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Collection: Mohnish Pabrai - #72 'Old Economy and New Economy'



So basically if you look at something like – you know, just look at Tesla, for example, So you know they have a – I don't know like a 30 – I think the market cap is about $30 billion now. They were $4 billion revenue run rate, they are losing $400 million a year.

And you know, you can argue that a business like Airbnb or Uber is a capital light business, it is a tech business. Tesla is a manufacturing operation with its manufacturing in one of the – you know, relatively higher labor cost – areas of the planet. And if they want to grow, they have some very very significant CAPEX.

And one should argue that – one could argue that an Airbnb or something which is CAPEX light deserves a richer valuation than a Tesla which would – you know, if they try to increase from 50,000 cars a year to 200,000 cars a year, for example, it would be a massive massive, I mean tens of billions in CAPEX to get there. So even if they make an 8% profit, the P/E would be over a hundred. And you know, the best car companies make about 7% so just to give you a sense.

And then you know, just to see how the money is moving from old economy to new economy, you know, we have General Motors which has a market cap – if you take out their cash at a little less than Tesla.

And you know, Tesla makes like I say about 50,000, actually less than 50,000 cars a year. GM has – you know, nearly 10% of the global auto market, making 9 or 10 million cars a year. So it's a rounding error for GM in terms of what Tesla makes. And they are the number one car company in the U.S. & China, I mean you know one in five and a half cars sold in the U.S. is a GM car and similarly in China, they are number 1.

And they make over $10 billion in cash flow that is heading towards $12-13 billion, aggressively buying back stock, NOLs shielding most income. And you know, people got excited about Tesla for the electric car. You know, GM's got the Chevy Bolt coming out next year, it has a 200 miles range, pure electric, $30,000.

And Tesla would not have a car equivalent to this, till at least 2018. So GM's actually, you know, two years ahead on this but because it has a name General Motors, nobody cares. And so you just see this kind of huge divergence in these valuations between kind of – you know, old and new economy.

And you can also see it when you look at something like Netflix and Micron Technology. So this is quote I took from David Einhorn's second-quarter letter to partners without talking to David. So I hope he doesn't object.

But you know, he said "our long-term outlook is that sometime in the next few years, Micron Technology (currently valued at $20 billion with $3.7 billion of trailing net income) will be worth more than Netflix (currently valued at $40 billion with $240 million of trailing net income)."

And of course, Netflix now is at $44 billion and Micron is at like $15 billion. And you know, if you ask Reed Hastings the CEO of Netflix about the stock price. His answer is [Inaudible] to me he does not understand why Netflix stock is trading where it's trading.

And the second thing to understand about Netflix is while they have a little bit of their own content more than 99% of what they're pumping through is other people's content. And other people's content is subject to inflation or subject to all sort of other factors because content is king.

So Netflix has even if you grant them that they have the pipe, what goes through the pipe has to be paid for by them to these content owners who aren't exactly – I mean you seen that even in the cable business the content owners versus the pipe owners, you constantly have to struggle.

And so when Netflix is charging 8 bucks to me to come and pandering room with unlimited content and they have to – at the backend, pay for that content. You know, it's not a business model where you can said out of the $8, $7 is profit. That's just not the economics.

And of course, you got all the technology costs and all the bandwidth costs where you know some of the internet service providers are complaining about the bandwidth and so on, the usage.

So again, Netflix is a fantastic business, extremely well-run business, all of us loved it, we get lot of values out of it but none of that means that stock is going to be a winner.

And you know, another way to think about this is to invert – is to use Charlie Munger's inversion logic. Charlie Munger says, you can solve many problems by inversion. So if you invert – so let's take something like Amazon which I love, you know probably spend too much money on every month on the Amazon.

But you know Amazon has a market cap of – I think $320 or $330 billion or something today. So if you are an investor today in Amazon, it would mean that you're expecting that market cap to go up from today because otherwise why else would you put money into Amazon unless you're expecting, you know, robust growth some years out.

And let's say if you are an investor with a somewhat modest expectations of let's say maybe 15% or 20% a year if you owned Amazon. Well, if you have a 15% expectation then what your expectation would be that every 5 years the stock would double.

And so over the next you know 20 years or something, Amazon would need to be 600 – about you know $2.4 trillion – $600 million after 5 years, no actually more than – $1.2 trillion after 10 years, $2.4 trillion after 20 years (15 years), yeah so it will be about $5 trillion in 20 years.

And if you think about the entire wealth of the planet. So first of all, the entire U.S. stock market cap, all stocks including Amazon today is about 20 trillion. And so you're expecting that the rest of the pie would not grow so much, and the one company would be you know – I don't know, 10 or 20% of the U.S. economy.

And global wealth currently is close to about a $100 trillion. And again, you know look at the percentage versus global wealth. And global wealth is not going to grow from $100 trillion at 15 or 20%, it might grow at you know 1 or 2% a year or something.

So when you do the math, the law of large numbers kicks in. And so count me as a skeptic on the $5 trillion valuation of Amazon in 20 years. So inversion is a good way to solve some of these issues.

And then you know, we have this chart which shows the number of public companies the P/E over a hundred. And in 2000, we had over a 100 of them and now, we have about 80 of them. This is that whole Nifty Fifty of 2015 where most of 80 companies are these Amazon-type high flyers. And anytime you got a high up there, you see that you kind of come back down. And that maybe another data point to look at.

And so you know on March 10, 2000 which is the day that NASDAQ peaked, Berkshire Hathaway hit a multi-year low of $41,000, Its price was cut in half from 1998. And in fact, what was happening is exactly that you know, the money was going from people selling Berkshire to buying all these different new economy stocks.

And of course, I started Pabrai Fund in 1999 and we didn't have any of the high flyers in our name. And we did very well actually in the first year of the fund [Inaudible] we were up 70% because we were buying these companies that were very cheap because no one was interested and such. And when the bubble burst, we really had no impact on what Pabrai Fund was doing.



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