Cruise, Uber, Tesla and a brief portfolio update

Yesterday Cruise unveiled their Origin vehicle which is to be ride-hailing vehicle, with no steering wheel and capable of doing 1 milion miles. Couple of relevent videos from Cruise and The Verge.
From some other articles on this topic it is apparent that they did not get the exemption from having the steering wheel just yet, and will likely introduce the AV taxi using some older tech, presumably the one based on Bolt. Anyhow, their launch gets closer and this is exciting and will perhaps serve as a catalyst for the GM share price.

Uber share price, in the meantime saw a significant uptick, presumably after exiting their India eat delivery for a stake in local competitor. While good move on it's own, it was telegraphed quite clearly way earlier that they want to be #1 or #2 within 18 months, so it's not exactly a surprise. As this will reduce the red ink and maybe even get recognized through P&L in Q1 thanks to the fair value of the new equity stake, it is certainly bullish news, although the scale of the rise surprised me. I've reduced my position quite significantly into this strength, especially since it rallied 43% from my cost basis of $26.47. Would be happy to reenter if it drops, but between California contractor/employee uncertainty and Cruise service at some point potentially eating into one of their most profitable markets with their launch (SFO), I prefer to wait at the sidelines at this time / until it drops again.

This brings me to Tesla, which continues their share price rise and incurs large losses on shorts, including paper ones for myself. I'm unwilling to give up that bet right now - as the valuation approaches $100B - going past VW and well more than GM and Ford combined. It is impossible to predict if/how/when this will get to more sane levels.

The combination of large TSLA and SPY shorts and taking some profits in other positions, mostly BHC, FB, GOOG and UBER made my IB margin account have positive balance for the first time in a few years. If/when a market will decline I expect to cover the two shorts and go into the margin again, but it's nevertheless interesting that I got to that point with still large stakes across long positions. But if market continue to appreciate and the BHC/FB/GOOG go up I might end up with a large net positive, which I currently wouldn't know what to do with - a good problem to have :)

More VIC ideas evaluated

Another bunch of VIC ideas that I looked at, but decided to pass on:

1. Nu Skin (NUS): I am not a fan of direct selling and MLMs so it would need to be a significant discount to intrinsic value to entice me to go there, but it is simply not there. The China risk discourages me even more, as I have no insight whatsoever into how this market can develop for MLMs in general and Nu Skin in particular.
2. New Fortress Energy (NEF): This short idea would be reasonably interesting, given relatively rich valuation, lack of interest from the fixed income investors (12%+ interest rates), but 91% insider ownership gives me a pause - arranging a short squeeze wouldn't be too hard.
3. Discovery Inc. (DISCA): While I like the FCF and deleveraging story, I think that the reality of streaming and distributed content creation might catch up with them sooner than people expect. Live sports is probably the only sustainable 'bundle' that users would pay for, apart from their Netflix/Disney+ subscriptions. With younger viewers, the YouTube channels will disrupt traditional network content and value of aggregation in this content will continue to move to the aforementioned platforms. I could possibly buy this story as a 'cigar butt', should management be committed to buybacks and deleveraging, but given the investments in DTC, it's much less compelling story.
4. Pluralsight Inc (PS): This company is rather expensive ($2B+ market cap), for what it is worth, which is essentially a provider of highly-rotating (low shelf life) content. Moreover, there are lots of negative reviews about their billing practices, which I think can destroy the business like that in terms of consumer trust. I gather that they are more of a B2B business, but still with so much of a free content out there, their valuation is rather rich, so I'll pass. I'd actually be inclined to short it, but an acquisition by a big player is not impossible, so safer to stay away.
5. Daneos (DAC): While very cheap on paper, I have real doubts about the equity raise, which disproportionally enriched the insiders ($6.00 offer price with the stock being in $11-12 range in the previous weeks. This does not build much confidence in them, and I'll simply pass.
6. MIC: Somehow doubtful special situation - no clear catalyst.
7. EPD: I know too little about energy to make well informed choices in this space. 
8. JD.COM (JD): While JD is likely a solid business, the valuation is not really very low and China adds a significant risk from my perspective.
9. Cimpress (CMPR): Stock is already lower compared to the original thesis, and given the heavy insider ownership and the core of the thesis being around decelerating revenue it is not a compelling short.

And various investments (mostly from VIC) that I liked:

1. Campbell Soup Co (CPB): This short idea makes a lot of sense to me,  and while it won't go under, the valuation is certainly extended and building a short position here makes sense, especially compared to shorting S&P 500 (which I'm already doing). So I'm putting some orders to sell a bit of CPB.
2. Seachange International (SEAC): The overall story seems reasonable, but given that the price is so much higher compared to 52 week lows, I'm hesitant to commit more time for analysis and money on this bet. I put a single order at $3.07 level (with $3.91 current price), just to revisit if there would be some interesting development here.
3. Westrock Co (WRK): Hard to find as boring story as a paper and cardboard producer. But with little excitement, there's the potential for depressed valuations and few new entrants. Even though it's a commodity, the oligopoly nature of the business should ensure healthy profits and the secular trend of e-commerce is only going to help. Similarly, WRK seems well positioned, with their innovative products, to the trend of trying to reducing plastic usage. Given the defensive nature of this holding, I'm comfortable putting orders that will build a 15% position of the net worth. The only drawback is the relatively high dividend, which is not the most efficient way of returning capital. But I can live with flat or growing share prices and in case it declines further, the buybacks are increasingly likely.
4. Wolverine (WWW): An interesting idea, but the price is too high for my taste right now, so similar to SEAC, I'll put an order (@ $25) at well below the current price.
5. Pangaea Logistics Solutions (PANL): A reasonable idea given that the owners are still operating it and the relatively depressed valuation.
6. Global Idemnity (GBLI): An OK insurer, which trades at low valuation. Given what I learned from Buffett, seems like a decent opportunity.
7. LRAD (GNSS): Looks like an interesting, promising entity, but their competitor (Everbridge) is large and fast growing, so this one needs more insight.
8. Alteryx (AYX): This short thesis is quite compelling, given the doubtful practice of front-loading revenue from long-term contracts. 
9. American Airlines (AAL): Even though it's challenged by 737 MAX delays, the current valuation is attractive enough to invest.

GM investment idea for VIC

I've submitted this write-up on GM as a long idea to Value Investors Club. Keep your fingers crossed for it to be accepted!

End of year update

I haven't posted a portfolio update in a while, so it's a good time to catch up:

The biggest change compared to EO Q1 was the disposal of AAPL - after it has risen so much it did not seem like such a bargain anymore. I sold last shares at approx. $260, so have undeniably missed the last part of the current run, but I don't feel bad about that at all - I have rebalanced into a lot of GM, which had relatively stagnant stock price throughout 2019, despite being great value. Even though BHC has also seen a great run from the October dip where I loaded up,

In fact, after learning about Value Investors Club I've decided to put my GM bull thesis into writing and have submitted that as an idea there. It may take weeks until I'll know if it'll be accepted, so in the meantime, I'll post it here.

The too-small-to-be-seen stakes are UBER at 2% and KHC, BBBY, ITI and EZPW at less than 1% each. Not included here, are three short positions: very large position in TSLA, a rather large SPY and very small EYE. These large shorts positions have taken my margin to almost zero and I intend to use it much less going forward.

Evaluating VIC ideas

I've looked through several ideas on VIC between Dec 24th and end of year, but decided against these:

1. NVFY - there is a significant risk it's a fraud - the $50M of 'mats' is suspicious. Rest of the numbers are hard to analyze in this context.
2. MNST - 25x multiple being attractive is hard for me to swallow - the 20% growth is nice, but GOOG/FB have similar valuations with far better moat.
3. CLW - interesting idea, with decent valuation. But the recent run up of the price makes me less interested. I'll put token order at $18 to remind me of this once it moves down. 
4. NWSA - the valuation was not particularly compelling, and the media/publishing business is in my mind one that is still going to be challenging.

The ones I liked are listed below.

Iteris (ITI): even though a relatively small, it sounds like a well positioned business with good leadership in a growing market.

My simplistic DCF based on 7% growth rate is only yielding share price of $4.66, but with 15% (not unreasonable) it goes to $12 and a 5x revenue multiple yields similar number in a potential takeover - quite likely with companies that do smart cities being hungry to acquire someone who already has foot in the door with states, counties and municipalities. The VIC write-up lists a few promising lines of business that have no/little revenue just yet, so it's quite reasonable to expect double-digit growth.

I decided to put several purchase orders and while I don't think that they'll all fill, the story is interesting and I'll be happy to be part of it. Right now it's a minuscule part of my portfolio.

EZ Corp (EZPW): a lot of interesting write-ups, with very cheap price due to problematic owner (Cohen). I put several orders to build ~2% stake if it goes to $6.4. Few filled by 1/1, but given that the management is making reasonable steps (i.e. initiated buyback), I'm inclined to increase the price I'm willing to pay.

Peloton and National Vision Holdings; TSLA and GM

I'm not entirely sure why only now I have joined Value Investing Club (as an observer). I must have read about that before, but for some reason did not take a closer look.

I started to correct this error, by reading through earlier ideas.

I have heard about Peloton some time ago already, perhaps via the hilarious tweets. It seemed like a bubble, but I was not paying much attention. After reading VIC short pitch I put a few sell orders between 31.99 and 34.79. We'll see how it goes.

The other idea I read through and decided to act on was National Vision Holdings (EYE). While the short pitch was focused on potentially losing the Walmart business, I decided to put sell orders based on valuation and poor margins. Starting from 33.20, couple of them executed and I initiated a small short position.

This makes it my fourth potential and third actual short, with SPY and TSLA being the other ones.

The size of my SPY has grown larger than I expected (to 21% of net account value) and paying out the dividend is mentally painful, this and the TSLA short allowed me to almost completely go into neutral position, with only 12% margin left. I continue to expect a market-wide correction that will allow me to close this short, but if the market will continue flat or up, I won't complain, since I'm still 112% long.

My TSLA short is quite a different story, as it grew to 44% of my net account value and has 31% paper loss attached to it today after averaging up, so represents a 11% paper loss on the account and goes well beyond my previous wins on TSLA.

Since I started shorting a bit over $200, my average price is $323, so I need 24% decrease to break even on this leg.

TSLA volatility of course makes it crazy to try to predict the near term, but after possibly a decent read of Q4 deliveries and maybe also Q4 financials, I think the Q1 is set to disappoint everywhere but in China. Europe will see a wave of mandated EVs from ICE makers and US will hit the usual demand cliff after Q4 incentive expiration. Given the demand, capital and manufacturing constraints, I see model Y being almost a zero sum game with model 3, with Fremont gradually switching to the former as model 3 demand dries up.

It's hard to predict if/what the catalyst would be for TSLA to eventually drop, but apart from the short squeeze I see no good reasons for further advancements from current levels.


One catalyst I'd hope for in 2020 is GM/Cruise to actually deploy AVs at noticeable scale, and therefore for the TSLA FSD narrative to break down. But hope is not a strategy, so my large GM bet (57% of net account value!) is based on the valuation of the core business. An interesting write-up focused on GM's truck business was published 1 year ago at VIC, and it's as bullish as I am.

Long Uber, Short Tesla

To burn or not to burn?

Being even remotely close to the investing world, it is hard not to be aware of the story of Uber. Burning through tons of money, while building prevalent, but controversial service is a great way to polarize investing community.

While Amazon or Netflix bears focus on sky-high PEs, the cash-burning enterprises such as Tesla, Uber or WeWork attract different kind of criticism.

Amazon or Netflix I never would have shorted, given the opportunity in front of these companies and irrationality of the markets. As for Tesla I always felt differently - my qualitative call was that the challenging auto business won't allow Tesla to become a big player with their inefficient operations, lack of durable moat and rationality of the majority of car buyers. I saw the worst case (for a bear) as them growing to the size of Toyota/GM/BMW/VW, with similar profitability profile. So hardly more than a $100B company. The energy/generation story was always not credible, given the commodity nature of these products.

Uber's advantage

On Uber, I had mixed feeling for a long time. On one hand the cash burning was despicable and buying market share that way felt wrong - a new player could always enter the market, undercut them and easily steal market share. And sure they did, adding to the common cash furnace.

On the other hand, there are several types and levels of scale advantages:
- brand (country and global level)
- aggregation of demand and supply (mostly at city/metro level)
- aggregation of supply by having various services (rides, eats, groceries, same-day delivery, courier services)
- aggregation of demand for mobility (cars/carpool/personal mobility/shuttle/public transport/), perhaps also longer travel a'la BlaBlaCar
- cross-selling of products
- ability to seamlessly integrate autonomous means of transport (AVs, drones) into the network

While it remains to be seen whether Uber will succeed it is hard to imagine a different player who could build all of this. As Buffett said about BNSF, "No one is going to build a new rail network across the US".

The secular trend to abandon car ownership and focus less on things and more on experiences also provides a sustainable tailwind.

And I have no doubt that such an aggregating entity will come to be - it is inherently more efficient to share many of these resources and move people/goods in a manner that has less footprint than people going in cars. And while in China it might very well be Didi Chuxing (which Uber has equity in...) in the western world and few other markets Uber is best positioned to be the winner.

Self driving cars

The major concern I have are autonomous vehicles. I see two potential technological winners in the AV game: Waymo and Cruis. Even with Waymo's headstart and Google's ML prowess I like the long-term potential of Cruise/GM more - to scale the service a lot of vehicles are needed and integration between AV development and car manufacturing will be key for best systems and manufacturing efficiency and cost.

GM/Cruise wants to start with their own service, perhaps in San Francisco. It's hard for me to tell whether they can be successful without human backup (not for oversight of AV, but to cover routes that are not mapped).

A hybrid network of autonomous drivers and AVs can have much faster response times in cases AV can't handle themselves - an idle, nearby driver can be summoned to AV which is in a challenging, non-driving-related situation (e.g. being in an accident with another vehicle not at their fault). Also it's hard to foresee in the short term use cases like eats, groceries, same day delivery or courier services operating solely via AVs.

With that assumption, Waymo and Cruise have only two potential partners to work with in US: Uber and Lyft. Alphabet has stakes in both, while GM has a stake in Lyft. Other Cruise owner (Softbank) also has stakes in both.

But even if first AVs would first be deployed via Lyft, I think that technological head-start will be no longer than 24 months - in that timeframe other players such as Ford/Argo will have their AVs ready and I have no doubt that some of them will want to tap into Uber's demand. There's also of course Uber's own ATG group.

Valuation

With this assumption that Uber won't go to zero, it's a question of value of this money-burning company. I've enjoyed reading several valuation from Aswath Damodoran and read several bullish and bearish stories. My simplistic model, based on Uber benefitting from operational leverage and continued, but slowing revenue growth implies 'adjusted profitability' in 2024 and current value per share of $34. Given management's guidance of (adjusted...) profitability in 2021 I think that's rather conservative. 

Speaking of which, I like the recent focus of management on costs and exiting markets with no profitability in sight.

Purchasing plan

With Q3 results behind us and lockup period expiring today it's a good time to evaluate taking a position in Uber. I continue to like my gradual purchase/gradual sell approach. For Uber, I've modelled to start buying at $28 and build full position by the time it hits ~$18 (or ~$30B market cap).

For a company that in a few years can easily spot a few hundred billion market cap it will be a very reasonable price to pay.

At the time of writing this I had a few orders already executed, but I do hope that it will go down a lot today to build up a sizeable position at reasonable price.

And to support the company I now own, I'll probably switch to use Uber from now on... Not rational but gives opportunity to experience the service level.