Saturday, August 12, 2017

Diversity at Google

            The brouhaha at Google regarding corporate “diversity” reminds me how confused I seem to be about this whole issue.  In a nutshell, there are four things I find to be particularly perplexing.

            First, if it our belief that people should not be judged according to criterion like race and gender, then why are we judging them that way?  Why is diversity defined in terms of variables that supposedly don’t matter?

            Second, in response to the first question, one possibility is that certain groups bring unique perspective to the corporate enterprise that helps promote the company’s success.  However, even assuming that is so why should the criterion by which groups are defined be variables like race and gender?  If the goal is to incorporate different viewpoints, I have found far more differentiation in perspective between fundamentalists and atheists than between men and women?  That finding, if true, implies that diversity should be defined along religious lines.  The same could even be said of political beliefs.  It seems clear, however, that opening the door to corporate political “diversity” would be a nightmare.

            Third, what is wrong with the simple criteria that all people be treated fairly in terms of their ability to do the job?  In that case, all a company has to do is make sure that variables like race and gender do not affect hiring, evaluation and promotion.  Companies should not be in the business of making social policy (just as I argued early they should not be in the business of making climate policy) because they lack both the training and the standing.  Those are issues best left to governments.  Companies can benefit society by offering the best products and services they can at competitive prices not by deciding what social groups, if any, require special treatment.

            Fourth, if there is a group that has been discriminated against so that their compensation and promotion fails to reflect their marginal product that is a great business opportunity.  When Jeff Bezos concluded that traditional retailers were not taking full advantage of the internet his solution was to start Amazon, not lobby Walmart.  In the same fashion, if good people can be hired at a bargain prices because of bias there is an opportunity to create value by hiring them in droves. 

Wednesday, August 9, 2017

What is the True Range of the Tesla Model 3?

      In December 2016, I published the results of tests I performed on my Tesla model S.  At that time, I wrote (the link is below),

I charged my Tesla fully at which point it said I had a range of 238 miles and then ran it down to a range of about 30 miles several times.  The first piece of bad news for Tesla owners is that while my range dropped an average of 208 miles, the car only traveled an average of only 144 miles – less than 70% of the promised range.  To cover those 144 miles, I used 51.2 KWH of electricity which comes to 2.80 miles per KWH .

       It is surprising that there is been so little written about actual range versus "stated" range.  Perhaps it is the case that many owners of the Model S and X, like me, come from families with several cars and do not rely on the Tesla for long trips.  But as a mass market car, the Model 3 is likely to be different - buyers will rely on it as their primary car.  If actual mileage in typical driving turns out to be only 70% of the stated range there could be quite an uproar which could come back to haunt investors as well as car owners.

Link to December article

Tuesday, August 8, 2017

If Apple Wants to Buy a Car Company

       There has been a lot of speculation about Apple buying Tesla.  While the mixture may be intriguing, Apple should bear in mind Warren Buffet's warning that no asset is so good you cannot overpay for it.  At a market cap of over $61 billion Tesla is already very richly priced without adding an acquisition premium.  So if Apple wants to buy a car company, why not Ford?  Ford's market cap is only $41 billion - much less than Tesla and a pittance compared to Apple's cash.  Plus Ford makes and sells a wide variety of vehicles all of which could benefit from Apple's technology.  Admittedly, Ford has a lot more debt than Tesla but the interest payments would be no sweat for Apple.  In short, if Apple wants to buy a car company why not buy one that makes a lot of cars and sells for a low price.  For that matter, Apple could even consider GM.

Government and Climate Change

       In a previous post, I argued that private firms should not base decisions on their assessment of the impact on climate.  The reason was that climate change is not only complex from a scientific, economic and statistical standpoint, but that it involves tradeoffs between conflicting groups of people that only governments should address.  There is a fly in the ointment.  Virtually all the economists whose work I follow argue that the best way to address climate related externalities is with a carbon tax - a view with which I heartily agree.  The problem is that a carbon tax does not offer a lot to politicians.  Not only is it likely to be unpopular, it removes the opportunity to use climate change as a reason to engage in a host of pork barrel programs that can advance one's political career.  In my home state of California, for example, we have dozens of special programs and subsidies designed to "combat climate change".  Few, to my knowledge, have been subject to any rigorous cost benefit analysis.  For instance, there are credits that are given to "zero emission vehicles" but not hybrid plug-ins.  This despite the facts that zero emission vehicles are not zero emission because most of California's electricity comes from carbon fuels and that many plug-in hybrids actually produce less greenhouse gases (taking account of electricity generation) than ZEV muscle cars like the Tesla model S and X.

       In short, climate change is such a large, complex and important issue - economists call it the mother of all externalities - that it opens the door to unprecedented levels of pork barrel politics.  Hopefully, much of that will be avoided, but our track record is not a good one.

Monday, August 7, 2017

A closer look at Tesla’s Q2 earnings “beat” by Andrew Cornell

         Tesla reported Q2 earnings after the bell Wednesday and shares rose 20 points following what was widely described in the press as an earnings “beat” on both revenue, 2.8 billion compared to an expected 2.5, and a loss per share of -1.33 compared to an expected -1.82.  In their letter to shareholders Tesla claimed an increase in vehicle deliveries of 53% compared to the same quarter last year.  Tesla CEO Elon Musk reiterated the production schedule for the Model 3 and expected that Model 3 margins would up 25% at the end of next year.

         Closer analysis of Tesla's quarterly earnings, however, reveals the quarter may not have been as significant of a “beat” as the headlines indicated.  A large portion of quarterly earnings and revenue can be attributed to a $100 million of ZEV credits.  Because Tesla only makes electric vehicles, they accumulate a surplus of ZEV credits which can be sold to other auto makers.  ZEV credits are government subsidy that costs Tesla nothing.  Consequently, the sale of credits contributes $100 million to both quarterly revenue and profit.  Without the sale of those credits, Tesla would have lost an additional 61 cents a share for quarter which would put quarterly losses at almost exactly what analysts estimated.

         Tesla’s claim of a 53% increase in deliveries for the quarter doesn’t look nearly as good when comparing to recent quarters.  In last year’s Q2 delivery report Tesla claimed a "steep production ramp up" resulted in high production during the last few weeks of the quarter so that many vehicles “in transit" and would be delivered and counted in the third quarter.  Consequently, Q2 2016 deliveries totaled 14,370 compared to Q3 at 24,500 when both Model X and S production lines were working at full capacity.  Had Tesla compared sales to Q3, the 53% increase becomes a 10% drop in deliveries.  Comparing deliveries to the most recent previous quarter gives Tesla a drop of 12%.  It appears Tesla is taking advantage of a weak 2016 second quarter to make their latest quarter look comparatively better.

        Following the July 3rd release of their 2017 Q2 delivery and production count, Tesla’s shares dropped from 375 to 310.  Several days later in a press release, Tesla once again highlighted vehicles in transit as an explanation for the lower than expected delivery numbers.  The company stated that vehicles “in transit”, 3,500 in total for Q2, would be counted in the 3rd quarter delivery numbers.  Adding 3500 cars to Q2 turns a disappointing 22,000 deliveries into a new quarterly record of 25,500.  What Tesla didn’t tell investors in the press release was that having vehicles in transit wasn’t unique to the second quarter.  The 3,500 vehicles in transit being applied to Q3 were more than offset by 4,650 vehicles in transit from Q1 that were counted in Q2.  The details are shown in the graphs below which show Tesla's reported deliveries by quarter and deliveries by quarter when vehicles in transit are added to the current quarter.




Sociobiology and Social Media

        Evolutionary biology suggests that between the ages of 12 and 25 people tend to be intensely interested in two things: social status and sexual selection.  This makes perfect sense.  As people enter prime reproductive age, status and sexual standing are the two things that have the greatest impact on successfully passing their genes to future generations.  It is no surprise then that people of that age are intensely social and make massive use of social media.  The hard question is what does it mean for investing in social media?  Despite their intense focus on social sorting, young people do not control most of society's resources and constitute only a sliver of total consumption.  Nonetheless, the idea is that if a company like Snap can attract a huge following among the young, those customers will stay with the company throughout life.  But there is a problem.  As you age matters of social and sexual status become settled.  People begin to realize that others are not that interested in them and they are not that interested in most others.  As a result, their interests in social media change.  The voracious appetite for right now interaction that disappears is replaced by the desire to keep in touch with family and close friends.  The very features that made a social site cool when you were young, becomes an irratating pain in the neck as you age (and as your consummable income increases).

       I am not sure what all of this means for investing in social media companies like Snap but I think it is something that cannot be overlooked.

Sunday, August 6, 2017

Private Firms and Climate Change

         In this essay, I mean private firms as opposed to public organizations like Department of Energy and the United Nations, not private firms versus publicly traded firms.  The point of the essay is to argue that private firms should not attempt to react to climate change in setting their corporate policies.  This has become a point of contention because private firms have been under pressure by both sides of the spectrum to make business decisions with an eye toward their impact on the environment and the climate.  In my opinion, that is not wise for two reasons.  First, climate issues are immensely complex involving aspects of fundamental science, economics and statistics.  Second, and even more importantly, climate policies by their nature involve tradeoffs among a large number of competing groups of people.  For instance, requirements that a certain fraction of energy come from renewable sources tends to benefit the rich at the expense of the poor who may not be able to pay for more expensive power.  These tradeoffs involve not only people alive today, but many future generations. 

            The simple fact is that private firms, even the most sophisticated private firms, have neither the knowledge nor the standing to make decisions based on their impact on climate.  Attempts to do so, beyond engaging in public relations efforts to appear green, are almost certain to be counterproductive and unfair to various groups of people.
 
            Only national governments, or international organizations have the knowledge and the proper standing to determine climate policy.  They do so by setting the rules of the game through regulations and impacting market prices through taxes and subsidies.  Private firms, in turn, should take those rules as given and do the best they can for their investors and customers.  If it is concluded that under a certain set of rules insufficient effort is being made to limit the production of greenhouse gases, then the rules need to be changed to produce different incentives.  Private firms could then react to the new rules.  However, private firms should not base decisions on their perceptions of how those decisions will affect the climate.  If they did so, the result would be a hodge-podge amalgam of idiosyncratic decisions made by people not adequately trained and without the proper authority to make them.

            More specifically, climate policy depends on the answers to four groups of questions – none of which private firms are in a position to answer.

1.  Does human activity have an impact on the accumulation of greenhouse gases?

2.  Assuming the answer to question one is yes, what will be the impact of the human caused increase in greenhouse gases on global temperatures going forward?

3.  What will be the costs and benefits associated with rising global temperatures?  How will those costs and benefits be distributed across groups of people alive today and across future generations?

4.  What will be the costs of policies designed to combat rising temperatures?  Who should bear those costs?

            Questions one and two are difficult ones that require scientific specialists that virtually no private firms employ.  Questions three and four are exactly the type of questions that private firms should not be trying to answer.  Trading off the welfare across diverse groups of people is an issue that can only be tackled by governments, to the extent it can be tackled at all.  Asking private firms to address it through their climate related decisions is not only folly, it is altogether inappropriate.

            Finally, I claim that my conclusion is independent of views regarding the appropriate climate policy.  Both those who believe that aggressive steps must be taken to combat global warming and those who feel the problem is no more than a minor annoyance should agree that the debate requires a public forum and should not be held in the boardrooms of private firms.

Saturday, August 5, 2017

What We Learned From Tesla's Earnings Announcement: Almost Nothing

      I was hopeful to gain insight into Tesla's fair value from the company's earnings announcement.  No such luck.  The value is still based on speculative growth options whose value depends more on sentiment than hard analysis.  The big questions remain unanswered.  Do a vast number of Americans really want an all electric sedan?  What price are they willing to pay for it?  Can Tesla profitably produce the cars at that price?  If so, will it cannabalize the Model S?  What are the cash flow implications for building, servicing and powering all those cars if the Model 3 is a success?  None of these questions were answered.  What's worse it looks like it will be six months, at least, until we start to learn the answers.

      In the meantime, there were some curious financial details associated with the announcement and the manner in which Tesla "beat" the streets earnings forecast.  Those will be addressed in an upcoming post.