Apple’s $20 Billion Search Pact and GM’s EV Challenges Explored

Ricky Mulvey: As we discuss the current landscape, concerns about monopolistic practices continue to surface. My focus would certainly be on acquisitions, as many tech firms have historically gained an edge through strategic purchases. The data sharing and search agreements also warrant investigation. However, regarding Google’s Chrome division, I find it hard to envision that being separated from the company. Ironically, I could be wrong, and that could indeed be the recommendation we see.

Ricky Mulvey: Observing this case, I see a potential ripple effect. Dilar Lewis pointed out that Apple could miss out on an easy $20 billion—the sum Google pays to make them the default search engine. Many tech analysts are closely watching how this unfolds. What ripple effects are you monitoring?

Jason Moser: That $20 billion is significant, yet for Apple, it’s just a fraction of their total revenue and wouldn’t drastically impair their operations. We’re also witnessing similar scrutiny with Meta. Many firms, including Google, are under the anti-trust microscope. The interesting part is that while Google is being scrutinized, they aren’t alone; many companies with extensive reach could face the same fate. It seems likely that we will see further investigations into other major players soon.

Ricky Mulvey: I must push back on your assessment. That $20 billion comprises approximately 16% of Apple’s pre-tax income, which holds implications for their growth narrative. If the agreement diminishes, shareholder sentiment could be adversely affected, especially given the company’s slowing growth trajectory.

Jason Moser: You make a valid point; the $20 billion is indeed high-margin revenue. However, Apple has various revenue streams to support its business. I don’t believe losing that agreement would fundamentally collapse the company.

Ricky Mulvey: Let’s shift focus to GM, where Business Week’s David Welch covers an intriguing topic regarding Mary Barra’s $35 billion EV investment amid a complicated political climate. The piece highlights that while GM is increasing EV sales, they face challenges including ongoing losses on these vehicles. What key insights did you derive from the article?

Jason Moser: To me, the crux of the matter is GM’s push to develop their own battery technology, Ultium. They’re making substantial investments to bolster production efficiency and reduce costs. This path, however, is fraught with challenges, and I commend their commitment to innovation.

Ricky Mulvey: I noted the intricate lobbying efforts as well. GM is adversely affected by tax incentives favoring EV leases that support international competitors. Eliminating these incentives would harm GM, but even more so impact their rivals. The market dynamics, especially in states like Colorado, seem unsustainable. I recently secured a low-cost EV lease, but I agree—such deals can’t last indefinitely given their financial imbalance.

Jason Moser: You’re right; the current model doesn’t appear sustainable. Various companies aim to promote EV adoption, often incurring losses initially. Establishing demand is critical, with the hope that as acceptance grows, they can command better pricing.

Ricky Mulvey: Given GM’s lengthy involvement with EVs since the 1990s, why are they still selling at a loss?

Jason Moser: For now, selling at a loss is not their long-term strategy. However, developing EVs involves hefty upfront costs, significant R&D expenditures, and necessary factory adjustments. Battery costs, while declining, have historically posed challenges. Additionally, gaining market share and consumer trust takes time. Their goal is to become profitable as they strengthen their manufacturing processes and expand market presence.

Ricky Mulvey: It’s notable that Tesla, despite its polarizing reputation, manages to profit from EV sales. As consumer sentiment shifts and less favor goes to Elon Musk, General Motors has notably increased its EV market share from 6% to 12% within a year as EV sales doubled. Is this a result of Musk’s political controversies or Barra’s leadership?

Jason Moser: Perhaps it’s a combination of both factors at play. Recent polling indicates a growing negativity towards Tesla, which could partly explain GM’s improved figures.

Ricky Mulvey: That seems wise. The market is clearly shifting.

GM’s Electric Vehicle Strategy: Insights from Industry Experts

Recent discussions among industry analysts highlight the impact of leadership decisions on businesses. A notable viewpoint is that Elon Musk’s actions over the past year have undeniably influenced Tesla’s operations and market perception, demonstrating potential risks associated with business leaders openly expressing their political views. On a different note, Mary Barra, the CEO of General Motors (GM), is receiving recognition for her strategy to expand the company’s electric vehicle (EV) offerings.

The Shift to Electric Vehicles

Barra emphasizes that electricity offers significant advantages for cars and represents the future of transportation. She believes that pursuing electric vehicles is imperative for GM, aiming to provide consumers with a variety of options. This strategy appears pragmatic; it’s not about an immediate switch to all-electric models. Currently, consumers show diverse preferences, and GM’s focus is to cater to those varying demands, which includes EVs, hybrids, and traditional gasoline vehicles.

Market Perspectives on Tesla

During discussions about Tesla, it was noted that approximately 27% of people hold a neutral stance on the company. This neutrality suggests a cautious but engaged group who may prefer discussing non-political topics. Personally, I find this crew appealing; they bring a refreshing perspective to discussions.

However, despite the ongoing innovations in battery technology and EV market growth, my interest in GM as a stock remains muted. Automakers, traditionally cyclic, may not present the most enticing investment opportunity for everyone. My preference lies outside the auto sector.

Hertz’s Market Movement and Insights from Bill Ackman

Shifting our focus, the spotlight is now on Hertz, the car rental company, which has surged nearly 150% in value. This spike coincides with hedge fund manager Bill Ackman acquiring a 20% stake in Hertz. As a company leveraging the car rental market, Hertz faces significant challenges, including increasing debt and decreasing international tourism. It raises the question: what is Ackman seeing in Hertz?

Ackman perceives Hertz as potentially mispriced, particularly after previous strategic missteps involving a heavy investment in Tesla vehicles. With new leadership under CEO Gil West, appointed in April of last year, he believes the company is poised to recover. Furthermore, though Hertz’s balance sheet has substantial debt, its structure provides financial flexibility for future periods.

Ackman’s thesis also hinges on the potential rise in used car values, which could positively affect Hertz’s asset base. Speculations about self-driving technology and partnerships, such as with Uber, present additional possibilities for Hertz’s fleet. Currently, Ackman believes Hertz shares could reach $30, while they trade around $9. For retail investors considering following Ackman’s lead, it’s crucial to conduct thorough research and make informed decisions.

Final Thoughts on Investment Strategies

The rapid rise in Hertz’s stock price raises caution for prospective investors, as Ackman may not intend to hold the stock for long. He likely views this thesis as a short-term opportunity based on current market conditions. Therefore, while pursuing potential investments can be exciting, it’s important for individual investors to weigh their own strategies carefully amid swift market changes.

Next Segment: Understanding Tariffs

In the next segment, Robert Brokamp will address questions concerning tariffs, 401(k)s, and backdoor Roths. If you have queries, please email us at [email protected].

The first question is about the mechanics of tariffs. If US Company A buys widgets from Foreign Company B for $100 and faces a 10% tariff, resulting in a total cost of $110, the question arises: who receives the additional $10, and what’s its purpose? Tariffs are collected by US Customs and Border Protection, which are part of the Department of Homeland Security, designating this money as new revenue for government budgets. Before any imported item crosses US borders, it’s classified and assessed for tariffs.

Understanding Tariffs, 401(k) Rollovers, and Roth IRA Strategies

In the world of imports, it is the importer who classifies the products. The U.S. Customs and Border Protection (CBP) sometimes verifies these classifications. Employing over 60,000 personnel, the CBP monitors 320 official ports of entry across the United States. Classifying an item accurately can be complex, especially when products originate from multiple countries. A key resource in this process is the harmonized tariff schedule, which, if printed, would span over 4,400 pages.

Most importers choose to hire customs brokers to streamline the process of proper classification and tariff payment. As pointed out, the tariff obligation falls on the importing company, usually a U.S. entity. The foreign manufacturer is not responsible for paying these tariffs. But where does that money go? Collected by CBP, tariffs are forwarded to the U.S. Treasury, contributing to the general fund, often referred to as America’s Checkbook. These funds can be utilized for various purposes, including future tax cuts or aid to businesses adversely affected by tariffs—like the financial assistance provided to farmers during the first Trump administration due to reduced trade with China. Essentially, the revenue from tariffs is flexible, allowing for diverse government expenditures.

Roth IRA Contributions: Navigating Restrictions and Opportunities

Ricky Mulvey: The next question comes from an anonymous listener who recently switched jobs and is considering a 401(k) rollover. They query about their eligibility for a Roth IRA since their current salary exceeds the eligibility limits for direct contributions. Their financial advisor suggested a backdoor Roth IRA. Can you explain this concept further and highlight any tax implications?

Robert Brokamp: Congratulations on your new job and increased income! You can contribute to a Roth 401(k), if available through your employer, since this option has no income restrictions. When direct Roth IRA contributions are not possible, a backdoor Roth can be a suitable alternative. Here’s how it works: Initially, you make a contribution to a nondeductible traditional IRA, followed by an immediate conversion to a Roth IRA. If this is your sole traditional IRA, you should encounter minimal tax consequences since the original amount was already taxed.

However, complications arise if you hold other traditional IRA assets, including workplace plans like SEP or SIMPLE IRAs. Due to the pro-rata rule, conversions from these accounts are considered proportional across all traditional IRAs, resulting in potential tax liabilities. For instance, if you have $63,000 in pre-tax traditional IRAs and make a $7,000 nondeductible contribution, your total balance is $70,000. Consequently, 10% is after-tax, resulting in 90% being taxable upon conversion. To mitigate this, consider rolling your traditional IRA into your 401(k), provided your plan allows it. This action excludes the 401(k) balance from pro-rata calculations.

Clarifying Roth IRA for College Savings

Ricky Mulvey: Another question comes from V, regarding the feasibility of grandparents establishing Roth IRAs with a grandson as the beneficiary for college expenses. What are the complexities surrounding this arrangement?

Robert Brokamp: This inquiry involves several moving parts. Grandparents can indeed open Roth IRAs if they have earned income, meaning income derived from work, rather than investments or benefits. However, they must independently complete the necessary documentation, though a power of attorney may facilitate this process. Once the IRA is established, contributions can derive from any source, not solely the grandparents’ accounts. When it comes to college expenses, contributions to a Roth IRA can be withdrawn tax and penalty-free at any time.

Additionally, specific IRA rules allow withdrawals to be utilized for qualified education expenses for the IRA owner and their immediate family, including grandchildren, bypassing early distribution penalties under certain conditions. However, traditional IRA withdrawals may incur taxes depending on the time frames involved. A preferred strategy may be for grandparents to contribute to a 529 college savings plan, which offers tax-free growth and withdrawals for qualified expenses. Funds not utilized in the 529 can gradually be transferred to a Roth IRA, although strict rules, including a $35,000 lifetime rollover cap and a requirement of 15 years of account activity, apply.

Advantages of Grandparents Contributing to a Child’s 529 Plan

Ricky Mulvey: Is there a benefit in allowing grandparents to contribute to a grandchild’s 529 plan instead of the parents?

Robert Brokamp: Yes, surprisingly, there is an advantage here that many see as a potential loophole. When applying for financial aid, only the child’s and the parent’s assets are reported. Grandparents’ assets, however, are excluded, making a grandparent-owned 529 plan advantageous in financial aid assessments.

Exploring the History of the 401(k)

Ricky Mulvey: Karen asks if there are any resources available regarding the origin of the 401(k). What can we share about pension evolution?

Robert Brokamp: The quest for information on the history of the 401(k) raises essential discussions about its development and role in the evolution of retirement plans. Details on this topic provide valuable insights into the financial landscape today.

Understanding 401(k) Plans and Their Impact on Retirement Savings

Robert Brokamp: There are a few books on the subject, Karen, but I recommend a podcast episode instead. The December 7, 2021 episode of Motley Fool Answers features an interview with Ted Benna, known as the father of the 401(k). Ted Benna was a benefits consultant at a company outside of Philadelphia. A law passed in 1979 allowed for employer contributions to tax-deferred accounts. In 1980, while working for a banking client, Benna recognized that this law, codified in Section 401(k) of the IRS Code, could enable employees to make pre-tax contributions. He proposed setting up a plan that would allow employers to match those contributions, despite the law not being designed for that purpose. Initially, the banking client’s attorney dismissed the idea, citing fears about being the first to adopt it. However, Benna’s own company decided to create the first 401(k) plan on January 1, 1981.

Fortunately, Benna’s connections helped secure government approval. A client of his company had ties to the Reagan administration, which facilitated contact with the Treasury Department. Although it took a few years for the 401(k) to become popular, it eventually gained widespread acceptance.

The shift from traditional defined benefit pensions to defined contribution plans like the 401(k) primarily revolves around costs and complexity. Companies prefer the simplicity of offering a percentage match—typically between 3% and 5%—rather than managing the complex calculations associated with pensions. This shift frees companies from long-term liability and allows employees more control over their retirement savings. Yet many individuals, as they age, express regret over not saving enough. Surveys of older Americans often reveal that wishing they had saved more is a top financial regret. Karen’s feeling is echoed by many.

As we adapt to a 401(k) system, individuals face difficult decisions regarding how much to save, investment choices, and withdrawal strategies at retirement. While the traditional pensions are unlikely to return, it’s essential to educate oneself about retirement planning. A good rule of thumb is to save about 15% of household income for retirement, including any match from employers. For novice investors, target date funds provide a prudent mix of cash, bonds, and stocks based on age. Upon retirement, the old rule of withdrawing 4% may be a good starting point, although this could be on the conservative side for some.

Ricky Mulvey: Companies really like getting long-term liabilities off their balance sheets. Our next question comes from Jonathan. He’s looking into a new employer who offers a capital accumulation plan. Having never encountered one, he noted they provide an 8% contribution of salary after the first year without requiring employee contributions. This sounds almost too good to be true. Do these function like retirement accounts? And what happens if he leaves after a few years?

Robert Brokamp: Jonathan, capital accumulation plans, while not common, do resemble 401(k) plans in that they typically involve employer contributions, often structured as profit-sharing. Each organization has its own criteria, and if a company reaches certain profitability benchmarks, employees may receive deposits into their accounts. However, these plans usually include vesting schedules. If you leave before a specific period, you might not take all the funds with you. Any remaining funds are potentially used by the company to administer the plan.

One example is the NFL’s capital accumulation plan, where team contributions kick in after a player’s first season. The team initially makes no contributions; then in the following seasons, it deposits $2,500, escalating significantly in later years. Players cannot withdraw money until they reach the age of 40 or five years after their last full season. As with 401(k)s and IRAs, funds can be rolled over, although withdrawals are taxed as ordinary income and may incur penalties if taken before age 59.5. Understanding the specific details of your plan will help maximize its benefits.

Ricky Mulvey: Any advice on how to stay in the NFL for more than three seasons, Bro?

Robert Brokamp: I’ll reach out to my friend Tom Brady for insights and share what he advises.

Ricky Mulvey: Stretching seems like good advice! Thanks, Bro.

Thank you for joining us today. Remember, the individuals featured in this program may hold positions in stocks discussed, and the Motley Fool might have recommendations for or against these stocks. Always do your own research before making investment decisions. I’m Ricky Mulvey, and we’ll be back tomorrow.

Disclaimer: The views and opinions expressed herein do not necessarily reflect those of Nasdaq, Inc.