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  • Writer's pictureRyan

October 16-20, 2023

Let’s get right into the news from this week!


Axon


As part of its moonshot goal to cut police-related deaths by 50%, Axon created a database to track the national statistics. Over the past two years, there have been roughly 1,200 deaths so to deliver on its goal, the number of police-related deaths would have to shrink to 600 by 2033. It’s a great goal and I wouldn’t be surprised to see Axon make a lot of progress towards it. You can check out the actual database here.



Tesla


First off, the UAW strikes have been going on for a month now and this is what Ford’s executive chairman, Bill Ford – the great grandson of Henry Ford – had to say:


“Choosing the right path is not just about Ford’s future and our ability to compete,” Ford said in the remarks. “This is about the future of the American automobile industry. Toyota, Honda, Tesla and others are loving this strike because they know the longer it goes on, the better it is for them. They will win, and all of us will lose.

Yep, what we’ve been saying every week for the last month.


Second, BMW announced it will adopt Tesla’s charging standard. This is one of the last holdouts so it really looks like everyone is all-in. This is the type of dominance that goes down in history books. Imagine if one type of car brand held a royalty on nearly all gas-station transactions. That’s what Tesla will be doing in a decade or so.


Last, but certainly not least, the company reported earnings on Wednesday. We already knew what revenue was going to be from the delivery numbers but the main thing analysts are looking at with Tesla’s earnings are margins. And we knew they would come in lower from the price drops.


YoY Revenue

74%

98%

57%

65%

81%

42%

56%

37%

24%

47%

9%



QoQ Revenue

-3%

15%

15%

29%

6%

-10%

27%

13%

-4%

7%

-6%



GAAP EBIT margins

6%

11%

15%

15%

19%

15%

17%

19%

11%

10%

8%



FCF margins

3%

5%

10%

16%

12%

4%

15%

6%

2%

4%

4%


You can see that growth wasn’t impressive and that’s including the price cuts. As interest rates have ballooned, car payments have as well. But trust me, competitors are suffering even more. However, legacy auto companies don’t feel the downturn immediately because dealers need inventory. So it typically takes a little while for the legacy auto companies to feel the impact.


Optimistically, Tesla has the Cybertruck coming, the price cuts will continue to help, and if rates do ever come down, then that’s a huge added tailwind. Meanwhile, the energy business is now doing about $1 billion in trailing gross profit and gross margins are flying higher, from 9% to 24% YoY.


We knew this wasn’t going to be a pretty quarter but underneath the surface, the company is doing the right things. Tesla will always be a controversial company because of Elon but the business results are more steady than his personality. This quarter wasn’t terribly impressive but it was another 3 months of training data for FSD. I think the FSD beta will reach 1 billion cumulative miles by the early part of next year (maybe March) which will be a huge milestone. But enough of my thoughts, let’s check out what management had to say:


The Cybertruck, and a lot of people are excited about Cybertruck. I am too. I've driven the car. It's an amazing product. I do want to emphasize that there will be enormous challenges in reaching volume production with the Cybertruck and then in making a Cybertruck cash flow positive. So I just want to temper expectations for Cybertruck. It's a great product, but financially, it will take, I don't know, a year to 18 months before it is a significant positive cash flow contributor. I wish there was some way for that to be different, but that's my best guess.


There was quite a bit of commentary on the Cybertruck. Elon estimates it will take 18 months to get it cash flow positive and he also said it will be extremely difficult to scale. They have to create entire new manufacturing processes because it is such a unique product. For instance, they have to use a gigantic stamp for the stainless bodies. I suspect there will be bumps along the way since Elon rarely feels the need to temper expectations. I would listen to him – Cybertruck won’t be easy to scale. But it will be a huge product and potentially sell millions of units.


I just can't emphasize this enough that the vast majority of people buying a car is about the monthly payment. And as interest rates rise, the proportion of that monthly payment that is interest increases naturally.


Elon also talked extensively about the impact of interest rates. With the price cuts, the monthly payment for a Model 3, after the tax credit, has actually remained unchanged over the past year. But it’s still not enough as interest rates continue to tick up. I don’t feel great that a lot of the commentary was directed towards the macro but cars are a very macro-driven purchase; it’s such a large dollar amount that the vast majority of purchasers use loans.


Some of these factories are still in the early ramp phase in Q4. We're still not up to where we want those factories to be. So they will impact in the near term.


This was the first earnings call for the new CFO and I thought he was actually fairly negative. Most of his comments seemed negative which is very different from the former CFO, Kirkhorn, who ran the finances for the last four years. It’s probably just personality differences but I noticed a difference. This particular comment was that the factories are still ramping in Q4 from the retooling upgrades that took place in Q3. This wasn’t necessarily negative but I don’t love to see that either. Tesla has a lot of irons in the fire and it feels like another really crucial time for the company. FSD is still not quite reaching escape velocity, Optimus is a long-way away, the Cybertruck ramp will be a bumpy ride, BYD and other Chinese competitors are scaling quickly, and interest rates are hitting the core car sales despite the stock still being pretty expensive. These are the bear cases and they are valid but when we zoom out, Tesla’s march to 20 million cars is still intact. This is what I’m focused on. If Tesla started losing money again and growth was negative, I’d certainly change my mind, but I don’t see anyone solving autonomous driving before them and they are still producing cars that almost everyone wants.



New Companies


The IC Portfolio has been pretty boring over the past several months, which shouldn’t be a surprise. That means the portfolio is strong. Our goal is not to jump in and out of the latest hot thing, but rather hold enduring businesses for as long as 1/ they are executing or 2/ there are better opportunities. So despite not making any moves in the portfolio, we are looking at new companies every day.


There are two that are really catching my eye at the moment but we are still monitoring them. We’ve actually written up both of them in Business Breakdowns. The first is Samsara and the second is Procore.


Samsara is an IoT company, focused on helping industrial companies save money and Procore is a construction software company that allows general contractors and their subcontractors to work together. Both companies are growing faster than 30% and are about breakeven on a free cash flow basis. Both are founder-led with leading positions in huge markets and both have recurring revenue.


Samsara makes about 20-25% of its revenue from hardware devices but the real secret is in its software that ties all of the hardware data into insights for customers. Procore technically isn’t charged on a ratable subscription basis, but rather they get paid as a varying percentage of the total construction cost. The fact that rates are ballooning makes me nervous about commercial real estate construction. I can’t imagine there will be much building over the next few years, once the backlog from the past couple years dries up. Therefore, I imagine Procore may face some headwinds. However, the market is currently very old-fashioned and Procore has an enviable position, so I don’t think growth will stagnate too much.


My main worry about Samsara is my own conviction level. Maybe I just can’t quite wrap my head around it but the main product market fit so far is placing dash cams to monitor truck drivers. That doesn’t seem like an incredibly defensible business, though I know that the differentiation, once again, is in the software. I have watched pretty much every video on Samsara’s YouTube page and it’s hard for me to reconcile some of these case studies I’ve read about how Samsara is saving some customers $10 million. I don’t think that’s fake but it’s hard to wrap my head around. And that’s what I mean by my own conviction. I’m getting there but that’s why I haven’t recommended it yet. I’ve read hundreds of pages of reports on the company and thought deeply about it, but I’m just not quite there yet and that alone sort of worries me. Usually, I’ve found that the best ideas come to me without too much struggle. Now that’s certainly not always the case but I’ve found it to be more true in the majority of cases. Anytime I’m trying to “force” an idea, it typically doesn’t work out. Maybe I’m being too harsh on Samsara and I certainly can’t knock the numbers – they are awesome – but I’m just not quite sold yet.


To speak out of the other side of my mouth, the interesting long-term picture of Samsara is that they are the software orchestration layer for the data coming from OEMs. Said in non-nerd terms, imagine that Samsara integrates with Peterbuilt and Kenworth so instead of customers needing to install their own Samsara hardware, these truck manufacturers already have systems installed and then all of that data gets sent to Samsara’s operations cloud and then boom…insights. The idea is that the OEMs will include the telematics and cameras but there still needs to be a system of record that enables real value creation. Samsara will be the connector between OEM data and business systems. Imagine integrating truck depreciation data right into your accounting system. Or telematics data directly into your warehousing software. This is what I could get excited about. Dash cams, on the other hand, I have a hard time getting excited about.


I really do think this is the direction Samsara is headed over the next several years. In fact, here is a quick sentence I found in the S-1:


Increasingly, vehicles include built-in cellular connectivity and upload data to clouds operated by OEMs. We partner with leading OEMs to capture data from their siloed clouds into our Connected Operations Cloud, where we enrich and analyze the data and enable customers to benefit from our Applications without needing to install an aftermarket IoT device in their vehicle.


Management clearly understands this. So this seems to be a case where there is a lot of optionality but the actual business is pretty much all telematics and dash cams. However, there is a path to a very interesting, sticky business that checks off an awful lot of the boxes I look for. In the meantime, the numbers are pretty so I’m quite interested. I will, of course, keep you updated!

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