Bitcoin ETFs, the Gig Economy, and Robotic Surgery

In this podcast, Motley Fool analyst Jason Moser and host Dylan Lewis discuss:

• The SEC’s pending decision on crypto spot ETFs and the agency’s X account getting hacked. This podcast was recorded before the SEC approved Bitcoin-tracking ETFs.
• Potential regulations coming for the gig economy and workers that are heavily reliant on companies like Uber, Lyft, and DoorDash.
• An early earnings look for Intuitive Surgical, and why surgery activity has normalized as the pandemic has waned.

Burford Capital CEO Chris Bogart walks Motley Fool analyst Rich Griefner through the world of legal financing, his company’s competitive advantages, and a high-stakes case with Argentina.

To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on January 10, 2024.

Dylan Lewis: We’re talking rules, rules, rules, Motley Fool Money starts now. I’m Dylan Lewis and I’m joined in the studio by Motley Fool analyst Jason Moser. Jason, thanks for joining me.

Jason Moser: Happy to be here.

Dylan Lewis: We’ve got a med tech company near all-time highs a conversation with a business that fits into the intersection of the legal system and financing. But Jason, we are kicking off today with rules and regulations. Today is the SEC deadline to weigh in on one of several applications for a Bitcoin spot ETF. But the drama started a little early on this one. We had some interesting news yesterday about this.

Jason Moser: Yes, we did.

Dylan Lewis: It’s funny like I’ve always say anything, at least in my mind it’s hackable. I guess that’s one of the arguments for crypto or Bitcoin is like it’s this clear ledger and it’s unhackable or the fraud obviously is not the same. I’m not a problem. But clearly somebody got hacked here in regard to this announcement. I wonder if that isn’t just a foreshadowing of what could eventually come here. But yeah, it seems like the SEC is meeting to figure out whether they want to go ahead and approve the spot Bitcoin ETF structure. I think that they’re going to do that, but you’ve got EXE saying one thing, you’ve got the SEC saying another, somebody got hacked somewhere and somehow this got out there and I don’t know how it happened, but here we are. It does seem to me though, that this is likely something that will be approved and really as a crypto skeptic, I’m not a crypto guy, not that there’s anything wrong with crypto if that’s your thing, that’s cool, whatever.

Don’t at me on this one. But it is something where I think this type of structure, these spotty TFs, could bring transparency to an industry that really does need it. I think approval of this will ultimately be a good thing and could make it maybe a bit more of a legitimate and understandable market for more investors. Yeah, if you are looking for official word on this, what we saw from the SEC on EXE yesterday, not actually from the SEC. (laughs). Their account was compromised. We will wait for the agency to officially weigh in and we should have word today. Unfortunately, we’re taping a little bit early in the day so we won’t have their answer as we’re having this conversation. But I look at this Jason and I don’t necessarily have a horse in the race when it comes to crypto as obviously it’s good for adoption if you’re a bull on the crypto space and even if you’re not necessarily a crypto bull, I look at this and I say if you are someone who is a fan of investors generally having more protection. Generally having more safeguards with where they’re put the money. Probably a good thing too.

Jason Moser: Yeah, I think you’re right, I agree there. Like I said, it’s not something I’m terribly interested in. But from the perspective of bringing more transparency, more accessibility, I think that’s a good thing. Because when you look at crypto now, I mean in general, you have to kind of jump through some hoops to be a crypto investor. But it’s becoming easier. I mean, I think the idea behind this right now is though that, for your every day investor who’s looking maybe to invest in a digital currency via their traditional brokerage. I mean, your options are limited. You’re going through ultimately a futures based Bitcoin ETF, for example, which is ultimately utilizing derivative contracts to come up that pricing. It’s just added layers of complexity and ultimately, I guess it’s just not as transparent as it could be. That’s what we’re hoping this decision could do, is ultimately bring more transparency to an industry that definitely needs it.

Dylan Lewis: As I mentioned, we’re taping before the SEC’s decision. We won’t know for sure where this one’s heading. But I will add the take that I think I always add when we see an incident like this where regardless of the business or the security or whatever in the mix when it comes to a hack, basically an advertisement for identity management and cybersecurity companies.

Jason Moser: Oh man, I mean, it just cybersecurity these days. It is such a hard space. I mean, that’s probably a whole another show we could do just talking about that. Because it is just this ever evolving threat that’s never going to go away. I mean, you look at investing in something like cybersecurity, it can be really difficult because the companies that are doing really well today, they may be rendered obsolete tomorrow and so honestly, when I look at investing in something like a cybersecurity, I would probably opt for something like an ETF that gives you broad exposure to a number of the companies that are helping shape in advance the space.

Dylan Lewis: We’re going to stick with the government theme here. The Biden Administration is set to unveil some new rules affecting independent contractors and gig economy businesses. Jason, we’re still waiting on full details for this, but the broad stroke that I’m seeing is if contractors are economically dependent on a company, they will likely be entitled to more benefits and legal protections from that business. Of course, as soon as you hear some of the elements of this and the themes here, head immediately goes to the gig economy, businesses, the Ubers, the Lifts, the DoorDashes of the world. What’s the impact for a company like that?

Jason Moser: Well, I think for sure the one guarantee from this is the lawyers are going to win. But because the decision that’s made, it’s going to go through the court system and ultimately that’s probably going to take some time. This is an interesting one. I looked to Uber as sort of the easy example to go by here and how this could impact a business because, I recommended Uber in one of my services back in June of 2022. The stock is up 150% since then, and one of the biggest risks at that time was that California Proposition 22, which essentially was this. I mean, this was just this and that. In a nutshell, I would be interested to know from the worker himself, like, would you rather be a contractor or would you rather be a full time employee? My guess is that it’s going to vary. Some love the flexibility, some would love the certainty. I’m not sure ultimately how this ends up. I think regardless, for companies, it is something that if they’re required to maintain these employees as full time employees and not contractors, and that pushes those costs up. Well, consumers are going to see that at higher prices, I mean, your Uber bill is going to go up, your Lift Bill is going to go up, your door dash bill is going to go up. Then I look to the companies that can navigate these waters most effectively. I think that’s where scale, I think that’s where size really matters. You look at it like a company like Uber. I mean, because ultimately it’s not something that’s specific to, Uber is specific to any business that wants to employ this business model and so you have to look to the biggest and the strongest as the companies to be able to manage those waters most effectively. If it does end up pushing costs up, then likely they’ll pass at least some of that on to consumers.

Dylan Lewis: You just mentioned before that this has been the existential risk the entire time for companies that are operating in this space. I look at this and I think you’re right. I think the big companies continue succeed and do very well. I also think we’ve started to experience the convenience of this style of business.

Jason Moser: Yeah.

Dylan Lewis: I don’t know that higher costs are necessarily going to move consumers away from it.

Jason Moser: I don’t think they will. I think a time ago it would it would have played more into the calculus. But I think that what we’ve seen over the last decade plus, and really I hold Amazon primarily responsible for this. I’m not complaining because, listen, I love Amazon and the convenience that all of these companies offer us today. But they have done a tremendous job in helping us value things a little bit differently. It’s not just about the lowest prices anymore. I mean, convenience matters, time matters, and they’ve really hooked us on the convenience that a lot of their business models offer us, whether it’s having something delivered to us or delivering us somewhere.

Jason Moser: They got in, I think early on, built up those user bases lift to a lesser extent. I think we’ve seen Uber rise above Lyft in that regard. But they’ve done a very good job of getting us hooked to the convenience. Like we were talking about pre-production, now this is wired behavior. That’s that value. When you become a verb and I need to Uber something or I need to Netflix something, there’s a lot of power that comes with that, pricing power included. I think it makes us focus a little bit less on the pricing and appreciate more the convenience that these models are offering us.

Jason Moser: We’re going to wrap up our news round up with a little bit of an earnings talk. Last week on the radio show we talked about how earnings season was ramping up. We don’t have a full earnings picture from Intuitive Surgical yet, but we got some preliminary results this week. Strong market reaction to the results because they looked like a pretty strong indication of the quarter.

Jason Moser: What we’re seeing is signs that things are getting back to a state of normal. Particularly for a business like intuitive. Intuitive being right there in hospitals, in medical facilities, those were places that really witnessed a lot of tumult here over the last few years because of everything that we went through with COVID. We saw procedures put on hold, unless it’s some type of life saving procedure. But elective surgery really tanked. What we’re seeing now, and we’re seeing this certainly through the procedure growth, things are coming back around. Procedural growth for this quarter, up 21 percent from the same quarter a year ago. Procedures matter for a company like Intuitive Surgical. One of the beauties of this business model is having that big razor in the hospital. Having that big razor in the hospital. Then selling those instruments and those accessories, the consumables that you need to actually make those machines work. When procedures go up, well then the sale of those accessories and those instruments go up as well. They’ve been able to witness a little pricing power on those as well, which will help their margins, of course. As painful as it’s been for them over the last several years, with procedure growth being so threatened, now we’re starting to see things turn, procedural growth turning back around, which really has a number of ongoing positive effects for the business.

Dylan Lewis: I think as we tape shares up about 6% on these preliminary results, and it’s an interesting time to check in on this business because we are hitting a little bit of a COVID normalization, it seems. But also because at its current valuation, we are getting close to all time highs for this business. Again, this has been a growth story and I think a very future forward story for a long time. Do you still see a lot of runway ahead of this business?

Jason Moser: I do. It is certainly a market that has become more competitive over the last several years as technology has proliferated and given other companies the opportunity to pursue this space. Their installed base is getting up there. This is something we are all in. They’re closing in on 9,000 of the systems installed, whether it’s Da Vinci or this new IonSystem that they have, that doesn’t go on forever. Particularly when you consider the competition in this space and the stock is not conventionally cheap. Somewhere in the neighborhood of 70 plus times earnings right now, it garners that multiple because of it’s top dog status in the space. I don’t suspect that continues. We will see that growth start to slow down a little bit. We will see more competition enter into the fray there. I think naturally as time goes on, we’ll see that valuation start to pull back down. Maybe at some point we start talking about intuitive like we talked about Apple making that transition from growth company to most aid dividend payer. Maybe we’ll get to that point with Intuitive, but I don’t think we’re close to it yet.

Dylan Lewis: We’ll check in certainly along the way. Jason Moser, thanks for joining me today.

Jason Moser: Thank you.

Dylan Lewis: Coming up. We don’t talk about legal financing too much on the show because there’s only one publicly traded company that does it. Motley Fool Senior analyst, Rich Greifner, caught up with Chris Bogart, CEO of Burford Capital in early December for a conversation about his company’s competitive advantages in the space and a high stakes case with Argentina.

Rich Greifner: Let’s start at the start. Can you give me Litigation Funding 101. What is it? What problem does it solve, and what role does Burford play in the process?

Chris Bogart: Absolutely. Litigation finance is basically specialty finance that looks at legal assets, claims, litigation matters, arbitrations. Looks at those things as financible assets. When you think about a business, companies often have valuable claims that they’re bringing. Sometimes it’s against other companies, sometimes it’s in the context of a multi company thing that has gone wrong. For example, companies that have been victims of price fixing. Those claims have value. You can think of them effectively as being contingent receivables. Just like any other financial asset that has value, you can organize a financing package around the value of those assets, and that’s exactly what we do. Now, why is that of interest to companies in particular? There are really two parts to that answer. One part is that spending operating cash, diverting operating cash from the purpose of your business and putting it into a collateral activity like litigation isn’t the most value maximizing strategy for companies to engage in. For example, I used to be the general counsel of Time Warner, the media group. Time Warner had lots of money. It wasn’t a question of Time Warner not being able to pay for litigation if it wanted to bring it, but every dollar that we spent on litigation was a dollar that we didn’t spend making television or movies, or publishing magazines.

Ultimately, it’s that core business, the business of publishing and making movies that investors want us to be engaged in, that’s the business on which you get multiple on your profits. Whereas being really good at collateral litigation doesn’t get rewarded by investors and doesn’t contribute to your market value in the same way. If you can get an alternative to paying your own operating cash for these collateral activities, whether it’s litigation or something else that businesses do, that’s a value. We help businesses take those costs off their PNL. We help them keep their operating cash to be devoted to the things that the core business are doing. So that’s Part 1. Part 2 is especially in the world that we’re in today where there is more and more litigation and that litigation can often be quite high value. These claims really do have significant future potential value. As a result, they are assets that businesses can obtain financing against today. Not only just to pay the costs of those cases, but also to generate today cash that businesses can turn around and use in their operating businesses. We do that as well. We effectively monetize the future expected value of litigation today, and we give businesses cash against those values so that they can go and grow and hire employees and increase their profitability.

Rich Greifner: Thank you for that overview. That explains why litigation finance, legal finance is beneficial to the corporation. How about from the law firm side? You also provide a benefit to the law firms.

Chris Bogart: We do because ultimately most of the law firms that we work with are law firms that have an hourly fee business model. They charge clients for their time, and law firms don’t really have access to the capital markets. As you know, you can’t go and buy stock in a US law firm. It’s not permitted for you to do that. What that means from the law firm perspective is the only way for law firms to get capital into their business is by borrowing it from the bank. They would prefer not to do that. They would prefer another more sophisticated financial party like us to be in the market intermediating that capital. They would just like to do the business of law. They’re happy to have us accommodate the desires of companies for alternative fee arrangements while at the same time not having to go and become financial institutions themselves. By the way, the investor side of that coin is that investors don’t have very many good ways of getting exposure to the legal industry, and the legal industry is absolutely enormous. Globally, it’s roughly the same size as the pharma industry.

Chris Bogart: But as an investor, there are very few ways that you can go and get direct exposure to what’s going on in that large and profitable industry and Buford is one of those ways.

Rich Greifner: Buford, co founded in 2009, and the company has generated very consistently high returns on invested capital since that time and that suggests that you guys benefit from strong and sustainable competitive advantages. The company likes to call out four sources of competitive advantage. Your scale, your brand, your expertise, and your data. I was hoping we could just quickly touch on each of those four categories so let’s start with scale. Why is scale so important in this industry?

Chris Bogart: Scale is important, but all of those advantages really link together and create a pretty substantial mote for Buford. Buford is the industry leader by a very significant margin, both in terms of pure scale. In other words, the number of dollars of capital that we put out. We’re sitting today with a portfolio that’s north of $7 billion in size. We have more than 150 people spread around the world who do this work, many of whom are experienced former lawyers and what that does, you mentioned Goldman Sachs at the beginning of this conversation. When you look at Goldman or a Blackstone or KKR or Morgan Stanley, those firms get a certain amount of business simply because of their size, scale, and presence and we benefit from that as well. We’re the known quantity in the legal industry. You’d be hard pressed today to find a partner at a major law firm who doesn’t know about us and doesn’t know that our capital and our services are available for their clients. Those are the competitive advantages that we’ve built over the last 15 years and they also lead to data. Data is a very significant competitive advantage for us that comes out of a combination of scale and longevity.

The reason the data is important is because litigation is inherently risky. In any piece of litigation, there is idiosyncratic risk of a court, a judge, a jury not agreeing with your position and going in the opposite direction. When that happens, you have a loss in the case and when we have a loss in the case we lose our capital. Trying to make the best quality investment decision that we possibly can is a significant part of what we do here and one of the things about litigation, of course, is that a fair bit of litigation resolves by settlement, by negotiated between parties instead of buy a case going all the way to trial. Settlements are usually confidential and so as a result, it’s relatively hard just based on public data for you to get a good data set from which to make high quality investment and analytical decisions. What we have is the benefit now because again, of our scale and longevity, the largest data set in the industry, which lets us apply significant quantitative rigor to our investment process and to make use of that data to improve our performance. We’re now down, for example, to a loss rate across our portfolio of only about 9% which is very low when you think of litigation being brought in large dollar cases where those cases are often pretty evenly matched.

Rich Greifner: For folks who aren’t familiar with this industry. You mentioned this a bit. The majority of cases will settle, so about 70% of your cases settle an when a case settles, Buford typically earns attractive returns with no real litigation risk. About 8% of your cases go to trial and Buford loses and in that event, it’s a near complete loss of capital. But there’s about 21% of your cases that go to trial and Buford prevails and that is where the real money comes in. There you’re looking to earn multi bugger returns on your initial investment. That’s just an asymmetric characteristic of the industry.

Chris Bogart: That’s exactly right, and it’s just common sense when you think about it. Litigation is inherently risky and so if you have a $10 million claim, you’re not going to spend $10 million in legal fees to fight that claim. You’re going to spend $10 million in legal fees only if you can get to $100 million in claim value. When we lose cases, yes, it’s unpleasant to lose, but we’re only losing the invested capital that we put into them. The $10 million in that example, when we win, we’re capable of winning the entire claim. The $100 million in that example and the settlements fill in the middle range, because settlements are an inherently outcome, because they’re negotiated with the other side.

Rich Greifner: Yeah. The best example that we can provide of a big outlier success is your YPF case. Ordinarily, Buford doesn’t reveal much information about the cases in which it invests. But this is so public and so material to your results that you guys have discussed this quite a bit. I’m hoping, can we just do a one minute overview? What is the YPF case? What’s the brief history of it? Where do we stand now and what’s next?

Chris Bogart: YPF is a publicly traded energy company that’s owned by the Argentine government. It was privatized a number of years ago. Argentina then renationalized and as it renationalized, breached its promises to shareholders to tender for their stock and YPF. As a result of that, large holders in the stock suffered financial distress because the share price collapsed. In particular, the Peterson clients went bankrupt and we were appointed by the Spanish Bankruptcy Court to try to get relief for their credit. In doing so, we brought a case on behalf of those creditors in federal court in New York. That case has gone all the way through the trial process and ultimately produced a final judgment that is now on appeal. That final judgment in the trial court was for a little bit over $16 billion. The reason that number is so high is simply because YPF was worth a lot and there is a formula for calculating that tender offer price that Argentina simply didn’t pay. All the court did, ultimately, was find that both Argentina was liable and the court used the formula to calculate the tender offer price.

Rich Greifner: Okay. You guys have been working on this case for eight or nine years now. You mentioned Argentina is found liable for about $16 billion in damages. Of that amount, Buford is owed a bit more than 6 billion, which is more than double the company’s market cap. The market is obviously skeptical about your ability to actually collect cash from Argentina. I know you probably don’t want to say too much here, but is there anything you could share that might give us some insight into your ability to enforce that judgment against Argentina?

Chris Bogart: Well, I think it’s not so much a question of enforcing the judgment, but we do a lot of judgment enforcement around the world and one of the characteristics of enforcing judgments is that that is a process that inherently in discounts, the face value of those judgments. Even though you’ve got a judgment sitting there for $16 billion ultimately you’d expect that judgment to be paid through a negotiated process with Argentina and that negotiation is going to result in a discount to that face value.

Rich Greifner: I don’t know if you can comment on this or not. Argentina has got a new president. Is there anything you can say about how that might impact your ability to collect?

Chris Bogart: Well, we just to say it’s obviously early days. The new president isn’t even in office yet. But only to say that during the course of the presidential campaign, this judgment because of its size did come up and the government’s position was Argentina needs to take care of its doubts.

Dylan Lewis: As always, people on the program may own stocks mentioned and the motley fool may have formal recommendations for or against, so don’t buyer selling thing based solely on what you hear. I’m Dylan Lewis. Thanks for listening. We’ll be back tomorrow.