Creative Destruction Fund

There’s been a lot of buzz around privately-held Bloom Energy. The company and its Solid Oxide Fuel Cell (SOFC) technology (dubbed the “Bloom Box”) were featured on CBS’s 60 Minutes recently. Google, eBay and Wal-Mart are customers. Having spent the past five years working with a company that was developing a SOFC, I was curious to find out what was so special about Bloom’s technology.

Upon speaking with my contacts in the fuel cell business, it would appear there is nothing special about the Bloom Box. As one expert I spoke with noted, the materials, the approach, the geometry, the efficiencies, and the economics are very similar to what other companies in the space are doing or have done.  The current economics of $8,000 per kilowatt are still – even after $400 MM of investment in large scale production – an order of magnitude too high.

The economics, combined with the unaddressed questions regarding the cyclability of the system (i.e., how many times can a Bloom Box be turned on and off before degrading), the long term reliability, and the sensitivity to fuel contaminants such as sulfur (which exists in many hydrocarbons) have been issues for other SOFC companies in the past. The issues have prevented broad-scale adoption of the technology as an alternative to the grid.

One has to question the veracity and integrity of Bloom’s CEO when he describes his material as beach sand. That is pure PR and quite disingenuous. Anybody in the solid oxide fuel cell business knows full well that the material is a highly refined, chemically synthesized doped ceramic powder. It doesn’t even come close to the cost of beach sand, even if the underlying major compound is the same.

Furthermore, the company’s comment that its SOFC can be fueled by solar is just plain silly. Solar panels produce electricity. Electricity runs a hydrolyzer to produce hydrogen. Hydrogen, in turn, powers the fuel cell. Not exactly running on sunshine!

One thing is very clear about Bloom Energy. They invested a great deal of money in a terrific PR firm. But, as we all know, PR can only take a company so far. If the product(s) don’t stack up in the market, it’s just a matter of time before reality sets in.

One of my friends summed up Bloom Energy’s Box beautifully when he said “it’s big hat, no cattle.”  If we were asked to make a recommendation, we would be long Bloom’s PR firm and short Bloom Energy.

I’ve been reading a book titled, “This Time is Different: Eight Centuries of Financial Folly,” by Carmen Reinhart and Kenneth Rogoff.  The book is a great reference for those interested in the history of financial crises. It is chock-full of empirical data and analysis. I was intrigued with the final chapter of the book titled, “What Have We Learned.?”

In the conclusion, Reinhart and Rogoff echo some thoughts we’ve made in previous posts. The authors note:

“The lessons of history, then is, that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics and profits no matter how well regulated it seems to be.”

Indeed, there is an arrogance among regulators that says, “If we only had a little more regulation, we could rid the financial system of crisis and collapse.” The problem with regulation is that it has a tendency to lay the seeds for the next financial crisis, which then begets more regulation, ad nauseam. As history clearly demonstrates, more regulation is not the answer.

Reinhart and Rogoff go on to state:

“Technology has changed, the height of humans has changed, and fashions have changed. Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant. No careful reader of Friedman and Schwartz will be surprised by this lesson about the ability of governments to mismanage financial markets, a key theme of their analysis. As for financial markets, Kindleberger wisely titled the first chapter of his class book “Financial Crisis: A Hardy Perennial.”

It is hard to disagree with this statement. Delusion is one of the hallmarks of human nature, as all the great Avatars – Christ Jesus, Krishna, Buddha, – have observed. And government’s ability to mismanage financial markets seems to know no bounds.

The authors conclude their book with this gem:

“We have come full circle to the concept of financial fragility in economics with massive indebtedness. All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked. This time may seem different, but all too often a deeper look shows it is ot. Encouragingly, history does point to warning sign that policy makers can look at to assess risk – if only they do not become too drunk with their credit-fueled success and say, as their predecessors have for centuries, “This time is different.”

Reinhart and Rogoff’s book is not an easy read, but it is worthy addition to an investor’s library. There is much insight to be gained from studying the dynamics of financial crises through history. If nothing else, after reading the book, one will be hesitant in ever uttering the words “this time is different.”

There was a time back in the 1990s when I recall looking at a pager and thinking: “So long, old friend.” At the time, mobile phones were proliferating in the global economy and I couldn’t see a future for the pager. I mention this story because I had a similar sensation recently when looking at a Garmin GPS unit.

Garmin was launched in 1989 after a brainstorming session. It has a number of successful stand-alone GPS units for various markets, including auto, motorcycle, and sports. The company is currently generating around $2 billion of revenue, $400 million of net income, and has over 7,000 employees worldwide.   The company has a market capitalization of $6.4 billion currently.

Garmin’s success has been impressive to date, but one wonders if the company has a future. Like pagers during the proliferation of cell phones, Garmin’s core product faces intense growing competition from smartphones.

GPS works only on devices with an embedded GPS chip. In 2008, one out of every three smartphones shipped with GPS embedded. Obviously, smart phones were not much of a competitive threat two years ago. However, the competitive landscape is shifting amid rapid growth in GPS-enabled smart phones. According to the folks at ABI Research, within the next 4 years nearly all new smartphones will ship with GPS embedded.  Put differently, by 2014 GPS will be a standard feature of nearly all new smartphones.

Nokia announced recently that it will offer a new version of Ovi maps for Nokia smartphones, which includes free turn-by-turn navigation and traffic information. The new Ovi maps are available for immediate download for 10 Nokia handsets and will be pre-loaded on all new Nokia GPS-enabled smartphones starting next month. We expect similar announcements from other smartphone manufacturers in the months ahead.

As we can see from the chart nearby, Garmin’s stock has been a big-time underperformer versus the NASDAQ index. Over the past two years, the stock price has fallen by 50%. Many analysts on Wall Street have grown increasingly bearish. Goldman Sachs’ analyst currently has Garmin on his focused sell list. If we were advising Garmin’s management, we’d be encouraging them to look for new markets and opportunities (e.g., Indepth Navigation’s unique GPS product). It would appear as if the writing is on the wall for the future of their core product.

One thing is for sure: It’s going to take some visionary thinking to navigate through the coming competitive challenges and keep Garmin growing and thriving in the years ahead.

We’ll see if the management team is up to the task.

Just a quick post to mention that Kris and I published a research note earlier this week titled: “Real VR: The Next Really Big Thing.”   In the note, we argue that the next big technology wave is under way and will gather force in the months ahead as the real and virtual worlds converge. I am delighted to say that our friends at MetaverseRoadmap.org loved the piece and requested a link so they could share it with their readers and sponsors. You can find the link to our research note on the MetaverseRoadmap.org home page just under the “Virtual Worlds Roadmap” banner.

I encourage you to take a look around the MetaverseRoadmap.org website. It is an excellent source of information on RealVR and a great complement to the work Kris and I are doing at Research 2.0. I would also encourage you to visit the Research 2.0 home page and take a look at the work Kris and I are doing.

Thank you for your support!

Kris and I have been on Wall Street for decades. We both think the current state of research on the Street in terms of value added for investors is as bad as it has ever been.   Many analysts spend the bulk of their time providing low value-added estimates of quarterly EPS figures.  Everybody knows the “earnings game” is a lose-lose proposition, yet the so-called status quo bias prevails. Whoever said human beings were rational?

So what does an investor who is more interested in playing win-win games do today?

Kris and I don’t claim to have all the answers, but we do think there is a big role for investment research that extends beyond next quarter’s EPS estimate.   Going beyond the quater is one of the primary objectives behind the work Kris and I are doing at Research 2.0.  Our aim is to provide high value add investment ideas to the marketplace. The last thing investors need in our humble opinion is more noise coming from Wall Street!

Our focus at R2.0 is on identifying key technology trends and doing in-depth, thematic and corporate security analysis.  Our approach is a classic “top-down, bottom up” approach.   As fans of the creative destruction economic process, we are on the lookout for great long and short investment ideas.  Our primary focus is on investing and generating strong relative and absolute returns, not trading. That said, we do find intriguing trading ideas from time to time, and we are happy to share those with clients.

Kris spent a good deal of time recently redoing the R2.0 website.  I would like to encourage readers of the blog to visit the website and sign up if it looks interesting. We’ve tried to make R2.0 as user friendly as possible, offering several options for potential clients depending on their needs and budget.  Here’s the link:

http://www.research2zero.com/

If you have any comments on the R2.0 website, please send them along. We’d love to hear from you. If you sign up, we thank you for your support.

Many happy total returns!

I just wanted to give our faithful readers a quick update on my health. I completed an intense month of treatments up at Yale recently (Phase 1) that severely constrained my ability to work.  Thankfully, that part is over. I will be moving on to Phase 2 of the treatment this week.  Phase 2 promises to be less taxing than Phase 1, although the next  couple of  weeks could be a bit rocky as I adjust to the medication I’ll be taking for the remainder of the year.

If all goes as planned, I should be back posting with Kris sometime next month. I appreciate your support and patience.

ps: Kris and I are in the process of writing up a research note on what we both believe is the next really big thing in technology.  Stay tuned!

Readers may have noticed that Kris has been doing all of the blogging over the past several weeks. I’ve been hampered with a serious medical condition that has constrained my ability to work. I am hopeful that I will be able to resume normal business operations in the new year and my physicians tell me that is a high probability if I stay the current course.

In the meantime, Kris will be covering for me and I would like to thank him for keeping things rolling during this difficult time.

I would like to take this time to wish all of our readers a joyous and healthy holiday season.

Best,

Steve