Ryan
Jan 86 min
Weekly Update Nov 13 - 17
Tesla
Last week, Elon Musk’s latest AI project, xAI released its first product – Grok. It’s a ChatGPT competitor that is being slowly rolled out to users. As I was learning about Grok, I remembered all of the mentions about the importance of AI inference in Cloudflare’s last earnings call. Then it struck me that Tesla, themselves, will have a lot of capacity for inference compared to something like a computer or smartphone. LLMs will almost certainly provide the brains for audio commands and enable other interesting apps inside of a Tesla.
Second, Elon made some comments about Berlin being another site where the $25,000k Model 2 will be built. This cheap model is still probably more than 2 years away from full-fledged production, but there are rumors that the company is aiming to sell 5 million units of them over time. With an EV tax credit, these cars will be some of the cheapest new cars out there…with the potential for self-driving technology. If you look at any other $17-18k new cars out there, there are some slim pickins’ these days. Originally, there were rumors that the Model 2 (not officially the name, but what a lot of people are referring to it) was going to be built in the new Mexico Gigafactory. But then it came out in Elon’s biography that Tesla wanted to move to beginning stages of production to Austin to push up the timeline. Now we’re getting confirmation from Elon, himself, that Germany will also produce the Model 2. That’s all of the information we have at this point but this price point will really stoke demand.
The short term looks a little bleak for Tesla as the Cybertruck ramp will be incredibly difficult, high interest rates are curtailing demand, and self-driving is in the trough of disillusionment. However, if we look out just a couple of years, we have the Model 2 on the horizon, the Cybertruck will get ramped, FSD is improving, the company will have some of the largest AI capacity in the world, Tesla Semi will be a sizable chunk of revenue, and parts of the energy business like autobidder will grow in societal importance. In other words, I don’t see a company out there with as much optionality over the next decade. Oh, and I didn’t even mention the Optimus robot!
Datadog
Datadog’s CFO was at the RBC conference on Tuesday. Here are just a few notes I made from it:
So we said on the earnings call that we're not declaring the end of this period. We think there'll still be optimization, always is, but that some of the most intense areas had abated and some of them have even begun to grow a little bit. So that's sort of updating everybody on what we've been through.
Same as they said on the call. Not fully out of the woods yet but Q2 did seem to mark a trough.
One of the great things about our product is it's sort of a must-have utility. So in -- for the vast, vast majority, and you can see it in the gross retentions, it's not a matter of turning it off, switching, insourcing, it's a matter of calibrating the cost.
Datadog is a very sticky product and you see that in the mid-to-high 90% gross retention numbers. It’s not so much a matter of churn as it is elevated or soft usage numbers.
Like if we just said ITSM, you would say, oh, you're going to go into ServiceNow. I'm just being very like black and white with you. And I think that's what a lot of other companies don't do, because in our end market, which is essentially monitoring real-time, customer-facing applications that are running in the cloud using DevOps, most of these other companies need something else, and they're not in the market. In security, we also don't mean endpoint, we don't mean network, we don't mean so many. We mean essentially using security signals in building and putting software in production for our DevOps, so DevSecOps.
Lastly, this was an answer in response to the competitive environment in cybersecurity. The CFO basically says that there are so many different niches in security and Datadog isn’t trying to compete with everyone. They are doing security for DevOps (developer operations), not endpoint to fight with Crowdstrike or network to fight with ZScaler or ITSM to fight with ServiceNow.
New Companies
Two companies that have performed extremely well, both in the underlying businesses and the stock prices, are Elf Beauty and Celsius. Both of these companies are growing sales in excess of 70% and are quite profitable. Both companies have solid leadership, though not founder-led. Both have very savvy marketing and popular consumer products. And both have strong distribution partnerships. In short, there are quite a few similarities.
Celsius has grown sales at a staggering 100% 5-year CAGR. I remember looking at the stock in late 2019 when the stock price was at $8. Now it’s $150. So yeah, that hurts. Elf’s sales have been accelerating to 70% YoY through its social media marketing and strong sell-through via Target.
The numbers are clearly very strong with both of these companies but I worry about the sustainability of growth. Clearly, I’ve been very wrong on Celsius and the exclusive distribution partnership with Pepsi largely debunked my original skeptical thesis. Brands are important but so are barriers to entry. There are hundreds of energy drink competitors and cosmetic brands. But a combination of a good product, strong distribution, and a reasonable price can propel some companies to staggering growth. It’s never quite that simple but these seem to be the core ingredients for both of these companies’ success. There’s one more thing that both companies are amazing at, which is marketing. Elf’s CEO even said that he views the company as more of an entertainment company that happens to sell make-up.
I personally prefer to invest in R&D-led companies rather than marketing-led companies. I would much rather a differentiated, amazing product than flashy marketing. That’s not necessarily the “best” approach – there are many different ways to invest – but I find that I have much higher conviction in those companies. Marketing-driven companies tend to have shallower moats as the barriers to entry for great marketing are generally people. Why can’t Monster go into Celsius and hire away the best members of the marketing team? Or why can’t L’Oreal do the same to Elf? Now, this isn’t a great augment because you could say the same about GM and Tesla. Why can’t GM just hire away Tesla’s best engineers? Well, that sounds crazy! Those are completely different companies with completely different missions. And I’m sure that’s the case with the employees who work at Celsius and Elf. A great company culture begets great employees which create strong brands and then there is a certain amount of momentum that brands, themselves, can carry. For instance, Elf has a very strong Instagram and TikTok presence. Influencers will use their products in videos, creating a very low-cost form of paid advertising. You likely won’t see that same type of virality for an Estee Lauder product.
Similarly, Celsius has a very different target market and brand than RedBull and Monster, the big two incumbents. Celsius’ drinkership (not a real word) is actually 50/50 between men and women, a much higher proportion than Monster or RedBull. After all, Monster’s long-time slogan has been “unleash the beast”. Celsius also has more of a fitness angle to it as it started out as a pre-workout supplement. Compare this to the extreme sports branding of Monster and RedBull. When I think of Monster, I think of a motocross race and when I think of RedBull, I envision someone parachuting out of a plane. Celsius has a very different brand persona, focused more on healthy energy, even though you could definitely argue that the ingredients aren’t all that much better. But there is a serious counterpositioning problem for the incumbents here. Celsius is hitting on the healthy trends whereas it is difficult for Monster and RedBull to shift their marketing towards something like that. It’s just not what people expect.
But then I visit stores like Target and see a product like Alani Nu, which has quite a bit of shelf space. This is an energy drink that has very similar packaging compared to Celsius, but even more of a female focus. And this company was founded in 2018, which sort of shows how low the barriers to entry are. Compare this to Tesla and how there hadn’t been a major new US car manufacturer in the last century. That’s a whole different ball game that a simple comparison between P/E ratios doesn’t account for.
All in all, I say all of this because I’ve spent the last few weeks studying Elf and Celsius and I can’t find anything wrong with the numbers but I just can’t quite get comfortable with them as long-term holds. Something might change my mind because I hope to be open-minded about this but at the moment, I’m content to keep studying. I find that when I try to force something when I just can’t get conviction on my own, those situations tend to work out poorly. So for now, I’m happy to let other people make a lot of money in those names, but I just can’t quite get there.