If 2020 feels a bit like the late 90s for the tech industry, that’s because it is.
And while we don’t know how all of the groundbreaking technologies we’ve seen hit the market this year will pan out, we do know there are likely going to be winners and losers amongst them… just like those from the dot-com era.
For the vast majority of the investing public, figuring out which ones will become the next Microsoft and the next Pets.com is not an easy task.
With the thousands and possibly millions of pages written about why some dot-com companies made it and others didn’t, there are some lessons we can take from that time.
And with the final quarter of 2020 upon us, it’s time we begin looking at the anatomy of a modern tech darling.
Incredible in Theory, Lacking in Execution
One company seems to remain the prime example of early adopters embracing game-changing technologies: Tesla Inc. (NASDAQ: TSLA).
Just a few short years ago, you might have thought Tesla’s founder Elon Musk was insane. There was simply no way anyone could break into the automobile industry in the modern era.
But, as we’ve seen, Tesla’s electric vehicles and that company’s potential have dominated news in this space over the last few years. Its 400-plus percent share price increase in 2020 alone proves that it is currently one of this year’s winners.
Nikola Corp.’s (NASDAQ: NKLA) incredible boom and bust in a matter of four months shows the other side of this scale.
But Nikola’s demise only tells a part of the story. Its short history in the public eye was filled with speculation, controversy, and eventual panic over what might or might not turn out to be lies.
Instead of analyzing that disaster, let’s look elsewhere in this field to see what a true breakthrough technology company might look like… or not.
Beating Tesla at Its Own Game
The thing that makes Tesla so revolutionary isn’t necessarily its vehicles. Its most impressive piece is the batteries in those vehicles.
Battery technology, which allows rapid charging, longer distances, and low or no carbon emissions is where investors are most interested.
Tesla leads here. But another company is making claims to have out Tesla-ed Tesla on this front.
QuantumScape Corp. is a developer of solid-state lithium-metal batteries. Rather than just using some lithium like Tesla, QuantumScape’s hope is to create the next-breakthrough with its fully-lithium-metal batteries.
In theory, this is game-changing. And it could be… in another five years.
You see, that’s when the company expects to actually have a product to sell. It hasn’t even created a full-sized prototype yet.
Despite this, it announced last month that it will merge with a SPAC called Kensington Capital Acquisitions Corp. (KCAC) as early as the end of this year. That deal would value QuantumScape at about $3.3 billion.
That’s $3.3. billion with no products or revenue for another half-decade. That’s $3.3. billion for a technology that’s greatest claim right now is to potentially halve the charging time for its batteries compared to Tesla’s.
I’m not saying this isn’t a revolutionary idea or technology. It very well could be. It has the potential to be slightly safer, faster charging, and longer-lasting.
But that gives the likes of Tesla five-years, a fortune in cash and researchers, and an already proven track record to come up with something that beats it.
This is 2020 in a nutshell. Early investors’ and private equity’s lust to profit as soon as possible makes deciding which companies’ technologies are actually workable very difficult.
Going public before you even figure out the underlying technology itself and a full five years before you might even come to market with a product used to be insane.
The only time in history companies could get away with that was the 1990s.
To look at the anatomy of a breakthrough technology opportunity today, that’s the only comparison one can make.
This isn’t a slam on QuantumScape. A solid-state lithium-metal battery could change the landscape a half of a decade from now. And $3.3 billion might be a steal a full decade from now.
But for investors, there needs to be a difference between emerging technologies and emerging profits.
QuantumScape might be the former. But it’ll be a long time before it becomes the latter.
And dissecting which companies are which is what this letter is all about. Smart investors need to figure out how to do that too.
Don’t be a 90s investor. Learn from their mistakes.
To your prosperity and health,
Joshua M. Belanger
Executive Publisher & Founder