• Introduction: This is Really Happening
  • Revenues, Profits, Units & Capital Intensity: No Footnotes Needed
  • Conclusion: M&A or Just GIVE EM AWAY!

Introduction: This is Really Happening

In Kailash’s recent paper Amazon – Notes from Agnostics we effectively re-published readily available footnotes from the firm’s 10-K. The footnotes involved accounting changes and the use of capital lease and stock compensation accounting. Kailash made no definitive conclusions but merely reprinted Amazon’s own numbers which show the firm’s Free Cash Flow may be as low as $3bn and the business’ capital intensity had exploded.

While seemingly naïve the paper drew either admiration or vitriol. Despite merely being a reprint of footnotes it was, apparently, incendiary. This paper takes a similar if even more naïve approach: Kailash believes markets are at a point in the cycle where footnotes are no longer necessary. Valuation disparities in some situations have now become so radical the most basic data may tell a valuable story.

A recent article in Bloomberg2 noted that Elon Musk’s pay package, the largest compensation deal in history, “doesn’t seem that crazy anymore.” Like this paper, that article stuck to the facts. The key points seemed to be:

•     The recent run in Tesla’s stock has put its valuation above GM and Ford’s combined
•     If the stock moves from $88bn to $100bn Musk will net a staggering $346 million bonus
•     Musk’s compensation plan lays out a “…market value [of] $650 billion … that could net [Musk] more than $50 billion if all targets are met…”3

Figure 1 below shows the evolution of Ford & GMs’ market cap next to Tesla’s since 2011. As the Bloomberg article noted, at its point of publication Tesla’s market cap was greater than Ford and GMs’ combined. Kailash put the chart here simply to present the data.

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  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about Speculative Asset, Overvalued Stocks, Overvalued Stocks

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

January 16, 2020 |

Categories: White Papers

January 16, 2020

Categories: White Papers

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