Sustainable Investing

Kirk Spano

"World's Next Great Investing Columnist" --MarketWatch

Amazon v Microsoft & Tesla v The World

Bloomberg highlighted the battle for the Pentagon contract today. Beth talked about this a month ago in her piece: 

Why Microsoft (Not Amazon) Will Win the Pentagon Contract

Beth had already eliminated Oracle and IBM from the running. That was just announced officially. 

Will The Deep State Infiltrate Pentagon Contract

The winner of the Pentagon contract will supply cloud services as the backbone to data collection and storage for Defense Department. The contract not only makes $10 billion in revenues for the winner, but also overruns which there surely will be, it's a gov'ment contract after all, and ongoing support services forever.

I don't have a strong guess who gets the contract, but I lean towards Microsoft as it doesn't have the central personality that Amazon does in Bezos. I'm sure the Pentagon doesn't want to hear "deep state" conspiracy theory nonsense that will come around if Amazon and Bezos get the contract.

If Amazon does get the contract, I think it will be a catalyst to AWS spinning off from Amazon. One reason that Amazon is a core holding for me is that I do expect the eventual spin off of AWS (Amazon Web Services). When that happens, it will immediately become one of the largest S&P 500 and Nasdaq listings around $400-600 billion. 

Microsoft needs this contract more than Amazon in my opinion as I believe the Office Suite of products is under long-term attack from Google. Also, operating systems will change over time with mobile maturing and the advent of quantum computers in the next decade or two. I don't think the government wants to see a potential slow deterioration of such a massive American tech company and will throw it this contract as support, bringing Microsoft more into the fold of defense contractors. 

It's rare that either stock is cheap. Now is no exception.

Amazon has rebounded off of its December lows. I bought it there with a limit order at $1500. I just trimmed most of my holdings, keeping only a starter position to rebuild later. That's inline with my thesis that the next couple years could be very choppy. I trade when I have to. I think the next two years will be a time to trade. I would buy it back around $1500 again.

Microsoft also rebounded from about $100. I do not own it and did not trade it. Their growth rate isn't particularly exciting to me and the dividend isn't growing fast enough. Plus, as I said, I don't see much growth in their future. The Pentagon contract could solidify the dividend growth though and that's something that dividend growth investors need to watch. If Microsoft gets the contract, it becomes a buy the big dips stock.

Larry Ellison and Tesla A Match Made In Purgatory

Back in December, Oracle accused the Pentagon of unfair practices and conflicts of interests in awarding their cloud contract. It's interesting to me that Larry Ellison's fought a bit dirty on this contract. Oracle's accusations were partly true, but what I found interesting was that Ellison was once again on the edges of something dirty.

One of my now passed clients was an early investor in Oracle and she told me stories of what a dick Ellison was and how he cheated many early investors out of money - she still made 10x what she invested, but should have made 100x according to her. For what it's worth, I believe her. 

Ellison is now on the board of Tesla. For what it's worth, I do think Tesla will survive and take a lot of global market share the next 5-10 years in the 10-20% range. For comparison GM is at about 17%, Toyota about 16% and Ford about 14%. GM and Ford have negative trends. That notwithstanding, Tesla is in for a choppy drive the next couple years. 

Tesla has a great lead in EV and is an iconic brand with "fanboys" (like me) who want to buy a Tesla eventually. To me, they are the Apple of cars. Their multilevel business model with solar energy generation and storage is also a good one. The problem is the pace of adoption of EVs, solar and energy storage and where that intersects with Tesla's balance sheet. 

The company will be done to around a billion dollars in cash by year-end by my calculations. They are at around $2.5 billion now, will lose about a billion this year and have a half-billion note due in November. 

Today, they announced they would be dramatically slowing their increase in battery production, a joint venture with Panasonic. 

Something to know about today's Tesla and Panasonic headline is that I have been talking about the advent of new battery technology and that I expected Tesla would jump to it quickly. I do not put it past Musk to essentially dump Panasonic for the future while using them now for what Tesla needs the next few years. 

Larry Ellison is also a very pragmatic hardguy in that way too. He will not dissuade Musk from doing what is right for Tesla, regardless of optics. 

The real story with today's battery decision to watch, is the announcement of a new battery design in the next year. There are new zinc air batteries that are on the cusp of being produced at larger sizes. We already use them in smaller products like hearing aides. 

Billionaire Patrick Soon-Shiong's new company (7 years old), NantEnergy, is about the distance from the top of this column and the bottom from having a battery that breaks the $100 per kilowatt-hour barrier. The zinc-air battery provides a lower cost for energy storage and is now able to be recharged multiple times. 

The technology is a hundred years old, but like other old technologies, has been reengineered to be much more efficient and cheaper. The major kicker of course is that zinc is not toxic and is easier to mine than lithium. I expect Tesla to announce something with Arizona based Nant in the not too distant future. 

What would that do for Tesla. First off, it would again be first to market with a next generation EV. Second, it would likely open up Soon-Shiong's pocketbook to a large investment in Tesla. Soon-Shiong is a philanthropist and I can see him giving the shares to his foundation one day.

It is possible that they sell licensing to GM, Ford and others for the battery technology, however, Tesla is the natural fit. Why? While I know people like to bash Tesla because they are young, changing the world and a little broke, the company doesn't have something that GM and Ford have, which is a horribly heavy footprint to support.

As I said in the comments to another Tesla bashers column on Seeking Alpha, GM and Ford are much more likely to go bankrupt than Tesla. There are nations that want Tesla factories and billionaires that want a piece of the action, in addition to wanting to see Tesla change the world. 

I'll finish with Ellison. For the shark that he is, he's another deep pocketed person that wants to see Tesla succeed. He did not come to Tesla for fun. He's about the money. What did grandpa tell you? "Follow the money?" I hope you listened.

When the correction in Tesla shares is over, you want to own some shares. I am targeting a price to buy around $180, however, it might not fall that low. We'll have to keep an eye on money flow. Tesla will become one of the largest car companies on earth, faster than you think. 

Kirk Spano covers Sustainable Investing as one of the original contributing analysts at FATRADER. Named the "Next Great Investing Columnist" at MarketWatch, Kirk has been getting the jump on secular trends for over 20 years, and now sees investing in alternative energy, smart grid, EVs, agriculture, healthcare and water as the most likely place to make outsize profits in coming decades.
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