Dylan Lewis: Welcome to Industry Focus, the podcast that dives into a different sector
of the stock market every day. It's Friday, December 7th, and we're talking IPO and IDC.
I'm your host, Dylan Lewis. I'm joined on Skype by senior tech specialist, Evan Niu.
Evan, what's going on? Evan Niu: Not much. We have a holiday party
going on this weekend. Going to have some friends over. That should be fun.
Lewis: I, too, am having a holiday party this weekend! Look at that! I think it's just early
enough in December that it's not too close to all the real craziness of the holidays,
so everyone's like, "We'll do the friend stuff this weekend."
Niu: It's that time of the year. Lewis: It's that time of the year.
What's on the agenda for you guys? What are you going to be doing?
Niu: Nothing too much, just hanging out. Open-house, people can come
by as they want whenever they're free. Pretty chill. Lewis: Got it. I'm doing something similar.
We're going to do a little movie kind of thing early on in the day, get in the spirit,
then decorate the tree that I have gotten with my roommates. Our non-denominational holiday tree,
because we are a mixed household. I'm excited for that. I'm excited to have some eggnog.
I'm also excited, Evan, because we're getting
the first inklings of a Lyft IPO thanks to some news that came out earlier this week.
Niu: That's right. It's funny, Lyft publicly announced that they made a confidential filing
[laughs] with the SEC. They've now filed their S-1 registration statement with the
SEC on a confidential basis. It's really the first step towards an IPO, which is probably
going to come in early 2019 at this point. Lewis: Yeah. This is notable for a couple
different reasons. This is a company that has been private for quite some time.
It's one of those unicorns that people have been watching for a while. They're also beating
their competitor Uber to the public markets with this timeline, if it holds. We're seeing
the confidential filing being used. Again, this is something investors have seen more
and more of. Let's unpack some of that. It seemed pretty
clear that Uber would be going public at some point in 2019. They also have some incentives
to go public based on some of the deals that they've structured with SoftBank.
Niu: Right. Lyft at this point being likely to go public first is meaningful,
because not only are they upstaging Uber, but there's quite a bit of investor demand to get into
this ride hailing space, and it's really just Uber and Lyft as the main ride hailing companies
if you exclude, before we talked about Waymo and Alphabet. As far as pure-plays go,
it's really Uber and Lyft. And I think there's quite a bit of pent up investor demand and
interest in this space. Whoever can get out there first might be able to capitalize on
some of that pent-up demand being let loose, and investors for the first time having a
chance to get into this space. Lewis: And as the smaller player, too.
Lyft is that clear #2 in ride hailing. They're about a fifth of the size of Uber.
For them to go public, enjoy all the name recognition that comes with that, all of the PR,
all the press, that might help with some adoption here in the U.S. and Canada, where they compete
with Uber, and really help them close the gap. They have a long ways to go to make that happen,
but I have to imagine going public will help a bit.
Niu: Absolutely, in terms of brand awareness, you're absolutely right. Uber is much more
prominent in more markets around the world. As you mentioned, they're a lot bigger.
Lyft is really just in the U.S. and Canada. They don't have a lot of brand recognition outside
of North America. So, this will probably raise that awareness a little bit.
Lewis: Unfortunately, we are kind of grasping at straws for what Lyft's financials look like.
Details are a bit scarce right now. You mentioned this confidential filing.
A lot of people probably don't understand what that means and why companies are allowed to
do this. So, just as a little primer, and something that you can stow away,
because you're going to see this more and more -- confidential filings are a relatively new thing.
It was something that was opened up as part of the Obama-era JOBS Act. Ideally, it was supposed
to be used for small companies, ones that have less than $1 billion in revenue, to confidentially
file a draft registration with the SEC months and months before going public. The idea there is,
they wouldn't be opening up their books to public scrutiny before deciding to go public
and making that step. Once they did that, all the paperwork would become available
15 days before the company would begin its IPO roadshow.
Like I said, this started with small companies as part of the JOBS Act. Mid-2017, the SEC decided,
"We're going to eliminate that cap on $1 billion in revenue." And you're seeing
all these larger companies doing that now. Niu: Right. I think Lyft certainly qualifies in there.
They're above $1 billion in annual revenue. They're taking full advantage of that.
Lewis: Yeah. And when you're in a space where
you have such a clear competitor in Uber, it totally makes sense that you don't want
to have to show them your books and your key business metrics.
Niu: Right. For private companies, keeping the books kind of under wraps is pretty important,
particularly when you talk about this type of competitive space.
Lewis: Big picture, the confidential filing is not a shady thing. This is something that
was passed, like I said, during the Obama administration as a pro-business thing,
making it a little bit easier, a little bit less intimidating, for small companies to wade
into the pool of going public, and starting to have those conversations with the SEC.
Now, I mean, is it great for investor transparency? Not necessarily. I think ultimately, the companies
that do wind up going public will wind up providing all the necessary paperwork, and
people are going to be getting it well ahead of when the companies start their roadshow
and start approaching investors anyways. It's a timing thing more than anything else. You'd
like to have the information, of course, but it isn't anything to be too concerned with.
Niu: Right. The timing of this is important, too. When they first passed the JOBS Act,
it was 2012. With that $1 billion limit, the goal was to basically get these startups to
consider going public more. Startups are an important part of the economy, they have
a lot of jobs. But, I think what they didn't foresee was the age of the unicorns sprouting
that we've seen in recent years, where you have all these companies that are becoming
quite large but staying private. I think that's the context of why they've changed this limit
to allow these larger companies to take advantage of the confidential process, like you mentioned.
Lewis: Yeah. And looking at the slate of potential 2019 and 2020 IPOs, we're just going to see
more and more of this. There's Uber, Lyft, Palantir, Airbnb. There are a ton of really big,
highly coveted private companies out there now that are probably considering an
IPO at some point soon. Investors, you're going to see this confidential filing come
up again. That's what it means. In talking about this in prepping for the show,
I threw out there on Twitter that we were going to be talking about the Lyft IPO
and was curious if anyone had any questions. We have one from listener Austin. He asks,
"Not sure anyone saw the Lyft IPO happening before Uber. Which company is the better company?"
Evan, we might think that they're kind of synonymous because a lot of people use them interchangeably.
But these are two totally different companies.
Niu: Right. Not only in terms of size, but there are also some pretty big strategic differences,
particularly with how they're approaching autonomous driving over the past year.
Uber has had such a tumultuous experience with trying to develop self-driving cars.
They had this whole trade secret thing where they reportedly hired a Google engineer and he
stole a bunch of stuff, and they had one lady die from one of their autonomous cars.
So, they really pulled back quite a bit on their investments in self-driving vehicles.
Whereas Lyft is trying to expand more into it and keeps pushing more and more. That's going
to be a pretty core differentiator long-term -- I mean, super-long-term, because we're
nowhere near close to actually having self-driving cars.
Lewis: It's a key element to the long-term thesis for both of these companies. We don't
have a ton to go on here, in terms of company financials, to do an apples-to-apples comparison.
If you want some of the highlights, though, you can look and see, Uber is international,
they're in over 60 countries. Lyft is focused in the U.S. and Canada. Uber has some other businesses.
They also do Uber Eats and they have a freight business. Lyft is pretty much
focused on ride hailing and some of the micro mobility stuff that John Rosevear and Nick Sciple
were actually talking on yesterday's show. If you want a little primer on that space,
definitely check that out. Uber also has some brand baggage associated with it.
They've moved away from the Travis Kalanick era, where there were a lot of problems
with the corporate culture there, some of the things you mentioned with the corporate
espionage with Google. Lyft doesn't have that. Lyft is like this nice soft and fuzzy brand.
Niu: Right. I mean, I'm not a big user of
ride hailing services in general because I live in the suburbs, but I will say that in general,
my wife and I absolutely refuse to use Uber whatsoever, even when we're travelling
and when we need to use ride hailing locally, specifically because of that brand baggage
that you mentioned. Their internal culture and ethics under Kalanick were just so horrendous,
in terms of just the cutthroat things they would do with competitors, their internal
culture with women, the misogyny, there's a whole long list of things that's not worth
covering right now since it's so long. But, I personally will not use Uber. I'll use Lyft,
and we'll use Lyft whenever we need to. But, speaking of brand baggage, we just don't use it.
Lewis: There are, though, plenty of people
that are happy to use Uber. There are a lot of people that look at the price and say,
"What's the better price? What's the better fare?" Some context around what we do know
for the books of these two companies: Uber did $2.7 billion in revenue in Q2 of 2018,
which is up 51% year over year. They're posting adjusted EBITDA losses of around $400 million
on that revenue. Lyft, in the first half of 2018, did somewhere in the neighborhood of
$900 million in revenue, up 120% year over year, and posted a net loss of $370 million on that.
Neither of these businesses are profitable. Both are growing very quickly. Those growth
rates and the revenue bases really speak to the size of these two companies. It's kind
of a Coke and Pepsi dynamic. Niu: Right. That's one thing that jumps out
to me, is how much money these companies lose for operating a fairly capital-light business.
They're just operating a platform. I've always looked at ride hailing in its current state,
it's kind of like it's subsidized by venture capitalists, because they offer these
rides for so cheap that are below cost, which is why they had to raise so much money.
Uber has raised $25 billion over 21 rounds. Lyft has raised like $5 billion. These companies just
devour so much capital. And it's kind of hard to justify why. Of course, if you're
investing in autonomous cars and stuff, that makes sense. But even the core operations
... we'll get more detail whenever they actually start showing us the books, but my sense is,
they're still losing a lot of money up front. Lewis: Yeah. I think Austin will get his more
responsible and direct answer from us down the road when we can really look at both of
these companies. What I will say, though, is that the future is so dependent on autonomous
vehicles for both of them. The idea that they can dramatically bring their cost structure down
by having a fleet of autonomous vehicles and not having to pay drivers makes the numbers
look a lot better for this kind of business. You think, okay, there might be a relatively
easy path to that. But, no. This is an incredibly competitive space. Just as a case in point
for that, Alphabet's driverless car company Waymo announced Waymo One this week.
This is a commercial ride hailing service. They're piloting it in the Phoenix metro area.
And rides are going to be carried out with a safety driver, but this is another step towards self-driving
cars taking hold. And Alphabet is not a company that needs to win self-driving cars to have
their future work out. They have way more money than Uber or Lyft possibly can,
and they're beating both of them to market in autonomy.
Niu: Right. Longer-term, it's just so uncertain who's going to actually get to full autonomy first,
like level five autonomy because it's such a tough challenge to tackle from a technical standpoint.
Some companies use LIDAR. Most companies use LIDAR, but some are trying without LIDAR.
It's not clear yet what approach is actually going to get people there first.
Then, on top of that, then you have to turn around, look at how you're going to actually
create a business model out of it. Lewis: Yeah. And then, GM is in there with
Cruise; Ford has its own mobility play. It's a crowded space. You have a lot of players
with a lot of different incentives. Like you say, whoever cracks autonomy first is going
to be the one who drives the way this industry goes. It's a hard business either way.
You'll get more details from us as we get the company financials. But, if you do nothing else,
if you're not an Alphabet shareholder, that's a pretty easy way to access this market.
And, you have the backing of a rock-solid monopoly to throw off cash while they invest in this
kind of stuff. As an Alphabet shareholder, I'm happy to say, if this winds up becoming
something that contributes to an already-strong ad business, awesome, because they're the
leader in this space right now. Niu: Right. We're just going to have to wait and see.
I'm personally not interested in either Lyft or Uber because of everything
we just mentioned. But it'll be interesting to look through the numbers when they finally
give us some. Lewis: Yeah, I cannot wait.
Unfortunately, we're going to have to wait until 2019. Evan, not to be outdone on the news front,
we have some fresh data from market research firm IDC on wearables and VR. I really love
checking these out. I think it's a great at-a-glance for what's going on in the consumer tech space.
This firm does such a good job giving people the 5,000-foot view.
Niu: These are really exciting markets in general. Getting this data on these estimates
and how it's going is a really useful tool for investors to see, when they're looking
at their investments in companies that are playing in and participating in these markets.
Wearables is a particularly fun one since wearable tech is a nascent category that's
still on the up and up. What we saw in the third quarter was that
basic trackers returned to growth. You know, the Fitbit kind of fitness trackers.
That was thanks largely to new product launches in emerging markets. Basic trackers are still
pretty popular in emerging markets because they're more affordable. The U.S. market was
actually flat in the third quarter because that market is already transitioning from
first-time purchases towards your placements and upgrades -- actually, in my opinion,
sooner than I would have expected. Lewis: One of my favorite things in looking
at these reports, though, is who's moving where in terms of market share? We can see
the competitive landscape. That's always fun. What did you see there?
Niu: This quarter, we saw Xiaomi reclaim #1. Apple had been #1 for the past two quarters
thanks to its Apple Watch, but Xiaomi's Mi Band 3, which is a basic tracker, has been
selling really well, so they were able to actually take #1 in the third quarter.
If you look at smartwatches specifically, and you exclude basic trackers, Apple is still #1.
In terms of the Apple Watch, they launched the Series 4 at the very end of the quarter.
So, they only had about 10 days left to the quarter when Apple Watch 4 launched.
They also discounted Apple Watch 3. Actually, that lower price point has also been helping drive
demand and drive unit volumes. Series 3, expectedly, was the majority of units. But, according to
IDC's estimates, the Series 4 was actually almost 20% of unit volumes in just 10 days.
That shows how strong the demand for Series 4 was at launch.
Lewis: That's pretty incredible. We can't talk about the wearables space without also
talking about Fitbit. We've given Apple Watch its time. What's going on with Fitbit in this report?
Niu: Fitbit has become the #2 player primarily
with its Versa smartwatch, which is much more approachable, it's a little bit cheaper.
That's what we've seen play out over the past couple of quarters. You and I have covered their
earnings a couple of times. We've seen this coming. The good news for Fitbit is,
the IDC expects them to keep that #2 status in the smartwatch market, mostly because, as we mentioned
in previous shows, Android Wear OS is not competitive. No one's really buying those devices.
The market still wants some alternative to the Apple Watch, and Fitbit has stepped
up to provide it. Lewis: Yeah. It's probably good for consumers
to have a couple different options out there. It's nice to have some competition,
nice to have a little bit of a push on the feature side so they keep innovating.
Niu: The big thing that IDC points out is that healthcare is really becoming a core
part of this market. Apple and Fitbit are both really pushing towards these digital
health platforms in their own different ways. Now, who gets there first, and who can really
build the most robust platform is an open question. It remains to be seen. But, certainly,
Apple has a lot more money to invest in building it. That's going to be a big thing to watch
going forward, is the underlying platform of these devices.
Lewis: Thinking about this market, though, you have the low-end and the high-end.
It sounds like any hardware profits are going to be made on the smartwatch side.
Market share gains are going to be happening with the cheaper end of the market. How do those
factor into the health solutions that these folks are looking for? Is it that, if we want
to track who's going to have the better health platform, we should be looking at the high-end
smartwatch sales? Niu: The basic trackers are just so limited
in the amount of data they can collect. The value that people are putting into the actual
platform will also determine what kind of device they're interested in. If you look
longer-term, smartwatch prices have been coming down quite a bit. Apple does this thing,
and they've been using the same strategy for the iPhone for many years, where they extend the
overall lifecycle of a product by selling the same product over years and years,
but they just lower the price over time. As those prices keep coming down, the difference between
going out and buying a basic tracker or buying a smartwatch,
even if it's a previous generation smartwatch,
will keep getting smaller and smaller. And as that gap shrinks, more and
more people will be willing to make the move up-market into a smartwatch that is more capable,
can do a lot more things, can collect more health data, and give you more value out of
those health platforms. Lewis: Yeah, it doesn't feel like as much
of an upfront investment, right? Niu: Exactly. Especially if the difference is small.
If the difference between a basic tracker and a smartwatch is $20 or $50,
which one would you pick? Lewis: Right. I think upfront investment
might be the perfect way to segue into the VR and AR discussion. This is a market where
I think a lot of people have been very excited for a very long time. It's a sexy idea,
the idea of virtual reality. The reality of virtual reality is, a lot of the rigs are expensive,
and a lot of the computing needs to power this stuff are also fairly expensive.
What does adoption look like there? What did you glean from the report?
Niu: People like thinking about VR because it's so sci-fi. [laughs] The VR market has
been declining for about four consecutive quarters. It finally returned to growth in
the third quarter, according to IDC's numbers, with 8% growth. There were 1.9 million units
sold worldwide. Kind of like we're seeing in the wearables market, the falling prices
and the discounts are really helping to spur unit volumes in both consumer and enterprise
markets because it makes it cheaper for people to give it a try.
Lewis: In the wearables market, we have the very limited functionality bands, and then
we have the smartwatches. In VR, we have screenless viewers, tethered headsets, standalone headsets.
What's going on within those spaces? Niu: Screenless viewers, which are those accessories
where you strap a phone to your face, which is kind of not a great experience, those volumes
are getting crushed. Those volumes are down 60%, almost. I don't think that's too surprising
because those products have never been that compelling to begin with. It's just a really
cheap way for users to explore a really rudimentary VR experience. There's also not a lot of potential
for innovation because it's just accessory, whereas the phone itself is the primary device
to delivering the VR. Companies aren't working too hard on this category, so it's not too
surprising to see the volumes dropping here. Lewis: I've always thought of it as the gateway
to VR. Maybe it's the first way that some people experience any VR interaction.
You have the Google Cardboard-type product, where you pop it in, it costs like $10 or something
like that. I remember being at trade shows, and people literally gave them away as a way
to build brand buzz and things like that. But you're like, "Oh, this is neat," and then
it collects dust on your desk for a year. So, I can see why that category might be getting crushed.
What about some of the more involved stuff?
Niu: The tethered headsets, which are the ones where you have the headset, but you still
have to plug into a high-powered PC, that market is still pretty solid. Sold over
a million units for the second time ever. Sony is the clear leader with the PSVR. They sold
almost 500,000 units. They have a pretty big advantage here because they've sold over 80 million
PS4 gaming consoles to date. That's a pretty large installed base of people that
already have the big hardware that you need. Then, the PSVR is a small accessory that you
buy on top of that Whereas, compared to PC-based virtual reality, like Facebook's Oculus Rift,
the Rift itself is kind of expensive, but also, you need to buy a gaming PC that's $800 or more.
That's a pretty expensive setup. There's clearly a market for it of enthusiasts
that are really big into it. Most of the applications are still gaming. That market is still doing pretty solid.
Lewis: That's kind of funny, because Oculus
is the Kleenex of VR. I think if you were to ask someone to name a VR rig, that would
be the one that they'd throw out there. Niu: They're #2. They sold about 300,000 units
in the quarter. They're second behind Sony. #3 is HTC. Three main players here.
Lewis: Something that I was surprised by looking at this report is how AR hasn't taken the
way that I was hoping it might. I look at VR and I say, it's immersive, it's wholly immersive.
AR is a hybrid there. And yet, it is still a very small portion of the market
of this combined AR-VR space. Niu: Right. AR is still only about 3% of the market.
Kind of like the early VR stuff we were talking about with the accessories,
AR primarily is being delivered through phones these days. You have Apple and Google really
pushing AR technology on their own platforms to allow developers to create these experiences
that are all through your phone. You use your phone as a viewfinder. As far as pure AR headsets go,
there aren't a lot of players. It's really Lenovo and Microsoft. Lenovo sells this one
headset that's very limited, there's just one Star Wars game. Microsoft has its HoloLens,
which there's been a lot of buzz around, but it's still only available to developers,
and it costs $3,000. Longer-term, Facebook and Apple are reportedly
working on these dedicated AR headsets. As we've talked about before, Tim Cook has talked
about the potential for augmented reality extensively. He really thinks it's a game-changing technology.
We know that Apple's investing heavily in it, we just don't know when they're
going to do something. Lewis: Your point about AR, and that headset
costing $3,000, that's been the struggle with this category in general. It's expensive,
and people don't necessarily want to lay out that kind of money for something that
the content isn't there yet for. The entertainment experience isn't quite there yet. Think about
how many things you drop several thousand dollars on to just purely enjoy. Maybe a TV
every couple years. I've long held the idea that the real, most visible adoption of AR
is going to happen with phones. And it hasn't really happened in a way that's all that functional
or all that helpful yet. Most of the AR experiences that people have on phones are emojis or filters on Snap.
They aren't these really helpful at-a-glances, or layers onto whatever you're
looking at that can help you make sense of something.
Niu: Right. Of course, you have to mention Google Glass from years ago, which was just
so ahead of its time. Yeah, I definitely agree that the really killer use cases aren't there yet.
But that being said, I think it's really exciting if you look at some of the stuff
that these developers are making. I saw one the other day, there was a photo-realistic shoe --
some product demo-type thing. But it looked photorealistic. It was kind of crazy
how good it looked. There's a lot of these glimpses that we're seeing of what developers
are working on that do have a lot of promise and potential for the future. But, I definitely
agree that it's not quite there yet, to the point where it would warrant someone buying
a dedicated AR headset for everyday use. It's just not there yet.
Lewis: To recap all of this, it sounds like Sony is continuing to do what it needs to do
to further VR in the gaming space. For some of the other big tech names, expect AR
and maybe some idea of VR to play into hardware that people maybe already have, or to future
product lines. But a company like Apple, this isn't playing into the strategy in a very
visible way right now. Niu: Right. But they're laying the groundwork
for it eventually. They're doing the right thing with getting the content and getting
people used to the idea first, which paves the way for eventual adoption of a dedicated
headset later on. Lewis: Do you think that we will see something
AR or VR-related from Apple before we see Uber and Lyft go public, Evan?
Niu: [laughs] No. I think it'll probably be three to five years or so. Definitely not
2019, would not expect that. Lewis: I guess we'll just have to keep waiting.
That's just the way things go. Evan, thanksfor hopping on today's show.
Niu: Thanks for having me! Lewis: Listeners, that does it for this episode
of Industry Focus. If you want to catch more of our stuff, subscribe on iTunes or get us
wherever you get your podcasts. You can also catch videos from the show over at YouTube.
As always, people on the program may own companies discussed on the show, and The Motley Fool
may have formal recommendations for or against stocks mentioned, so don't buy or sell anything
based solely on what you hear. Thanks to Austin Morgan for all his work behind the glass today.
For Evan Niu, I'm Dylan Lewis, thanks for listening and Fool on!
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