In this podcast, Motley Fool analyst David Meier and host Ricky Mulvey discuss:
- Tesla returning to growth.
- Expectations for full self-driving and humanoid robots.
- Peloton's deal with Costco.
Then, Motley Fool host Anand Chokkavelu talks with contributor Matt Frankel and analyst Jason Moser on "Scoreboard" about Empire State Realty Trust. "Scoreboard" is available to members of any Motley Fool service at 7:00 pm ET on Motley Fool Live, or anytime in the video library (subscription required).
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our beginner's guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Oct. 24, 2024.
Ricky Mulvey: Full self driving. Is it safer than a human? You're listening to Motley Fool Money. I'm Ricky Mulvey joined today by David Meier. David, how're you doing?
David Meier: I'm doing great, Ricky. How are you?
Ricky Mulvey: I'm doing well. You know what? One thing I like about Tesla reporting is they give us plenty to talk about. [laughs] I don't have to search far for some topics for today's show. It is always a wild quarter. But what else would you expect from the electric car maker AI company, robotics company. Automotive revenue up just 2% from the prior year, but energy generation and storage revenue up more than 50%. CEO Elon Musk also saying that affordable models are coming in the first half of 2025. He says that will drive double digit vehicle growth, 20-30% unless something happens was his qualifier. To the extent that you can give one, what is your headline for Tesla's quarter?
David Meier: Growth is back. I think that's the message. Earlier in the month, we saw deliveries were up after seeing a bit of a decline. From the quarterly revenue earnings report, we see that revenue is up this quarter, even as average selling prices for cars was down a little bit, according to the company's presentations. Those are the great signs that investors have been looking for. They want to see that growth, especially given the future vision that we'll talk about in a little bit that Musk is laying out. Yes, we hear a commentary from Musk on the conference call, about 20-30% vehicle growth next year. Yes, it wasn't guidance, but he's vaguely right pretty much all the time and that's helping investor sentiment move in a more positive direction. I think that's the big reason why the stock price is pushing up really high today. It was 20% the last I looked. It's because they think growth is back.
Ricky Mulvey: Take them seriously, but not literally, maybe. [laughs] One thing that I'm amazed by is, it seems like we're pretty close to full autonomy for driving from Tesla. This is also something where I want to believe. I like watching the YouTube videos of seeing the cars drive themselves around with minimal driver intervention. In Tesla's Quarter 3 vehicle safety report, they said that there was one crash for every seven million miles of autopilot. For comparison, the US average is one crash for every 700,000 miles. If you're doing math at home, that is allegedly a 10X improvement. Anecdotally, I've talked to Tim Sparks who works on the show, and he was talking about borrowing a Tesla and using the full self driving feature and absolutely loving it. I also have a buddy who owns a Tesla and says, I'm not using it because I had a close call at a stop sign. When you're looking at these results, though, David, how close do you think we are to full autonomy?
David Meier: Look, that's the $64,000 question. Look, I can't be certain, but I do know we are moving closer and closer to it. There is no doubt about that. It's certainly hard to argue with the crash data. We're talking an order of magnitude better, given the data that Tesla has given us. But unsupervised full self driving is such a difficult problem to solve. I don't fully know how to account for human instincts and experience. Yes, I totally get that that's the purpose of training and rolling out the experience that cars get via the training to the entire fleet so that instead of you and I having our own experiences, and our own instincts driving, it can translate to every single car that is currently available and will be available in the future. I couch my statement. I really don't know how close we are, but Tesla continues to make and is certainly going to make more amazing strides toward that goal.
Ricky Mulvey: One of the visions for Tesla long term, and this is from the Walter Isaacson biography about Elon Musk is basically you own a Tesla, it has full self driving. Essentially, you send it out to go basically have other people use your car during the day and then it comes back whenever you need it. Maybe you're making a little bit of money on that as well. One thing that we heard about on the conference call, as well, not getting talked about a ton is that Tesla has basically been running a full self driving ride hailing app in the Bay Area for about a year now. There's still a human driver behind the wheel. But David, this looks like it could be a competitor for Uber [laughs] and Lift. If they get this thing figured out, could that be a problem?
David Meier: Look, you got to stop asking these difficult but relevant questions, Ricky. My goodness. Now, in all seriousness, it very well can be over time. If the model for transportation shifts from owner operator of a vehicle to owner operator of a fleet of vehicles, that could certainly disrupt the current Uber Lift model. On the question of adoption, though, we'll see. I'm going to relate just a personal experience here that everybody has their own. But I like driving. On longer trips, I like the feel of the wheel in my hands as I'm traveling down the road. I like to listen to podcasts and music. I personally don't see myself as an early adopter of unsupervised full self driving. But again, I don't have to be, there's going to be plenty of others. But I think that there will probably be a similar dynamic to overcome in the driver versus driverless transportation market. It's probably won't happen immediately. But I am sure there will be plenty of entrepreneurs who take this opportunity to say, hey, it's more economical for me to have a fleet of cyber cabs than to drive my own vehicle and provide transportation to others.
Ricky Mulvey: My litmus test will be, so I'm out in Denver, Colorado. They're rolling this out in Texas and San Francisco. Both of those markets not getting a whole lot of snow and ice. [laughs] I'll be curious to see when they start testing these things out and getting them working in those more variable road conditions.
David Meier: A very good point there.
Ricky Mulvey: I mentioned earlier the growth in the energy segment, 50% year over year, what's behind that? What's going on with Tesla's energy division?
David Meier: This is really simple. The growth of renewables like wind and solar power, that is continuing. There's literally no stopping it right now. The scale of the projects associated with wind and solar is increasing, too. But as we know, the wind doesn't always blow fast enough to turn the turbines and the sun is only out for part of the day. But when you find that need and combine it with the incredible improvements that we've seen in battery storage on a cost per kilowatt basis, basically, it's becoming more and more economical to have utility scale battery storage systems attached to renewable power generation facilities. That's a mouthful. Simply put, the costs have come down to the point where this is a very economical decision. You get companies like Tesla and Fluence Energy, which is another Fool recommendation. They are two of the biggest global players in this fast growing market. Tesla's quarterly numbers show that demand is still very high. I don't expect that to change any time soon.
Ricky Mulvey: I think we got to hit the Optimus robot just for a second. I feel like I'm a Musk apologist on this. I'm not trying to be, [laughs] yes, they were remote controlled. Yes, they walked. It wasn't just a video. Musk is calling this possibly the greatest consumer product ever. That's quite a setup. What's your bullishness bearishness level on the Optimus robot coming out of Tesla?
David Meier: Before I do that, I'll make one quick comment. Whenever you're marketing something, you should always stay in control of the marketing process. Every company that's rolling out high tech products like this wants to do that, so I begrudge Tesla, none of that during the wheel robot event. But let me give you another little bit of context before I answer the question. A long time ago, I actually worked as an engineer on a team that was developing a robotic arm to perform maintenance tasks. This many gray areas ago was incredibly challenging, and the movements of this arm were way simpler than anything that the optimist robots are trying to do. But over the years the technology foundation for robots today, both from a hardware and a software standpoint are so much stronger.
But it's hard to compete or it's hard to replicate the movements that we as humans can do relative to what robots can do. We just have almost an infinite amount of degrees of freedom relative to what's available from a hardware standpoint for a robot. Finally, getting to your question with that long setup, I'm actually very bullish on the idea. I think humanoid robots can and will be useful over time. It'll take some time, but they will be. If the training technology that Tesla is developing with its AI and UFSD initiatives can port over to the robots relatively seamlessly, then the advancement curve that they will move up will probably be faster than I anticipate right now. The future is bright. They will find a use case for them. The development is going to be measured in years, but the potential of the value creation, that might be on the order of somewhat priceless.
Ricky Mulvey: I want to quickly hit this Peloton story and their deal specifically with Costco because there's a larger strategy going on at Peloton that they communicated just in September in a Wall Street Journal piece. The idea basically is, we're going to move to a more holistic fitness company. We're not just going to talk about the bikes. Then we're also going to do fewer discounts and promotions. [laughs] Earlier this week, they announced that Costco is going to sell Peloton bikes at a dramatic discount going for $2,000 in store. That's a discount from $2,500. Seems like there's a lot going on at that company, but what do you think of this move?
David Meier: My first thought when you sent me this was the Mike Tyson quote about, everyone has a plan in the ring until you get punched in the face. I don't know all the details about the negotiations, but this seems like Peloton got punched in the face with an opportunity from Costco and decided to take it. A couple of things to consider as we're evaluating this. First, Costco share shoppers are extremely loyal. If they see this as a bargain that is coming to them from a retailer that they absolutely trust, they're going to buy it. What that does is that brings incremental sales growth at some level of margin to Peloton, which is something they need right now.
Ricky Mulvey: Dion Camp Sanders, who is the Chief Emerging Business Officer over at Peloton, saying, and I think part of this is key, "We've been able to architect a deal with Costco that meets our needs with regard to profitable, sustainable unit economics, while at the same time delivering robust and clear value to Costco members." The unit economics have always been a question with Peloton. Do you think that what he's saying is true here?
David Meier: You're right to focus on the phrase unit economics because that's the key. Unfortunately, again, we can't see the actual unit economics of this Costco deal fully. But I would suspect that again, it provides incremental revenue, and it provides some level of gross profit dollars that will be helpful to the company. What would be interesting to know in order to get a better idea of what the unit economics were, is, is there something in the agreement that says, as a Costco buyer you're locked into the one year, maybe you're locked into a two year subscription plan, which would completely change the way the economics work, given that that customer would not be churning off right away.
Ricky Mulvey: We'll have to look given Costco's reputation on how easy it is to return things to the store. I'd be a little surprised if they stick to that, but they're basically making the argument, hey Costco shoppers are loyal. Also, many of them are younger and also wealthier, and we think that they're going to stick around.
David Meier: Such a good point on the return aspect. That is something you would absolutely have to factor in.
Ricky Mulvey: Peloton is a company that's on my watch list, I don't own the stock. It's improved its operating margin from negative 35% in Quarter 4, 2023 to negative nine, not profitable, but it's quickly moving that way. Are you buying that Peloton is becoming more disciplined? Is this looking more attractive?
David Meier: I've worked at a variety of companies, and unfortunately, I have been through cost cutting phase at another company in my career, and it's not a lot of fun. But I will say the jump from minus 35 to minus nine, which is very commendable, looks like it's picking the low hanging fruit. These were the easy things that we needed to do in order to make big improvements right away. In order to answer your question fully about whether or not they have become more disciplined, we'll need to see those numbers continuing to move in the right direction and we'll also need to see that inflection point. We need to see them move from a negative number to a positive number. That will be a good sign that the managers and leaders and workers are doing the right things to sell both the units, the bikes and the subscriptions at a price that generates margin for the company.
Ricky Mulvey: David Meier, I appreciate you breaking it down. Thank you for your time and your insight for joining us. Motley Fool Money.
David Meier: Thanks, Bun Tricky.
Ricky Mulvey: Up next, we've got a sample of scoreboard, a show that any Motley Fool member can find every day at 7:00 PM, on Motley Fool Live or any time in the video library linked in today's show notes. On and Chakkavelu posts Matt Frankel and Jason Moser for a segment on Empire State Realty Trust, and office ret with some trophy properties. They cover a quick bull bear, management, financials, and stock valuation.
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Anand Chokkavelu: Let's get to it, Matt, tell us more about Empire State.
Matt Frankel: All we need to know is Empire State is when I was pounding the table on about 50% ago in the stock, during the pandemic, and it's been a good investment. They are a real estate investment trust. They are an office ret, which is why they kind of get overlooked by the market a lot. But they own a portfolio of mostly office properties located in Manhattan and the surrounding areas. They also have quite a bit of retail properties. If anyone's been to New York every office building has retail on the first floor or two. They also own a lot of multi family properties, not a lot, but three multifamily buildings in New York City. The bull case is they own the empire state building. They own some iconic assets, they own some top notch properties. They own some unique assets like the Observatory on top of the Empire State Building. They have a stellar balance sheet, especially for an office ret right now.
They have a laser focus on the New York City market that they know really well. The bear case is the future of offices is uncertain right now. A lot of people don't know what's going to happen. The other two people on this recording were working in an office when we were recording four years ago and now aren't. The future it's evolving very quickly. That's really the bear case here. The concentration in New York City can be a good thing or a bad thing depending on how you look at it.
Anand Chokkavelu: That's what scared me off when I could have had a double listening to Matt Frankel a few years ago. But, Jason, let's move on to the strength of Empire's business. One to 10, 10 is invincible, one is hopeless.
Jason Moser: I went with seven here. I think with Empire, it's unique in its properties, and I think therein lies most of his strength. Now two thirds of its rental income comes from office real estate. Matt hit on why that is a little bit of a question mark right now. I think we all understand that. You include in that the Empire State Building. That is a one of a kind. Owning smaller concentrations in retail and multifamily properties, the Observatory at the top of the Empire State Building, those are all unique, and I think that gives the business some strength that can help offset some of that risk from the exposure to the office real estate. So I'm going with seven.
Matt Frankel: It's tough to imagine a more well known office property than the Empire State Building. Their properties, just in general, not just the Empire State Building, sit really nicely. They fill a niche that's between those Class A trophy office properties that no one can afford and the Class B office properties that don't have enough amenities. They really strive to be right in the middle of that. They've renovated and modernized all their properties just to hit that mark. The Observatory on top of the Empire State Building is an absolute cash machine, one of the best statistics. Twenty five percent of their net operating income comes from the Observatory, and that occupies 1% of their square footage. It's high margin revenue. It's a great business.
The street level retails and great locations. Their top tenants are things like Sephora and Target, and they have several multifamily properties that are over 97% occupied. Their office properties are 92.5% lease. That's up 230 basis points year every year. They have absolutely no exposure to these trendy types of real estate specifically co-working that has crushed a lot of other office rets over the past couple of years. When we were collapsed, they made a big point to say, we have none of that. I really like this busses, I gave it an eight. I didn't give it any higher because it is an office, and it's really tough to justify a higher than an eight.
Anand Chokkavelu: Right on, man. The increasing your number of tenants is amazing in a year. Jason, now let's talk about management. One to 10, 10 is Buffett, one is Homer Simpson. I'll go with another seven here Empire is led by CEO Tony Malcolm. He's been in the role since 2013. I think he's managed the business through some very challenging stretches. Now, that said it depends on your time frame as to whether this has been a winning investment over the last several years. Matt mentioned a more recent time frame where the stock has performed very well. You look at that over a longer stretch of time. It's not necessarily been that winning of an investment. But again, I give credit to CEO Tony Malcolm for really being able to manage this business through what has been a tremendously difficult stretch, and still a lot of question marks out there. In regard to office space and exactly what the future of work looks like, I think he's doing a good job.
Matt Frankel: The Malcolm Family has actually run this business since the 1960s when it was an unlisted real estate investment trust. The business has been around since then. Early investors have generated really great returns. Obviously, like Jason said the past decade or so has been challenging for New York City offices. He's done a really good job given the situation. He intentionally keeps the balance sheet very strong, really conservative with cash and things like that, which I really like, especially in an uncertain type of real estate. For example, since March of 2020, they've bought back almost $30o million of stock. This is like a $2 billion reed. That's a lot of the company. No stock based compensation, really worry about too much offsetting that at an average price that's about 25% below the current price. Really, very disciplined with capital allocation, and I really like that. That's a dying quality among business leaders these days, I feel.
Anand Chokkavelu: What about the financials, Jason? Ten is a fortress, a one is Yikes.
Jason Moser: Yeah, I actually I went with eight here with $535 million in cash and equivalence versus around 2.5 billion dollar of long term debt, and that long term debt is basically all fixed rate, at fairly low rates. I think generally speaking, the balance sheets in very good shape, and again, I fall back to the unique nature of the portfolio that Empire possesses. I think that statistic Matt mentioned about the Observatory at the top of the Empire State Building really stands out to me. I remember when we went there as a family many years ago and took our girls there. It almost had a Disney World vibe to it in that there almost wasn't $1 figure that was too high in order to make sure we got our kids up to the top of that building so they could see that. Because for a lot of folks, that is a once in a lifetime experience or maybe a twice in a lifetime experience. I think the balance sheets in good shape, and I think the unique nature of the portfolio of holdings there strengthens those financials just a little bit to an eight.
Matt Frankel: The latest thing they're doing with the Observatory, they're turning it into a Rainforest Cafe pop up. [laughs] They keep finding really cool creative ways to monetize. I want to go see that. But so I gave financials at nine. You mentioned the balance sheet quality, no floating rate debt. They're not afraid to take on individual property mortgages, which is something that you don't really see too often in the reed space these days. Trades for under 12 times it's FFO guidance, so it's a relatively cheap company. A lot of people won't invest in an office reed. They should with this one.
Anand Chokkavelu: I just looked up the prices to go to the Observatory, depending on the package, like, 40-$80 a person.
Matt Frankel: To write an elevator up, look over a building, and then go back down.
Anand Chokkavelu: If you want the discount version, it was $8 to go to the top of the pyramid in Memphis. There you go. You got the cheaper option too. Now, where were we? We're on valuation. Matt, our Quanteam rates, empire state as moderate on the cautious, moderate aggressive risk reward spectrum. How well will Empire State stock do over the next five years and how safe is it? Keep in mind, a 10 is a sure thing, a one is a lottery ticket.
Matt Frankel: I'll start with safety. I gave safety a seven. I think the Quanteam hit the nail on the head with the moderate. It's as cautious as you can get for an office ret right now is basically the why I'd say it. High quality Manhattan office properties are about as safe as you get. It's still an office rit, so it's tough to give it more than a seven or so on safety. For returns, I said 10-15%, probably on the lower end, I think falling rates are going to create a nice little tailwind for all real estate investment trusts over the next few years. This is a really well run rit. I think it's going to slightly beat the market over time.
Jason Moser: I also went with a seven on safety, I think, again, a unique portfolio, but it is susceptible in that office space environment. There's some long term leases that could start to roll over and there's still some question. There's still some question marks in regard to long term leases and exactly how those may roll over. That could start to hurt business if tenants continue to whittle down office space. In regard to return, I looked at a little bit more 5-10%. Dividend yield 1.3%, and they have repurchased shares over the last several years, brought the share count down about 9.5% over the last five years, which I think is encouraging. But still there's so many question marks in regard to the office space and what exactly that looks like the future of work, where I think it's a little bit more I don't know, maybe a little bit more reasonable to expect 5-10 and hope for better.
Ricky Mulvey: As always, people on the program may have interests in the stocks they talk about, and the Motley Fool may have formal recommendations for or against, so don't buyer sell anything based solely on what you hear. I'm Ricky Mulvey. Thanks for listening. We'll be back tomorrow.
Anand Chokkavelu, CFA has positions in Peloton Interactive. David Meier has no position in any of the stocks mentioned. Jason Moser has no position in any of the stocks mentioned. Matt Frankel has no position in any of the stocks mentioned. Ricky Mulvey has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Peloton Interactive, and Tesla. The Motley Fool has a disclosure policy.
