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This week: 3,000 Daily Deaths; One Way to Value Tesla; Vaccines and Those Immigrants; Thanksgiving F(east); Reading List.
3,000 Daily Deaths
The coronavirus cliff aka second (or third in the US) coronavirus wave appears to be peaking in Europe and leveling off in the United States insofar that the rate of ascent in confirmed cases seems to be fading, odd as it may be that we have to look at the derivative of change for some solace. We are not out of the woods however because 1) the rate may yet re-accelerate to new highs and 2) the number of deaths will continue to climb for at least three more weeks.
Using a well-established 1.8% for the ratio of US daily deaths to 21-days-ago confirmed daily cases, we can deduce that deaths will double from a grim 1,660 today (7-day average) to a disastrous 3,200 by mid-December, just as confirmed daily cases doubled from 91,000 (7-day average) three weeks ago to 180,000 today. It is possible that better therapeutics may reduce the incidence of daily deaths to less than 3,200 but we are talking about an interval of only three weeks with limited probability of a large improvement.
More optimistically, if the current wave lasts the same five to seven weeks as previous ones (a big unscientific if), confirmed US cases will make a top as soon as this week or next.
One Way to Value Tesla
Since we wrote about Elon Musk’s Tesla Rocket on July 20th, Musk’s after-burners have remained on full throttle, pushing Tesla stock an additional 70% higher by yesterday. It is up 564% year to date and 726% in the past twelve months. This action is explained by the company’s improved operating performance, by the enormous pandemic stimulus offered by the Fed and by Congress, by Tesla’s recent inclusion in the S&P 500, and last but certainly not least by Musk’s personal mystique in particular among cohorts of small investors.
Which raises the question of where would Tesla stock be without Musk? It is a vapid question, just as ‘where would Apple stock be if Steve Jobs had not returned in 1996?’ Possibly at zero as no other than Michael Dell predicted in 1997. These companies are built by visionaries with a unique ability to execute on their visions.
Still stock investing must add up to more than faithful adoration of a leader, no matter how gifted he is, or of a product, no matter how thrilling it is. Valuation is a sucker’s game in this frothy market but sooner or later, stocks do revert to something resembling fair value. Our back of the envelope approach (anything more detailed seems a waste) is to look at Tesla as 1/3 auto company, 1/3 software company and 1/3 hype and to apply the corresponding revenue multiples to each third, 1x for the auto part, 8x for the software part and 0 for the hype part. The first two are generous if anything.
Using an expanded forecast of $54 billion for 2021 revenues (2019 revenues were $25 billion; 2020 are projected at $31 billion), this results in (1 x 18) + (8 x 18) + 0 = $162 billion for the market cap, or a 70% decline from current levels. Will it fall this much? Probably not as there will always be a nonzero hype factor, but a 50%+ decline in the next 18 months is a fair bet. This is not as bold a prediction as it appears, given the speed of its rise this year.
If you are long, how do you gauge your ability to choose a better exit point between now and then? If you are short, are you able to withstand another 50-100% surge (or more) before you get any relief? If you are holding for the long term, what is the sustainable moat that will protect margins from rising competition and turn this into another trillion dollar company like Amazon or Apple? Until then, enjoy the view from space.
MORE >>> Read Copenhagen Consensus Bjorn Lomborg’s ho-hum take on electric vehicles.
Vaccines and Those Immigrants
Like Steve Jobs and Elon Musk, immigrants are still hard at the task of innovation. This time they played a big role in developing the vaccines to fight the pandemic.
Pfizer’s vaccine was spearheaded by the wife and husband founders of its partner BioNTech. Both are immigrants from Turkey to Germany. And Moderna is led by a team of Armenian-Lebanese, French, Spanish and Israeli managers and financiers.
Contrary to conspiracy theories from anti-vaxers and others, these companies do not stand to make big profits from the vaccines. Vaccines are low-margin and their profitability will be further pressured in this case by governments and by a public opinion intent on keeping pricing moderate. The companies will likely deliver them at a thin profit or even just at cost including R&D.
What this does to the stocks of these companies is unclear. Pfizer’s stock did not get much of a reaction to its announcement except on the very first day. Moderna, smaller and more focused, is up significantly this year. Perhaps the scientific externalities of the mRNA approach will lead to other products that will be highly profitable in their own rights.
The T bird originates from the East, in words if not in facts. The word for the bird turkey and the country Turkey have the same etymological origin. Similarly, the bird in French is dinde as in d’Inde, meaning ‘from India’. It is indushka in Russian and indyk in Polish.
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