Why shares in companies like Tesla are going to zero

Note: This post was originally published on Patreon on 6 June 2018

I am using Tesla as an example here more than anything. I am not about to delve into Tesla’s loss-making operations and make a case against the stock specifically. But I do want to highlight the ‘bubble’ that Tesla represents and what it means regarding excess consumption and investment.

Electric scooter companies worth $1 billion

A recent article at Bloomberg sparked this post. The Bloomberg piece is called, “Scooters Are Cool, But Not $1 Billion Cool” and here’s the narrative I want to hone in on.

I’ve always had an interest in electric scooters. I started researching them in 2002, when I had to walk from the Port Authority Bus Terminal in New York at the corner of 42nd Street and 8th Avenue to my job at Lehman Brothers on 49th Street and 7th Avenue. I figured an electric scooter would get me there faster, zipping me through all the filth on 8th Avenue.

[…]

There’s no denying electric scooters are cool. They are more environmentally friendly than cars and fun. I’ve always thought that they might be a solution to congestion in cities. Fast forward about 15 years and electric scooters are all the rage. Last week, an electric scooter-sharing startup known as Bird achieved a $1 billion private valuation by raising $150 million funding.

[…]

There must be a lot of optimistic people in California, because a $1 billion valuation at some reasonable multiple assumes that Bird might one day have 75 times as many riders as it does currently. That implies Bird will expand to every U.S. city and achieve a nearly 100 percent adoption rate. That doesn’t take into account all the fines and logistical issues that Bird encounters along the way. So the $1 billion valuation is, to be blunt, kind of dumb.

This is insane.

Bubbles create jobs and bubble companies make capital investments

Here’s the thing. These people are spending real money. The misconception is that when this mania collapses and the money goes poof, it isn’t going to be destabilizing. That’s simply not true. It is destabilizing. I’ve seen it up close – as a banker in the European technology, media and technology bubble of the late 1990s and as a technology executive at Yahoo! in the early 2000s.

When the bubble pops, people lose their jobs. They stop spending money and their companies stop spending money. To the degree these companies are leveraged up as Tesla is, you have a debt that goes bad too.

So the question has to be: how sustainable is all of this? $1 billion scooter companies are a symptom of a much wider problem of capital misallocation.

Take Uber and Lyft for example. They have decimated the taxi industry. But are there business models sustainable? Uber lost $4.5 billion last year. And Uber and Lyft drivers earn $3.37 an hour in profit after expenses are calculated. That’s without insurance, folks. So, how’s that a sustainable business model again?

And remember, these are companies spending billions on driverless cars and whatnot. That’s real money supporting real companies, who have real employees, putting food on the table for real families. So it’s not just about Uber but the whole ecosystem around Uber.

That’s what I learned when a bunch of telecom companies went bust in the Internet bubble.

The Tesla mystique is fading

Right now, we’re in the midst of the great unwind. That’s my view here. Investors still have patience for field of dreams companies like Tesla, but scepticism is palpable. Look at this article from the Guardian on Elon Musk.

Once upon a time Elon Musk was our era’s real-life Tony Stark, a billionaire Iron Man streaking across the sky with technology to save the planet and take us to Mars.

Reusable rockets, electric cars, solar power, he did them all, taking time out to advise Robert Downey Jr on how to play the Marvel superhero on a trajectory seemingly forever up, up, up.

Now Musk, 46, is literally and figuratively in a long, dark hole.

You can read the rest of the article here. It goes on to demonstrate how patience is running thin with Musk and how he is at war with media as a result. And there are two ways this can go. Either Tesla steps up to the plate and delivers or it fails and the company goes under.

And when that happens, it will be occurring simultaneously at hundreds of other field of dream technology companies spending IPO and VC money like crazy. Most of those companies will go bust. And that’s going to leave a huge hole in the economy.

Early this year I wrote an article comparing companies like Tesla to Amazon. Here’s the link. That’s because Amazon passed the same test Tesla faced and went on to become an $800 billion company. So I see investments in Uber and Tesla and the scooter company Bird as a crap shoot. It’s the kind of game venture capitalists play; on the individual level these companies have a poor likelihood of making a ton of money. But on a collective level, they are a good bet because one of them will be the next Amazon or Facebook.

Final Words

So that’s why shares in companies like Tesla are going to zero. This is technology bubble round two. And just as round one produced winners like Google, Ebay and Amazon, this round has already produced some and still some more will only be seen for what they are later. Remember, Ebay was a late bloomer. When the tech bubble burst, the company was in its infancy and later went from strength to strength.

At the economy-wide level the shakeout is going to be calamitous. There will be a giant sucking sound as the capital supporting these ecosystems dries up and the investors scale back to nurse their wounds. That day is coming. And it will make the next recession more severe than it otherwise would be.