Monday 22 March 2021
Ark Invest’s newest Tesla analysis leans heavily on full autonomous deployment, a technology that remains stuck below a hard ceiling. While Ark acknowledges a lower bearish case along with its bullish case, the just released report also arrives at a time when Tesla is about to entirely cede its top market share position to a constellation of other automakers. Volkswagen in particular. I wrote about this dynamic last month for Transition Economist, a new offering from London-based Petroleum Economist. | see: For EVs to succeed, Tesla’s market share must fall.
The imminent decline of Tesla’s market share is not a problem. The total market for EV is about to soar, so Tesla’s percentage take will decline as its unit sales grow nicely. But investors must acknowledge this moment as the turning point from a phase when $TSLA, the stock, was the only available pure play to a broadening formation which now sees GM, Ford, and VW assuming co-leadership. The pure play phase saw Tesla shares accrete nearly all of the energy, investor interest, and share price appreciation that reflected the future growth of EV more generally. As a proxy for this future growth, $TSLA the stock pushed far past any credible level of market capitalization.
The Gregor Letter has been quite clear that two groups got the Tesla story wrong. First, “the haters” who failed to see that Tesla would indeed be more than just a car company, and was a play on batteries, and grid storage. Second, the true believers who failed to see $TSLA was increasingly priced for every possible tech advantage and earnings growth out to the year 2030. It’s not for nothing shares are down roughly 30% from the highs, and probably need to go lower. You no longer need to own Tesla shares to participate in the EV growth story.
Ark Invest’s bearish case acknowledges the possibility that autonomous technology is still not developed to the point of broad commercialization, by the year 2025. It must be said: there is no expertise on the Ark Invest team that equips them over others to assess the prospects of AV. Autonomous technology is far more complex and difficult than casual observers understand. Specifically, AV continue to have a last-mile problem, also broadly misunderstood: the public thinks we are inches away, not realizing those “inches” are the entire ballgame. Without them you have very little. Not much more than a golf-cart device, that can adequately travel on groomed routes.
What’s clear is that common intuitions are all too much at play, here. Because many other tech barriers seem to fall quickly, autonomous technology is presumed to be right on the cusp of a breakthrough. At an investor conference in 2014, for example, I was told that government funding of public transit would eventually go into steep decline, as AV were rolled out soon—by the end of the decade at the latest. The following year saw an explosion in AV coverage, much of it extensive long-form journalism, as the prospects for AV were covered deeply at WIRED, The New York Times, and Bloomberg. I’m of the view this five year period however stands as one of the more notable failures in tech journalism. Much of the material that made it to print was very focused on the companies trying to achieve AV, but was at serious odds with the views of AV experts. Bloomberg’s ongoing coverage of Google’s Waymo project in Arizona was quite justified, in one sense, because it provided a window into the difficult process of AV trial and error. But the coverage also carried a blind spot. The intractable hurdles to making autonomous extend fully to all terrains and conditions were left mostly unaddressed.
Tesla currently faces roughly the same challenges to reaching full autonomous that have controlled the AV experiment for the past five years. The Ark Invest team is not unlike the public—they think autonomous is rock n’ roll, and is imminent. But there is no indication that is the case. Relatedly, Ark increasingly has a very bad and concerning habit of using the phrase we believe. You may have noticed the phrase appearing more frequently in the interviews given by Ark’s Cathie Wood. Now it’s been hoisted into the latest Tesla report. At first, this seemed like nothing more than an annoying verbal tick, whose function was to avoid more rigorous analysis. But Wood’s recent interview with the FT put a different spin on the phrase:
As Wood sees it, it’s all God’s work anyway. “It’s not so much about me and my promise. It’s about allocating capital to God’s creation in the most innovative and creative way possible.”
In science, medicine, technology, and also investing, faith is a sin. It’s not merely that Ark Invest's Tesla report is amateurish on a number of levels, but that their bullish case clearly relies on autonomous going full rocktonamous, and soon. But full AV will not arrive simply by chanting we believe.
For a better and more useful credo to employ in the profession of investing, I would suggest W.B Yeats’ epitaph:
Cast a cold eye on life, on death. Horseman, pass by!
Generation from combined wind and solar globally will surpass nuclear over the coming year. Nuclear’s long-term growth stagnation made such a projection possible around 2015. Now that wind and solar are growing quickly from a much higher base, the imminent crossover point has arrived. In 2019 for example, wind and solar grew by 301 TWh, as nuclear grew by 96 TWh. Last year (for which we are working with estimates only) wind and solar grew by another 300 TWh and nuclear was likely flat, or had a small decline. From this point forward, forecasting an additional 300 TWh from wind and solar is quite conservative. And holding nuclear roughly flat points towards a crossover point later this year, around 2750 TWh.
Combined wind and solar surpassing nuclear is not a policy failure, but rather a straightforward story of speed. The Gregor Letter remains sympathetic to the frustration nuclear advocates feel that we have wasted an opportunity to deploy a firm source of clean power. While smaller, more tactical nuclear solutions may appear and we should welcome them, it is now too late for nuclear technology—in the main—to participate meaningfully in decarbonization. Speed has value. Not only in business, but in fighting climate change. The faster a new machine is productively deployed, the better the return on investment for a company. And the faster we deploy climate solutions, the more effectively we put a brake on the compounding process in emissions. Compounding of gains, compounding of costs. The game is about compounding, and when it comes to wind and solar, the ability to deploy them at high speed confers gains not just to the bottom line, but the double-bottom line.
Reader Sam Penrose has a nice, conversational twitter thread about the time value of decarbonization, and you can pick up the start of that thread here. While Sam helpfully and constructively brings math to this issue, the salient point is easy to understand. Indeed, using the future perfect tense is a helpful way to bring the insight home: every TWh of clean generation that comes online next month, will have been online for ten years, by April of 2031. When Albert Einstein quipped about the miracle of compounding, it was no joke. While we will certainly have even better tools in the future, wind, solar, and storage are now the fastest compounding tools we have right now. And that matters.
Volkswagen held a Power Day presentation last week, signaling a dramatic surge in the company’s investment plans in battery capacity. VW intends to build 6 new gigafactories, with a combined output of 240 GWh. Shares of the company have been surging of late, and VW is once again Germany’s most valuable company. When the future book is written about VW, Diesel-Gate will surely feature prominently as the crisis that did not go to waste, but rather, propelled VW to take action. The turnaround is now being memorialized with fun, hilarious headlines. Here’s just one: Elon Musk Has a Serious Rival: the Technokaiser.
Small scale solar is booming in the United States, and in unlikely places. Dense US states on the eastern seaboard jumped into the small scale solar game early, as they recognized they could never compete against big dryland states like California, and Nevada. In the last decade, therefore, states like Massachusetts and New Jersey moved quickly to plaster as much rooftop space as possible with PV. Indeed, any tour of eastern Massachusetts starting in 2015 would have revealed solar near parking lots, small corporate buildings, playing fields, farmhouses, and along highway greenstrips. Today, New Jersey, New York, and Massachusetts are 1, 2, and 3 in the country for small scale solar.
But now come later arrivals like Maryland, Texas, and new entrant Florida. Florida has long been an obvious domain for solar, but for political reasons lagged. No longer. And just to give some sense of how powerful, collectively, small scale solar can become: as of last year, small scale solar made up 31.5%, or 42 TWh of the total 133 TWh of US solar generation. See the recent posting from EIA for more details.
New York Times reporter Neil Irwin, who reminds that he’s spent most of his career tracking gloomy economic forecasts, is finally optimistic. And with good reason—17 of them to be exact. Two points from his piece, 17 Reasons to Let the Economic Optimism Begin, are worth a mention. First, Irwin recognizes that batteries are to this era what semiconductors were to another. The analogy is not perfect; few are. But like semiconductors, batteries are indeed an enabling technology. They will surely not fall in price or double in capacity like semiconductors, but the learning rate is hard at work.
The second item worth mentioning is that longtime productivity and innovation pessimist Robert Gordon, Northwestern University professor, is also optimistic. Gordon was famous in the last decade for declaring that growth was essentially over. His 2012 paper on this topic was quite a sensation, at least in economic circles. And much of last decade those who battled with Gordon did not fare well. The argument, it seemed, had been won. But Gordon now expects growth to be higher this decade, compared to the last.
UK emissions have now fallen 51% since the year 1990. Why yes, it can be done. As The Gregor Letter has pointed out previously, the UK is positively California-like in its deployment of clean power generation, its efficiency gains, and its newest assault on ICE vehicles. No, the UK is not perfect. But London is clearly a leader in fighting vehicle emissions as it builds further on its road pricing platform. And of course, the UK is an absolute giant now of offshore wind. Good news can be curiously hard to accept. Perhaps, just this once, let’s bask in the sunshine and enjoy it.
—Gregor Macdonald, editor of The Gregor Letter, and Gregor.us
The Gregor Letter is a companion to TerraJoule Publishing, whose current release is Oil Fall. If you've not had a chance to read the Oil Fall series, the single title just published in December and you are strongly encouraged to read it. Just hit the picture below.