Free beer tomorrow!
“Free beer tomorrow!”
It’s a promise hanging on the wall of a bar in my hometown.
Free beer is always promised tomorrow. So the proprietor never actually has to give anything away for free.
The promise of “tomorrow” is quite often made in the world of investing. What’s even more interesting is that people seem to buy into that promise!
To some extent investors have to take a long-term view. Unless you’re a trader, you’re in it for the long haul when you put your money in companies.
The money pouring into investments that are yet to prove their profitability is astonishing.
Tesla, Uber, initial coin offerings (ICOs): a lot of money is finding its way towards ventures that are yet to prove they can deliver profits to their shareholders.
Have investors gone mad? Or are they simply playing the long game?
Exhibit A: Tesla
Tesla Inc overtook General Motors and Ford this year to become America’s most valuable carmaker.
At first sight there might be nothing wrong with that.
Tesla is a pioneer in electric cars, which could well be the future as the world moves away from fossil fuels towards cleaner cars.
The company is ambitious and is investing heavily in gigafactories to manufacture batteries for its cars.
Importantly, it’s creating cars people are genuinely excited about.
So, what’s the problem?
Tesla is yet to make a profit and is burning through cash. It raised $1.2bn in March – the second time in a year that CEO Elon Musk went to the markets with his hand out.
Clearly there’s something to say for Tesla’s strategy to invest heavily and grow quickly. At the same time it’s a risky thing to do for a company in a sector that’s highly cyclical.
Despite better than expected quarterly results, investors fear another fund raising round is on the cards.
Although Tesla won’t be rewarding its shareholders anytime soon by paying out dividends (it’ll need to become profitable first), it seems to be better in attracting investment than many of its rivals.
Tesla has a higher market cap than competitors like Ford and Nissan, both of which are profitable companies that produce more cars.
The fact that the markets view Tesla as America’s most valuable carmaker seems to be solely based on one thing: promise.
But promise is a fickle mistress. Promise doesn’t always live up to expectations when it matures.
Tesla’s cars may be popular, but the company still needs to figure out how it’s going to produce enough of them to meet demand.
“I think Elon Musk knows that Tesla is going to succeed spectacularly, at the last moment… or go down in flames, along with billions of shareholders’ capital,” my colleague Sean Keyes predicted last year.
If Tesla’s future success is like the toss of a coin, we’re still not much closer to knowing which side it’ll land on.
The company is still a long way off proving it deserves the title of America’s most valuable automaker.
Exhibit B: Uber
Uber doesn’t just get you from A to B. Uber delivers your food. Uber delivers your parcels. Uber offers boat rides, helicopter rides, hot air balloon rides.
The company doesn’t lack ambition!
Though it’s not publicly traded, Uber has already raised billions and billions of dollars. It’s had 16 funding rounds since 2009 and yet it’s billions in the red.
Like Tesla, Uber’s offering services their customers truly value. But I wonder if the company isn’t biting off more than it can chew.
Despite its relatively short existence, Uber has launched many different ventures: UberEATS, UberRUSH, UberBOAT, UberCHOPPER, Uber Garage. It wants to dominate everything in transportation and delivery services.
Uber might want to become the “Amazon” of the streets. But Amazon grew much more organically.
It first focused on becoming the best in online bookselling before it branched out to other products. Uber seems to lack the patience to own one service before moving on to the next.
It’s as if the likes of Uber and Tesla first want to completely dominate every single branch in their sector before they might consider turning a profit.
Good on them, for as long as they can keep investors convinced they’re ultimately going to make them a lot of money. But so far their success is far from guaranteed.
Even companies with a lot of promise will sooner or later have to explain why they keep moving forward the date they become profitable.
The danger is the answer will forever be “mañana, mañana”: that comes later.
Exhibit C: ICOs
In the cryptocurrency market that’s hotting up, people have already poured over a billion dollars into projects that are yet to prove their worth.
People pay money and receive tokens of a cryptocurrency that may or may not be worth something one day.
These “initial coin offerings” have turned everyone into venture capitalists.
Great – if the projects they invest in come off. Not so great if they end up like all those dot-com companies that lost their investors their money.
Do people know what they’re buying into? Who knows! The evidence suggests they don’t.
Dogecoin, which was meant to be a joke currency, has a market cap of nearly $190m. What does it do? I have no idea.
But it’s facilitated a real-world remake of the film Cool Runnings by sending the Jamaican bobsled team to the Winter Olympics. I suppose that’s something.
PotCoin is a cryptocurrency set up for marijuana smokers (shock!), though it’s mostly known for sponsoring a Dennis Rodman trip to North Korea. Current market cap: $32m.
It’s hard to say what people expect to get out of investments like that – and why they would make them in the first place.
The people behind “Useless Ethereum Token” are probably the most upfront about their intentions: “You’re literally giving your money to someone on the internet and getting completely useless tokens in return.”