Tag: Investing

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Unveiling the Untold Story of Tesla’s Q1 2023 Earnings Report: A Deeper Dive into Share Price Implications

Tesla’s Q1 2023 earnings report has captured the attention of investors and market enthusiasts alike, showcasing impressive revenue growth and a solid financial position. However, a closer inspection reveals some underlying concerns that might not be as clear on the surface. In this analysis, I will explore the hidden truths that may impact the company’s future success and share price, while offering a unique perspective on the unfolding situation.

Part 1: Financials and Profitability

The Balancing Act of Tesla’s Profitability: At first glance, Tesla’s Q1 2023 report reveals an 11.4% operating margin and $2.7B in GAAP operating income. However, this figure is down YoY, primarily due to reduced average selling prices (ASPs), higher raw material costs, and increased logistics and warranty expenses. As the company continues to expand production and launch new products, these costs may continue to escalate, potentially putting a strain on profitability.

Share Price Implications: A decline in profitability could dampen investor sentiment and lead to downward pressure on Tesla’s share price. As the electric vehicle (EV) market becomes increasingly competitive, Tesla may need to continue cutting prices to maintain its market share. This price war, along with the rising costs of production, could significantly impact the company’s profit margins and, consequently, its stock valuation.

Part 2: Product Development and Challenges

Navigating the Cybertruck Waters: Tesla’s Cybertruck has generated a significant buzz, and its production is set to begin later this year at Gigafactory Texas. However, the unconventional design and features of the Cybertruck may not resonate with traditional truck buyers. The pickup truck market is fiercely competitive, and Tesla’s entrance into this space comes with a considerable risk that may not be fully reflected in their earnings report.

The Odyssey of 4680 Cell Production: Tesla’s 4680 battery cells are crucial for their future success, as they promise increased energy density, reduced cost, and better performance. However, ramping up production for these cells has proved challenging, contributing to the decrease in operating income. If Tesla encounters additional setbacks, it could significantly delay product launches and hinder their ability to meet the 50% compound annual growth rate (CAGR) target.

Share Price Implications: Tesla’s share price is heavily influenced by investor sentiment and expectations of future growth. If the Cybertruck fails to capture a significant portion of the pickup truck market, or if the 4680 cell production encounters further delays, it could lead to a negative impact on the stock price. Furthermore, as Tesla’s valuation is based on future growth potential, any delays in product development could result in a revaluation of the company’s worth by the market.

Part 3: Energy Storage Expansion and Market Position

Tesla’s Energy Storage Ambitions: Tesla’s energy storage business showed promising growth in Q1, with the company planning to increase production capacity at their Megafactories in Lathrop and Shanghai. Despite the positive outlook, the energy storage market is becoming increasingly crowded, and Tesla may face stiff competition from both new and established players. This competition may put pressure on margins and make it more difficult for Tesla to maintain its position as a market leader.

Share Price Implications: As a significant portion of Tesla’s valuation is tied to its position as a market leader in the EV and energy storage sectors, increased competition could negatively affect investor sentiment and the company’s stock price. The energy storage market is evolving rapidly, and new technologies could emerge that challenge Tesla’s dominance. If Tesla fails to maintain its competitive edge, the market may reevaluate the company’s growth prospects, leading to potential share price

Part 4: Tesla’s Long-Term Growth Strategy and Share Price Implications

The Roadmap to Tesla’s Growth: In the earnings report, Tesla outlines plans to grow production in alignment with their 50% CAGR target, aiming to produce around 1.8 million cars in 2023. However, the automotive industry is known for its unpredictability, and Tesla’s ambitious growth plans may not be feasible in the long run. The company’s aggressive expansion may leave them vulnerable to unforeseen challenges, such as supply chain disruptions, regulatory hurdles, or shifts in consumer preferences.

Share Price Implications: Investors have high expectations for Tesla’s growth, which is reflected in the company’s stock price. Any signs of faltering growth or the inability to meet their ambitious targets may cause a loss of investor confidence and result in a decline in Tesla’s share price. The market is sensitive to changes in growth projections, and if Tesla’s growth falters, even temporarily, it could cause significant volatility in the stock price.

Part 5: Tesla’s Long-Term Plans and Share Price Dynamics

Tesla’s Vision for the Future: Tesla has ambitious long-term plans that focus on rapid growth, expansion of its product lineup, and continuous investment in autonomy and vehicle software. The company’s strategy includes an emphasis on Full Self-Driving (FSD) technology, which could potentially revolutionize the automotive industry and create new revenue streams through ride-sharing and other applications. Tesla’s commitment to innovation and growth is part of what has propelled its share price to around $170 per share.

Cybertruck Manufacturing Optimism: Cybertruck has the potential to disrupt the pickup truck market with its unique design and advanced technology. Tesla’s Gigafactory Texas, where the Cybertruck will be produced, is expected to feature cutting-edge manufacturing techniques and innovations that could help streamline the production process. If Tesla can successfully ramp up Cybertruck production and gain a foothold in the competitive pickup truck market, it could further solidify its position as a leader in the EV industry and create a positive impact on its share price.

Full Self-Driving (FSD) Prospects: Tesla’s FSD technology is one of the key pillars of the company’s long-term strategy. The company has made significant progress in recent years, with multiple iterations of their Autopilot and FSD software being released to customers. However, the path to true autonomous driving is complex, with regulatory and technical challenges still to be overcome. If Tesla can successfully navigate these hurdles and deliver a fully functional FSD system, it could potentially unlock substantial value for the company and its shareholders.

Share Price Implications: The share price of Tesla is closely tied to the company’s long-term plans and its ability to execute them successfully. The introduction of the Cybertruck and advancements in FSD technology could potentially lead to significant upside in Tesla’s share price. However, the market will closely monitor the company’s progress in these areas. Any setbacks or delays in production, FSD development, or regulatory approval could negatively impact investor sentiment and the stock price.

Conclusion: Tesla’s long-term plans, including the Cybertruck production and Full Self-Driving technology, play a crucial role in the company’s current share price of around $170 per share. While there are risks associated with these ambitious plans, a successful execution could propel Tesla to new heights in the automotive industry and lead to potential gains in its stock valuation. As the electric vehicle market continues to evolve, Tesla’s ability to navigate these challenges and capitalize on emerging opportunities will be key to maintaining its dominance and protecting its share price.

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When Stocks Stop Being Sexy – Why I’m Buying Tesla

These are scary times. The market is the most volatile that it’s been since the crash in march 2020 during the first lockdown. Tesla is down over 25% from its high share price to below $660 as of this video. Friends keep asking me: Is it time to sell? Is this the end of the run?

Well, something big is happening and I want to share it with you. 

Tesla is one of the most talked-about companies in the market and one of the most popular to trade. There are hundreds of YouTube channels dedicated to their cars and many dedicated to their stock.

So why should you listen to me?

Please don’t take it lightly when I say that I’m VERY familiar with Tesla. I’ve been following the company since they released the first roadster in 2008. I actually founded a company, InOrbis Intercity, that uses exclusively Tesla vehicles for city-to-city travel, in 2015. During that time I have owned several models of Tesla and have driven and ridden in virtually every model and trim that has been released to-date. We’ve had cars with upwards of 400,000km of use and we’ve driven nearly 3 million km in total with travelers in the past 5 years. We gather feedback from our drivers and our customers on the safety, comfort, maintenance, energy costs, and reliability of Teslas every single day.

I know a lot about these cars and about the company. Let me tell you, until about 5 days ago, I thought Tesla’s share price has been overvalued. And I’ve thought that since 2018.

This is not easy for me. But I’m here to tell you that I was wrong and that I’ve changed my mind about Tesla and also what I’m going to do about it.

Here’s how I changed my mind. And trust me, it wasn’t easy. 

Full disclosure, I’ve been bullish on Tesla’s products for a long time. In my opinion, Tesla makes the best cars on the market. Full Stop. And they only get better every day. We’ve had nothing but positive feedback and experiences in our fleet with the vehicles. There certainly are downsides to owning a Tesla but the software and driving experience make up for any of the negative experiences with the company that we’ve had to this point.

Unfortunately for me (and my wallet), I’ve been bearish on their stock price until now, thinking that it was just the ‘popular kid on the block’ and eventually, the price would come back down to earth. I was sure that Tesla would eventually get bought up by Apple or another large auto-manufacturer and their cars would live on as a sub-brand. I even created an extremely detailed valuation model and wrote a 30-page report on why Tesla was overvalued back in January of 2018 when their stock price was $200 (pre-stock split).

I was absolutely positive that Tesla was not going to make it. They’d soon run out of money and that the only way for them to keep going was if they got bought out.

In my defence, I was almost right! Tesla almost went bankrupt. Apple ALMOST bought them. Elon almost had to give up leading his dream of electrification (twice).

But then they delivered; first on the Model 3, and then the Model Y. They’ve hit target after target and even delivered very nearly half a million cars in 2020, during one of the most difficult years in recent memory for many of us. Tesla has been on an absolute tear for so long that I finally bought in around the time that their stock split. I didn’t buy much though. I still thought they were overvalued and that the run would end.

To summarize, I’ve thought Tesla stock was overvalued for a LONG time.

Lots of people are saying that Tesla would have to have a 50% market share of the entire automotive industry to hit its current valuation. I believed them. Until now.

It turns out that’s just not true!

I won’t go into detail here but in future posts and videos on my YouTube channel, I’m going to show you how, even with an extremely conservative (high) discount rate, Tesla is actually undervalued. And it’s probably undervalued at $800 per share, too. You can check out my valuation by clicking this link.

I’ve changed my mind on Tesla. I’m now bullish on the product AND on the stock.

I am going to buy shares of Tesla, and keep buying until they hit my price target, and maybe even more after that depending on a few factors. I bought shares in after-hours today at a price of $651. If they keep dropping, I’ll keep buying.

As meet Kevin says, I’m throwing my money into the fireplace! As the price of Tesla falls I’ll be Buyin’… The… Dip…!!!

Numbers don’t lie, and I am confident in my numbers.

There’s also a move that Tesla could make that would double my price target. Sign up to my Patreon to find out what that is.

My targets are not based on any dreams of a full-autonomous revolution and of Tesla taking the MaaS (Mobility-as- a-Service) market over with their Tesla Network app (although that certainly wouldn’t hurt my valuation).

My targets are based solely on EV sales and on Tesla’s planned expansion of production. Not on a guess, but on their actual, stated manufacturing targets.

Before I tell you why I’m doing this. Please don’t JUST listen to what I’m saying and start buying because I said so!!! Do your homework! Make your own decisions! I am not a financial advisor so please don’t sue me if I’m wrong!

If you decide you want to buy too. Click this link to get Wealthsimple and get $10 to start trading on top of being able to make trades absolutely free!

OK, here’s what you CAN do and what I did: Make a valuation spreadsheet and understand what the intrinsic value of Tesla is. If you want to learn how to do this, I have a course that I’m building on how to value a company, get more info on that in my Patreon group. 

To get a good head start today, though, just Google discounted cash flow statements and fundamental valuation.

Learn about the business you want to value. Learn what they do and how they do it. Learn about its competitors and the technology that they use. Learn everything you can because you need to know what you’re investing in if you want to be successful. Then, build your model. Predict how much they’re going to make over the next several years and decide if the company is worth investing in. Invest until the business hits your target valuation or until you get new information that changes your mind.

So why is Tesla undervalued?

For me, this all comes down to something that many people glossed over at the time it was announced back in September. The media barely talked about it, because, I think it was too abstract for most people. What is was is Tesla’s internal battery production goal. That’s right. The key factor is how many batteries Tesla is going to manufacture in-house. That number is 3-Terawatt-hours by 2030. That’s huge! It’s 3000x more than what they produced in 2020. And that’s purely for cars and energy storage.

Because that’s their internal production target, and they’ve stated that they’re going to buy every battery their existing partners can make for the foreseeable future. I think it’s fairly conservative to use that 3TWh/year production target as a benchmark for calculating Tesla’s share price. All I had to do from there is work backward to find the size of each car battery and divide to find the number of cars they plan to produce. If Tesla can keep selling as many cars as they can produce (and I think they can because the demand for autonomous EVs is enormous), then this tells me exactly what Tesla’s sales curve is going to look like over the next years. Peek over a few Elon tweets and stats on their expenses and margin targets and we’ve got our future cash flow statement.

Fundamentally, Tesla is leading the way in EVs and in autonomous tech. Those two technologies ARE the future of transportation. They have the technology, they have the manufacturing capacity and they have the talent and the plan to make it happen.

I now think that this will happen and that it’s a great bet. Whether you do is up to you.

Remember: Do your research. If you’re confident in what you’ve found. Take a deep breath and make your call. You can do this.

For now, that’s all.

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I lost $70,000 – The Beautiful Problem with Bitcoin

gold bitcoin

What is Bitcoin?

In the simplest terms, Bitcoin is a decentralized way to make transactions.

Bitcoin is the first ‘cryptocurrency’. It is the first and most popular way that we have so far to conduct transactions digitally and, theoretically at least, securely and without an intermediary.

A transaction means to buy or sell something. Normally, when we buy or sell things digitally, a third party or ‘intermediary’, usually a bank, validates each transaction and makes sure that neither party is trying to scam anyone, for example, by sending the same money to two different people at the same time.

The decentralized part of Bitcoin means that it is not necessary to trust one company or individual to keep an accurate log of your transaction or to verify it because everyone has a log of every transaction (this is oversimplified but is essentially how it works). A copy of all the transactions that have ever happened is stored on every Bitcoin user’s hardware. This log of transactions is called the blockchain.

Basically, Bitcoin is a tool that people can use to buy and sell things without having to rely on a bank as a middle-man.

Is Bitcoin a good alternative to use as money to complete transactions? Is Bitcoin a good long-term investment? Well, as with most things in life, it depends.

Here’s what’s good about Bitcoin.

  1. Bitcoin is in Limited Supply – There will only ever be 21 million bitcoin in existence. Because of the way bitcoin is designed, it is ‘deflationary’. That means that no more than 21 million Bitcoin can ever be made or ‘mined’. So if people want it, the price should keep going up because they won’t be able to make any more of it. This differentiates bitcoin from regular money or ‘fiat’ currency. With fiat money like USD, CAD, and most other national currencies, governments continually introduce new money into circulation. For example, in the US, 26% of all US dollars that have ever existed were created in 2020. These types of money are called ‘inflationary’ because the supply is not constrained. What this means, in practice, is that dollars tend to buy less every year that you hold onto them. Other commodities like gold, tend to increase in value over time because there is a limited supply, and creating more gold is difficult because you have to find it or mine it. Bitcoin, similarly, is limited to 21 million bitcoins, ever. As of February 2021, we’re at about 18.5 million Bitcoin in existence and it takes a lot of computing power to generate a new Bitcoin. Because the supply of Bitcoin is constrained, as long as the demand keeps rising, the price for Bitcoin should also rise. 
  2. Bitcoin is Easily Divisible – The smallest unit of bitcoin is called a ‘Satoshi’ and it’s one hundred-millionth (0.00000001) of a Bitcoin. Right now, one USD = 2,037 Satoshi. Dollars, like Bitcoin are divisible into cents. This makes it easy to buy something that costs less than a full unit. Gold was a good currency in the past for this reason as well. Because it is malleable, you can easily break up a block of gold into smaller chunks. Often, prices were measured in the weight of gold or other precious metals. The British Pound, in fact, used to be called the ‘Pound Sterling’ and gets its name because it used to be the case that British money was measured in pounds of sterling silver. In 1865, a person could exchange 1 US dollar for 1.5 grams of gold. Bitcoin, like gold and money is easily divisible, so that means you can easily buy smaller and larger things with it.
  3. It is Fairly Secure – Bitcoin is called a ‘cryptocurrency’ for good reason. It is built on cryptography – the science of cracking codes. The foundations of Bitcoin are based on something called a Secure Hash Algorithm. Secure hash functions make it very difficult to reverse engineer a private key from a public key. Taking a step back, for each bitcoin wallet there are two keys, a private key and a public key. The public key is like your address, it tells people where they can deliver your Bitcoin. The private key, is more like the key to your front door. With the private key, you gain access to all of the bitcoin inside of the wallet. What this means, in practice, is that it is very difficult to guess someone’s private key. In fact, it’s so difficult that, with today’s technology, we can say that it is impossible. I say that Bitcoin is ‘fairly’ secure because breaking into someone’s wallet can happen through more ways than picking the lock on their front door. Unfortunately, most people have to go outside. What this means in our analogy for Bitcoin is that people need to access their bitcoin and doing this often leads to them interacting with third parties like cryptocurrency exchanges (think BlockFi or Wealthsimple Crypto). Quantum computers may also pose a risk to the integrity of Bitcoin’s algorithm. More on that later. Essentially, Bitcoin is incredibly secure, it’s only when you introduce complexities (like exchanges) that you run into challenges.
  4. It’s Popular – Six days ago, on Feb 19, 2021 the market capitalization of Bitcoin hit $1 Trillion. Major companies like Tesla and Apple are starting to hold some of their cash in Bitcoin. In fact, Tesla has made more money from the increase in price of Bitcoin than it has from car sales to-date. The total market capitalization of Gold is $10 Trillion, that means that Bitcoin is about 1/10th the size of Gold in terms of total value in existence. The total market capitalization of Silver is around $1.5 Trillion, so Bitcoin is almost as big as silver! That’s good news for Bitcoin because the fact that it is so popular means that it is in demand, and as long as people want it, and the supply remains constrained, the price should keep rising. Bitcoin being popular is also good because it means that it’s more likely that someone will let you use it to buy things with. PayPal recently started allowing users to buy and sell goods with Bitcoin and BlockFi is releasing one of the first credit cards that delivers 1.5% ‘cash-back’ in the form of BTC (the symbol for Bitcoin).
  5. It has been (extremely) Profitable – in 2015, I bought one Bitcoin from a Bitcoin ATM in Toronto Canada for $300. The price of Bitcoin passed $70,000 Canadian last week. That’s a 23,000% return on investment in only 6 years! Some analysts predict that the price of Bitcoin may exceed $500,000 in the next few years. Obviously, continued profitability will depend on continued demand. Because the supply of Bitcoin is constrained, as long as the demand keeps increasing, the price of Bitcoin will as well.

There are a lot of great things to say about Bitcoin. Full disclosure, about 10% of my portfolio is in Bitcoin and other cryptocurrencies #DogeToTheMoon. However, there are also some potentially catastrophic downsides as well. I wouldn’t feel comfortable releasing a video on any subject if I didn’t cover both the positives and the drawbacks. 

There are a few problems with Bitcoin, some of them major.

  1. Scalability Problem – Bitcoin transactions are fairly slow to process (the network is capped at about 7 transactions per second), this is known as the ‘scalability problem’ and it has a number of solutions that range from bundling transactions to involving intermediaries and even creating offshoot cryptocurrencies with higher transaction capacities (see Bitcoin Cash). This is a problem because if you want something to be useful as money, it needs to be able to be used quickly. Visa, for example, handles about 65,000 transactions per second. For Bitcoin to take its place as money it needs be able to change hands much quicker than is possible right now.
  2. Trust Problem – Most of the time, people are not interacting directly with the blockchain and are going through a trusted intermediary to buy and sell Bitcoin i.e. buying Bitcoin through BlockFi or Wealthsimple Crypto. One of the main benefits of bitcoin that we discussed previously was it ‘decentralized’ nature. Unfortunately, without an intermediary, it can be difficult to buy and sell Bitcoin. This opens up some of the same trust and security issues that we have with traditional digital currencies.
  3. Energy Problem – Bitcoin is really all about energy. In order to make sure that transactions are valid, a whole bunch of computing power is required. The creation of Bitcoin, similarly involves the use of massive amounts of computing power and, therefore energy. Recent estimates put annual Bitcoin Mining energy consumption at around 121.36 terawatt-hours per year. This is 1/5 of the energy that the country of Canada uses in an entire year.
  4. Intrinsic Value Problem – One of the problems with Bitcoin is that it does not have any real-world use outside of buying and selling things. While it is a useful tool for buying and selling other real-world goods and services, Bitcoin has no use outside of this. Throughout history, metals like gold and sliver were used as money, but they were also highly sought after because they could be used for other purposes like making jewelry, and later in electronics. The money that we use today, dollars, is similar to Bitcoin in that it does not have any intrinsic value. The property that gives money its value today is simply that other people will accept it. Some economists argue that fiat money (the kind of money we use today) gets its value from the fact that you need it to pay your taxes. 
  5. Disappearing Problem  – If you lose your private key, your Bitcoin is as good as gone forever. One man lost $250 million in Bitcoin when his girlfriend threw out his old laptop. I myself lost a Bitcoin when the receipt paper that my private key was printed on faded into oblivion. That cryptographic hash function is definitely secure. I tried every method I could to retrieve the missing Bitcoin including using UV light to try to decipher the faded paper and making an Excel script to try to guess the missing digits. No luck! That Bitcoin is gone forever.
  6. Hedging Problem – Assets like gold and silver tend to be less volatile than the stock market (they go up and down in value less often). Investors often hold gold and silver as a ‘hedge’ to stocks because, often, when the stock market falls, the price of gold and silver rises. So far, Bitcoin has traded in the same direction as the stock market, so if the stock market is falling, so is Bitcoin. That could make Bitcoin a poor choice as a ‘hedge’ against market fluctuations. (Of note, on February 25, 2021 as of market close, many stocks were down almost 10%, Bitcoin, as of this writing is only down 4% on the day. Could this be a sign of a reducing correlation between Bitcoin and the stock market?)
  7. Volatility Problem – The price of Bitcoin is very volatile compared to fiat currency. Although the price trends upward, Bitcoin often drops in value by 10% or more in a single day and has dropped in value by as much as 65% in one month! Imagine buying a jug of milk for $10 today, and then, next month when you went to the store to buy milk, that same jug of milk cost you nearly $30, that is what a 65% drop in the value of the dollar would look like. It would be very difficult to predict how much money you needed to buy groceries and meet your basic needs.
  8. Copycat Problem – Bitcoin is not the only cryptocurrency in existence. Many others exist that are built on similar principles. Etherium, the second most popular cryptocurrency, for example, has a market capitalization of almost $200 billion, so it is comparable gold and silver in relative market sizes. Theoretically, a new, better cryptocurrency could emerge at any time. Maybe that new cryptocurrency helps solve one of the problems with other cryptocurrencies mentioned before like the energy problem or the scalability problem.

Despite the drawbacks, many large companies, governments and individuals are heavily investing into bitcoin and the technology that it is based on. Because of its limited supply and continued popularity, I see few reasons why Bitcoin will not reach $500,000 or even $1 Million in the years to come. Is Bitcoin the future of money? I don’t think so. Governments will not want to give up their control of the money supply and are already investigating ways to digitize their currencies. Many countries have banned Bitcoin and other cryptocurrencies, citing its use in illicit activities like drug smuggling and money laundering. Governments likely also fear that if Bitcoin takes over as the dominant currency, they will lose the ability to create more money. This would impact their ability to stimulate spending and to reduce the burden of government debt through inflation.

I do believe, however, that Bitcoin is a good long-term investment. It can be a store of wealth that individuals and companies use in addition to other assets and investments. Despite my lost investment, Bitcoin is here to stay and I’ll keep adding it to my portfolio until I see some evidence that its place as the dominant cryptocurrency may be changing.

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How Much Is Your Idea Worth?

Nothing.

Zero, nada, zilch, bupkiss. That’s how much your idea is worth.

But…but, my idea is brilliant! It will change the world! My new plan for how to solve snow-covered streets is worth billions!

Really? Who is willing to pay you a billion dollars for your idea? Anyone?…Anyone? Bueller?

I’m sorry to burst your bubble, but the likelihood is that any idea that you’ve had, someone smarter than you has already had. Your idea is worthless. So what? It doesn’t matter that it’s not worth anything now. What matters is what you do with your idea.

Take your idea for a product or service, and sell it to someone. See if there are people willing to put down actual money for what you’ve thought of. And don’t be afraid to tell people what your idea is. If it’s so easy to replicate that just by telling someone, they could take it and turn it into a business, then your idea wasn’t really worth anything, to begin with. How do you sell your idea? Take it to market! Start by defining the problem that you’re trying to solve. Research the hell out of it, what the pain points are that your idea addresses, who has those pain points, and how you can reach those customers. See if you can interview people with the pain. Ask them to tell you a story about the pain and see if it really bothers them enough to change what they’re already doing. This type of research costs nothing but your time and will provide valuable insight into the minds of your target audience.

Image result for lean startup
Has the Lean Startup flopped?

Steve Blank, the entrepreneur responsible for customer development methodology says The Lean Startup is dead. What does that mean? Basically, there’s so much money available through angels and VCs that a young company’s success depends almost exclusively on their ability to raise huge sums of money and not on their ability to bootstrap a startup.

I am not confident that Steve is correct, especially if you live outside of the Silicon Valley bubble, or are creating a startup that doesn’t immediately scream ‘FUND ME’ to Angels and VCs. It’s still possible to build a company without raising a hundred million dollars, it’s just difficult. I’ve been building my company, InOrbis Intercity for over three and a half years now. It started off as a worthless idea, just like yours. But it has grown to be more than that. We’ve just had our first profitable quarter, and we’re still only in Alberta. The vision I have for the company is beyond large. It will be a billion dollar company. But it takes time for great things to happen.

In order to change the way that people travel, we have to reinvent the model of a transportation company. We can’t rely on what companies like Uber did for intra-city ridesharing, and we definitely can’t copy what the airline and bus industries have done (RIP Greyhound). Our vision involves fleets of autonomous vehicles bringing business travellers, vacationers and more between the hundreds of cities that are within a few hundred kilometres of each other. So far, we have connected 6 cities with a combined population of nearly 3 million people. If we provide to access 100 times that number in 5 years, then we’ll be well on our way.

If you have an idea, and you want to talk to someone who also had one, and has tried to turn their idea into a reality, I am always open. Send me a message, I’ll happily sit down with you for a coffee to tell you my story and ask you about yours. I want you to succeed just as much as I want to succeed.

Think your idea is worth it? Let’s make it happen.

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Real Life Is Not Like Billions

Bobby Axelrod, the main character on the popular Finance drama, Billions, is a lot like Tesla CEO Elon Musk. They’re both billionaires. They both draw substantial public praise and criticism and are highly divisive figures who have a large impact on their respective industries. They were also both investigated and charged by the SEC (and in Axelrod’s case, the US Justice Department) for actions related to securities law. The main difference between the two? Bobby Axelrod is a fictional character whose proclivity for conflict is only superceded by his complete lack of restraint when his life and freedom are on the line. In real life, the consequences of your actions are permanent and making deals in the business world often means compromising, negotiating, and settling.

Today (September 29, 2018) Elon Musk settled with the SEC. He will no longer be chairman of Tesla, for at least three years, and will pay a fine in excess of $20 Million. In all, it is a relatively lesser penalty than the lifetime ban from being CEO of a publicly traded company that the SEC was seeking. It is also a larger punishment than someone who has not committed any wrongdoing deserves. Depending on your perspective, Musk either got away easy or was unfairly chastised by the state for a 60 character tweet.

Of course, the civil settlement does not preclude the Justice Department from filing criminal charges against Elon at a future date. However, a criminal trial has a much higher burden of proof than a civil case, which can be decided based on a balance of probabilities. In a criminal case, the prosecution must prove, beyond a reasonable doubt, that the defendant committed the alleged crimes, whereas, in a civil suit, all that is required is a greater than 50% probability that the act took place.

In a previous post from September 27, we discussed whether AI could play a role in predicting the outcome of cases like this, perhaps assisting traders in making appropriate investment decisions surrounding companies with legal troubles. Despite a strong performance in short-term volume trading, automation has not yet played a large role in the fundamental analysis of a stock’s long-term viability. Most AIs that trade today are relying on purely technical analysis, not looking at any of the traits that make a company likely to succeed, but instead relying on historical price data to predict trading and movement patterns.

Fundamental analysis is complex and subjective. Even the smartest deep neural networks would have a difficult time distinguishing between the very human aspects that go into valuing a company. The problem with AI, in this particular application, is that it would require a broad knowledge of various domains to be combined in order to predict with any degree of accuracy. Right now, even the best deep neural networks are still very narrowly defined. They are trained to perform exceptionally well within certain contexts, however, beyond the confines of what they ‘understand’ they are unable to function at even a basic level.

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Complexity in neural networks results in ‘overfitting’ – networks specify the training set well but fail at more generalized tasks.

In the above example, we can see how more complicated neural networks might fail to understand topics that are even slightly different from what they have seen in the past. The model fits the data that the network has already encountered, however, this data does not reflect what could happen in the future. When something happens that they haven’t encountered before (a CEO tweets something about 420, for example), a human can immediately put that into context with our everyday experience and understand that he’s likely talking about smoking weed. However, an AI trained to predict share prices based on discounted cash flow analysis would have absolutely no clue what to do with that information.

It is likely that there are companies working on technology to help train neural networks to deal with the idiosyncratic information present in everyday business interactions. One possible answer is to have multiple neural networks working on different subsets of the problem. Similar to how deep neural networks have enabled advances in fields ranging from medical diagnosis to natural language processing, new organizations of these systems could enable the next generation of AI that is able to handle multiple tasks with a high level of competency. As we continue to build this technology, we’ll keep speculating on whether or not an executive is guilty, and traders and short-sellers will continue to make and lose billions based on the result.

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The True Cost of an MBA

Everything has an opportunity cost. An MBA, for example, costs about fifty to eighty thousand dollars, but that’s just the face value. It turns out, by taking two years off of work to go to school, you are also sacrificing the earnings you could have had from those two years, not to mention any promotions, raises or job experience that would have come along with it. If we’re thinking about lifetime earning potential, we can calculate the incremental earnings that you’d need from the MBA in order to break-even on the investment. Of course, all of these calculations should always be done ex-ante (prior to enrollment) because otherwise, we’re falling prey to the sunk-cost fallacy, and that will only make us regret a decision we’ve already made.

For example, let’s say that your MBA will cost $75,000 up front and that you are currently making $50,000 per year annually at your current job. What incremental salary increase would you need in order to account for the opportunity cost of the MBA?

First, we have to calculate an appropriate discount rate for our money. In this case, we can probably use r_m , the market’s rate of return because if we choose not to put the money towards an MBA, we could instead put it in an Index Fund or another similar investment vehicle, where it would grow at around the market interest rate.

Source: Market-Risk-Premia.com

Based on the July 2018 numbers, the market risk premium is about 5.38%. Notice that we didn’t just use the Implied Market Return of 7.69%, this is because we need to subtract the Risk-free rate r_f in order to account for the incremental risk.

Let’s round down to 5% for simplicity. Assuming we’re starting our MBA in January of 2019 and Finishing in December of 2020 (2 years) with a cash outflow of $37,500 in 2019 and 2020 and sacrificed earnings of $50,000 in each of those years. We can calculate the future value (FV) of that money in 2021 as follows:

Future Value of Annuity Formula
Future Value of an Annuity

Our periodic payment, P , is $87,500, our discount rate,r , is 5% and our number of periods, n , is 2. That leaves us with the following:

FV = \$87,500*[((1+0.05)^2-1)/0.05]  = \$179,375

Assuming we’re able to land a job on day 1 after graduation, how much more do we have to make in our careers to make up for the opportunity cost of the MBA? For that, we can use another annuity formula to calculate the periodic payment required over a given number of years to equal a certain present-value amount.

Annuity payment formula

Let’s say that we will have a 30-year career and that our market risk premium stays the same at 5% (the historical average for Canada is closer to 8%, however, let’s be conservative and stick with 5%). Substituting in these values to our formula with PV = $179,375 r = 5% and n = 30, we find that the payment, P, is:

P = {0.05*\$179,375}/{ 1 - (1+0.05)^{-30}} = \$11,670

So, we need to make an additional $12,000 per year every year for the rest of our careers, because of the MBA, in order to make up for the opportunity cost of the program.

If that seems realistic to you, maybe you should consider an MBA.

Of course, if we’re being really clever, we should probably also include a risk premium for our MBA. There is not a lot of data out there to suggest what the probability of completing an MBA is, but we can assign some probabilities to our equation for reference. Let’s say that there’s a 60% chance that the market will be strong when we complete the MBA and we’re able to find a job that pays $62,000 per year right out of the MBA program. There is also a 20% chance that we’ll make the same amount as we made before the MBA program $50,000 per year, a 10% chance that we’ll make $75,000 per year after the program and a 10% chance that the market for MBAs tanks and we’ll make below $40,000 per year when we graduate.

Expected Value = 0.6 * \$62,000 + 0.2 * \$50,000 + 0.1 * \$75,000 + 0.1 * \$40,000 = \$58,700

How do we make a decision with all these different possible outcomes? Simply multiply the probabilities by the annual salaries and add them together to find the probable result. If these numbers are correct we’re looking at an equivalent salary of $58,700 per year coming out of the MBA program. Of course, these numbers are completely made-up, but if we find numbers like these in our real-world evaluation, the logical decision from a financial perspective would be to reject doing an MBA because the cost is outweighed by the potential gains.

According to PayScale, the average salary in Calgary for an MBA with a finance specialization is $87,500 per year, but the average salary for someone with a bachelor of science degree is over $75,800 per year. Based on these numbers, it might not make sense for someone with a science degree to do an MBA.

Of course, there are other intangible factors that come into play including career preferences, lifestyle, and happiness. These are all important and should definitely be factored into your decision.

Graphs and iPads are an important part of any MBA

Yes, this is a very hard decision to make but can machine learning algorithms help make these decisions easier for us? It should be possible to use machine learning algorithms to predict future earnings potential and even take into account qualitative variables like career preferences and working style to give us a better idea of which choices might be right for us.

It is my goal to understand the capabilities of machine learning models to assist in these types of financial predictions. Hopefully, in the next few weeks, I’ll have an update for you on whether this type of predictive capability exists and if it does, how to access it.

For now, good luck with your decision making! I did an MBA and I don’t regret it at all because it was the right decision for me. My hope is that this article has given you the tools to decide whether the decision might be right for you.

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How to Value a Business (Or a Project)

The best-kept secret of financial professionals is that it’s actually pretty easy to value a company, that is, decide how much you should be willing to pay for the business or its shares. My goal is to automate this process using machine learning algorithms to select the appropriate data and apply the formulas in the correct manner. This level of sophistication is still a few months (years?) away, at least by my skillset. For now, we’re going to cover the basics of project valuation via the discounted cash flow (DCF) methodology. Later on, we’ll see if we can get a computer to do the calculations for us.

Note: I’ll be using the terms company and project interchangeably here. However, for companies in more than one industry or market segment, you’ll need to use multiple discount rates because the Beta (systematic risk of the segment divided by the market risk) will vary depending on the industry.

You can probably find a lot of the information that I’m about to disclose (or all of it) in an introductory finance textbook or even from a free resource like Investopedia. That’s fine. Lots of people do not choose to read textbooks or financial-wiki sites in their free time, so I’m going to go over the basics here if you’re interested in the subject, but not quite interested enough to open a book.

Here we go. Are you ready?

All that is needed to value a company is:
    1.  Some revenue projections,
    2.  Some cost projections,
    3.  An appropriate discount rate (or cost of capital) for the company

That’s it!

Obviously, these things can be easy or very difficult to come by depending on several factors including the type of company (or project), the stability of the market, and the quality of the information available about the business.

Let’s assume //quite a big assumption, but hey, that’s what we’re going to do right now// that you’re able to come up with some reasonable revenue and cost projections for the business that you want to value and that you’re able to calculate an appropriate WACC (Weighted Average Cost of Capital) or discount rate.

Then what do you do?

Basically, you take the company’s projected revenue over a given period (let’s say every year for 5 years), subtract the cash costs on the business in each year and you’ve got the company’s Free Cash Flows (we’re skipping a few steps here like subtracting taxes, adding back depreciation, and subtrac

ting Capital Expenditures (CapEx) and changes in Net Working Capital, but we’ll save those for later).

Here’s an example of a company with some projected revenue and some projected costs going out 5 years:

Year 0 1 2 3 4 5
Revenue $20,000 $20,000 $20,000 $20,000 $20,000
Costs ($50,000) ($5,000) ($5,000) ($5,000) ($5,000) ($5,000)
Cash Flows ($50,000) $15,000 $15,000 $15,000 $15,000 $15,000

Next, we take the free cash flows that we calculated above, and we discount each of them by an appropriate ‘discount factor’ that we calculate using our discount rate.

Where: r is the discount rate and n is the period (or year)

All of my finance professors are about to roll over in their beds right now (they’re not dead), but let’s say the discount rate that we found for the company is 10%. Here’s what we end up with for the discount factor over the 5-year period.

Year 0 1 2 3 4 5
Revenue $20,000 $20,000 $20,000 $20,000 $20,000
Costs ($50,000) ($5,000) ($5,000) ($5,000) ($5,000) ($5,000)
Cash Flows ($50,000) $15,000 $15,000 $15,000 $15,000 $15,000
Discount Factor         1.00        0.91        0.83        0.75        0.68        0.62
Discount Rate 10%

Now we just multiply our free cash flows by the discount factor for each year to get the present value (PV) of the future cash flows. Once we have the PV of the cash flows, we can add them all together to find out what the project is worth to us, also known as the project’s NPV or Net Present Value.

Year 0 1 2 3 4 5
Revenue $20,000 $20,000 $20,000 $20,000 $20,000
Costs ($50,000) ($5,000) ($5,000) ($5,000) ($5,000) ($5,000)
Cash Flows ($50,000) $15,000 $15,000 $15,000 $15,000 $15,000
Discount Factor               1.00              0.91              0.83              0.75              0.68            0.62
PV Cash Flows ($50,000) $13,636 $12,397 $11,270 $10,245 $9,314
Project NPV $6,862
Discount Rate 10%

If you want a primer on what present value means, and what the time-value of money represents, here’s a good video on it from Khan Academy:

That’s it! We’ve valued a business. We now know that if this company was only going to operate for five years, and then cease to exist, that it would be worth about $6,800 to us in our pocket today.

In general, we accept projects that have a positive NPV and reject projects that have a negative NPV. I’ll cover the reasons for this in another post down the line. For now, at least, we are able to value a company given only its revenue, costs, and an appropriate discount rate. Things are going to get a lot more complicated from here so enjoy the simplicity while it lasts.