Blain’s Morning Porridge – February 1st 2022: Tech Bounces Back – But for How Long?
“If I’m selling a Tesla, then of course it’s a better car”
This morning: A bounce back rally is underway – but its reactive, based on the hopes of “buy-the-dippers”, and the fundamentals haven’t changed. Many weakening Tech stocks are seeing their foundations exposed as built on sand.
Apologies for no serving of porridge yesterday – I was travelling…
The Bounce Back Rally
So much to think about in terms of markets this morning. It feels like time to play a tactical game as the bounce back recovery rally I predicted last month, (which I suggested will occur for all the wrong reasons), is underway. A whole bunch of improbable stocks like Tesla, and current-story stocks like Spotify surged on the back of immediate reactions to news and events.
The questions for markets are simple: is this a new up-wave in the remorseless tide of ever higher Tech valuations, have valuations changed, have the underlying market fundaments swung back in favour, or is this a dead-cat Tech bounce before the brutal reality of a changed market base again bites expectations..?
It’s a question to approach from both a fine focused details basis, and from a more philosophical perspective: what is real, what matters, and how much are markets being swung by the bias and the learned behaviours of the last 12 years of unprecedented tech rally…
A number of readers have asked why I haven’t commented recently on Netflix – is it a buy or a sell? I promise, I will get round to Netflix and Streaming very soon. It’s the subject of vigorous debate in the virtual office – those who believe it’s now fully embedded in our entertainment habits (so were VCRs and Video Stores), and those who believe it’s at an evolutionary dead end as the market changes. I am undecided – but am unimpressed with its current offering of programmes. (I am even more unimpressed I can’t access Prime or Disney here in Dubai!)
What’s fascinating me is how my younger and intellectually lither colleagues are all fans and have unlimited belief in new tech including Netflix, while the firm’s older but no wiser cohort tend to be more sceptical of anything new. If anyone has any particular insights on Netflix let me know by email.
Spotify has also been in the news. I closed my Spotify subscription a while back – I am an audiophile and have a record player, a wall of things called LPs, and use Hi-Res streaming that also plays through my phone on earbuds (if I hadn’t left them on my home office desk!) I admit to never having head of Joe Rogan till last week. Being of a certain age I am a great fan of Neil Young and Joni Mitchel – but would probably find Rogan’s company more entertaining at a dinner party. I suppose there are elements of “cancel culture” and free speech to consider, but at the end of the day.. it’s about business.. Where do we draw lines and when do we open gates?
Where I do have a problem with Spotify and Streaming is the return to artists. The model is unsustainable. While Rogan has monetized his podcast rather well with his $100 mm from Spotify, I read it would take any music artist over 20 billion downloads to make a similar amount… which just isn’t real. Most recording artists make the square root of zero. On one hand Spotify subscriptions don’t pay for artists fairly – yet more and more artists are forced to use it as it’s a monopoly to monetising themselves. Fundamentally.. that’s wrong… and it will change…
And then there is Tesla.. Oh no.. not again… I hear you scream…
In Tesla’s case it was that well-respected banking paragon of virtue (US readers: sarcasm alert), Credit Suisse, which provided a trigger for a 10% intra-day bounce when it put out an overweight recommendation on the basis the EV maker’s moat is unassailably deep, margins are going to 100%, and Full-Self-Drive (FSD) is just around the corner. Of course it is… (I wish I had a quarter ounce of whatever the CS analyst is smoking, but since I’m in Dubai, probably not my best call..)
A 10% bounce in Tesla is like a free dose of Oxy-cotton for the Robin-Hood investor generation, conclusively demonstrating and proving the Power of Greyskull/Musk and the inevitable upside for the stock… Kathie Wood of ARK will be delighted – is this her get-out-of-jail card?
Oh Lord. Forgive me for I must have been in error.
For years I have not accepted the genius of the blessed Elon Musk. I must now accept the foolishness of my ways and accept Tesla is probably the world’s best and leading auto-maker. Elon Musk is maybe not a slobbering narcissist, and will be proved a bona fide genius for focusing on making a humanoid robot rather than putting its massively anticipated and ordered Cybertruck into production. (Yep.. he said it..)
Instead, I believe Tesla exists in a perfect world, and since this February bounce back recovery is all about a market priced for perfection it’s the perfect stock…
If Tesla, as predicted by CS and the market:
• hits all its production targets,
• continues to dominate the EV space free of competition from rivals who can replicate its success,
• continues to attract suckers to pay subs with the promise of FSD tomorrow (always tomorrow),
• and Lithium can be made to grow on trees..
Then, yes…Tesla will be worth more than the top properly profitable mass car maker.. In that best case scenario where it makes and sells more cars, more profitably, than anyone else, and is free from any competitive threats then let’s say it’s worth a 50% premium on Toyota – ie $400 bln (40% of today’s Tesla value).
Which means the market anticipates the value of Tesla’s fascinating, but unproven FSD technology is around $600 bln. Maybe. But probably not. Apparently every other Auto OEM will licence Tesla’s tech… and Self Driving is going to be a multi-quintillion market in coming years.. yadda, yadda, yadda…
Belief in fairies and tech deliverables is one of the key aspects of markets that separates dreams from realities, optimists from pragmatists. Self Driving Cars are just one of those marvellous ideas that is not only going to be fraught with technical impossibilities, but also legal issues. In the UK, the law commission has agreed with the insurance industry that drivers of self-driving cars will not be liable for any accidents – the auto-manufacturer will be liable. Go figure it out.
You could also try reading Forbes’ recent article on Telsa’s FSD – The Grain of Truth in The Critique of Musk, Telsa and Full Self Driving. Last week ads appeared telling Drivers “not to be Tesla’s crash test dummies” placed by the Dawn Project, whose backers include Green Hills Software. The adds said Tesla’s FSD is unsafe and unsecure. Musk’s reaction was to tweet “Green Hills Software is a pile of trash” – which is bad news for anyone flying a commercial airliner if its true. At least Musk didn’t accuse them of being paedophiles, as he’s done to previous detractors of his god-like wisdom.
The gist of the Forbes article is the Dawn Project makes some pretty good and accurate points about FSD safety – meaning it remains years away! The founder of Green Hills makes the point that claiming FSD is more about Musk defending and extending his moat from competitors than deliverables.
From a philosophical view, the belief that Tesla (which has been promising FSD for years) can deliver tomorrow, next month, next year, this decade… fuels the market’s bias to believe disruptive tech will eventually deliver – just like Theranos did? That meatless meat will replace meat, that space tugs will supply lithium, that every car on the planet will overnight learn not to hit other cars, pedestrians or break red-lights.
The reality… as I’ve said so many times… is we can’t even make trains run on time on straight line tracks. The signalling problems on the new London Queen Elisabeth line have taken years to resolve. The value of Tesla is largely based on the hope Musk will solve FDS – and hope is never a good investment strategy…
So enjoy the February recovery bounce as long as it lasts… and then we get back to worrying about the reality of rising rates, energy security, geopolitics, inflation and tax hikes..
Five Things To Read This Morning.
Torygraph – Joe Rogan row triggers a blaze of publicity for Spotify’s podcast dreams
FT – Closed China: why Xi Jinping is sticking with his zero-covid policy
FT – World’s Largest wealth fund warns “permanent” inflation will hit returns
BBerg – Tesla Lover Baillie Gifford Gets Hit as Tech Bets Go South
WSJ – Bill Ackman scored on Pandemic Shutdown and Bounceback
Out of time and back to the dayjob..
Strategist – Shard Capital