New Constructs' Friday Webinar: Intelligent Capital Allocation - 21 July 2023

Welcome to our Friday webinar. This is New Constructs Intelligent Capital Allocation. We're here with you every Friday. This week you have with you Hakan Salt, Kyle Deske II, and myself, Tamara Pesic. We're happy to welcome you and looking forward to a great discussion today. Here's our disclosures and disclaimers. And sadly, we will not be with you for the next few weeks. Today will be our last webinar for about a month. We will be back on Friday, September 1st. We're still working. We're still in the office. So ping us if you need us. We'll still be out on the Society of Intelligent Investors in the community hanging out. We just won't be doing Friday webinars. For a bit. As usual, our agenda is to focus on your topics and questions throughout. So please do use that Q&A feature in Zoom. We'll make sure that we get to everything. You can get to all of the replays and slides on the Society of Intelligent Investors. If you're not on our online community with us, give me an email at support@newconstructs.com and I'll make sure that you get all Hooked up there. Tons of best and worst research came out this week, mostly style this week. I think it was mostly sector last week. Thank you. Go out and check all that out. There's 2 updates, the Exec Comp and ROIC model portfolio has a featured stock that we're talking about. There's the long idea. There's the safest dividends model portfolio update. And also 2 reports that are public on Netflix and Tesla. You can go check those out on our website. I'm going to go ahead and hand it over in just 1 minute to Hakan, who's going to go over the headlines for us and then take us out to society to review some of the comments that have been happening out there, things that you might be interested in, things that you might be interested in commenting on, and then Kyle's going to do our favorite 2 DCF case studies, Netflix and Tesla. They're my favorite anyways. I don't know if you guys have favorites. All right, Kahan, let me hand it over to you for interesting headlines.

This week we have the big tech companies releasing their earnings, Tesla and Netflix. They both fell down quite a bit, 8 to 10%. Netflix Missed revenue and the investors weren't happy about that. They're just spending a lot of cash to get even the earnings. Tesla hinted that there's gonna be more price cuts, so their margins are gonna be even slimmer and they've been decreasing for a while. Kyle is gonna do the in-detail DCF models for them.

We'll talk about Tesla and Netflix in a little bit, but I wanted to hit on A new announcement we have on primary coverage late next week, probably around Friday is when we're expecting it. We're going to be expanding our coverage universe with what we call primary coverage tickers. These tickers will have models built based on the income statement, balance sheet, and cash flow statement only. So they will not take into account footnotes and MD&A like our current models do. We'll be noting any of these companies. With an analyst note that says primary coverage, so you know exactly which model you're getting. We'll start calling our current coverage premium coverage. So anything that is currently under coverage, currently has a model, is premium coverage. It's based on cash flow statement, income statement, balance sheet, as well as the footnotes in MB&A. This new primary coverage, it will be multiple hundred companies to start with. And like I said, it's going to be based on the income statement, balance sheet, and cash flow statement. But we still think it will be superior to what you can get elsewhere because in the Harvard Business School Journal of Financial Economics paper we've referenced many times, they found that traditional data providers miss around 30% of the unusual items directly on the income statement. So even building a model with just income statement data collected by New Constructs, we feel confident that we can still provide a superior model than what is out there. And this is a way for us to start increasing coverage at a greater scale. We'll note those with that primary coverage analyst note so you know what the model you're looking at or rating you're looking at is based on, whether it's financial statements or if it's financial statements plus footnotes and MD&A that drive our core earnings data that everyone's come to know through these webinars and through our website. We're excited to roll that out. It'd be a nice increase to our coverage. universe. I'll throw it back to Hakan and we'll go out to society and see what's going on there.

Yeah, definitely. We have had a couple good discussions. The latest one, there's a post about Discover dropping 15% after the company disclosed accounting mistakes. That's something we have not yet taken a look to 'cause the earnings report hasn't come out for the second quarter yet, but it's definitely something we're keeping an eye out for. So after that, we have a new IPA post about Audity Tech. It's about the trend that's been going around this summer, just IPOs skyrocketing after releasing. Interesting to see that happen pretty consistently. We have posted about one of our most recent long ideas about Warrior Metal and how the And Knowles that are gonna be depleting this at the end of the year this year. And David made a nice comment that we think that that's already priced in. It's expected price right now is showing that the profits are expected to decline by 80%, which looks unlikely. We have the in-depth report on our website if you wanna check out the deep dive. There was a post about ETFs and mutual funds. Now they can look similar but have different ratings. We have an education section about how we rate them. The most important 2 are the individual stock ratings and how expensive the funds are. Check out our website education section if you want to learn more about that. And lastly, there was a About banking stocks and how they can be different to analyze rather than the other businesses because they use money as a commodity and how that comes into play.

That society post this week.

Well, hand over to Kyle.

Awesome. We'll get into the DCF case studies this week and spend a good amount of time here. We've got. 2 new reports out. As Hakan mentioned, Netflix and Tesla reported this week. Both stocks fell on the news, at least in the direct aftermath. And so we wanted to put out an update. Netflix and Tesla have been longtime danger zone picks. We would not recommend shorting them because they can defy gravity for so much longer than we would expect. On a pure price basis, our Danger zone calls have definitely been bad calls from a price performance, but we wanted to really point out that with the recent runs from this year on both Tesla and Netflix, the valuation on both of these stocks has gotten into the stratosphere of expectations baked into the current prices. I'm gonna take over the screen and jump out to the website. We'll start with Netflix. We'll work through some of the reports we've put together. We'll go in depth into DCF scenario, and then we'll Do the same thing on Tesla.

As Kyle is doing that, if you guys have questions, please don't hesitate to ask them in the Q&A feature. We are tracking that, and I know that Kyle would be happy to take them as we go through the topics. Please don't wait till the end.

Here is the Netflix report. You can get it from the research tab of our website. It's available to Everyone, not just paying members at this point. It looks at initially what happened with earnings, slowing growth. They missed on top line even though they beat on the bottom line. We got slowing growth, possibly future price increases. When we run our DCF analysis, they're going to need price increases to justify the current stock price. Let me look at the big key we've always talked about with Netflix is They can do one of two things, either grow subscribers or try and increase profitability. Those two have never gone hand in hand together. We've looked back to 2013. The only time they've generated positive free cash flow is in years where they've actually cut content spending. You've got a business that is predicated on more and more content, new content to get people in, updates of old content to get those existing subscribers to maintain their subscription. And so it's a scenario where if they cut content, they risk losing users, but they might be free cash flow positive for a year. When they increase content, we see those free cash flow numbers decline again. And we think this is something that is going to continue. The costs of content aren't going down, especially right now with the writers' strike and the actors' strike as well, that, that content's just gonna become more expensive. And so the constant need to spend more for content Developing new ideas, new content makes it so where generating positive free cash flow and increasing users are not likely to happen at the same time. We've actually seen a breakdown in content growth and subscriber growth for a while. Netflix, when they increased content spending, they could also see increases or high levels of user growth. Not the case as much with the exception of the TTM period here when they had their password sharing crackdown. I think that's some of an artificial jump that won't be sustained forever. It's something that could have been moved forward because of that crackdown. But we see a situation where content spend, even when it increases, subscriber growth slows down. Not always negative. It's only been negative in one, a few quarters recently, but it's definitely slowing and it's been slowing for a while. Simply throwing money at content is no longer the solution. And ultimately Netflix, as we've long said, is one of many streamers now. That was one of our original arguments was they had a monopoly in the beginning. Many people were quick to say that no one can catch up. We've seen other streaming platforms, whether it's HBO Max, now called Max, Apple TV, they've really put in the money to develop high-quality content, start building out those user bases. Disney Plus has expanded rapidly. From a user base perspective. Now it's really everything is the fight for who has the better content and who can charge less for it. Because ultimately we are price sensitive in some of this stuff when our TV bills get up to multiple hundreds of dollars potentially. With Netflix already being at the top, we won't say never. They could definitely raise prices again. We were quick to say they couldn't raise prices before and they did, and everyone followed suit, but it's definitely at the high end and some of that content spend will have to go towards increasing the quality of the content if they're going to maintain those high prices. But really the big key of Netflix is that valuation. It'd be one thing if they were a business that was burning cash, but they were valued much cheaper or something that would look a little less certain from a valuation perspective. But In the current price, and this was on the $475, they'd come back a little bit after earnings. We were looking at how to justify the pre-earnings share price and what was baked into that, because again, it's huge expectations. We looked at the DCF, NOPAT margins to 18% and revenue by 20% compounded annually over the next decade just to justify the current price. And what that equates to on revenues and profits is Revenue upwards of $200, almost $201 billion, which would be more than the combined revenue of Disney, Fox, Paramount Global, and Warner Bros. So essentially the $4.75 a share means Netflix is bigger than all the big streaming platforms combined. And we don't see that as a plausible taking of market share given the competitive nature of the industry, given that these companies aren't just going to roll over and say, Netflix can have all the content, we're gonna disappear. Disney's making its own content. All these companies are fighting for content, not going the opposite. Yet Netflix's valuation implies that they're going to be bigger than all of them. On the profit side as well, implied NOPAT in this DCF scenario is $35.5 billion in 2032, which is 2 times Amazon, almost 6 times Disney, and 3 times Disney's highest ever profits. So we've got a scenario where Netflix has to be 3 times as profitable as Disney ever was just to justify that current price. When we look, I'll pull over to the DCF model. You can see these forecasts in our model here from the results page. We got our DCF review, the forecast page. We can model out exactly what was that we were looking at there. In that optimistic scenario, it was margins upwards of 18%. And we've got that out through the whole forecast frame. We've got the optimistic revenue growth rates of 20%, and then we do keep invested capital growing at 10% of revenue, which is equal to what it grew at in 2022. So we've got, we're not saying they're going to be less efficient on the invested capital side. ROIC's still gonna remain in line with where it is. And we can pull up this optimistic scenario here. We can see around $475 or so a share. It's gonna change a little bit, right? $477. That's what's baked into the current price is a situation where Netflix has to be bigger than all these streaming companies combined. When we look at what's something maybe more realistic, doesn't mean it can't happen, but it's definitely not as optimistic as that. And that's what we looked at in this neutral scenario. We look at margins at 15% in this scenario here. It's equal to the TTM. So we put margins 15% throughout the forecast scenario. We do revenue growth at consensus for the first 3 years, and then we continue on that consensus growth for the first— out to 2032. So a decade of growth at consensus rates, keeping margins the same, and we can see what that implies for the Stock price on the DCF review page here, we can see that in that scenario, Netflix would be generating $90 billion in revenue, $13.3 billion in NOPAT, and the stock is $155, $156 a share today. And so we looked at what that means for, in the report. In that same scenario, Netflix's revenue would still be 104% of Disney's TAM revenue, 105% the combined of other peers. We're still even at $153 a share. Netflix is the biggest and best streamer in this scenario. So we've got the optimistic downside of $153 a share. We think it could go lower based on the, again, competitive dynamics. This implies that Netflix can grow all the revenue and profits while growing free cash flow as well. Which we haven't seen in the past. So it's really a scenario where the fundamentals, where they're headed, what they've done in the past, how the business has operated, don't match the valuation of the stock, especially in this $475. Again, that $153 a share downside could still be optimistic. And we point that out in the report as well, that we're only growing invested. We're assuming invested capital grows at 10% of revenue, which is equal to 2022. Over the past decade, they've grown invested capital 34% compounded annually, and change in invested capital has averaged 21% of revenue. So that 10% assumption is more recent for one period, but in the past, as they've been ramping up this content, it's grown much higher. $153 a share as a downside could still prove pretty optimistic. And when we run these scenarios. Are there any questions on any of that? Please get them in.

Hey Kyle, I have a question.

Yeah.

How often do stocks not trade on their fundamentals? Is it some teeny tiny minority or is it like 25% of stocks at all times or?

More often than we would like.

Sure.

Yeah.

It's heaps of things.

We talk about, that's why we have the whole Danger Zone series and we put out weekly ideas that companies that are significantly overvalued, it's not often as much that we would say the expectations in this business are that they will be bigger than all of their peers. But we've looked at Netflix for years and we once called it the original meme stock and that its valuation was so untethered from fundamentals for so long. And part of that was The initial technological disruption, they were one of the first to get on the video on demand streaming platform, but a lot of those first mover advantages disappeared, but the valuation hasn't dissipated. It's still pricing in such huge growth, huge profits. I don't know if I have an exact percentage. I could probably pull the percentage of very unattractive companies we have under coverage, and that would be a good estimate.

Oh, interesting.

The number of overvalued companies. Okay. But definitely it's this high and we'll look at Tesla and Tesla's even higher as far as a disconnect from the reality of their business. Probably doesn't happen nearly as much, but there are definitely a significant amount of companies that are overvalued, especially current market. We've seen a lot of companies bounce back this year after having some rough Stock performance last year. And we, David's talked about some of the economic factors going into that misallocation of capital. People chasing returns creates scenarios where big companies or small companies as well. We've looked at many danger zones of some smaller cap companies, but some of these big names attract so much capital, people aren't even looking at valuation at sometimes. It's just a money manager has to own Netflix because if they don't, they might look People will question why they don't. Netflix is the leader, but when you really get into the valuation and what it implies, there's really not a great straight-faced argument that, yeah, I think they're going to be bigger than every streaming company out there.

And when you're looking at overvalued companies in general, do they tend to be more volatile than other companies?

I haven't looked empirically. Anecdotally, I would say yes.

Okay.

We do see a lot of the danger zone companies Carvana's been one that's been so up and down huge. It's up 10x, I think, this year.

Right.

But it's still down from its high of 300%. So it's up 1,000% this year, but it's still down 90% from its high. And so the volatility there is massive with a lot of these names. In general, people want companies' stock prices to go up. The incentive is to buy more stock. I don't want company, I want this company to fail is not always a popular thing. No one wants a company to fail and have everyone lose their jobs and whatnot. So it's definitely a scenario where we do see this overvaluation. There is more of a chance where stock moves around a bunch and it swings wildly on earnings. Can be catalyst many times because there are 2 different camps on a lot of these companies and stocks where one are the bulls that this is the best company ever.

Yeah.

On our side, it's like, hey, let's look at the fundamentals here. This, the story isn't as great as it seems. Those forces can definitely swing the stock much more wildly than maybe your steady blue chip type companies. It's just slow growth profits. They're not super technologically changing, but you know what you're getting. A lot of these danger zone picks can definitely be a bit more volatile, which is again why it becomes hard to short many of them. Like I said at the top, our Tesla, if you actually shorted it, you would not have made money, but that doesn't mean it's not still overvalued. Same thing with Netflix. If you have one good period where the stock falls and it's a great short, great timing. We're not here to try and time it. We're here to warn. If you're buying it today, here's the expectations you're buying. And again, with Netflix, that is $200 billion in revenue. Was it 30-something? billion in profits over the next decade, which is not expectations we want to bet on, which then gives it low quality risk reward.

Thank you.

With that, we'll jump into Tesla. It's long been a danger zone stock. It is the stock we have written the most on dating back to 2013 or so. The amount of money that's been invested into the Electric vehicle market, you know, Elon Musk's ability to raise capital has almost been unprecedented. And Tesla's valuation with it moving up this year as it has, has sent the valuation of this company or the stock into levels that I don't know if I've ever seen 'em this high. Some of the expectations baked into the stock price, we'll get into it. We start off our report right off the top. We wanted to look at what was baked into $290 a share, which is where it was trading when we wrote this. And we ran a couple different DCF scenarios. We'll get into those, but the overarching theme here and the key point is the current stock price implies that Tesla will generate a 129% ROIC over the next decade, which would be only 2 other companies in the entire S&P have done higher over the last 12 months, and I believe 3-year average. And for reference, I believe Apple As in the '70s. So you can look at one of the biggest tech companies in the world. The current price for Tesla implies that they'll have a greater ROIC than that. When we really dig into it, we can quantify, and we did in this report on not just ROIC, but we'll quantify NOPAT growth expectations as well as what that means for revenue and the implied vehicles Tesla will build. 'Cause that's obviously a big question is How many vehicles will they have to build to justify the current price? That's something we've been looking at for quite a while, and we look at it again here. On the earnings side, you know, there are a few notes. The supply constraint was always an argument that bulls would have with Tesla. They're selling everything they can make. For quite a few quarters, that has not been the case. They look a little bit more like traditional automakers. They're building more than they're selling. We see that could be Price cuts maybe fix that if they cut prices further. They've already cut prices significantly to drive some of that demand. But if Tesla looks like a traditional automaker, we could argue they should be trading like a traditional automaker, and their current multiples do not. That continued cash burn, the key point with Tesla is the margins. Margins continue to fall. They've been falling for a few quarters now, I believe. GAAP gross margin, and we'll look at NOPAT margins below, but the reported gross margin was lowest level since 4Q20, and it was even lower than the previous quarters. We've got situations where margins are headed the wrong direction, and that's long been one of the arguments of why they garner such an over-premium stock price is they have much higher margins than traditional automakers. But if those margins fall back down, Again, they look much more like a traditional automaker. The goal is Tesla is the traditional EV automaker eventually. If they're gonna supplant Toyota or General Motors or any of the big incumbent combustion engine makers, then Tesla will look a lot more like one of them as well. You see market share, they're holding the lead in the US, but beyond that, Europe and China, they've already got competitors that have taken much bigger market share. They've got, it's something like 2% of the total. And when we look below, the implied market share and their current price is magnitudes higher than that. So we'll get into the DCFs. Like I mentioned, we looked at in this report, the implied ROIC, the implied NOPAT, the implied vehicles sold, and we made a distinction here. We wanted to look at vehicles sold with their current revenue breakdown. Right now they generate about 86% of revenue from automotive sales or automotive revenue. But one of the arguments we've seen with Tesla is they're not a car company. They are so many other things. Energy company, battery company, energy storage company, solar company, at one point robot company. There's been so many different arguments of what else they can do. We wanna look at a scenario where we assume their non-auto businesses grow to be 40% of total revenue. And what that implies for the stock price. We'll break this down in the current stock price I mentioned earlier. 129% ROIC is implied by the current stock price. These are the assumptions for that. 13% margin, which would be 2 times Toyota, and it compares to Tesla's TTM of 12%. So it's actually an increase in margins. They need to grow revenue by 36% compounded annually. And they need to maintain, not maintain, but keep invested capital growth to just 15% compounded annual growth rate. Over the past decade, it's been 50%. So this is a huge improvement in capital efficiency, and that's to justify the current price. We look at revenue, that would imply they're generating $1.7 trillion in revenue, which is almost double the combined revenues of all these peers here, Toyota, General Motors, Ford. All the big names publicly traded that we have under coverage, and it implies that ROIC improves from 25% to 129%. On 2 other scenarios we ran through, I wanna highlight these 'cause then we'll go into the actual implications for profits and revenue and stuff like that. At NOPAT margins at 11.5% equal to the TTM revenue growth consensus, invested capital growth 8%. Tesla will be worth $93 a share today. It's a significant cut, but still of 85%, which will be above Apple's current ROIC. We wanted to look at one more scenario. If ROIC improves to 36%, so still above the TTM, Tesla will be worth closer to $26 a share. One, even a 1/10 where they're trading right now. And we think that that could still be optimistic given some of these assumptions. Wanted to run through that. You can see here on the forecast page again, some of the, in those different scenarios, we've got the optimistic as the current price, the neutral being that $93, and the pessimistic being that $26. We don't really think this is super pessimistic, but those are the 3 standard options. So I went with that so we could look at them all in one place. But you can see revenue growth in many of these upwards of 20%, 36% in that optimistic scenario. And we've got 26% and 15% in the following years in that lower scenario there. And then change in net working capital and change in fixed assets. We've got put these in levels that are lower than the past couple years in some cases, but it really keeps that Invested capital growing a little bit, but below historical levels, which is where we get that super high implied ROIC. Is if we were to increase this invested capital at rates they've done in the past and keep that ROIC down, current valuation will look even more expensive because the expectations they'd have to grow above that change in invested capital would be even greater. But Jump back here because these charts really tell the story. You can see in the current share price, there's the implied ROIC, 93 a share and 26 a share. And so we still see improvement in those. They are currently priced to generate more profits than Apple by a significant amount. In that first scenario, Tesla has a NOPAT margin which is equal to its company record, and they would generate $220 billion in NOPAT. It'd be 3.5 times the incumbent peers, incumbent being companies like Ford, General Motors, Stellantis, Toyota, and it'd be double Apple's TTM NOPAT. So essentially Tesla's current price, not only will they have an ROIC better than almost every company in the S&P 500, they'll also be twice as profitable as Apple, which is a $3 trillion company. So if again, if you're buying it today, that's what you're betting on as the future growth of Tesla. Other scenarios here we outline in the report. I'll skip ahead to the implied vehicle production because that's a little bit, it really quantifies how much they have to grow, not just numbers, but vehicles built. We look at, they've sold off 1.6 million cars over the trailing 12 months. Current consensus is around 1.8 this year. We're not coming to say that that's nothing. That's a decent amount of cars, almost 2 million cars, 1.5 right now. But when we look at the scenarios that we've put together, the current price and these other 2 scenarios and the revenue in each of those scenarios, we can directly tie that to vehicles sold based on average selling price. We look at right now, 86% of their revenue is from automotive revenue. So we look at each of those scenarios at 86% of sales being automotive, take an average selling price per vehicle. We're looking at Tesla has to build 31 million vehicles in those scenarios by 2032 at their current ASP. If they increase it a little bit to the average new car price from the last month, so we're still looking at 29.9 million vehicles implied in those revenue numbers and the market share, like I mentioned, if they've got 2% of the whole EV market, or not EV, the whole vehicle market. And they've got 9%, I believe, the market in Europe, the EV market. But these implied vehicle numbers, the market shares are even higher. You're looking at 59%, almost 100% if their average selling price fell to the average new car price across the globe last year. In the current share price at $290 a share, You're betting on Tesla taking anywhere from 57 to 100% of the market. And again, stock price can be crazy, but those aren't expectations we would want to bet on, especially given the massive amounts of competition coming and currently in the market. Like we said, we've seen prices come down, margins come down, and these scenarios imply almost the opposite, margins improving or margins maintaining. We looked at that. This was based on current revenue breakdown. We also wanted to look at it based on the most optimistic scenario, those other businesses that Tesla has. If we assume their energy storage business and the robotaxi business that has been mentioned many times, or the self-driving turns into a massively successful product they're able to license and use across everyone else. These aren't things we necessarily think are realistic. We've looked at some of the arguments in other reports. You can, in this report, you can click down here and see where we talked about some of those, like the insurance business. We looked at what profits might be derived from insurance based on what GM has done in the past when they were offering insurance. But for argument's sake, we wanted to look at, let's assume those businesses grow to 40% of revenue. Only 60% of the business is automotive. Sales and what that implies for production and vehicle sales. When we do that, the number of vehicles is still at their current ASP. They'd have to generate or build 21.5 million vehicles in 2032, which would be a 41% share of the projected EV market. At different ASPs, there could be up to 67% of the entire market is baked into Tesla's current stock price. In that $26 a share scenario, they're still selling 5 million cars, which would be less than, it'd be half of Toyota today. In that $93 a share scenario, they'd be selling 8.2 million cars, which is right around Volkswagen. So again, even in that huge significant price cut, Tesla, the expectations are still that they are one of the biggest and most profitable auto companies in the world. If, and that implies the stock cuts in half or more. This is really a scenario where the stock price has gotten so far ahead of the fundamentals that it becomes very, very difficult to build a case that they're worth anywhere near the current price. We do point out that invested capital in these scenarios grows between 6% and 15% compounded annually. But we think it would increase even faster if they have to scale up vehicle production to make something on the 40 million vehicles. That's the scenario where if that invested capital grows even faster, downside could be even more, or they'd have to do even more sales, more profits to equal the current stock price. And so it's really a scenario where Netflix, not Netflix, Tesla can trade so far above fundamental value for so long, but buying it today is a bet on a future that looks increasingly unrealistic, if not impossible.

We have a question from the audience about renewable energy credits, which falls into one of the topics that you were talking about earlier about how so many of the other profit streams seem to not be coming true. This question from John Rademeyer is, isn't a lot of Tesla's income from selling RECs? If that is the case, what if there's a change in the law that reduces or eliminates tax credits from RECs?

Yes. So the energy credits flow almost directly to Tesla's profits. We haven't seen, and not only regulatory credits, but Tesla also has a lot of other items often in their statements. We haven't seen the 10-Q yet, but I know in the press release they put out There was $300+ million in other income this quarter compared to a loss last quarter, which really boosted that bottom line number. I've seen there's a chance where if we get some disclosure on what that other is, if it ends up being non-operating, it could be a situation where our NOPAT number, we remove the non-operating income and we see that profits are even worse than maybe were first presented. But we definitely look at the Regulatory credits, I believe we pull them out of NOPAT. I'd have to double check on the treatment on Tesla, but it is a scenario where we do think those credits will run out eventually. And it's a profit center for Netflix, and it's one of those reasons that again, current profits aren't likely to be as high as future without a significant improvement in the business, or at least the efficiency of the business. And so far, That has been trending the opposite way. And so where if you've got energy credits that disappear, that'll be a direct hit to and meaning less profitability for Tesla.

Yikes.

Also, I can tell that I'm middle-aged now because the idea that the average cost of a new car is $48,800, that seems impossible to me.

It's gotten high and it's Oh, I think the COVID supply chains definitely got thrown off. Prices went up. I know we've done this analysis in the past and I think we were looking at some of the new car prices in the mid-30s or the high 30s. So to see it at 48 is pretty astonishing.

Yeah.

Even if that were to fall, that just makes the expectations in Tesla even higher. That's a scenario where what is a realistic level of an average selling price? If we're doing mass market cars, 48.8 seems high. If that falls, there's again a hit to margins, which is why we again think the expectations here are so optimistic that it makes Tesla just look increasingly overvalued, possibly more than we've seen in the past as well after the recent run this year.

Any other questions before we move on? Anything else that you wanted to make sure that we went through on those DCFs, Kyle?

No, that is it. We can throw it over to Akan for some stock pick talk.

That's great.

Feature one danger zone, one long idea. For the danger zone side, we have Blue Apron. It's a prepped meal delivery company. So the boxes you get with all the meal prepped, it is one of our zombie stocks, which means it's a cash burning business. Typically it should go to zero. This has been a good danger zone performer, especially since we made the report. It's down 91% since September 2022 when the S&P was up 25%. For the long idea this week, we have Zions. This is a regional bank that came out the recent banking crisis pretty good. It had good underwriting structure and had a healthy risk management, up 28% since May. If any of you have been following yesterday, it had a pretty good run-up, up 10% in one day after the quarterly releases. So this has a lot of potential for a long-term long idea. That would be overall picks this week.

Thank you both. A reminder, we will be back with you on September 1st. Please do hit us up on the Society of Intelligent Investors. If you have any questions at all, please don't hesitate to reach out. And we hope you have a lovely weekend, everybody. Take good care.