Amazon Has Officially Entered The Car Dealer Business

In this podcast, Motley Fool analyst Asit Sharma and host Mary Long discuss:

• Disruptions to traditional car dealerships.
• Amazon's next potential venture.
• The rise and fall of GM's driverless ambitions.

Then, Motley Fool analyst Jim Gillies and host Ricky Mulvey look at Aercap, an airline leasing company that sees debt as a "raw material."

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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 Dec. 11, 2024.

Mary Long: One car dealer revs up while another slows down. You're listening to Motley Fool Money. I'm Mary Long, joined today by the illustrious Asit Sharma. Asit, thanks for being here.

Asit Sharma: Mary, no one's called me illustrious since I put too much hair gel in my hair as like a 20-something so I appreciate that.

Mary Long: You know what? I'm out here trying to help you out, gas up a little bit. We were talking about books before we started recording. I feel like that puts another check in the illustrious box for you. But I digress.

Asit Sharma: I'll wear the luster proudly throughout the rest of the day.

Mary Long: There we go.

Asit Sharma: That's not why we're here.

Mary Long: That's not why we're here. No, we're here to talk about a lot of car stuff today. We got news yesterday that Amazon has officially entered the car dealer business. Or for now, specifically the Hyundai Biz. In 48 US cities, you will now be able to buy Hyundai vehicles off of Amazon through participating dealers so Amazon acting as a middleman here. You'll also be able to finance the car, arrange a pickup, and or trade in your old car all through the Amazon app. More manufacturers are allegedly coming next year, right off the bat, I can think of a bunch of different players who are affected by this announcement. Let's maybe start with traditional car dealerships. What do you think they are thinking right now?

Asit Sharma: I think for them, it's wait and see. Let's start with traditional car dealerships that operate within the Hyundai. I'm sorry, I pronounce this differently than you, Mary.

Mary Long: I could very easily be wrong.

Asit Sharma: It's just stuck in my head. Hyundai dealerships, you get to opt into this program. You don't have to participate. Even within the umbrella of this one carmaker, I think dealers are looking to see what the economics will be like for those who participate, whether it's better to sacrifice a little bit of your profit to a company like Amazon in a trade for volume. Or just to stick through your own channels that you've built with Hyundai and with your local community. I noticed I went on this morning I am an Amazon Prime customer. I thought, let me buy a new vehicle this morning. I bought maybe a set of light bulbs from Amazon Prime.

Last, let me buy a vehicle. I didn't get all the way till the click to purchase. But what I did notice is that the dealership that showed up is about 54 miles away from me, which means that some other dealers haven't opted into the program. But this is available in, I think, like 48 states. If you are a car dealership, whether you're this brand of vehicle or you're maybe with, let's say, GM who we're going to talk about a little later, you're going to see, what the volume looks like, and if it's maybe worth you dabbling or participating in.

Mary Long: When you were going through this car buying process on Amazon, potentially, you didn't go all the way. I've heard a rumor that you can get a $2,300 gift card. Was that offered to you, too?

Asit Sharma: I didn't get to that point, and I was scared to. Amazon has that one-click function in Prime so if you're not careful, you might end up just buying the vehicle outright. Actually, I think they protect against that. I did hear about that. It's enticing. It's one thing to make you to try it out. I do want to say this about the interface. It's funny. The interface wasn't that glamorous. Actually, there's a much sharper and crisper interface if you go to Hyundai site, but there's a lot more choice. You can build your vehicle. You can root around the different makes and models.

Amazon gives you that Amazon experience where they pretty quickly show you a number of vehicles you click through. Then you get your classic prime side panel so you can configure the vehicles by whatever your trim, your price, your parameters are, and that'll shift the results to different dealerships. You can see that, while it's not so flashy, as we've come to expect those who visit the large car manufacturers' websites for buying a new vehicle, it is a faster process, and you're used to it so I had some thoughts that it might be intuitive for many people to use.

Mary Long: We hit on how traditional car dealerships might be feeling about this news. What about less traditional ones? What do you think the vibe is at Carvana's corporate office this morning?

Asit Sharma: Carvana has been through a lot. They had troubles with getting their title system right a few years ago, then the economy went in reverse on them with high interest rates. Their business model nearly snapped in, too. I think because they've been through the fire a couple of times, they've been through the crucible, they're probably like, so what?

Mary Long: As far as long they're like, another day. [laughs]

Asit Sharma: They're battle-hardened, and, too, they probably have some time, if you look at the long-term horizon for how this plays out because Amazon is going to naturally try to work with new car sales up front. That's going to be more profitable for them. They don't necessarily want to get into the business of dealing with used cars. That requires a different type of investment in hand-holding, and that's where Carvana put its money. To make that experience great for someone who wants to buy a used vehicle. They are prone to the vagaries of that market so when used car prices are higher, they make money, and when the economy isn't so great, they hit the skids. But I think it's a space that's like second order for Amazon so I don't think they're that scared yet. I think the vibe pretty much it's 10:00 AM let's go grab another cup of coffee.

Mary Long: This is second order for Amazon, as you said, but it still feels like a pretty big jump. Why do they want to bear with me, get into this race in the first place?

Asit Sharma: Mary, we've touched on this in some other conversations about Amazon. Let me stop here. I admire Amazon. There are a lot of things I don't admire. I get in trouble when I say this. I don't like some of their business practices. I don't like some of the things that they do and how they treat warehouse employees. I think automation, for one, makes humans compete with the robots, and I think they run their drivers and trucks way too hard. Having said all that, what I do admire about Amazon is that they're steadily marching toward $1 trillion in annual sales.

They're going to hit that in a few years, and I've talked before about how they're going to bypass Walmart as the world's largest retailer. When you hit that scale, it becomes harder to move the needle using the top line. If you start selling a new line of dinner cloth napkins on amazon.com, that's not really going to help you move the needle that much. They have to do that but look, get into a big ticket item business where you have a large transaction that's crossing your books, and then you make some appreciable slice on that. If we go past or vision past just working with Hyundai, then there are many other manufacturers, many other big-ticket vehicle pathways for Amazon, if they get other companies to participate, where that starts to become appreciable to that top line and can move the needle on profits and cash flow. They're so big right now. It's almost like this makes sense when you think of how huge their scale is.

Mary Long: We already think of Amazon as the everything store, and as you've mentioned, they have their hands in so many different pots, as well. If you, Asit are in charge of determining Amazon's next big business venture, doesn't even have to be big, actually, their next business venture. What would you say it should be?

Asit Sharma: I think they should get into the precision agriculture business.

Mary Long: I'm not expecting you to say that.

Asit Sharma: Only half jokingly. Look at Tesla. There's a company that also invests a lot in Cloud computing in computation and artificial intelligence, but it has this whole manufacturing bent, and that also results in big-ticket sales for Tesla. Amazon has so much smarts in the world of computation. They've got everything that Tesla conceivably has or Apple conceivably has in the electronics portion of any consumer goods. Why not manufacture something? You can sell big-ticket items. It would not be that hard for Amazon to start a small prototype R&D manufacturing operation or just snap up a couple and start figuring out how to compete with the John Deers of the world. I know it's crazy but it's also Wednesday. [laughs] What's your next question, Mary?

Mary Long: Well, I promise lots of car talk, so we're going stay in the same lane, but move on to a different angle. While this is happening at Amazon, meanwhile, over at GM, we got news that they're shutting down Cruise, their robotaxi unit. GM has poured between $8 and $10 billion into this department since 2016. A quick trip down memory lane, Asit. When this first rolled out, what was the original dream for Cruise, and what it could be?

Asit Sharma: The original dream was for Cruise to become a platform so that GM could be more than just a company that made and sold cars. If they built a fleet of row taxis somewhere here in the US that they could then export around the world, then suddenly GM becomes this ride-hailing for service business and not the sleepy old GM that we all have known all our lives. It's a romantic dream, but it's a dream that also takes capital, smarts, patience, a lot of other things. But that was the vision, and I still applaud GM for having that vision and understanding that to compete in this new world, you've got to evolve. You've got to become more than what you were, but that looks like it wasn't quite the solution for GM.

Mary Long: Why did GM decide to abandon this grand vision that they had?

Asit Sharma: It goes back to what I was just talking about. I think they had the technology that they were developing. I know they have the capital. GM outputs a lot of free cash flow each year, but this wasn't a small portion. I think the total run rate of capital expenditure on this business on the Cruise robotaxi concept was like two billion bucks a year. That's a lot of money. Then patience, sometimes you are patient as a management team, but your shareholders aren't as patient. Remember, GM was telling investors that this business would mature by the end of the decade. It doesn't look that close to it so I think investors were getting antsy on how much money that GM has put into this business. I'm going to call it rough numbers maybe $8, $9, $10 billion, and what the perceived returns could be.

Mary Long: Those perceived returns, Mary Barra had been talking about the idea that Cruise could generate $50 billion in annual revenue by the end of the decade by 2030. Obviously, by shuttering this unit, that's no longer on the table. What other project might replace that potential revenue? Was the success of Cruise already baked into GM stock, and does that now have to be reevaluated?

Asit Sharma: I'm going to give an answer that seems very counterintuitive here and that it was baked into the stock price. But if you look at the stock today, it hardly moved. I think GM is down maybe 1.5%. What I mean by that is that lots of analysts who model out to 2030 use a type of reasoning where you're basically taking the probability of something happening and then multiplying that by the total expected return. If Mary Barra says that this is going to be a multibillion-dollar business, $50 billion, as you say, in annual revenue by 2030. I'm an analyst who feels very skeptical and thinks, well, I think there's only a 5% chance of that happening by 2030, I may just plug in $2.5 billion of revenue instead of $50 billion into my forecast.

I think it was included and as we got closer to 2030, and investors, yourself, myself, people who use spreadsheets, institutional investors, everyone started to model this out. We would take the probability of what we saw on the ground and then attribute that to what the stock should be valued at so the stock could conceivably have risen if GM had stuck it out. That's one thing that's clear today. The other thing that's clear is that it's so unclear what could possibly bring that much revenue in the next what? They've got five or six years. I don't think they have a good answer to that, but investors probably feel good today that they get back maybe $1 billion worth of cash flow after some restructuring. It's important to know that the other part of that cash burn is going to continue to go on. They're going to try to develop Cruise now as more of a technology for a new car you or I might buy. Maybe by 2030, we have a fully autonomous vehicle that GM will offer that takes all this learning and technology but isn't going toward building this incredible robotaxi fleet. We can just buy that technology, there'll be some yield out of it, but there is no good answer now to any revenue source that's going to bring 50 billion bucks more to their top line in the next five to six years.

Mary Long: Obviously, GM is not the first company to pursue these driverless ambitions. They're also not the first company to abandon these driverless ambitions. Uber left the game in 2020 when they sold their self-driving unit to Aurora Innovation, which is backed by Amazon, Lyft followed suit a year later. Ford's unit, Argo AI closed its store a year after that in 2022. Apple earlier this year, noted that it abandoned its autonomous electric vehicle pursuits. Those are a lot of big companies with a lot of big money. They're all exiting this race so clearly, having the money is not enough to get you closer to the finish line. If that's true, then what is? What do you actually need to make these grand visions of driverless robotaxis a reality?

Asit Sharma: I think what you need from the start is a commitment to what's called Level 4 of driving autonomy so this is high driving automation. This is a condition in which you're like a passenger in the car and the car doesn't need a human driver for most situations. That's really hard to do, and I think many companies get into this understanding that they're already potentially at Level 2. Level 2 is like partial driver assistance. Something goes wrong, you can grab the wheel. The transition from this Level 2 to Level 3, which is you're a passenger. You're just watching what's going on. That is harder than most companies assume because to get to this level of autonomy, you need a lot of different types of technology. You need radar, you need LiDAR. You need sensor capability.

You need a lot of artificial intelligence. You need high-definition mapping. There's so many I don't even mention ultrasonic sensors. Let's not even get into this level of detail, but you can see from what I'm saying that there's so much involved in getting to truly driverless states that, again, patience comes into play, patience of management teams, patience of shareholders, patience with regulators, like in the US, we still don't have the full regulatory landscape worked out. We don't have the insurance landscape worked out. What happens when one of these robotaxis just collides with a crowd of people who are coming out of a concert? God forbid that should happen. But this stuff is so much harder than it looks both on a capital level, a technological level, patience level. This is why you see even companies with deep pockets just pull up stakes after a while, and kudos to Waymo to Alphabet because Waymo has been around now. I'm sure I'm misquoting this, but the earliest days since 2009, 2010, and rough numbers, Alphabet's probably invested 20 billion bucks already. But they've got their robotaxi fleet in several cities now, and we're going to see that grow in the next couple of years so if you can stick it out you're suddenly dominating a market.

Mary Long: Waymo sets us up for a great segue. We've got a daily news digest called Breakfast News. It's free to subscribe to summarizes market and business news each morning, and it closes with a fun question. Today, that question is all about robotaxis. I'm going to pose to you the same question that Breakfast News poses to readers this morning. Have you ridden in one, and do you think we'll be seeing them in most cities, not just these few that they're already in, but most cities anytime soon?

Asit Sharma: Unfortunately, I haven't. I live on the East Coast, Mary, and so the centers of development started from the West Coast and moved gradually to the East or Detroit. I really don't have anything that's close by to me where I can even take advantage, but I fully intend to next time I travel out west as long as it looks safe [laughs] or I'll get out of the taxi and feel great. How about you?

Mary Long: I was just in Phoenix for a half marathon a couple of weeks ago, and I was so excited to try and ride in a Waymo. I am really not that excited about self-driving cars in general, but just being close to Waymo got me amped. I wanted to try my hand at it, or, I guess, not try my hand at it because I'm not doing anything. But I will say, my friend and I were the bus that was going to take us back to the parking lot after this race was taking forever to get there so I said, oh, perfect opportunity to call a Waymo, and it was going to take 25 minutes to get to us. The bus that we've been waiting for wound up getting there in that time so we did not try it. But if I'm in a city that offers it again, I'll surely check it out. But that wait time was a little bit too much for me at the time.

Asit Sharma: Well, maybe at one of our next Fool meet-ups, if we're in a city where there are some Waymo taxis around, we'll try it together.

Mary Long: I like that plan. Asit, thanks so much for joining me this morning. Always a pleasure chatting with you.

Asit Sharma: Thanks a lot, Mary. This was a lot of fun.

Mary Long: You can subscribe to Breakfast News @breakfast.fool.com. I'll drop a link in the show notes for you to do that in case it's of interest. We already talked cars on today's show. How about planes? Up next, Ricky Mulvey makes good on a promise to let Jim Gillies talk about AerCap. An airplane leasing company that's gushing cash.

Ricky Mulvey: Jim, we've recorded, I think, about three A segments over the past few months where I've promised that we're going to talk about this airline leasing company called AerCap. Primarily, because it's a company that you seem to be pounding the table for, and when you're doing that, I usually listen. This is an aircraft leasing company called AerCap. Why are you pounding the table for it?

Jim Gillies: Well, thanks, Ricky. I guess I am pounding the table for it.

Ricky Mulvey: Why was that sarcastic? Hang on. You gave me a little sarcastic thing. I'm giving you time to talk about this company that we normally don't talk about on the show. I thought it would be nice.

Jim Gillies: I accept that in the manner in which you've just reframed it. Yes, it is a company that I own, is a company I've recommended multiple times. It's a company that I guess I am pounding the table on maybe in the context of I think there's a lot out there that's enthusiastically valued. Is that a fair way to put it?

Ricky Mulvey: Sure. That's a nice way of putting it.

Jim Gillies: Enthusiastically valued companies have this proud history of a 2000, 2001, 2002, a 2008, a 2022 coming along, and all of a sudden, those enthusiastically valued companies get a little less enthusiastically valued. But what I look at in AerCap I think we have a really interesting convergence of a number of things. That is the biggest and best player in a space facing probably the most attractive industry conditions they've had for a while, while gushing cash, deploying that capital in the service of shareholders, trading at a compelling valuation with probably the best CEO in the business. But other than that, I guess maybe I'm lukewarm on the company.

Ricky Mulvey: We can break down a few of those. Why are conditions good for an aircraft leasing company right now?

Jim Gillies: I don't know if you are aware, but we had this little thing called COVID in 2020 and 2021.

Ricky Mulvey: Missed that one.

Jim Gillies: Yeah, I was going to say, it would have been easy, if you weren't tuned in mainstream media 24/7. During the pandemic, obviously, air travel ground to a bit of a halt, AerCap which had been about a $65, $70 stock pre-pandemic got taken out behind the barn and shot. I think it bought them to $12 or $14 or something. The first time I recommended it in Hidden Gems Canada was around 25, I think, if memory serves and the thesis boils down to pandemics end. Or if they don't, we have a whole host of problems, obviously, that don't really matter about investing. But the thesis was, look, pandemics end and so, what is the world looking like?

Well, before the pandemic, before COVID, on a revenue passenger kilometer basis, on RPK basis, air travel grows about 5% a year, doubles about every 15 years, and I'm like, look, that's going to come back. We like to travel as a species, and we're going to do more of it. In fact, post-pandemic, it has been excellent. I think the most recent year was about 12% growth. But I expect we'll probably get back to that 5% thing on the long-term basis, and that's a good thing. That's just the first piece of thinking. The second piece of thinking, though, is that look, here is this company that their customers. They're buying from Boeing and Airbus and they're leasing to insert name of airline here. The airlines came out of the pandemic, I will argue substantially, structurally weakened. I know this sounds weird for people or people don't think about this. Airlines don't really want to own planes.

Ricky Mulvey: Why is that?

Jim Gillies: Because they're expensive. [laughs] They are expensive, and we want our capital tied up in less assets like that. We prefer someone else owns the asset. That would be AerCap, and the airlines want to focus on running what is, I think we can all agree, a tremendously complex logistics business, right, whether you're moving cargo or people or people as cargo, essentially, that's my last experience on Air Canada. They want to focus on the cost structure and running that business and lease payments even though you're going to probably end up paying more in the long run for the asset. They are happy just to pay lease payments and take on maintenance contracts or whatever, and they're happy to pay that much smaller amount of money to a company like AerCap, and there's a few other competing ones, too. Air Lease is another one. But I hold that AerCap is probably the best in this space. Essentially, it's the airlines looking to rationalize their capital and their cost structures, happy to push that off to someone else until someone else happens to be AerCap.

Ricky Mulvey: In the past couple of years, they've taken about 20% of their existing share count off the market, going from that 240 number, we said to about we'll call it 190.

Jim Gillies: 185 about now.

Ricky Mulvey: We're not doing. It's about 20%. I got to remember people don't have notebooks out, Jim. Is this a company trying to go private?

Jim Gillies: Well, it's funny you asked that. About a year ago, I think it was actually almost, I think it was Q3 of 2023, an analyst on the call essentially said that, and Gus Kelly basically said, yeah, the current valuation, which, by the way, at the time was trading at about 0.85, 0.9 times book value and about 6.5 times earnings. Gus Kelly basically said, yeah, if we don't get a better valuation on the market, we're just going to keep buying ourselves, and at some point, it will make sense to take ourselves private. He flat-out said that. That's pretty rare to hear from a CEO. The valuation is slightly worse today.

Ricky Mulvey: Are you saying that with air quotes?

Jim Gillies: I am saying that with air quotes as of last week. I haven't looked this week. As of last week, the price-to-book ratio here was 1.06, and the price-to-earnings ratio was 8.2. Seems fairly cheap, and I think that both of those numbers are wrong in the direction of being too conservative.

Ricky Mulvey: As we wrap up this segment, I know you wanted to talk about what debt means for a leasing company. Thoughts on that or anything else on AerCap as we finally make this time for this aircraft leasing company on Motley Fool Money?

Jim Gillies: If you pull up AerCap's quote today, you're going to see that this is a company that's about a $17, $18 billion market cap. Then you're going to pull open the balance sheet, you're going to see this company has $43 billion in debt. A subset of people are going to freak out and go, Oh, my goodness, look at how much debt here. This is a ridiculous idea. Gillies is an idiot and run away with their hands screaming. Thing is, when you're a lessor, debt is raw material to you. It's like steel for a car maker. They are deploying that into assets, in this case, planes or engines or even helicopters, but mainly planes.

They're deploying it into assets that are readily redeployable. If Mulvey Airlines decides to close down business, there's another airline there that will take the plane from you. We'll get it release really quickly. As well, they're salable. That's another thing that's going on with AerCap. They quite often will buy a new plane, and they'll run it for the first third to two-thirds of its useful life. If a plane on average is good for 25-30 years, AerCap will run it for 10-15 years, and then they'll sell it to airlines. The interesting thing is, they have been selling these planes. Historically, they were very good at selling these planes, and they would sell them for about 1.5 times book value. As mentioned, the stock today is selling for just over one times book value. But if you're able to sell assets for 1.5 times book value, that implies a couple of things. The first thing it implies is that you've been over-depreciating your existing assets. You've been taking too much depreciation expense, which has depressed your earnings down. Remember, this thing is only trading at eight times earnings, and those earnings are probably understated because of that over-depreciation.

The second thing is if I can sell my planes for 1.5-2 times book value, spoiler, most recent quarter, they're actually selling older aircraft at two times book value. What does that imply for the assets still remaining on your books? I would argue it implies that because of that over-depreciation, those assets are undervalued, at least reported there. I like to see what's going on with this company as they cycle capital through, and part of that is going to show up as debt, but you have to understand debt is a raw material. It shouldn't be viewed as scary because at the end of the day, let's say AerCap needed to pay off all their debt tomorrow or at least in the near term. In theory, they could sell a bunch of planes, engines, helicopters to pay off all the debt. The portfolio is almost 3,500 airplanes, engines, helicopters. They could monetize far more than they're currently doing.

The debt is not terribly a worry, frankly. I will close with this. One of my compatriots asked me this question when he was asking questions about AerCap and whether he should invest and he says, well but what about macro conditions? What about the macro? I'm not too sure I like the macro environment right now. There's some pressures on the stock market, pressures on recessionary talk in parts of the world. I just looked at him and said, how much worse macro-wise do you think it gets than shutting down the world for two years? Yet here is AerCap making all-time highs on the other side of that. Are you expecting we're going to shut down the world again? Because I suspect we're not, and if we don't, then here is this company again. Tremendous cash flows, super valuation, dominant place in their space, industry conditions in their favor with the best CEO and capital allocator in the industry. Seems pretty good to me.

Ricky Mulvey: You know what? I'm glad we didn't do this on A segment. You needed some runway for this one. Jim Gillies, thanks for your time and your insight. Appreciate being here.

Jim Gillies: Thank you.

Mary Long: As always, people on the program may have interest in the stocks they talk about, and. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and are not approved by advertisers. The Motley Fool only picks products that it would personally recommend to friends like you. I'm Mary Long. Thanks for listening. We'll see you tomorrow, Fools.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Asit Sharma has positions in Amazon. Jim Gillies has positions in AerCap, Amazon, and Apple. Mary Long 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 Alphabet, Amazon, Apple, Tesla, Uber Technologies, and Walmart. The Motley Fool recommends AerCap and General Motors and recommends the following options: long January 2025 $25 calls on General Motors. The Motley Fool has a disclosure policy.