Dear Chris,
As this lingering virus slows down the pace of life, I am being reminded to rewatch and reconsider ‘equity markets past’. Nowhere are the comparisons more striking than in the price action and cult-like belief in Tesla (TSLA) - “an auto company wrapped in a technology company led by a visionary.”
Tesla, named after inventor-engineer Nikola Tesla who created the Alternating Current induction motor, has risen 4x this year and 80x since its listing a decade ago. It is now rumoured to be soon to join the S&P 500. Its acolytes believe in the company’s uniqueness and that it shall alter our energy, transport and Artificial Intelligence trajectory. Well perhaps…
I have experienced a similar cinematic narrative two decades before in a company called JDS Uniphase (JDSU). This company in 1999 was a semiconductor optical visionary; the stock rose 100x in a decade and 5x in the year it joined the S&P 500. Now (in)famous Wall Street analysts hailed its ‘unique technology’. At its peak JDSU was 20% the size of the then largest listed company - Microsoft. This old 1990’s movie provides some comparable benchmarks for Tesla today. Strangely enough the 2nd largest today is again Microsoft with a market cap of $1.5tr. 20% of that is $300bn, roughly the current size of Tesla, but if we wish to use the largest market cap, Apple, just had another 15%. Using these metrics would then ascribe a market price for Tesla of $1,900-a-share, which is close to the price called by the most bullish Wall Street analysts. And Tesla is also expected to join the S&P 500 after reporting 2Q earnings in July. All the stars have aligned for the ‘Return of the New JDSU.’
All we need now is the Fed to be pumping money like it was 1999. But wait…it seems that Covid 19 has taken care of that issue. So to put the retro movie into our present-day we have a ‘once in lifetime’ tech company with a cult following, cheerled by the Street, being added to the key mainstream index, whilst the central bank is flooding the markets with liquidity….this sounds like an old script but with new characters polished up for our Instant Age. Two decades ago the next few episodes had the Fed slowly turning off the money tap. The result was that JDSU first fell 20%, then another 20%, then another, until it fell a total of 75% from its peak. Currently, such a slowdown is not in sight, but the rate of the Fed’s balance sheet expansion is slowing; and if this rate of expansion continues to slow, there will be less money around to buy assets…and that potential for a 75% fall crawls into the realm of possibility.
Is it heresy or more like insanity or stupidity to say any of this and have the new cult’s membership descend upon us? Our reply will be simple, please go and watch the old film - ‘The JDSU awakens.’
