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Brendan O'Boyle  

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  • Before You Short Tesla Remember This: Tesla Is Selling A Brand, Not A Car [View article]
    Certainly government tax credits are a factor, but I don't think most consumers buy a $100k car to get a tax credit. These programs are more impactful at a lower price point, which is why GM and many of the other manufacturers are trying to make inroads.

    But your statement that the Tesla brand is past its prime is a risk factor for the stock. Indeed, this would be a far better reason to be bearish than some of the articles I have read.
    Jan 14, 2015. 09:37 AM | 5 Likes Like |Link to Comment
  • Before You Short Tesla Remember This: Tesla Is Selling A Brand, Not A Car [View article]
    "Don't you understand that he's running out of places to expand??? "

    Doesn't growth by definition mean there are fewer places to expand?

    Even the U.S. market is 33% in CA. I lived in Boston until about one-year ago. I never even saw a Tesla until nearly the day that I left.

    Looking at a quarter-by-quarter or year-by-year income statement I just don't see it. Clearly the analysts do not either because they are calling for 60% revenue growth in the coming fiscal year.

    The strange part is all this top-calling by the bears will probably lead them to be short at the worst possible time. Growth always ebbs and flows, I think going short you stand more to lose than you stand to gain, which is what I said in the article.
    Jan 13, 2015. 09:36 PM | 7 Likes Like |Link to Comment
  • Before You Short Tesla Remember This: Tesla Is Selling A Brand, Not A Car [View article]
    I'm having trouble understanding why you think the market has reached saturation. 81% of Tesla sales are in the U.S. (as of April 2014). China (the purported culprit of the current after-hours sell-off) doesn't even register yet.

    http://bit.ly/1ItPMNH

    For comparison sake a quick Google search indicates there are approximately 1.1B cars in the world and 250M in the U.S. (23%).

    Why do we need to use year-over-year-same-te... growth when the brand is clearly expanding globally? I don't think the company is going to go from supercharged growth to zero, rather the risk is that growth slows down, which is real no doubt.
    Jan 13, 2015. 08:52 PM | 3 Likes Like |Link to Comment
  • Before You Short Tesla Remember This: Tesla Is Selling A Brand, Not A Car [View article]
    We can use the expected year-over-year revenue growth rate at ~60% if you prefer. I still don't see how Tesla fits your description as "not really a high-growth company."

    The difference between naivety and dreaming big is often only known in hindsight. Musk has made a hugely risky and thus far successful bet on changing the way we approach transportation. And shareholders are willing to risk their capital to try and make that happen.

    We could call that "head-in-the-sand thinking" but most real innovation only comes with tremendous risk. I for one am happy someone is willing to try.
    Jan 13, 2015. 07:43 PM | 15 Likes Like |Link to Comment
  • Before You Short Tesla Remember This: Tesla Is Selling A Brand, Not A Car [View article]
    "This is not really a high-growth company"

    I'm not sure how a company with over 167.4% annualized five-year revenue growth is not a high growth company?

    "Late this year they may get a little growth from the Model X but I believe it will mostly cannibalize sales of the 'S.' "

    I think the strategy here is probably to get older users to upgrade, similar to how Apple releases a new iPhone periodically.

    I agree with you that the valuation is stretched and note I didn't say I was long or recommend buying. However, I do admire that the company is trying to revolutionize the auto industry. I also admire that TSLA shareholders are dreaming big, even if big dreams sometimes turn into poor investments.
    Jan 13, 2015. 05:09 PM | 11 Likes Like |Link to Comment
  • Before You Short Tesla Remember This: Tesla Is Selling A Brand, Not A Car [View article]
    "If you exclude the ZEV credits, last quarter's operating margin was approximately minus 14%, but I'm not exactly sure what your point is. Anybody can sell a desirable luxury item at a loss-- that doesn't make it a viable business."

    My point is that comparing Tesla to other high growth companies (AMZN in particular) leads me to believe that the market is willing to allow management to grow the business aggressively, while assuming that profits will eventually emerge. We can debate how wise this strategy is, but because the market is willing to give the benefit of the doubt I don't see an imminent catalyst for a short-sale. The market seems to have decreed here that margins do not matter, so how can 'margin compression' be the thesis of a short-sale?

    "Are BMW and Mercedes "luxury brands"? Would it be okay to compare Tesla's valuation with THEM? (I guess I'll keep living "dangerously.")"

    Yes, I might consider these as luxury brands and this is a good point. BMW according to Yahoo Finance has an Profit Margin (TTM) of 7.5% to GM's 1.9%. Being further out on the luxury spectrum, I could entertain the idea that TSLA could achieve superior margins to BMW.

    Still, at 9x sales there is very aggressive growth priced into TSLA shares, so I concur that the valuation is a risk for longs. But as I said in the article this aggressive growth is also a huge risk for shorts.
    Jan 13, 2015. 04:35 PM | 8 Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    "Which are you referring to?"

    If a stock doesn't pay a dividend then OTM calls and puts trade for at, or nearly, the same price. Take GILD as an example the stock is $96, the 2017-$95 call midpoint is ~$21.50 and the put midpoint is ~$19. So ~$2.50 as credit would have to be offered to go synthetically long by selling the put and buying the call. $1 of this is from the stock being over $95 with the extra being the market's assumption of the risk-less rate over the next 2 years.

    But think about the probability distribution of an option, that looks something like this:

    http://bit.ly/1xXGgis

    i.e. the options market thinks that even over fairly long stretches of time the chances of the stock moving up or down is equivalent. That is why the image I showed you is symmetrical.

    What I am saying is, over long stretches of time this cannot be the case if the stock market moves up on average 8-10% a year. On a 2 year LEAP this begins to become significant. So first, the probability distribution should be shifted to have an upward bias. It should not be symmetric over a long stretch of time.

    Furthermore, the value anomaly is pretty clear that the cheaper a stock gets the higher the expected return. So when I buy a GILD $100 call the options market is giving an overall distribution that is symmetrical (i.e. the odds of the stock going up 20% or down 20% are the same). In a year yet again this will be the case if GILD trades at $80, but we know at $80 the long-term on return must be higher than it was at $100.

    What I am saying is if GILD is part of the market and the market goes up on average 10% a year the two year LEAPS puts and calls should not be the same cost - the calls are systematically underpriced and the puts are systematically overpriced. There is no arbitrage opportunity because this is the same as saying "over time the stock market goes up." While this is true there is no way to capitalize on the statement without buying the market and taking risk. If you go synthetically long the market you should systematically take advantage, but only through the price risk of the market.

    Then, if the stock goes down over a year again you will see a distribution from the options market like the link I gave, but from my perspective the odds of upside have increased. Thus you roll the position.

    I don't think this idea is at odds with risk arbitrage, is it? I know value arbitrage could be one way to derive alpha from the market. That is what value investors do. But the value anomaly takes so long to work that I don't think it can be readily arbitraged without taking market risk. Thus the quants haven't yet figured out how to make money off it.
    Jan 13, 2015. 03:45 PM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    I want to revisit my comment on being long options rather than stock because recent trading gives an illustration of how options can be adventageous. Not meaning to suggest anyone long the stock is making a bad move, there are advantages and disadvantages to each.

    If you bought GILD at $102 you are currently down ~$7 per share. If you wrote a covered call on the options I bought you are down ~$5.

    If you bought the GILD-$100 LEAPS in question at ~$23 you are down $2 based on the last price, perhaps more because the bid/ask is quite wide. Again this is not a strategy for frequent traders.

    So it is worth pointing out, for each notional unit of risk the volatility is a good deal less. This cuts both ways though if the stock rallies, but not as much on the upside depending on where the strike is exactly.

    Conceptually, what I am trying to do is take advantage of what I believe is an inefficiency in the Black-Scholes options formula. This formula views stock movement as a random walk and while I may agree that in the short-term this is the case in the long-term it is not. Stocks that become undervalued over long periods of time are likely to outperform. Stocks go up more than they go down over the long-term, so it has never made sense to me that two year OTM puts and calls have the same price.

    For example, GE today is more likely to go up because it continues to retain earnings and has become cheaper. Over a month it is meaningless, but over a year this begins to matter.

    The result is me losing a dollar on GE calls when the stock moves down $3 is an advantage, because I can roll the position and capitalize on the increased chance of GE going up. I will do exactly the same in a year or so if GILD stagnates.

    On the downside I lose less, on the upside my return is nearly equivalent. I hadn't actually tried to articulate this trading strategy before and granted it is an intuitive one and not quantitatively based.
    Jan 13, 2015. 02:45 PM | Likes Like |Link to Comment
  • Before You Short Tesla Remember This: Tesla Is Selling A Brand, Not A Car [View article]
    You see the point of my title? Tesla isn't really selling cars: it is selling a brand. Tiffany sells an image, not diamonds. Louis Vuitton sells status, not handbags.

    If the power train frequently fails as you suggest then it begs the question, why are consumers paying more for it? From my understanding the waiting list to get a Tesla is still rather long.

    Furthermore, neither of us have any idea what Tesla's margins are at equilibrium. The current pretax margin is ~-7%, so I must confess to being a bit confused when margin compression is expounded as a catalyst for a short-sale. Equilibrium margins will not be known for some time because like AMZN, TSLA is reinvesting to grow the business defying traditional notions of GAAP earnings.

    From my perspective, it is dangerous to observe that a stock does not trade in-line with other companies in the industry and then sell based on no discernible catalyst. One may as well come to the conclusion that a baseball card is overpriced because it is made out of cardboard. Buyers are not pricing it like cardboard because that isn't what they see when they look at a Honus Wagner rookie card. Similarly, buyers of TSLA aren't seeing a car company. They are paying for a disruptive quasi-tech luxury brand. Unless there is a catalyst diminishing the value of the brand selling to them may be a losing bet, in my opinion.
    Jan 13, 2015. 10:33 AM | 23 Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    @Menicholas

    I think the options market is interesting because when it surges that is the opinion of the crowd telling you that something important happened.

    What do you think? Did the options market for GILD just jump?

    I think the wind started blowing in the opposite direction.

    I'm saying it right now, I am bullish on GILD.
    Jan 12, 2015. 01:59 AM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    Personally, I would not want to enter this spread.

    If GILD is really on the move you are picking up pennies in front of a steam roller...

    6000 contracts is risking $2.64M to earn $360,000? Not my kind of bet...
    Jan 11, 2015. 11:32 PM | 1 Like Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    Yes I agree with you that the GILD options aren't nearly as cheap compared to the GE ones, but the implied volatility in my view isn't unfairly discounting upside potential. I happen to believe that GILD shares do have the potential to run a good deal higher over the next 2 years (certainly GE is pretty unlikely to appriciate 60%). Expecting a return equal to estimated earnings growth could be viewed as conservative when those earnings are already discounted rather harshly relative to the S&P 500 (12x 2014 earnings vs. nearly 20x).

    But I must confess that it still worries me to some degree that half of revenue comes from one product in a very competitive industry. So for my own peace of mind, I am happy to pay a little to avoid tail-risk (~6% a year - It would be 10%, but remember I can invest the extra capital elseware). The ABBV patent litigation is another potential tail risk here btw. But you are right that there is a good argument to be made that buying the stock is a better move.

    And yes you can always use margin, but I prefer to avoid it for exactly the reason that was the last sentence in your comment.

    I prefer to avoid margin to insure myself against catastrophic losses.

    Be careful using margin. We quickly forget that starting in late 2007 the S&P500 fell over 50%. A 1.5x levered portfolio would have fallen ~70% over this time. Perhaps some people are psychologically equipped to deal with those kind of losses, but I for one am not...
    Jan 11, 2015. 08:23 PM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    It's also worth remembering here that this is all a zero-sum game:

    If the trader went long 120s someone sold them to him.

    If he went long a spread someone else is short the spread.

    Either way there is someone on the other side of each trade (risking an equal amount of capital). So I don't know if any of these trades really tell us much about where GILD is going to go.
    Jan 11, 2015. 02:38 PM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    But I wanted to add, this could be a spread as 13302632 said, so my assessment above could be incorrect.

    It depends on if the trader was already long the 115s and rolling the position up, or if they had no position to begin with. We can't know.

    If it is a spread going short 115s and long 120s to collect ~$0.60 is like saying there is a >12% chance ($5 max loss) of GILD getting to $120 by expiration.

    So the trader is saying there is >12% chance for GILD to break out to new 52-week highs within a month.
    Jan 11, 2015. 02:05 PM | Likes Like |Link to Comment
  • The Hepatitis C Price War Begins: Gilead Plays To Win By Signing With CVS [View article]
    @13302632
    How can being long $120 calls be a bearish bet?

    I agree with Menicholas' interpretation, it looks as if someone rolled up their Feb calls from 115 to 120.

    The reason a trader would do this is that they thought the chances of GILD going above 120 by mid-Feb had increased enough that the expected risk/reward profile of the 120 call is better than the 115 call.

    This means they think the odds of being above $120 have increased. It is a bullish bet.
    Jan 11, 2015. 01:38 PM | 1 Like Like |Link to Comment
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