Can the Netflixes and Amazons of the world ever beat both competition and regulation?

Topic: has any large company succeded after running large deficits in the beginning?

Conclusion: hit me with your best examples of companies with backstories like Netflix and Amazon that today report very large profits (global top 100)

This morning as I and my girlfriend had our morning coffee, we started talking about the ebbs and flows of new economy companies. Sometimes it’s radio or railways. Sometimes it’s IT or biotech — have both been through four waves so far, or is it more?

Right now, companies like Netflix and Amazon are running extremely hard to monopolize their market. Investors are playing along, hoping for a combination of both high market share and high profit margins in the future, when the economies of scale and network effect moat is wide enough to effectively cement their position as well as profitability.

Just imagine when Amazon is the everything store and no other company can even start competing, since their cheapest source of intermediate goods isn’t from their ordinary suppliers but from Amazon itself! Or when Netflix has 2 billion subscribers and own all the writer and actor talent there is.

A few things ocurred to us:

  1. If these companies are doing it right, then what will happen to other companies — old school companies? Actually, the churn rate among public large caps has increased for several decades, which is a sign that with every passing decade old, large, “wonderful” companies are getting more and more vulnerable to new economy competitors. Apparently the process of new style co:s overtaking oldtimers is already well underway…
  2. Does that mean The Netflixes of the world warrant a high valuation, or the General Motors a low one. Or both? But what if even newer companies will overtake companies like Netflix even faster in the future, i.e., that the churn rate keeps increasing? What if “VR-nano-artibio-fy co” destroys Netflix the way Netflix killed Blockbuster? Then all current S&P 500 companies warrant lower valuations than in the past.
  3. What historical examples are there of companies investing heavily in the beginning, running large losses and negative cash flows, and actually subsequently could reap the rewards of high market shares and high profit margins? Which companies among the world’s top 100 nominal earners have a history of such audacious investments? I couldn’t find any at a quick glance.
  4. My take is that if you don’t reasonably quickly find a way to profit from your operations, you won’t be able to charge enough from your clients in the future either. Either you don’t succeed in securing a near monopoly, or you do. In the former case, competition prevents you from super profitability and in the latter regulation does.

Please comment with links, charts and tables if you have good examples of companies that make very large profits today and that have a history of running very large deficits in the beginning of their existence. If they aren’t among the 100 largest earners don’t bother, since what’s interesting is if Amazon and Netflix are charting new territory or if it has been done before in the last half century.

The sprezza bull case for Tesla

Topic: the bull case for Tesla

Conclusion: It’s a free option at prices below 700 dollars per share (or not)

OK, so Tesla missed its production target slightly. No, matter, they are making 2000 M3 a week and aiming for 5k/wk by the end of Q2. Musk has talked about stabilizing production at 5k for profitability so let’s run with those numbers. The other models were at 25k/month for Q1 and 100k for the year, thus giving us the following table for 2018:

TESLA: conservative revenue and value case for 2018

So, conservatively calculated, Tesla warrants a share price of 700 dollars. Even at half that (which means a ridiculously low EV/Sales multiple of just 3.0x this year’s revenues) the stock is still undervalued at its current once-in-a-generation buying opportunity level of  below 300 dollars per share. In addition you get the optionality of having access to Musk (about a quarter of him, considering his other assignments, but 25% is plenty in His case) and his future plans for Tesla for free. And at this point we haven’t even mentioned the huge potential in taking over the truck market.

700 dollars

Now, is that something you might be interested in?

A target price of 700 dollars per share is thus truly a rare give-away. And it’s not like Tesla shares grow on trees or can be printed willy nilly. (not anymore they can’t, but more about that later)

What the bears are saying

I know, I know, I know. Trust me, I know. There are no Tesla bears, and if there were they would be utterly and irrecoverably stupid so why bother?

But, bear with me for a minute (yp, I said bear with me; that’s how old I am #dadjokes)

Let’s just assume that the prospect of being ridiculed for being on the wrong side of history, for exposing oneself (uh, gross!) to potentially unlimited losses (aha, ok..), for actually reading and understanding Tesla’s convoluted and long-winding reports full of marvelous non-detailed information and made-up numbers, isn’t the pure unadultered fun it’s made up to be.

Let’s play with the idea for a while, that the bears have actually made an effort before punting their and their clients’ hard earned money on the foolish venture of shorting stocks in the bull market of a century in a company where the founder and CEO sends cars to outer space, and posts “bankwupt” pictures of himself while claiming the company is in “production hell”.

Here are some ideas of what they might be thinking:

First mover disadvantage: Competition is heating up. It seems more and more as if Tesla has wasted years and billions blazing the trail for electrical vehicles, only to create a huge first mover disadvantage in terms of a potentially fatally heavy balance sheet, and a bloated vertically integrated and all but impossible to overview company. Porsche, Jaguar, BMW and many more all know what it takes to build and test a new product and streamline its production and quality management. They waited on the sidelines until the market was ready, and now they come armed with doors that actually close, knobs that stay in place and engines that don’t need half an hour of cooling down after one single INSANE MODE 0-60 mph in 2 seconds blast of juvenile idiocy.

Musk is overextended having too many companies to keep track of — one large tech company is usually more than enough to manage. Waking up at 3 am in the morning doesn’t cut it in this case (especially since that means having to go to bed by 8 pm at the latest or he’ll be punch-drunk at the job and getting worse by the day). You have to stay sharp and focused to be at your A-game in the tech industry, not a scatter brain like so many Twitter jockeys (and coincidentally Tesla fans… makes you go hmmm)

Vertical integration is rarely a good idea — in particular not in mature and highly specialized industries like car manufacturing. Nota Bene that just because the engine is electrical doesn’t mean you have to string the batteries and solar panels together yourself. That tactic reeks of mirrors and smoke screens. If the core business is sound, you’re better off focusing there, and let your subsuppliers work on the details for everything else. Management 101.

Lack of focus: There might be a certain place in hell for vertical integrators, but just next to it you’ll find serial acquirers that keep buying stuff instead of focusing on the task at hand. Musk and Tesla have enough to do, but I guess all the new CFOs need new numbers to fudge, and what better base to work with for your creative accounting measures than oh-so-malleable goodwill and adjusted this and adjusted that?

Introducing new products like the semi and the roadster with impossible specifications that takes many years of innovation to pull off, when the company still has trouble delivering their current models with satisfactory build quality, is just yet another example of sleight of hand. It has worked before when Tesla needed to sell bonds or stock, but at one point or another event the most fervent bull must ask himself when Tesla is going to make a profit. These are of course just distractions, which is all fine and dandy in the world of finance, not to mention saving-the-world-business. What’s surprising is that some allegedly smart investors are actually buying it.

All the cool 1999 dotcom style vocabulary smacks of, well, … the dotcom mania: supercharger, gigafactory? Really? The fans might like it, but investors shouldn’t fall for it. Again. Oh, they already did? My mistake.

The world’s largest compensation package, albeit given a 10-fold increase in market cap, is yet another genius-level (i.e., so moronic that people assume it’s ingenious) anchoring trick. If I say 10x, then 2x just has to be within reach. 700/share here we come!

Misplaced humor: I actually appreciate Musk’s antics and Twitter humor. It’s hilarious and gutsy, but guess again what happens once his “easter eggs” come home to roost when Tesla runs out of money, without having fully functional cars to sell at anything but losses and finally clients come asking for their 4bn dollars in deposits back.

Unfortunately Musk’s antics and humor are nothing but more smokescreens, desperate ones — and if they fail he’s running out of options (including that 60bn dollar pay package). I like his “save the world and humanity” agenda as well. Although, one might wonder why we need to go to Mars if his electrical vehicles and solar panels can save Earth in the first place :D.

Anyway, it’s cool and altruistic, but his God complex and ‘world peace before profits’ agenda is in fact being altruistic with other people’s money — namely Tesla’s shareholders’ money. Do you like being food for the immortals (i.e., Musk)?

Exodus much: A few other things are troubling too: why are so many senior executives, “insiders” if you will, putting Moses to shame in their exodus from Tesla? Why leave millions behind if not for the fact that your boss is turning more and more erratic by the day, not to mention the numbers can only be fudged so much before the authorities come knocking (although I wouldn’t hold my breath for the latter; the SEC won’t see what’s coming even 5 years after the fact, and by then they’ll probably start interrogating some of the very investors that shorted the stock in an attempt to get the truth out).

Interest costs, margins, you know, “financials” are in shambles: Oh, ok, so the above is just what’s most pressing about Tesla’s operations. Looking more into detail in Tesla’s accounts you could argue that rising interest rates (the interest cost is already 4% of sales), very high opex (34% of sales, excluding interest rate costs, 38% including the latter and thus 15-20 points higher than the company’s gross margins, so whatever profit multiple you’re looking for, there are no profits to go forth and multiply on).

I almost forgot… how long can Tesla shaft it’s suppliers with longer and longer time to get paid? Suck on that one for a while.

The Sprezzaturian sober not-superbullish-case for Tesla

So, disregarding the bankwuptcy case (which is salient enough but nowhere near necessary to contemplate shorting Tesla), here is a slightly more sober view of Tesla’s immediate prospects, albeit probably still way to bullish and not even taking quite pressing financing needs into account:

The production pace of 2000 M3/wk for two weeks took an inhuman effort and is taking its toll on production of S and X models. Missing 2500/wk so soon after stating it tells me Tesla won’t be making more than 3500/wk by the end of Q2 and maybe reach 5000 by the end of Q3 and hold that level for Q4 — IF I’m optimistic. However production and sales of S+X will probably taper off due to the focus on M3, both in production and for prospective Tesla buyers.

Also, 2x growth for energy is more than optimistic (vs guidance for 3x), not to mention a positive cash flow of 15% of sales. I’m turning cash flow down to a negative 15% instead.

As for valuation, at this point with share issues looming, losses, production misses etc, I think I’m being generous at EV/S=1.5x.

I can’t stress generous enough because this really isn’t a bear case, it’s just not terribly bullish.

So, 100 dollars per share… is that something you might be interested in? Or are you still hoping for those semis?

Please note my disclaimer on this site, and know that I never recommend any investments of any kind on this site. It’s all just for entertainment and provoking thought.

Did you like this article? Bookmark it, share it. And by all means, check out my podcast Future Skills where you get all the tricks you need to stay relevant and prosper on a world of accelerating change.

Do you want 20 per cent annual returns without risk?

Topic: optimal investing

Conclusion: to decide on how to invest, first you must ask “for what?”

Low risk, high return, please

I often get questions about what to invest in. What’s missing is “why?”, “for what?” and “at what potential cost?”. People want as high returns as possible, and preferably with high liquidity (the option to cash in at any point) and low risk of loss.

That’s not how investing works. Investing means taking risk and betting on an uncertain future. Anything that’s obvious and certain has already been bid up to a price promising zero returns. Actually these days, many investments that aren’t even perfectly certain promise negative returns — government bonds for example.

If you have nest egg of a year’s worth of income that you want to invest, you must first decide on at least two things:

  1. What you want to get out of the investment — becoming rich, getting a decent return to live off, or preserving your capital
  2. What you’re willing to risk for having a shot at that — risk having to start over from zero, risk getting a sub-par or zero return

My own portfolio consists of the following main 9 elements:

  1. Lemuria (physical gold, silver): insurance in case of a financial re-set
  2. Polskenet and Agerus, small private companies in mid and north Sweden: middle of the road value plays with reasonable growth, exposure to my homeland economy
  3. ESURF (electrical jet motor surfboards) : exposure to increasing demand for expensive toys, in effect a bet on continued growth and monetary madness
  4. Private loans and Lendify: interest income, a bet on the status quo with muted growth and low interest rates but not a depression
  5. Apartment (no mortgage): inflation hedge, safety — a place to stay
  6. Listed stocks and Svahn portfolio management: public equity risk, economic growth
  7. Creditsafe, Bofink: exposure to increasing focus on the credit economy
  8. Apstec: exposure to increased demand for safety from terrorism
  9. Fimbulvetr (private business, including two podcasts): staying agile and relevant, honing my future skills

All bases covered

It’s a mix of exposure to growth, inflation, deflation, monetary madness continuation, monetary re-set, debt management, terrorism and personal development. I think I’ve covered most outcomes, but I definitely have much more to gain from a strong economy than a weak. Sure, I would still welcome a stock market melt down, but I’m not so sure I would be able to profit that much from it since I would have too little liquid assets to put to use.

I’m not really geared for a stronger economy either — well, I’m not geared at all — but for me it’s much more important to preserve my capital (with some upside) than to multiply it. I have almost nothing to gain from doubling my net worth, whereas halving it or worse would put me at risk of not being and feeling rich anymore.

What’s your investment equation?

Who are you? What do you want? Why do you want it? What are you willing to risk to get it?

What are you not willing to risk?

Do you want to live comfortably? Do you want to be rich (and dont care if you become poor, as long as you’re not average)? Do you just want to fit in, actually be average? Is your focus on yourself and your family (absolute level) or on comparing and competing (relative riches), or on something else altogether (e.g., being admired for your investment performance)

Whether you should buy physical gold, government bonds, P2P lending like Lendify, public or private equity, gamble on derivatives with or without leverage, or focus on your own education, skills and business is a question of what the returns are for, when, and with what certainty. There is no such thing as an optimal investment or optimal investment strategy.

I can say this much though, most people should be invested in equites for the long run, while maintaining more or less liquid reserves (depending on where we are in the stock market cycle) in uncorrelated assets (such as commodities, currencies or precious metals), in order to take advantage of the quite regular large drawbacks that occur on the stock market.

Please note that right now (April 11, 2018) seems to be a very special period for both stocks and fixed income instruments like government bonds. Plainly stated: they are extremely expensive and due for severe pullbacks. That’s especially true for story stocks like Tesla (I’ll write about that one pretty soon) that is all but sure to fall by at least three quarters unless Musk pulls off something truly remarkable. Hope is not a strategy though. Remember that.

Now, today’s homework is to write down what you own and why.

Your second homework is to start taking responsibility for your future, by taking regular walks while listening to my podcast Future Skills. Start with the conversation with hedge fund billionaire Martin Sandquist (episode 3) or this one (episode 6) with futurologist and philosopher Alexander Bard.