A Blog by Jonathan Low


Feb 26, 2014

Tech Bubbles Are Worth It

Tesla. WhatsApp. Whoever's next. We could say that the valuations are getting more absurd, but that would require an acknowledgement that traditional approaches to evaluation, let alone value, are actually at work.

The reality is that the world is awash in cash. Or to be more precise, investable liquid assets. They are looking for opportunity. And they want it fast.

So however much you may cringe, there are others playing by different rules in pursuit of a different vision. Kitchen table economics? Pul-leeeze. Who said you need a kitchen: order out. And pay with credit.

We are in yet another period of transition. The rules by which decisions are made, returns are calculated and success is determined are all changing. Yes, with experimentation comes risk. But with risk comes opportunity. This is not a call for throwing out standards or eliminating regulation or any other libertarian bugaboo. It is an acknowledgement that there are people and institutions with extraordinary access to both knowledge and the wherewithal to act on it. They are going to do so. Some will succeed and some will not. We are fortunate that there are at least some willing to invest without demanding guarantees of success. Because that is how economies grow. JL

Houses and Holes reports:

The ludicrous valuation of the firm provides it with abundant opportunity to pursue an accelerated vision
Via FTAlphaville comes a vision of the near future by Morgan Stanley filled with promise:
Autonomous capability: This is an “ideal” world akin to common science fiction in which all cars on the road have at least a Phase 3 level of autonomous capability (including retrofitting older cars), full V2V/V2X capability and the ability to drive from Point A to Point B with zero human intervention.
Scenario: A family of four wants to travel from New York to Chicago. They have dinner at home, climb into the vehicle at 9pm, watch a movie projected on the windscreen, and then go to sleep in their fold-flat seats, waking up at their destination the next morning.
Functions: Fully autonomous driving with no human intervention, with the focus likely to be on lifestyle/entertainment of occupants and manual car control as a back-up/supporting function (or disallowed). Cars will look very different from cars of today. Cars can also travel with no occupants. Remote control/disable functionality necessary.
The Luddite’s and rev-heads among us can take comfort from the fact that any revolution of this kind will be slow to arrive in Australia and we will, by definition, not participate in the construction of these vehicles.
The quotes come from a report into Tesla, the electric car company pioneered by futurist Elon Musk:
While acknowledging its ultimate potential, up to this point we have observed Tesla becoming more of an annoyance to the established order of automotive power rather than a true disruptor. But what if Tesla’s ambitions extended further than giving high-end OEMs a run for their money? What if a period of transformational technological change in the auto industry coincided with Tesla’s application of its capabilities in hardware, software, infrastructure, and manufacturing.
We argue Tesla cannot be valued on near-term multiple metrics like traditional auto companies given that we expect Tesla to multiply revenues by more than 10x from 2013 to 2016 by nearly 30x by 2020 and around 60x by 2028. We have thus chosen a 15-year time horizon for our DCF which captures the full maturation of the Model S, Model X (and top-hat derivatives) and also the ramp up of its mass market electric vehicle (the Gen 3). We have applied a 11% WACC with a range of 9% to 13%. The terminal value, calculated on a midpoint of 10x EV/EBITDA accounts for roughly 50% of the total DCF value across the range of methodologies we have applied to arrive at our PT.
Alphaville rightly gives MS a serve for another round of “this time it’s different” thinking. After all, with TESLA’s share price trading at three-quarters of the value of General Motors with only one hundredth the revenues, it’s got tech bubble 2.0 written all over it:
But there’s something else going on here that is more virtuous. While the capital underpinning TESLA maybe foot loose, it is also visionary. The ludicrous valuation of the firm provides it with abundant opportunity to pursue an accelerated vision and in a way that America owns it.
What I am arguing is that bubbles are not always all bad. In technology and stock prices they can leave spectacular legacies of social progress, just as they did in the pre-1929 crash railways boom and again in the internet revolution of the nineties.
Stock market bubbles based on technology can be productive, and although they implode like all others, because they are based largely upon equity the bust is far less destructive than in other asset classes where debt plays the major role.
So I raise a glass to Elon Musk this morning and say bring on utopia!


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