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Jacob Steinberg
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I mainly focus on two sectors: technology and auto industry. I am long only and I like to take a conservative approach where I sell covered calls on the shares I hold in order to reduce my risks. Some of the stocks I follow closest are Nokia, Microsoft, Ford and Apple. I believe that being able... More
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  • Will Tesla's Insurance Cost Offset The Gas Savings?

    Lately everybody talks about Tesla's (NASDAQ:TSLA) fire incidents. There were three separate incidents two of which happened in the US (one in Washington and one in Tennessee) as a result of hitting metal objects which apparently cut through the batteries of these cars. Luckily, no one died or seriously injured in these events, which is great for Tesla; however, if more of these fires start happening, insurance companies might start increasing their premium rates for Tesla owners, which can pretty much most if not all their gas-savings.

    First, let me tell you this, when we currently look at all the available data in our hands, it is pretty much impossible to tell whether Tesla cars are more or less likely to catch fire than ICE cars. A lot of people look at the 19,000 Model S vehicles in traffic and the 3 fire incidents we know of and say that the chances of a Tesla catching fire is about 3 out of 19,000. Then, they compare these numbers to ICE figures which say that hundreds of gasoline cars catch fire every day. There are two problems with comparing the probability of a Tesla fire event to the probability of an ICE car fire event. First problem stems from the fact that not all ICE cars are created equal. The average ICE car in the US is 11 years old and a lot of these cars are cheaper models that are not well-maintained. Furthermore, a lot of ICE cars might be driven in small towns and rural areas where road conditions are less than perfect. On the other hand, average age of a Model S vehicle is less than 1 year old, and these cars are owned by wealthier people, which means that they are more likely to maintain their cars well and drive them in nicer roads.

    The second problem with comparing the probability of a Tesla fire incident to probability of an ICE car fire incident is that we don't really know how many Teslas actually caught fire. I know that we saw 3 separate incidents that were photographed and made it to the media, but does that really mean those are the only incidents? There is really no way of us knowing unless the incident gets photographed, released on the internet and makes it to the media. Lately a lot of Tesla longs say that it is suspicious how we haven't seen any Tesla fire incidents for months but now we are seeing 3 incidents within a 6 week period. This doesn't mean that no fires happened before. This might simply mean that older fire incidents did not make it in the media. Lately, Tesla has been on the media more than usual and people have been paying more attention to Tesla fires in the recent weeks than they ever did.

    Two months ago, no one might have thought of photographing a burning Tesla and posting it on Twitter, but now, people are more likely to photograph this incident and share it on the internet in order to make it on the evening news. In human psychology, when something becomes salient, people pay more attention to it and they start behaving on it more often. This is why we are more likely to see Tesla fire incidents being reported on the media in the future, but this doesn't mean that there were no incidents outside of the 3 we saw on the internet so far. Think about the incident in Mexico. We saw the photos of the incident 2 weeks after it has already happened and Tesla has been quiet about the incident until the photos made it in the media. If the photos never appeared, Tesla would have never made the incident known.

    Since we can't really calculate the risk of a Tesla burning compared to an ICE car's risk of burning, all we can do is to speculate. On the other hand, insurance companies have more data than we do and they can conduct all kinds of risk analyses to determine how risky a car is for them. If we see more fire incidents, insurance companies will start seeing Tesla cars as a "high-risk" category.

    So, what makes Tesla cars so expensive for insurance companies? Well, if a Ford driver has a bad accident and totals his car, the insurance company will take the car, give the owner a check. After this, the insurance company will try to get its money back in one of the two ways: 1) if the damage is not really, really bad, it will try to get the car fixed and sell it in the used-market, 2) if the car is badly damaged, it will try to salvage the good parts of the car and sell these parts separately in the parts-market. Usually, insurance companies will minimize their losses by selling whatever is left of a car after it gets totaled. In Tesla's case, we are looking at a different story. If a Tesla collides with a metal object and its battery starts burning, the insurance company doesn't have much to do in this case. It will have to write the car off as a total loss. Can the insurance company fix the burned up Tesla and sell it in the used-car market? It can't because the battery is the most expensive part of a Tesla and replacing it would cost the insurance company too much to make any money on it. Besides, this is not even practical since the contracted mechanics wouldn't have access to extra Model S batteries, neither would they know how to install it. The insurance company couldn't just sell parts of burned up Model S vehicles either because, 1) there isn't much of a market for Tesla parts since the volume of these cars is so small, and 2) most of a Model S car's parts are not that valuable once you take out the battery. Since Model S doesn't have many moving parts, it can't really have much of a parts-market.

    So, if we see more fire incidents, the insurance companies will have no choice but to increase their premiums for Tesla owners. Of course in the worst case scenario, the insurance companies might even consider Model S cars as "uninsurable" and refuse to insure these cars altogether. In a more likely scenario, they will charge these cars so much in insurance premium that it will eat away all the gas-savings that came with these cars.

    I know that most Tesla owners don't really care about gas savings since they tend to be pretty wealthy to begin with, but if Tesla wants to eventually sell 500,000 cars and go mainstream (possibly with its Gen III models), it will have to make its cars affordable. If a Tesla car will save me $200 in monthly gas savings but cost me $200 in extra insurance premiums, it makes little sense for me to buy this car unless I am a big-time environmentalist, which most people are not. This is something to think about.

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

    Additional disclosure: I am long both call and put options of TSLA.

    Tags: TSLA, long-ideas
    Nov 12 3:03 AM | Link | 1 Comment
  • Apple: IPhone 5S Is Selling Like Hot Cakes

    On Monday morning, Apple (NASDAQ:AAPL) announced its first weekend sales figures for the newly launched iPhone 5S and iPhone 5C in an unusual move. Apple is known to be tight-lipped about things and keep things quiet with the exception of quarterly conference calls. It turns out that Apple sold far more copies of its new phones than analysts were expecting, as the company's early figures topped estimates of even the most optimistic analysts. On average, the analysts were expecting the company to sell 6 million copies, with more optimistic analysts predicting numbers closer to 8 million.

    From Friday through Saturday, Apple was able to sell 9 million units of iPhone 5S and iPhone 5C, with most copies being 5C. After all, the price difference between the two phones wasn't great enough for people to prefer 5C. Many consumers felt like they could pay the little difference and get their hands on a much better phone.

    The strong start of iPhone 5S and 5C compare nicely with iPhone 5, which sold about 5 million copies in its opening weekend. Keep in mind that iPhone 5 had supply issues where a lot of stores ran out of copies too quickly. It looks like Apple supplied stores with more phones this year than last year in order to sell as many copies as possible, even though some supply shortages were still reported.

    Also, Apple launched its new phones in many markets at the same time, which helped increase its first weekend sales. Last week, iPhone 5S and iPhone 5C were launched in the US (including Puerto Rico), China (including Hong Kong), Singapore, Australia, Japan, UK, Canada, Germany and France. This is why the first weekend sales of 5S and 5C might not be comparable to the first weekend sales of iPhone 5, but this doesn't mean that the company's strong sales figures were not impressive.

    Apple also informed the investors that its revenues and gross margin would be at the high-end of the guidance provided by the company in the last quarter. In the last quarter, Apple guided for revenues of $34 billion to $37 billion and gross margins of 36% to 37%. The higher end of these numbers would be closer to $37 billion and 37%, which is better than what most analysts expect.

    At a time when most mobile phone producers struggle to post a tiny profit, Apple continues to be a cash cow. Recently, BlackBerry (NASDAQ:BBRY) decided to lay-off 40% of its workforce as the consumer demand for its latest phones are next to non-existent. Similarly, Nokia (NYSE:NOK) agreed to sell its mobile phone division to Microsoft (NASDAQ:MSFT) for a pretty cheap fee (pending shareholder approval), as the company didn't expect to post a profit on its phones anytime soon, despite recent successes of its Lumia models. Apart from Samsung, Apple continues to be the only smart phone producer in the world that is comfortably profitable, but many investors forget to appreciate this fact and focus on this cash cow's "troubles" as if the company is going out of business.

    While the market is being pumped by the quantitative easing to infinity, many companies get ridiculously high valuations, and Apple continues to sell for a single-digit P/E (excluding its cash) in this ultra-bullish environment. Many times the analysts told us that Apple is not cool anymore and that the customers would just start replacing their expensive iPhones with cheaper alternatives from Asian companies; however, this is not happening. Even though Android enjoys a much larger global market share than iOS, it practically means nothing since Apple still claims about 75% of all profits in the smart phone market. For investors, profit share is much more meaningful than market share but they continue to ignore this. Android producers can pump the market with cheap phones all they want for the sake of gaining market share; however, investors put their money in companies to make money, and Apple is where the money is at.

    Apple has one of the most loyal consumer bases in the world and its consumers are not going anywhere. Basically, whoever can afford an iPhone gets an iPhone, and whoever can't afford an iPhone gets one of the Android phones (or a Windows Phone, evidenced by the recent surge in Nokia's market share). On a related note, Apple announced that 200 million devices worldwide has upgraded to iOS 7 so far, which marks another victory for the company.

    With its insanely low valuation (single-digit forward P/E), stronger-than-the-government cash position, impressively strong margins most hardware companies couldn't even dream of, a customer base more loyal than any company has ever seen, healthy dividend yield and giant buyback plan, Apple is a no-brainer investment. Apple currently fits every description and criterion of a good investment.

    Disclosure: I am long AAPL, 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.

    Sep 23 5:29 PM | Link | Comment!
  • Welcome To The New Microsoft

    On Thursday, Microsoft (NASDAQ:MSFT) finally made clear the reorganization plan it's been working on. Many investors and analysts had been waiting for this day for a long time. Now we will be looking at a new Microsoft that will hope to get rid of many stereotypes associated with the company, such as "boring" "non-innovative" and "slow to adapt."

    The company's CEO Steve Ballmer sent a memo to Microsoft employees in order to lay out the details of the new plan. Microsoft is attempting to adapt to a fast-changing environment. The company has been working on increasing the speed of product releases, customer interactions and strategic responses in order to become more competitive.

    So, what's the new plan? The company had been enjoying a divisional hierarchy for a long time (since the time of Bill Gates). The structure was centered around products, and each product had its own management, marketing, business development and finance business units. This created a lot of layers in the management and slowed the decision making process significantly. Now, the company will look at how its products function together and build teams around this idea. This will improve the integration of the Windows ecosystem across devices such as computers, Xbox devices and Windows Phone devices.

    For example, Terry Myerson used to be the VP that's responsible from the Windows Phone. Now he will become the VP of operating system engineering and he will be responsible for Windows, Windows Phone and Xbox operating systems to make sure that these three operating systems integrate perfectly in order to create a strong ecosystem (like the one Apple did).

    Satya Nadella became the VP of cloud and enterprise engineering. His previous position was involved around Microsoft's server and related tools, and now it includes Global Foundation Services. Because cloud and enterprise businesses of Microsoft go together, he will be responsible from both business units. As you can see, Microsoft is taking its products that work or integrate together and hands them under one leadership in order to make sure that the ecosystem is fully integrated. In the past, each product would have its own manager.

    Julie Larson-Green is another example. She used to be the VP of Windows Engineering and she now became responsible for devices including the Microsoft Surface tablet, the Xbox hardware and mice and keyboards produced by Microsoft. Notice that there isn't a smart phone in the list of products she's responsible from, because, as I've been saying for the last year, Microsoft doesn't plan on building a smart phone anytime soon. For the time being, the task of building smart phones is designated to Nokia (NYSE:NOK).

    Finally, Qi Lu who was responsible with Bing and other online services of Microsoft became the boss of multiple projects including a variety of applications (also known as "apps"), Microsoft Office, Skype, the Lync and Yammer.

    The plan is not only about moving people around, but it's also about moving products together. Also, the company will be cut into two parts: devices and services. After this, instead of being a holding of multiple smaller companies (technically that's what Microsoft was), the company will be one highly focused corporation. In the last couple years, Microsoft has been spending a lot of time, money and other resources in order to catch up to the competition in the war of ecosystems. The new company will be in a much better position to accomplish its goals now.

    The structure is not the only thing that's changing at the company either. The company is changing its mindset and the way it approaches its competitors and partners. In the past, there were many times when Microsoft was openly hostile towards competitors. Lately, the company has been commenting about how some of its products work or integrate with Apple's products and how the company's partnership with Nokia is going. Microsoft is still in "war" with Apple and Google; however, the company now understands that it can co-exist and benefit a relationship with its competitors. Until recently, it used to be very rare for Microsoft to honor its competitors by mentioning their names during conferences or presentations but that's becoming a more frequent thing for the company now. This is just another sign that things are changing at Microsoft.

    The investors took the announcement pretty well. During the day, Microsoft's share price was up by nearly 3% it neared $36. This is the highest share price Microsoft has enjoyed since 2007 and things can get a lot better if the company's latest restructuring is able to influence its earnings positively in the medium term.

    Disclosure: I am long MSFT, NOK. 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.

    Tags: MSFT, long-ideas
    Jul 12 11:19 AM | Link | Comment!
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