George Soros (Trades, Portfolio) is an investing icon and the founder of Soros Fund Management. He is most famous for his bold macroeconomic forecasts, such as his short of the British pound in 1992, which resulted in his fund making $1 billion in a single day.
The guru is also a major stock investor with 144 holdings in his diversified portfolio. In the first quarter, 13F filings show Soros sold his position in Tesla Inc. (TSLA, Financial) and loaded up on Netflix Inc. (NFLX, Financial).
In this discussion, I will break down the two companies and their prospects. Let’s dive in.
Tesla
Soros dumped his entire 132,046-share position in Tesla (TSLA, Financial). During the quarter, the stock traded for an average price of $174 per share, which is close to where it traded at the time of writing.
Tesla has recently been criticized for announcing price cuts across its vehicles. On the first-quarter earnings call, CEO Elon Musk claimed Tesla is focusing on creating “affordable” vehicles for consumers.
While many analysts saw this as a new strategy, I believe this has been part of Tesla’s strategy all along. For instance, in a 2013 interview with Bloomberg, Musk said, “I think the most important thing is to make cars that people can afford."
Either way, the price cuts do signal lower demand, and at the Tesla shareholder meeting in May, Musk confirmed as much.
A positive is he confirmed that the company has “real-time information” on demand and will adjust prices to meet it in a “dynamic pricing” manner.
The price reduction also helps its vehicles qualify for tax credit incentives. In addition, lower prices help Tesla to remain competitive given the vast competition entering the market.
Given the scale of Tesla’s operations with five gigafactories around the world, the company is in a prime position to lower its cost of manufacturing. This will be much harder for many competitors, which are converting from producing traditional internal combustion engines to electric vehicles.
Therefore, I think Tesla lowering prices will not be bad in the long term, as it should cause increases in market share.
Financials
In the first quarter of 2023, Tesla generated $23.33 billion in revenue, which rose by a steady 24% year over year despite missing analyst estimates by $26 million. Its growth rate has slowed down from the 34% level in the fourth quarter of 2022, which looks to have been driven by the aforementioned macroeconomic environment and increased competition.
However, the company reported record production and delivery numbers.
Its full self-driving technology also offers huge potential to disrupt many industries, from rail hailing to passenger railway.
Musk believes its full self-driving technology will have a “ChatGPT moment” within the next couple of years. This would mean "suddenly 3 million cars will be able to drive themselves with no one, and then 5 million cars, and then 10 million cars" via a software update.
Tesla is in a unique position to achieve this objective as users in its full self-driving beta program have racked up over 150 million miles.
If I compare this to Alphabet's (GOOG, Financial) Waymo, which reports indicate has covered just 20 million miles, Tesla appears to have a strong advantage.
On the robotics front, Musk showcased the latest version of the Optimus robot, which performed a variety of tasks like walking and learning directly from a human. This robot is powered by the full self-driving computer from Tesla and thus benefits from the vast amount of training data.
Musk believes the market opportunity is in the billions of people as he thinks everyone will want one.
Tesla also plans to make these robots cost-effective at around $20,000 each, with a planned launch in 2027.
Moving on, Tesla reported $2.6 billion in operating income, which fell 26% year over year on the back of higher costs and its price-cutting strategy. However, it still operates with an 11.42% operating margin, which is strong.
Valuation
Tesla trades with a price-sales ratio of 6, which is 39% cheaper than its five-year average.
The company also trades with a price-to-free cash flow ratio of 30, which is 50% cheaper than its average for the same period.
Based on historical ratios, past financial performance and analysts' future earnings projections, the GF Value Line indicates a fair value of $419 per share. Therefore, the stock is significantly undervalued as of the time of writing.
Netflix
Soros purchased 35,000 shares of Netflix (NFLX, Financial). During the quarter, shares trade at an average price of $330 each, which is close to where it traded at the time of writing.
Netflix is the world's largest video streaming provider with about 26% market share, according to Insider Intelligence.
The company greatly benefited from the lockdown of 2020 as people were stuck at home and sought different avenues for entertainment. However, by the first quarter of 2022, the company reported a loss in its number of subscribers, which led to its share price getting obliterated.
This prompted management to enact a series a of changes, including introducing an advertising-supported membership level and a crackdown on password sharing.
This resulted in its stock rebounding by over 78% year over year.
Financials
The company's financials have also continued to rebound with $8.16 billion in revenue, up 3.73% year over year.
This is not a rapid growth rate like the 18% reported in 2021, but is still an improvement from the 1.85% rate reported in the fourth quarter of 2022.
The company noted its paid members grew by 100,000 in North America and by 640,000 in Europe, the Middle East and Africa. Surprisingly, the number of paid subscribers in Latin America fell by 450,000, though this may have been driven by some converting to the advertising-based plan.
The company reported earnings per share of $2.88, which beat analyst forecasts by 1 cent.
Netflix also has a strong balance sheet to continue its content investments. The business reported $7.8 billion in cash and short-term investments. It also has $16.9 billion in total debt, of which $14 billion is long-term debt. This means it is manageable.
Valuation
Netflix trades with a price-sales ratio of 4.65, which is 40% cheaper than its five-year average. Similarly, its price-earnings ratio of 29 is 55% cheaper than its average for the same period.
The GF Value Line indicates a fair value of $633 per share. As such, the stock is significantly undervalued at the time of writing.
Final thoughts
Tesla and Netflix are both fantastic but very different companies.
Tesla is currently experiencing lower demand and dropping its prices as a result. This could have been a reason for investors to sell the stock, but I believe this strategy will help Tesla to remain competitive in the long term. Its self-driving technology and Optimus robots have huge future potential.
Netflix is a simpler play and really a bet on the continued transition away from traditional television to streaming services. The business is on a content production treadmill, but faces stiff competition from other traditional media producers. However, its valuation does look to be cheap.
