Ryan
Sep 6, 20238 min
Let’s get into this week’s news!
Tesla
The company recently announced that all three trims for the Model 3 now qualify for the $7,500 tax credit that was instituted by the Inflation Reduction Act. That means the Model 3, on average, is around $30k, a very reasonable price for a top quality vehicle. The change comes because of the company’s emphasis on moving away from Chinese batteries, which only qualify for a $3,750 tax credit. Even at 6% interest rates, someone can get a $600 monthly payment for a Model 3 if they’re financing the car.
And the cost could come down even more over the next few years, leaving competition further in the dust. The fact that Tesla is already very profitable at these price ranges and with further tax credits, enables the company to get even more efficient with manufacturing operations. This is what the final cost was looking like after I put in very realistic assumptions for California gas prices. Tesla’s moat very well may be that they end up being a low cost producer.
What’s absolutely crazy is that if you make less than $73,000 per year in California, the tax credit is actually $7,500, not $2,000, like the calculator assumes. So even before the 6-year gas savings, the basic Model 3 would cost about $25,000, which is lower than the new Camry’s. That is amazing! After the gas savings and delivery fee, the cost would be around less than $20,000. For a Tesla! Talk about price parity. Bears can argue all day long about how the tax credits make such a big, unfair difference. It almost doesn’t matter because as these credits increase demand, Tesla’s manufacturing operations will get leaner and then the company will further be able to lower costs. So yes, the tax credits are unfair to ICE manufacturers. But that’s exactly the point. To reduce fossil fuels, government leaders deem EV’s to be better and Tesla is disproportionately benefitting from it.
Axon
Axon, the latest company added to the portfolio, is most famous for popularizing the Taser. In fact, the company’s old ticker symbol was TASR, until it started expanding into new product categories and updated the ticker to AXON.
The founding story is quite unique. The current founder/CEO, Rick Smith, was at Harvard when two of his friends from high school were shot dead. While grieving, he wondered if there was a non-lethal weapon that could solve the problem of gun violence. He kept thinking about the idea and eventually found the inventor of the Taser, Jack Cover, to team up with. Mr. Cover was a NASA engineer and had been working on his idea for nearly 20 years by the time Rick Smith reached out. But the story goes back even further. Rick Smith and his brother set out, with the help of Jack Cover, to improve the Taser in 1993. The original Taser actually used gunpowder so it was officially labeled a firearm which really depressed sales. So the Smiths decided to use compressed nitrogen and sales eventually took off. One early marketing stunt the company did was to pay cops to teach citizens how to use Tasers and thereby sell more devices. Now, Tasers account for just under 50% of the company’s $1.2 billion in revenue and the new Taser 10 should be released here pretty soon. As mentioned, for 24 years the company was named Taser International, but it rebranded in 2017 to Axon. Over the past decade, Axon has diversified its business and now the overarching mission is to protect life. In fact, Rick Smith set out a moonshot goal to decrease the number of police related deaths by 50% over the next decade.
One of the main products that Axon offers is body-worn cameras for law enforcement officers. These cameras are designed to record video and audio of interactions between officers and the public, which can be used for evidence in criminal cases and to improve officer training and accountability. A key feature of Axon's body-worn camera system is its cloud-based storage and management platform, Evidence.com. This platform allows agencies to securely store and manage their video and audio evidence, as well as other types of digital evidence such as documents and photos. Evidence.com also includes a range of tools and features for analyzing and organizing evidence, including redaction tools and automatic tagging of important events. Apparently, the library of footage in Evidence.com is 22x the size of Netflix’s entire catalog
In addition to body-worn cameras, Axon also offers a range of other products and services for public safety agencies, including in-car video systems, a portal for citizens to upload police-related videos, evidence management software, and training and consulting services. Nowadays, Axon’s recurring revenue makes up nearly 40% of total sales and the company is still growing well over 25% in firmly profitable territory. I think the best analogy for the company is Apple. Axon is dominant in police stations. The hardware, coupled tightly with software, means that about 80% of police stations upgrade to the latest Axon products. The company has quite a bit of pricing power in the form of new products. It’s just like the iPhone. Many people upgrade despite higher prices.
As a recent example of the company’s products, Axon announced that San Bernardino county, one of the largest in California, adopted Justice Premier. This is a software system that enables lawyers to go through digital evidence much more efficiently. The county signed a 10-year contract and it goes to show how much optionality the company has. From body cams, to recurring revenue associated with storage of that evidence, to another system that allows prosecutors to go through that evidence efficiently, you begin to see just how much value Axon can provide.
To wrap up Axon, its COO was at an investing conference this week and here are some good quotes:
we have launched TASER 10 and shipping this year. We're going to start shipping Axon Body 4, our new body camera in July, and so we're really excited about that as well
These are the two new products that are launching this year.
So it's about really building out that operating system so that police officers and police agencies really have one place to go for all of their technology needs from the time a dispatcher is called on a 911 line, all the way through the culmination of that court case and really controlling that flow of information and evidence as part of that workflow.
This really is the long-term vision – an operating system for police stations.
So we're excited about what this year entails, certainly looking forward to our call in August, and we're -- and same with the 2025 guidance where we have a lot of conviction in that guidance. We think you'll start to see some nice operating profit expansion and got a lot of confidence moving into the future here.
Management seems very confident in the next couple years.
Snowflake
Snowflake launched yet another Data Cloud, this time for government workers. I’m losing count now as to how many vertical clouds the company now supports but it’s good to see Snowflake continue to build out its strong marketing playbook.
Datadog
Datadog released a new workflow automation product, perhaps a small-time ServiceNow competitor. Site reliability engineers can now pre-program steps that will automatically happen when outages occur. For example, maybe a server is down so all the devops engineers will get a Slack message but the system can be programmed to go a step further, remediating the issue based on a pre-constructed set of protocols. It’s all about increasing automation to make the lives of devops engineers much easier.
The company also announced a new cloud cost management product for Microsoft Azure. I imagine this product will do very well and you can seamlessly allocate dollars to either Azure or AWS. It’s good to see Datadog deepening its relationship with both of the largest cloud providers.
Lastly, the company’s CFO was also at a conference and here were a few notable quotes:
And the main way that Datadog has competed and one is through investment in product. If you look at our R&D as a percentage of revenues in the low 30s, it's an outlier relative to our competitors. We are lucky enough to have designed or the product to be very efficient to be able to be installed by customers in a very frictionless way. That is the core to a very efficient sales and marketing go-to-market that we plow back in a material way in R&D. So I think the first part of it is that we have invested substantially. The next part of it is the clients are speaking that they want -- if they're going to buy a SaaS software solution, a tightly integrated package that economically can be deployed ubiquitously and can allow collaboration. And brilliance or luck, the founders of the company designed the platform that way.
I prefer investing in companies that focus more on building the product than selling it. Ideally, the product is so good that it sells itself. I think companies that rely on sales and marketing are a little more fragile. That is definitely not always the case. There are plenty of counterexamples and marketing obviously does matter, but if I had a choice, it would be a product-led company. Fancy dinners and large events are great but people buy products that solve their problems. If you wine-and-dine a decision maker but then that decision maker gets fired, boom, all of that money was sort of wasted. So market is important but products that solve problems are way more important and lasting.
On the good side, our gross retention, meaning our customers staying with us has stayed really, really high in the upper 90s. What that indicates to us is we're a must have, once they install us, they're not leaving.
Gross retention is the ultimate indicator of stickiness. I like companies where gross churn is as close to 100% as possible. Two other examples that come to mind are Crowdstrike and Global-E.
And it starts with the hyperscalers, but we're attached to that in some other ways. So they started that. And what we said we've been experiencing that. This will be the fourth quarter we've been experiencing that. We -- in the first quarter, we had growth that was in terms of the approximate organic growth that was slightly higher than Q4, but a little lower than Q3. So we're sort of plateauing down there. And we have said we don't know when this is going to end. It's going to be a lot in the economy. On the other hand, we have lapped those comparables of that accelerated or caffeinated growth. So the rate of decel is going down. Now when we will excel again is largely going to be dependent on when all of those customers are finished with their cost management efforts. And there's been a lot of comments on that, and we don't know the answer to that. So we, in our guidance, we just put in, we assume it's going to continue throughout the year. That should set us up very well for resumption of growth, but we don't know when this optimization is going to run its course.
Cloud optimization is still going on and we don’t know when, or necessarily if, things are going to reaccelerate. The long-term tailwind of moving to the cloud seems to be in tact but the consumption based business model of true cloud players allow customers to pull back spend quite easily.