Tuesday, November 3, 2009

Apple, Google and Buffett

What is similar between Apple, Google and Buffett?

Nothing at the first glance, dig a bit deeper and one comes across multibagger personalities. All of them are in different businesses rarely encountering others as competitors but I can’t help myself imagining the ever upwards sales and profit charts for these companies (Berkshire Hathaway in case of Buffett). All three of them share some common traits.

Core business

Apple and Google excelled in their initial businesses of computer hardware and internet search. None of them were the first entrants (a number of mainframe makers were present when Apple started) but harnessed the potential of being ‘not so late’ entrants.

Buffett, on his part can easily find a place in the list of all time great investors on the basis of his early investment in Coke and Gillette. It was the firm belief in the value investing ideals that he refused to invest in any of the dot coms. Needless to say, Buffett had the last laugh.


Apple has always been great with software but has never played the ‘software alone’ card till now. Rather, the company has always focused on the combination of hardware and software. Not paying heed to the naysayers for entering into the portable music player industry, Apple took on the challenge and created a profitable niche for iPod in the industry dominated by the likes of Sony and Philips.

Google saw a logical stagnation in its income merely being a search engine and providing contextual text advertisement along with search results. The company thus widened the scope of its contextual advertising by diversifying into email and acquiring YouTube.

The Oracle of Omaha officially says that he prefers to invest in the businesses he understands. But he has repeatedly made investments which defies the logic. Latest in the list is the investment in Chinese battery maker, BYD. The investment is something which even Charlie Munger claims Buffett wouldn’t have done five years ago. Buffett learns. Now Buffett and Berkshire Hathaway have the clout to earn US$1bn profit on such investment in less than a year


It is interesting to note how Apple reinvented itself after losing its first mover advantage in GUI based operating system to Microsoft. First notebooks and then mp3 players, the company created new markets. Latest feather in the cap for the company is the surging sales of its smart phone, iPhone. Again, Apple took on the industry leaders including Nokia, Sony and BlackBerry. A dip into the latest regulatory filing of Apple will tell us that the company books more sales by selling phones and music players overtaking the traditional Mac business.

Google has now become an internet powerhouse offering web search, video hosting, web browser and maps. Bill Gates is surely threatened by the idea of a Google developed operating system. However, apart from the internet, Google has many other offerings. The company is at the forefront of changing the electricity consumption pattern. Google recently showcased a power monitoring system which puts more options in the hands of users by providing consumption details every 15 minutes.
Google’s variety of the products stems from the fact that the company officially earmarks some hours every week in which employees are encouraged to pursue projects of their interest.

Markets have revisited the theory of value investing after every stock market collapse to find a self assured Buffett. It doesn’t happen so often that the chief of an investment firm of the size of Berkshire Hathaway keeps US$30bn in cash earning nothing on it but finally walks all the way to bank with investments in firms such as Goldman Sachs, Harley Davidson and Wells Fargo at favorable terms. In the hindsight, it appears that Buffett seldom deviates from the value investing principles while the rest of market goes too far ultimately resulting in a crash landing.

Tuesday, July 14, 2009

Startup Valuations: Too much, too early?

Corporate valuations of the cleantech firms have always been an issue of fervent debate. On one hand, a set of market participants advocates usage of traditional valuation methods (discounted cash flow, comparable company analysis etc.) to arrive at a figure, while another school of thought propagates the consideration of intangible variables like the impact of new technology on common masses and the quantum change the technology promises to bring in daily life of an average user. Automotive battery and electric vehicle manufacturers are no exceptions with a number of low sales, concept stage companies receiving high valuations. Here are a few examples.

A123Systems Inc.
The company was incubated in MIT in 2001. After initial rounds of funding and dropping the original idea of self-organizing batteries, A123 scored big with a contract to supply batteries to Black & Decker power tools in 2005. The company has raised around US$300m in as much as six rounds of funding excluding the common shares placed early last year. GE has been the largest investor in the company and its US$70m investment till now accounts for a close to 10% equity stake in the company. Apart from GE, the company counts North Bridge Venture Partners, Motorola, Sequoia Capital, Qualcomm and Procter and Gamble among its investors.
As expected, the latest round of funding is more of a pre IPO placement rather than a VC funding. However, with 1,100 employees worldwide A123 is hardly a start-up anymore. The company has secured orders from GM, Chrysler and SAIC.
In its S-1 filing in August 2008, the company wanted to raise an additional US$175m through an IPO at an enterprise valuation of US$1bn. IPO plans were scrapped later due to the crunch in financial markets but the company is hopeful to launch the IPO sometime in 2010.

Luxury electric vehicle manufacturer Tesla Motors, incorporated in 2003 has received funding from PayPal co-founder Elon Musk, Google founders Sergey Brin & Larry Page, VantagePoint Venture Partners and Draper Fisher Jurvetson. To its credit, the company has sold 500 premier Roadsters till June 2009 and plans to launch a more affordable Model S sedan by 2011. On the flip side, the company doesn’t have a strong product line or technology barriers as far as batteries are concerned.
Tesla is riddled with some management failures in the past and is currently under litigation through its founder and former CEO Martin Eberhard regarding the ownership of the founder title. However, its poor track record at handling the investor money has not stopped Daimler from investing in the start-up. The German automaker acquired a 9% stake in Tesla by investing US$50m in May 2009. Going by the deal, valuation of Tesla works out at close to US$550m.
As if the US$550m price tag wasn’t enough, the company has been valued at an eye-popping US$1bn in a private equity marketplace on 16 June 2009. Though the service was only a simulation and didn’t reflect the real-life market situations and serious buyers in Tesla shares, the valuation still provides a rough estimate of private equity investors.

BYD is not exactly an early stage company with venture capital. It is also not an unproven and speculative business model, but being the only listed company among the pack makes the details more trustworthy.
In September 2008, at the time of the deal with Berkshire Hathaway, BYD was valued at US$2.3bn on the basis of US$230m investment for 10% stake. The market capitalisation of the company has now swelled to US$9.2bn.
The Warren Buffett company invested at a PE multiple of 12.3 which has now increased to 52.5. Given that a lot in the appreciation of the valuation of the company has to do with the Berkshire investment, strong performance by the company in recent months should not be ignored.
Corporate valuations have always been debatable but investments in the recent times are significant as they promise to change the course of mankind. Altruism apart, free markets have their own rationale of arriving at the valuations. But the exorbitantly high valuations in one of the most credit starved times in modern history have surely left the analysts wondering.

Thursday, April 30, 2009

Alternative Propulsion Systems: ETV Motors gets US$12m in initial round of funding

Alternative energy storage and powertrain investments have been on rise lately. Apart from many venture capitalists taking a U-turn on their investment policies (Vinod Khosla being the prominent one), encashing the old industrial investments and dedicating significant portion of their corpus for clean technology (Former president candidate Al Gore's Generation Investment Management Fund et al). After the recently completed investments of Berkshire Hathaway in BYD and GE’s investment in A123 (battery manufacturer) and Think Global (makers of TH!NK City electric vehicle), an Israeli company has raised US$12m in Series A funding for the development of electric vehicle propulsion technology.
Quercus Trust and 21Ventures LLC jointly invested in ETV Motors. The company is developing micro-turbine technology, another possible ‘game changer’ in plug-in hybrid-electric vehicle (PHEV) market. ETV is contelplating the vehicle propulsion system as a combination of high voltage lithium-ion battery and micro-turbine. The company has replaced the internal combustion engine with the micro-turbine to charge the battery. The development stage miniaturized turbines are smaller and lighter than the traditional internal combustion engines.
Meanwhile another stealth company, EEStor announced the ‘huge milestone’ of verification of its Barium-Titanate powder’s high relative permittivity by a third party.
I am no kill-joy for the new technologies, but I hate it when the new kids on the block often accuse the internal combustion engine for gross inefficiencies. While true in their criticism, they forget that the technology is more than 100 years old and no major changes have occurred in its design till date. Not that the changes were never suggested, but either the cost of implementing the changes was prohibitively high or the changes were difficult to achieve technically. Latest in the series is the Scuderi family trying their hand at a new design which is expected to increase the IC engine efficiency from 33% to 40%.
So far so good, we still have to see a reliable technology which can work on roads, not just the research laboratories.

Monday, April 20, 2009

Lead Carbon: Rising upto the challange

Automotive battery market is heating up. Last week, the state of Michigan approved investments by four battery producers amounting to US$1.7 billion. Lithium-ion battery technology, which is often touted as the most mature technology for the automotive use dominated the investment space in the state.
However, the week also witnessed a rather unusual deal between battery major Exide Technologies and relatively unknown Axion Power International. Axion is a small company focusing on Lead Carbon battery technology. The company is working on the similar lines as Australia’s Commonwealth Scientific and Industrial Research Organisation (CSIRO) in developing the activated carbon battery. Axion Power is taking a slightly different approach with its battery technology replacing the negative electrode with microporous activated carbon. The company is confident that by doing so it will be able to overcome major drawbacks of lead acid batteries namely high weight and low energy density.
While CSIRO’s ultrabattery has been road tested on Honda Insight for 100,000 miles and licensed to Furukawa and East Penn, Axion power states that battery technology is still in development phases. However, significant cost advantages of lead carbon technology over NiMH and Lithium-ion prompted Exide to enter into a supply agreement with Axion Power.
Lithium-ion is the default choice among the automakers for motive power including GM, Ford, Chrysler and Renault Nissan. Longtime NiMH champion Toyota is also following a Lithium-ion development program for its 2010 model of Prius. However Lithium-ion’s prohibitively high cost makes it unaffordable to most of the buyers. Approximately half of US$40,000 price tag of Chevrolet Volt is attributed to the Lithium-ion battery packs. One of the reasons behind Lithium-ion’s dominance is the absence of a worthy competitor. Large-format NiMH deployment in automobiles is restricted due to Cobasys’ patents and standard lead acid batteries are good for SLI (Starting, Lighting and Ignition) only. Let’s hope the Lead Carbon batteries change the game.

Sunday, April 19, 2009

Road to recovery???

Are we out of the woods now??? I'm not sure about it, but going by the laws of physics it looks the worst is over. After the months of bad news flow, even the absence of bad news is positive for the markets. So here we go, US automotive sales in the first quarter is a down by some gruesome number and the US treasury department continues to burn lots of green after the Detroit automakers and their supplier entourage for the cars no one would like to drive five years down the line.
But the government can be spared on the ground of being a mere economic agent for the redistribution of wealth. Some individual portfolio investments in the current gloom however stand out. Warren Buffett has invested in a Chinese automobile and battery manufacturer BYD thinking that electric is the future of automotive industry (People will drive something afterall…the Oracle has also secured a pillion ride in Harley Davidson). This ‘never say die’ spirit is impressive, eventually everything that goes down comes back to equilibrium.
Meanwhile positive effects of the recession back home in India are the low levels of inflation and healthy corrections in the asset valuation across industries. BSE Sensex has appreciated from their October lows to a more encouraging figure of 11,000. A lot of smart money which was sitting on the banks earlier took plunge at the lower levels. Here comes the big question, is it sustainable??? Analysts point out that India’s growth story remains intact but going forward general elections hold the key for Indian stock markets. A mere thought of SP or third front coming into power disrupts my thinking process. Keeping my fingers crossed for now. Ahem!!!

Thursday, March 26, 2009

Solar thermal: Siemens AG acquires stake in Archimede Solar Energy

German engineering and energy giant Siemens AG has acquired 28% stake in Italian solar thermal company Archimede Solar Energy (ASE) for an undisclosed amount. The terms of the acquisition allows Siemens AG to increase its stake in the company to the majority level. Archimede, a subsidiary of Italian industrial group Angelantoni Industrie is a producer of solar receivers which use molten salt as the heat transfer fluid. The capital raised from the acquisition would be used in the expansion of Archimede’s production capacities.

Siemens believes that the solar thermal market is set to cross €10bn mark by 2015. While Siemens is already a market leader in steam turbine-generators for solar thermal power plants, the acquisition has paved the way for the company to become a major solution provider for solar thermal plants.

Solar thermal power plants use high temperature collectors to concentrate sunlight using mirrors or lenses. The concentrated energy is used by the heat transfer fluid to power the turbine at high temperatures. Besides being a non polluting energy, Solar thermal power is most land-use efficient technology.

Renewable energy sector has occupied the top slot in the mind share of the energy analysts and companies especially after the oil spike last year to US$160 barrel. Solar thermal energy as one of the most potentially viable technologies has seen hastened activities. Ausra Inc., a developer of large-scale solar thermal energy systems received US$60.6m funding in October 2008 from arguably the best of the pack venture capitalists including Khosla Ventures and Kleiner Perkins Caufield & Byers. Ausra is currently operating a 5MW solar thermal power project in Bakersfield, California apart from a similar facility in Australia.