Your January issue of Small Cap Investigator

Buy the automaker at the head of the pack in the great EV race

In May last year, we wrote about sodium becoming a viable alternative to lithium in batteries.

A few months prior, Chinese automaker JAC had unveiled a test version of its Sehol E10X electric car that used sodium-ion battery cells and not its better-known and more widely touted counterpart.

In one fell swoop, JAC – and the Chinese company supplying the cells – had joined a host of players in the emerging battery space racing to create a new generation of lower-density batteries that use cheaper raw materials than lithium-ion cells.

As we wrote, despite being chemically very similar, sodium, found all over the world as part of salt, sells for just 1% to 3% of the price of lithium.

The demonstration car had a range of about 250 kilometres (155 miles) per charge and it supported fast charging – so certainly acceptable to most electric vehicle (EV) drivers today.

Sodium, of course, has a particular advantage in the low-cost or entry level EV segment, due to its abundance and chemical nature. Thermal runaway – the chance batteries spontaneously combust when hot – is a key risk factor for lithium-ion batteries, and sodium offers the potential for greater stability and, therefore, reduced fire risk.

Their slightly lower energy density, that helps mitigate that risk, makes them more applicable for the mass market than high-end or critical applications.

Sodium-ion technology is also sufficiently similar to lithium-ion that the same manufacturing processes can be used, making its advancement a seamless development from what’s already operational.

The establishment of new production methods and capacity is a key challenge for more alternative chemistries in development. Sodium’s feasibility and scalability, however, are key advantages.

As we wrote last year, we can certainly expect more advances and more companies entering the space. After all, sodium-ion “hits the holy trinity of being affordable, feasible and scalable”.

We’ve been on the lookout for the smartest way to play the development in sodium battery chemistry for some time – and I’m pleased to say we’ve now found that company.

Just weeks ago, the firm – our latest Small Cap Investigator recommendation – invested in a French sodium battery technology company called Tiamat.

The investment in Tiamat will ensure a sodium-ion battery factory in France gets underway. Tiamat, a division of the French National Centre for Scientific Research, may well be the first company in the world to commercially produce a sodium-ion battery.

Tiamet will begin by building batteries for power tools and energy storage devices and will scale up to “second-generation” cells for EVs, though when that might occur is unclear.

But the company making the investment is no one-trick pony – far from it. Its investment in Tiamat is merely the trigger for my interest.

In fact, the investment forms part of a broad technological push by this automaker, inherent in its innovative and decarbonisation-focused culture, to cut battery weight by 50% by the end of this decade.

It is making the biggest push towards EVs of any of the top original equipment manufacturers (OEMs), and has secured supplies of EV raw materials through 2027 by signing key agreements around the world to support that ambition.

No wonder, then, that the stock is now the largest holding of the hedge fund run by the inimitable value investor Michael Burry (of The Big Short fame), who can certainly see the direction of travel.

The company I’m talking about, and the one I’m recommending today for Small Cap Investigator, is Stellantis (NYSE: STLA).

Stellantis is a much larger and more mature company than we usually look at, so we will go through it in a more methodical and detailed way as the picture is more complex. This will look at six main factors: its business model, strategy, management and backers, financials, competitive advantages and risks.

Let’s get cracking.

The business and operational model behind Stellantis

Stellantis was formed in January 2021 by the merger of Fiat Chrysler and the French PSA Group (Peugeot-Citroen). The full list of brands it has is: Abarth, Alfa Romeo, Chrysler, Citroën, Dodge, DS Automobiles, Fiat, Jeep, Lancia, Maserati, Opel, Peugeot, Ram and Vauxhall.

It also has two of what it calls “mobility” divisions: Free2Move offers vehicle rentals (short term), and Leasys does business and private vehicle leasing (longer term). Both offer only EVs and hybrid vehicles and focus on renting/leasing Stellantis’ brand’s vehicles across the US and Europe. It also has a financing division for creating and managing auto loans to customers who pay on financing.

Stellantis operates globally, along the full value chain: design, engineering, manufacturing, distribution, and sale of a vehicle. It also builds engines, transmission systems, metallurgical products and production systems separately.

It is perhaps the most ambitious of the traditional auto OEMs when it comes to electrification. It is targeting 100% of European and 50% of US sales to be fully battery electric by 2030, by which time it will offer 75 different electric models across its 14 brands.

Stellantis has set up a system for battery EV manufacturing with four vehicle platforms, upon which branded chassis are then placed. With two different battery chemistries, this gives Stellantis the flexibility to release a wide range of EV models each year across multiple brands, while consolidating production to improve the efficiency of production, thus lowering costs.

Each platform, by sharing the use of certain components and manufacturing processes, is capable of producing over two million vehicles per year. The goal is to achieve economies of scale, whereby the various merged entities – the 14 brands – are stronger together than individually. By combining manufacturing and increasing order size with suppliers, Stellantis can achieve lower costs, and thus, improve margins. The proof is in the pudding and, so far, it seems to be working as profit margins since 2021 have been higher than before the merger – as you’ll see in the financials section below.

The range of its four platforms goes from 500km to 800km, and the four platforms are flexible in length and width, to improve its diversity of offering.

Stellantis possesses key strategic advantages

For Stellantis, its agility, long-term thinking, family ownership and strategic clarity are all advantages against other legacy automakers.

Meanwhile, a cash-generative legacy business, global penetration and relationships, production capabilities, a broad product range, regulatory compliance and brand heritage are all advantages against Tesla and other new entrants.

For years, the EV story has been Tesla against the world. When would the response from the legacy automakers come, people wondered? Well, it’s here.

Stellantis is seeking to capitalise on the paradigm shift that is vehicle electrification, seeking to build cost and competitive advantages through a long-term plan that it is calling “Dare Forward 2030”.

Chief Technology Officer Ned Curic summarised the company’s vision well when he said, “Our customers are asking for emission-free vehicles that offer a combination of robust driving range, performance and affordability. This is our North Star, as Stellantis and its partners work today to develop ground-breaking technologies for the future.”

Why do we like the strategy?

Firstly, it capitalises on a key industry shift, in this case that of vehicle electrification and sustainability, but also technological advancement, the incorporation of software and autonomy, future battery technologies – they are all interlinked, as well as encompassing the entire enterprise.

From financing to rental and leasing, to venture capital – all auxiliary parts of the business are aligned with the core vehicle business in transitioning to a tech-first, electrified future.

Secondly, it has a cash-generative core business to fund it. We see this as an advantage, as it’s less dependent on the market financing a long runway of losses on its path to a profitable EV business. Its existing operations give it the capital needed to execute on what will be, no doubt, a costly and complex transition to an EV-dominated business model.

Thirdly, Stellantis’ advanced EV strategy should protect it from regulatory shocks and setbacks, and perhaps give it an advantage over its rivals. After all, regulations are set to be a big factor in the passenger and commercial vehicle segments in the decades to come, as governments attempt to impose the climate imperative onto one of the largest sources of emissions: road transport.

Finally, it is coherent. From battery developments to software and autonomy, to model releases and China partnerships (which we’ll get onto) – it’s all joined up across every aspect of the company. The Dare Forward 2030 strategy is also an attempt to forge a unified culture from disparate merged entities that will come with their own distinct cultures.

This kind of longer-term, industry change capturing strategy is a hallmark of family-owned businesses, which can afford to invest now (impacting shorter-term financial metrics) and reap the rewards in the years and generations to come.

An impressive cast of management and backers

Stellantis’ CEO is Carlos Tavares, who was the CEO of Peugeot-focused PSA Group before the merger. Tavares was at the helm during the turnaround that brought Citroen back into the fold, and successfully launched PSA Group back into the CAC 40 – the leading French stock index.

What I like about Tavares is that he has an appropriate focus on profitability, saying as recently as earlier this month that Stellantis wouldn’t follow some automakers in the practice of loss-leading EVs, i.e. selling them unprofitably to try and grab market share.

As for Stellantis’ key ownership, the Agnelli family (of Fiat heritage) owns 14% of the company, while the Peugeot family owns 7%. This level of family ownership lends itself to the kind of long-term thinking that has seen these brands survive for 100 years or more, as is the case for ten of Stellantis’ brands.

As for its capital allocation and decision-making, last year’s acquisition of Chinese new energy vehicle mobility company Leapmotor is an interesting signal about management. As well as fitting with its Dare Forward 2030 strategy of accelerating its shift to EV, it also adds technological capabilities and shows just how important China is for the company.

Tavares also has previous success in China at PSA Group that suggest he knows what he is doing, and that Stellantis could perform better than its peers in a critical market.

Overall, Tavares, backed by the Agnelli and Peugeot families, and evidenced by the Dare Forward 2030 strategy and Leapmotor acquisition, have all the hallmarks of a high-quality management team with good long-term financial backing, the kind we are happy to invest alongside.

The financials are impressive

The financial history is interesting. The merger between PSA Group and Fiat Chrysler was completed in January 2021, so all data before that obviously understates its current earnings power. For example, its 213% jump in revenues from 2020 to 2021 was not organic.

Saying that, however it achieved them, the company still earned $180 billion in sales in 2022, up 20% year-on-year. This compares to the current market cap of the company of only $63 billion. The price-to-sales (P/S) ratio is, therefore, really low at 0.35x. Its net profit in the last 12 months is just shy of $20 billion, giving it a price-earnings (P/E) ratio of just over 3x – also an incredibly low figure.

What’s more, Stellantis’ net profit margins have been boosted in the last two years, following the PSA Group merger.

Before they were in the 3%-5% range, since 2021 they’ve been up at 9%-10%. The fact that Stellantis achieved this against a backdrop of supplier/cost inflation and a consumer price squeeze makes it especially positive. This suggests that perhaps there are genuine economies of scale available, and that merging into a larger entity has been good for each of the merged entities.

Given that Tesla’s success is a main reason why Stellantis (like every other automaker, frankly) is so incredibly unloved by investors, it’s worth comparing the two: Tesla is on a P/S ratio of 6x and a P/E of 68x. So, on the simplest, most basic comparison, Stellantis is 17-18 times cheaper per unit of sales and 21 times cheaper per unit of earnings.

When you see numbers as extreme as these, it’s best to ask what am I missing? The first thing that makes Stellantis look a little less cheap, in absolute and relative terms, is free cash flow (FCF). Net profits are an accounting measure, FCF is the actual cash generated by the business that year that is available for use – either to grow the company or give back to shareholders as dividends or buybacks. 

If Stellantis’ net profit margin gas been 9%-10% for the last 2-3 years, its FCF margin has been around 6%. This offsets a bit of the low valuation, but it seems to be an industry feature.

Tesla, by comparison, is in a similar position of cash flows coming in noticeably below net profit, so in relative terms nothing changes, but it’s important to note that on a cash flow basis, Stellantis isn’t quite as cheaply valued as it first appears.

But it’s not just Tesla to which Stellantis compares favourably

Data based on 19.1.24

You can see, in green, where Stellantis rates favourably against its big three competitors – the other traditional automakers. Hyundai and Volkswagen are also cheaply valued, but less profitably and more heaving in debt.

Tesla is a different beast entirely, existing almost on a different planet in valuation terms. Its margins are currently superior, but sustaining them in the face of greater competition from the top four is going to be its challenge.  

Some may worry that Stellantis and Co may turn out to be “value traps” – i.e. they are cheap for a reason. I would caution though that a “growth trap” is far more dangerous, a highly valued security, bought widely for its potential future sales, that disappoints on growth. Tesla has a lot further to fall than Stellantis, if its growth disappoints.

Tesla’s market cap, for example, roughly implies 14% growth for the next 25 years (by which time its FCF would be $73.5 billion) on top of a 5% cost of capital… that would be impressive, in an industry growing at 1%-6% (depending on who you ask). Meanwhile, Stellantis’ current $62 billion market cap implies negative growth in cash flows of 7% each year for 25, using a high discount rate of 10%.

Alternatively, if you allow it a 7.5% long-term cost of capital (a more reasonable estimate), and standard industry growth rates of 2%-3%, the present value of future cash flows (over the next 25 years) are equal to $150 billion. In my view, its EV strategy, historic brands, efficient operations and strong management and backers make it likely to grow more than the industry.

Overall, Tesla’s current valuation implies extremely high levels of growth over a very long time period, while Stellantis will prove a good purchase even if growth is slightly negative or flat. That’s a margin of safety.

What’s more, in terms of operational efficiency, it is ahead of the game, too.

At Stellantis, compared to its peers, purchased raw materials are turned into finished products and sold faster, its customers pay it quicker and it waits longer before paying its suppliers. This gives it a negative cash conversion cycle (the speed at which orders to suppliers are converted into cash flow from customer sales). Negative means that on average, money comes in before it goes out. Not even Tesla can match that, let alone the other legacy competitors.

Altogether, this means Stellantis is clearly more efficient than its major peers in the traditional OEM and EV space. Its cash conversion cycle is the best at -23, vs 22 for Toyota, 32 for Hyundai, 70 for VW, and 4 for Tesla.

Stellantis’ negative cash conversion cycle is remarkable, especially given its main rivals do not share it. It suggests hugely efficient production and supply chain management, strong supplier relationships, a responsive dealer network, successful demand forecasting and a lack of product recalls and issues.

To summarise the financials, Stellantis is cheaper, more profitable and more efficient than its peers.

There are some notable risks to consider

Although it’s true to say there is a huge amount going for Stellantis from an investment perspective, it is also equally fair note that the business and the shares face serious risks, too.

First and foremost, recession is a key risk. Two of the world’s three key car markets for Stellantis are currently suffering worse than most: China and Germany.

Economic weakness in is a threat in those markets, and if they export that weakness to other nations, especially America, then the spread of weak demand could compound into a global issue, affecting Stellantis everywhere.

Within economic weakness, specific mention has to go to the EV segment, which has grown exponentially over the last five to ten years, breaking into the mainstream market much faster than so many people believed was possible.

However, as the cost pressures from inflation and the impact of higher interest rates are feeding through to a squeeze on all consumers, the cost of a new vehicle is becoming a hurdle for too many people. 

Secondly, competition. The EV market that Stellantis is so focused on dominating is the golden fleece that Elon and all the Chinese argonauts are chasing. Competition will be fierce, and there will be bursts of oversupply that cause deep losses for some competitors.

The other three largest global automakers are Toyota, VW and Hyundai. In the EV space, the main competition is obviously Tesla. It is an old, and highly competitive industry that had been well-consolidated and stable, but is suddenly facing challenges from new entrants riding the wave of electrification.

Tesla has been cutting prices aggressively in the last year, and Hertz is currently flooding the market with additional used car supply. CEO Carlos Tavares recently warned of the dangers of a race to the bottom on pricing, while stating that Stellantis would prioritise margins over volumes in such a scenario, which would avoid weakening to cash generation and brand power of the company.

What’s more, the products (passenger and light commercial vehicles) face a lot of competition and are highly standardised, aside from branding/marketing. They are considered “consumer discretionary”, that is to say they are large purchases for consumers, and so differentiation, quality, curability and cost are all very important. Second only to homes in terms of purchase size and length, cars form a large part of consumers’ image and self-worth.

Thirdly, there is a two-fold transition risk. One, that it takes far longer for full mainstream EV adoption than Stellantis currently estimates, leaving them with stranded assets and no legacy models to fall back on. And, two, that the transition actually cuts out passenger vehicles more broadly and focusing more on public transportation.

E-bikes, for example, may present a cheaper and more functional alternative to a car for many urban-dwellers. We cannot assume that the car remains ubiquitous forever.

Overall, the incredible complexity of building a culture and delivering a long-term strategy internally is hard enough, but doing so in a cut-throat industry undergoing a once-in-a-century shift to EVs just means nothing can be taken for granted in the years to come.

If you’re comfortable with the risks, then Stellantis is a BUY

In summary, Stellantis’ recent formation has given it the possibility of achieving economies of scale, which it is capitalising on through a streamlined production process that is already delivering higher efficiency than its main competitors.

The combination of its technology-orientated culture and electrification strategy – as evidenced by its recent investment in sodium-ion batteries – align well with the long-term thinking of its backers and management.

All of this, built on over a century of accumulated brand value. Pulling it all together, Stellantis has the ability to be highly competitive against peers both new and old over the next decade.

If we then look at its extremely cheap valuation in that context, Stellantis looks like a smart way into the mainstream EV story with huge potential upside from even the smallest realisation of its potential value.

As such, we recommend that you buy Stellantis today.

Action to take: buy Stellantis
Ticker: NYSE: STLA
ISIN: NL00150001Q9
Current price (as of 2.02.24): $22.84
Market cap: $69 billion
52-week high/low: 15.07 – 23.66
Buy up to: $23.50

Big breakthroughs

Inside the lives of James and Sam

James:

I can’t lie: 2024 hasn’t got off to the best of starts.

I’ve been laid low for much of January by a bout of dengue fever.

I was infected with the tropical disease during a family holiday to (and violins at the ready, please) sunny Barbados over the festive period.

My entire family was on the trip – 18 of us in total – and half of us ended up contracting the mosquito-borne disease at some point during our stay on the island.

My twin brother was the first to fall ill on New Year’s Day, followed by his wife, my partner Deborah and one of my nephews.

All complained of high fever, headache, joint and muscle pain, rash and fatigue – and basically spent what was left of their holidays in bed.

Five more of us – including me – started to fall ill in the days following our return to London. I started to shake violently with cold one evening and then threw up in the night – at which point I knew that I was the latest to succumb.

However, at this point, none of us realised we had dengue fever – we all thought we had the flu. But suspicions that we all had something else started to form over the next day or two when we read – somewhat belatedly, you might think – about an outbreak of dengue in Barbados and the surrounding region.

Certainly, the range of symptoms (which for me included shivering, severe nausea and vomiting, as well as shooting bolts of pain down my legs at night), the duration of incubation, the absence of a sore throat or cough and the fact that we learned that Barbados currently has three times more dengue than flu cases strongly pointed to the former than the latter.

But it wasn’t until I took myself to the walk-in clinic at the Hospital for Tropical Diseases in London that our suspicions were confirmed. After taking a swab and blood tests, a doctor at the hospital eventually ruled out the flu, Covid and a range of other illnesses and said that indeed, I most likely picked up dengue from a certain type of mosquito lurking near pools of stagnant water.

(It so happened that a few of the kids found a favoured spot to make sandcastles near such a pool of water on the beach, which then became a focal point for much of the family.)

The doctor’s diagnosis was later confirmed by the UK’s Rare Imported Pathogens Laboratory, where a sample of my blood was sent.

Luckily, in most cases, the symptoms of dengue pass on their own accord. I’ve been taking paracetamol to bring down my fever and minimise discomfort, and I’m pleased to say – along with the rest of my family – I’m now pretty much fully recovered.

But on top of all this – and by far more devastating – we’ve also been dealing with the sudden death of Deborah’s mum, Linda, who died suddenly on 17 January after a recent diagnosis of stomach cancer.

This has really knocked us for six and certainly put everything else in perspective.

Linda was a fabulous mum, wife and grandma – our kids adored her – and she’ll be missed enormously.

I apologise for the sombre tone of this month’s personal missive from me but, as we move into a new year, perhaps it’s no bad thing to be reminded of what’s really important.

If it needs saying, families and health really are life’s priorities. Everything else is secondary.

I’ll be back in touch next month with hopefully a more upbeat missive.

Sam:

Why does January always feel like it has around 75 days in it, not just the usual 31?

Definitely the “longest” month of the lot. Probably just the come-down from Christmas and New Year’s.

But it does feel like it’s been a long month, which means when I was in Las Vegas for the CES expo in early January, that feels like years ago now.

But it was only about two and a half weeks since I got back and it was an absolute whirlwind of a trip.

There were loads of tech on display, from the future TVs that we’ll see hitting the shelves (so many TVs!) through to self-driving cars, artificial intelligence agriculture and an interesting tilt back towards hydrogen technology.

In terms of the good, the bad and the ugly, I have to say that in terms of the good, those transparent TV screens were actually quite breathtaking.

Now you might think: why would I want a transparent TV? And it’s a great question. After all, sitting in your lounge room, it’s unlikely you’d want to see the wall behind it.

But hear me out…

The TVs, for a start, aren’t always transparent. They can cycle through a regular-backed TV and then reveal the “other side” on command. Now that doesn’t make much sense if you’ve got a plain wall behind it.

But maybe you want to use it as a feature to display some images, a fake fireplace or something, anything while not using it. And that it doesn’t back onto a wall, but it’s in the middle of a room for all to see.

The TV itself becomes somewhat of a piece of tech art.

Ok, maybe that’s not convincing you to get one. Which is fine. But where I saw these transparent screens really come into their own was the application for things that aren’t TVs.

Like LG’s “Dukebox” which is an audio device that displays information on the screen, but you can also see through it to reveal the amplifier tubes and internal workings of the device. It was arguably the coolest thing at CES and something that’s going straight onto my own shopping list.

So that was up there with the cool tech.

And what about the other end of the spectrum?

What about the crappy tech?

Well, literally, the crappiest tech for me was the smart toilets from Kohler. Yes, that’s right, a smart toilet.

It’s not that it didn’t look good. I mean, the toilet itself was able to change its visual design and patterns on it when closed. And it did a whole range of different “smart” things to your backside when you’re doing the business. Visually, it’s certainly a statement.

But really… why?

A toilet doesn’t need to be a statement. It needs to quietly blend into the background –unnoticeable, innocuous.

I’m all for a smart, connected world. But when it comes to my schedule and that part of my life, I feel like analogue is the way forward. I don’t want it to be smart. I just want it to do what it’s supposed to do – nothing more, definitely nothing less.

It was a fun week, and there’s too much to cover in this section of our monthly update. But it was easily the thing that kept me busiest this month and has also shaped some ideas for the kinds of tech and stocks we might be looking at in the near future.

Crypto Corner

Sam:

In somewhere between 75 to 80 days’ time, bitcoin’s block reward is getting halved, again.

The reward drops from 6.25 to 3.125 bitcoin per block.

On average there are around 144 blocks confirmed each day on bitcoin’s blockchain.

That means the new daily supply of bitcoin will go from about 900 to 450.

That’s per day.

Not a lot is it.

Now think about this. In the first seven days of existence, the US-based spot bitcoin exchange-traded funds (ETFs) gobbled up over 100,000 bitcoin. That’s 14,285 bitcoin per day.

Put another way, the ETFs’ demand was 15.87-times greater than the new daily supply.

After the halving in April and based on that demand, you’re looking at 31.74-times greater demand for bitcoin from just those ETFs than the daily supply will be.

So with such divergence in demand and supply, a lot of questions arise as to why the bitcoin price hasn’t already exploded.

And that’s where the detail here is important, for now.

Sucking up supply for now…

After the US Securities and Exchange Commission (SEC) approved spot bitcoin ETFs, there was an immediate supply flood into the market.

That was down to the Grayscale Bitcoin Trust converting to an ETF – a very liquid ETF at that.

It had previously not been as easy to trade in the Grayscale Trust, but as an ETF, the floodgates proverbially opened. While demand in the seven days has been huge, Grayscale has seen around 80,000 bitcoin outflow from its (now) ETF.

This “dump” was for several reasons.

The first being that Grayscale’s fees are up around 1.5% whereas others like the iShares Bitcoin ETF are closer to 0.2%.

So ask yourself this, if you’re sitting on a million worth of bitcoin, would you rather pay $15,000 for the privilege or $2,000? Well the correct answer is $0. But for many, the idea of custody with a financial institution for that size of capital makes better security sense, and they’ll pay for that.

But $2,000 is closer to the mark than $15,000.

Another reason for the exit is that no doubt investors would have taken profits from the divergence in Grayscale’s price to net asset value.

This chart from The Block shows that in February last year the Grayscale Bitcoin Trust (GBTC) was trading at a 46% discount to its net asset value. As the ETF approval got closer and closer, that premium closed in to 0%.

In addition, bitcoin was trading at $21,000 in February 2023. That discount effectively priced the bitcoin in the fund at $11,340. So as the fund closed in to parity of price to NAV, some of those who’d bought in while the discount was large no doubt would have clipped some profits.

It’s also believed that a large portion of FTX bitcoin assets were sold off to fund the liquidation process that’s still ongoing with FTX’s failure.

Furthermore, anecdotally I’ve been hearing of bitcoin holders transitioning away from self-custody bitcoin storage to the ETFs. And I can truly understand that perspective.

Don’t get me wrong, I’m all for self-custody and breaking free of the shackles of traditional finance. But safety and security must also be a factor in how you hold your assets.

For large hodlers of bitcoin – and I mean on a scale that most never will get close to – when it comes to self-custody devices, there’s a physical security element you need to consider.

It’s akin to using your own house as a treasury, storing kilos of gold bars or piles of cash. It’s not really the safe move is it?

That’s why I’ve heard that in the US in particular there’s been some selling of bitcoin to move into these ETFs. Now that’s not a Grayscale thing, but it has added supply to the market, which gets gobbled up by the ETFs right away.

Therefore the demand for bitcoin by the ETFs has more or less been met by these additional supplies plus the regular liquid market in bitcoin.

However, Grayscale outflows look to be slowing. This transition period in the early weeks of these ETFs is starting to wind down. Which means in the next couple of weeks we’ll start to see a clearer picture as to the real demand/supply imbalance from the ETFs and the available bitcoin in the market.

We know that these ETFs have already been the most successful launches in history. Demand indicates that they will go on to soak up billions more in capital over the year. Billions more in demand that must come from a market with dwindling supplies.

That logically indicates that bitcoin’s value has but one direction to take.

Stack sats

Of course it’s not as linear as that. There will be supply coming from hodlers who no longer wish to hodl. Plus demand for the ETFs will eventually find a limit, albeit I expect far from here.

But then you also need to factor in demand for bitcoin regularly as well, particularly if the price levels up back towards its previous all-time highs. That’s when the retail FOMO kicks in again, and we launch into the next big bull cycle.

We’re only about 50% off that mark. So it’s not a leap to see that happening in 2024 – possibly not long after the halving. All this means, in my view, is that if you’re stacking your sats, if you’re getting a position in bitcoin, while you can, now’s as good a time as any to be doing it.

As for the rest of the market, that will follow bitcoin heavily into a new bull market. It does almost become a case of everything heads higher. But in particular I think some of the big areas of opportunity in the altcoin market will come from sectors like artificial intelligence (AI), bitcoin layer-2, decentralised infrastructure, modular blockchains and some of the larger community-backed meme coins.

In other words, a lot. But first and foremost, it’s bitcoin that’s going to drive the market. It’s sats that I think should be stacked and bitcoin that should be the first point of diversification in a portfolio.

What else we’ve been looking at this month

James:

Why Jeremy Grantham likes clean energy stocks — even if they’re getting smashed

Jeremy Grantham got rich by profiting from bubbles in late-1980s Japan, in turn-of-the-century tech stocks and in US housing prior to the 2008 financial crisis.

Now, the investment company he co-founded says clean energy has momentous growth and major public policy on its side, with the “abysmal” performance in the stock market over the last two and a half years creating exciting opportunities for long-term investors.

In a report dating from September, but only landed on my desk last week, Grantham’s GMO said inflation and rapidly higher interest rates during the past 12 months had made clean energy projects more expensive to finance and less attractive as future cash flows are discounted at a higher rate.

Rising interest rates also caused investors to re-evaluate growth stocks and clean energy companies “got caught up in the broader growth unwind,” said Lucas White, Lead Portfolio Manager for the Resources and Climate Change Strategies at GMO said.

What’s more, the Inflation Reduction Act has also impacted clean energy performance in a way that was unexpected, according to White.

Although the landmark legislative package, which included clean energy incentives, will drive investment over the long term, clean energy projects were delayed in the short term because stakeholders were waiting to learn the final details of the law.

“Public policy changes often pull demand forward, but in this case, demand has been pushed into the future,” White wrote in his report.

The new market regime, coupled with policy changes, negatively impacted clean energy company earnings and their stock prices were impacted disproportionately, said White.

Canadian Solar, the world’s largest solar developer, had been beaten up to such an extent that it was trading at less than five times forward earnings, despite growing at 25%-30% per year, said White, noting something similar happened to the company SolarEdge.

White said:

However, this is not the Tech Bubble or Tech Bubble 2.0. Clean energy companies are growing profits rapidly, and the sector is maturing. At some point, one would expect the sector to withstand a bit of bad news. In the meantime, these situations create opportunities for long-term investors.

And GMO believes the growth and public policy changes will continue to support the sector.

The Infrastructure Investment and Jobs Act, the CHIPS and Science Act, the European Green Deal Industrial Plan and other more local public policies will help transform clean energy in the future. But the impact of the Inflation Reduction Act’s $369 billion package of incentives — many of which take the form of uncapped tax credits — will be huge. It hasn’t been appreciated by markets yet either.

GMO stated:

Barring a stunning change in course, it’s clear that US investment in climate will dwarf anything we’ve seen before, and the same is true around the world. In fact, the U.S. has lagged China and Europe in driving clean energy investment over the last few years and needed to act aggressively in order to catch up.

From 2019 to 2023, China has increased its annual clean energy investments by $180 billion, the European Union has invested $150 billion and the US has invested about $110 billion more, according to estimators by the International Energy Agency (IEA). “Clean energy isn’t just the future. It’s the here and now.”

The full report is certainly worth reading. You can read it here.

Electric aircraft may have more potential than we thought

Although batteries are doing a great job replacing petroleum in car engines, they’ve been a lot less successful in the skies. Efforts to make a working electric airplane prototype have perennially come up short.

After all, the conventional wisdom about battery-electric planes is that they can’t be large or travel very long distances because of the weight of the batteries.

However, according to Dutch electric aviation firm Elysian, launched last year, previous analysis has been based on “several misconceptions”, leading to the conclusion that battery-powered aircraft would only be suitable for short-range aircraft in the sub-19-seat commuter class.

But Elysian has now showcased plans for its E9X aircraft. The plane is engineered to carry 90 passengers up to 800 kilometres.

The forecast capabilities, which go beyond previously announced projects, are based on two scientific studies carried out in collaboration with Delft University of Technology in the Netherlands.

The first study introduces new “parametric” designs for an electric aircraft suitable for 40-120 passengers and presents design principles for a higher range than previously thought possible. While the second study presents a conceptual design of a battery-electric 90-seater aircraft, including batteries integrated into the wings, a low-wing configuration, and folding wingtips.

In short, the findings show that large battery-electric aircraft can carry much more energy and are aerodynamically more efficient than originally assumed.

The team at Elysian is now working through a list of technical challenges, from battery development to how power moves through the plane. They plan to have an updated design by the end of the year and then dive into more detailed development. If all goes as planned, the first flights could begin in 2033.

Analysts struggle to keep up with exponential green expansion

Renewables are growing so fast that the IEA has had to – yet again – revise its forecast, this time up an incredible 33% in one year.

Renewable power capacity is expected to grow by 7,300 GW through 2028 under countries’ current policies and will overtake coal as the leading source of electricity globally by 2025, according to a new analysis by the IEA. That would mark a 33% increase over 2022 projections, led overwhelmingly by surging renewable energy generation in China.

Renewable energy capacity grew by 50% in 2023 to more than 500 GW, the fastest rate of growth in more than 20 years, according to the IEA.

With the dramatic increase seen over the past year, the “Renewables 2023” report found that the world is now on track to grow renewables capacity by 2.5x by 2030, putting the global goal established at the COP28 climate conference to triple renewable energy capacity by the end of the decade within reach.

The expansion happened almost exclusively among the world’s 20 largest economies, with China far out in front. In fact, China commissioned more renewable power last year than all other countries combined did in 2022, and it’s expected to account for around 60% of renewable power additions in the next five years, the IEA said.

Analysts are having a seriously hard time keeping up with what’s going on: an exponential expansion of renewables everywhere, all at once.

Sam:

When is a 50/50 outcome actually a 51/49 outcome?

The answer to that question is all the time. This story in Scientific American magazine had me enthralled. The very idea that a coin toss is not a 50/50 outcome is a game changer. There’s not much to explain other than to say read this because it will change your perception of the phrase “it’s a coin toss”.

The reality is that it’s not a coin toss at all, unless someone is a favoured outcome.

When will virtual actually become reality?

This YouTube video is a few months old, but I only just got around to watching it this month. The reason is that the hype surrounding Apple’s latest Vision Pro device, its augmented reality headset, is reaching a fever pitch.

The company has already sold 200,000 Vision Pro headsets, which, at around $3,500 a pop, is a lazy $700 million, or so, in revenue coming Apple’s way. But I also saw some people describe the FaceTime calling function within Vision Pro as resembling 90s NPCs (non-playable characters) from the original PlayStation games.

And then someone pointed me to how good the virtual avatars that Meta and Mark Zuckerberg were working on, at least compared to Apple’s. Also, the best example of just how good the interview Zuckerberg did with Lex Fridman was.

I don’t know about the headsets. And you can see in this month’s breakthrough tech section my discussion about it all. But you can’t argue that Meta does seem to be streets ahead of Apple in this case.

A good read of bitcoin, past, present and future

I’ve been in the crypto space for a long time now. And the changes and developments in this space are astounding. The “altcoin” market is a big driver of that development, but there’s also a fast-growing movement of innovation and development with bitcoin.

It’s something that not a lot of people understand very well. To be honest, there’s so much information out there that it’s hard to piece it all together.

So, when I came across this in-depth look at the bitcoin ecosystem, it was refreshing to see something quite detailed and easy to read that explains where everything is at for bitcoin right now.

I highly suggest you have a read of it to get a solid footing of what the bitcoin ecosystem is beyond just bitcoin. 

James Allen and Sam Volkering
Editors, Small Cap Investigator