I stumbled upon a video of an episode on Jimmy Kimmel Live! In that show, the actors Michael J. Fox and Christopher Lloyd (aka Marty McFly and Doc Brown) made a guest appearance to promote the new Back to the Future movie (click here). Well, if you have watched the Back to the Future Part II, which was released in 1989, you would have known that Marty McFly (Fox) and his friend Dr. Emmett “Doc” Brown (Lloyd) travel to October 21, 2015 to prevent McFly’s future son from ending up imprisoned.
In the Jimmy Kimmel show, Marty and Doc Brown were obviously disappointed at the ‘advancements’ we have – well except for the IPhone. So much for the hoverboard and flying cars. Well, we did have the self lacing Nike shoes though (click here), and games that don’t need any actual physical parts (shaped like guns). However, in reflection, much of the optimism in the 80s has not really translate into reality. Doc Brown in that Jimmy Kimmel show ended up telling Marty that he suspects that they are in an alternate 2015.
There is another comic clip that pokes fun at the current 2015 (click here).
Thiel’s basic argument was that innovation appears to have stalled in tech, much as it has in the rest of economy. Thiel contends that the amazing advances we have seen in computer science and communications have masked ominously disappointing progress in energy, transportation, biotech, disease prevention, and space travel.
From a business point of view, the IT business in many ways represent a very highly efficient business. If you have a great ‘sticky’ IT programme that caters to the daily needs of your targeted consumers, you can generate high profits. You don’t need to spend a lot on rent, overheads, machinery, etc. You don’t have perishable products to worry about. Your business can be highly scalable – buy more servers vs building more factories. And if the company product operates in a monopoly or oligopoly, you can easily achieve high Profit Matgins, ROE or ROIC. Think Google, LinkedIn, Ebay, Amazon etc.
Pat Dorsey mentioned that one of the best sector to find companies with strong and wide moats is the IT sector. His own fund is heavily invested in Silverlake Axis. In fact when Peter Thiel first invested in Facebook, the company was still in its infancy, with 7 or 8 teenagers cramped into a small workplace with graffiti on the wall. Yeah low overhead and low rent – although the take up rate of Facebook is going off the chart.
On the other hand if you are dealing with energy, transportation, space travel, biotech – these need heavy investments (initial and continual).
It is no wonder that people have invested more on computer science and communications rather than in energy, transportation, biotech, disease prevention, and space travel.
When I read about how Elon Musk first started SpaceX and Tesla Motors, it is really tough at the beginning. Even for a genius and a rich guy like him. Click here. At that time, he was already very rich ($180 million to be exact), after having sold Paypal (which he co-founded with Peter Thiel) to Ebay. However in 2008, both SpaceX and Tesla were at the brink of total failure. To make matters worse, his first wife divorced him in 2008. For SpaceX, the first 3 launches were failures, and while Tesla ran out of money and couldn’t pay its 100 employees anymore. Elon Musk had only money for one final 4th launch for SpaceX which was eventually successful leading to NASA offering the company a $1.6 billion contract. In the case of Tesla, by 2009, the government agreed to loan the company $465 million from an alternative vehicle fund to launch phase two: Challenge the car industry head-on by mass-producing the Tesla Model S, a stylish four-door sedan powered by more than 7,000 lithium-ion batteries. Model S turned out to be quite a success.
From the traditional investment point of view, these are terrible investments. You need high overheads, huge factories, high maintenance and R&D fees etc. The risk factors are sky high. For the longest time, nobody started a car company in the US, not to mention a space travel company. For anyone who have made millions, they would have probably prefer to sit back and enjoy life (live happily ever after), or do Angel investing in other start-ups, why get their hands dirty and put all their money in risky ventures like electric cars and space travel. But not Elon Musk.
Actually I did do a check on the financials of Tesla and Solar City. As expected (of any ‘young’ high tech companies), they do not have the best of financial fundamentals. Balance sheets are weak, valuations are high (probably due to the hype – SolarCity & Tesla actually have negative P/Es due to negative earnings) – well, nevertheless, there were sharp drops in Solar City shares recently due to their poor earnings. However, all in all, with no long consistent improving financial history, you basically depend more on the Narratives rather than the Numbers.
To digress a bit, there are nevertheless some ideas by Musk which confound me. For instance, the idea of relanding rockets (to reuse rockets) – click here, although technologically a great achievement, it is like solving a simple problem using a very complicated solution. What about the idea of parachutes and impact cushions to protect rockets when they drop from the sky? People have already invented the “invisble helmet“. Why not make it bigger – an impact ‘helmet’ for the rockets? Unless… it is to land on another planet with little or no atmosphere like Mars?
When I talk to people in the mobile communication sector there is a sense of stagnation. There hasn’t been much innovation since the Iphone / smartphone. The world economy has been for the longest time been on a ICU drip – artificially held up by loose monetary policies.
We need the sense of wonder and optimism we had in the past. With people like Elon Musk and Peter Thiel, perhaps, we will get to see the days of flying cars and life on Mars.
Maybe one day, I would have my ‘little boy’ fund. To invest in all these ‘crazy’ start-ups companies / high tech companies. Like Jack trading his mother’s cow for the bag of seeds – in Jack and the bean stalk. Dream of reaching for the sky. It goes against all the principles of Value Investing like Margin of Safety, Intrinsic Value, Good balance sheet, within your Circle of Competence…..
Deep down I am just a geek who is still in awe of Star Wars, Back to the Future, Lord of the Rings etc….. If we don’t believe in a better future- who will?
Shall leave you with this song.