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Tesla is the Next Apple

Tesla is the Next Apple

This note was originally published on Business Insider.

Apple is the world’s largest company with a market cap of nearly $770 billion as of this writing. Tesla is one of the world’s largest automakers with a market cap of close to $55 billion, although we think the Tesla story is just getting started.

There are many parallels between Apple about a decade ago and Tesla today, market cap being one of them.  In Q4 2005, Apple’s market cap was close to where Tesla’s is today ($54 billion). A decade from now, we think we’ll look back at Tesla and realize it was the next Apple.

There are five major similarities to Tesla today and Apple in the mid-2000s:

  1. Brand
  2. Visionary leadership
  3. Integrated hardware and software
  4. Halo effect
  5. Reshaping a market

Brand

Tesla’s brand is to the car industry what Apple’s brand is to consumer electronics. Tesla owners love their Teslas.

According to a Consumer Reports survey, 91% of Tesla owners state they would “definitely” buy their cars again, the highest rating of any automaker. The next two closest automakers were Porsche at 84% and Audi at 77%. By comparison, Tim Cook stated on Apple’s Dec-16 earnings call that iPhone had a 97% satisfaction rate.

Beyond tangible customer satisfaction metrics, we believe there is a less tangible cool factor to the Tesla brand, much like Apple in the late 1990s and early 2000s. In many ways, Tesla has the same “think different” attitude that Apple popularized.

Tesla has built a brand around being a different kind of automaker. Not only because its vehicles are powered entirely by electric, but also because they don’t use model year numbers and treat software updates more similar to updating an iPhone app than a car. The company has done this all while squarely placing itself in the conversation with BMW as one of the best-engineered cars in the world. Tesla has established itself as an aspirational brand by taking a new approach to the car market.

Visionary Leader

Elon Musk and Steve Jobs share similarities in that they are visionary entrepreneurs that simultaneously operated multiple groundbreaking companies.  Musk with Tesla and SpaceX and Jobs with Apple and Pixar.  However, both seem to have different guiding lights.

Where Jobs seemed to be singularly focused on developing the absolute best products he could to delight customers, Musk appears to be driven to save the world, from developing alternative energy products, to exploring space, to protecting humanity from AI. But that doesn’t mean Musk isn’t obsessively detailed. He recognizes the importance of quality to be successful (recall Tesla’s satisfaction rate). But he seems to be driven by something bigger.

Musk may be the biggest wild card in the comparison between the two companies. The drive to create great products is eternal from a business standpoint. That purpose survives as long as the company is in operation. Saving the world, if that is Musk’s guiding light, is not company dependent.  What the world needs most may change over time.

Obviously, the move to sustainable energy is a multi-decade opportunity. From an investment standpoint this may not matter, but from a philosophical standpoint it’s apparent that the world needs many things and Musk is convinced he can affect positive change.

He’s already involved in Tesla and SpaceX as CEO. It was recently announced that he would also be CEO of Neuralink, a brain-computer interface company that creates a neural lace to enhance the human brain. Musk is also involved with The Boring Company, which is currently experimenting with tunneling under Los Angeles to reduce the traffic burden. Finally, Musk is involved with OpenAI, which is dedicated to creating open IP in artificial intelligence.

There will always be those capable of breaking conventional rules, in this case the important of a laser focus. Musk is obviously one of those people. The only question may be if his desire to save humanity ultimately pulls him in too many directions. We think the risk of this is real, but low, as Musk has shown an ability to surround himself with great talent, enabling him to better leverage his own time.

Integrated Hardware and Software

Tesla, like Apple, produces its own hardware (cars) and software (software). Tesla’s integrated approach allows them to have complete control over the product experience, which is important because a car is a constant user experience when you’re in it.

Perhaps more importantly, Tesla has a multi-year head start over other automakers in terms of features like over-the-air updates and autonomous driving. As autonomous driving functionality becomes a requirement for modern auto buyers, Tesla holds an advantage in that its constantly improving self-driving software is an update away.

Other automakers will likely bring in software partners like Google and Microsoft (Ford has already). Apple may even become an automotive software partner depending on the direction of Project Titan. While partners like these will be able to deliver software experiences better than automakers have in the past, both the software providers and automakers will face natural limitations that come from designing the two product elements separately.

Looking at product categories beyond transportation, Tesla’s proven ability to integrate hardware and software will continue to set it apart from competitors looking to introduce real innovation. Their ability to control the product experience from end-to-end is an innovator’s advantage over the incumbents in industries that Tesla will address in the future.

Halo Effect

Perhaps more than any company in history, Apple has used the halo effect to its advantage. The company’s iPod represented a product that appealed to the masses, where the Mac computer line did not. Once customers adopted iPods and experienced Apple’s attention to detail in design and simplicity of use, it convinced customers to buy Macs.

The iPod also laid the groundwork for the iPhone. Combining the iPod with a phone had long been a topic of discussion, and those two features, combined with an Internet connection, were the iPhone’s tent pole features at launch. Now we see the halo effect in full with many iPhone owners also owning Macs, iPads, Apple Watches, and AirPods.

Tesla has a similar opportunity to create a halo effect through its cars.  With the Model 3 starting at $35,000, a large audience of entry level luxury car owners are going to experience Tesla for the first time, and at 91% satisfaction, they will likely be happy to join the club.

Aside from cars, Tesla also offers the Powerwall energy storage product ($5,500), as well as the Solar Roof and solar panels. We believe that Tesla owners will want to add other Tesla products to further reduce their dependence on traditional energy.

Tesla has taken over 400,000 pre-orders for the Model 3. For context, If you assume another 100,000 Tesla owners of Model S and Model X (500,000 Tesla owners in total by end of 2018), a 10% attach rate of Tesla owners buying the company’s Powerwall or solar products, and $30,000 in revenue from those products, there is an incremental $1.2 billion business opportunity in the near term due to the halo effect.

Reshaping A Market

Tesla’s stated mission is to accelerate the world’s transition to sustainable energy. The company is attacking two major industries — automotive ($995 billion in US new vehicle sales in 2016) and electric utilities ($377 billion in US revenue in 2015). These industries make sense.

Transportation accounts for 70% of total US oil consumption. Sixty-four percent of electricity in the US is still produced by coal or natural gas. Where the iPhone created a platform that combined functionality of basic PCs, digital cameras, GPS, digital music players, software distribution and others, Tesla is creating a platform for sustainable energy from your vehicle to your home. Just as Apple captured significant value from the chain of industries it disrupted, we think Tesla can do the same.

As Tesla pursues its mission, it has a path to be one of the most valuable companies in the world. For the past 10 years, the largest company in the world as measured by market cap has been either Apple, Exxon Mobile, or Petrochina.

Going back 20 years, the only other additions are Microsoft and General Electric. Therefore, either a consumer electronics company, an energy company, or a conglomerate represented the biggest company in the world. Tesla is all three.

Tesla’s cars are effectively consumer electronics, albeit expensive ones, that reduce our dependence on oil. Tesla’s acquisition of Solar City and introduction of the Powerwall and Powerpack are next-generation energy plays driving toward the replacement of coal and gas. Doing both makes it a conglomerate.

Tesla is not a car company. It’s an operating system for sustainable energy that combines a powerful brand, a visionary founder, integrated hardware and software, and a halo effect all with the purpose of transforming a combination of large markets.  TSLA might be the next AAPL, but Tesla will forge its own path and the world will be better for it.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple, Artificial Intelligence, Audio, Loup Ventures Podcast, Robotics, Tesla
6 min. read Show less
Apple Results Reinforce Importance of AR

Apple Results Reinforce Importance of AR

Apple reported Mar-17 quarterly results below Wall Street – and Loup Ventures’ – expectations. Judging by the mild negative reaction of the stock in after-market trading, it appears that investors are focused on the coming iPhone X product cycle and beyond. We agree with the market that a bet on shares of AAPL is a bet on the company’s ability to transition from their existing iPhone platform to an augmented reality-driven platform in the future. Underlying this transition is the Services business, which was solid in Mar-17 ($7.0B vs. our estimate of $7.1B) despite lower-than-expected iPhone units (50.8m units vs. our estimate of 54.8m). This shows Services revenue has resilience in the face of relatively soft iPhone growth.

The Beginning of the Transition to AR-Driven Computing. Tim Cook attributed the “pause” in iPhone sales to earlier and more prevalent rumors of future iPhones, but we see something bigger going on. Every 10-15 years we’ve seen a shift in the dominant computing platform: from the PC in the 80s, to the internet in the 90s, to the smartphone in the mid-2000s. And we think we are in the early stages of the next big shift – to augmented reality-driven computing. In short, wearables and other AR-devices will eventually replace the smartphone. Apple’s Mar-17 iPhone growth rates (-1% y/y in Mar-17), and growth rates in the global smartphone market, are slowing; however, we note that channel-adjusted iPhone growth was +1% y/y in Mar-17. Regardless, slowing iPhone growth will compel Apple to accelerate its development of wearables and AR-driven devices to ensure it’s position as a leader in the next dominant computing platform.

Slowing iPhone growth will compel Apple to accelerate its development of wearables and AR-driven devices.

Supply issues aside, the success of AirPods represents an early win for Apple in its exploration of wearables. We expect the company to continue its development of hardware products (e.g., Apple Watch and AirPods) along with the core technologies that will facilitate the emergence of AR-driven computing. We’ve outlined our thesis on why Apple is well positioned to win the jump ball for the next dominant computing platform. And the recent trend in iPhone growth rates only serves to emphasize the importance of this transition for Apple.

Our Thoughts on AAPL. We expect shares of AAPL to move higher in anticipation of announcements at WWDC in June along with growing optimism around the iPhone X this fall.  Separately, the Jun-17 quarter has been de-risked with the just-issued conservative guidance.  Fast forwarding to the end of the summer, we expect shares of AAPL to be range bound as optimism around the potential of the iPhone X driving 5-10% y/y unit growth will slowly be replaced by anxiety about the iPhone X tail in Mar-18 and Jun-18.

Over the next year, we expect to see two camps emerge on the Apple story: The first camp will remain positive on Apple despite little to no iPhone growth over the next few years if Services meets Cook’s goal of y/y growth in the high teens. The second camp will be more pragmatic, wanting to see Apple make a push into AR & auto to set the stage for higher growth over the next decade.  We remain optimistic that Apple will be a significant player in the shift to AR-driven computing, and potential growth from Apple’s car project will represent option value.
Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.
Apple, Augmented Reality
3 min. read Show less
Apple Results & Guidance a Non-Event; Clear Sailing to iPhone X

Apple Results & Guidance a Non-Event; Clear Sailing to iPhone X

Expect Slight Upside In Mar-17 From Easy Comps and Typical Conservative Guidance for Jun-17. Apple reports Mar-17 quarterly results tomorrow, May 2nd. Despite shares at an all time high, investor optimism for an iPhone X super cycle this fall remains high, which should continue to push AAPL’s multiple higher into the fall. There appears to be little risk from the Mar-17 results or Jun-17 guidance that would change iPhone X anticipation. Fast forwarding to the fall, shares are setting up to enter a range-bound period as investors playing the iPhone X trade will likely unwind positions.

If Apple guidance midpoint is 1-3% below our Jun-17 estimates, we will likely maintain our estimates.

Mar-17 & Jun-17 Expectations. We expect Apple’s Mar-17 quarter slightly ahead of Street consensus numbers given the 17pps easier comp, vs the Dec-16 quarter, and the Street is generally looking for similar iPhone growth from Dec-16 to Mar-17.  As for the June quarter guidance, we expect a typically conservative outlook. This is understandable given investors are expecting a step up in iPhone growth from around 7% in Mar-17 to 13-15% in Jun-17. Part of the step up in iPhone Jun-17 growth is due to the 5pps easier comp in the Jun-17 quarter.

On The Call. We will be paying close attention to the following topics:

  • Super Or Typical Cycle? Investors will be tuned into any unlikely commentary from Apple to help answer the question of whether we are entering a super cycle with the iPhone X (reason for accelerated upgrades) or just a modest step up in iPhone growth. We’re not expecting much color from Apple, but are encouraged by our estimates that this fall the 2-year old or older iPhone base should exceed 300m units, a strong base of potential customers to fuel investor expectations of the  unit sales between 235-245m phones in FY18 during the iPhone X cycle.
  • Services Potential.  Apple will continue to be heavy on the services growth message. We expect CEO Tim Cook to reiterate comments from the Dec-16 call that he expects the Services business to double in the next four years, implying annual growth of about 19%. We expect services to grow from 14% of revenue in FY17 to 20% in FY22.
  • AR & Auto Ambitions. Related to AR, Cook has made six public comments in the past 9 months and we expect him to continue to emphasize that Apple will be a winner in AR. It’s been widely reported that one version of the iPhone X will have 3D mapping capabilities.  We see the iPhone as the AR device for the next 5 years. As for automotive, recent news of Apple’s permit to test self-driving cars in California should not have come as much of a surprise given the poorly kept secret of Project Titan. The permit does beg the question of whether Apple is building a car or just building software for a car. Our take Apple is almost certainly exploring how it could build an entire car, but as we learned the hard way with Apple television, exploration does not mean a product comes to market.

What To Expect With The iPhone X. Read our thoughts on iPhone X and the features we expect to advance Apple’s lead in AR-enabled devices.

Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio.  Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Apple, Augmented Reality, News
3 min. read Show less