“Fly me to the moon
Let me play among the stars
Let me see what spring is like on
A-Jupiter or Mars,
In other words, hold my hand
In other words, baby, kiss me Fill my heart with song and let me sing forevermore
You are all I long for
All I worship and adore
In other words, please be true
In other words, I love you
…”
Fly Me To The Moon
Lyrics and Music By Bart Howard, 1954
Arrangement by Quincy Jones, 1954
Performed by Kaye Ballard, Johnny Mathis, and Eydie Gorme
Popularized by Peggy Lee, 1963
Immortalized by Frank Sinatra, 1964
For those of us watching the value of stocks tied to technology in the Equity Markets in 2020, they continue to move upward and onward in what appears to be an invincible charge. For those of us who lived through the late 1990’s Bull Market, more and more of those days appears to be reappearing in a different form today. As Yogie Bera once famously said, “It’s Deja Vue all over again.” In yesteryear, late December 1999, it was Cisco at 176x and Microsoft at 75x. Today, it is such stalwarts as Amazon and Nvidia, which trade at 94x and 88x 2020 estimated earnings respectively. Instead of the Dot.Com and CLEC companies coming public in spectacular IPOs, there exist Hydrogen, Space, and Electric Vehicle Companies coming public through SPACs (Special Purpose Acquisition Companies) and Technology Companies coming public through Direct Listings. Over 165 companies went public through SPACs so far this year (Refinitiv data), including the likes of Nikola Motor, Virgin Galactic, and DraftKings over the past 12 months. And recent Direct Listings include Palantir and Asana, Silicon Valley unicorns. These stocks, coupled with already public companies such as Plug Power and FuelCell Energy Inc., collectively caught investors attention, with their stock prices exploding upward. Given the market’s appetite for new companies, waiting in the wings stand companies such as AirBNB, Affirm, Wish, Doordash, Bumble, Instacart, and Nutanix.
Leading the stock market charge upward and onward this year stands one company, viewed as the father of the electric vehicle, Tesla, Inc. Its stock price ended 2019 at $83.67. By late November 2020, in less than 11 months, its stock price rose over 7x, or over $500.00 per share, to reach $585.00. With almost 948 million shares outstanding, its market capitalization rose by more than $475 billion to more than $555 billion, up from just $76 billion at December 31, 2019. And with almost 1.1 billion shares fully diluted, when options and convertible securities are counted (1.105 billion according to the firm Macrotrends https://www.macrotrends.net/stocks/charts/TSLA/tesla/shares-outstanding ), the fully diluted market value of the company exceeded $644 billion. This makes Tesla one of the Top 10 Companies by Market Capitalization in the world. The only companies with a larger market capitalization are Saudi Aramco (#1), Apple (#2), Microsoft (#3), Amazon (#4), Google (#5, now known as Alphabet), Facebook (#6), Alibaba (#7), and Tencent (#8). Its value now exceeds that of Berkshire Hathaway, Johnson & Johnson, JP Morgan, Visa, and Procter & Gamble. (Data as of November 27, 2020.) For Elon Musk, the founder and CEO who owns almost 20% of the company, this put him #2 on the list of the world’s richest men, only behind Jeff Bezos at Amazon.
To understand the value of Tesla, a quick look at the value of the public auto companies puts things in perspective. Here is a table of the Top 10 Global Automobile Manufacturers by Public Market Capitalization and their Unit Sales of vehicles:
2019 actual production for Top 10 and 2020 estimated for Tesla.
As the above Table makes clear, Tesla’s valuation exceeds that of the Top 10 Auto Manufacturers combined. Given Tesla’s estimated revenue of ~$31 billion for 2020, the company trades at over 20x this year’s revenue. And even if Tesla grows its revenue 20% per annum over the next 4 years, achieving more than $64 billion in revenue in 2024 and selling more than 1 million cars that year, the stock still trades at over 10x its 2024 projected revenue.
While Tesla likely will continue to grow its market share over the next few years and remain one of the leading electric vehicle companies, on the horizon stands real competition as major car manufacturers bring their own electric vehicles to market over the next 5 years. GM plans to bring to market 30 EVs globally by 2025, with 20 available in the US. To reach this objective, the company will invest $27 billion over the next 4 years. In addition, it benefits from its existing car platforms as an EV shares more than 75%+ of the parts used in today’s gasoline powered cars. Its technology in batteries led Honda to buy into its capabilities. And it plans to launch its Cadillac EV in Q1 2022, just 15 months from now. Already there are companies such as BMW Group (Bayerische Motoren Werke GmbH) offering Hybrid Electric Vehicles across their whole lineup. (These are known as PHEVs or Plug-In Hybrid Electric Vehicles.) BMW currently markets 4 SUV’s and 4 automobiles in this category. And in pure EVs, BMW will have 3 on the market in 2021 with 7 more to follow by 2023. (Please see the latest investor presentation available on BMW Group’s Investor Relations website at https://www.bmwgroup.com/content/dam/grpw/websites/bmwgroup_com/ir/downloads/en/2020/Investor_Presentation/BMW_Investor_Presentation_2020.pdf.) Based on its Q3 Earnings Release, the company’s sales of EVs and PHEVs will exceed 150,000 vehicles in 2020, less than 10% of their total volumes. With plans to ramp this towards 50% over the next few years to meet both European standards and global demand, BMW could sell more EVs than Tesla in 2024. Daimler Group, the venerable producer of both Mercedes-Benz cars and trucks and Daimler trucks and buses, already produces an electric car and van. By next year, the company will have 20 PHEVs and 5 EVs for sale. By 2025, Daimler will produce 25 PHEVs and 10 EVs. The company’s goals include “leadership in EVs” as per its latest Analyst Meeting. In addition, the company plans to rollout Hydrogen and Fuel Cell trucks and buses under the Daimler brand. These trucks will enter customer trial in 2023. And should one think that only high end brands stand poised to compete in EVs, such an assumption would shatter on reality. Ford, the maker of the F-150 Pick-up Truck and the market leader in its segment, just introduced an all-electric F150. And the company will introduce an all-electric version of its van in 2022, which currently stands as the global leader in cargo vans.
With technology stocks continuing to ascend and SPACs flying out the door, the market looks more and more like the late 1990s. Companies with revenue and earnings trade at historical valuations resembling the peak of the Technology Bubble. And newly public companies in areas such as Hydrogen and Space sprout large values, yet their products remain years away. For investors in these companies, a historical look at the period from 1998 – 2003 might be in order, to understand the risks they are taking in investing in companies with valuations similar to that time period. However, as immortalized by Frank Sinatra in 1964, investors appear to be singing that final verse of Fly Me To The Moon, over and over again, as these stocks continue to levitate, and fortunes are made overnight:
Fill my heart with song
Let me sing forevermore
You are all I long for, all I worship and adore
In other words, please be true
In other words
In other words
I love you.
Tales From Abroad: Part II
As we wrote several months ago, while we saw the vast potential in Turkey, we saw great risks as well. The country continues to exhibit some of the classic Emerging Market issues that typically impact theses economies. We were concerned that the country was on the way to an economic crisis given the classic collapse in the currency, the canary in the coal mine, which typically indicates significant underlying problems in the economy:
Typically, when a currency collapses, the Central Bank is forced to act to fix the economic imbalances. In this case, the Central Bank raised interest rates to support the currency and prevent more economic damage:
Chart of One Week Repo Rate. Chart courtesy of tradingeconomics.com.
Unfortunately, as can occur in Emerging Economies, this often happens at just the point when monetary policy should ease to alleviate an economic downturn:
As the chart above indicates, Turkish GDP fell over 10% in Q2, due to the impact from the pandemic. Having the ability to ease in the face of an economic crisis is critical. However, oftentimes, Emerging Economies take economic actions that lead to significant bouts of inflation and currency depreciation, limiting the government’s ability to respond to economic crises. As a result, when the economy starts to go south, critical degrees of freedom do not exist to respond to economic difficulties. For Turkey, with stated CPI Inflation of 12% and on the ground inflation of 20%+ coupled with capital flight, as investors moved their assets overseas, the currency depreciated at an accelerating rate, as the following data demonstrate. The Turkish Lira dropped from ~1.8 TL per US$ in 2013 to ~3.8 TL per US$ in 2018, a period of 5 years, before dropping another 50%+ to ~8.0 TL per US$ in 2020, a period of just 2 years. Cumulatively, the currency dropped in value over 75% over the past 7 years. With the Central Bank forced to raise rates, things likely will worsen before they get better. However, with the global economy exiting the Pandemic in 2021, the economy should get a boost as exports recover and a cheap currency makes Turkey a desirable location to manufacture goods. Should the government institute more investor friendly policies, then strong economic growth could ensue. While the Tales From Abroad show a story with an unhappy ending today, future policy changes could enable the country to once more stand out as a desirable location to invest the massive amounts of capital sloshing around in the global economy.
While the Coronavirus continues to sideline our live Public Speaking, we continue to do several Zoom/ Skype presentations per month for private groups. And expect to do many more over the coming months. This has become a good way to reach those in search of insights into the current state of the economy and what the data indicate will come. Once the powers that be allow us once more to get up in front of more than 2 people, we plan to be out on the road, sharing our thoughts again live. As to speaking for your group, should anyone wish to have me speak for their group using Zoom or Skype, please contact us and we can set up a date on the calendar.
Monthly Letter Preview
This Month, we take a look at the 2021 Economy and what likely will ensue as the Pandemic comes to an end:
- This Time Is Different: Consumers, Corporations, and Banks, & The Coming Economic Boom – Recent vaccine announcements indicate a coming end to the Global Pandemic, with vaccines starting to roll out before year end. Unlike 2008, the US possesses an intact Banking System, ready to lend as opportunities open up. With Consumers sprouting strong balance sheets and Corporate Profits now above their Q4 2019 peak, the fuel for an Economic Boom awaits the spark to set off a blazing inferno.
- Blowing in the Wind: The Coming Offshore Explosion in Wind Power – With technology continuing to drive down the cost of wind power, wind power’s economics became more and more attractive compared to traditional forms of producing power, such as natural gas, over the past decade. However, with numerous communities opposing the erection of windmills that scar the landscape, kill birds, and impact real estate values, wind farms faced rising opposition to locate and operate on land. To address this NIMBY issue, the industry developed offshore windmills that can sit in the ocean and deliver power back to land. Given the political support for green energy production, new wind farms are being constructed at a rapid pace in Europe and elsewhere. With an explosion in orders over the past few years, Offshore Wind Power should grow dramatically, meeting a significant portion of the growth in power demand.
As always, we end the Monthly Letter with Economic Observations on the US Economy through Interesting Data Points that provide color on the happenings in America. The link to the Monthly Letter is:
https://greendrakeadvisors.com/2020-green-drake-advisors-december-newsletter/
Should you have any questions on how the above issues or the items discussed in our accompanying Monthly Letter impact your family’s financial position or your business’s future as well as the potential actions you could take in response, please do not hesitate to contact us. We welcome the opportunity to discuss this with you.
Yours Truly,
Paul L. Sloate
Chief Executive Officer