Bubble or Breakthrough: Investors bet on electric cars and green energy
Anyone who’s been paying attention knows that EV stocks have been on a serious roll. Industry trendsetter Tesla has seen its stock price balloon by well over 700% in the last 12 months, and was recently trading at a head-shaking 1,000 times trailing earnings.
Above: Tesla Model S (Flickr: Studio Sarah Lou)
Many other companies have been powering ahead in Tesla’s slipstream, and talk of a bubble is rampant. One comical sign of the out-of-control frenzy: shares of a company called Signal Advance soared by 11,000% after Elon Musk tweeted “use Signal” to his 42 million followers. News flash, folks: Elon was talking about a completely unrelated company—a messaging platform called Signal.
“The bubble in renewables is probably the stupidest that I have seen in my career,” Charles Gave of money management firm Gavekal, wrote last month (and the green tech sector has climbed far higher since his comment).
However, as Greg Ip writes in a recent article in the Wall Street Journal, stupid doesn’t always mean useless. We may think of stock market bubbles as destructive forces (and many are, like the 2008 housing crisis). Paradoxically, however, a bubble can also have a socially beneficial silver lining. As Mr. Ip sees it, even if investors regret paying so much for TSLA someday, they’ve done the planet a favor. “Their enthusiasm enabled the company to raise enough money to stay afloat until it could profitably mass-produce electric cars, while accelerating other manufacturers’ rollouts.”
As regular readers of this column are well aware, Tesla has achieved many amazing things over the last year—perhaps the most amazing of all is that it has finally succeeded in motivating the legacy automakers to get serious about their own EV programs. All of this was enabled by the California carmaker’s soaring stock price, and even if TSLA crashed tomorrow, that wouldn’t undo the positive changes the company has set in motion.
Above: Why investors are pushing more money into green energy than ever before (Source: Wall Street Journal)
But how can a bubble be a good thing? Wouldn’t it be better if markets were truly efficient, allocating just as much capital to each company as its earnings and realistic growth prospects justify? Not necessarily. As Mr. Ip explains, “Private markets generally provide too little incentive for risky innovation...a bubble can overcome that market failure as investors shower capital on countless new ventures they hope will be the next Microsoft or Amgen [or Tesla]. Even as most of those ventures fail, they extend the technological frontier.”
During the dot-com boom of the late 1990s, speculators (let’s not call them investors) were seemingly throwing money at any company with a web site. Many of these startups were losing money, and some were never able to explain exactly what their products or services did, but nobody cared until the music stopped. Yes, some of that money was squandered on elaborate press events and decadent launch parties (I know, because I enjoyed attending quite a few of those myself). However, it also financed more productive endeavors, as Ip points out. For example, “the mania financed a glut of fiber-optic [cable] that drove the price of bandwidth down enough to bankrupt many telecom companies while allowing countless new businesses to emerge.” Among the recipients of the cash that was sloshing around was a young company called PayPal, and $180 million of that loose change found its way into the pockets of a young entrepreneur named Elon Musk, who used it to finance SpaceX and Tesla.
Like internet platforms, EVs and other green technologies are subject to network effects, tipping points, and learning curves such as the famous Moore’s Law. The upshot of this is, as Ip explains, that some technologies and companies that aren’t commercially viable now may be in the future if they can obtain the necessary financing to scale up. Government funding for basic research helps to develop nascent technologies, and venture capitalists provide funding for innovative startups to get off the ground, but sometimes a medium-size company that has progressed beyond the startup phase needs an extra boost to make the transition to a mass-market manufacturer.
When Tesla was a money-losing enterprise, it was vulnerable to the vicissitudes of the stock market (and to a constant stream of FUD generated by short sellers, flat-earthers and clickbait peddlers). Becoming profitable freed it to focus more strongly on its long-term goals, and more recently, the huge amounts of money that have poured into its stock have enabled it to launch hugely ambitious projects. Most of these projects (the Gigafactories, the new 4680 battery cells, the huge casting machines that will form the underbodies of future vehicles) are designed to cut costs and improve quality, so they’ll be delivering financial benefits to Tesla and its customers for years to come, whatever happens in the stock market.