Friday, November 01, 2013

Why You Should Dump Those Shares of Tesla Now

Any investor who has ever heard of Tesla (TSLA) is probably aware that the stock is currently up more than 400% so far this year. With gains such as that many people are continuing to jump onboard and ride the wave. But not so fast. Keep in mind that I like to follow Warren Buffet’s advice to be fearful when everyone else is greedy and be greedy when everyone else is fearful. However, aside from that and the fact that history has proven in most cases that extraordinary gains like this are eventually followed by a sudden and resounding crash, here are some cold hard facts you can take to the bank, or your broker while you place your sell order.
Seeking Alpha’s Ayush Singh has come up with a nice comparison between Tesla and other car manufacturers to illustrate how overvalued Tesla is currently.
The company expects to sell 21,000 cars in 2013 and is presently trading at around $165, which translates into a market cap of just under $20 billion. But, given the amount of cars Tesla sells, this valuation is too high to be justified.
Aswath Damodaran, a Professor of Finance at the New York University, may not be a household name, but he's made some of the most accurate share valuations in the recent past - predicting Apple's peak and Facebook's low, to name a couple. And now, after doing his math on Tesla, Damodaran concluded that Tesla is worth $67.12. When he came up with this figure, Tesla was trading at $170.62, and after working out a comparative index, I believe he may be right.
In this index, I compared Tesla's share price with its production and profitability and compared it against the other big guns of the automobile industry and this is how the results stacked up.
Company's Name
Market Capital
Unit Production
General Motors (GM)
9.288 million
Ford (F)
5.708 million
Toyota Motor (TM)
9.692 million
Honda Motor (HMC)
3.137 million
Source: Yahoo Finance, Bloomberg, Zacks and Author's Calculation
Hence, Tesla is charging close to $950,952 per car, which translates into around 14 times the actual cost of the vehicle under the assumption that it is free to manufacture! Given real operating gross margins of 13% on its $70,000-priced Model S, Tesla is generating about $9,000 in gross profit from each car that it manufactures. Despite that, investors are placing an irrational valuation of around $950,952 on every car! Going by such calculations, Tesla will need to enhance its production by 20 times in order to be twice as expensive as Honda, which is the next big car maker, on a value-per-car basis.
A 20-fold jump may seem far-fetched, but that is exactly what Tesla bulls anticipate and they expect it to happen before 2020. But even if the company somehow manages to multiply its production by a factor of 20, will it justify a market cap of $20 billion or will it have to sustain its growth for a longer period of time to justify today's share price?
Dana Blankenthorn has a strategy for Tesla investors based on the fact that even Elon Musk acknowledges Tesla is overvalued.
How you deal with this depends on the kind of stock owner you are. Traders may continue getting profits out of Tesla for some time, but they must be warned that, when the fall comes, it will be sharp and sudden. Careful attention must be paid to small technical moves, to any move regarding momentum, or you'll lose your gains in a heartbeat.
For investors who may have bought their shares in the first quarter of this year, when the price was less than one-third what it is now, the situation is different. You can sell less than a third of your present stake and have all your investment out of the stock.
While the company may not be worth today's $20 billion, it may well be worth yesterday's $5 billion. Sales have been doubling every year. Gross profit is 25%. These are unheard of for a mass manufacturer. You're betting that Tesla can indeed use robotic manufacturing technology and scale to bring the company into lower price points, and get ancillary gains through the battery business. These are not unreasonable assumptions.
But I wouldn't pay 50 times sales for that, which is what you're presently paying. On a fundamental basis, Tesla is in a bubble. Those who believe in fundamentals can take their profit and wait for the bubble to pop - although they may risk some remaining momentum gains - or take out their initial investment and know that, even after the bubble pops, they're in the clear.
If you were one of the lucky investors who purchased your shares earlier in the year, you should consider cashing out now while you’re significantly ahead. Alternatively you can decide to hold onto those shares, or even continue putting more money in, but doing so would be a very risky move, even if you have the ability to hang onto them for many years to come.

Wednesday, October 09, 2013


Market reactions to the uncertainty surrounding the partial U.S. government shutdown and debt ceiling debate have been highly predictable, with all major indexes showing steady declines with each passing day. On Tuesday October 8th the S&P 500 index closed at 1,655.45, down 20.67 or 1.23%. The Dow Jones Industrial Average closed at 14,776.53, down 159.71 or 1.07% and the NASDAQ Composite closed at 3,694.83, down 75.54 or 2.00%. The value of the U.S. dollar has also declined against most major currencies. However, this may be good news for long-term investors.

Between the government shutdown and the debt ceiling debate the one that scares investors the most is the potential for the U.S. government to default on its debt if the borrowing limit is not increased, and there are plenty of reasons why investors should be scared, however unlikely the threat of default:

Consumer Confidence
Consumer spending drives the economy and when confidence in the economy is shaken spending drops significantly as consumers and businesses alike begin to horde more cash. This also results in fewer investments, driving the value of securities down.

Treasury Securities
Governments and banks around the world hold U.S. Treasury securities. They account for about 11.6 percent of total public debt. The Social Security fund holds nearly 30 percent of the outstanding securities. Not only would a debt default destroy the U.S. finances, but it would also damage the fiscal houses of governments and banks around the world.

Borrowing Cost
As the U.S. Treasury has explained, “Investors’ willingness to lend to nonfinancial corporations is often summarized by credit risk spreads — that is, how much higher yields on private securities are than yields on comparable maturity Treasury securities. If investors are less willing to invest, they demand a higher return for that investment. From the borrowers’ perspectives, wider credit spreads imply a higher cost of funding for a given level of Treasury rates. Higher funding costs lead to less spending on investment or other outlays that are financed.” In a nutshell this means that interest rates will rise, investments will slow, and the economic recovery will be at risk.

Equity Markets
Economic uncertainly creates volatility in the markets. Increased volatility can cause investors to exit the market, driving the market down, in addition to and causing households and businesses to reduce spending. During the last debt ceiling standoff in 2011, the S&P 500 fell about 17 percent.

Bond Markets
Markets are all interrelated with the solvency of the U.S. Treasury being the glue that holds them all together. In the event of a default bond prices will plummet as interest rates increase.
All of these possibilities are already rankling investors, as shown by recent trading. However, there is a silver lining that many investors fail to see, yet one that the most successful investors regularly recognize—opportunity. 

Warren Buffett follows the rule, "Be fearful when others are greedy, and be greedy when others are fearful." Essentially this means that when the market spikes you should be more conservative in your investments due to the potential of downward correction resulting in losses. The flip side of that is when the market dips then you should take advantage of the lower prices, expecting an eventual upward correction resulting in gains. It’s not rocket science, yet many investors fail to understand and heed this advice.

Buffett recently provided proof that this advice works. During the Great Recession Buffett invested $25 billion, mostly into large companies having significant financial troubles at the time. Companies like Bank of America, Mars/Wrigley, General Electric, Dow Chemical, and Swiss Re. As a result, he recently disclosed that those investments have netted Berkshire Hathaway a profit of $10 billion during the somewhat modest recovery thus far, including a $300 million yearly dividend from Bank of America alone!

While it’s likely that you lack the financial resources of Warren Buffett, your portfolio can still benefit by using this strategy. If you typically invest a set amount of your income each month, refusing to reduce your investments in a market dip will result in similar returns when the market recovers. If you have additional disposable income to invest during a dip, then doing so will result in even greater returns in the future as the economy improves.

The trick to using this strategy is to remove emotion from your investments and invest when you have time on your side. When investors become scared and exit the markets en masse, instead of following suit like a lemming over the edge of a cliff, double down on your investments. Additionally, as investors are regularly advised, the more time you have to hold onto your investments the better returns you will reap. That’s just one more reason why you should begin to grow your investments early on in life. Doing so will allow your investments to weather the storms and provide gains when you finally need them in retirement.

Saturday, September 28, 2013


Facebook (FB) has had a tumultuous time since its May 2012 IPO. The IPO price was $38 and quickly headed downhill to a record low of $18.75 in August 2012. The stock remained slumped below $30 per share for most of the year that followed, leaving many investors disillusioned and disheartened.

And that’s just some of the more prominent and high profile situations, all of which seem to have helped to suppress the stock price.

But then in August something changed. The stock finally jumped past the IPO price and continued to climb steadily, reaching a record high of $50.60. Now, suddenly investors who had shunned the company have become drawn to it again. Yet there are still mixed signals about Facebook’s future.

Analyst Northrop Puckett feels that the stock is overvalued, stating that the company will soon “become a shell of its former self, like AOL”.
“The company has a P/E ratio of 175, which is obviously high. It has a forward P/E ratio of 49, which is also quite high, but better than 175. But it seems over-priced considering its fast 5 year growth rate. The company has a PEG (P/E ratio to growth rate) of 5.74 which is very high. For context, Peter Lynch stated that normal stocks have PEGs of around 1. PEGs significantly under 1 mean that the company may be undervalued when taking into consideration its 5 year expected EPS growth. On the other hand, a PEG of 5.74 either means that the stock is i) overvalued compared to its 30% expected growth rate, or ii) that analysts are way off on that growth predictions. It is worth noticing that if predictions for next year's earning growth are correct, you could then see a more reasonable PEG of 2.16 show up. However, that is still relatively high.
Facebook's price-to-sales ratio sits at a quite high 18.57. Additionally, its Q/Q sales are down -19%. Compare it to another (overpriced) online network -- LinkedIn (LNKD). LinkedIn has a price-to-sales-ratio of 21.42, and a Q/Q sales increase of 59%.
Facebook also has an Enterprise Value/EBITDA of 39, which is pretty high. Other "high flyers" like Chipotle (CMG) and Priceline (PCLN) have Enterprise Value/EBITDA of 21.2 and 22.81 respectively.”
Then on the flip side, Jayson Derrick claims the stock is undervalued and will continue to perform.
“1) Facebook has more than 1 billion users, and is still growing this tally above 20% year over year. The massive amount of data that the company has already collected (and will continue to collect) from the billion plus users will be an extremely valuable asset that can be utilized in various ways to generate revenue.
2) Facebook has a vast array of growth opportunities that have yet to be rolled out or even discovered. Specifically, in the near term, the company will roll out video advertisements for U.S users, which can be rolled out internationally over the coming years.
3) Facebook currently has huge investment plans, which include maintaining data servers to keep up with a growing user base. The company has already spent $595 million in 2013 and expects its investments on infrastructure to total $1.6 billion by the end of 2013. In the short term this can lower margins, but an increased investment is a positive aspect as the company continues to expand internationally and gain new users.
4) Management has silenced the bears and nay-sayers who were convinced that the company couldn't meaningfully monetize on mobile users. The company has, so far, addressed what I believe to be the biggest bear argument and only valid thesis against owning shares. Mobile ad revenue represents 41% of the company's revenue mix and is still in its infant stages with significant growth opportunities over the years. In terms of actual numbers, in the second quarter of this year, the company sold $656 million of mobile ads, an increase from $375 million in the previous quarter.
5) Although engagement levels are always a concern, Facebook's measure of daily average users and monthly average users has remained consistently high and showing no signs of faltering. In July, the company reported its daily active users totaled 699 million for the month representing an increase of 27% year over year. In the same month, monthly active users totaled 1.15 billion users, an increase of 21% year over year.”
While both sides have valid points and arguments, this emphasizes the uncertainty behind Facebook’s stock at the present time. Regardless of which situation pans out, one thing is certain, purchasing Facebook stock any time soon is going to be a gamble that should be severely scrutinized beforehand.

Friday, September 20, 2013


Don’t feel bad if you’ve never heard of Flurry before. A lot of people haven’t, but if you own a smartphone your certain to have been affected by this quiet mobile adtech giant. Some surprising information can be found on their website. The company claims to have a reach of over 1 billion devices each month and mines 3 terabytes of data each day through 350,000 apps from 115,000 different companies.

Business Insider’s Jim Edwards had a talk with Flurry CEO Simon Khalaf about the future of the company:
Simon Khalaf, the CEO of mobile adtech company Flurry, tells Business Insider that an IPO is inevitable in the company's future because his business has grown so big.

There has been gossip about a possible Flurry IPO for months now. Large adtech companies are often aimed specifically at IPO "exits," so that their venture capital funders can get a payback on their investments. Millennial Media, Tremor Video, YuMe, Criteo and Marin Software have all gone public recently. Yet when CEOs are asked directly if they want the rich rewards of floating their companies on the public markets, they usually demur or hedge.

When we asked Khalaf about an IPO exit, however, he was refreshingly direct: "I consider an IPO an entrance," he tells us. "We don't have a choice, our volume is too high and our scale is too big for anyone to absorb us."

Flurry has a net revenue run-rate of about $100 million. It has 150 employees and has taken $50.5 million in funding from investors. And although that doesn't make Flurry the biggest player in mobile adtech — InMobi and Velti still have more employees, and Millennial has greater revenues — it is one of the biggest players in big data analytics and mobile app ad reach.

Flurry reaches 1.1 billion mobile devices each month with ad impressions inside apps, almost twice as many as Google, which is alarming because everyone knows that Google has the largest share of mobile ad revenue on the planet, which is in the billions of dollars. But the Flurry’s numbers refer to reach on devices via ads in apps. Google's mobile ad business is largely search. And the bulk of consumer time spent on mobile devices is in apps, not on the web, Khalaf says.

Flurry offers the full mobile ad stack, including a "supply side platform" for mobile app publishers who want to offers ad space for sale, a "demand side platform" for buyers who want to place ads, an analytics suite to measure the whole thing, and most recently a "real-time bidding" platform so that buyers can place ads on a live auction basis. That RTB marketplace, launched in April, already has 30 DSPs buying in it, Khalaf says. The Guardian and The BBC both use Flurry as publishers.

There is one more thing Khalaf is unusually direct about. Flurry is not yet profitable, he says. Usually when adtech CEOs are asked whether their businesses make money, they launch into an explanation of how they're investing for growth or scale (or they say something impenetrably complicated about EBITDA). When asked whether the company is profitable, Khalaf says, "No. In 2014 we're profitable maybe."

The reason: Flurry is spending $28 million a year on data centers. "The cost of analytics is huge," Khalaf says. Flurry wants to create the largest HBase cluster in the business, he says, referring to the gigantic — and gigantically expensive — database serving devices that can handle millions of lines of tabled information.