The Wall Street Journal - USA (2020-12-07)

B10| Monday, December 7, 2020 ** THE WALL STREET JOURNAL.

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FINANCIAL ANALYSIS & COMMENTARY

Tech Tempers Dreams for Autos

Sector’s future in cars will likely be more evolutionary than revolutionary

Lyft’sshareprice,pastthreemonths

Source: FactSet

$45

20

25

30

35

40

Oct. Nov. Dec.

costs less to incentivize drivers”

outside of rush hour.

That could help explain why Lyft

believes it can pare its losses in the

fourth quarter, even while overall

ride-share volume remains signifi-

cantly challenged. In an 8-K filing

on Wednesday, Lyft said it saw ride-

share rides volume down 50% in No-

vember compared with a year

earlier.

Despite that, the company said it

expected to book a fourth quarter

loss of less than $185 million on the

basis of adjusted earnings before in-

terest, tax, depreciation and amorti-

zation—slightly better than an ear-

lier forecast.

Boosting its bottom line, it says,

has been an improving contribution

business, investors also should con-

sider what will happen to unit eco-

nomics when much of that business

comes back.

Lyft has seemingly executed on

its fixed-cost savings goal of $300

million on an annualized basis

this year.

Other expenses are variable.

Even if fewer people ultimately use

Lyft for their daily commutes and

off-peak trips increase, rides to and

from work at peak hours are sure

to be a significant volume driver

for Lyft as normal life returns.

That isn’t to say Lyft can’t still

hit its goal of a profit by the end

of next year, but that recovery

couldbesloweddownbytraffic.

—Laura Forman

margin, which it expects will expand

further next year.

It also helps that some business

has moved to the suburbs, where

many of its regular riders have mi-

grated from city centers.

At the same investor confer-

ence, Lyft’s president and co-

founder John Zimmer said his

company has benefited in some

ways from consumers’ moving out

of cities, where “there’s only so

many cars you can get on

the road.”

Wall Street was thrilled by Lyft’s

business update, sending its shares

up nearly 10% on Wednesday. While

it is encouraging to see Lyft make

progress on its path to profitability

despite losing half of its rides

EvenLyftcan stand a break

from the rat race.

The ride-hailing company’s re-

covery has been smoothed some-

what, according to comments at an

investor conference last week.

With so many people working at

home due to the pandemic, much of

Lyft’s business over the past few

quarters has been done during off-

peak hours with riders visiting

doctors or buying groceries

rather than commuting during

peak hours.

That has meant less volume, but

the shift seems to have at least

been good for Lyft’s unit

economics.

Lyft said it can make more

money on off-peak rides “because it

MARKETS

Technology companies were go-
ing to revolutionize the car mar-
ket. Then reality happened.
Just a few years ago, Silicon Val-
ley seemed to have Detroit in its
sights. Google had self-driving test
cars roaming around, whileApple
was building its own automated car
from scratch. Chip giantIntelmade
its second-largest acquisition ever
with Mobileye for $15.3 billion in
early 2017, while rivalNvidiawas
building powerful chips designed to
become the central brains of auton-
omous vehicles. AndAmazon.com
wasn’t even keeping its dreams on
the ground. The e-commerce giant
was testing air delivery drones in
the U.K. by late 2016.
Most of those efforts haven’t
died, but the hype has faded con-
siderably. Apple seemed to make
the biggest reversal, reportedly lay-
ing off more than 200 workers last
year from its autonomous-car ef-
fort called Project Titan. Google is
still at it, with its Waymo car ven-
ture now offering a highly limited
taxi service in Phoenix. But Waymo

remains buried in parent company

Alphabet’s “other bets” segment,

where it doesn’t appear to be gen-

erating much actual business. The

company’s most recent quarterly

filing said Other Bets revenue is

still derived primarily from its

broadband service once known as

Google Fiber and licensing from its

Verily Life Sciences venture.

Intel, meanwhile, hasn’t exactly

revved up with Mobileye. Revenue

for the unit, which makes com-

puter-vision and driver-assistance

technology, rose 6% for the trailing

12-month period ended in Septem-

ber, lagging behind Intel’s overall

revenue growth of 11% in that

time. It also still makes up barely

1% of Intel’s overall business.

Nvidia’s automotive segment

revenue has fallen over the past

three quarters due to the coronavi-

rus pandemic’s impact on auto

sales and a decline in “legacy info-

tainment systems,” according to

the company. Auto-related sales

now make up less than 4% of the

chipmaker’s revenue compared

with 7% four years ago.

The car market, as it turns out,

isn’t so easy to disrupt. Car de-

signs evolve slowly over years and

involve thousands of suppliers with

deep relationships. Most auto mak-

ers are understandably reluctant to

hand over the keys to tech giants

that have upended many other in-

dustries such as telecommunica-

tions, media and advertising.

A fully automated car is also a

legitimately hard technological feat

to pull off, even for companies with

deep expertise in computing and

cash hoards exceeding $100 billion.

Tech news site the Information re-

ported earlier this year that

Waymo’s “robotaxi” venture—eas-

ily the furthest along of competing

autonomous vehicle projects—uses

a “chase van” that follows each

taxi with a spare human driver.

None of this is to say that tech

companies have no future in cars.

More vehicles are becoming con-

nected, which provides opportuni-

ties for software and services with-

out the need for costly and time-

consuming physical redesigns. And

capabilities such as enhanced driver

assistance still demand more com-

puting power, presenting an oppor-

tunity for chip makers supplying the

components. New Street Research

projects that automotive semicon-

ductor revenue will jump 16% next

year, recovering from a pandemic-

driven slump of 10% this year.

Further out, it remains to be

seen which tech giants will be in

the driver’s seat for automated

cars. Amazon may have the stron-

gest motivation. The company runs

a massive, human-intensive deliv-

ery network that now runs up

more than $52 billion a year in ful-

fillment costs. Its acquisition of ro-

botaxi venture Zoox earlier this

year for $1.3 billion makes sense in

this light. But that price was also

about one-third the valuation Zoox

fetched in a funding round just two

years prior—a sign that even the

ambitious and long-term-oriented

Amazon knew when to stay out of

a hyped market. —Dan Gallagher

Lyft’s Path to Profit Risks Stalling in Traffic

Google’s Waymo doesn’t appear to be generating much actual business.

JOHN G. MABANGLO/EPA/SHUTTERSTOCK

Unpack that thought and

the implication is that we

are paying more for the

same future stream of in-

come. That is, stocks offer

pretty much the same pro-

spective profits and divi-

dends that they did before,

but at a higher price. Sure,

some biotechnology and vid-

eoconferencing stocks have

had their growth accelerated

by the pandemic, but share-

holders of airlines, shopping-

mall owners and travel com-

panies will be using a big

chunk of future profits to

pay for the debt needed to

survive 2020. The market as-

sumption is that 2020 is a

write-off but that S&P earn-

ings in 2021 will be about 4%

above last year’s, and 2022’s

will reach roughly where

2021’s were expected to be

before the pandemic hit.

The reason to pay more

for the same is the hunt for

yield, or TINA, There Is No

Alternative (to stocks). The

10-year Treasury offers less

than 1%, making stocks look

attractive—so the price goes

up. But paying more for the

same earnings means lower

future returns, unless bond

yields repeat the trick.

A

nd here is the prob-

lem: Treasury yields

can’t keep falling in-

definitely. This year alone

the 10-year has fallen from

1.9% to 0.9%. Repeat the

drop and yields would be

negative. The Federal Re-

serve insists it won’t take in-

terest rates negative. Even if

it did, there is a limit to how

low it can go, with even the

fans of negative rates at the

European Central Bank

thinking banks would start

to have serious problems be-

low minus 1%.

None of this means that

stocks are overpriced. To see

this, compare with 2000, the

last time stocks were incred-

ibly expensive—a little more

expensive than they are now,

at least on forward price-to-

earnings multiples and Prof.

Robert Shiller’s cyclically

adjusted price-to-earnings

ratio.

Back in 2000, stocks were

very unattractive compared

with bonds. The 10-year

Treasury yielded more than

6%, while the U.S. market’s

dividend yield reached an

all-time low of just above 1%.

The most generous measure

of how much shareholders

are making, the earnings

yield that includes not just

profits paid out but also

profits reinvested, fell below

4%. Investors were betting

big that unprofitable compa-

nies, many without any reve-

nue, would be huge suc-

cesses in the future. Few

lived up to the hype (Ama-

zon did, eventually).

S

ince the dot-com bub-

ble high in March

2000, stocks have had

a poor return compared with

history—just 4.9% annual-

ized after inflation. By the

2007 peak, they had risen

only 16% in total, less than

inflation. And that was with

the tailwind of a huge drop

in bond yields. All of that

poor performance was be-

cause of valuations falling as

the bubble burst, with the

forward P/E down by a third

from 2000 to 2007, even as

forecast earnings rose 68%,

more than in the past 13

years.

This is both the good and

the bad news. If earnings

keep growing as they have in

the past, stocks might offer

annual gains around 3% to

4% above inflation, averaged

over many years. That

should be regarded as an ab-

solute triumph at a time

when Treasury inflation-pro-

tected securities offer a

guaranteed return of 1 per-

centage point below inflation

for 10 years.

Unfortunately, 3% to 4%

plus inflation wouldn’t be

the sort of return to excite

the Robinhood trader, or

enough to satisfy the needs

of America’s underfunded

pension plans, even if noth-

ing goes wrong.

It might seem odd that if

the future avoids the twin

disasters of financial crisis

and pandemic that stocks

should be expected to offer

less than in the past 13

years. But that is because

valuations, or what is al-

ready priced in, matter so

much—and thanks to the

Fed, many good years are al-

ready anticipated.

STREETWISE|By James Mackintosh

Thank the Fed for This Year’s Run in the Stock Market

Many in-
vestors are
still bewil-
dered that the
shock of
2020’s econ-
omy gave rise to the awe
that is this year’s stock mar-
ket. The puzzle gets worse:
Stocks have done better than
their norm of the past cen-
tury even if you invested at
the high in 2007 and held
through both the worst fi-
nancial crisis and worst pan-
demic in 100 years. What on
Earth is going on?
The answer should give
pause to investors who plan
to hold for the long run.
Stocks have won big, not pri-
marily because earnings
went up but because the cost
of money went down almost
to zero. A repeat in the next
decade is almost inconceiv-
able, which means future re-
turns are likely to be pedes-
trian, at best.

T

o put some numbers
on it, an investor who
bought the S&P 500 in
October 2007, stayed calm as
Lehman Brothers went bust,
and ignored the repeated
panics and the pandemic
made an annualized 7.3%
above inflation, including
dividends. That is far better
than the 6.5% annualized
real return on U.S. stocks
from 1900 to the start of this
year calculated by academics
Elroy Dimson, Paul Marsh
and Mike Staunton for Credit
Suisse.Itisonaparwith
the postwar returns of 7.4%
over inflation annually from
1950 to the start of the year,
despite the great financial
crisis and the pandemic, the
worst hits to the economy
since World War II.
This year is a fine example
of why: In 2020, falling earn-
ings coincided with much
higher valuations of future
earnings, as lower interest
rates and bond yields made
stocks look more attractive.

Shareholders of airlines, shopping-mall owners and travel companies will be using some of their

future profits to pay for the debt needed to survive 2020. A mall in Redondo Beach, Calif., last month.

KEITH BIRMINGHAM/SCNG/ZUMA PRESS

1985 '9 0 '95 2000 ' 05 '1 0 '1 5 ' 20













%

S&P 500 forward

earnings yield*

10-year U.S.

Treasury yield

Theall-inyieldfromstocksisalmostaslowasinthedot-com

bubble,butthistimeisfarabovethatonsafeTreasurys.

• 2024 % 68

Oct. 2007

March 2000- Oct. 2007

March 2000

1950

1900

Annualizedafter-inflationtotalreturnonU.S.stocks†

Sources: Refinitiv (yield); Dimson, Marsh & Staunton/Credit Suisse; Refinitiv (return)

*Forward earnings yield is forecast earnings/price, the inverse of the forward PE ratio †Up to Jan.

1, 2020 for 1900 and 1950, rest through December 2020. Recent data uses Russell 3000