The Wisest Thing I've Heard From Any Executive in a Long Time
Editor's note: Mentioning Uber Technologies (UBER) evokes a mixed bag of reactions...
On one hand, over the past decade, the ride-hailing pioneer revolutionized the way millions of Americans get from one place to another. But on the other hand, the company keeps burning through cash at an alarming rate, and it faces significant legal and regulatory battles.
As portfolio manager Austin Root details in today's Masters Series essay – adapted from the December issue of Stansberry Portfolio Solutions – Uber is the opposite of a good business right now. But as he explains, the company's CEO recently sounded like a changed man... and this message relates closely to the goals of all our Portfolio Solutions products...
The Wisest Thing I've Heard From Any Executive in a Long Time
This may shock you...
You're not going to hear this view from the mainstream media anytime soon. And it's not going to win me any points with some of my fellow editors here at Stansberry Research.
But I have something positive to say about Uber management – particularly, about an incredibly wise statement from the ride-hailing company's CEO.
A year ago, being positive on Uber wouldn't have seemed so crazy...
Back then, the technology company was widely regarded as an innovator and the best and brightest among the highly valued startup "unicorns." Pundits credited Uber for creating the ride-hailing industry... and even the entire "gig economy" itself (the growing portion of the workforce involved in temporary and flexible work).
Before Uber went public, private investors valued the company at more than $75 billion. (That's more than twice the current market value of nearly 120-year-old automaker Ford.) Uber CEO Dara Khosrowshahi and other executives reportedly received options packages that would pay them huge bonuses once the company reached a $120 billion valuation.
Today, Uber's market capitalization sits at around $60 billion. In November, its stock was down nearly 45% from its highs since going public last May. Today, even after rallying for much of the past two months, the stock remains down about 25% from its 2019 high.
Our friend and Empire Financial Research founder Whitney Tilson has gone so far as to say Uber is destined to go bankrupt. And last September, my colleague and Stansberry's Big Trade editor Bill McGilton described in detail the major headwinds facing Uber and its main competitor Lyft, including potentially crippling legal and regulatory battles.
To be sure, Uber has several areas of concern. But the biggest one is this: To date, the larger Uber gets, the more money it loses.
That's just not how a good business – or any business that wants to stick around for a while – should operate. Good businesses are supposed to scale and grow more profitable over time. Uber seems to be doing the opposite. Its current unit economics are negative. That means Uber loses money on every ride it provides, even before bloated corporate overhead costs.
As bad as that sounds, not too long ago, it seemed that markets didn't care about such things. Venture capital investors encouraged their startups to "grow at any cost." They argued that entrepreneurs should build market share first, and the rest would take care of itself... Don't worry if you lose money on each widget you sell – you'll eventually make it up in volume.
That's the mentality that birthed companies like money-losing, "we have free beer and pingpong in our offices" real estate company WeWork. But when WeWork began to implode last year, it changed everything...
While many of my colleagues have recounted the WeWork saga in the Digest in recent months, I refrained from even mentioning the company in Stansberry Portfolio Solutions. It has been a conscious decision. You see, up to now, I didn't think the overleveraged company was particularly relevant to what we're doing with this service.
But I bring it up now because I see its collapse as a seminal moment in the markets – a clear pivot in investor psychology...
No longer are investors willing to look past major profitability concerns. No longer are company growth forecasts and creative accounting metrics going unchallenged. The market still wants to see big growth, but only when the company operates at a profit – or at least has a credible forecast for getting there soon.
Of the companies built under the "grow at any cost" mentality, Uber appears to be one of the first to recognize that economic viability now trumps unprofitable hypergrowth – and that, as a result, it will need to adapt to survive.
On its earnings call in November, Uber's CEO sounded like a changed man. Rather than leading with pie-in-the-sky revenue targets and trillion-dollar addressable market claims, Khosrowshahi discussed "rationalizing" Uber's business and focused on long-term profitability targets.
One line in particular struck me. I'd like you to read it, and then read it again (emphasis added)...
Magical companies are ones that can compound top-line growth at massive scale, improve margins, allocate capital efficiently, and do the right thing for all of their constituencies.
We're working hard to be one of those companies.
This is easily the wisest comment I've come across from any executive in a long time. And it's also exactly the way we aim to position the Portfolio Solutions...
We want to invest the bulk of our capital in world-class operations with outsized growth opportunities... businesses that get more profitable as they get bigger... that are capital-efficient with excellent returns on investment... and that are ultimately shareholder-friendly.
Uber isn't even close to becoming a "magical company" right now. But Khosrowshahi got it right on the call. Now, let's see if he can follow up those wise words with real results.
Speaking of results... The Portfolio Solutions continued to perform exceptionally well last year. Each portfolio met or exceeded its respective goals in 2019...
The Capital Portfolio's return of 42% in 2019 trumped the benchmark S&P 500 Index's gains for the year – all while staying partially invested in safer income plays and value stocks.
Longtime readers know we tend to refrain from talking up shorter-term gains, in part because the market can move the other way on us quickly. But with such a successful year now behind us, I'll go ahead and say it: These returns are nothing short of outstanding.
Since we utilize the recommendations from editors and analysts across the Stansberry Research franchises to create this portfolio, the results are a credit to the entire research team here at our firm. Kudos, and keep up the great work!
After we established The Defensive Portfolio last May, it quickly did everything we expected of it... and more. From our launch on May 14 to our first full issue on June 3, the S&P 500 dropped 3.2% while The Defensive Portfolio gained 0.6%. That's the kind of protection we want.
The Income Portfolio allows you to "have your cake and eat it too" by generating solid, sturdy income and strong positive returns. Even after the robust 27% total return in 2019, the current yield on this portfolio is still attractive at 4.5%. As we move forward, we'll look to push this closer to 5% or more.
And finally, our all-star, all-weather product, The Total Portfolio, continues to knock it out of the park... The Total Portfolio's return of more than 32% in 2019 exceeded not only the S&P 500's returns for the year... but also our own lofty goals for the product.
That's because it's hard to keep up with the S&P 500 when you're more safely positioned and allocating capital to sturdy income plays and portfolio protection like gold and short sale recommendations. Yet, despite those prudent allocation moves that will protect us on the downside, The Total Portfolio has still outperformed a "naked long" S&P 500 Index investment in a decidedly up-market move.
We are pleased with the results. We hope you are, too.
We put together these portfolios with great care and an earnest sense of responsibility. We know that you may invest your hard-earned net worth into these recommendations. We are humbled by that trust, and we do not want to disappoint.
With Stansberry Portfolio Solutions, we aim to take the "guesswork" out of your investing. You'll be able to manage your wealth in less than one hour per month. It's a way for you to finally "be there" when it comes to your investment goals.
So if you're not already receiving these products, we invite you to come along for the ride.
Good investing,
Austin Root
Editor's note: We've just reopened the doors to Stansberry Portfolio Solutions through our most generous offer ever... and for a limited time, it comes with a unique performance guarantee. Austin revealed all the details during an exclusive live event earlier this week...
Stansberry Research founder Porter Stansberry, True Wealth editor Dr. Steve Sjuggerud, and Retirement Millionaire editor Dr. David "Doc" Eifrig sat down with Austin for this special event. They all shared their latest thoughts on the markets... their biggest predictions for 2020... and their No. 1 stock picks for this year. Watch the full replay right here.