The Lex Newsletter: uncanny reality in start-up land 

Dear reader,

Artificial intelligence start-ups have done a perfect job dreaming up their own reality. Amid sharp valuation downturns, they exist in a bull market. Investors may be closing their wallets to former favourites, but money is still flowing into AI thanks largely to San Francisco’s OpenAI, whose ChatGPT chatbot triggered mass excitement last year.

Of course, Lex is a big fan of anything that gives us the kind of glowing description ChatGPT does (see image above). Though we question OpenAI’s apparently open-hearted call for regulation — something that could lock in the lead of early moves. AI experimentation is expensive. Google and Microsoft (plus OpenAI) may end up dominating the sector. 

Either way, the rest of the US tech start-up scene hasn’t benefited much, no matter how many times they jam the acronym “AI” into presentations. SoftBank’s screeching halt on investments is a case in point. 

Maybe the smart money runs counter to SoftBank. Investors piling into Chinese ecommerce giant Alibaba seem to believe so. Lex is not so sure. Alibaba has been slow to catch on to the rise of online sales via short-form video platforms. Across China, the post-reopening boom has faded quickly. 

We are far more positive about the prospects for Japan’s economy. This week, the stock market hit a 33-year high. If retail investors can be persuaded that this is not a repeat of the late ’90s bubble, it could rise further. Share repurchases at Hitachi and Fujitsu look hopeful. So does investor activism and low valuation multiples that support further price rises. 

Scrag ends 

AI is, of course, the latest west coast creation that promises to change the world. Not long ago, alternative meat companies said the same thing — claiming that they could improve our health and lower greenhouse gas emissions by weaning us off pork, beef and chicken. Fast-food chains added faux-meat burgers and coffee shops added non-dairy milks. Shortly after Los Angeles-based start-up Beyond Meat joined markets in 2019 it was valued at $14bn.

That now looks like a high point the sector cannot reclaim. A rush of competitors, backed by venture capital firms flush with cash, ate into Beyond Meat’s market. The market then shrank as customers became more discerning about ingredients and conscious of cost. It is still cheaper to kill an animal than buy meat replacements. From a valuation of 122 times sales, Beyond Meat has dropped to two. Lex doesn’t expect it to rise. 

Speaking of miracle cures to social ills, weight-loss drugs are still in demand, with Denmark’s Novo Nordisk and Eli Lilly of the US leading the charge. Though Lex notes that long-term use raises the odds of so-far unknown side effects.

The backlash against processed, meatless meat is reminiscent of the life cycle of vapes. Once hailed as the best way to stop smokers from lighting up, they are now subject to their own crackdowns. That’s bad news for British American Tobacco, which hoped alternative nicotine products would more than make up for lost tobacco sales. 

Here in San Francisco, cigarette smoke is treated as evil incarnate. Vapes are popular but they are less common than they were a year ago. If new BAT chief executive Tadeu Marroco spends much time looking at the share prices of rivals, he will know that companies that talk less about replacing cigarettes perform better. 

Still, new chiefs with new plans do not always reverse performance. When Vodafone’s chief executive Nick Read departed last year, little changed at the telecoms group. Nothing that replacement Margherita Della Valle dreams up is likely to match the kind of value that a break-up would unlock. As one Lex reader pointed out, job cuts do not make a strategy.

Summer lull 

Brookfield’s attempt to sell Center Parcs was met with dismay by the British press this week. The Canadian alternative assets group bought the resorts business in 2015 and tried to expand it at a fair clip, reducing free cash flow in the process. Lockdowns and planning permission difficulties proved intractable obstacles. 

Still, this has not been a bad bet. The resorts are popular, with users willing to look past the US spelling of “center” and pay £250 per person per day to stay in cabins, go swimming and cycle round forests. Few alternatives exist. Using some assumptions about the debt used in the purchase and a £4.5bn sales price, which Lex thinks is possible, Brookfield could lock in an 18 per cent annualised return.

US homeowners who refinanced homes during low rates have used the period to bulk up wealth too. Now that rates are up, refinancing is down. Commercial British landlords are watching rates too. British Land and Land Securities are duking it out over office blocks as debt payments rise and tenants try to strike new deals that adjust for staff working from home. The same negotiations are playing out across Europe. But Lex thinks London is in better shape than many other cities. Central skyscrapers are still in demand. Readers are sceptical, but we say: bet against the capital at your peril. 

Best of the rest

If you’re interested in OpenAI, this 2016 New Yorker profile of chief executive Sam Altman is a good primer. It includes the ominous line: “Like everyone in Silicon Valley, Altman professes to want to save the world; unlike almost everyone there, he has a plan to do it.”

I liked this sobering analysis of San Francisco’s problems in the FT Magazine. I also wonder how nervous business leaders must get when they hear that the FT’s Dan McCrum has some questions.

Finally, a wild story from the world of wannabe YouTube influencers. A 29-year-old pilot accused of deliberately crashing his small plane for views is facing up to 20 years in prison. The video is here. It’s a bit of a giveaway that he was holding a selfie stick when he jumped.

Enjoy your weekend,

Elaine Moore
Deputy head of Lex