Wednesday, November 10, 2021

EV Bubble?

Whenever a new technology comes along, there are going to be bubbles.

Bubbles exist, and have existed for millennia.  I am sure when Og discovered fire in 10,000 BC, there was a sudden investment in fire-related products, as well as "me-too" fire products.  "Don't use two sticks - flint and a rock - it's the latest thing!"

But in all seriousness, when the railroad was invented, it quickly took off, particularly in the United States after the Civil War as vast expanses of land were opened up for settlement - often by relocating or even murdering the native residents from their lands.   No longer would settlers have to struggle with Conestoga wagons, crossing the prairie, when they could ride in confort on the iron horse.  And it helped that the railroads were granted vast swaths of rights-of-way, often fifty miles wide, as an incentive to build the railroads - land which they sold off to settlers as farmland.  There was money to be made, and everyone wanted in on it.

So a speculative bubble started.  Railroad stocks were bid up through the stratosphere - in an eerie echo of the railroad mania that struck Great Britain a few decades before.  Miles and miles of new track were laid, most of it useful, most of it potentially profitable.  But at the stock prices quoted, there would never be enough profit even in worthwhile lines, to justify the stock prices.  Stop me if any of this sounds familiar.

In addition to the mainline railroads that ran between major cities and made regular profits, there were smaller lines that potentially could be profitable, over time, but again, the stock prices were driven to the stratosphere, as everyone wanted in on the deal.  As investors poured more money into railroad stocks, newer railroads started springing up which made less and less economic sense - railroads that went form nowhere to nowhere, in the wild west, or were dependent on one industry - timber, mining, or such - which meant that the railroad would go bust once the mines tapped out or the last log was cut.

Then there was outright fraud.  If people were making money selling railroad stocks, why not sell something that looks and sounds and smells like a railroad stock, but not actually build the railroad?  All you have to do is build a couple of miles of track - if that - in case any stock speculator wants to check on you.  Then again, a railroad in the distant west might not be visited by some wanna-be stock chump who lives in New York City.

There was so much money being flung around, that even "legitimate" railroads engaged in a little price padding and financial hi-jinks.  People could manipulate the market price of railroad stocks and acquire an awful lot of power - and money. Again, this sounds pretty familiar today, when you have the head of the largest EV company constantly manipulating his over-inflated share price.

To be sure, there were other causes of the resultant bubble bursting.  Overcapacity was one concern.  With so many competing railroads, there started to be price competition, and that meant slimmer profits, which in turn meant inflated stock prices no longer made sense.  If you have a monopoly on transportation in a certain area, well, you can set prices and reap huge profits.  But when a parallel line is established, well, all bets are off, unless you can collude on prices (which they eventually did) or have the government set prices (which they eventually did) to prevent ruination of the railroads - which by then, were an essential part of the national economy.

Of course, this didn't mean the railroads went away - in fact, they are still around, although it is not the business it used to be.  Passenger rail service in the United States is a money-losing artifact of a bygone era.  And worldwide, most developed countries are building more and more highways and closing more and more rail lines.  Yes, rail service in Europe and Japan is great.  We've been to both places - more than a decade ago, and they were closing unprofitable rail lines even then - and building new expressways.   People love their cars - worldwide - as the Chinese are illustrating.  GM sells more cars in China than in the US - and makes most of their money there.  The old stereotype of Chinese masses on bicycles has pretty much gone away, as their country prospered under Capitalism, and more people could afford cars.  But I digress.

Railroads will still exist, now and in the future, simply because they are the cheapest way of transporting goods around.  For people, the automobile and the airplane are proving to be much faster and convenient (well, airplanes were more convenient, for a while) than rail service.  But who knows?  Maybe a new generation of passenger rail service will change that narrative.  I wouldn't bet on it, though.

The point is, not that the technology is no good or is flash-in-the-pan, but that people bid up stock prices to regions of un-sustainability.  A company can be profitable and stay in business, but its stock price can still make no sense.  The small investor wants to "get in on the deal" and ignores things like P/E ratios.  When a company has a P/E ratio of a 100 or more, that means you'd have to wait over 100 years to make your money back - or hope that profitability increases by a factor of five in the interim.

What happened to the railroads?  Well, the stronger companies survived, although the stock price bubble collapsed and a lot of investors lost money.  The smaller, weaker, lines collapsed when they ran out of money and their lines were either acquired by larger railroads, or their rolling stock and equipment bought for cheap - helping the bottom line of the surviving railroads.  In some instances, though, the lines were left to rust in place, as it wasn't practical or economical to salvage any or much of the equipment.

If you look at history, you see a pattern repeated again and again.  After the railroads, it was the telephone - with competing telephone companies running wires all over cities, often using incompatible systems.  Eventually there was a shakeout (and government regulation - that's bad, right?  Maybe not) to consolidate into one format, one company, as the technology proved to be too important to let the "free market" decide.

After that, electricity.  Westinghouse and Edison competed with two incompatible systems - AC and DC - and it took decades to figure that all out.  My Mother recalled her first apartment in Boston having Edison DC power - which meant if you wanted to play your "record player" you had to use a "converter" which consisted of a DC motor and an AC generator connected together by a rubber belt, which they put out on the fire escape.  Technology!  That wasn't so long ago.

And again, there is a shakeout, and government intervention, in the form of regulations, and once again, people who bet on the wrong stocks, the speculative stocks, the fraudulent stocks, lost their shirts, while the people with real money got even wealthier.  If you want to stop the 1% from acquiring even more wealth, stop sending them your money.

I digress a bit, but many have pointed out that during the pandemic, the very wealthy got very wealthier.  How did this happen?  While Joe Lunchbox was panic-buying paper towels and bottled water, James Gotrocks was selling it to him.  How would paper towels and bottled water stop the virus, anyway?  It still goes on today, with profiteering going on in every sector, with "supply chain" or "Corona Virus" used as an excuse to price-gouge.  Buy what you need and stop hoarding toilet paper, people!  Sheesh!  And yet they blame the 1% for their woes.

But again, I digress.

Today, it is the electric vehicle (EV) industry which promises to revolutionize transportation.  In the coming years, we are told, the internal combustion engine, which has been wrung out for every last bit of efficiency over the years, will go away to be replaced by lithium-ion batteries and electric motors.  And while some may think this is a fantasy (and that the virus is a hoax and global warming doesn't exist) the major carmakers seem to have a different opinion - investing hundreds of billions of dollars in new factories to build the vehicles and the batteries.  No one wants to be caught with their pants down when this change comes.

Tesla, of course, was first-to-market, which makes me too nervous to buy Tesla stock.  By all accounts, the Teslas are amazing cars, but being first-to-market has its risks - the second guy often has a better time of it, once you blazed the trail.  Subsequent players can learn from your mistakes and don't have to spend all that money on R&D - which is nothing but making mistakes and learning from them.

The Tesla is an amazing car.  The DeHavilland Comet was an amazing airplane.  The Fitbit was an amazing fitness tracker.  The Franklin automobile was an amazing car.  The best cell phones used to be made in Scandinavia.  In every instance, it seems, the guy who blazes the trail is the one found dead by the side of it later on.  This should trouble Mr. Musk.

Tesla is, by all accounts, making some profits, but not nearly enough to justify the stock price.  In fact, the stock price of Tesla is ridiculous - having  P/E ratio of around 400 today, but peaking at over 1200 just a few months ago.  Imagine waiting 400 years to make your money back.  Assuming a P/E ratio of 20 is "normal" (a 5% rate-or-return on your money), Tesla would have to increase profitability by a factor of 20 in order to have the stock price make sense.

The plebes, of course, look at things like "The Market Cap of Tesla is greater than that of Toyota!" or some such nonsense.   Of course, "Market Cap" is utter bullshit - it is just a number obtained by multiplying the share price paid by the last sucker in times the number of "outstanding" shares.  And in the case of Tesla, the share price paid by the last sucker in is often the price paid by a "Stonk" buyer from Reddit, who bought one pathetic share online, as part of his plan to get rich.  And the "outstanding" shares are not "outstanding" at all - most are held by insiders, such as Musk himself, and thus not available for sale.  Scarcity might determine prices, but it doesn't determine value.

Musk, of course, recently made headlines by asking Twitter users, in a poll, whether he should sell 10% of his Tesla holdings, which of course, caused the share price to fall.  Maybe he is trying to school the "Stonk" buyers about how the world works - how he can manipulate share prices with just a tweet.  Because if he really wanted to cash out of 10% of Tesla, the way to do it would be to sell a few thousand shares at a time, week after week, so as not to alarm investors or flood the market with more shares than buyers.  Even then, such a sale would depress share prices.  Again, scarcity doesn't mean value.

But Tesla is a "legit" company at least, in terms of actually building and selling cars and making small profits (relative to share price, anyway) and even still antics are going on.  Perhaps Musk realizes that once the car market is flooded with electric vehicles, he no longer will be able to command premium prices for his vehicles, unless he can pull an Apple and get people to pay 10x for the privilege of a fancy logo.  Hey,, it's kept BMW and Mercedes in business for decades!

Others are entering the market - or will enter the market shortly - and as the supply of electric vehicles increases, prices will drop, particularly if demand remains flat.   Would I buy an electric vehicle?  Well, I am not in the market for a vehicle, period.  My cars are paid-for and the hamster has 26,000 miles on it, after six years.  Why would I want to buy a new car?   Granted, an EV would fit my lifestyle, and maybe down the road - five years from now, or more - I might buy one.  Not rushing out to get one yet.

Oddly enough, the local KIA dealer had electric hamsters for sale.  They had an 80-mile range, which was pretty sad for an EV these days - but would still fit my lifestyle in terms of going to the Walmart for groceries.  They discontinued the EV hamster because of the range shortfall and are introducing a new EV.  So they are not abandoning the market.  The "early adopters" who bought some of these first EVs, though, may have lost their shirts.  Outside of Tesla, EV resale values for limited-range EVs are not that great.   First to Market applies to customers as well as companies and shareholders.

But what about these other companies? Rivian is making a big stink about its IPO, valuing the company at $77 billion or some such.  Seen a Rivian vehicle on the road?  Didn't think so.  Seen a lot of Teslas, though.  Still doesn't justify a P/E ratio of 400.  Rivian isn't a fraud, of course, they do seem to have a product, even if it isn't readily available to the ordinary consumer.   Maybe overpriced and over-hyped, but not outright fraud.

Working our way down the food chain, though, finds some more "interesting" companies that are hangers-on in the EV business, much as these small rail lines were in the 1870's.  Nikola, for example, came of with the oh-so-original idea of using Tesla's first name for their company.  For some reason, Nikola Tesla is revered amongst people who are not Electrical Engineers as being some sort of "free energy" maven.   Tesla had a lot of crazy ideas toward the end of his life (as indeed, I do as well) but that doesn't make him a free-energy genius.  But hey, it sells stock to the plebes, right?

Anyway, Nikola seems pretty mainstream compared to some other Johnny-Come-Latelies.  Fredrick's of Hollywood was a lingerie chain that foundered in the Internet era.  Back in the day, before "transgender" was in the dictionary, if a man wanted to wear women's sexy panties, he could sneak into "Fredricks of Hollywood" and buy a lacy nightie or bustier.  The company went bust, sort of, and the stock was trading for pennies.  It was hyped - again on the Internet by the "Stonk" buyers - and turned into a SPAC vehicle which has acquired the tiny Cenntro Automotive which has made only hundreds of EV vans of some sort.   This is plain weird.

Further down the food hain is Lordstown Motors, which smells a lot like the ill-fated Elio Motors.  They bought an old auto plant for pennies and promise to make electric vehicles.  But nothing has come of it so far, even though GM has "invested" $75 million into it and sits on the board (no word on whether the investment was the plant itself, or cash).  GM also announced a deal with Nikola but quickly backed out of it when they saw what was going on.  GM isn't asleep at the switch, but seems to be keeping multiple options open.  They are repositioning the Cadillac brand as an EV vehicle company, buying out hundreds of dealers who won't invest the money into rebuilding their dealerships and training employees to sell and service EV's.  GM introduced a new EV Cadillac - at the Shanghi Motor Show - GM sells more Cadillacs (and Buicks) in China than in the US - and makes more money there as well.

Ford doesn't have that option - its sales in China are flat - but has gone "all in" on technology.  Ford was first to ditch its 1950's-era pushrod V-8's and replace them with overhead cam, high-tech engines, which now feature dual turbos, variable valve timing, intercoolers, and other esoteric technology designed to squeeze every last HP out of  every drop of gas.  GM still sells the same motor introduced in the 1955 Bel Air.  The new Ford F150 Hybrid has moved the ball down the field even further - a very high-tech tour-de-force.  And Ford has gone "all in" on a new all-electric F150 plant and a battery plant in Kentucky, investing $5 Billion (some say $10 Billion) in the process.   Ford also is not taking any shit from anti-vaxxers.   Seems they are more willing to trust technology than, say, Volkswagen - or Toyota for that matter.

How odd, the company that created the Prius is also the biggest spender on lobbyists to halt global warming legislation.  How freaking odd!

So which company to invest in?  And will EVs take over or not?  Hard to say without a working time machine, and mine is broken.  I have the parts on back-order, but since they were made in the future I cannot access them without a working time machine.  If yours is working, could you pick up some parts for me?  I ordered them from Alphabet-Meta-Amazon in 2432.

But seriously, you cannot tell in advance which company, if any, will succeed, and even if so, for how long.  I was skeptical that Facebook would ever make a profit - but I was wrong, of course.  But that doesn't mean buying Facebook stock is a good idea - you can still lose money on stocks, even if a company is making a profit, if you buy and sell at the wrong times.  And with what we are seeing today - the fallout from social media - is Facebook going to be around for the long haul, or will it be a bigger version of the MySpace story as the "kids these days" migrate away from Grandma's rumor-spreading platform.  And no, Nextdoor isn't the answer - it is just even more hysterical women with a little racial profiling thrown in.

So sure, EVs will be a thing - whether they displace the majority of IC vehicles remains to be seen.  For many, many applications, they will work, and as they increase in volume production, the prices will come down, even without tax incentives.  Delivery vehicles, for example, that stop-and-go less than 100 miles a day, will be excellent targets.   Even big trucks, that go from hub to hub (where there are charging stations) less than 300 miles apart, will be feasible.   For many people, they may work well as primary or secondary vehicles.

But predicting how prevalent these vehicles will be is hard to do.  And predicting which company will be a winner and which a loser, is also hard to do.  Tesla seems like is has an invincible lead at this point, but on the other hand, its model X was something of a disappointment and the vaunted "pickup truck" has been the butt of jokes for some time.  Meanwhile, companies like Ford and GM have established dealer networks and deep, deep pockets to dip into, as well as Engineering expertise.

It could go either way - Ford could stumble and end up in trouble if the electric F150 isn't received well in the marketplace or catches fire like the Pinto (which really wasn't all that more fire-prone that other small cars of that era, in retrospect).  Predicting the future is hard to do.

The companies without staying power aren't hard to spot, though - the folks with wild dreams and not much to show for it, using wacky financing and a showing only a few prototypes that may or may not even work.  It is the Elio model, and we know how that worked out!

Trying to "make it big" by spotting the "Next Microsoft!" or whatever is a foolish dream.  The people who made big money on what seem in retrospect as long-shot gambles, were the ones who owned huge blocks of stock from the get go.  You, buying a share or two, aren't going to become wildly rich, overnight, or over a decade.

Invest in a panoply of things - rational things - and use time, your greatest allay.  Gambling on stocks is just that - gambling!