Tech sector’s tectonic plates keep shifting

Blain’s Morning Porridge July 27 2021: Tech sector’s tectonic plates keep shifting

“There is nothing like an earthquake to remind you solid ground isn’t..”

This Morning – Yesterday’s events across Tech served to remind us it’s a fluid sector where what we believe one day may be false the next, but deep down there is bedrock. Crypto currencies saw a last-chance bubble pop, while Tesla genuinely surprised me by producing solid results – which don’t for one moment change my perspective its fatally overvalued. Meanwhile, the latest China clampdown on listed stocks shocked markets, but reminds us we need to think differently about the wakening Dragon.

Another fascinating day in the Tech markets yesterday. If the tasteless froth on top of a mixed day was crypto, then the tasty chocolate sprinkled on top was Tesla’s surprisingly excellent (looking) results. But, the important stuff was China slapping an outright ban on yet another sector we once confidently expected would make us rich – education. It’s all evidence further dampening interest in the Middle Kingdom as the apparent contradictions at the heart of the China investment thesis look difficult to resolve.

Are you are still following cryptocurrencies – and why not? They are a fascinating chapter in the Girls and Boys’ Bumper Book of Human Folly!  Yesterday’s big “this is the moment” rumour briefly drove Buttcon back above $40k amused me as perfect example of delusional thinking. A recent Amazon job-ad looking for blockchain expertise was hailed as irrefutable proof-positive the firm was signing up for Bitcoin. The firm shook its head and denied the rumour later. Crypto’s crashed – and the question is: did anyone learn the lesson?

It was the kind of desperate clutching at straws moment characterising the crypto-crash. Nothing has changed. Cryptos were, are, will remain delusional. The price has crashed, but it remains a fertile soil for scammers and dreamers. I recently signed up for a crypto-nonsense news sheet, and its commentary y’day was euphoric – “it’s going up to $1 million” type nonsense, and inviting me to sign up for its premium content at just $1k a month to understand their perfected coin trading strategy.

Yesterday’s noise was all based on external hopes of greater credibility – even as the nets of greater crypto regulation and outright bans tighten. For all the froth about widespread adoption of Bitcoin as a means of exchange and commerce… yet again its proved meaningless. It doesn’t actually matter how many hedge funds have “adopted”, how many retailers have “adopted”, how many nations (Venezuela anyone?) have “adopted”… Any good Snake Oil salesman will endow his worthless product with credibility by claiming the support of the rich and powerful.

Why would anyone sign up for such a bogus, volatile, and unfounded investment thesis? Ah.. because everyone wants to get rich for the least amount of effort. What will be interesting is how crypto plays out for the few genuine firms that have adopted it…

Tesla managed to get away with a mere $23 million impairment on its results y’day due to Bitcoin. Yet, over-puffed market barkers like Musk (who added that SpaceX is also invested), and Cathie Wood of ARK telling are still telling corporates they should be adding crypto and buttcon to their corporate balance sheets. Why? Oh.. because they hold them..

Meanwhile..

Tesla’s results y’day came in well above expectations. Over the years I’ve gone from being an early enthusiast, to vaguely suspicious, then an absolute Tesla Uber-bear as its value went stratospheric without a corresponding jump in its numbers and Musk’s behaviours broke every corporate governance rule. But, breaking rules sometimes works, and success breeds success – in Tesla’s case it was able to shore up its balance sheet and build a substantial long-term war chest on the proceeds of well-timed share-sales as its price spiked. This year Tesla has underperformed – but who really cares when it rose a couple of trillion points last year.

Y’day’s numbers look good. It’s no longer flirting with disappointing analysts on its production numbers – its doubled profits, margins and production. For the first time ever it made a real profit selling cars – previously its profit numbers have been shunted into positive territory only by the sale of regulatory credits. Regulatory credit sales were down, and it made more money selling cars – which is impressive given Chip supply problems, global supply chain issues and the increasing regulatory state-sponsored pushback its suffering in China – which it expected to become its main market.

Aside from the China news, does the tidal wave of positive Tesla news y’day make it a screaming buy?

No.

Tesla has proved itself as a real(ish) car company – but it is fatally overpriced. Why fatal? Because it now faces enormous competition from an autosector playing catch up – which looks cheap. Next year Ford will be selling electric pickup trucks – which will occur before the first cybertruck rolls off the new Tesla production lines in Austin. Next year, the Germans, the French, the Americans and the Japanese will all be selling more and better EVs. Next year.. Tesla still won’t have delivered the long-promised Full-Self-Drive (FSD) function and it will be under increasing pressure on the ESG issues around the supply and recycling of the lithium battery tech it’s based its premise on.

Musk perhaps did a smart thing – stating he will no longer be on the quarterly calls. Is he detaching from the business, moving into a more chairman role? Or is he just stage managing the apparent maturity of the business?

The brutal reality is Tesla has matured, but it has no monopoly in EVs. It looks expensive. While it isn’t vulnerable – yet, it’s no longer lengths ahead of the competition. I suspect a second Auto revolution is still to come, where new battery tech and perhaps hydrogen power surplant first generation EVs like Tesla.

Big Trouble in China?

China is in the cross hairs this morning. Yet again its blindsided the international markets by clamping down dramatically on Chinese companies listed offshore. This time its effectively told Education companies – serving the crammer and tutoring needs of the Chinese middle classes – they are utilities not expected to make profits. Shock horror in the West. Plays right into the needs of the Chinese masses though – who increasingly see access to additional expensive education as the only way for young Chinese to secure higher education and good jobs.

China is tightening the regulatory noose around many sectors of the economy – payments, fintech, food delivery companies, residential property, and now education. These are seen in the Capitalist west as direct assaults on mercantile capitalism… and everyone is looking for reasons. To the Chinese they are being sold as sound regulatory and social policies countering the excesses of Westen Capitalism that Chinese media plays up.

The biggest threat to China isn’t the West. Its itself in terms of Demographics. The one-child policies of Communism have proved difficult to undo – especially when the costs of educating Chinese children have gone stratospheric. Making education free and effective isn’t guaranteed by outlawing educational profits (smart entrepreneurs will go do something else more remunerative), but it certainly may encourage families to have more kids, and go some way to reversing the “China gets old before it gets rich” threat at the top of its economic threat board.

In many ways the regulatory clampdown the CCP is inflicting on Chinese corporates all play to the same themes: social engineering, regulatory oversight of the economy and maintaining an illusion China’s capitalism-with-Chinese-characteristics version of free markets is seen to favour the population rather than elites. It’s all about appearances.

In hindsight, private education was a top target for the party. Yesterday it was a massively profitable sector, but a risk to the party from stifling social mobility if only the rich middle and upper classes could afford it, and its high cost made it a discouragement to larger families. If Chinese families now think its free it may encourage them to have daughters and educate them to look after their parents in old age, reversing the chronic male/female imbalance in the population.

I note that Cathie Wood’s ARK has reduced its China holdings from 8% to less than 0.32% in the last 6 months on the back of the recent series of regulatory clampdown. My own China positions are looking distinctly soggy – but… I suspect the trick is not disinvestment, its figuring out how to invest in China’s very different approach to capitalism, and its reliance on regulatory pogroms.

Five Things to Read This Morning

FT – “Platform” is the latest buzzword to beguile investors

BBerg – China: What the Tech crackdown is really about

BBerg – How Xi’s Four Pillars of Regulation will Reshape Big Tech

WSJ – Tesla’s Quarterly Profit Soars Despite Chip Shortage

FT – How Softbank’s dalliance with Greensill ended in disaster

Up in Edinburgh today – but still out of time, and off to do my day job!

Bill Blain

Strategist, Shard Capital