#innovation

Was Tesla/Maxwell deal smart?

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Tesla (TSLA) has bought Maxwell (MXWL) for an all-stock transaction at US$288m notional value. The question is why any company would accept an all share transaction from a chronic loss-making company to buy its supposedly “amazing” futuristic dry capacitor technology? Are shareholders of MXWL as hooked into the EV cult as those at Tesla? Clearly not all of them. A group of MXWL investors launched a class action to block the deal. Sadly they failed.

If the management of Maxwell truly believed this deal was a winner and the technology was game-changing, why not demand cash? Why didn’t Tesla invite Panasonic’s battery boffins to assess whether the technology had merit? One must question how good is Maxwell’s IP to only find one buyer and for an all share deal? Where were the private equity (PE) vultures circling? How little confidence in one’s product or how much faith in Musk’s cult-like status to fall for such terms?

Maxwell at the 9 month FY2018 stage reported US$91.6mn (-8%YoY) in revenue and a net loss of $30.2mn. Cash halved from $50.122m in 9M 2017 to $23.561mn 9M 2018. The company did sell its high voltage product line to Renaissance Investment Foundation for $55mn with a 2-year $15mn earn out. That involved an upfront payment of $48m making pro-forma cash as at Sep 30, 2018, total $69mn. The company has an accumulated deficit of $277mn.

While the two companies had been in conversation for several years, Musk seemed to get serious in December 2018.

Forget the technological merits of Maxwell. It is easy to work out the quality of the deal based on the structure and the lack of appetite from the mega battery makers or PE firms to validate it. There is no way that MXWL didn’t show its wares to the majors. Given the deal was announced in February 2019, the EV battery and PE world would have at the very least done some back of the envelope calculations to value the business.

All that Musk has done has absorbed another loss-making business into the same cult and give himself another “dream” to add to the smoke and mirrors story.

Maxwell’s management must have channeled Don Adams, “good thinking, 99” but will undoubtedly end up saying, “sorry about that, Chief!”

How to predict market bubble tops?

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Triumph Motorcycle is about to launch the 750 unit limited edition Rocket 3 TFC. The bike will sport the largest engine ever fitted to a production motorcycle – a 2,500cc 3-cylinder behemoth. 170ps power and 221Nm of torque. Triumph has really got its act together with its motorcycle line up. In 2012 the UK maker sold 49,000 units. In 2018 that topped 60,697. There must be customers who wish to tow caravans. The bike is sure to annoy every environmentalist.

Although there is something of a pattern with “limited edition specials” and economic cycle tops. Honda released a homologation special 3000-unit RC-30 in 1987 ahead of the stock market crash. At the height of the tech bubble in 2000, Ducati sold a 2000-unit limited edition MH900e replica on the internet for 15,000 euro ahead of market collapse. CM bought one. Ducati sold the 1,500-unit US$72,500 limited edition Desmosedici RR in 2007/8 right ahead of the Global Financial Crisis (GFC). Triumph’s Rocket 3 TFC will retail for US$36,000. Has Triumph signalled the top?

The idea of buying one to annoy climate alarmists is desperately tempting.

Credit card with a carbon limit

Here is a credit card business model bound to fail. Johan Pihl, one of the founders of Doconomy, is launching a new credit card in collaboration with the UN Climate Change Secretariat and Mastercard. It cuts your ability to spend when you’ve hit your “carbon” limit, not your financial one.

To CM, the pricing is wrong. It should allow one to spend beyond their carbon limit and pay penalties on exceeding it straight into the UNIPCC’s coffers. Or perhaps we should ask all UN staffers to use it as a corporate credit card. If it lived up to its promises, most would have their carbon limit triggered when paying for flights to the next COP summit halfway around the globe. That would be a plus!

Pihl said, “we realized that putting a limit that blocks your ability to complete the transaction is radical…but it’s the clearest way to illustrate the severity of the situation we’re in

It is such a dopey idea. Presumably, if you wish to purchase something that you want and your Doconomy cuts you off, you’ll use another card to complete the transaction. The carbon footprint limit will initially be based off a random calculation tied to the industry aggregate. So it is wildly inaccurate from the get go.

Imagine if the consumer would pick up our app and actually look at their footprint and that’s the basis for whether they buy something or not,”

If history is a guide we can look to carbon offset schemes have failed. Aircraft carbon offsets may provide some idea as to how hard this card might be to sell.

In its 2017 Annual Report, Qantas boasts,

We have the world’s largest airline offset program and have now been carbon offsetting for over 10 years. In 2016/17, we reached three million tonnes offset.”

Carbon calculators tend to work on the assumption of 0.158kg CO2/passenger kilometre.

In the last 10 years Qantas has flown around 1 trillion revenue passenger kilometres. While the literature in the annual report denotes one passenger offsets every 53 seconds, the mathematical reality is simple – 2% of miles are carbon offset. So that means that 98% of people couldn’t care less.

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Another example was a cryptocurrency named LivingOffset, which tried to conduct an initial coin offering (ICO) 12 months ago.

LivingOffset notes on its web page,

Let’s say you buy a cup of coffee. You know that producing the coffee has created carbon emissions.  Now, you can offset that damage with a contribution that matches the value of the carbon cost, 5c for a cup of coffee…Your 5c contribution is matched with an equal corporate contribution.  Turning your 5c offset into 10c. Just think, if everyone having coffee did the same… how quickly we could start to make a real difference…All the contributions go to projects that have proven to have a positive impact on the environment by reducing carbon emissions. And, you can track and verify that your money is going exactly where it is meant to go.

To the best of CM’s knowledge, the ICO didn’t succeed and is currently priced at $0. That despite its lofty goals of 128% returns. Perhaps using Wikipedia as a source in the prospectus did not help matters.

CM is not sure about his readers, but to have the card reject a payment based on spurious mathematics would undoubtedly frustrate after a while.

Probably says much about MasterCard to sign up for this virtue signalling rubbish given it is lagging behind Visa. If they looked at Gillette, Colgate-Palmolive and other “woke” corporations, they would learn the value of sticking to their lane and allowing consumers to have the freedom to spend how they choose.

MasterCard 1Q 2019 report showed

Transaction Volume: 19.2 billion

Gross Dollar Value: $1.484 trillion

Cards in Circulation: 2.537 billion

Quarterly Revenue: $3.889 billion

Market Cap: $251 billion

Visa 2Q 2019 report revealed

Transaction Volume: 47.4 billion

Gross Dollar Value: $2.197 trillion

Cards in Circulation: 3.358 billion

Quarterly Revenue: $6.972 billion

Market Cap: $355 billion

Elon Musk’s golden chocolates are already melting

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What is it with Elon Musk that keeps making up such fictitious dreams about the future? So even assuming his $2bn capital raise all goes smoothly, his dream of up to 1,000,000 robo-taxis, Tesla cars doubling in value and a market cap of $500bn is just barking mad. It reminds CM of a time when a mobile phone retailer in Japan, Hikari Tsushin, had Y100 trillion (c.US$1 trillion) market cap gold coin chocolates produced as a hubristic internal target in 2000. 19 years later the shares are only 9% of the peak price reached and 1% of the value of the prophecy embossed on the chocolate. It is up to the market to decide how much a company is worth, not the CEO. A CEO obsessed with the share price is always a dangerous game.

According to CNBC Musk said at his Autonomy Day,

that autonomous driving will transform Tesla into a company with a $500 billion market cap, these people said. Its current market cap stands around $42 billion. He also said that existing Teslas will increase in value as self-driving capabilities are added via software, and will be worth up to $250,000 within three years.

Musk reiterated that because Teslas can be upgraded “over-the-air” with new software-enabled features and functionality, they will appreciate in value, unlike nearly every other car on the market. A Tesla will be worth $150,000 to $250,000 in 3 years, he claimed. He also said that a full self-driving upgrade will increase the value of any Tesla by a half order of magnitude, or five times.

Tesla expects to have 1 million vehicles on the road next year that are able to function as “robo-taxis,” Musk said, reiterating statements made at Autonomy Day and on the company’s Q1 earnings call. Each car should be able to do 100 hours of work a week for its owner, making money as a robo-taxi he told investors.

So if Musk’s cars would be worth $150,000-$250,000 how does that reconcile with a sticker price of $35,000~$124,000? A used 2018 Model S 100D with 18,588 miles on the clock is $60,990. So the above used car could technically be worth c.2.5x higher in Musk’s thought bubble. Where is the stampede of people running to used car lots to hoard compatible Teslas? That has to be one of the best investments out there – forget buying Tesla shares! Buy the used cars. Sadly, about the only cars that appreciate are limited edition classic cars. A mass-market electric car in abundant supply will not be worth a 100% mark-up, even if one takes into account the hypothesis is driven by the revenue uplift of one’s car doing the rounds of a taxi while you sleep.

If Musk truly believes his robo-dream, he should move to immediately raise the price of his cars to the price range he thinks his cars will be worth. Why not bring back residual value guarantees (RVG)? That’s right, he had to take a $121m write-down on existing RVGs this quarter just gone. Guess how many of his current line up he will sell at $150,000-250,000? Zero. That shows us the true value of Tesla. Appreciating Teslas and $500bn market caps. Some of the best comedy going. So is $240/share.

More digital diplomacy

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More digital diplomacy from Israel to Iran. This time using Iran’s solid performance against Portugal in the World Cup. The last time digital diplomacy was used by the Israeli PM was to push free drip irrigation technology to prevent farmers suffering any more from drought. Bibi Netanyahu is a polarizing figure at home, but his message here seems to be resonating with Iranians too.

Terrorist tunnel detection has mining applications

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Underground tunnels have been a feature of Hamas’ tactics to create havoc in Israel. An Israeli start-up company has developed a drone with equipment that can detect changes in soil composition, seismic activity and geology with use of hyper-spectral and 4K high definition thermo-imaging cameras. The IDF has deployed the system and used it to seek and destroy offending tunnels on Israel’s side of the fence.

The company claims the technology will be just as useful to mining companies for site testing new deposits as the sensors can breakdown the composition of minerals up to 100 metres below the surface. So instead of millions of dollars and onerous environmental impact studies to drill into the soil using cumbersome heavy equipment, a surveyor can use a drone for a fraction of the cost with zero impact on the planet. Innovation.

Oi vey Australia! Time to develop innovation

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While the Australian school system seems obsessed dealing with LGBT awareness, gender fluidity and social causes, a day in the most up to date Israeli cyber park in the Negev Desert shows just how seriously the small nation deals with the real world and preparing future generations for it.

It should come as no surprise that Israel lives under constant threat. The Jewish State is happy to leave LBGT 20yr celebrations to rainbow flags on the beachfront in Tel Aviv. When it comes to education it is all about working kids hard to be competitive, hungry and innovative. Primary school students learn computer coding and mathematics. They don’t hold cross dressing presentations or participate in Family Day as a replacement for Mothers Day to show inclusiveness for minorities. Survival matters.

Those same primary schoolers learn even more skills when they hit high school. The government monitors 13yo kids for their cyber acumen to screen the best possible assets for the future. By 16yo the weeding out process is all but done.

The notorious IDF cyber unit 8200 is relocating to this cyber centre in Negev where over a dozen buildings are being erected to gather the finest innovators in the world. It’s a $50bn investment. Even the Israeli Defence Force standard cyber units will relocate there. As Israelis have compulsory military service from 18 years of age, the best and brightest get automatically assigned to these cyber teams.

The universities are collaborating with corporates and government. They work on real solutions that matter rather than shoot for research on questions nobody is asking. Companies like Intel are setting up R&D centres in Israel because the talent is there.

Australia may have a Department if Innovation & Science which has a billion dollar budget. The Israeli tech infrastructure organizers in places like the Negev encourage start ups. They award grants thru competitive processes based purely on merit. Instead of cutting grant cheques to all for participating in the Aussie “everyone wins a prize” mentality, the idea is that only the “best” idea out of 500 wins. The rest are forced to make more compelling arguments and work to secure alternative funding. That weeds out waste. If Australia just divvies out with fairness in mind, resources are misallocated and it is more likely the capital allocators are clueless.

The system is impressive beyond words. Listening to a dozen presenttions ranging across medical, cyber and agricultural fields, one cannot be thoroughly in awe of an early-thirties doctor from the neighboring university who has racked up 20+ patents for his inventions.

Then there is the tale of a 17yo intern who was given an asssignment to hack the vulnerability of a mobile phone manufacturer whose PR department lied through its back teeth to cover up a flaw in the system they boasted was secure. They cited the original hack wasn’t done over a secure VPN. In 3 days the 17yo kid hacked that too. Take about a face plant.

The same group told a large American corporate that it’s video streaming had a bug. Instead of admitting the lapse, the tech giant hunkered down and dug in its heels. They put a bandaid on it and were hacked again. They have managed to make a computer that is next to another but not connected in anyway, even via WiFi to make functions purely based on heat.

The answer is simple though. There are many cultural reasons why this type of education system works in Israel. While Australia has no hope of holding a candle to the Israelis there are huge lessons to be learnt about fostering a culture of individual excellence rather than move down the slippery slope that fails to prepare our kids for the future. It maybe too late.