Tesla News: The Model X Is Here – Can It Support a 30 Billion Market Cap?

Tesla has just started to deliver the first batch of Model X units. As frequently happens in high level engineering endeavors, the Model X got around 2 years behind its original schedule.

For a common company, that time and again is struggling with liquidity issues, this could be a very bad sign. However, for a variety of reasons Tesla is not the common company and it was able to weather the 24 months delay without much trouble.

Design of some of the parts was one of the main causes for the delays. Fortunately, design is also responsible for some of the attractions in the Model X: the “falcon-wing” doors and a third row of seats.

Picture 1 – The Falcon Wings (Credit: Don McCullough)

Picture 2 – Third row seats (Credit: MotorBlog)

The goal behind these features is to facilitate the accommodation of children in the car and other typical family needs. Design has played an interesting role in Tesla. The company has given a refreshing new perspective to car design by introducing features (including technology) that other traditional constructors have been reluctant about. The end result is a very functional design coupled with refined aesthetics. Other interesting features include:

  1.  A panoramic windshield
  2.  Auto steering tech to steer the car away from an imminent side collision
  3.  Air filter that allows to compare the cabin to a hospital operating room
  4.  The top version of the Model X has performances comparable to sports cars, going from 0 to 60 mph in 3.2 seconds

In my view, the design and technological approach is providing Tesla with a slight edge over the competition. However, it doesn’t seem to be a moat wide enough to protect the company from the traditional problems of the auto industry.

The fresh look on design and the bold decisions regarding technology choices have given Tesla a first mover advantage over the traditional car constructors. However, companies like Audi, BMW and Porsche are starting to bring very competitive offerings to the market. Additionally, Tesla has offered the view that it could challenge the economics of the industry. But so far, it has been a struggle to achieve the break-even point. The company projected to share 60% of the parts with the older Model S during the first stages of development, however, now that the car is on production it only shares around 30% of the parts. This can’t be good news for a company trying to change the economics of the sector.

The expenses on R&D and plant tooling for the Model X had a considerable negative impact on Tesla’s results during the past 24 months. Now, the company can start diluting those costs over the units produced. Only time will tell if the simultaneous production of the Model S and Model X will bring Tesla to profitability because, right now, I find it hard to justify a Market Cap around USD 30 billion.

Stock Market Hysteria: Headline Trading

Financial markets have been acting like crazy. During the past few weeks, the ups and downs of the Street could be seen as symptoms of bipolar behavior from the standpoint of any psychologist. We have seen multiple established companies with swings in the stock price ranging 20%. This is sheer madness!

Analysts blame China and a soon-to-be hard landing of the Asian giant. Most likely, this errant behavior has been amplified by the algo trading so common these days. It’s hard to say if the unwinding of US’s QE is also having an impact but I believe so.  Shifts in the monetary fluxes cannot be disregarded as sources of stock marketing scares.

However, the presented reasons are just noise. Predicting a stock market downturn is no easy task and thinking that we can identify one main single driver that has the power to tell us the future, is just arrogance. Remember, the last crisis started with an overlooked mortgage system that ended up contaminating the whole system. Don’t go after big headlines, usually, the important things are happening under our noses. The trick has been the same since ever: find good stocks and keep them!

The Pros And Cons About Google’s Alphabet

The creation of the new holding company will have profound effects on Google (GOOG). The current structure, mixing organic initiatives with a kind of venture capital, has allowed for the emergence of interesting new services like Android and Chrome, that have strengthened Google’s position. However, it has also masked a lot of underperforming experiments.


(photo: Karen Horton)

Although, this might not be the currently accepted mainstream management philosophy, I believe that the current structure was good in terms of managing an innovative organization. It allowed for young initiatives to grow under the protection of Google’s cloak. Unfortunately, it also created a conglomerate discount on the company stock price.

So, the biggest advantage of this transformation lies on the fact that Google as a standalone business unit will have much cleaner financials. Investor can look at the search engine as the fillet mignon and value the company through sum of the parts. On the medium term, financial exercises striping Alphabet of all the money absorbing activities will become a common exercise between analysts. This is Wall Street’s dream.

Cooperation or Competition?

However, this new structure might create new obstacles to innovation within Alphabet. Firstly, will the usual freedom for employees to invest time in new projects be maintained? The creation of new cost centers might raise incentives to each business unit to compete between them, removing the possibility of employees allocated in a given unit to participate in new ventures elsewhere. Employees are considered a cost in the companies where they belong, therefore, to have them working for other units for free is helping others at the cost of our own budget. You can extrapolate the previous example to other types of resources. This myopic view is very common when the management allow silos within the organization.

You can’t handle the truth!

Secondly, disclosing detailed financials for incubated ventures might trigger a reaction from activist investors demanding for the management to get rid of the underperforming units. Obviously, this could meant the death of projects like the self-driving car, the Google Glass and Google fiber among others. Allowing investors to know where the money is going might not be the wisest thing to do in companies that bet so much in an uncertain variable like innovation.

No vision, no hope

Finally, the company might lose its purpose and unifying vision. Although, many of Google’s projects don’t seem to have much to do with search engines, the truth is several of the high profile projects respect the company’s main activity: creating audiences for ads.

Yes, creating audiences is Google’s main activity. The indexation of online information and development of a way to find it easily through something commonly known as search engine was the first step to dominate the online ad market. So, when the internet started to become a reality in mobile phones, Google was already working on an operating system. As the search market spread to mobile phones, Google was effectively working on increasing its audience.

Google Chrome and Chrome OS are also initiatives pursuing the goal of consolidating a loyal audience. From here on I am merely speculating, but I believe that the Google Glass, the self-driving car, the Google Fiber, and the Project Loon (internet balloons) are also projects respecting the pursuit of a broader audience. The Google Glass could expand Google’s dominance to augmented reality, which could mean increasing a lot the number of hours that each user passes using Google services (i.e., being part of the audience). The self-driving car could allow users to free up commute time that they can use to access the internet. Project Loon is about bringing the internet to remote areas thus increasing the audience. Even Calico could be seen by as a way to extend the life of its loyal audience (maybe too much Machiavelli on this one though).


Obviously, effective results will depend a lot on how this new structure is implemented in practice. Alphabet might end up being the best move that Google’s management has ever done to avoid becoming another dull corporation but it just seems to be the other way around. Wall Street is clearly euphoric with the idea of having detailed numbers for each unit, however, a conglomerate of individual units means raising walls within the company – which is exactly what decadent corporations do.

Google has beaten the broad market (SPY) by a heavy margin since the IPO. The secret sauce has been applied innovation. The new structure indicates that Google wants to become a conglomerate of diversified innovative business units. Although, this might seem interesting in theory, I think this might create a destructive competition within the company. For instance, I am not seeing Apple (AAPL) dividing its operations in standalone business units. We won’t see Apple creating a company for the Macintosh and other for the tablets. The Macintosh business unit would have never allowed the rise of the tablet unit knowing that it would end up cannibalizing the Mac sales. The tablets were allowed to grow and thrive thanks to a vision of a greater good for the whole company.

A Game of Thrones: Greece and the European Equities Decline

The Greek case shows that Europe has a laggard vision

Once again, the Greek government sold the Greek people. Paradoxically, it’s a defeat for Greece and for Europe. But above all, it’s a bad service to democracy. It seems like it doesn’t matter which side is governing a given country, the outcome will always be the one chosen in Brussels.

The old aristocracy reigns in Europe, they’ve left the common people have a taste of the purchasing power of the Euro. But now common folks are enslaved, bended by the very same Euro. Europe is building a laggard society to serve the old aristocracy.

My point focuses on the fact that the old grocery store math doesn’t work anymore. Economic systems resemble biology. They grow, evolve, adapt and mutate which makes them unpredictable. That is why the gold standard failed and any system that it’s based on a zero-sum philosophy will fail. However, the Neo-classic economy philosophy that rules Europe just can’t deal with this fact. They will keep screaming that the Sun circles the earth. Obviously, this won’t do us any good.

Without a vision of progress, Europe risks to repeat the errors of the past

They just can’t let go. It’s better to die in a world that they’ve always known than to let others pave the way to the future.

I once wrote these same words to describe the end of the Roman Republic. Look how closely this resembles to our reality. It’s not that farfetched to believe that the Euro zone might share the same destiny as the old Roman Republic.

But above all, the Greek government did a bad service to democracy. It will take a long time before any country will have the courage to empower an anti-establishment party. However, we have learned one important lesson: no one can try to negotiate with Europe holding a mere bluff. The next rogue government that tries to pull a trick against the EU must have an executable plan to leave the Euro (meaning Foreign Currency Reserves). Without that, the ECB will always pick the winner. And that is why I believe the Euro zone has started its decline. It might pass a long time before anyone tries to defy the EU, but when they do, they will be ready to break it. And by the Murphy’s Law, if something bad can happen, it will happen – it just didn’t happen this time.

The negative vision on the European society is a bad sign for European equities

Going forward, there can’t be much hope in any kind of long term outperformance by the European equity markets. The European retrograde elites are running the European companies based on a laggard set of management principles. This explains why, for example, Finland now a troubled country, lost Nokia (NOK) and Europe lost its jewel of the crown in the tech sector. Obviously, the old aristocrats don’t know much about smartphones and mundane stuff like that so in their perspective it was probably better to just get rid of it.

The United States with all its defects (and congress deadlocks) has by far a much better set of principles ruling the country. This is the main reason why, after I’ve started this blog to identify undervalued companies in Europe, I have been mostly identifying opportunities in the US. Europe is in decline and usually there aren’t that many opportunities in a context of slow death.

Going forward, European Jewels will just be a name. I’ll keep it but I could just call it Investment Jewels. It would probably do more justice to the blog, since I believe most of the opportunities are in the US (SPY), not in the decadent Europe.

A Valuation Approach for 3D Systems (DDD)

Previously, I’ve wrote a long article on 3D Systems (NYSE:DDD). There, I focused on analyzing the company organization and the product conception philosophy. In other words, I was interested in the growth potential of the company. However, in this text, I want to present a different perspective about 3D Systems. I want to present an analysis from a valuation perspective.

3D Systems has achieved profitable growth

Looking at 3DS historical operating performance:

Table1 – Gross and profit margins 2014 to 2009

We can see that the company has performed well in terms of gross margins from 2009 until 2013. Last year, the gross margin had a significant decline in line with the overall downturn in the company operations. In terms of profit margin, 3DS made a similar progress by significantly improving its profit margins from 2009 to 2013. In 2012, the company achieved its best profit margin for the analyzed period at 14.5%.

The margins performance is one of the reasons that make me like this company so much. Basically, the company has already shown the ability to achieve strong profitability even before achieving, let’s say, USD 1 billion in sales. At the same time, 3DS has been able to grow very fast, capitalizing on the growth spurt of the whole industry.

Underperforming the general market

3D Systems has proved its worth by achieving profitable growth. However, the fact that the industry is still small increases the likelihood of hiccups along the way:

Graph 1 – Stratasys (SSYS) vs. 3D Systems (DDD) vs. S&P 500 (SPY) from 2013 to present (

After a good performance in 2013, both Stratasys (SSYS) and 3D Systems started a prolonged disinflation process. Presently, both companies are underperforming the S&P 500 (SPY) by a wide margin as you can see in graph 1. This makes me believe that the downward movement in the stock price is related to the investment community perception about the whole industry rather than just a 3D Systems specific issue.

Valuation exercise

One interesting exercise would be to compare the profits for 3D Systems under different assumptions. In the following table, I have selected 2 main drivers: sales growth and profit margin.

Table 2 – 3D Estimations for profits in 3 years given different growth rates and profit margins

In the first row we have the margins, in the left column we have the revenue growth rate. Figures in thousands USD.

The previous table offers estimations for the next 3 years under different scenarios. In my opinion, the scenarios are the most probable given the present information. I am selecting a 10% to 40% annual growth rate interval and a 7% to 15% profit margin range. However, outcomes outside of this set of scenarios are possible and will lead to very different results from the ones I will present shortly.

Obviously, the different outcomes inside our table 2 will lead to very different earnings multiples. Based on my experience, I selected the following possible scenarios:

Table 3 – Estimations for the earnings multiples for 3D Systems

As an example, selecting a 10% margin and a 30% growth rate we would result in an earnings multiple around 35x. This would mean a market cap around USD 5 billion which compares with the current market cap around USD 2.4 billion. Assuming 120 million shares outstanding by then, the resulting stock price would be around USD 38.66. The next table summarizes the whole set of stock prices under the selected scenarios.

Table 4 – Estimations for stock price for 3D Systems in 3 years under the different scenarios


The presented scenarios offer a broad view about the possible upside/downside relation for this investment case. The important aspect here is to understand that 3DS stock price will be extremely sensitive to variations in sales growth and profit margins.


(Photo credit: 3D Systems)

I believe this is investment has a high upside/downside relation, which means that the pay-offs may be much higher than the capital at risk. However, there is a lot of uncertainty related to the company sector. Therefore, I believe this investment is suited for an aggressive investor that also uses well diversified portfolios. Only this way will it be possible to accommodate capital losses that may arise from this investment.

Of Interest: Best Buy and Varoufakis


From this week, I highlight two main events: Best Buy’s earnings release and the profiling on Yannis Varoufakis in the NYT. These two pieces make a very interesting read:

Best Buy presented results that topped analysts’ expectations. Earnings were pressured from restructuring charges. These one-off items are related to the disposal of several international stores, specifically in Canada. Overall, the results are in line with a positive execution of the turnaround.

Varoufakis is a key character in the negotiations with Greece. Of importance is the fact that the outcome of these negotiations will shape the future of the EU. The New York Times did an extensive profiling on Varoufakis. This a very interesting work piece that can help us to better understand the man behind Greek’s financial policy.

Have a nice weekend!