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Anirban Mahanti sat down with Mayur Thaker, a Senior Relationship Manager at Zacks Investment Research, to chat about hypergrowth investing.
June 3, 2021 – By Samantha Bailey
Anirban Mahanti sat down with Mayur Thaker, a Senior Relationship Manager at Zacks Investment Research, to chat about hypergrowth investing.
This conversation is all about investing in rapidly growing companies with huge addressable markets. As investors, we need a framework to study these options: how do we evaluate the investment opportunities in businesses at the bleeding edge of their respective domains?
So, grab a coffee (or any other favorite drink!), and let’s learn about hypergrowth investing.
In this wide-ranging conversation, Mayur describes his investment journey. He started out when he was only 13-years old, investing a portion of his dad’s portfolio. He won the lottery with the dot-com boom and then saw it all crumble. And as a young adult working at Zacks, he experienced how the GFC was unraveling the very industry he was working in. We hear how his experience made him the investor he is today.
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A significant portion of the conversation is devoted to Tesla (Nasdaq: TSLA), where Mayur addresses the following topics:
What is the high-level investment case for Tesla? Why should investors care?
There are many bear cases for Tesla, including the historically low-margin and capital-intensive nature of manufacturing, reliance on regulatory credits, and impending competition. Mayur explains why many of these issues are irrelevant to the Tesla investment case as things stand today.
What metrics should investors focus on when evaluating Tesla and why?
What is the future of Tesla’s energy business?
What is a reasonable estimate of Tesla’s fair value?
And for those who want to explore beyond Tesla, we have you covered. Mayur outlines his thesis for two potential multibaggers — Square (NYSE:SQ) and Beyond Meat (Nasdaq: BYND).
Finally, we close, by putting it all together. Specifically, Mayur lays out his hypergrowth investment framework. I (Anirban here) identify closely with his methodology. I think it works well for patient, long-term focussed investors.
Don’t miss this masterclass in hypergrowth investing. Trust me, this marathon conversation is well worth your time!
This interview covers a wide range of topics, and it will appeal to investors of all types, but should be particularly interesting for both budding and seasoned growth investors. Below are some of the highlights from this conversation, along with relevant timestamps:
In this section, Mayur discusses the importance of understanding what is discretionary spending and what constitutes non-discretionary spending. He uses Amazon.com (Nasdaq:AMZN) as an example to illustrate this concept.
00:06:51 The Return On Invested Capital (ROIC) concept and why it is relevant.
00:11:26 Mayur’s investing journey, from his teen years, to GFC, to now.
00:15:16 Buying the dips: Why buying the S&P 500 index during major “corrections” makes sense.
00:24:25 What is the high-level investment case for Tesla (Nasdaq: TSLA)?
00:27:13 How Tesla is fast becoming a manufacturing powerhouse.
00:31:15 The existential crisis for internal combustion engine manufacturers.
00:36:35 Regulatory credits and Tesla’s profitability.
00:46:29 Why investors should pay close attention to adjusted EBITDA when analyzing growth companies.
00:56:29 Is Tesla’s energy business a loss leader?
01:04:50 What is Tesla’s fair value?
01:07:58 The investment case for Square (NYSE:SQ).
01:11:16 Why Square should own Bitcoin but Tesla shouldn’t.
01:14:44 The investment case for Beyond Meat (Nasdaq: BYND).
01:21:23 What Bill Miller is wrong about and why.
01:22:47 Putting it all together into an investment framework for growth investing.
Anirban Mahanti 00:00:03
Hello everyone it’s my pleasure today to welcome Mayur Thaker. Mayur is a senior relationship manager for Zacks Investment Research, a stock data and research provider for asset managers and he’s worked in the markets for over 13 years, consulted with over 100 portfolio managers so mostly in the Boston New York area and he’s also worked at Zacks on portfolios to used by RIAs and advisors and is interested in in high-growth, financial statement analysis, return on investment capital.
And it is, you know, I’ve been following you for a long time on Twitter. We’ll share this out its @freshjiva.
And he has some really interesting tweets on certain high growth companies, notably Tesla which we’re going to talk about as well, but he does share, you know his insights into other companies as well and yeah so Mayur, welcome to the 7investing podcast.
Mayur Thaker 00:01:10
Well, thank you, thank you for having me, pleasure to be here.
Anirban Mahanti 00:01:14
Fantastic you know, usually what I like to start off with is just a quick introduction about who Mayur is and what can you tell us about yourself.
Mayur Thaker 00:01:29
Sure yeah I have you know all sorts of interests, but you know, as you mentioned my professional background is being an analyst as well as the senior relationship manager, which means that I work directly with zacks clients who are primarily portfolio managers and analysts.
At a variety of different investment management firms so I’ve spent the last you know 15 years 13 years or so.
Just working directly with them, so I kind of have, you know, a firm understanding of the variety of equity, you know strategies that professional firms utilize everything from value strategies to growth strategies and everything in between.
Large firms, as well as mid mid sized firms so we’re talking about you know companies that have over $10 billion dollars in assets under management, all the way down to small RIAs who managed somewhere between $25 to $50 million, but the majority of our clients are you know somewhere in that sweet spot, which is between $100 million to about $1 billion of assets under management so those are the types of firms that we work with you know portfolio managers, as well as analysts.
And so you know kind of started off as a blank slate no just you know graduating college starting you know working at Zacks.
So I had no real background or understanding of the equity markets, I only started to develop that, as I listened and learned from our clients, so I started off just providing you know, support and training on the tools that we provide to them that they use to make their decisions and in the process of started to understand exactly what they’re thinking is like what metrics do they look at how do they look at the balance sheet, how do they look at the income statement.
How do they look at the cash flow statement and then, how do they value companies right? That’s a very, very important point.
As investors, we want to know a key question which is valuation right where the business is and then there’s the valuation right the company, the price that we pay for that business.
So you know we can have a great business, but if it’s not trading at a good price, then as an investor, we can say yeah it’s a great business but i’m not going to make an investment in that company.
Right so that’s a key question that you know investment managers ask every single day, and so I was over time kind of exposed to those you know those different strategies and methods about how to go about thinking about those factors.
So there’s you know that side of it, and from that I’ve developed a keen interest in you know these four areas that you know I spend most of my time on.
Mayur Thaker 00:04:20
One, is understanding high-growth right, and this is something that is confusing investors and financial markets purchase spins for many, many years right, beginning with Amazon.
You know, which is sort of the first example in the modern era of the Internet era where you have a high growth company, but was unable to show profitability in the first five years or so, five or six years of you know, post ipo.
And even after they showed profitability, the company’s still treated at a PE of somewhere between 100. To even up to 200 at one point and that confused investors into thinking that the company is overvalued.
So you know when you’re a growth investor there’s a number of things, and you have to know how to be able to understand and compare a high growth company with other companies and to understand its valuation so high growth is a key area of interest.
And that’s connected to financial statements analysis right, we have to look at the income statement, we have to look at the balance sheet, we have to look at the cash flow statement and and put it all together to understand.
You know, a key question, which is how much of their expenses are discretionary versus mandatory and that’s a question that I think not enough people ask right.
We can have you know, say, for example, 100 million dollars of revenue and the cost of that revenue could be say 50 million.
So your you know your gross profit is you know 50 million, but then after that the company can choose to take that 50 million and hire you know 1000 new workers because they want to open up you know operations in a new country.
You know that would obviously depress their earnings of that quarter right and that would make their stock price little elevated or inflated.
But that was a discretionary decision that they made, however, the expenses that they have to pay their employees in the markets at the operating today that’s mandatory spending right.
So you know when we look at high growth, we have to know how to separate these two categories of you know expenses that hit the income statement and lead to that net income at the bottom line.
So that’s financial statement analysis, you know, specifically for growth companies, but also for value for all companies, we have to do this.
And then another key question is Return on Invested Capital.
Mayur Thaker 00:06:51
Right, this is a concept that you know Warren Buffett has spent his entire life talking about his partner Charlie Munger especially to be famous for talking about it.
As well as you know his contemporaries right they you know Seth Klarman is another key investor that I watch very closely Bill Miller as well.
These are investors who have a very, very clear understanding of RoIC, which is that companies must earn a return on invested capital that exceeds their cost of capital.
Right, so if a company has raised 100 million dollars from investors and investors say that Okay, we want a minimum return of 5%.
Right, so that is the cost of debt, plus the cost of equity right that the cost of did is very obvious, you can just look at the interest rate that the bonds are trading at right now.
And the yield that those you know bonds are treating at is basically the cost of debt. The cost of equity is a little bit harder to understand, but there are methods to understand that as well.
Using you know the CAPM model is one you know the main area that you know people use, which is you know long story short, you know the risk free rate plus the beta times the equity risk premium right so that’s one way, you can estimate the cost of equity.
Basically there’s a cost of capital right the company has started with a capital base that was raised by investors and investors have a minimum rate of return that they require right.
So if a company earns above that rate right that blended rate of return that investors require, then they generate economic profits right, that means that they’re actually creating value.
If the company earns below that then they’re actually destroying value, right now. What is return on invested capital, we can talk about that you know, later on, but basically that’s a key area that.
Mayur Thaker 00:08:52
You know that I’m interested in and then lastly is valuation right once you’ve already identified, you know great businesses that generate great returns on capital they have great looking financial statements.
Ultimately, what price do you have to pay for them right and what price are they actually worth? What’s the intrinsic value of the company.
So that’s a key question as investors right, we have to ask that, ultimately, is what is the company worth, what is the company currently trading at in the marketplace, right now, is there a big difference between the two If yes it warrants a further look right.
Anirban Mahanti 00:09:30
That’s a great introduction and summary of what you do. You didn’t talk anything about your interest in cycling or music that’s okay.
You mentioned that you have spent I think you’ve played some instruments as well. Or at least I gather that you do sometimes. I’m curious about what other things people like to do.
You know, are different from actually analyzing companies, you want to share something with us.
Mayur Thaker 00:09:57
Yeah I’m an avid cycling fan. I love long distance cycling. I love camping and cycling together.
So I’ve done, you know trips, where I just have everything on the cycle itself, as well as like you know we have you know different compartments on my bike, where you can store like you know your attention, you can store a sleeping bag, you can store, you know little equipment to actually make food and coffee.
So I love camping and I love cycling to do that so i’d like going on trips on my bike even so i’ve done, you know 200 mile cycling trips so that’s you know, one of my favorite things to do, I almost a huge fan of drumming so I love all sorts of drums the drums set as well as Indian drumming.
So I’m originally from India and I love the tabla right which is a Indian hand drum. It’s one of the most famous drums of India and so I personally play them myself. So I love that I’m also keen on eastern religions, such as the dharmic religions, which are in Buddhism, Sikhism, and Jainism.
So I’ve you know keenly study those religions, as well as their philosophies so I dabble in that in those areas as well, so.
Anirban Mahanti 00:11:1
Excellent good to know a little bit about you, know your diverse interests as well, I always like to ask this to all anyone I interview or even actually meet.
When did you sort of start this thing you know, and do you remember what your first stock was and how did that go.
Mayur Thaker 00:11:34
Yeah it’s funny I started investing right during the height of the technology bubble so at the time I was 13 years old and, for some reason I was always inclined towards the stock market, so I used to watch CNBC other you know other kids watched you know cartoons I watch CNBC I don’t know why so.
Anirban Mahanti 00:11:58
Mayur Thaker 00:12:00
That is a cartoon basically yeah.
But yeah I used to watch Jim Cramer, too, and I used to love listening to him and I developed a great you know basic understanding of what stocks are right at a very young age.
But it happened to be during the tech bubble, the tech boom of the late 90s, where everything was trading at atmospheric valuations right.
But that’s when I got started. That’s just I just happened at the time and I remember convincing my dad to let me manage a part of his portfolio so interestingly, the first time I ever bought for him was a company called Juniper Networks.
It was right up there in terms of the hot the hottest sectors, along with Cisco Systems ultimately Cisco Systems prevail Juniper kind of went by the wayside.
They said they’re still around, but you know they never became the behemoth that Cisco went on to become.
But you know Juniper back then was kind of like the Peloton. You don’t like the really hot stocks that everyone talks about even Tesla you know we’re just like everyone is talking about Tesla now people used to talk about Juniper Networks back then.
So I bought Juniper Networks from my dad and you know made some you know good money but eventually It all went way down, so I made a lot and and I lost a lot.
I remember that was a great learning experience.
Anirban Mahanti 00:13:29
Remember, from that time there used to be a company called Nortel Network, so you are at least lucky that company still exists. There are lots like, as you said that don’t even exist today like Nortel went bankrupt and then probably got acquired by someone along the process where a lot of these networking companies.
Yeah a very interesting thing is that the.com era was very interesting in many ways, and in many ways, what I find interesting is that a lot of those things that people talked about actually have happened.
It just happened later right, you know a lot of those things got realized this was just you know they’re too early.
To talk a little bit about.
Your portfolio, so you know you have a pinned tweet on your portfolio page.
I give high marks for the disclosure that you have. You know you don’t have to do it, but you do it.
Anirban Mahanti 00:14:21
80%, as you say off your investments on what you define as high growth so there’s basically a high revenue growth company with you know long runways and things like that.
Tesla and a few others on that list, and then you have some that I guess you know steady, as she goes, you know stable companies and relatively modest PEs that people would call maybe maybe a value sort of thing.
So i’m just wondering, you know from your early days as an investor — did you — were you always a high-growth investor because you know you started at the peak of you know at the sexy and dot-com where everything you know you just put dot-com and it just went boom were you always attracted to the.
You know the high flying ideas, the ideas of the future and high growth companies or you know, is this an evolution sort of been how you became an investor that you are today.
Mayur Thaker 00:15:16
Yeah I kind of have gone through a sort of a journey, where, in the very beginning, when I was really young right my you know, starting at age 13.
Obviously, the only thing that I know is what I hear right. So when I watch cnbc the stocks that are constantly being talked about by traders are the companies that I know.
And back then, you know we didn’t really have access to you know sophisticated technology we didn’t have social media.
The Internet was just at its very nascency like you know, it was very, very early on, so.
You know there weren’t you know a lot of message boards or things like that back then that was very, very early on, so you know. All I did was invest in what I heard so that was basically buying the hot stock today right.
And then, when everything crashed in 2000 and that left such a bad taste in my mouth about investing that I actually stopped investing myself.
And that was right when I was about to start, you know that was high school and then college.
So I went for about a period of like six years where I didn’t invest anything. I just, you know, looked at the markets and tracked them but I didn’t personally invest in fact that I didn’t have a whole lot of money, either as such a young, you know kid and student.
But after I started working I joined Zacks in late 2007 and then we had the financial crisis of 2008 right.
And I saw the markets crash, and we didn’t know that I was looking at my co-workers who were like hold on we work in the very industry that’s getting completely devastated right now.
We didn’t know if we’re going to still have jobs or not, but I looked at the S&P 500 and during that time I started to be more of a macro investor rather than individual, you know, stock selection, so I looked at the broad markets, and I saw everything collapsing together right everything goes to a correlation of one during major market.
Mayur Thaker 00:17:23
You know, you know turbulence, no matter who you are no matter what your situation is whether you have billions of dollars in cash, you know as a safety measure.
Or if you don’t have that everything dropped, you know in lockstep with one another, so I said, you know if we just bought an index fund right during the crash.
Then what’s going to happen is you know, due to the natural rebalancing that happens within the fund, which is that.
You know the best companies are the ones that are weighted the most and the worst companies are the ones that are weighted the least right because the index is a market CAP weighted index.
So it naturally rewards winners and you know diminishes losers, so I said, everything is getting tossed out together, where you’re whether you’re a good company or bad company.
Why not just by the S&P index, and I saw that you know because of the massive drop you know post the Lehman bankruptcy.
I said, you know why, not just by the S&P index, so I became an index investor for some time, buying the dip right after the Lehman crash.
Mayur Thaker 00:18:30
And that was when the markets were already 35% or so they proceeded to drop another 15% after that, and so I was underwater for some time.
But you know I just had this in me where I said well why don’t we look at the 100 year history of the Dow Jones the 100 the almost 100 year history of the S&P 500.
You know the US equity market and really the world market has gone through so much over the past 100 years right we’ve had the great depression we’ve had.
The crash of 1929 we’ve had World War I, World War II, you know the Cold War right we had you know, in the US, we had the Cuban missile crisis where we didn’t even know if the communist you know Communist Russia is going to you know actually unleash nuclear weapons, you know we’ve been through so much and despite all of that markets just continue to go up and up and up and up in the long run. In the short run, yes, there are periods of turbulence, but if you simply look at that hundred year chart of the Dow and if you simply bought the dips you would have done phenomenally well.
And that money that you buy during those periods of depressed evaluations compounds that much quicker, because what you’re doing is you’re paying for the same basket of companies at such a lowered, you know, expectation that you know these companies don’t have to do a lot in order for your investment to actually pan out well because of the prices being so low expectations at lower so dramatically.
In fact, they usually overshoot to the downside beyond what’s even reasonable.
And you know that ends up being a great way to compound your money at a much higher rate than the average over that time period by buying those dips.
You haven’t either.
Anirban Mahanti 00:20:34
Yeah go ahead yeah.
Mayur Thaker 00:20:35
I, so I was just gonna say it’s a funny thing that Art Cashin if you, you know, watch us CNN version of cnbc.
Who was the floor trader of you know, for UBS at the New York Stock Exchange he’s a veteran trader huge respect for him, he said something really funny, which is that you know.
If you knew that, you know if we got an alert that says a nuclear warhead is headed towards us right now.
You know, you should buy the dip.
Because if it’s true that you know warheads are coming our way we’re all going to be gone and no one’s going to care about whatever losses that you make.
But if you’re if there is no warhead and guess what you just made a ton of money by buying that, it’s a win, win situation, either way or you can’t you can’t lose any money, I guess, in that.
Anirban Mahanti 00:21:33
I love that idea. This idea of buying the dip.
It’s actually very hard to do right, I mean most people do the exact opposite right the by the top and the seller, the bottom, because they just can’t tolerate the stocks going down because typically people would own, you know if you had a portfolio a million dollars and that’s down 30% right now you’re at $700,000 you’d be like oh my God right, so I mean it just is psychologically hard, but it makes complete logical sense to actually buy the dip especially you know the broad market because you know the markets on the long term returns I love that idea.
And would 100% say that’s the right thing to do, brilliant I love that i’m going to you know switch to a topic that I love, you know.
Anirban Mahanti 00:22:18
My largest personal holding is Tesla. It’s as large as I would not recommend anybody have an asset that lunch, but i’m Okay, with the volatility.
So I want to spend some time talking about Tesla.
So I want to frame this like this.
When I tell anyone and i’m almost stopped trying to convince people to actually buy the Tesla stock.
And that’s that’s really, the reason being that whatever I tried, people will say things like well automobile manufacturing, is a very, very capital intensive business you look at all the other, you know original equipment manufacturers, OEMs out there you know
Are you there?
Okay we’re gonna pause for a second. Mayur’s video just cut out.
I’m not sure what happened, for a second.
I can’t hear you, you’re muted out.
Okay, can you hear me?
Anirban Mahanti 00:23:40
Yes, I can so we had a cut out in the middle, but that’s Okay, we can deal with that.
So I was just saying that you know people think that auto manufacturing is very capital intensive which is right, you need factories, you need to build these bulky things.
And gross margins are typically not very high, they’re not like software like gross margins right, I mean they will be low.
And it’s a scale game, so when whenever I tell people about Tesla himself, but you know there’s four there’s you know there’s Chrysler, now Fiat or whatever it is, you know there’s Toyota, there is BMW, Mercedes Benz, and there’s so many others right it’s a very competitive field and it’s very difficult to actually and so many companies have gone bankrupt.
So I guess what I’m interested in is your viewpoint on what’s the very high level reason the Tesla is an interesting investment case.
Mayur Thaker 00:24:35
Yeah I think ultimately there’s one reason why you should own Tesla, which is that in the future.
You know, five years, 10 years, 15 years, however long it takes ultimately every car sold every new car sold will be all electric.
The writing is on the wall that electric vehicles are superior in every way to the internal combustion engine so before we even talk about Tesla let’s talk about like the, why are the what right electric vehicles in general, not just tesla’s but anyone anyone’s electric vehicles are superior in every category versus their equivalent at a price for price versus internal combustion engine vehicle they are more cost effective right they utilize you know the cost of maintenance and the cost of upkeep.
And the cost of operations is significantly lower than equally priced gasoline powered vehicles and they have better performance than equally priced, you know internal combustion engine vehicles.
And then also there is the environmental impact as well, so I think there’s a trifecta year where you have better performance, lower cost of operations and better for the environment they’re in in that sense, because it makes sense, it will happen right, ultimately, something has to make sense, it has to be good for the environment, but it also has to create value for customers.
The Toyota Prius is great for the environment versus you know you know previous vehicles right as a fuel efficient car.
But there are things that you have to give up when you have a Toyota Prius and you can’t really have a you know, a hybrid with that kind of efficiency for larger vehicles.
Like SUVs and pickup trucks and you know even you know class eight semi trucks right, so you know there’s a lot of compromise with.
You know the Toyota Prius whereas with electric vehicles, you get better performance, lower cost of operations and better for the environment.
So, fundamentally, it makes sense for all of society, the world to transition away from fossil fuel based vehicles to electric vehicles so that’s step number one.
You know, a future of all electric you know battery powered vehicles in the future number two why tesla.
Mayur Thaker 00:27:13
The reason for you know the investment case in Tesla is that, despite the fact that every automaker and Elon musk has actually said this himself, he said it on battery day.
The day they announced their new battery late last year, he said that, ultimately, he said something that really struck me. He said ultimately every auto manufacturer will have long range electric vehicles. Ultimately every automaker will have autonomous driving.
The difference, however, between different automakers will be manufacturing capability and manufacturing efficiency, and that is the advantage that I see Tesla having versus the establishment versus the Mercedes Benz, and the two and the General Motors and the BMW of the world.
They have expertise in auto manufacturing better than anybody else, and they have 100 years of expertise in that.
However, their expertise is in a fundamentally different apparatus, which is the internal combustion engine, the only thing that the internal combustion engine vehicle and electric powered vehicles have in common is the chassis right which is the frame of the vehicle itself, and even that is now changing.
But, like, for example, the door handles are going to be basically the same.
You know the side view mirrors are going to be basically the same the steering wheel is basically the same, the seats are basically the same.
That’s the only thing that they kind of share in common everything under the hood is completely.
Mayur Thaker 00:28:50
You know, completely different and Tesla has an advantage in that area, because they are the upstart right. They have built the apparatus from the ground up.
If you notice what other vehicle manufacturers are doing is that they take their existing vehicles and just retrofit a battery pack into them.
And that’s fine for a quick fix. They just rush in electric car out to the market so that you can get you to say to people that hey we have an EV too.
But ultimately they won’t have the margins that Tesla does so, we know that Tesla has an advantage in battery cost right because they’re the ones that have been leading the charge on this.
For over 10 years now, so because they’re the most you know, because they have unit economics on their side.
They’re the ones that produced the most number of electric vehicles and therefore have the lowest unit costs of you know per kilowatt hour for their battery cells.
They can achieve gross margins that are significantly better than what any competitor out there can do so. For example, I looked at GM.
You know earnings call transcript of Q1 as well as Q4 a lot of conversation about electric vehicles about their plans to go electric.
But you won’t find even one reference about their gross margins right. They’ll talk about their gross margins of their gasoline powered cars, they will not talk about their margins of their Electric vehicles and there’s only one reason for that you can guess what that reason is right it’s probably not a good.
Margin in fact they’re probably negative they might be getting close to break even if they get to at least you know, a couple hundred thousand units per year.
But they’re not there yet they’re not talking about it, so they are operating at a fundamental disadvantage, because they are you know, on a double edged sword right do they invest heavily in electric vehicles and get worse gross margin out of them, then their existing profit machines which is there, you know, let you know their gasoline powered cars and trucks.
Or they do, they continue to just you know you know new they just continue to build you know the internal combustion engine and hope that this is all just a fad.
Mayur Thaker 00:31:15
Right, so they have an existential crisis right now is what direction do we go if we go the electric vehicle route, then we have to prepare investors to accept lower profit margins lower overall margins.
As well as take billions of dollars in asset charges write offs because their existing supply chain will be obsolete.
So all of their factories right now that are configured to build internal combustion engines are essentially worthless right they have to write down those assets, they have to.
Basically, scrap them or you know auction them off or just liquidate them and basically start from scratch again so ultimately if.
The old school automakers want to go electric they have to start from the beginning of the line not jump straight at the or sorry, they have to start from the back of the line not jump straight to the the front of the line and tesla already has 10 years of experience doing this, so they have a huge lead on know how they already have very good gross margins compared to you know the existing automakers.
Mayur Thaker 00:32:22
And now they’re already on you know Tesla’s battery cell 3.0. 1.0 was the original, or sorry a 4.0. The 1.0 point, it was the original roadster which they basically built off of laptop batteries. Then they had the model S, which is the next you know generation battery pack, which is called 18650.
Then they had 2170 innovation, which is even better than the old ones, and now they have you know and even next generation battery that is even higher density and lower cost to build. So you know, I think that the combination of 10 years of know how, and a huge leg up on gross margins and a huge leg up on cost right and those two are related, are the reason why Tesla is in escape velocity where why I think they will be the leaders of the electric vehicle revolution and everybody else will be followers.
Anirban Mahanti 00:33:19
I love that. I will try to summarize that. So basically if I say that if we assume that EVs are the likely final point at which we are going to be then it’s then, what we need is we need a completely different set of technologies, we need batteries, we need different chassis design, we need software that we need the integration between the hardware and software right so it’s basically the the car looks like the car but it’s a different type of car.
And your existing factories are therefore not in a position to transition. It’s very I guess you could you could assume that you have the space, but everything else the equipment that you have for manufacturing and all the robotics and so on, does not work right. You basically have to throw it off.
And I guess, this is one of those things where the incumbent always finds it difficult to change over because there’s the incumbent and their profit machine is something else, and they have got I guess institutional imperatives right. If I work on the ice in the internal combustion engine department I lead it i’m not going to be really happy transitioning to EVs because that reduces my my clout right all of those very human behavior come into play, which which, in my mind it basically says that I think I would give a higher odds for success of, the upstarts I even if they’re you know behind Tesla in terms of where they are in the roadmap right so something like Rivian has a much higher possibility probability of success, compared to an original equipment manufacturer who used to manufacture ICEs is actually succeeding so that’s how I look at it.
That seems like you know one way of summarizing what you basically said.
I get I guess if you can get exactly yeah.
Mayur Thaker 00:35:04
Yeah so that’s why I think that if they want to succeed.
Yeah if if the original you know automakers want to succeed with the EVs, they will have to do what Tesla did in 2014 you know which is build a giga factory build a battery factory, you know and then build you know infrastructure from the ground up so and I think they will do it because I think they will eventually have to do.
Right, because I believe.
That you know, the world is going to go straight, you know directly to electric vehicles, it just makes fundamental sense.
And so I think they will have to do that so eventually they will figure it out, I don’t think that you know tesla will be the only one.Or even Rivian, but I think GM I think Volkswagen will eventually figure out electric vehicles but they’re going to have to do what Tesla already did six to seven years ago, and then they will only be caught up to Tesla from about five or six years before that work Tesla’s today.
So that’s my view. In the end they have you know you know, a decision to make, and it has to be quick.
Do they continue to go down the road that they’re going on right now, which is you know the internal combustion engine.
Which is a, which is a profit machine for them, or do they invest heavily in electric vehicles take huge losses up front and then eventually only make gross margins that are basically the same as where they are right now.
It’s it’s a very tough decision for them.
Anirban Mahanti 00:36:35
Excellent okay , so switching gears let’s you know, one could look at the high level numbers, for you know the Q1 2021 report.
For Tesla and say well whoa you know 70% revenue growth, you know companies still very early stage, generating profit and actually you know.
Whether it’s GAAP or non-GAAP, or you know, whatever is your favorite number, with a street cash flow everything looks great, but then.
Most people will say well you know all of those things look great because there was like what $500 million of credit, which is essentially credits that other companies are dollars to the other companies are paying Tesla so that they don’t get fined the polluting cars that they are producing because of various regulations.
When we take that out you know you get to like you know almost like zero profit to free cash flow kind of sit scenario right and that’s been the story for the last several quarters, I would say that you know there’s been a dominant component. It almost seems like you know Tesla’s able to figure out exactly how much credit should book in each quarter, so that it makes the number, it needs to be so, how do you how do you respond to that.
Mayur Thaker 00:37:48
You know it’s a great question and I, you know, I agree that you know when you do analysis of Tesla I actually agree with that crowd, which is that.
We should be looking at Tesla’s numbers before the effective regulatory credits because regulatory credits are great it’s real it is real income that they’re making, it’s not like they’re not.
But it will eventually go to zero. It’s high right now, it may continue for another year or two so there’s still you know potentially billions of dollars left for Tesla to make from them.
But eventually they’ll go to zero right so as an investor and an analyst right my interest is not in what Tesla can do for a year or two, but what they can do repeatedly.
For the long run right, so we have to look at you know things like gross margins and profitability before regulatory credits are considered now. Yes it’s true if you looked at to one if you subtracted the regulatory credits from their operating income they basically you know broke, even now, you can say that they basically broke even they didn’t make a profit or loss it’s not a big it’s not a big number either way.
However, what you have to do is what I mentioned earlier, towards the beginning of this, you know of our conversation, which is that we have to be an analyst and understand how much of their P&L right how much of the expenses that they’re booking on their income statement is discretionary spending and how much of it is mandatory spending.
So, if you look at it under the hood and if you listen to the earnings call right Zach Kirkhorn right the CFO of Tesla said that you know embedded in our costs that we reported for q1 are you know $200 million of a hit that was recorded on the cost of goods sold line.
And that is attributable to the plaid model S & X tooling as well as other expenses that they had to record because remember they did sell model S & X vehicles in q1 it was only about 2000 or so.
But remember the way that accounting works is that if you sell even one car, whatever you know the total expenses are attributable to that program you have to record all of it up front.
So if you sold one car and you hired 1000 workers for that line, you have to book all of their wages against the revenue of that one car right so that’s just how accounting works. So they sold 2000 model S & X cars. Very low, significantly lower than previous quarters.
But because they sold those 2000 cars and because they made investments to upgrade that lines getting ready for plaid model S & X, they had to record according to gaap accounting rules they had to record 200 you know the total cost of have that setup.Which was about 200 million, you know, according to Zach on the call. So that alone, you know, is a discretionary spending category, what I would call a discretionary you know spending why, because that is spending for growth right. They could say we’re not making any changes, you know model S and X are our profit, you know you know machines.
We are happy with what they’re doing you know people are still buying them we’re just going to let it go and just you know milk it for as much as it can make for us.
If that’s the case, they would have made a lot, you know they would have made a very healthy profit.
They could say you know forget about it we’re not expanding in Berlin we’re not going to expand to Texas we’re not going to do any other factories.
We’re just going to max out the production of our existing the you know factories and we’re not going to hire any more people you know for new markets and whatnot.
You know we’re just going to sit, where we are right now, if they did, that you know, we would have hundreds of millions of dollars of fewer expenses and you would have seen you know, a profit, even before counting you know the regulatory credits. It would be north of a billion dollars, and you know the critics would be you know probably move on to something else to criticize about Tesla right, and you know profitability will be one of them.
So you know, ultimately, but that’s not what maximizes shareholder value right we don’t want them to do that.
We want them to continue playing you know full court offense right. We want them to continue investing in the next generation battery.
So, if you look at it on you know the $200 million hit to COGS, the cost of goods sold.
Mayur Thaker 00:42:27
They also had a big step up in R&D. And that’s related to, according to Zach on the call again related to the development of their new battery cell the 4680 battery cell, which will change everything in my view. It’s going to allow you know Tesla’s next phase of growth, why because right now batteries are in such you know scarce supply right now, given the growth that Tesla is going through that they need additional battery cells.
But they also need to push costs down further right if they want to attain higher gross margins.
Or if they want to maintain their gross margins and produce a more affordable car, which is what their plans are.
Great so we have to see further reductions in battery cost per kilowatt hour so they’re making these investments in order to realize that battery cost decline.
Right, if we want to do that, then we have to have these expenses up front, if you don’t want any of that if you don’t want to widely affordable tesla car if you just want to Tesla to sell $100,000 cars to the ultra rich.
You know, maybe they could do that, and they would make billions of dollars, but then it would be a fraction of the size as as they are today because you know, millions of people can afford hundred thousand dollar cars right that’s only in the 100,000 200,000 range per year.
And that’s not what we want, as Tesla investors, we want Tesla to accelerate the adoption of electric vehicles and you can’t do that by just selling hundred thousand dollar cars right.
So again, we have to separate these discretionary spending items from non-discretionary spending or mandatory spending so if you were to do that, then Tesla would have actually made.
You know, a very large profit I believe they would have made roughly a $500 million profit, even before counting regulatory credits.
Mayur Thaker 00:44:19
And another thing that they booked in Q1 as well as in Q4 of last year was the accrual of Elon Musk’s compensation bonus right because he has a stock based compensation plan, he is not paid a salary he’s paid in stock and so, if they achieve you know market cap targets, as well as revenue or even targets, then.
You know, he gets paid for that right that’s his compensation because it’s aligned with shareholder interests as the company grows and as the stock price goes up
Elon gets his bonus right so because of that a cool that also increased the total stock based compensation for that period so again, if you stack up all these things I believe tesla you know, had $500 million of non reoccurring charges that were booked in Q1.
If you were to simply reverse those, then yes Tesla did make a profit right, so the question is, are they recurring charges or are the non recurring charges, I believe that there are non recurring charges right.
You know so that’s what we have to do that’s what we have to talk about right. So if you can just if you can discern
These two categories of expenses that end up hitting the p&l, then you can better understand why Tesla reported what they did.
Right and whether or not there is room for significant improvement down the line and that’s what you know Zach you know guided on the call is that right now.
You know our margins took a hit because, as the S&X deliveries were down dramatically and at the same time cost of goods sold increased right, so you had a reduction in revenue and an increase in cost of goods sold to that double you know hit to the gross margin level as soon as Plaid model S and X is up and running as soon as they start production.
You know I believe we’re going to see a huge reversal in gross margins and then ultimately down to the operating profit level, even before considering these regulatory credits so that’s something that we have to you know, take into consideration.
Mayur Thaker 00:46:29
Also, just another quick point, if you look at adjusted ebitda right. Adjusted ebitda is a measure that Tesla reports and I like this number a lot.
And the reason is because, like I said, we have to make adjustments to financial statements to understand you know how much of the expenses are due to discretionary versus mandatory spending.
Adjusted ebitda gets you closer I wouldn’t say it’s the perfect measure, but it gets you closer to looking at operating profit before you know these discretionary spending decisions are considered. Why? Because what is adjusted ebitda its earnings before interest taxes depreciation amortization and stock based compensation, the lion’s share of those expenses are stock based compensation and depreciation.
Stock based compensation correlates very, very closely with the rate of hiring right that they do so, as they grow right and as they expand to new markets.
They create new jobs, right and so as the headcount increases soda stock based compensation. So by adding that back to the the operating profit level what we’re actually doing is we’re adjusting for okay if they didn’t grow, so if they didn’t you know, expanded their operation so much, then these you know, then this growth in stock, please competition never would have happened.
So if you add that back right. And then what’s depreciation right? It’s the depreciation of all of these new factories that we’re building all at once, simultaneously, so giga factories Shanghai is coming up and running now that’s contributing to depreciation now.
You know gigafactory, Berlin and Texas are starting to come up like you know they’re they’re coming up now pretty soon and those two factories are going to start contributing to depreciation, so the question is, you know if we are to put our analyst hat on.
We would look at adjusted ebitda to understand operating profit before growth spending is considered into that number.
And if you look at that number ex-regulatory credits right, even before regulatory credits,you will see that the adjusted ebitda margins of tesla from you know 2014 to now have actually gone up not down.
So, even before you count the effect of these regulatory credits, you can see that Tesla is has actually been building profitability.
But it’s just simply being you know you know obfuscated right it’s been covered up by growth spending.
Right so as soon as we you know separate that adjusted ebitda, in my view, is a great way to kind of do that to understand okay, before we count all of these growth spending decisions that they made what would have they made if they just stay, you know stay, you know stood still.
Right and that’s what adjusted EBITDA gets you towards at least closer to that final number, and so, because that’s happening right now.
I believe that this is a leading indicator for traditional operating profit so as adjusted ebitda continues to scale.
As adjusted ebitda margins continue to scale, I believe, eventually, the operating income number will start to show huge profitability and that’s what Zach said on the earnings call.
He’s still expects Tesla to basically achieve industry leading operating profit margins so that’s super super exciting to see.
Anirban Mahanti 00:50:09
Fantastic i’m going to ask you for two clarifications on this, because this is, this is actually useful for people who want to analyze things on their own.
So I love actually the adjusted looking at this operating profit as a metric one of the things that you know one way to counter that argument and i’m just making this argument, I want to hear your answer for this is when we add back stock based compensation eventually stock based compensation is basically dilution right because the EBITDA number is not looking at any per share growth right, so you can look at the EBITDA actually grew 50% but if the share based compensation added 20% dilution, then the total growth is actually lower right, so how how should people think about stock based compensation and EBITDA and then, and the corresponding dilution that comes into play.
Did you get the question Mayur?
I think we have a little tech glitch again.
Again, something happen.
Yeah you’re back again to hear my question I didn’t get my question.
Mayur Thaker 00:51:48
I know I couldn’t hear what that was again.
Anirban Mahanti 00:51:51
Okay, so I said that I love operating looking at operating profit and looking at it EX-credit that makes a lot of sense that the adjusted ebitda the one you know if I had to throw shade at it, I would say, well, if we add back stock based compensation structures competition basically adds dilution right so.
You know the operating profit might have grown by 50% but the dilution might have been another 20%. So how do you in your analysis factor that in you know how do you how do you think of the stock based COMP actually causing dilution versus the growth that we’re getting.
Mayur Thaker 00:52:27
Yeah so you can actually very easily look at that, by looking at the adjusted ebitda per share.
Right, so if you want to make sure that the dilution isn’t actually diminishing the growth rate right on a per share basis, then all we have to do is take adjusted ebitda in dollar terms and divided by the total share count the total diluted share count.
And so, if you look at that number even that number has a very, very high growth rate, I don’t have the number in front of me exactly.
But the number is in excess of the revenue growth rate, so the revenue growth rate has been right around 50%.
You know, roughly speaking and the adjusted ebitda per share growth rate has been something greater than that I think it’s around 65% so even adjusting for the dilution that’s caused by stock based compensation, you know, in the growth is still absolutely phenomenal.
And that’s what also and that’s also an indication that there is operating leverage being you know playing out here. You don’t see it, yet at the you know at the
At the traditional operating income level ebit which is ebit because of all these you know growth spending, you know measures that we’ve been talking about.
But because adjusted EBITDA is showing this it to me tells me that, eventually, this is actually a leading indicator.
For the traditional operating income level and then ultimately net income so as Tesla continues to scale, I believe that you know that number will eventually show. It’s already shown in past quarters it so so it’s not like we’re completely.
It’s already been doing this we’ve already seen a full year profitability. Yes it’s you know thanks a lot in big part to regulatory credits, but keep in mind Tesla hasn’t.
This is not new to Tesla right. Tesla has been selling regulatory credit since 2016 and yet only now they’ve become profitable.
You know that tells you right there that you know they were getting regulatory credits back in 2016, 2017.
And back then, they were not profitable because they hadn’t scaled yet now they’ve scaled and so now you’re actually seeing profitability and it’s being you know forecasted it’s being telegraphed and by adjusted ebitda you know and that’s EBITDA is something we all should pay attention to.
Not to say that even more important than net income not saying that at all it’s not more important than free cash flow it’s not more important than the bottom line.
But it’s a tool of analysis you know is relevant, so if you are an analyst you want to know what’s happening with this, you have to pay attention to that number.
Anirban Mahanti 00:55:14
Absolutely again, you know, the thing I like to say, which you have pointed out, right now is.
The thing to note is that is operating leverage we are seeing in the model we are seeing that at scale right, this is the scale of billions that is happening.
And we’re still sort of at the growth curve, where all these factories that are still not online yet right we don’t have Berlin producing cars we don’t have Texas producing cars right we don’t have Shanghai at full ramp up, so we are already you know at the point where we are seeing billions of dollars going through at the top line just translating into operating profit and yet.
We have not yet scaled up to that point where all these investments are really forward because I love that it’s fantastic. Thanks for clarifying that since we’re kind of trying to rush through something’s.
Always cautious about other people’s time and your time Mayur.
Lets you know and actually i’m going to skip talking about full self driving because no that’s not that’s not even probably relevant to what we’re talking about right now, one of the things that I noticed in the call.
For Q1 was Tesla has you know the auto business, we can call it the full self driving business and then, as the energy business.
Anirban Mahanti 00:56:29
The energy business, I have to say I have mixed feelings about it personally, although I’ve always thought of Tesla personally as an energy sustainable energy company first and then there are various means, in which it realizes the sustainable energy goal.
Now, on the call I believe Zach was making a comment that the the power walls, you know, and I personally have to power walls in my house.
I’m contributing to their profits. The power walls have auto like gross margins, the mega pack actually don’t, you know that tiny profitability and I think they’re losing money on their solar business.
How do you feel about where this energy business is, and do you think it can actually scale up and be profitable.
Mayur Thaker 00:57:14
Yeah yeah then that I also noticed that as well on the call, and it was an interesting part of the column, where you talked about the differences there. Yeah the power wall is going to be.
You know if you noticed like one of the questions on the Q1 call was concerning the Tesla solar roof right the new product that they have the solar tile that they, you know that they’ve been developing now for a number of years, but it’s been delayed repeatedly.
So there’s a little bit of frustration now setting in regarding that product because it’s been so you know.
You know, delayed.
And the people that have gotten it, you know, have had their prices increase and things like that. I think what’s happening here is that solar is a commodity right. It’s a commodity business rooftop solar, I should say right so rooftop solar panels are essentially a commodity.
In fact I think Elon Musk even answered this question on a previous earnings call where someone asked you know, is there any you know improvements that we can expect out of the Tesla solar panels themselves any Elon musk said no there’s really not much more we can do you know solar is basically maxed out in terms of its energy efficiency.
There’s no, you know technology that we know of that can do anything better than this so it’s going to be, you know it’s going to be plateauing from here on out in terms of its you know, energy, you know efficiency in terms of how much energy can produce from sunlight.
So solar is and always will be a commodity, at this point and there’s many others solar providers, not just Tesla in fact there are many others that are much larger than Tesla and solar.
I think Tesla solar is going to move towards the solar roof, and the solar roof is really the area that I think Tesla can actually create value because we all have roofs right and ultimately the roof needs to be replaced, so why not get you know, two in one which is a roof and solar tiles together.
The problem with, that is, although it’s great for the you know the the customer it hasn’t been great for Tesla because they can’t do it at a cost that makes sense, you know, in terms of profitability.
Mayur Thaker 00:59:32
So now what they’re doing is coupling the Tesla solar roof, with the power wall right and power wall like you mentioned has gross margins that is auto like and so, if they can combine those two.
Can you hear me?
Anirban Mahanti 01:00:04
This has been so far, the tech issues we’’re having.
Yeah, so I think I think I missed, most of it, but I don’t know whether it recorded it or not, but maybe you can summarize the issue with the solar business.
Mayur Thaker 01:00:20
Yeah yeah so i’d like I was saying is that you know solar is a commodity rooftop solar.
But I think the area that makes a lot more sense in terms of the value creation is the the the Tesla solar roof, because it gets you to products in one.
Right eventually everybody needs a roof replacement, so why not get a roof replacement and solar together in one So if you do some of the cost analysis I believe it, you know number of people on on Twitter and YouTube have done this.
If there is, you know some evidence, there is good evidence that it is a good economic decision for individuals to get the solar roof, if you count in calculate your internal rate of return that you generate from that versus a comparable, you know regular roof plus rooftop solar, the problem is, is that although it’s a good deal for customers it hasn’t been a good deal for tesla because they haven’t been able to do it profitably or, at least at a gross margin that’s acceptable.
Because it’s it’s a very complex product, you have to have roofers you know come in and do it, and you have to do it in X amount of days, I think, a week is the Max that they want to aim for in terms of how long it takes to install it.
Because the longer it takes, you know, the higher the cost, it is to install it in there, for you know that’s coming directly out of Tesla’s pocket.
So what they’re doing now is coupling that with the Tesla power wall according to Elon Musk on the Q one call and the power wall like you mentioned has auto like margins to it.
So when they can do that, it adds Oh yes, it does increase the total costs pretty significantly but it still adds incremental value to the customer, because the power wall itself serves as a battery bank, you know, for your home, so that your solar charges your power wall.
And so, therefore, everything interfaces with your power wall between you and the utility.
And, essentially, you can live off grid, you know from the utility if you’re you know battery has enough power based on your energy production, you know consumption needs so it’s still adds value does increase the total cost, but for what you get there is, you know value creation So hopefully.
This new initiative fixes that problem of lack of profitability and, hopefully, they can figure out the installation costs as well, but you know something that’s different that Tesla did starting in Q1, which is to combine the solar roof product with Tesla power wall.
In the mega packs are different, you know ballgame entirely because those are for utility right that’s not for individuals so utilities are all about you know concerned with cost economics and so you know when you’re dealing with you know you know battery arrays in the megawatts right then you know the cost per kilowatt hour in terms of the price that Tesla charges has to be significantly lower otherwise utilities weren’t accepted you just won’t make sense economically
So the margin potential for the mega pack has always been lower than you know the rest of Tesla’s business, which is the auto and power wall business, and I think that’s going to continue.
I think Tesla will ultimately try to replicate their successes that they that they have in South Australia, where they built, you know, a battery and wind farm, together with a French company.
And you know they have utilized their software which is auto bidder to essentially arbitrage the energy markets so that way you know, energy is discharged when rates are really high
and energy is saved when rates are really low right so Tesla I think is going to try to make up on margins, the low margins from mega pack.
By software by unlocking software and ultimately that’s I think the avenue that they’re going is is is you know to combine low margin energy products with software which is like auto bidder and that generates the revenue that they need the high margin revenue.
Anirban Mahanti 01:04:32
So okay, I would ask you this question about Tesla, last question about Tesla, then we can talk, we can go beyond Tesla and what would you say is test us fair value according to you, what’s the ballpark fair value, do you think that Tesla should be trading at.
Mayur Thaker 01:04:50
Um so like I just did a very back of the back of the envelope math on if you use the tidbits from you know that we know to be true.
Which is a long run growth rate right.
Zach has you know repeatedly stated this Elon Musk himself and say to this as well that they expect roughly 50% growth for the foreseeable future right.
50% growth in unit delivery So if you, you know take that number and apply it to their free cash flow.
Right, and this is actually going to be a conservative approach, because the bottom line is experiencing operating leverage right now, so the bottom line is going to grow faster than top line for many, many years now.
Eventually they’ll they’ll converge right once you hit you know huge scale eventually the growth rate of both top and bottom line converge together, but for some time it’s going to be much higher than 50% but let’s say a grows at only 50%.
I did just a small exercise about this and you know, using their current free cash flow growing at 50% per year.
You know out to about 2035 after which growth tapers you know significantly lower and ultimately converges with the global GDP growth rate, which is about 2.5%, 2.5% to 3% if he did all that the fair value of Tesla is 1200 dollars per share in my view today.
And that and that is not considering anything else that they’re doing you know adjacent to the car business. That’s purely the auto business and energy business as it is today, growing at 50% per year and then tapering all the way down to two and a half percent you know by 2035.
That doesn’t consider autonomous driving and doesn’t consider you know you know the increasing gross margins due to the new batteries pack or to further you know cost declines in better in cost per kilowatt hour none of that just taking what their current you know operations are projected to grow 50% and then taper from there.
That’s what I think 1200 dollars per share and so there’s a lot of upside to that.
Anirban Mahanti 01:07:07
Typically, what I would say is that you know it business that grows at that scale doesn’t all of a sudden slow down to grow a GDP rate right, but every that’s what our models tend to be conservative by by definition and growth, many growth stocks are being key for that reason it’s just you know we.
We have these assumptions that you know, we are not willing to important 5% 10% rate after 10-yeards, so I love that.
Thank you for that they can I realize it’s very late for you at Washington DC and it’s only midday for me so and we’re taping this on Monday, the 17th of may here, which is the 16th in the US, I would ask you a couple of questions beyond Tesla.
Anirban Mahanti 01:07:49
Can you give me two ideas beyond Tesla that you think are very interesting and exciting and maybe a very high level view as to why.
Mayur Thaker 01:07:58
Yeah my my second largest holding after Tesla is Square.
And Square is an absolutely fascinating business as well, they are you know, the only bank stock that I would own and, yes, I call it a bank stock because it actually is a bank.
You’d never think of it as a bank, but it is a bank so think of think of a bank that’s growing in 60 or you know 50 to 60% per year there is none like that, but Square is that and what they have done is they have basically created a closed loop ecosystem.
You know, between merchants, right business owners and individuals.
Where they are integrated between credit card processing, which is how they first started. That was their first product, but then the you know grew into a all encompassing you know application, you know which is called cash APP.
That allows for p2p payments, it allows you know stock investing it allows bitcoin investing and trading.
It allows you to have a banking account so that you can actually get direct deposit from your job it works, just like a bank account right.
So you have a bank account, you can invest in stocks and but you know in stocks through that you can invest in bitcoin through that you can send payments to your friends through that.
You can do shopping through that you can also have a debit card, you know through that as well. So they have a number of you know partnerships with a whole range of you know merchants.
That you can do shopping in there’s lots of incentives that you can get from that as well, so they have basically created A fly will where once you create
An account with cash app, a cash app account you never need to leave that ecosystem.
The problem with existing traditional banks is once you have a bank account, you often need to you know change it from one account to another let’s say, if you have a bank account, a checking account.
And then you want to invest in stocks usually it’s not in that same account usually have to transfer it out.
Great traditional banks, you know, in terms of commercial lending also have a huge lag time because they don’t have a lot of data. It typically takes weeks or months to get a small business loan, whereas Square because they already have your data right, because if you have the square you know the you if you accept Square, you know as your business, you know at your business they already see the revenue cycle that your businesses, generating they see the expenses that you have so they know through data.
How much money that they can lend to you, so if you need a working capital loan for your business, Square will make that you know the turnaround time is within three days you can get that.
As opposed to weeks or months, so you have to wait and you know sit through a long you know applications, and you know have credit checks and all that stuff you know run through so Square is disrupting banking as much as Tesla disrupting the auto world.
And you know they have a huge profitability, if you will get there, you know you know numbers their gross margins, you know I think it’s going to be, you know bigger or as big as PayPal or in the future, I think it’s going to be a multi bagger just like tesla.
Anirban Mahanti 01:11:16
Can I Mayur, quickly ask as you said, bitcoin number of times, and you know there’s something called within Tesla and Square, which is bitcoin so just curious your thoughts on what do you think about all the turmoil that’s going on in bitcoin land.
Mayur Thaker 01:11:29
And so I own bitcoin myself I do own it i’ve owned it for some time now, for you know almost three years now, so i’ve really low cost basis in it, I think my average cost spaces around 5000.
I don’t support Tesla owning bitcoin.
Well, I should say I did support it until Elon Musk announced that they’re no longer accepting bitcoin, you know as payment for you know their cars.
And the reason is because, in general, this is a general principle of finance, I don’t think businesses should own financial assets.
Unless if it somehow assist them in their core competency right. So Tesla is an electric vehicle maker, they they are a battery maker right there a solar maker. Bitcoin doesn’t assist them in achieving those goals right if it did I would be all for it, you know, maybe, maybe there is a way that they could do it, maybe it makes reduces the friction between clicking payments internationally and settling it, you know here.
If there was a case like that, then I would have been I would you know endorse that but I don’t think that there is a case for that anymore, based on what Elon Musk has said.
So I don’t think that they should own bitcoin because it doesn’t add any value as a shareholder if they owned it because we can simply own it ourselves, if you are bullish on bitcoin.
You can own it yourself, you don’t need Tesla to own it for you on your behalf as sort of like a you know custodian right, you can do it yourself.
And why is that because you know Tesla is a business right Tesla is a high growth business so by definition they’re already.
You know, inflation protected why because they’re earning a return per dollar capital that is in far access, so we have the inflation rate.
Inflation might be 3% this year in the US, maybe it’s 4% I don’t know but Tesla is growing at 50% right, and you know net income is now going to be growing at every event in excess of that.
So Tesla has no need to you know you know invest their cash into inflation hedges like bitcoin because the business itself is growing at a high rate and therefore it is an inflation hedge by definition.
So I don’t think they need to do it. Square is a little bit of a different case because bitcoin is a fundamental part of their business they offer bitcoin trading, and so they have to maintain a certain inventory of bitcoin in order to facilitate those those trades and earn a small Commission from that so it makes sense for Square to own it.
But I don’t think it makes sense for Tesla or any other companies to own it if it doesn’t in some fundamental way assist them in you know executing their core competencies so that’s my.
That’s basically my position on bitcoin yeah.
Anirban Mahanti 01:14:24
Like that. Okay, do you have time to tell me about the second business i’m not sure if I asked you how much time do you have that’s going to decide how many questions, I would ask.
Mayur Thaker 01:14:33
I mean, I guess, we can go on, maybe another I don’t I don’t want to stretch it out too long, but maybe another 10 minutes or something.
Anirban Mahanti 01:14:39
Okay, so tell me about the other business that you like.
Exactly that’s an interesting one.
Mayur Thaker 01:14:44
Yeah, this is another passion of mine, which is Beyond Meat so again my general principle is finding high growth companies right high growth companies that are growing for a reason right or group for some good reason. Do the do the customers love the product or is the company solving an unmet need right? These are my favorite ways to pick stocks.
And Beyond Meat, I believe, is doing something equally as important as Tesla which is attacking the meat industry and by many accounts, the meat industry contributes almost as much maybe not quite as much but almost as much, or at least a significant amount of greenhouse gas emissions right globally.
And that is not sustainable, if we want to work towards a sustainable environmental future.
We have to do something about the meat industry we can’t just ignore it, because that is a major culprit among total greenhouse gas emissions and so Beyond Meat has for the first time ever, has figured out how to replicate animal protein using entirely plant based sources right.
Up until now, yes we’ve had veggie burgers for years and years and years right vegetable burgers but you know people that love you know traditional like Angus beef burgers are never going to have a vegetable burger right it’s just not the same thing. It’s just a very it’s a completely different thing.
So Beyond Meat recognized this need that you’re never going to convince carnivores, to stop eating beef unless if you make something that is almost you know, impossible to tell the difference right, so they were the first ones to be able to do this at scale.
We’re now at the fundamental molecular level if you actually see their their quarterly letter that they put out for q1 they have a slide on there that shows at the molecular level, you know you you look at under a microscope what they’re Beyond Burger and looks like under a microscope.
And what beef looks like or actually I think it was pork, so what pork looks like under a microscope versus their sausage under a microscope and you can see that there’s almost no difference at the molecular level so they’ve been able to replicate to a very high degree animal protein, you know, using entirely plant based sources so ultimately what they have to do is get closer and closer and closer right it’s a march of 9s right as Elon Musk calls it.
Where we have to try to get as close to the taste and texture of the animal protein of beef and pork, if we can do that, and if we can do it at a affordable price there will be huge market adoption for this, because it attacks this you know core problem of environmental concerns, but it also does a number of other things too, which is better for your health right it, you know meat is known to be a carcinogen, it has other problems too.
But also it’s for animal welfare too right, so we want to save as many animals as possible.
I know as a carnivore you may not be as interested in that you know, but ultimately, you know if it tastes, just as good.
If it has a similar texture if it’s better for you, and if it’s better for the environment, you know why not right, it just makes fundamental sense, just like for electric vehicles, it makes fundamental sense.
For us to switch over to electric cars in the same sense if they can do this, it makes fundamental sense. Now I don’t think you know we’re going to go to 100% plant based.
You know, you know protein I don’t think that’s ever going to happen, like electric vehicles will go to 100% but the global meat industry is massive right it generates $1.2 trillion of revenue every year.
So even if plant based meat gets to just 10% market share, and I think it will get to 10%.
You know that’s 120 billion dollar revenue potential I think Beyond Meat because of their execution because of their vision, because of their r&d lead time and their know how.
I think they can get to you know 15 to 20% market share of that hundred and $20 billion.
You know market, which would be a you know, possibly a 10 bagger from where the stock is trading at right now, so I think I actually think to be on need by 2030 will be a 10 bagger from today’s price that’s why i’m invested in that one as well.
Anirban Mahanti 01:19:23
Fantastic my daughter loves Beyond Meat, she would pick a beyond meat over real beef burger every day twice on Sunday, because I think you hit the nail on the coffin in terms of the taste the taste is good and so real that even those people like me to actually will you know, find a reason to actually be on the Beyond Meat bandwagon so i’m a fan let’s do some rapid fire and then we’ll conclude.
Anirban Mahanti 01:19:48
The three investors that you have learned most from.
Mayur Thaker 01:19:54
And I have learned the most from Warren Buffett. I read his shareholder is a shareholder letters from over the years, so that’s been my number one influence and then also Seth Klarman.
Who is a contemporary of his he’s also great value investor also growth investor occasionally and then Bill Miller.
Who, you know, was an early investor a very early investor of Amazon and he’s actually the one that I learned the most from in order to understand the value of Tesla.
Because if you watch his interviews over the years, the tools and analytical methods that he talked about of how he was able to see the value of Amazon is, in my view, almost exactly the same as the investment case for Tesla right this ability to discern discretionary from mandatory spending right with the growth rate right the implied in the implied profitability that you don’t necessarily see from the traditional gaap, you know net income number right.
So he’s the one that I actually should credit, you know all of my you know thinking towards in order for me to recognize Tesla early on as well.
Anirban Mahanti 01:21:11
Yeah okay, so this is a hard one, what do you disagree with if I know what is it that of Bill Miller, that you actually disagree, or do you think he’s wrong about.
Mayur Thaker 01:21:23
He’s not wrong often. Um I actually have been in touch with him i’ve been sending emails back and forth, with him, I tried to convince him about Tesla.
And this was in 2019 as well, so this is before this huge run up that we’ve seen and I I tried to say that look the same things that you told us about in Amazon 20 years ago I think is happening with Tesla today right. Unfortunately didn’t see it the same way, he still he kind of made the you know the the argument that yes, there’s comp.
He conceded, the fact that Elon Musk is a genius and what he’s done tesla’s is done right phenomenal but he’s still use the argument of competition and you know, low margins in the auto world and low returns on capital in the auto world as the reason for him to avoid the investment.
Anirban Mahanti 01:22:18
All right, so far, he has been wrong see how it pans out okay to conclude, I know, and again this is for those people who have actually stuck with us for this long and and dealt with the few
tech challenges we’ve had. What would you, you know what are some high level takeaways that you want to know what you want people to remember from this talk.
What is it that they can I guess if they’re not interested in Tesla or a particular business, what would you like them to take away.
Mayur Thaker 01:22:47
You know, ultimately, I think, to be successful in investing, we have to build a conviction right and you should always build a conviction of a fundamental case for companies.
And it should be based on your own due diligence don’t rely on other people’s research, you know you will see very smart people make mistakes.
And you’ll see a lot of other people give wrong information or you know give information that is not relevant to the you know the the long term fundamental case for the company.
So you should do your own due diligence never entirely rely on others, but build a conviction right understand like what it is about this company that makes you excited.
Do you want to be a part of the future that they’re building right that makes it a lot easier and ultimately you shouldn’t know your own strengths right everybody has a specific expertise. If you work in a certain industry right, and if you know that this has been the major trend that the entire industry is shifting towards, then you know something that other people don’t know necessarily.
Right, and so you should invest in the companies that you know are creating value better than others right. You have that edge, you have that information edge and it can be in anything right, it can be you know, even if you’re a teenager and you see all my friends are using instagram everybody posts on instagram well why not take a look at Facebook, then as an investment that could be a good thing to do, and you could have done that you know 10 years ago and you would have made a great you know return from that.
Ultimately, build a conviction is step number one um you know base it on verifiable facts right look at the facts, what are the fact, what is the fact safe and does that square with what you’re thinking is right.
And then, once you build that conviction start asking questions like you know, does the company do something that is fundamentally solving a problem right.
Are they doing something that solving a problem or if they’re not solving a problem, per se, then do their customers love what they do.
Right do they have repeat customers are the customers happy with their products and services do their customers recommend their products and services to their friends and family.
Right, these are all indications of the long term success of a business right.
And so those things need to be there that question needs to be a yes, one of those two questions, preferably both but one of those two questions have to be a yes, do the company, you know, do the customers love the product or service or and, or are they solving an unmet need or underserved need one of those to have to be yes. Then number three is our people voting with their dollars right do you see that revenue growth right if they are recommending you know their products and services to friends and family, then, that has to be translating into revenue growth.
So that has to implications, one is people want their product and service and to the business is able to execute on that demand.
Right, the demand itself is a great problem to have, but if you can’t execute and provide that service in a way that customers love, then that demand doesn’t make any sense it doesn’t mean anything.
So revenue growth has to be there and then gross profit as well, has to be there right.
And then the next question is, you know does management have skin in the game right, like, for example, Elon Musk owns everything in Tesla that’s basically his entire network is Tesla.
Ethan Brown right the CEO Beyond Meat a big big part of his net worth is Beyond Meat. Same with Jack Dorsey and Square.
So you know, this is not a requirement but it’s a it’s a nice to have you want to see the owner operator running the company because it’s his own thing right.
You know, and then other things too, like other quality things like what does the company do that’s different from the competition.
Right if you can answer these questions in a confident way right based on facts, then you have on your hands a very, very good company right. So you’ve identified a great you know potential investment.
Then the next question is on valuation right and the simplest way you can value, a company is to look at how big is the total addressable market.
Right if the total total addressable market let’s just say, for example, for Beyond Meat is 120 billion dollars.
Let’s say you think that they can grab 20% market share right so that’s about $24 billion of revenue that they could do at some point, maybe by 2030 or so.
And then apply a reasonable multiple to that right, which is the price to sales multiple in that case.
What do other food companies trade at in terms of their price to sales multiple it’s roughly three times right very average.
So 24 billion times three right that’s about $72 billion that’s the potential market cap that beyond meat could treat that by say 2030.
What is the what is the market cap today it’s roughly 6 billion, or so, so that is a pretty good return that you can you know expect.
Now that’s obviously based on a lot of assumptions, but you should do this minimum exercise to make sure that you’re just not over dramatically overpaying for a company right.
A minimum exercise like this if you go through these five or six questions that we just talked about, then you have on your hands of great you know potential investment.
And then the last thing is once you’ve answered all these questions and, once all the boxes checked off.
Buy the dips right, you should buy these dips because then what’s happening is when these big you know corrections, like right now in Tesla and Beyond Meat and Square and all these high growth companies are getting hit 20%, 30% 40% right now.
When you buy these dips what’s happening is you’re taking advantage of timeframe arbitrage, this is a concept that Seth Klarman and you know Warren Buffett and his mentor Ben Graham have talked about incessantly, which is that markets assign a greater way too short term events, then long term events.
Right Ben Graham used to say that markets are a voting machine in the short run and a weighing machine in the long run right voting is based on opinion.
But your weight is based on objective fact right it doesn’t matter, whose opinion is what you are what you weigh right so ultimately the stock will track its fundamentals, in the long run.
So when you buy the dips you are taking advantage of short term thinking of the marketplace and locking in at a much lower valuation.
Which means that expectations are much lower for that company so as long as your conviction in those other points that I mentioned are still there, as long as all those boxes are being checked then suddenly you’re getting that asset at a discount.
So you should buy the dip and that’s what I do personally whenever stocks in my high conviction list get hit hard like this it’s you do the exact opposite of what the herd is doing, you should be moving towards those companies that away from them that increases your return over time, as long as that revenue growth continues the way that it already has been doing. So build up conviction and you’ll do great you know maintain a long term view and buy the dips that’s the summary that’s basically the summation.
Anirban Mahanti 01:30:06
I’ve been doing that last couple of weeks, and you know to our7investing listeners and everybody else has been listening to this, I think, if you have stuck to the end I think you’ve got essentially a summary on how to be an analyst and how to actually look at high growth stocks I would highly recommend people actually look at it reread, it revise it because I think that’s like I think it’s a template which you can then customize to make your own everybody has to make things their own because if it’s exactly that’s part of the building conviction thing that Mayur talked about.
I have totally enjoyed this conversation has been fascinating for me and I realized again in a couple of technical hiccups and I think.
There’s probably I could produce three articles out of this time and actually do that because there’s so many so much content here that you know you have talked about, and so much useful, interesting things that I think investors in general can benefit from, so thank you Mayur a lot for doing this staying up late at night I enjoyed it.
And it was great and when we you know when we publish it we will tweet it out and give people your Twitter handle as well, so that they can follow you and learn from you, thank you once again by you.
Mayur Thaker 01:31:17
Thank you, thank you for having me on Anirban, definitely appreciate it, thank you.
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