September 24, 2020

What if There Isn’t a Covid-19 Vaccine for Years?

A reminder: We are holding a DealBook Debrief call on Thursday as part of The Times’s special project for the 50th anniversary of the seminal Milton Friedman essay that changed the course of capitalism. Joining us are special guests Leo Strine Jr., the former Delaware chief justice, and Joey Zwillinger, the C.E.O. of the shoe company Allbirds. R.S.V.P. here for the call tomorrow at 11 a.m. Eastern.

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The conventional wisdom is that a coronavirus vaccine will be widely available by next summer, if not earlier. But AstraZeneca’s move to halt testing of its treatment calls that into question — and puts into doubt how quickly the global economy can recover from the pandemic.

AstraZeneca is investigating a serious suspected adverse reaction in a volunteer in a late-stage U.K. trial. It isn’t clear whether the illness is linked to the company’s vaccine, or for how long the drug maker will keep its trial on hold. The AstraZeneca vaccine, which is being developed with Oxford University, is reportedly under consideration by the Trump administration for fast-track approval.

To be clear, this isn’t necessarily a bad thing. Medical experts say the point of late-stage clinical trials is to uncover potential side effects by giving thousands of people a treatment under controlled conditions. “The perspective we need to keep in mind,“ said Dr. Faheem Younus, the chief of infectious diseases at the University of Maryland Upper Chesapeake Health, is this one potential case of a serious side effect versus the tens of thousands of Covid-19 patients currently hospitalized in the U.S.

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Today’s DealBook Briefing was written by Andrew Ross Sorkin in Connecticut, Lauren Hirsch in New York, and Michael J. de la Merced and Jason Karaian in London.

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Senate Republicans plan to vote on their “skinny” coronavirus aid bill. The move is meant to put pressure on Democrats to compromise on economic stimulus measures. House Democrats have rejected the $500 billion proposal as “pathetic,” and even some Senate Republicans are likely to oppose it.

JPMorgan Chase said customers and workers had misused federal relief money. The bank said it had found “instances of customers misusing Paycheck Protection Program loans, unemployment benefits and other government programs.” JPMorgan said it was cooperating with law enforcement.

New York real estate faces its biggest challenge since the financial crisis. Under 10 percent of New York’s office workers had returned as of last month, and just 54 percent of companies plan to return by July, The Times reports. Businesses have increasingly put off decisions to sign new leases, and some are holding out for steeper discounts than are now on offer.

The first day of school in the U.S. didn’t go smoothly. Website crashes and cyberattacks bedeviled many students logging on remotely. “A lot of districts are just wildly unprepared for online learning,” one expert told The Times. College students attending in-person classes aren’t faring much better: Tens of thousands have been infected with the coronavirus, and universities are resorting to lockdowns.

Steven Davidoff Solomon, a.k.a. the Deal Professor, is a professor at the U.C. Berkeley School of Law and the faculty co-director at the Berkeley Center for Law, Business and the Economy. Here, he and Panos N. Patatoukas, a professor at Berkeley’s Haas School of Business, run the numbers on Tesla and try to make sense of its volatile valuation.

It’s been a torrid time for Tesla, which has lost a third of its value over the past week or so. Yesterday alone it erased 21 percent in value, leading another down day for technology stocks. It follows an amazing bull run — for tech stocks in general and Tesla in particular.

Is the correction warranted?

Let’s look at it through the eyes of Tesla investors. What did they need to believe about its path ahead to have been willing to value Tesla at almost $500 billion in market capitalization at its recent peak?

We can apply traditional valuation techniques to see what would need to happen for this valuation to be justified. In theory, a company’s fundamental value is the capital in place plus the expected added value. Value added, the theory goes, should be based on investors’ expectations about growth and profitability. Using this basic framework, we recasted the Tesla story in terms of fundamental projections over a 10-year horizon.

There are two key aspects: sales growth and profit margins.

If Tesla is going to justify a half-trillion market capitalization, it needs to increase its sales from $24.6 billion in 2019 to approximately $140 billion by 2030. This would require an annualized growth rate of 19 percent, and end up with the company becoming as big as G.M. and Ford are today.

At the same time, Tesla also needs to expand its net profit margin, the money earned for shareholders per dollar of sales. By our calculations, its net margin will need to increase from minus 3.5 percent in 2019 to over 21.5 percent by 2030. That means that by 2030 Tesla’s margin would converge to what Apple’s is today. Toyota is among the most profitable big automakers, and its margin in its latest fiscal year was around 7 percent.

Over all, if you were willing to buy Tesla’s shares at their recent peak, then you should also be willing to believe that over the next decade Tesla will achieve the scale of Ford or G.M. with the margins of Apple. This implies that Tesla would become more than a car company: It would have to become a renewable technology company in which cars are only a small part of its business. Elon Musk’s moves into solar panels and batteries suggests that he understands this.

Eventually, expectations reflect reality and fundamental valuation drivers come into play. That said, expectations may take a long time to correct themselves if investors aren’t very focused on fundamentals. It’s possible that Tesla and other hot tech stocks will justify their recent highs, but a lot needs to go right in the long term. Perhaps investors are starting to realize this, and revising their expectations.

Eric Ries is launching the Long-Term Stock Exchange today, nine years after his book “The Lean Startup” laid the foundations of the concept and made him a mini-celebrity in Silicon Valley.

The big idea: LTSE’s pitch is that it makes it easier for companies to manage for — you guessed it — the long-term instead of obsessing about quarterly targets. The risks of short-term thinking have been called out by the likes of Jamie Dimon and Warren Buffett, and the embrace of stakeholder capitalism has questioned the wisdom of serving shareholders alone.

The exchange says it’s more than just marketing. Companies that list on the San Francisco-based exchange are required to report on and maintain a series of principles that “focus on long-term value creation.” This should appeal to institutions like pension funds that tend to take a longer-term view of returns, Mr. Ries said. He dismissed concerns that even companies with the best intentions could find themselves vulnerable to activist investors or takeover threats, forcing them to make short-term, defensive moves. “The bullying tactics only work if you’re actually afraid,” Mr. Ries said.

It doesn’t have any companies signed up — yet. Today is “the starting gun” in which LTSE can begin the solicitation process, beginning with companies that have yet to go public. Asana has explored the prospect of listing on LTSE, people familiar with the matter said, as has Airbnb, The Times has reported. “I think this is such a seismic change that to get even one company to do it is unbelievable,” Mr. Ries said.

• One of the companies that lists on LTSE may be the LTSE itself. The company would not consider exploring a sale, but would consider going public — on its own exchange, of course.

Deals

• Berkshire Hathaway will invest $570 million in the I.P.O. of Snowflake, the cloud database company, in a rare bet by Warren Buffett on enterprise tech. (FT)

• G.M. agreed to take an 11 percent stake in the electric truck maker Nikola, valuing the start-up at nearly $19 billion. (NYT)

• The merger of the digital ad companies Outbrain and Taboola has fallen apart nearly a year after the deal was announced. (CNBC)

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