Facebook Must Grow Up In Order To Become A Better Investment (NASDAQ:FB)


Introduction

In my dividend growth portfolio, I always look for a way to increase my exposure to the information technology sector. The companies in this sector are less likely to pay dividends as many of them are still in the rapid growth stage and use the cash generated to build their business and improve the fundamentals.

Therefore, I find myself many times left with the companies with lower growth rate. I have long-term goals for my portfolio as I am a young investor. I am willing to invest in companies for their future dividends. I look for companies in the sector that have grown their free cash flow and have plenty of cash in their balance sheet.

Eventually, these companies will consider paying dividends, as their cash position will keep growing. This is the same process that happened with Cisco (CSCO) and Apple (AAPL). As part of this strategy, I own shares in Alphabet (GOOG) (GOOGL) and Facebook (FB) as both companies grow their FCF and, I believe, will eventually share their wealth with their shareholders.

Facebook is a great company, but it is still immature and looking for guidance and a solid plan. The problem with Facebook is not with the fundamentals, or the risk to its business model and even not from future growth opportunities. The problem is with trust. It cannot gain the investors’ trust due to a series of scandals. It has to choose its path and grow up.

Current ad boycott scandal

When I talk about scandals, I’d like to note that I am not talking about the current advertisers’ boycott. I believe that this is a public relation move by several brands who want to get some good publicity with certain demographics, and I find this move legitimate, but I do not believe it is really intended to hurt Facebook.

Everybody knows that FB is a bad erratic boy, so they take advantage of it. When you are the bad boy, you may be blamed for everything so others can avoid criticism, or gain good PR.

We are practically in a recession. The coronavirus is here to stay for the next quarters, and the level of uncertainty is high. During recession, companies tend to cut expenses, and that includes advertising expenses. They advertise less online, but also in television, radio and newspaper. The only difference here is that, due to Facebook’s reputation, they were able to cut expenses and still get free publicity. It’s a win-win for these firms, and they just capitalized on this opportunity. I doubt it really comes from an ideologic position.

Scandals in Israel and America

In Israel where I reside, Facebook is under consistent pressure. Itai Leshem is suing the company for colluding with the government. He petitioned even to the Supreme Court in Israel in his attempt to uncover the company’s possibly illegal behavior. The allegations are severe, and Facebook is using every tactic to delay him and bully him and other media outlets, according to him.

On the other end of the political map, we have right-wing users who claim they’re suspended and punished for publishing information which is uncomfortable for other people. This is not just about bots or unknown people. Even Professor Gadi Taub, a right-wing lecturer from the Hebrew University of Jerusalem showed today that he was warned by Facebook. He claimed that every opinion which is not aligned with the “right” opinion is being silenced.

(Source: Gadi Taub’s Twitter Account)

The examples above are just two examples, which I believe most reads aren’t aware of as it happens in Israel and hurt public opinion on both sides of the political field. I am sure most people are aware of the Cambridge Analytica scandal where a company harvested information in order to use it for political gains to the highest bidder while Facebook did almost nothing to prevent it in real time.

While this scandal influenced the Brexit and the 2016 presidential elections, we have now a new scandal and constant debates over the current November elections. Facebook is blamed on the one hand for spreading hate speech and racism by the left, and on the other hand, the right blames Facebook for censorship. Every side brings some good examples to censorship and hate speech, and this happens due to Facebook’s lack of direction.

The need of a philosophy

Facebook is immature. It tries to please everyone even when it’s obvious it can’t. When we grow up, we choose our path, and our goals, and understand that we might aggravate people on the way. However, when we communicate our goals and ideology well, it is easier for others, and soothe any friction. When you try to always appease everyone, you end up aggravating everyone.

When a company grows and matures, it also chooses its path. The people and customers understand it and make their choice whether they want to associate themselves with the company. Even companies with controversial products like Coca-Cola (KO), Altria (MO), and Las Vegas Sands (LVS), avoid major scandals. They do it not because they stopped selling controversial products or services, but by being clear about their services and their goals.

Facebook should adopt a business plan and a philosophy and stick to it. If Facebook wants to be neutral, it will go ahead communicate it and deal with the backlash and the consequences. If Facebook wants to limit certain types of messages, again it will go ahead, communicate it and deal with the consequences. The lack of a clear philosophy is critical here. We only hear from its leadership new age texts with no clear boundaries.

At the end of the day, Facebook is an advertising platform. Advertisers need stability and understand what crowd is present. You use different commercials in Fox News and in MSNBC, and there’s nothing bad about it. If Facebook matures, decides what it expects from itself and the users, set clear boundaries, it will attract more advertisers and increase user satisfaction.

Conclusions

FB must grow up. It must explain thoroughly its ethic, ground rules, what kind of speech is welcomed and what is not welcomed on the platform. Then, it will suffer some consequences from users and advertisers alike. No matter what it chooses, it will suffer in the short term, but after the initial blast, people will know what to expect and what will they see, and Facebook will be able to keep focusing on the business and not on dealing with an infinite number of scandals.

This way, it may be able to attract new investors who don’t want their companies constantly in the news cycle. Investors like me want a boring company that works quietly to grow its free cash flow and hopefully pay dividends. The leadership should be more professional and clearer about its intentions both ethically and financially, or else it should be replaced. The current fundamentals are strong, but due to the never-ending scandals that hurt the brand constantly, I will not be adding to my position.

Disclosure: I am/we are long FB, MO, KO, CSCO.AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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QuinStreet: Poised To Grow Margins With QRP Catalyst (NASDAQ:QNST)


Company Overview

QuinStreet (QNST) lays claim to the term ‘pioneer’ of performance marketing. With a history of over 20 years, the company specializes in delivering clicks, leads, inquiries, calls, applications, or customers to its clients. This performance marketing strategy is attractive to QuinStreet’s clients, who pay solely based on tangible execution. QuinStreet operates in financial services, education and home services. M&A is a big part of the business model: the company has acquired three companies since 2018 (AmOne, CCM, and MBT) primarily to increase its number of customer relationships. Although digital ad spend has been down during the pandemic, the macro-shift toward online advertising is resolute. QuinStreet is well-positioned to profit from this transition as long as management can successfully increase margins.

Business Model

QuinStreet’s business model is fairly simple. The company is paid a commission for its marketing performance on a per-quote basis. The variable model runs very few fixed costs as the cost of revenue is largely media-based. When revenue drops, so too does the company’s largest cost. Unfortunately, this low-risk model returns less than favorable margins. The company has TTM gross margins of 11%. Management plans to increase these margins by divesting its unprofitable businesses and rolling out SaaS-like products. Additionally, the company plans to continue its heavy emphasis on growth-oriented acquisitions. On the 2Q 2020 Earnings Call, CEO Doug Valenti remarked:

We plan to narrow our focus to a smaller number of our best-performing businesses and market opportunities and to restructure to align resources and efforts with those areas…We also expect faster margin expansion from top-line leverage on a smaller cost base and a heavier mix of businesses with SaaS-like margins

These plans will need to be monitored by investors over the next few months as the changes begin to be recognized. If the plan is followed through successfully, QuinStreet will prove to be undervalued at its current price.

Financial Highlights

The last few years have been rocky for QuinStreet. After increasing revenue by 35% YoY in 2018, the top line grew just 13% in 2019 and is expected to grow just 7% at the end of the fiscal year in July. This volatility in top-line growth has led to a wavering stock price, as shown below:

Zimlon Insurance Company Analysis

As shown in the graph, QuinStreet’s earnings have been up and down and it is reflected in the steep declines in price. Breaking down its revenue, financial services represented 77% of total revenue in Q3 FY2020. The majority of other revenue comes from the education vertical, representing ~12% of revenue. Financial services grew 15% YoY in the most recent period, while education showed meager 4% growth. The company has struggled to gain ground in education since 2019 when it lost Dream Center Education Holdings, which represented upwards of 20% of revenue. Client diversification remains a risk for QuinStreet as Progressive Corporation (PGR) represents 22% of net revenue. One strong positive for QuinStreet is its balance sheet. The company has upwards of $97 million in cash on hand, representing 17% of its market cap. This gives management a cushion if ad-spend falls off temporarily due to coronavirus. It also may allow management to pursue acquisitions or develop new products to increase margin.

Catalyst

Although the company hasn’t grown its top line favorably over the last few years, it has an exciting catalyst which management expects to grow margins. The QuinStreet Rating Platform (QRP) is an enhanced workflow system designed to vastly improve the sales efficiency of carrier partners and their agents. Carrier partners will get much better workflow management and control, ultimately allowing them to reduce costs. CEO Doug Valenti cited on the Q3 2020 Earnings call that QuinStreet has the most end-to-end integrations with the biggest carriers, allowing them to provide agents with accurate and timely quotes. Although the product has not been completely rolled out, Valenti said the pilot company realized upwards of 40% lift in productivity.

The most exciting part of this catalyst is the SaaS-like margins. Management expects QRP to have 80% gross margins and rise steadily with use. Valenti also noted that the pipeline for the product is extremely deep. In the Q3 2020 Earnings Call, he had this to say regarding QRP:

Launched QRP clients already represent over $6 million dollars in estimated annual revenue opportunity once fully ramped. Signed and near-signed clients (not yet launched) represent $12 million of additional estimated annual revenue opportunity. The balance of clients in the advanced pipeline (not yet at signing stage) represents $36 million more of estimated annual revenue opportunity. That means we believe we already have line-of-sight to over $50 million of estimated annual QRP revenue. We believe the full pipeline and market represent an estimated revenue opportunity of well over $100 million per year.

The excitement for this catalyst is evident in the management’s rhetoric. The company has yet to recognize revenue for the product, but expect to do so sometime in the next few months. Until then, investors can rely on the testimonial of Tom Lyons, Chief Operations Officer of Plymouth Rock Management Company of New Jersey:

QRP will help us improve response time to client inquiries while preparing the most competitive insurance quotes possible. We view QRP as a mission-critical enterprise workflow management application that should significantly drive our business value to customers and help us expand sales.

It should be clear to investors that QRP is a great opportunity for QuinStreet in the near future. The product offers great reward to carriers and their agents, and will allow QuinStreet to improve upon its poor margins. Management expects to see 8-digit revenue from QRP in FY2021 which is just shy of 15 months from now.

Risk

Aside from the bright future surrounding QRP, the company has a few risks. As mentioned earlier, 22% of its revenue is derived from Progressive Corporation. Although no other companies represent more than 10% of revenue, this heavy reliance on a single company could be reason to worry. Progressive currently has a strong balance sheet, but further virus implications could force the company to reduce ad-spend. Doing some simple math, a 50% reduction in ad-spend would wipe more than 10% of QuinStreet’s revenue. This is a very real risk and deserves to be recognized in any financial projections.

Another risk lies in the company’s business model. Management has promised to continue to pursue acquisitions. While the company certainly has enough cash to do so, the underlying principle is cause for concern. One bad acquisition could prove costly to a growth company like QuinStreet. Investors will be putting their trust in management, relying on them to choose the right acquisitions at the right cost.

Valuation

Given the risk of decreased ad-spend from Progressive and/or other carriers, any valuation deserves two scenarios. A DCF model captured both scenarios. The following table shows the inputs and assumptions of the model:

5-Year CAGR

QRP Revenue Growth

50%

Other Revenue Growth

10%

QRP Gross Profit Margin

80%

Other Gross Profit Margin

11%

Operating Expenses (% of Revenue)

10%

Tax Rate

20%

Growth rate in perpetuity

2%

WACC

7%

Beta

1.25

Risk-free Rate

2%

Market return

6%

The above assumptions were present in both scenarios. In the first scenario, FY2021 revenue (consisting of Financial services/Education/Other) decreased by 10% from FY2020. The effect of the loss on earnings is somewhat diminished by QRP revenue which represented $10M in 2021, in line with management guidance. Discounting the 2025 value back to present, the model returns a price target of $12.25. This should be viewed as a baseline price target.

In scenario 2, FY2021 revenue has no growth, followed by 10% growth in subsequent periods. This results in a price target of $13.83, representing 35% upside from the current price. It should be noted that both models incorporated QRP revenue as management guided, forecasting for 8-digit revenue in FY2021. QRP revenue tops out around $50M in 2025 in the model, although management foresees revenue reaching $100M in the future. As seen in the chart below, profit margins will steadily increase as QRP gains ground in the market.

Zimlon Insurance Company Analysis

As the company becomes more profitable with QRP and other SaaS-like products, the stock price is sure to follow. Both of these scenarios were relatively conservative and thus clearly exhibit a considerable margin of upside for investors.

Conclusion

To sum up, QuinStreet is an undervalued company with room to grow. Revenue growth has been up and down in recent years, but the impending QRP product will rejuvenate the company’s earnings. Keen investors will notice QuinStreet trading at an absurd 38 P/E ratio. Normally this high of a ratio would be cause for concern. However, QRP promises to lift earnings over the next few years and management remains focused on growth-oriented acquisitions. The successful combination of these two will result in a profitable business worth more than 35% of its current share price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.





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Spanish property prices grow slowly but new-builds are booming By Reuters


© Reuters. FILE PHOTO: Outbreak of the coronavirus disease (COVID-19), in El Masnou

By Clara-Laeila Laudette

MADRID (Reuters) – Spanish property prices grew at their lowest rate for five years during the first quarter of 2020, the National Statistics Institute said on Tuesday, as the coronavirus outbreak dampened demand across the sector except for new-builds.

Spain’s property price index rose by 3.2% in the first quarter compared with the same period in 2019 – its lowest increase since 2015, when the country began a slow recovery from the deep economic crisis of 2008.

Second-hand property prices rose 2.7% year-on-year, also the smallest increase since 2015.

But prices for new-build properties, typically favoured by big investors, grew 6.1% year-on-year, up from 5.3% the previous quarter, suggesting demand among institutional buyers remained buoyant despite Spain’s stringent lockdown.

Measures to curb the coronavirus prevented individuals – who tend to buy second-hand homes – from visiting properties, taking out mortgages, and using public notaries.

Spain’s real estate market had already showed signs of a slowdown in late 2019, with prices dropping 1.3% year-on-year for the first time in three years, according to the country’s second-largest property portal, Fotocasa.

“The moderation in prices will continue during 2020 as a consequence of the domestic and global macroeconomic context,” said Fotocasa communications director Anais Lopez. “It’s possible we’ll see the first outright falls in property prices.”

Fotocasa’s price index for the first five months of this year showed falls ranging from 1.1% last month to 2.9% in March, when Spain declared a state of emergency which halted most activity.

Spain suffered one of the world’s worst coronavirus outbreaks, with over 241,000 cases and 27,000 deaths so far. The economy, which relies heavily on tourism and real estate, contracted 5.2% in the first quarter.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Ingredion Inc Is A Solid Business, Undervalued And With Room To Grow (NYSE:INGR)


We feel bullish about Ingredion Inc. (INGR). Even before COVID-19, the company was going through a tough macro environment and other troubles beyond their control. Shares have been beaten down from a high of $140 in the early months of 2018 to a recent $84.23, after rebounding somewhat from the market sell-off in March. However, weakness in their share price was not an irrational move by the market. During 2018 and 2019, management had to reduce their earnings guidance, starting in the first quarter of 2018 followed by more cuts as the company was facing tough headwinds.

Our bullishness comes from the higher probabilities of margin expansion and returns on capital once their specialty ingredients segment takes a larger percentage of revenues. Ingredion operates in a commodity market, but growth in its specialty segment gives them better pricing power, as the process requires more specialization. It also gives them some competitive advantages in the way of switching costs.

COVID-19 is going to impact the business in the short run, as their products are used in the foodservice and brewing industries. Both affected by shelter-in-place orders. However, we don’t see COVID-19 impacting their fundamentals in the long-term. Ingredion’s products are used in key consumer markets such as food, beverage, brewing, paper, and animal nutrition. Also, the company was already implementing a new cost program and was shifting its capacity to increase production for its specialty segment while focusing less on producing secularly declining products like high fructose corn syrup. In a way, they were already adjusting to new trends within their industry.

Ingredion should provide some decent returns to long-term investors. We have a fair value estimate for Ingredion of $112.

Looking at their numbers

Ingredion consolidated resultsSource: company filings

Ingredion’s operating results show a stable company, even though their products are mostly commodities, which they call their “core products”, representing 70% of sales with the rest is in their growing specialty segment (30%).

The big jump in revenues from 2010 to 2011 is the result of a transformative acquisition. In October of 2010, the company completed the acquisition of National Starch, a global developer, and manufacturer of specialty and modified starches for $1.2B. Before the acquisition, Ingredion’s main selling product was sweeteners (52% of sales), followed by starch (28%). After the acquisition, starch increased its percentage of total sales to 36% and has since grown at a 10-year CAGR of 13%, outpacing the growth in sweeteners, which have grown at a 10-year CAGR of 1%.

Ingredion sales categoriesSource: company filings (Note: Specialty products are within every product mix reported, which is why if added, the numbers surpass 100%. The percentages without specialty add to 100%.)

In 2014, we see a sudden drop in revenues. However, it is due to how the company prices its products, which is on a cost-plus basis. 2014 saw a big drop in the cost of corn. Gross corn per ton that year, decrease by approximately 24%, as disclosed in their 10K. Lower sales that year were the consequence of decreasing raw materials, reflected in their product pricing. That said, trends looked healthy as any revenue growth constantly outpaced growth in expenditures, creating positive operating leverage, accelerating operating income growth.

Things changed in 2018 and 2019 when we see a slowing/declining top-line growth followed by an increase in COGS, punishing gross and operating margins. The company cited “lower sweetener demand, commodity margin pressures, higher production and supply chain costs in North America, higher raw material costs in Asia-Pacific, and unfavorable currency translation” as the main drivers of margin pressure and operating income decline.

That said, gross profits were starting to show signs of stabilizing starting in their first quarter of 2019, with three consecutive quarters of quarter-on-quarter growth:

Source: tikr.com

Why growth in their specialty segment is going to improve margins and capital returns

Ingredion started strengthening its specialty ingredients market with the acquisition of Penford Corporation in 2014 for $340M. Since Penford was a public company at the time, we know they did sales of $443.8M in 2014. Therefore, Ingredion acquired Penford at a sales multiple of 0.76x. There is also a useful piece of information within Penford’s annual report, which separates their specialty foods ingredient segment and their industrial ingredients segments, something Ingredion doesn’t. From there we calculate specialty ingredients gross margins of 29.7%. That number can be used as a proxy to the gross margins Ingredion makes from their specialty segment. It also aligns well with some comments made by management during their conference call regarding the profitability of their specialty segment:

Overall, just to start, our specialties are about 29% of our net sales. They sell it at higher average price points per ton than the remainder of the business and whether the gross profit margin levels are much higher than the remainder of our business. – Q4 2018 call

Their specialty segment currently accounts for 30% of total sales and has been compounding at a 6% rate. There are also tailwinds within the segment as more consumers are switching or replacing sugars with more healthy options, such as stevia or allulose. In that regard, the company is investing in such growing trends and recently announced the acquisition of a majority stake on PureCircle Limited, a leading producer of stevia sweeteners for the food and beverage industry.

There is also the increasing demand for alternative meat choices, such as pea protein. The company is actively investing in CAPEX to improve capacity. They have recently invested $185M in a pea protein isolate facility in Nebraska.

We see the investments in the specialty ingredient segment as the growth driver for Ingredion, supported by their core portfolio, which still produces strong operating profits and cash flows. With an increasing percentage of total sales coming from their higher-margin specialty segment, it is only a matter of time before we see the results reflected in their income statements.

Ingredion is trading at a slight discount

Source: tikr.com

Ingredion is currently trading slightly below its 10-year average sales multiple of 1.27. We estimate Ingredion’s fair value to be $112 per share using what we consider to be a fair EV/Sales multiple of 1.6x and using analyst’s revenue estimates of $5.6B for 2020

We base our sales multiple on the following assumptions: We believe Ingredion can sustain EBITDA margins of 15.6%. For the past years, their EBITDA margins have ranged from 12.5% at the low end to a high of 18.4%. The company has reinvested on average around 32% of operating profits back into the business. Their 10-year return on capital has an average of 8%. If they can sustain their reinvestment and return on capital rates, then we can estimate Ingredion’s intrinsic growth to be around 2.7%.

Takeaway

We like Ingredion as a long-term play. The company is a solid business and currently undervalued, which makes a good recipe for solid returns.

That said, the company still generates most of its revenues from its core portfolio, which lacks any pricing power, and results are heavily dependent on raw materials costs, especially corn. Second-quarter results are also going to be impacted, as COVID-19 is going to reduce demand for corn syrups used in fountain drinks as restaurants slowly open or in the case of Mexico, the mandated stoppage of production at breweries.

These headwinds should be temporary. The long-term path for the company remains on track and it should be business as usual once the dust settles.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in INGR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Elon Musk’s actions encourage ‘outrageous behavior’ and he needs to ‘grow up,’ says green-tech blogger



‘Ripping society apart with bile-filled outbursts is the polar opposite of what the world needs to meet the challenges of the future. Grow up, Elon. It’s time to act like an adult, not an overgrown baby.’

That’s CleanTechnica blogger Steve Hanley reconsidering his purchasing plans for a new Tesla
TSLA,
+1.56%

Model Y in a fiery takedown of Elon Musk on Wednesday.

Hanley said he has, for many years, had a “sneaking suspicion” that the Tesla boss is “an arrogant ass.” Specifically, he took issue with the misleading “Autopilot” label for his cars, as well as Musk’s “frankly stupid” decision to tweet about the company’s stock price, to name a couple.

The latest dust-up with Alameda County over public-health directives, in which Musk threatened to move his company out of California, is just the latest example.

Hanley said it comes across as “the actions of a self-important jerk who believes he can defecate in the middle of a crowded room and pretend nothing out of the ordinary happened.”

Read: California assemblywoman hits Musk with an F-bomb

The issue for Hanley goes well beyond the assembly lines at the Tesla factory.

“Such shenanigans have a deleterious effect on other members of society,” he explained. “It is becoming fashionable now, as the coronavirus crisis drags into its 9th week, for some people to claim — loudly — that all health directives, whether at the city, county, state, or federal level, are unconstitutional violations of their personal liberty.”

And we’ve seen plenty of that, ranging from the armed protesters at the Michigan state house or the raucous bunch in Southern California marching for the right to access beaches.

“Elon would never acknowledge this, but his actions encourage such outrageous behavior,” Hanley wrote. “If Musk was a private citizen on an island in the Pacific, no one would care if he walked around naked throwing hand grenades at the local fauna, but a person who thrusts himself into the public eye should expect to behave with some decorum.”

From there, Hanley directed his rant toward the White House.

“America is currently ruled by petulant people who behave like two-year-olds with full diapers,” he wrote. “Liberty doesn’t mean being able to do any goddamn thing you please.”

Tesla representatives didn’t immediately respond to a request for comment.

While Musk continues to be a controversial figure during the coronavirus pandemic, there’s no assailing the performance of Tesla’s stock, which has nearly doubled since the beginning of the year while the S&P 500
SPX,
+1.15%

is down about 12% over the same period.

CleanTechnica claims to be the No. 1 cleantech-focused website in the world, reaching some 7 million readers globally each month. Apparently, it can count Musk as a reader, considering he retweeted the website’s story earlier this week about Tesla employees returning to work.





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