Ryan
Sep 6, 20238 min
Weekly Update
You know the drill, let’s jump right into the news from this week!
Tesla
Let’s kick things off with a rundown of Tesla’s earnings.
Here are the numbers:
YoY Revenue
74%
98%
57%
65%
81%
42%
56%
37%
24%
47%
QoQ Revenue
-3%
15%
15%
29%
6%
-10%
27%
13%
-4%
7%
GAAP EBIT margins
6%
11%
15%
15%
19%
15%
17%
19%
11%
10%
FCF margins
3%
5%
10%
16%
12%
4%
15%
6%
2%
4%
And here were some interesting quotes from the earnings call:
While we continue to execute on innovations to reduce the cost of manufacturing and operations, over time, we expect our hardware-related profits to be accompanied by an acceleration of AI, software and fleet-based profits.
Tesla keeps talking about FSD and robotaxis but the market won’t believe it until they see it. A good chunk of the valuation is being propped up by the idea of robotaxi and this sounds crazy, but a $1 trillion valuation will look like a steal if the company can truly figure out FSD.
So the success in AI and dev is a function of talent, sort of unique data and computing resources. And we have outstanding capabilities in all 3 arenas. And I really just don't know how anyone could do what we're doing, even if they had our software and had our computer, if they did not have the training data…So today, over 300 million miles have been driven using FSD Beta. That 300 million-mile number is going to seem small very quickly. It will soon be billions of miles, tens of billions of miles. And the FSD will go from being as good as a human to then being vastly better than a human.
Tesla has the most data which is the most important criteria for AI. This is the key long-term thesis. The short-term thesis is that the company is vertically integrated so they can iterate faster and keep costs lower than competitors. I mean they slashed prices and were still able to bring in $1 billion in free cash flow despite ramping up investments pretty much everywhere.
And we are already in discussions with -- only just early discussions with a major OEM about using Tesla FSD. So we're not trying to keep this to ourselves. We're more than happy to license it to others.
Elon has said they are willing to license FSD (full-self driving) before but this is the first time they’ve confirmed conversations with another OEM (original equipment manufacturer).
As we look forward to the rest of the year, I want to reiterate Elon's comments on Q3 volumes driven by planned downtimes for factory upgrades. These upgrades will also carry some amount of factory idle cost.
This is the quote that led to the stock being down yesterday. But I’ve heard rumblings about this over the past quarter. As the company is ramping Cybertruck and upgrading some of the factories with the new 4680 cells, there needs to be a little downtime to make the changes. What I also think the market is reading into is that management was pretty vague about this and it fears that the factory downtime is so that Tesla doesn’t have excess inventories. With the price cuts and the tax savings, bears say that Tesla got lucky and had those not happened, growth would’ve been stagnant. Now this is another datapoint that could confirm those suspicions. I think, even if that’s true, the long-term demand picture remains and the company will sell far more cars five years from now. The short-term has a lot of noise.
We'll continue to use -- we'll actually take NVIDIA hardware as fast as NVIDIA will deliver it to us. Tremendous respect for Jensen and NVIDIA. They've done an incredible job. And frankly, I don't know, if they could deliver us enough GPUs, we might not need Dojo. But they can't. They've got so many customers. They've been kind enough to, nonetheless, prioritize some of our GPU orders. But yes, the sheer magnitude of video training -- because like I said, we're not trying to just get as good as human.
I thought this was an especially interesting point – that Dojo was almost built out of necessity because NVIDIA couldn’t supply chips fast enough. That is a pretty bullish quote for NVIDIA.
My Thoughts on Earnings
Growing nearly 50% despite the rapid increase in interest rates is a feat in and of itself. The price cuts certainly boosted this but for the company to keep margins at 10% is fairly impressive. The company has so many exciting technologies under development. The short-term is pretty unclear, but like Elon said on the call, there is a clear path to a 5x increase in value, and possibly 10x over the longer term. If $10 trillion sounds crazy, that’s because it is. But it’s possible with Optimus, FSD, virtual power plants, Dojo, and all of the new models that Tesla will come out with. There are a lot of irons in the fire and that gives me long-term conviction.
And now onto some non-earnings news from the week:
This is more an Elon news bullet than a Tesla one, but X.ai was recently announced. In typical, mysterious form, the website states that the goal of the new company is to, “understand the true nature of the universe.” It’s likely going to be an OpenAI competitor, as Elon has repeatedly said he is nervous about the pace of AI progression.
In actual Tesla news, a recent article in the Times of India says that Tesla is looking to produce 500,000 units of a $24,000 car in India. As mentioned a couple months ago, Elon met with Prime Minister Modi but there have been some regulatory hang-ups. This article seems to imply that India is a more likely location for the next Gigafactory than previously thought. This lower-priced model will probably be the mystery model so it’s at least a couple years away from coming to fruition. Further, I’m a little skeptical because an Indian factory will be much more difficult given the Indian government likely won’t tolerate CATL battery cells, which are the industry standard. I would like to see Tesla continue to ramp up their own cell manufacturing so they don’t have to be as reliant on CATL.
The company also produced its first cybertruck out of the Austin Gigafactory, as can be seen in this photo. We haven’t gotten official pricing on the cybertruck yet. Originally, in the 2019 pre-orders, the cheapest model was $40k. Tesla scrapped that but I wouldn’t be shocked to see them keep it below $50k. Ford’s F-150 Lightning is $50k for the base model and Elon said that was a little pricey. We will likely find out pretty soon.
And lastly, the company announced that it wants to double its German Gigafactories’ production, from 5,000 cars per week to 10,000. It also wants to double its output of battery cells. This won’t happen overnight but it’s always good to see more long-term investments because Tesla is laying the foundation for future growth.
Axon
Axon recently acquired an unmanned drone and ground vehicle company named Sky-Hero for an undisclosed sum. If you’re interested in the products, I highly recommend watching this video. The company has mainly been working with elite tactical teams to use its two products to do indoor recon. Axon bought the company to equip police officers with de-escalation tools as part of its Axon Air program. The idea is to use drones to monitor situations so that officers can be more informed when they need to take action. Axon is very bullish on drones as part of their moonshot to reduce police-related deaths by 50% over the next decade. As part of this, the company also has a “drones-as-a-first-responder” program. Stations can dispatch a drone when they get a 911 call so that officers can understand the situation before entering. Drones can also be equipped with a speaker for de-escalation purposes to scare off intruders without endangering the life of an officer.
Now, this might seem like some sort of sci-fi movie where drones are always watching us and I’m sure there would be public pushback on this. But I like how Axon is innovating and building technology that makes people safer. I do think we will start to see drones flying at high levels at large public events like concerts, using AI to recognize abnormal behavior and alerting security guards on site. It will be very interesting to see how police stations start to use this technology and how the public will react to some of it.
Some Thoughts
It’s interesting to think about the biggest winners over the past few decades. Companies like Amazon, Netflix, Tesla or Nvidia. All of them had visionary founders at the helm and all of them were leaders in creating a new space. Those are the two criteria we talked about last week but what’s also interesting is some of the things that investors typically look for that these companies didn’t possess in the early days. One thing is big markets. Looking back, it’s so obvious that the markets these companies were going after were gigantic but it wasn’t so obvious in the early days. E-commerce was arguably the easiest to spot but DVD rentals, electric vehicles and gaming graphics cards certainly weren’t no-brainer ideas. But if you listened to the founders, they told you what was going to happen. So I actually think that market size could be overrated if you have a truly special founder. The visionaries just keep innovating and moving into new markets and changing the entire paradigm of how things are done. I mean look at Tesla. It literally started the avalanche of electric cars because it wants to accelerate the move to sustainable energy.
Another thing they didn’t necessarily have is super linear, consistent growth. I think there has to be some level of wiggle-room. Netflix had the Qwikster debacle in 2011, Tesla had a few quarters of production shortfalls when ramping up the Model 3, and Nvidia has had several supply gluts following the crypto bubble and more recently post-COVID. Amazon, frankly, has probably been the most stable but the narrative all along is that they could never be profitable – which is crazy to me considering they’ve been operating cash flow positive since 2002 and EBIT profitable since 2003. Yes, you read that correctly!! Amazon, the darling of the unprofitable narrative, has been EBIT profitable for 20 years. There have been a few years of negative net income because of some one-time issues like in 2012 and 2014 but the company has been EBIT profitable for all of these years. It’s quite wild to see the difference between the numbers and the narrative. The company has been purposefully keeping margins low because their reinvestment opportunity is so large.
This brings me to another thing in common with these companies. Margins weren’t super high. Nvidia has and has had the highest margins by far but each of these companies focused more on free cash flow growth than absolute margins. They proved that once you can get to profitability, then Wall Street will actually give you some more leash so that you can grow revenue and free cash flow. I would personally much rather a company grow free cash flow at super low margins than have stagnant free cash flow at really high margins. It’s important to have a great capital allocator at the helm but in the latter scenario, the cash flow will go towards buybacks and acquisitions versus reinvesting back into the business.
So management and product leadership are crucially important but maybe market size, linear consistency in growth, and high margins aren’t required to hold onto a big winner. I think it does boil down to the leadership at the company because they are making all of the reinvestment decisions. If they can’t breakeven, then it’s quite likely that there are too many strong competitors or that they simply aren’t effective capital allocators.