Vantage Point - Part I

It was the cold and windy evening of February 6th, 2018 in New York City. Sechan Kim finished work at Silkroad Capital office in Manhattan around 8PM. It was a surprisingly early finish at work, considering how intensive work can get at the boutique private equity firm focused on East Asian technology ventures. Maybe, it was because he was only a summer intern there. Kim, as he would like to be called in America, was doing his Masters in Finance at Columbia  University. No stranger to hard work being a South Korean, Kim put in his full effort to complete his project, like a war-horse.  He reached his temporary apartment in Hell's Kitchen, where he was put up, like so many other young millennials - interns or fresh pass-outs from college starting their careers- in the Big Apple. Hell's Kitchen, though sounding sinister and more suited to a neighbourhood of gangsters and drug dealers, to the contrary, was a docile locality with affordable rents, cheap yet trendy hangouts and consequently home to many young professionals, students and budding actors, where they, quite commonly, shared a one or two bedroom apartment with two or three other mates.

Getting off the 50 Street Subway station, Kim walked along the street, amidst the flurry of snow, to his apartment. He opened the door to be greeted by the comforting warmth and Alex, who was atop the bean bag in the salon. Alex Patterson, from Albuquerque, New Mexico. Not many Americans from the wild west traditionally made it to the world of finance. Alex, coming from a family of merchants, was the ugly duckling who veered away from the family trade. Having seen his dad and relatives doing business from close quarters he was street smart and had that intuitive knack of spotting opportunities, which usually are in the blind spots of other people. Good with numbers and in poker since teenage, he inclined naturally towards speculative trading of all kinds, especially the stock markets. His entry into the financial world was not the usual way. He only did a bachelors degree in finance to learn the basics. However, he had his own trading portfolio since he was sixteen and was making his own pocket money from trades, unlike other kids who rely on their parents.  Instead of learning from best professors in ivy league schools, Alex received his education from the two best teachers of the world, Self-learning and Experience. He networked with many traders.  Many noticed his skill and one of them, a trader with JP Morgan, gave him a chance to join him. Luckily for Alex, when his benefactor looked at him, he didn't see the lack of formal degrees, but only looked at his money making potential. 

When Kim entered the flat, Alex was scanning stock and oil futures for next day's trade setup, with a cup noodle in his hand and took his gaze away from the screen to look at Kim, "Evening mate! wanna have some noodle? There are a couple more in the kitchen". Kim was in the mood for some pizza that night, "Hey Alex! Good evening. Thanks for asking, I'll get some pizza I guess. So, what's your kitty for the week ?" , he asked with a chuckle.

"Well, the flavor of the season is futuristic technology and the full year earnings of Tesla is coming out tomorrow. Since the start of February, I have been having dreams about driving electric cars in Mars with Elon Musk by my side", winked Alex. "Haha. Cool man. I am impressed by his ideas too. However, I heard there is some delay in scheduled production of Model Three cars. What's your take on it?" asked Kim. "Are these few months or years of delay really gonna matter after a couple of decades? Oil's gonna run out in a few years.  Electric cars are the future!", retorted Alex, with vigour.

Navin walked into the salon hearing voices of his flatmates in a conversation. Naturally curious and always up for a good conversation or a debate, he couldn't resist joining in the milieu."Talking about Tesla, are we now boys?" Navin, was the typical young Indian professional you would find walking along Wall Street. Like many other kids of his generation, he grew up in New Delhi, like a race horse with blinkers in the eyes, to keep focused on the finish line. His target was getting straight A's in school and excelling in a profession most probably in engineering or medicine or business. Right from beginning of teenage, the seed of the American dream had been sowed in his mind and Navin had made his parents proud by achieving it. After completing business degree at New York Stern School of Business, he had just landed a job as an equity research analyst at Jefferies.

"What the hell!? Were you in your room all this time? I thought you weren't back yet," asked a surprised Alex.  "Quite an illusionist, aren't I?", chuckled Navin with his witty sense of humor. "Let me guess, did the results day tomorrow get you two talking about Tesla?" Kim and Alex nodded in unison. "Well, our brokerage had a buy call on the stock for the last two years. But, since June last year, we went neutral with a Hold rating and it still remains", chipped in Navin. "Ah you guys are chameleons!, You just go with the trend", quipped Alex. Navin replied with frowned brows," Not really. We are only painting the picture that the numbers tell until this point in time. We come close to the bull's eye most of the times and we aren't throwing darts randomly either". Alex smiled and said, "Cool down  bro. I know what you do. I was just pulling your leg. The profit numbers could be low now, but they might turn high tomorrow and you will paint a rosy picture then. But the value of the pioneering idea shall always remain".  Kim felt relieved as he felt for a moment that the two would continue arguing seriously.

"So Elon fanboy, what's your trade setup for the earnings release? Going long all guns blazing I guess?", asked Navin. Alex paused for a moment and replied calmly, "Well, I might feel strongly about Tesla. But as a trader, I do what the charts tell me to. And rule number one, I don't trade events. News events like earnings release give you 50% hit rate. Ask any trader who knows his stuff, he or she won't take a trade with less than 70% chance of success. Just not worth the dime and time!" Navin rolled his eyes and said condescendingly, "Oh come on now! Don't give me this Wolf of Wall Street talk. You can't rely so much on charts. They aren't based on any proven method. They are just a bunch of patterns which may repeat once in a while." Alex shook his head and replied with a smile, "You are missing an important element of charting. They are not a tool to value stocks. You will realize what they are really used for soon." He asked Navin, "You have all the right tools and a mountain of data to analyse stock value. So what do you suppose is the right value of Tesla? Will you buy or sell it?"

There was a glint in Navin's eyes. Although not gregarious enough in social situations, when it came to his specialization, Navin's confidence was at its zenith. "Tesla hasn't been profitable since its inception in 2003. Although the company has been successful in winning investor's hearts with Model S and X cars, it is way behind target in the mass market Model 3. At this point in time, to meet its targets the company needs to produce 5000 cars per week, while currently the rate is just 2000. Add to that the massive cash burn over the last 3 years, which has left them a gap of 2 billion dollars to fill from debt. All this has been comfortably forgotten by the market which is valuing the company at $345 a share right now, while the fair value should be close to $250-275 a share", said Navin, completing his speech with as much seriousness as he did for his university thesis.

Alex paused for a couple of seconds and started a slow clap. Kim started laughing and joined him too. "Oh thanks for the accolades you sarcastic bastards!', screamed Navin. Alex and Kim laughed even harder. Kim quiet for a long time jumped in, "I see your point Navin. I agree with how the financial data right now will affect the valuation and bring it down. However, there is an intangible premium given to certain stocks considering their future impact and market dominance in the future. It's pretty common with technology companies and can apply to Tesla as well." Navin replied, "Not for long. People need results soon. Can't hang in on hope all the time." Alex put in a pointed question, "Ok so now both of you have got strong opinions on the stock price of Tesla. What is your plan of action? Are you guys already invested with positions or just talking without any skin in the game?"