2021: Technology's Greatest Hits & Misses

A day doesn’t go by when we aren’t wowed by an emerging technology which will literally change the way we live and create new corporate heroes which savvy investors can ride right into retirement.

It’s here that we need to be pragmatic in our approach. While tech stocks have been the outperformers for over a decade, much of what they promise in terms of disruptive innovation rarely leaves the lab. One notable exception is the smart phone.

In truth, much of what they have to do is substitute with efficiency via digitization which is also where our investor mindsets ought focus. When was the last time you had a driverless car pick you up or you received a package via drone delivery?

It is fair to say that tech companies have become exceptional at selling the Tech Utopian dream and while they have underdelivered on many promises, it does seem like the market is buying what’s promised – even if it rarely arrives.

In a market filled with high valuations and a dominant tech sector, it’s worth looking at the hits and misses of the tech sector, so we can enter 2022 with our eyes wide open. 

Self-Driving Cars

Google unveiled its first autonomous car by video which stopped the world way back in 2012. They promised to have them available to the public by 2015. Elon Musk promised to have a Tesla drive coast to coast in 2017 and a million robo-taxis on the road by 2020. Since Google announced things first, similar promises have been made by every original equipment manufacturer (OEM) in the world. Other than a few test sites with clear boundaries, we still wait.

So, here’s my prediction: We won’t see full autonomy on our roads this decade. What we will see, is autonomous zones emerge. We’ll be able to drive between cities in full autonomous-mode. Road signs will emerge to accompany speed limits which read “You’ve now entered an autonomous driving zone”. We’ll also have special zones in cities for robo-taxis. From an investing perspective, there won’t be an ‘autonomy winner’ but there will be efficiency beneficiaries, like interstate logistics providers.

Electric Cars

This is an area the technology sector has delivered on. Here we must give credit to Musk for ushering in the inevitable. Globally, electric vehicles now have a 4.9 per cent market share and have doubled in volume for the past seven years. If that rate continues, we’ll see the majority of new cars sold being electric be 2026. Unlike self-driving, this will happen quicker than we think. Already, consumers are getting nervous about buying a petrol car in case they won’t be able to sell it for a fair price a few years later.

Every OEM in the world will ditch internal combustion engine models long before their promise and well ahead of government regulatory deadlines being set. The early lead of Tesla is surely going to be eroded rapidly.

The real emergent investing opportunity in the EV market is now selling picks and shovels which support the required infrastructure, especially since Scott Morrison has finally succumbed to the EV reality and promised to invest a, still small, $A250 million infrastructure to our electricity grid.

Another smart investment around EV growth could be real estate on noisy roads. As EVs begin to dominate, previously smelly and noisy real estate will outperform the market and these opportunities don’t take a huge amount of technical analysis to spot.

OEM Valuations

I used to think Tesla was the most over-valued stock on the market with a capitalisation of $US1.02 trillion, which equates to over $1 million per car sold. But I’ve since handed the title to Rivian. Since its IPO a few weeks back, it has settled at a massive $US92.5 billion valuation. For context, Ford currently has a market cap $US76 billion and GM is currently valued at $US87 billion. Rivian is a firm which has no sales to date and a promise of sales below $US1 million in 2022 and accompanying loss of $1.5 billion, according to its prospectus.

Likewise, Lucid motors, an EV ‘maker’ which will build 557 cars this year, has had its share price rise 471 per cent with a promise to sell a mere 20,000 units in 2022. It’s as if legacy car manufacturers have yet to figure out how to make EVs – not true. It’s also worth pointing out that software style valuations in manufacturing are fraught with danger. Let’s remember they’ll always have to bend metal and ship physical products. The problem for investors of course is that real gains are made while we wait for the market to stop being so irrational.

Tech Valuations

One of the worst performers in tech, despite its global influence, has to be Twitter. Not surprising given it has had a part-time CEO for the past six years in Jack Dorsey (who spends most of his time at Square / Block where most of his wealth is held). Since he has been CEO Twitter’s stock increased 33 per cent while the S&P 500 rose by 121 per cent and Facebook increased by 283 per cent. In my view this is a stock which is undervalued against its geopolitical status and earnings potential, and if anything, is a prime takeover target by a highly valued tech firm.

As I predicted, gravity has also hit the darling BNPL sector since Square / Block acquired Afterpay. Now that the sector has been entered by big banks including the CBA, Apple and Visa, local stocks have been hammered. Zip has declined 25 per cent, Sezzle is down 30 per cent, Splitit is down 19 per cent, Openpay is down 23 per cent, Humm is down 11 per cent and Latitude is down 6 per cent. The lesson here is pretty clear for tech valuations in general – beware of easily replicated features masquerading as companies.

NFTs & Crypto

And if you think EV makers and tech stocks have boomed, then NFTs are the clear winner of 2021. This year sales topped $A12.7 billion which represents a 2,500 per cent jump on 2020. These have largely been made via the Ethereum crypto currency and blockchain which, if anything, points to the importance of this crypto (it’s “Turing Complete” which means it is programmable, unlike bitcoin) in shaping the eventual smart contract economy. Ethereum had a 700 per cent increase from $US591 exactly one year ago, compared to Bitcoin which rose by a still heady 266 per cent. It’s worth remembering that NFT sales are happening in something which feels a lot like ‘found money’, and NFT’s are rarely re-sold, so it’s hard to put a real value on them. What we can be sure of is it feels a lot like gambling.

Ask any young NFT acolyte and they’ll tell you it is a financial tool where they can get theirs back on the boomers, finally make some financial headway, and maybe acquire enough capital to get a house deposit. Speaking of gambling, crypto trading platforms do seem a bit like a casino for millennials. If the recent sponsorship by both Coinjar and CoinSpot of AFL clubs, tells us anything, it ought be that most crypto market action isn’t investing, or even hedging of Covid Liquidity, but a timebomb. And if you really want to test a Crypto maximalist on if they truly believe in Bitcoin or crypto generally, just ask them what a single bitcoin is worth. If the answer is in USD or AUD, then they’ve just told you what they really think. A true believer knows that 1 bitcoin is worth 1 bitcoin.

Looking ahead to 2022

Augmented and Virtual reality will again promise to be big this year and underdeliver (see Meta). China will continue to remember it is communist and severely throttle the potential of its technology firms and chastise its egocentric entrepreneurs — the power tech firms. We should pay very close attention to any and all of our investments which rely on the Chinese supply chain as it seems very much like a country which focusing inwards again after it opened its first free economic zones in the late 1970s. The tide is changing.

Thanks for reading and have a safe Christmas and New Year.