Ron Baron’s Wisdom: Risking Assets for Tomorrow’s Cash Flow

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Tsai discussed Ron Baron’s Wisdom: Risking Assets for Tomorrow’s Cash Flow. Here’s an excerpt from the episode:

Christopher: One of my mentors, Ron Baron, taught me very early on how companies that are growing very rapidly are investing now to create a higher intrinsic value later, and that can depress earnings. So, you have to think about where earnings are going to be not just now, in 12 months, but a few years out. And obviously, you need to have some sort of visibility and believe that the company is going to hit those numbers.

But if you do, a company that might look like it’s selling at 65 times might only be actually selling at 20 or 25 times a couple of years from now, and the street eventually catches up and that’s why growth companies often never look cheap, because people are only focused on 12 months and they’re not seeing this S-curve formation in terms of the earnings growth. At that point, it looked good to us in terms of valuation. And interestingly, today the stock is selling at roughly the same valuation as it was back then, even though shares are up 6X. That should give you an idea of how quickly net income, GAAP net income has grown from just 2020 to today. Stock up roughly 6X and the multiple roughly the same.

Jake: And I think it was Peter Drucker, said something like management’s job is to risk today’s assets for tomorrow’s cash flows. So, in early companies especially, it could be hard. The future profitability can be very obscured from today’s vision.

Christopher: It can be, absolutely. And the problem is that a lot of companies don’t come through with their projections. And there are base rates, and there are all of these things that people don’t consider. But on the flip side, sometimes companies do defy base rates, there are exceptions, and that should also be taken in consideration. And sometimes, because of that unknowable element, you can find value in places that other people might have just overlooked or simply don’t want to even go there, because they’re only thinking about base rates.

Jake: When you were buying Tesla, did you feel like that you were going with or against base rates?

Christopher: Definitely against, definitely against. It’s still against base rates today. I mean, you have roughly a 760-billion-dollar market cap that we think is going to 3 trillion by roughly 2030. So, it’s a 20% CAGR in terms of per share value, a bit more in terms of market cap. So, when we factor in dilution from current levels, we get to roughly 20% stock price CAGR from here to 2030, that would be a $3 trillion market cap plus in six years’ time, that’s definitely against base rates. But I always remember this conversation I had with Charlie Munger when I was fortunate to meet him in 2018. And he said to me, it’s the nature of the world for the large to get larger.

And so, in certain markets, you have these competitive dynamics where you have winner take most or winner take all, and especially with technology products. And ultimately, this is a technology company selling a technology product that’s a computer on wheels. And so, there’s room for other players. But ultimately, I see a world in which there is a winner take all or winner take most dynamic at play. So, Tesla plus one or two other players will grab most of the market, most of share of wallet, maybe even more share of wallet than they have share of market, if that makes sense.

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