FANG and Aswath

I'm a big fan of Aswath Damodoran who teaches practical valuation (and corporate finance). I have went through online materials for both courses and it has been time well spend.

Having said that, I do not always agree with his assumptions. I oftentimes come up with valuations much further from the current stock price than his. For example I am much more optimistic on Valeant than his most recent valuation (my $97.5 vs. his $12.68).

This time I want to briefly discuss his latest FANG valuations.
Before I dive in, I'll admit that a lot of insights into these business that drive my thinking about them are coming from the Ben Thompson's excellent stratechery.com.

Starting with Facebook, I don't agree with his margin assumptions (going down from 57.7% to 42%). If anything, I would expect that them to go up, as fixed costs spread over rapidly growing revenues. Facebook benefits from being THE destinations and does not to have to pay anyone for traffic as Google does. The growth story is also IMHO far from over and instead of 20% for 5 years, I would expect very gradual tapering off from 40% in year 1 to 15% in year 10.

I admit that these numbers are not substantiated by deep market research, but from the observation that many potential improvements in their monetization systems and operations are likely still possible, overall time spent on FB's apps will continue to increase and ability to monetize users in developing countries will increase rapidly.

I (finally) did a valuation of FB, and with my assumptions (25% growth for 5 years and 15% for another 5 years), my valuation is at $331, twice the current price. While I did add substantially to my FB position after the recent drop, it's still only 7% of my portfolio - I should have probably been more aggressive during the dip.


I did not spend enough time to value Netflix myself (I wish I did). While valuation seems nose-bleeding, It seems like it's strongly positioned to rule the video/entertainment segment for the years to come.


As for Alphabet/Google, I did spend a lot of time working there and thinking about it.
Here, again, I'm much more optimistic than Professor Damodoran. First of all, his estimates revenue growth coming down from 15% a year to 12% a year for the next five years. My number for last 5 years is 19%, and I expect it to continue like that for next five years, as the growth rate was actually accelerating lately. Core advertising is probably still doing well and the new drivers (YouTube, Cloud, Hardware) do not show a sign of slowing down and the other bets such as Waymo will start to contribute, instead of being a drag. While some of these businesses will have lower margins, higher capex or both, I think that with Ruth doing her magic (or actually just common sense discipline, actually) on the cost side, the operating margin will stay around where it is today.

Overall my latest valuation pegged Google at $1600 vs. his $968 and I invest accordingly, with Google comprising quarter of my portfolio.

End of quarter update

Q1 2018 has seen a return of volatility, which I very much cherish.
I've had a chance to buy into or increase position in a few names I observed, but that were priced too high for my taste earlier.

Below is the usual breakdown:

I've increased meaningfully my GM position thanks to the decline in stock price. I'm as bullish as ever on GM, given that it runs disciplined, profitable operations and provide great upside potential with their autonomous driving program.

Google has for a short time sold for below $1000 and I used it to slightly increase my stake. I don't see an end to the revenue growth and they are increasingly disciplined too. I think they are executing well strategically, with investments in cloud, hardware, other bets and last but not least, evolving the ad products.

Valeant stock price declined, with little changes in underlying fundamentals. I think their 2018 guidance was low-ball and they set themselves for an easy 'beat' of expectations. Increasing interest rates will make their debt more costly over time, but their first maturities are two years out and the cash flow will enable them to pay down a good chunk of it ahead of time. There's a good chance they'll return to revenue growth and there's less and less effect of loss of exclusivity on older products. I can see them improving balance sheet and stabilising business going forward, but perhaps it will take a bit longer than I originally expected, given reduced cash flow.

Berkshire is a stock I most likely won't sell completely no matter how high it goes, but I trade around my core position when it goes up or down. I've tried to draw position size (red) vs. stock price (blue) below:

Note: the horizontal scale is not linear, but only reflects transaction dates.
The initial buildup of the position comes mostly from transferring from other brokers to Interactive Brokers, so it's somehow artificial.
Overall, I'm happy with my strategy of buying as price declines and selling as it raises. I've much larger positions today in other stocks beyond Berkshire.

Vereit has declined significantly, to the point of exceeding 8% of yield. The company is as solid as ever and dividend is safe, so I'm happy with increasing the position a bit as it declines, but I don't want to build a huge position there, as the upside is limited (compared to GM/GOOG/VRX) and it's not a compounding machine like BRK.

I've used the recent 'Facebook scandal' to add to my position, essentially tripling the size over the last month or so. This too shall pass is my approach, and I don't see the fact that others misused FB data to affect its business model. I don't think people have high expectations of privacy of the data they share with FB to begin with, so their behavior shouldn't change.

I've bought into Kraft Heinz again after the shares dropped into a somehow attractive territory. It's not a bargain bin yet, but the downside is also limited. Just going forward with the business should make it grow thanks to debt repayment, while potential future accretive acquisition provides some potential upside.

Apple is as great an investment as ever, and I keep thinking if I shouldn't have more in it. In the recent volatility period, I mostly traded in and out to shave off a few dollars of market's chaotic moves, but I'll keep thinking of increasing the position size. The downside is very limited and when they update on capital allocation plan in late April, it can be a strong catalyst.

Last three positions are PCG, WMT and GILD (which was unchanged).
I've reduced PCG position by more than 50% at a small profit. This was mostly to free up funds for other bargains (primarily GM and FB) as my thinking of the company did not change much.

I don't consider WMT cheap, but have added quite a bit in last market correction, I still see it as a primary contender for Amazon in 'physical world'.

Last but not least, I've reduced my short in Tesla by ~1/3 and locked ~20% profit for them in the latest decline. It seems like the short story is unfolding quickly now and bankruptcy/reorganization this year is not out of question. Beyond straight short position, I have only a few $50 and $100 puts for Jan'19, which would pay nicely in case of bankruptcy, but they're very small relative to the whole portfolio. Should the stock price rebound meaningfully in the future, I'm very much prepared to double down on either straight short (if available for borrowing - are not in IB now...), buying out of money puts or selling deep in the money calls.
On the business side, I don't care much about Model 3 ramp, as it doesn't change the profitability and valuation question.

Self-driving

The latest AutoPilot problems are something I think was inevitable as Tesla pushes to prove it's 'lead' in autonomy, even though they're deep behind. Both this and Uber's last accident emphasize why:
1) requiring constant driver's attention is a dead end in autonomy (some pun intended :/)
2) LIDAR is a must given current state of camera's usable dynamic range in driving condition vs. human eye and level of awareness it can algorithmically deduct from visual signals in real time.

So I'm very bullish on autonomy, but right now it requires LIDAR, explicit programming of driving rules and extensive testing/tuning. This means GM/Waymo, but not Tesla.

I'm really curious how Level 3 autonomy will work out - Audi A8 is the first incarnation and it sounds like it could work in a well-defined conditions, with reasonable handover protocol to human driver.