Dear Reader,
Friday brought us the full month of July jobs numbers in the U.S. I have been looking forward to seeing these numbers in light of the economic recovery.
I first saw the news listed on CNN…
“U.S. jobs recovery takes a massive hit and is still down nearly 13 million jobs,” the front-page headline screamed. I immediately thought to myself… Could I have missed something?
The answer… not at all. As usual, it was just more fear- and panic-based propaganda.
The U.S. economy added 1.8 million jobs in July, and the unemployment rate dropped to 10.2%. This is down from a pandemic peak of about 14.7%. How could this be negative news? Clearly, we are not yet back to pre-pandemic levels, but that is one heck of an improvement in just a few months.
It is hard for me to not be optimistic in light of such a rapid recovery. Let’s have a quick look at the chart.
An image like this really puts things in perspective. That’s a pretty remarkable bounce back in a very short period of time. The U.S. still has a way to go in order to get back to sub-5% unemployment, but we are certainly headed in the right direction.
Understanding this, perhaps it is not such a stretch to see the Nasdaq Composite trading only 1.6% off the all-time high it reached just a few days ago or the broader S&P 500 index now trading less than 1% off its February all-time high.
And something else positive caught my eye this morning. U.S. homeownership spiked higher in the second quarter. In fact, it has reached the highest level since the third quarter of 2008. Homeownership is now at 67.9% and rising.
Are these the signs of a failing economic recovery that is taking a “massive hit”?
Absolutely not. These are the signs of good things to come.
Now let’s turn to today’s insights…
Last week, Google announced a $450 million investment in ADT Inc. (ADT).
I’m sure many readers are familiar with ADT. ADT is the definition of an old-school legacy company. It was founded in the late 1800s.
I remember the company from back when I was a kid. It sells home security equipment and is known for security systems that are proprietary and complex. And ADT is notorious for locking customers into contracts with expensive monthly rates.
In the 1960s, the company was deemed a monopoly practicing anticompetitive business practices. Since then, the company has changed hands a few times – most recently in 2016 when private equity giant Apollo Global Management acquired the company in hopes of making it profitable.
But it hasn’t been very successful at doing so yet. ADT doesn’t make any money. Look at the numbers: −12.5% profit margin, −19% return on equity, and −$657 million net income. What in the world is Google thinking here?
Wall Street seems to think that Google wants to acquire the home security company, and ADT’s stock price shot up 57% on that speculation.
But nothing could be further from the truth… Google is far too smart to get bamboozled by a private equity firm.
The purpose of Google’s investment is to buy distribution for its own smart home products.
The terms of Google’s investment include an agreement for ADT to actively sell and install Google’s Nest product line. This includes security cameras in the home, smart doorbells with cameras, and smart thermostats.
That’s the story behind the story. ADT is nothing but a distribution channel for Google.
This is a power move by Google to try and get ahead of Amazon. Ironically, Amazon beat Google to the punch with smart home speakers and home automation technology with the success of its Echo and Dot products. And the company also has made investments in smart thermostat player Ecobee.
And why does Google want to break into the smart home market so badly?
Regular readers already know the answer – it wants to collect even more behavioral data on consumers.
Google already knows what consumers are doing online. If it can get its Nest security cameras into more homes, Google will also know what consumers do when they aren’t online.
It will use that data to augment the consumer profile it already has, and then Google will be able to generate even more advertising revenues by making this data available to advertisers.
As much as I detest Google’s business model, this is a smart move.
After all, Google has $121 billion in cash and cash equivalents on its balance sheet. $450 million isn’t even 1% of its cash balance. The investment won’t negatively impact Google in any way, and over time, it will almost certainly earn a profit on it. After all, Google’s products will help improve ADT’s overall product and service offering.
That said, I’m curious to see if Amazon responds in some form. Will it make a counter move to protect its market share in the smart home market? Will it invest in or acquire a similar distribution channel?
Oh, and just in case it needs to be said – I would think long and hard before letting Google put a camera in your home. I certainly will never be installing one.
We have to talk about what’s going on at Eastman Kodak (KODK) today.
I’m sure readers know this iconic film and camera company from before the advent of digital cameras. There was a time when nearly every household had a Kodak camera in it. How many “Kodak moments” were captured of the kids and grandkids in action?
Case studies have already been written around Kodak. It’s a perfect example of a legacy technology company too comfortable in its ways. It completely missed the largest, most disruptive trend in its own industry. It’s a classic case of management being asleep at the wheel.
Kodak missed the move to digital cameras, and its legacy business became 100% obsolete as a result. After struggling for years, the 131-year-old firm went bankrupt in January 2012.
After selling off most of its legacy assets and laying off thousands of people, Eastman Kodak emerged from Chapter 11 bankruptcy in September 2013 as a company “focused on serving commercial customers.” This included packaging, printing, and graphic communications services.
Initially, the market cheered, and Kodak’s stock hit $37.20 per share on January 9, 2014.
But it was mostly smoke and mirrors. Kodak continued to struggle for years as its share price steadily declined. In June of this year, Kodak traded for a little more than $2 per share, down 94% from its peak.
And that’s when the executive team at Eastman Kodak got an idea…
On July 28, an announcement shared that Eastman Kodak would get a $765 million loan from an obscure division of the U.S. government to produce pharmaceutical ingredients. That’s right – Kodak, apparently, just became a pharmaceutical company.
As regular readers know, the biotechnology sector is on fire right now. So it’s no surprise that shares of KODK shot up from $2.62 on July 27 to $33.20 by July 29 – a gain of 1,167% in two days.
And how does Kodak’s CEO justify this moonshot? “We have always been a chemical company,” he said.
Ha! Any thinking person knows that there’s a big difference between photo chemicals and pharmaceuticals.
I don’t buy the Kodak pharmaceuticals hype for a second. And I have good reason to be skeptical. Kodak has tried this nonsense before.
In January 2018 – at the peak of the cryptocurrency bull market – Kodak announced that it was going to launch KODAKCoin. It would be a cryptocurrency to help photographers make money and protect their intellectual property rights (their pictures).
Like today, the stock shot up. KODK soared 250% in one week.
But then the cryptocurrency mania died out, most cryptocurrencies plummeted in value, and the market realized that KODAKCoin would never amount to anything.
Kodak tried to cash in on a “hot” technology sector in 2018. And it’s trying to do the exact same thing today.
I hope it goes without saying, but let’s avoid KODK.
Oh, and one more thing…
The Securities and Exchange Commission is coming in to investigate some suspicious trading activity from Kodak’s executives prior to the pharmaceutical announcement.
Yes, it looks like there may have been some insider trading going on in Kodak’s boardroom. That $765 million loan has been put on hold in the meantime.
I couldn’t make this up…
I receive a lot of reader feedback asking about battery technology. And I share everyone’s excitement about this area. But unfortunately, this area of high tech has had few breakthroughs in the last three decades.
We tend to experience small, incremental improvements each year. I’m as anxious as you are for the next breakthrough. So to cap off today’s edition, let’s talk about batteries…
In October of last year, I told readers about Tesla’s rocky relationship with its battery partner, Panasonic.
Panasonic just couldn’t keep up with Tesla’s production demands or the speed of its own technological development, which is why Tesla acquired Canadian battery maker Hibar Systems last October.
And more recently, Tesla ended its exclusive relationship with Panasonic and partnered with both LG Chemical and CATL to produce cobalt-free batteries.
That’s big. Cobalt is very expensive, and it comes from high-conflict parts of the world. It’s the main reason why lithium-ion batteries cost so much. And the battery is the most expensive part of an electric vehicle (EV).
By getting rid of cobalt, Tesla will reduce its manufacturing costs, which will allow it to also reduce the price of its cars.
The loss of the exclusive agreement with Tesla is a huge embarrassment for Panasonic. And it’s already costing Panasonic a lot in lost business. So Panasonic is looking to fill the gap with the next battery technology.
In an interesting move, the company partnered with Toyota to produce solid-state batteries.
These are batteries that don’t contain liquid electrolytes like lithium-ion batteries do. That allows them to charge faster and provide greater energy density. Higher energy density will allow EVs to travel farther before needing to charge the battery.
Panasonic’s joint venture with Toyota is called Prime Planet Energy, and it plans to employ 5,100 people. These two companies are clearly serious about this venture.
To me, this signifies that the industry is taking the transition to battery-powered vehicles seriously. And it gives me even further conviction in what I’ve been saying for years. The days of the internal combustion engine are numbered. It will take the next 15 years or so to play out, but electric vehicles are the future.
Solid-state batteries are an exciting direction for the EV industry. And while I have a lot of respect for Panasonic and its products, I bet that a private technology company will deliver the breakthrough before Panasonic and Toyota do.
Panasonic lost its exclusive deal with Tesla because it was slow to innovate, and the same thing will likely happen with solid-state batteries.
We’ll keep tracking this trend. And we’ll be keeping a close eye on Tesla.
Tesla’s long-awaited annual battery day will be held on September 22. I have been eagerly waiting for Tesla’s announcements at this event. It was originally scheduled for earlier this year but got postponed due to the pandemic.
I am interested to see if Tesla gives us a view of its product road map for EV batteries. Does the company have plans to develop its own solid-state batteries? Or will it stick with its cobalt-free lithium-ion batteries for the foreseeable future?
We’ll find out next month.
Regards,
Jeff Brown
Editor, The Bleeding Edge
P.S. Once again, thanks to readers who showed up to watch my biotech master class last week. We broadcast that event from Cambridge, MA, the biotech capital of the world. I always love getting back to Cambridge to get the scoop on the latest breakthroughs in the industry.
Biotechnology has been one of the hottest sectors of the market this year… and for good reason. We are witnessing a generational shift in the industry right now.
Historically, biotech was a lot more “bio” than “tech.” It’s a whole new game today, however.
The top biotech companies are utilizing bleeding-edge technology like artificial intelligence (AI), machine learning (ML), computational biology, CRISPR genetic editing, and more.
And that’s why some of the best opportunities for investing in 2020 will appear in the biotech space. We will be well-positioned to capitalize on this massive trend.
If you haven’t had a chance to catch my presentation yet, make sure to do so before midnight tomorrow when the video goes offline. Just go right here for the replay.
Like what you’re reading? Send your thoughts to feedback@brownstoneresearch.com.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
