In this podcast, Motley Fool host Ricky Mulvey and senior analyst Bill Mann discuss:
- Uber's long-term vision.
- If the ride-hailing app deserves a victory lap.
- A mortgage REIT paying investors a 14% dividend yield.
- Overstock's "brilliant" rebrand to Bed Bath & Beyond.
Plus, Motley Fool personal finance expert Robert Brokamp and Megan Brinsfield from Motley Fool Wealth Management discuss common tax myths for digital nomads.
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 August 01, 2023.
Ricky Mulvey: Did you ever think that Uber could make a profit? The CEO has a message for the doubters. You're listening to Motley Fool Money. I'm Ricky Mulvey, joined today by Bill Mann. Bill, good to see you.
Bill Mann: Hey Ricky, how are you doing, man?
Ricky Mulvey: I'm doing pretty well, thanks for asking. The big news today, the A headline, Uber reported its first ever operating profit. The ride-hailing company made about $400 million in the quarter that beat analyst expectations and is up from a 2.6 billion-dollar loss in the year prior, CEO, Dara Khosrowshahi took what I would call a mic drop on the earnings call for hitting that green operating profit. Also one billion in free cash flow. Does Uber deserve to give itself a nice little pat on the back?
Bill Mann: I think because they've crossed the line from being negative and losing money into operating profitability, yes, they have proven to the most negative doubters that Uber is probably a business that can sustain itself without continually going back to the public markets, and so this quarter was a surprise, and obviously, the market is rewarding it as a surprise. I'm not convinced it was as great as all that though. I was someone who during the COVID period was mystified that a company in Uber's business was not yet able to make a profit. But yes, so they've done it. It's great. Not 100% sure that this is the mic drop situation that the CEO is suggesting it is.
Ricky Mulvey: Yes the quote from the earnings call from Khosrowshahi is, "Many observers over the years boldly claimed that we would never make any money and I understood why they felt that way."
Bill Mann: Because we didn't.
Ricky Mulvey: Also, I would say with the earnings call, Bill Mann, I think this hit what I'll call the 2023 triple. Big tech company found its way to profitability. Investors seem to be responding more to the revenue guidance and the very first analyst question is about large language models.
Bill Mann: [laughs] That's right. We need to hear not so much about money, but we need to hear about your generative AI program, which is going to revolutionize your and every other business, which means that it will revolutionize no businesses. Look, I don't want to sound like a naysayer, but they did also have almost $500 million in stock-based compensation that does not show up at the top line and it does not show up in the cash flow statements. Again, it was a great quarter for them. It actually was and it was one that was better than I thought that Uber was capable of. I do think that because so much of their gains came from their investments rather than their operations, you have to be a little bit careful before you take that full victory lap.
Ricky Mulvey: Or how about promising profitability in every quarter moving forward, I'll point out some more highlights. Gross bookings, that's how much customers pay grew 16% over the year. Revenue came in at 9.2 billion. That missed expectations by a cool 100 million. The Chief Financial Officer is leaving in January in their freight revenue declined by 30% year-over-year. Any of those really stand out to you? We don't have to talk about stock-based comp, Bill. We adjust for that.
Bill Mann: I don't know that we can adjust for the CFO choosing to leave. I mean, maybe he feels like at this point I did it. We've made it into the green. I've got a new adventure in front of me. The freight has been their weak point. It is the part of their business that has I would suggest the least logical linkage with the other components of their businesses. It is quite a heavily competitive segment. But is that good analysis, Ricky?
Ricky Mulvey: We'll leave it at the long-term vision, which I would say I might have a similar response to Uber is trying to be a "Operating system for your daily life." It's one app for all kinds of rides, not just car, we've got boats, we've got planes, and delivery services. I know you're less than enthusiastic, so I'm not going to ask you about your enthusiasm, but they seem to be doing better than Lyft.
Bill Mann: They are doing better than Lyft. I am waiting for Uber piggyback rides though. That I think is the game changer. I mean, forget AI, someone showing up and giving you a piggyback ride? That's going to be huge.
Ricky Mulvey: I don't have a clever response for that, but I would love to see it.
Bill Mann: Your eyeballs started just shaking involuntarily when I headed that direction. Here's something we were unprepared for.
Ricky Mulvey: Alright here's the company I really want to talk to you about is a small cap and a value investor, Bill. It is a REIT. It's called Apollo Commercial Real Estate. They reported earnings yesterday. It's sub-two billion dollars. Here's why I want to talk to you about it. It's a complicated story. It's got about 20% of its book in office buildings. But a lot of those buildings are in Europe with different back-to-office trends. It's got a lot of real estate in New York City, about a quarter of it. Almost all of its debt is floating rate and the company trades at seven times earnings, they will pay you a 14% dividend to wait. The CEO Stuart Rothstein says that this floating rate debt is good because it means more borrowers are paying more to service their debt and shareholders get more income. What say you?
Bill Mann: Apollo Commercial Real Estate. It's not just a REIT, it is a mortgage REIT, so it means that they don't go out and buy office buildings or they don't go out and buy apartments. It means that they go out and buy primarily the first mortgages. Somebody else has done the building and they are going out and buying the mortgage, they're collecting the interests, they've got servicing rights which they either can retain or they can sell, then they use a lot of leverage. Now, in the case of Apollo, they are not a traditionally highly leveraged mortgage REIT, they currently have about four times their asset value in leverage. Now, what that means I've always described this type of business as vacuuming up nickels in front of cement mixers. You're going to keep collecting money and it seems like it's going to work out just fine. But at some point, if that cement mixer moves in a way that you aren't prepared for, it could get very bad very quickly, and specifically in this quarter, the stock is responding to something very specific that happened, and that is a CECL allowance. Now I know acronyms are great radio that's called the current expected credit loss, and in this case, they are taking a 141 million credit loss allowance against a luxury and ultra-luxury residential property in Manhattan. They own at least one or several really big mortgages and really big pieces of paper that they are suggesting is not performing well. $141 million in an assumed loss is a really big thing for a leveraged company.
Ricky Mulvey: The company also took about an $80 million loss on its actual investments for the quarter, and that sort of separated the, what is it, the distributable earnings to shareholders before we count the loss, which they would like you to look at and then there's a negative amount of income distributable to earnings after we actually count the investment loss. That's how I'm going to start reporting my investments.
Bill Mann: That's right. Here's my checking account now, keep in mind. Now, it is important to note that they are not entirely wrong in wanting you to focus on that first number because the second number does have a huge amount of variants in it because it is incredibly sensitive to interest rates, for example, and it would make the company look much more volatile than it actually is. If that was the number you focus on, it's obviously something that you need to note. I always recommend people as soon as they start talking about something like adjusted EBITDA. What are you adjusting for? This is adjusting for the natural variances that happened in the market so it's OK but it doesn't mean that the variances themselves aren't meaningless.
Ricky Mulvey: I want to point out too that the reason I'm looking at this is office in New York City is like enough reason to scare off a group of investors. We have office buildings in luxury real estate in New York City, but most of the loan book is in hotels, other residential properties, retail. You like value investing, you like small caps. Is there a misunderstanding here or does the market seem to have a good understanding, it a seven times earnings multiple with the 14% dividend?
Bill Mann: I think that they've pretty much got it right. A lot of times with mortgage reads, what you're receiving in the form of the dividend is also a return of capital. It's a little bit deceptive for it to be a 14%. You're not getting a 14% return. But I think the market in this case has it, right, but just keeping in mind that because they own mortgages and they don't own the real estate itself, their cost structure is very different than what you might think of when you think New York commercial real estate.
Ricky Mulvey: Let's move on to a more fun story than mortgage rates. Back in June, Overstock acquired Bed Bath and Beyond intellectual property for about $22 million. Bill Mann, Bed Bath and Beyond is back from the dead. Today, Overstock has rebranded as Bed Bath and Beyond. If you go to overstock.com, it will take you to Bed Bath and Beyond. In terms of rebrands, what do you think that this one?
Bill Mann: I think actually this one is brilliant because overstock.com, over its time, has had such a poor brand positioning and it had almost no brand credibility. Bed Bath and Beyond, probably the most valuable thing that they had at the end of the day was actually that intellectual property which Overstock got on the cheap. Whatever else it is that you think about Bed Bath and Beyond, it is very much thought of as being a good brand. For almost nothing, Overstock is getting to recast itself as an old line, credible retailer. You and I talk about business almost every day. There are a lot of people out there who might not have even noticed that Bed Bath and Beyond filed for bankruptcy. I think this is very smart on behalf of Overstock.
Ricky Mulvey: Yeah. Most of the time when you hear about a rebrand, usually it's to a new name that nobody knows in the business would like you to be familiar with. But in this case, they're going back to a company that as you said, people know well, but there will be some key changes. First of which is that Overstock does not own its own inventory, so it's going to be relying on those third-party suppliers to ship. They claim that the classic 20% off coupon is gone, still on the website today, and also,
Bill Mann: Gone-ish.
Ricky Mulvey: Gone-ish. Well, there's a lot of gone-ish. Overstock claims that it doesn't want to sell these one-off, inexpensive items, such as a four dollar spatula with free shipping. As of today, you can get $4.50 bachelor with free shipping anyway. Let's say Bill that they've brought you on as a highly paid consultants to give a PowerPoint presentation on what they should do. What advice are you giving them about this rebrand?
Bill Mann: Yes. Keep in mind that they only bought this in June. I think probably you're seeing the first step rather than the last step. Because you're exactly right, and as you said that I started thinking about some of the best rebrands that I've ever heard, maybe the best. I'd be interested in your thoughts was when SBC bought AT&T and then rebranded the entire company, AT&T because everybody had heard of AT&T, but AT&T was a much smaller company by that period of time than SBC. SBC didn't really have a brand outside of the Southwest, so sometimes it really does make some sense. In the case of Overstock, yes, they probably haven't gotten to the point where they want to be in terms of operations, taking on Bed Bath and Beyond what, from six weeks ago? They haven't had time to get there yet, so I think they would get an incomplete at this point. But they will actually probably need to shift quickly because the thing that about intangible assets, like a brand, is that it's really easy to ruin them.
Ricky Mulvey: Yes, it is. As we wrap up, we're in the dark days of earnings season and the dark days of summer. What's a trend company storyline that you find interesting right now?
Bill Mann: You pointed it out earlier. It's the incredible number of companies that seem to be name checking some form of AI or ChatGPT that they are considering or are actively bringing into their businesses. I think we've seen so far this has been an incredibly benign earnings season so far. One thing to keep in mind though, is that the S&P 500 in particular is more concentrated among its top companies, the top seven, or about 25% of the total market capitalization of the S&P. So if one of them, misses it is going to feel much worse across the board than it would have nearly at any point over the last 50 years.
Ricky Mulvey: Bill, Mann, I appreciate your time and your insights.
Bill Mann: Thanks, Rick.
Ricky Mulvey: Before we get to our next segment, I wanted to let you know that the latest episode of Stock Advisor Roundtable is now on Spotify. The show is available to members of Stock Advisor, Epic bundle, and our advanced investing services. I'll put a link in the show notes. Motley Fool Co-Founder and CEO Tom Gardner catches up with Chief Investment Officer Andy Cross, to talk market valuations, Tesla and NVIDIA. Now, if you work remotely, then you can work from anywhere, but that flexibility can come with a cost. Robert Brokamp has more.
Robert Brokamp: The phrase digital nomad may conjure up images of a modern-day cowboy going from town to town on horseback armed with nothing but a laptop and a Bluetooth dongle. Their battle cry is asking, can you hear me on Zoom while jacking for the best Wi-Fi signal? You may have spot on them at your local coffee shop, maybe in a co-working space or just posting work southeast from the beach. I asked these digital nomads are defined as workers that are able to do their jobs remotely and take advantage of their mobility to explore different states or even countries as their chosen workplace. But what does all this mean from a tax perspective? Joining us to debunk the top three tax myths are digital nomad lifestyle is Megan Brinsfield, Director of Financial Planning for our sister company, Motley Fool Wealth Management and someone who's done a little digital nomading herself. Megan, welcome back to the show.
Megan Brinsfield: Well, hello. If you've listened to shows I've been on before, you know I carry with me this heavy bag of disclosures that I must share with you all. Everything stated here today represents my own thoughts and not necessarily those of Motley Fool Wealth Management or its affiliates. My comments are informational and should not be considered recommendations. Any examples are for illustrative purposes only. While wealth advisors can counsel on tax efficiency and general tax considerations, Motley Fool Wealth Management does not, and is not permitted to provide any tax or legal advice. Consult with a wealth or tax advisor prior to making any financial decisions and finally, Motley Fool Wealth Management, a sister company of The Motley Fool operates independently from the Motley Fool.
Ricky Mulvey: Thank you for that, Megan and I will just emphasize that since we are talking about taxes, this is a situation where I really do think getting some help, helps out. Let's talk about the first tax breadth of being a digital nomad and that is, if I don't live there, I don't have to pay taxes there. Or maybe some variations such as, as long as I stay less than six months, the state can't tax me.
Megan Brinsfield: That's right. This is the often cited six month rule and this is really for states to consider you a resident of the state and pretty much any state that has an income tax is going to have a rule to collect non-resident income tax and so you can consider yourself joining the elite taxpayer group that includes people like athletes, performers, entertainers that have to pay what's known as a jock tax or a tax that's collected by the state wherever they perform the services for which they're being paid.
Ricky Mulvey: The jock tax is probably surprising to people. We talked about all this when we interviewed Jonathan Scott who played in a super bowl for the Pittsburgh Steelers and that is basically in many states, as the team travels to that state, they have to pay a tax. I read one article that California alone collects $200 million in taxes from people who come to compete in that state and it's not just the athletes, the coaches, the trainers, and everyone, and so the athletes probably have the money, but not everyone in the team has to do this. Basically, what you're saying is this no longer applies to just to your favorite NFL team. It could apply to you if you work in another state.
Megan Brinsfield: That's correct. Yes, all income that you earned through a job, whether it's self-employment or W2 employment has what's known as a source and it's linked to the location where you're taxed. Essentially wherever your butt is when you're doing the work, is the state that has the right to tax you on it. Each state will calculate their right to tax you based on the proportion that you earned in that state. Just a quick example. If I normally live in Florida soaking up the sun, not paying any state income tax, but I spent two weeks working in Virginia. I now have 10 workdays out of roughly 250 workdays spent in Virginia and Virginia can tax 4% of my income.
Ricky Mulvey: That doesn't sound very fun. Are there ways to mitigate the risk?
Megan Brinsfield: You don't associate taxes with fun. Again, I don't know you could have the confidence of the fun.
Ricky Mulvey: What am I talking about here?
Megan Brinsfield: Yeah, of course, there are some ways to mitigate your risk. I have three top strategies. One is to situate strategically by working from states that do not impose an income tax. There are what I like to call 8.5. You've got Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming that do not collect a personal income tax from its residents or nonresidents and then New Hampshire only taxes interest in dividends. If you're earning income from employment, that's not going to apply to you. If you are working in any of those states, you don't really have to worry about this requirement and now you might start to see things clicking as to why all these singers do their residencies in Nevada and Las Vegas. I just saw Garth Brooks woo-woo and every time he performs there he does not owe a state income tax to Nevada, which would be different if he was doing the Taylor Swift errors tour methodology.
Ricky Mulvey: Is there anything to the idea that if you don't stay in a state for very long, you don't have to worry about it.
Megan Brinsfield: There is, each state has a diminimus calculation that says, if it's below this threshold, we're not going to chase you or worry about it and that is defined separately by each state. If you just google the term income tax filings threshold, along with the state that you're interested in, you should get a pretty quick result there for what is the tax filing threshold in that state.
Ricky Mulvey: Let's move on to tax myth number 2 and that is, I'm smarter than whatever state you're staying in, and their tax department. They can't catch me anyways.
Megan Brinsfield: Oh, contrary, things have really come a long way in the world of tax auditing. Particularly high-tax states like California and New York. They've got a lot to lose by you leaving their state or not reporting your income there and so they've developed pretty advanced audit methodologies and one easy flag in their system is if you're a resident of their state and then you report that you moved to a zero tax state, that can be tracked really easily by their tax department and they will probably send you a little inquiry considering house warming gift that asks you, hey, just want to make sure you've really severed ties with our state and these can sometimes look innocuous. It's just like fill out this little questionnaire. Make sure if you work with an accountant, you're always providing that thing to your accountant so you don't inadvertently step into trouble there. I've seen a lot of California residents that moved to Nevada, or New York residents that moved to Florida and New York to Florida is so common that the New York state auditors actually started doing things like looking in people's refrigerators, looking at their veterinary bills, seeing where their dentist is. Yes.
Ricky Mulvey: Wow.
Megan Brinsfield: I pulled up an article and this was from, I believe 2014. It wasn't even recent where a client won their case of non residency because when the auditor went and opened the refrigerator, this stuff had been in there for a year and a half untouched. Crazy to know that that is the type of thing that auditors are looking for. But more than that, the state is aware of high-profile events happening in their state. Things that are public are increasingly fair game for audit purposes. If you are an athlete by chance, thanks for listening. Or a high-profile CEO or something like that. Someone who's traveling for board meetings. Or if you're just posting all over social media where you are and how much you earned in a given month. You might be getting a little note from the state and tax department.
Ricky Mulvey: Pretty interesting and maybe a little scary. [laughs] Let's move on to tax myth Number 3. If my company doesn't report it, I don't need to either.
Megan Brinsfield: This is a common method if I just get my W2 from my employer and I put that stuff into my tax preparation program, everything's going to take care of it self. The problem with that is that the burden is on you as the taxpayer to keep track of these things and report appropriately. Another interesting tidbit is there is a statute of limitations that says the state only has so long to come after you, but in order to start that statue, you have to file a tax return. If you never file in a given state, your statute of limitations is basically forever. You would need to consult a lawyer and confirm all of that. But that is what I've seen in practice previously. But the fact of the matter is that you are responsible for reporting these extra days that you're traveling, at least notifying your employer. A lot of payroll departments do have the capability to withhold taxes for a brief period of time interstate other than your home state. But so many payroll departments just haven't caught up with the times. There's very little software out there. There is integrating the HR record, the payroll record, the corporate tax filing record, and all of these things are so intertwined and harry, so if you're traveling all over, I know for accountants in particular who have to go onsite to do audits. Those payroll systems are tracking where they are and accumulating a tax in all of the relevant states.
Ricky Mulvey: Wow, so that's all the tax stuff, but as I mentioned at the beginning of the show, you've actually done this yourself. You have personal experience with digital nomading. Just give us your personal tips, tricks, reflections, and maybe things you wish you knew before you started trying it.
Megan Brinsfield: The few things to consider are technological, make sure that you're going to a place that has a really strong Wi-Fi connection. There's nothing that puts a hitch in your step, like not being able to connect to the meetings or tools that you need. If you're staying somewhere, make sure you're confirming your WiFi speed or connectivity generally if you're using your phone as a backup and then the other thing just practical is time-zone. Usually, your employer is not going to care if you are nomading around as long as you're sticking to your normal schedule and so I have never gone to Hawaii to [laughs] work my East coast hours. I think that would be pretty miserable. But I have gone to Florida and it's nice to get off work and take a walk on the beach when my normal walks or just the city streets. Sometimes a change of scenery is all that you really need to reengage with what you're doing anyway.
Ricky Mulvey: As always, people on the program may own stocks mentioned in 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 Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
