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USA: Is Tesla the Next Apple?

The value of a company can now soar from almost nothing to hundreds of billions of dollars in less than a decade. Such radical increases in market capitalization are a major new paradigm of our financial markets. Every investor ought to be on the lookout for the next example. I believe Tesla Motors is likely to be one.

The story of Apple, which made headlines recently for breaking $500 per share, exemplifies the new paradigm. But it’s difficult for investors to understand. Our brains, oriented towards linear thinking, have difficulty adjusting to a world in which innovation and the growth of intangible capital can proceed at exponential rates.

Apple’s stock market value has increased by over $450 billion since 1997, from a base of less than $2 billion. It did so by investing only $12 billion in internal R&D, and significantly less in patent acquisitions. By comparison, during this same period, Sony invested a cumulative $65 billion in R&D, only to see its market value shrink by $15 billion, from close to $35 billion to just $20 billion today.

Radical innovation is not about R&D dollars invested but about R&D productivity, and how human capital under visionary leadership can innovate in areas that matter, thereby opening sizable uncontested “blue oceans,” market spaces that are not yet explored and in which innovators can create new demand. This led in the case of Apple to a company generating over $40 billion of annual free cash flow, more than Exxon Mobil, which until recently was the world’s largest company by market capitalization. Companies that open blue oceans with defensible solutions and can ride the wave rather than selling out too early are the ones that stand to capture the lion share of value creation.

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