Chris Hill, with me today, the one and only Bill Mann. Thanks for being here.
Bill Mann: Hey, Chris. How are you, brother?
Hill: I am good. We got some things to talk about. We have payment for order flow, we've got the latest news from the restaurant industry, but we're going to start with the stock of the day. Shares of Uber (UBER 1.13%) are up 10 percent after the company increased its guidance for the 3rd quarter. In a filing with the SEC, Uber essentially raised the floor on the gross bookings that it expects in the 3rd quarter. They had previously said it's going to be somewhere in the range of 22-24 billion. They're now saying 22.8-23.2. I don't know if this is short-sellers running for the exits, but if you are an Uber shareholder, you're having a good day.
Mann: They raised the floor and they lowered the ceiling. Essentially, they just took a little bit of the uncertainty out of it. I'm not quite sure how this is worth nine percent, but Uber as a stock has had a hard couple of years. I was looking the other day in DoorDash, which only does food delivery essentially, that is their bread and butter, has a larger market cap than all of Uber now. Which is incredible to consider because Uber when it came public, was essentially supposed to eat the world one bite at a time and it hasn't happened.
Hill: The big news with DoorDash recently was the upgrade they got from Bank of America, just laying out that in 2026, they're going to be making more money, so goes the thesis. They're going to be making more money from non-restaurants than they are from restaurants. The CEO was on CNBC this morning. He's a smart guy. One of the things he said is, "We're very clearly on a path to profitability." I'm not going to dispute that, but I think the obvious question is, how long is that path? Because that's the thing about Uber, Bill. That's why Uber [laughs] has never been a stock that has made its way to my watchlist because I'm happy to be patient with businesses that I believe in.
Mann: Yeah.
Hill: I'm not interested in being patient while Uber tries to figure out what it wants to be when it grows up.
Mann: It's so funny that you say that because the other thing that they talked about today is that on an adjusted EBITDA basis, they were forecasting profitability. In 2020, they lost 2.7 billion using normal accounting rules, but only 2.3 billion using adjusted EBITDA. I know this is terrible podcasting, but I want to read what Uber considers adjusted EBITDA. I know this is horrible and I have to admit, Chris. We define adjusted EBITDA as net income excluding income from loss discontinued operations, net of income taxes, net income, non-controlling interest, net of tax, provision for income taxes, income from equity method investments, I could keep going and going down to drivers personally impacted by COVID-19, the cost of personal protective equipment distributed to drivers. I can't even do it all in one breath. There is so much that they adjust for that are all expenses.
Hill: Nobody ever adjusts for profits.
Mann: Nobody ever adjusts, oh, wow, we got to take those profits down because we got them because of the weather. No, they never do. You have to be super careful with the EBITDA in general, but when they are adjusting EBITDA, this is earnings before everything, they're saying they're going to be profitable. I am with you on Uber. It's definitely on a path. It doesn't seem like it's getting worse, but I don't know, man.
Hill: I'm probably going to get emails or tweets for the comparison I'm about to make. [laughs] But to go back to DoorDash for a second, you would've done really well as an investor if say 30 years ago, 20 years ago, you bought a few shares of businesses that deliver things. If you just bought a few shares of FedEx and UPS, the delivery of things seems like a better business than the delivery of human beings.
Mann: Have you met us? [laughs] We're literally the worst things to deliver. We yell on airplanes, we riot occasionally, deliver things. We should be in the thing delivery business. Let's deliver horses to people, like a surprise horse.
Hill: There are some people who want a surprise puppy or a surprise kitten. I don't think any adult really wants a surprise horse.
Mann: I have good news and bad news and they're both the same. Here's your horse.
Hill: Our email address is [email protected]. We've got a couple of email to hit today. First from Bancroft in Rhode Island. Loyal MarketFoolery listener here wondering, what are your thoughts on Cathie Wood? She seems to fit the mold of a Fool. Long-term focus buys traditionally considered overvalued tech-focused or genomic disruptors. Do you consider her a lowercase f fool or a capital F Fool?
Mann: I love the spirit of Cathie Wood. I don't happen to think that the level of research that goes into a lot of the theses at ARC Capital that get sent out are all that deep, but I do happen to think that she has something deeply in common with David Gardner. David Gardner once very famously said that there was no academic research that suggested the way he invested was the way to go because they have definitions of risk that we fundamentally disagree with, and I think that she does as well. Whenever I see the criticism of Cathie Wood, I think of the Jonathan Swift quote, "When true genius appears in the world, you may know him by the sign, or her, that the dunces are all in confederacy against her." Everyone wants Cathie Wood to fail. I hope she succeeds. I really do. I think she's a good person, I think she is a great thinker, and I think that she is a differentiated thinker, and we need more people like that in the public markets.
Hill: Got an email from Steven Shure. He writes, "Can we hear about your thoughts on payment for order flow and its impact on retail investors like us? I know it shot up into the limelight during GameStop's short squeeze at the beginning of the year, and I feel like it's been a contentious black box ever since. It seems to introduce a conflict of interest because brokers are rewarded by the market-maker when they send our trades over to them. On the other hand, brokerages say they always submit our trades such that we get the best execution. What's more, payment for order flow undoubtedly paved the way for brokerages to cut trade commissions to zero. I don't want commissions to come back and I don't think I'm alone in saying that." No, Steven, you're not. Finally, writes, "With the SEC looking into the practice and Robinhood's business model relying on it, payment for order flow is something I'd like to learn more about."
Mann: I think if I could push the other direction, I would love to see a situation where there's a commission of a dollar, a nominal commission. I think if we look back and see what has happened, and maybe one lead into another, the confluence of a commission's going to zero and the gamification of stock trading, I think we're going to find that focusing on those commissions was the exact wrong thing. To make payment for order flow is something that needs to be looked into because there is no regulation in between how much a broker gets and how much the broker that does the executing does, the payer for the order flow. There are certain issues there. To me, focusing on payment for order flow is just another classic way of people just looking to blame whatever the problems are on the richest person in the room, because the companies that are paying for the order flow are massive hedge funds like Citadel, people like that. I don't have a huge issue with payment for order flow, but I do think that we need to look into the environment that exists now with zero commission trading and look for better, more optimal regulation that limit some of the excesses in the market.
Hill: In the same way that Apple has spent a considerable amount of time and money over the past couple of years marketing the privacy aspect of its devices. Do you think there is a similar opportunity for someone in the brokerage industry and by doing so, Apple is essentially positioning itself against its competitors. Do you think there is a similar opportunity for someone in the brokerage industry to basically position themselves against Robinhood to say, hey, look, this wouldn't be the ad campaign because it will never be this [...]
Mann: We're about to hear why Chris isn't in marketing.
Hill: Right, exactly. We know some of you got screwed over by Robinhood earlier this year and we're never going to do that to you here.
Mann: Yeah. Robinhood has been incredibly successful at taking advantage of the time that we're in. Unfortunately, I think because so many green, unsophisticated investors have gone to Robinhood because they've been attracted by the gamification of stock trading. It really worries me that they're going to have to learn a lesson that they can learn no other way. Maybe there is a way for other brokers to position themselves. I'm not sure that the market that Robinhood is looking for right now is that worried about having a responsible broker, because it is more fun than it is anything else at the moment.
Hill: I'm going to ask you to make a prognostication before we move on to our final topic. In terms of the SEC and payment for order flow, where do you think we are one or two years from now? I mean, the SEC has Gensler come out and said, "This is something we're looking into." Do you expect any sort of action? Are the rules going to be different in 2023 than they are in 2021?
Mann: We'll let me ask you a question. How big is the money on the other side of that issue?
Hill: So big.
Mann: So big.
Hill: So very big.
Mann: This will sound nihilistic. It will change if the market has caused too many people a lot of pain. Otherwise this is a tempest in a teapot. Nobody feels the pain from this so therefore, nothing will happen because it's so big.
Hill: Just to be even more crass. If a bunch of kids in their teens and 20s who have a couple of thousand dollars at stake, if they get screwed over in the process, if a bunch of wealthy guys in their 50s get screwed over, then some change is going to come.
Mann: Heavens to Murgatroyd. Yes. But once again, I don't know that you can necessarily blame that on payment for order flow though as opposed to other elements if they will get blamed because that's how politics works. But I really don't think that there will be much difference that individual investors will see. I really do think that there's going to be some regulation for how the brokers deal with each other. That's skunk works and not that much on the surface.
Hill: Last week on the show, we talked about Yum! Brands, specifically the new taco subscription service that Taco Bell is testing out in Arizona. Yum! Brands is back in the headlines for very, very different reasons. In New Zealand, the city of Auckland reinstituted lockdown measures due to the Delta variant. This is a city of about 1 1/2 million people. The lockdown measures mean no restaurants, no take-out food, no delivery. On Sunday, two men were arrested for having a trunk full of KFC. They had three buckets of fried chicken, 10 cups of coleslaw, fries, and other items. Bill, they're facing up to six months in prison for contraband KFC.
Mann: Worth it. Worth it.
Hill: Don't do the crime if you can't do the crime. Yes, this was worth it.
Mann: What a great marketing campaign dropped into Yum's lap that they could probably never touch. So delicious, it's worth risking jail. But yes, the city of Auckland has literally locked down. So if you are a citizen of the city, you're not supposed to leave and vice versa and so these guys drove down to the town of Nelson, which is 75 miles away where the KFC was open and they were either buying for themselves for the next month or they were buying for a big group of people and they were the ones who went beyond enemy lies. On some levels, I loved the story so much and on some levels, that makes me sad. This is a marketing coup.
Hill: You're right. The underlying conditions are serious and legitimate. The marketing opportunity for KFC is one that I hope they recognize and I really hope they take advantage of. Bill Mann, always great talking to you. Thanks for being here.
Mann: Thanks, Chris. Great to talk to you.
Hill: As always, people on the program may have interest in the stocks they talk about in The Motley Fool, may have formal recommendations for or against, so don't buy yourself stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow!
