The Curious Case of Elon Musk

TeslaIn the first quarter of 2016, Tesla Motors reported total revenues of $1.15 billion and an adjusted loss per share of 57 cents. Investors and capital markets rely on positive earnings, a measure of profitability, to value companies. Since 2010, the company has reported a loss every year. If positive earnings serve as a barometer for stock valuation, Tesla stock is unlikely to capture your imagination.

Yet, investors have driven up the price of Tesla as if they are driving the Aventador, the Italian stallion, on the Autobahn. The stock price of Tesla was around $20 in 2010 and today it is worth $207, which translates into a heart pounding growth rate of more than 900%. If you had bought 1,000 Tesla shares in 2010 for a modest investment of $20,000, the same investment would be worth almost a quarter of a million dollars.  

Irrational Exuberance

What is the basis for such irrational exuberance? Are investors assessing “value” of Tesla based on its revenues or expected future profits? The company’s total revenues grew from $117 million in 2010 to $4,030 million in 2015, which is an astounding growth of 3,400%. Estimating equity value based on revenues and disregarding economic profits is like chasing James Bond’s Aston Martin in a Cinderella Carriage. Could investors be arriving at intrinsic value using expected future profits. Sure, I could also win the New York lottery!

Most analysts have a sell recommendation on Tesla yet investors are treating the stock like Malva Pudding served with Witblits. So what is the rational explanation for the fascination with Tesla? Most likely, investors are really betting on the ingenuity and brilliance of Elon Musk.   

The Musk of Zorro

Elon Musk is a South African-born Canadian-American entrepreneur, engineer, innovator, and investor. He is the CEO and product architect of Tesla Motors. He is also the founder CEO of SpaceX, co-founder and chairman of SolarCity, co-chairman of OpenAI, co-founder of Zip2; and co-founder of PayPal. As of April 2016, he has an estimated net worth of US$14.2 billion, making him the 68th wealthiest person in the US.

Mr. Musk has stated that the goals of SolarCity, Tesla Motors, and SpaceX are based on his vision to change the world. His desired goals include reducing global warming through sustainable energy production and consumption, reducing the risk of human extinction, and setting up a human colony on Mars. He has envisioned a high-speed transportation system known as the Hyperloop, and has proposed a VTOL supersonic jet aircraft with electric fan propulsion, known as the Musk electric jet.

Tesla Models: Bevy of Beauties

The company caught the attention of the avant-garde driver when they produced Tesla Roadster, the first fully electric sports car. The company’s second vehicle was Model S, a fully electric luxury sedan, which was followed by the Model X, a crossover. Its next projected vehicle is the heavily hyped mass-market electric car Model 3.

The price of eco-friendly and curve enhancing beauties is not cheap. Models S and X are around $100,000. Only Model 3, a Musk gift for the masses, is priced around $35,000.  According to Tesla, reservations for Model 3 is approaching the 400,000 mark. The expected shipping date is not until the end of 2017. Many of the later orders fulfilled may not be available until 2019 or 2020. Model 3 should be renamed “Phantom of the Opera.”

Are you ready to test drive a Tesla or invest in the Tesla stock? You will certainly enjoy the “ride.”

Chatham, May 13, 2016; 12.30A

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The Pay to Play Formula

RaceThe pinnacle of high-speed auto sport, Formula One or F1, is estimated to be worth $4 billion per year. The commercial rights to the sport alone generate annual revenues of $1 billion. Nearly 600 million sport enthusiasts from 128 countries tune in regularly to follow F1 circuit championships.

The season includes a series of races, known as Grands Prix, organized around the world on F1 circuits and public roads. The results of each race are evaluated using a points system to determine two annual World Championships—one for drivers and one for constructors.

F1 Yoga: Body, Mind, and Soul

Modern Formula One cars are mid-engine open cockpit, open wheel single-seaters primarily made of carbon-fiber composites. The entire car weighs only 1,523 pounds, the minimum weight set by regulations. F1 cars can race up to speeds of 220 mph with the rev limiter reaching an astronomical range of 15,000 RPM while being capable of lateral acceleration in excess of 5g when turning. In sharp contrast, a high-performance 2-seater mid-engine street car like the Porsche Cayman, which is considered ultra-light and weighs around 3,600 lbs., can only reach 7,500 rpm while achieving 1g of lateral acceleration.

Since 1981, F1 teams have been required to build their car chassis, which is distinct from most other races like the IndyCar Series which allows teams to purchase their chassis. When the Formula One series began in 1950, eighteen teams competed for the coveted title. Ferrari remains the only team competing today since the formation of F1 series in 1950.

Cost to Play

Inductees are required to cough-up a princely sum of £25 million. Because of the  stiff barrier to entry, potential entrants/constructors prefer to buy existing teams (e.g., B.A.R. purchase of Tyrrell and Midland purchase of Jordan). In 2006, the total spending of all eleven competing teams was $2,900 million (Toyota $418.5, Ferrari $407, McLaren $402, Honda $381, BMW-Sauber $355, Renault $324, Red Bull $252, Williams $196, Midland F1/Spyker-MF1 $120, Toro Rosso $75, and Super Aguri $57 million).

The cost of designing and building mid-tier cars can reach $120 million. F1 teams pay entry fees of $500,000 plus added amounts based on prior performance. F1 drivers pay a Super-license fee of $10,000 plus added amounts based on prior performance. Therefore, you must pay-to-play.

F1 drivers earn the highest salary of any class of drivers. The highest paid driver in 2010 was Fernando Alonso, who received $40 million from Ferrari. The top Formula One drivers get paid more than IndyCar or NASCAR drivers who earn around a tenth of F1 pay. Teams get substantial amount of money for winning F1 series races, or even finishing in the top 10 list, which can hover around the $100 million mark. the bottom line is that it pays to play.

The Maestro

In 1978, Bernie Ecclestone became the President of Formula One Constructors’ Association (FOCA). He has been credited with rearranging and managing F1’s commercial rights and catapulting the speeding autobahn into a multibillion-dollar business. Ecclestone trick was to persuade the teams to bargain as a collective group rather than contract individually (we are well aware of the economic benefits of collective bargaining!). The new contracting arrangement meant that FOCA, or the constructors, effectively acquired the responsibility of negotiating and distributing television revenue.

Grands Prix

The inaugural 1950 world championship season included seven races. The number for the 2014 season was nineteen. Not surprisingly, much of the races are held in Europe. Traditionally, the country hosting a Grand Prix carries the name of the country. The United States has held six separate Grands Prix, including the Indianapolis 500, with the additional events named after the host city.

Recent additions to the calendar include the Singapore Grand Prix (2008), Abu Dhabi Grand Prix (2009), Korean Grand Prix (2010), Indian Grand Prix (2011), United States Grand Prix (2012),a and Russian Grand Prix (2014).


In 2014, Mercedes emerged as the dominant force with Lewis Hamilton winning the championship closely followed by his main rival and team-mate, Nico Rosberg. Mercedes won 16 out of the 19 races in 2014 (the other 3 victories went to Daniel Ricciardo of Red Bull). In 2015, only Ferrari posed a negligible challenge for Mercedes. Ferrari’s driver, Vettel, won the three Grands Prix that Mercedes did not win.

Are you ready to play?

March 18, 2016; 9.48P

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The Most Powerful Woman to Ride on “The Street”

DETROIT, MI - MAY 16: General Motors CEO Mary Barra sits in the first Camaro ever built at a Camaro Museum on Detroit's Belle Isle before GM officially reveals the new 2016 Chevrolet Camaro May 16, 2015 in Detroit, Michigan. General Motors is hosting a day-long event to unveil the sixth-generation Camaro. (Photo by Bill Pugliano/Getty Images)


When Mary Barra was appointed the CEO of General Motors on Jan 15, 2014, she became the first woman-CEO in a U.S. auto manufacturing company. According to Catalyst, women hold just under 17% of the seats on boards of directors and fewer than 15% of senior executive positions in Fortune 500 companies. Only 23 women head the 500 largest corporations in the U.S.

Crash Check

By the end of 2013, GM was losing money in Europe and the big bet on Chevrolet Volt electric car was yet to pay off. Ms. Barra survived a harrowing first year facing revelations about faulty ignition switches which allegedly resulted in 74 deaths and 126 injuries, a 30-million car recall and pressure from investors to return more cash to shareholders. She was forced to testify at a hearing by a House panel into the delayed response by GM in recalling 1.6 million small GM cars.

Deft Driving  

Since then. Ms. Barra has been widely praised for her handling of the crisis. The company recently had its best quarter since emerging from bankruptcy in 2009. She was praised for tackling the faulty ignition switches head on. She issued a corporate mea culpa and set up a victims’ compensation fund. GM also agreed to pay $900 million to settle criminal charges levied by the Justice Department.

Under her leadership, GM has increased its sales dramatically and has delivered its strongest earnings since 2009. Ms. Barra considers India, China, and the U.S. luxury car business as the prime potential growth markets. In recent years, GM has benefited from a sharp increase in U.S. demand for trucks and sport-utility vehicles, which is helping fund future projects. She took major decision to discontinue manufacturing operations in Southeast Asia, close a factory in Australia, and end GM’s sales and manufacturing operations in Russia.

Stock Survey

GM’s stock price, however, has declined during her tenure from around $40 to $29, which is below the company’s $33 initial public offering (IPO) price in 2010. Ms. Barra said the company needs to deliver on what it promises if it hopes to get Wall Street to give it more credit.

While market valuation of a stock may be an appropriate, and parsimonious, yardstick to evaluate the performance of a CEO in many circumstances, the unusual circumstances at GM would require a more nuanced lens to judge the CEOs handling of the crisis, tackling challenges from lack of growth in the emerging economies where GM has a strong presence, and confronting investor-fascination with electric car manufacturers like Tesla.

Most Powerful Woman on Wall Street

The encouraging news is that the financial pundits are giving Ms. Barra a resounding endorsement for her efforts and initiatives. Forbes ranks her as the most powerful woman on Wall Street in 2015 and the 5th most powerful woman in the World. No Bar is High Enough for Barra.

Are you ready to test drive GM’s redesigned Corvette Stingray!

Jan 27, 2016; 10.57P

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Amtrak Sings “Good Morning America, How are You?”

all_aboardGood Morning America, How Are You. Say don’t you know me I’m your native son

Amtrak, or The National Railroad Passenger Corporation, is a federal organization that operates passenger rail service in the United States. The name “Amtrak” is a portmanteau of the words “America” and “trak.” Amtrak was created in 1971 by Congress as a public-private partnership tasked with continuing American passenger-rail service, which was foundering at the time.

Although structured as a corporation, its board members are appointed by the President of the U.S. Virtually all its stock is owned by the federal government. As of 2014, Amtrak has about 20,000 employees with annual revenues of $2.4 billion. Incidentally, Amtrak owns only about 3 percent of the tracks it operates in the U.S.

Gargantuan Operating Losses

The company is operated as a for-profit enterprise. Yet, the “sleeper” has not reported a single profitable year since its inception. Operating losses have ranged between $230 million and $450 million over the period 2005 and 2014. Government subsidies to support the “occidental express” have been staggering. Each year, federal funds between $1 billion and $1.5 billion are required to support the omnibuses’ operating losses and capital investments. According to some estimates, total federal subsidies since its inception have exceeded $40 billion.

Some rightly claim that It pays to eat on Amtrak. Government auditors have found that  Amtrak lost more than a billion dollars on its food and beverage services over the last 15 years because of waste, employee theft and lack of proper oversight. On average, the locomotive loses about $80 million a year selling food. The 2005 GAO report said that poor management, lack of planning and enforcement of its food and beverage contract were likely causes of losses.

Antiquated Look

The average Amtrak passenger coach is 26 years old and some of its oldest coaches have been in operation for more than 60 years. Some coaches were tracked into service when Harry Truman was president. The company’s last major equipment update was in the 1980s. In 2010, Amtrak approved the acquisition of 130 cars to replace the oldest ones, or about 9 percent of its fleet, but it’s unclear when they got tracked into service.


The irony is that the government of the world’s largest free-market economy continues to subsidize using hard earned tax dollars a state-run enterprise that has never generated any profit since its commencement and is unlikely to do so in the future. Why we have ignored the first best solution, which is to privatize and deregulate passenger rail mode of travel, is beyond any economic imagination. Other advanced countries including Australia, Britain, Germany, Japan, New Zealand, and Switzerland have managed to incorporate varying degrees of privatization while managing to generate profits.

According to a survey of likely voters in the U.S., 53 percent want the federal funding to stop and are in favor of privatization. So why have we not privatized the locomotive? Newton’s First Law of Motion?

All aboard, Amtrak chugs along while burning more and more tax dollars….…

December 11, 2015; 6.57P

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Italian Stallion Ready to RACE on NYSE

FerrariFerrari priced its initial public offering at $52 a share after the market close on Tuesday, and the IPO is “oversubscribed.” The company starts trading today at 9.30A. As part of the planned IPO, the carmaker is floating about 17.18 million shares to the public, representing about 9 percent of the company.
The Ferrari family owns 10 percent; Fiat Chrysler owns the remaining 90 percent of the company. Fiat Chrysler’s stake will be reduced to 80 percent as a result of the IPO. Ferrari’s ticker on the NYSE is RACE.


Ferrari produces around 7,300 cars per year mostly targeted for Europe and U.S. The low production rate keeps the image of the company intact while generating huge pent-up demand. However, the downside is that unusually low production (owners typically wait for a year to get their car) raises a checkered flag on profits. In contrast, BMW, Audi, and Porsche have seen their profits rise because of double digit growth in their production over the past decade.
In its initial-offering filings, Ferrari now claims that it intends to expand its production to 9,000 cars by 2019. There are some economic benefits to keeping their production under 9,000; the company is exempt from U.S. fuel-economy rules so long as it sells fewer than 10,000 cars a year globally. Exceeding the ceiling could impact the performance of its high-powered engines.

Stylized Facts

• Ferrari spends roughly 20% of revenue a year on research and development (global industry average is around 5%)
• Between 2010 and 2014, Ferrari’s revenues increased by about 50%
• During the same period, operating profits rose 32%
• Its operating margins are around 14% to 16%.

First Trading Day

What will happen when RACE revs up its engine and starts trading at 9.30A today? My guess is that, like most IPOs, we will observe a run up of about 20-50%. So don’t be surprised if the price jumps to around $75 on the first day.
However, it is hard to tell what will happen in the long run but this stock is worth watching. If you don’t own one already, your chance to own a Ferrari finally arrives today.  See you at the finish line.

October 21, 1.34A

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Easy Rider: Indo-British Collaboration Makes In-Roads into the U.S. Market

tata-motors-logoTata Motors of India, a subsidiary of Tata Group, acquired the British luxury brands Jaguar and Land Rover from Ford Motor Company in 2008 for $2.3 billion. The acquisition was structured such that Ford was required to make a $600 million payment into the Jaguar-Land Rover pension fund. Thus, Tata paid only $1.7 billion for the two brands. Ford, which had acquired Jaguar-Land Rover in the 1990s for a whopping $5.3 billion, was forced to sell the two European luxury brands at a huge loss because it needed funding for its own survival during the financial crisis.


Since then, Tata has been able to revive the two brands and increase global sales. Few expected Tata Motor Company with limited experience in manufacturing trucks and inexpensive cars in India to successfully run a troubled Western luxury company. According to analysts, Tata’s success is attributable in large part to its management style. It did not seek to run Jaguar-Land Rover from its headquarters in India, instead, it left the day-to-day operations in the hands of U.K. executives.


The Indo-British manufacturer now wants to leave its own ‘tread’-mark in the fertile and coveted U.S. luxury car market. The U.S. sales of Land Rover have been accelerating this year emulating the triumphs of the unstoppable Lewis Hamilton, the acclaimed F-1 driver from U.K. In the first eight months of this year, Land Rover sales have grown by 20%. The company has ambitious U.S. growth plans for the Jaguar brand. The redesigned and much-anticipated Jaguar F-Type roadster is expected to add to U.S. sales. This month, Jaguar unveils its first sport utility vehicle “F-Pace” at the Frankfurt Auto Show, which might capture the American imagination. Jaguar is also launching the “XE” compact sedan next year priced under $35,000, which will compete with Audi A4, Mercedes C class, and BMW 3 series.


Ratan Tata, the retired chairman of the Tata conglomerate, who was instrumental in the acquisition from Ford, has been credited for the success of the two European luxury brands. As a fitting tribute, Mr. Tata was inducted into the “Automotive Hall of Fame” in Detroit in July this year. Step aside US, German and Japanese car manufacturers, we have a new American Idol.

Rich Anecdotal History

The Tata family, which owns and controls Tata Group, has been credited for fueling and championing much of India’s industrial revolution since its independence in 1947. The Tatas belong to the “Parsi-Zoroastrian” community.  The word “Parsi” in Persian language means Persian.  The Parsis originally migrated from Iran (then Persia) to India sometime during the 8th-10th century to avoid the persecution of Zoroastrians by Muslim invaders who were in the process of conquering Iran. To preserve their identity, culture, and heritage, the Parsis chose to flee Iran and migrate to India.  Human migration in the face of adversity, labelled as “refugees” today, has deep roots in history. History also teaches us, as in the case of Tatas, that the winner is almost always the host country that provides shelter to the displaced.®ion=bottom-well&WT.nav=bottom-well&_r=0

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The Passion for Cars Fueled on Debt

corvetteConsumers in the US borrowed around $119 billion in the second quarter of 2015 to buy cars, which is a 10-year record number. Based on the sales as of May, 2015, annual auto loan is expected to exceed $1 trillion for the current year which is staggering considering that the amount of auto loan is projected to be around the same amount borrowed by students in the US to finance their education.

Prior to the financial crisis, auto lending and credit-card lending were competing for the second- and third-largest categories of U.S. household debt (mortgages was the first category). Today, both auto loans and student loans exceed credit card loans and home mortgages. One explanation for the rise in the auto is that borrowers with low credit scores are typically able to get cheap financing because the delinquency rates are near an all-time low. Because student loans tend to be subsidized by the federal government, rise in student loan is not unexpected. However, despite the money being injected by the FED following the financial crisis, borrowers with low credit scores, also known as subprime borrowers, have found it relatively difficult to find mortgage financing. For instance, the aggregate amount of new loans to individuals with low credit scores (< 660) was $650 billion in 2006. Mortgage financing offered to individuals with low credit scores has fallen below $150 billion since 2010 (data based on New York Fed).


Banks today are reluctant to lend to subprime borrowers so buying a home for some maybe a distant dream yet such borrowers face relatively fewer hurdles to find cheap financing for their dream car. The unexpected rise in the demand for cars is also fueling the growth of the Detroit auto-makers. Are you ready to buy your dream car? Banks are eager to earn your business!

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Lamborghini Races to Build an SUV

lamborghiniLamborghini, the acclaimed Italian automobile manufacturer renowned for producing hand-crafted sports cars that customers compete to own, recently announced its plans to build a high-end SUV named “Urus” (Latin for wild ox). Currently, Lamborghini produces only two sports cars (Aventador and Huracan with an average starting price around $300K) in limited quantities (around 2,000 units per year). The production of Urus is expected to more than double the company’s annual output.


Lamborghini is trying to emulate the highly successful business strategy of Porsche, which entered the profitable SUV market for the first time in 2002. Global sales of premium SUVs rose from less than 400,000 in 2000 to 1.2 million last year (about 10% growth rate). However, very few brands compete in this high-end SUV market where the prices of SUVs range between $70K-$100K (e.g., Porsche, Land Rover, Mercedes Benz, BMW). Lamborgini is now tapping into this profitable sector but, by pricing its Urus over $200k, it is essentially entering a segment of the SUV market where it has absolutely no competitor.


Why this shift in business strategy? I believe the answer is tied to changes in the company’s organization structure and the race to find attractive profitable opportunities. Lamborghini as a family owned company was more conservative and content with its production of limited edition cars. However, once it became owned by a bigger public corporation, the conservative business model was bound to change. Automobili Lamborghini is owned by Audi, which is a unit of Volkswagon AG, which in turn is majority owned by Porsche!

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Porsche and Profitability: Winning the Race Aided By Euro

Porsche-Logo-AT-4Earlier this year, Porsche AG, headquartered in Stuttgart and owned by Volkswagen AG, which is itself majority-owned by Porsche Automobil Holding SE, was cautious whether it would deliver on its goal of a 15% pretax profit margin because of slowing growth in China, turmoil in emerging markets, and a shift toward cheaper cars. However, a weaker euro makes Porsche cars cheaper in many foreign markets. Although Porsche hedges 20 currencies, those that are unhedged are translating into higher profits especially those from the U.S. and China (U.S. is the single largest market for Porsche high performance sports cars but China is expected to get the #1 spot by 2016).

Porsche’s margins have come under pressure, falling from 19% to about 15% largely because of its SUVs (Macan and Cayenne) which have much lower profit margins but account for 58% of the company’s sales. This is in contrast to the 911, Boxster, Cayman and Panamera sports cars which have much higher profit margins.
At the Frankfurt Motor Show in September 2015, Porsche will unveil an exclusive arrangement with Apple Inc. to launch an updated version of its 911 sports car, with new engines and a new communication system. The new 911 will come with Apple’s CarPlay preinstalled. CarPlay is an in-car information and entertainment system that allows drivers to use their favorite iPhone apps such as iTunes and iPhone contacts on their car’s dashboard computer.

Porsche remains an all-round winner – a proven winner on the tracks, a thrill-provider for its drivers, and a darling stock for its investors.

For more details, read the following Wall Street Journal article (may require subscription)

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