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Aerospace engineer who is seeking to learn as much about investing as possible in hopes of one day managing more than just my own money.
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  • Time To Play Benioff Buzzword Bingo!

    With salesforce.com (NYSE:CRM) about to report earnings, it's almost time to play everyone's favorite game: Benioff Buzzword Bingo!

    To play, just print out the Bingo card below and listen to the quarterly earnings call to see how many words you can match:

    (click to enlarge)

    Or make your own card and try to predict which superlatives our blustering, bombastic, big-talking baron of balderdash babbles, blabs, and blurts out! Phenomenon-GAAPreposteroustaculargemendous!

    Aug 17 9:18 PM | Link | 4 Comments
  • Kandi: The World's Greatest Non-Candy Company

    Wouldn't it be nice to invest in the best business in the world? Now, I don't want to hyperbolize, but I believe I have uncovered the greatest investment opportunity in the history of the universe. This perfect company goes by the sweet name of Kandi Technologies (NASDAQ:KNDI). Now, I know what you're probably thinking: "Mmm, candy..."

    If this is the case, you're either A) Homer Simpson, or B) Hungry. Why are you still reading this? Go fix yourself a snack or grab some actual candy, because it's going to take a while to describe just how incredible this company is.

    Are you back? Good. Anyway, contrary to what you were probably thinking when on your candy break, the company Kandi is actually a manufacturer of Electric Vehicles in China. Now, wait just a minute, you ask out loud, causing your spouse, dog, or coworkers to look at you like a crazy person, "Isn't China irredeemably corrupt?"

    The answer, of course, is yes. But it's only their politicians. Oh, and some of their CEOs. So basically it's exactly the same as here in the good old US of A, except slightly less socialist. The main difference is that they have a much larger population than us, the US. Wikipedia, the main source of information for lazy writers like yours truly, estimates that they have over 1.3 billion people. That's billion, with a B. Or whatever letter of the alphabet that "billion" starts with in Chinese.

    But, no matter how you ignorantly translate it, this is a fairly large addressable market. If every man, woman, and child in China were to buy an electric vehicle, this could help solve global warming, assuming it is not a myth. An affordable electric vehicle, that is, not global warming, which is clearly a scientific theory, like Intelligent Design. All of these (except ID, which, unlike here, their backward education system doesn't allow them to teach) Kandi can help solve, perhaps mainly by causing a bit of a traffic jam, as many urban Chinese are not used to driving, especially the aforementioned children.

    But, no matter, Kandi has a solution to this problem as well, which will probably allow them to gain considerable market share in China, as well as in other progressive countries like California. This is a revolutionary CarShare program, where the vehicles are sold not directly to consumers, but rather to cities, which will then rent them out of high tech garages to make them more accessible to the masses. Especially the aforementioned children, who will probably be the only ones capable of operating such an advanced technological system. Now, if you'll excuse me for a sec, I have to go ask my 6 year old nephew to show me how to cut and paste an image of the car sharing garage into this article...

    Ah, there we go. Wait a minute, buddy, how do I make it larger? I can't read it without my glasses! Come back here! Ah, never mind, it'll have to do, with the added benefit that the image of the car in the photo is now shown at actual size. What, you were expecting some big honking road hog like we drive here in the States to compensate for our physical and fiscal insecurity?

    No, the Kandi electric vehicle is perfectly sized for the Chinese market. Not because the people there are small, that would be presumptuous to presume, as well as possibly racist even though perhaps factually true. Except for Yao Ming, obviously, he probably wouldn't even be able to stand up in the garage, much less fit into the actual car.

    But anyway, to arrive at my point in a roundabout way, street smart pun intended, the space saving design of both the garage and car is perfect for China's crowded cities, where space is at a premium. Also, fresh air is at a premium as well, with smog approaching pea soup thickness in some cities. Or to use a more appropriate culinary analogy, egg drop soup thickness. Or egg drop soup with peas thickness, although I hate when restaurants ruin perfectly good egg drop soup with vegetables!

    Regardless, air/soup quality is a major problem that Kandi's product can help solve. Well, not the soup problem, as the electric motor on these cars is not quite powerful enough to run a blender at a high enough speed to get the right consistency in a soup. But it does power these cars at speeds up to 30 mph, which is even faster when translated into kilometers per hour, or whatever unit of time the Chinese use. I believe it is the yuan, since after all, time is money in any language.

    So, assuming the exchange rate stays constant, you can cruise along in your Kandi EV at up to 48 km/yuan, which may or may not be the speed limit in China, but I'm too lazy to even bother looking it up on wikipedia. But won't driving at such a high speed drain the battery, leading to performance anxiety? Did I say performance anxiety? Sorry, Freudian slip, I meant range anxiety. Range anxiety, of course, is the fear that your battery might not have the juice to go all night long. Or day, if you're driving in the daytime, which come to think of it is probably much more likely and less of a double pun-tendre.

    But, having beaten around the bush long enough before reaching my climactic point (I've found the trick is to think about baseball), I will now reveal that Kandi's solution to this problem is a battery exchange system, shown as follows:

    This QBEX system, short for Quick Battery Exchange Xstem, quickly and easily swaps out a flaccid battery for a fully charged one, like electric Viagra. If this system looks familiar, it's probably because Tesla (NASDAQ:TSLA) blatantly ripped it off for their own battery swap system. This is no surprise, given Elon Musk's history of stealing great ideas, for as everyone knows the Winklevoss twins really invented the Model S. But I wouldn't trust Tesla's Supercharger, a grandiosely named but clearly cheap knockoff product, since have you ever tried generic versions of Viagra? No, of course not, me neither. It was a rhetorical question, what are you implying?

    However, even though Kandi has had to put up with the corporate espionage of lesser electric vehicle manufacturers, they have managed to keep research and development spending in check. In fact, since completely overhauling their product lineup from their legacy ATV and go-cart business to become a global electric vehicle powerhouse, they have only spent several million dollars per year on R&D. Contrast this with the irresponsible wasting of several hundred million taxpayer dollars per year, which Tesla has dumped into boondoggles like R&D with not much to show for it, other than the greatest car of all time.

    But this is nothing compared to what Kandi has been able to achieve, not only an impressive lineup of small appliances/vehicles, but also all the impressive infrastructure to support them like smart parking garages and battery exchange systems. To imagine that Kandi has developed all this on a mere hundredth of the R&D spending, fills my mind with wonder until it strains the credulity of my tiny brain. But of course this can be easily explained when you consider that unlike me, Kandi's founder and CEO, Xiaoming Hu, is a certified genius. Yes, he literally has a certificate, as you apparently can get any sort of official document drawn up in China for the right price.

    But, all kidding aside, which would have made this article quite a bit shorter and probably saved some eInk and eIQ points, the man must be brilliant to have built such an incredible company with so many innovative products on such low R&D spending. Apparently he retained some patents from his illustrious career as a government scientist, which he donated to Kandi pro-bono, which is Latin for "in exchange for a majority stake". These decades old patents laid the foundation for Kandi's impressive lineup of EVs, which may be why most of them look somewhat like a Yugo from the early '90s.

    But say what you will about aesthetic styling, Hu was ahead of his time. You might say he was first, well ahead of when Tesla got into the game. Hu was first, and with his design, the battery responds with power in a second. I'm not sure even Tesla can match that acceleration, and I can't even name the third place finisher in this contest. So to recap: Hu's on first. Watts are second. I Don't Know's in third.

    So in conclusion, Kandi Technologies has developed a cutting edge product for a huge market at a very low cost, which is the holy grail of business. And you can buy a share of this company and own 100% of Continental Development Limited, which owns 100% of Zhejiang Kandi Vehicles, which owns 30% of Jinhua Three Parties New Energy Vehicle Services Company and 50% of Zhejiang Kandi Electric Vehicles, which owns 100% of Kandi Electric Vehicles and 19% of Zhejiang ZouZhongYou Electric Vehicle Service, where Zhejiang Kandi Vehicles owns 100% of Yongkang Scrou Electric, 90% of Kandi Electric Vehicles and 50% of Jinhua Kandi New Energy Vehicles, which also owns 10% of Kandi Electric Vehicles.

    Obviously, this labyrinthine corporate structure is for the benefit of shareholders, to get around Chinese ownership laws, allow them to more easily form lucrative joint ventures, and/or to save on taxes, or something similar that sounds good in SEC filings, when they actually bother to disclose relevant things like that in them.

    But hey, that's just a minor issue when you own the greatest company in the world. I'm sure their impending massive profits will eventually find their way back into your pocket. After all, you're certainly not a fool for reading this story today and wanting to buy the stock, so the joke's on those who merely laugh at this article and miss out on these April showers of profits.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Apr 01 1:46 AM | Link | 26 Comments
  • Baffled By The Bifurcated Market

    I haven't written an article in a while, and honestly the main reason is I've been befuddled by the market lately. I'm already leery of putting new money to work in a bull market that has done pretty much nothing but go up for five straight years, and the recent divergent behavior of certain stocks makes me even more nervous that we could be approaching a momentum driven bubble where certain stocks, and perhaps by association the entire market, has become divorced from reality.

    The poster child for this lately has been Tesla (NASDAQ:TSLA), which has accelerated faster than one of its high performance electric sedans, more than doubling from $120 to over $250 in just the last three months. Some of this gain has come from the company recovering from an overreaction to news reports of some of its cars catching fire in extremely rare circumstances, bouncing back to deliver a record number of cars in the most recent quarter. However, most of Tesla's valuation is based on future expectations like the continued buildout of their Supercharger network, now in Europe as well as the US, and the latest preposterously prefixed project, the Gigafactory.

    This $5 billion factory aims to bring down the cost of the most expensive component in their cars, the lithium-ion battery packs. By expanding their production capacity while bringing down costs by as much as 30% through economies of scale, this presumably paves the way for the company to release a much anticipated next generation car with a lower price tag for the mass market. For them to be able to reach their stated goal of being able to deliver 500,000 vehicles once the factory is up and running in 2020, up from the 35,000 that they are expected to sell this year, we should probably expect some margin compression from the lower prices likely to be realized by a car aimed at the 99%.

    Even if Tesla is able to leverage the expected cost savings from the lower priced battery and maintain their 25% gross profit margins, nearly double that of Ford (NYSE:F) or GM (NYSE:GM), this would result in a maximum gross profit of $6.25 billion if they are able to realize an average sale price of $50,000 per vehicle. Assuming R&D and other selling and administrative costs merely double by 2020, this could result in after tax income of maybe $4 billion. While this seems like a lot, if we apply a discount rate of 10% this equates to a present value of about $2 billion. At Tesla's current market cap of $31 billion, this is equivalent to a P/E of 15.5, well above where both Ford and GM are trading.

    Alternatively, you could extrapolate the recent 10% annual growth in Tesla's share count forward to 2020 to obtain approximately 175 million shares outstanding, or diluted earnings per share of about $23. At the same P/E ratio of 15.5, this would result in a share price of $350, which again seems pretty good, but in reality is only a compounded annual return of 6% over today's $250 share price. At this price and share count, Tesla's market cap would be $62 billion, approximately what Ford's is right now. Even if you assume Ford is so devoid of innovation that both its earnings and market cap would remain exactly the same, Tesla would still trade at a valuation almost double that of Ford. We can basically buy Ford's practically worst case future earnings for half the price as we'd have to pay for Tesla's best case scenario, which seems preposterous to me.

    Another egregious example of overvaluation is demonstrated by cloud computing juggernaut salesforce.com (NYSE:CRM). Despite a slight dip after another spectacularly unprofitable quarter, the stock is up 15% year to date after gaining 28% last year. With GAAP losses approaching half a billion dollars over this timeframe, the stock clearly trades based on something else, namely phenomenal revenue growth. To achieve this remarkably consistent revenue growth, the company has had to continuously make acquisitions, as well as increase sales and marketing expenses at an even faster rate than revenue growth, somewhat ironic for a company that supposedly makes sales and marketing tools more efficient and cost effective.

    The company continuously boasts that its analytics tools will eventually allow people to manage their sales accounts or even entire companies on a smartphone running the Salesforce1 platform. This narrative is so compelling that salesforce.com's overly promotional CEO Marc Benioff apparently felt the need to relate an anecdote, about him being able to run the company on his iPhone while at dinner, three separate times after the company reported earnings, once on the conference call, again during the question and answer session, and once more on his obligatory appearance on chief cheerleader Jim Cramer's Mad Money show.

    Despite this tantalizing prospect of enterprise cloud computing nirvana, which you would think would be so much in demand that it would sell itself, the company still relies heavily on paying commissions and stock options to salespeople and management. The company ignored half a billion dollars worth of stock based compensation in the non-GAAP earnings it reported last year, but even if you stripped out all of salesforce.com's ballooning SG&A expenses, the company would have only earned about $2.5 billion over the past 12 months, good enough to get their P/E ratio down to 15. Incredibly, this totally unrealistic elimination of almost all of their expenses still results in the company being more expensive than most of their competition, like Oracle (NYSE:ORCL) at 13.5 times earnings, Microsoft (NASDAQ:MSFT) at 14 times, and IBM (NYSE:IBM) at 10.5.

    These old tech companies aren't the only ones languishing as they are perceived as revenue growth deprived and innovationless. Apple (NASDAQ:AAPL) is trading at barely 3 times cash and less than 8 times earnings after backing out said cash stash. Contrast this with Google (NASDAQ:GOOG), which is trading at 24 times earnings even assuming earnings grow 17% over last year's results. This would be a remarkable achievement for such a large company to achieve for even one year, much less 5 straight like Google has. As we saw with Apple, it becomes increasingly difficult to grow the larger you get, and Google would have to continue to grow earnings at 17% for another 7 years before passing Apple's annual income. Despite this lofty hurdle, Google is already nipping at Apple's heels in terms of total market cap, at a valuation of $410 billion versus just $475 billion for Apple, and if you factor in net cash positions, Google is actually already the larger company by enterprise value.

    Clearly investors are ready to pay up on the hopes that Google can start to better monetize their popular Android operating system, something Apple already has achieved, with iOS garnering over half of all profits from mobile devices. There are also moon-shot expectations baked into the stock, such as gaining widespread popularity for wearable devices like Google Glass, not to mention innovations like driverless cars, but so far there hasn't been much tangible evidence that Google can move away from deriving over 90% of their revenues from their dominant online advertising platforms like search and YouTube. This market is also expected to get more competitive as other titans like Facebook (NASDAQ:FB) and Amazon (NASDAQ:AMZN) vie for the larger share of advertising dollars implied by their own overextended stock prices.

    At the risk of belaboring the point, I would also point out another disconnect with a company I've been wrong on so far, Chipotle Mexican Grill (NYSE:CMG). I'm skeptical that they can keep up the incredible same store sales growth they've shown lately, which clocked in at an astounding 9.3% last quarter and 5.6% for the full year. Chipotle management has repeatedly warned that they are unlikely to keep this up forever, forecasting only "low to mid-single-digit" comps growth for the current year. This is even after raising it from the "low single-digits" due to the momentum shown at the end of last year, but any additional sales growth is counting on them being able to raise menu prices in order to pass through cost increases in the high quality organic ingredients Chipotle prides itself on serving.

    However, in part because of these impressive results, Chipotle's stock price is now pushing $600, good for a trailing P/E ratio of well over 50 based on last year's earnings of $10.47. The forward P/E ratios based on this year and next year's expected earnings are also at the lofty levels of 46 and 37, respectively. Even with the latter value, this would result in a PEG ratio of about 1.7 based on expected 5 year earnings growth of 22%. When you have to use forward PEG ratios to justify buying a stock at these levels, I remain skeptical that there's much value left in Chipotle at these prices, even if they do continue to put up good operating results for awhile longer.

    In contrast, the company that Chipotle was actually spun out of back in the day, McDonald's (NYSE:MCD), looks downright cheap by comparison. The company is trading at 17 times last year's earnings and 16 and 15 times the earnings expected this year and next. McDonald's $94 billion market capitalization implies that each of their over 35,000 restaurants is valued at about $2.65 million each. Compare this with Chipotle, whose over $18 billion market cap values each of the approximately 1600 locations they had at the end of last year at over $11.5M each, over 4 times higher than each McDonald's.

    Moreover, McDonald's actually owns much of the valuable real estate under their restaurants, reporting about $20 billion worth of owned land and buildings on this owned land, out of the $40 billion in total property and equipment that are held on the balance sheet at cost. This means that the value of most of these properties are probably understated since many of them have been held for years or even decades. Compared to Chipotle's strategy of leasing most of their land, I would personally much rather buy a restaurant that generated $150,000 in annual profits for $2.65 million and own some of the land and property outright as well, instead of having to pay $11.5 million for one generating $200,000 and getting less value in leasehold improvements, no matter how enticing the growth prospects appear to be.

    These are just several examples of what I view to be pricing discrepancies between older, boring, more profitable companies and newer, exciting ones that exhibit the kind of revenue growth that investors seem to be infatuated with. There are legitimate reasons why you might want to focus on revenue growth, notably that profit margins are at all time highs, meaning stagnating companies might have difficulty squeezing profit growth from spending cuts. However, you have to be careful not to pay an absurdly high price for earnings that might never materialize, so I would avoid the stocks that have these overly optimistic assumptions baked into the current share price and instead choose the reasonably valued companies that people currently don't seem to think will be able to compete with the flashier upstarts.

    Disclosure: I am long AAPL, F, MSFT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Mar 10 5:42 PM | Link | 3 Comments
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