Tesla’s Bedrock In AI & Robotics Will Transform The Industry & Our Lives

I always wanted to cover Tesla, but as an internet analyst, the stock fell outside of my coverage space. Despite this, I continued to study the company and ultimately invested because I believe that Tesla is not a car company, but a consumer electronics company that thinks like an internet company. With a bedrock in AI and robotics, Tesla is one of the best positioned companies to transform our lives over the next 20 years.  We think Tesla is on par with Amazon when it comes to a reckless pursuit to shape the future, which we believe will reward investors over the long run.

The Street Is Understandably Focused On The Wrong Metric

Tesla reports December quarter results on Wednesday (Feb. 22). Given the 48% rise in TSLA shares over the past 3 months, now trading near an all-time high, it’s understandable why investors are nervous going into the print. After all, good news is priced in as information of the earlier-than-expected Fremont production retooling has stoked Model 3 production expectations. As of our last check, buy side investors expect 17k to 25k Model 3 shipments in 2017.  That’s a big number when you consider that in 2016 Tesla delivered 76k vehicles (all models) to customers. Investors will be zeroed in on Elon Musk’s comments on the earnings call about production of the Model 3 in 2017.  His comments may cause volatility in the stock short term, but they are irrelevant in the long run.

It’s Not About How Many Model 3’s Tesla Sell In 2017

As venture capitalists, we have the luxury of thinking about themes over a very long horizon. With that perspective, Wednesday’s Tesla earnings report is a non-event.  What’s more important is that Tesla makes the best car in the world, amplified by AI and robotics. That focus will keep competitors in check, allowing the company to reach scale and ride the next tech mega wave as our lives are quickly transformed (over the next 20 years) into an electric, automated existence.

Artificial Intelligence

Tesla’s obvious AI play is autopilot for autonomous vehicles, with a less well known AI push in manufacturing. We know that the company is pushing boundaries to gain data to improve its driving AI with a goal of being first to market with an L4 compatible vehicle (the automated system can control the vehicle in all but a few environments).

The first to market will have a measurable advantage because road data equates to smarter AI and safer cars.  Google’s Waymo has driven over 2 million autonomous miles, but comparisons with other automotive companies are difficult given some companies include simulation miles.  Last October, Elon Musk reported Tesla had driven 222 million cumulative autopilot miles, but those miles are not comparable to the fully autonomous number that Waymo reports.  It’s unlikely that Waymo will have a commercially available vehicle in 2019, but likely that Tesla models solid in 2019 will be L4 compatible. Traditional automotive is even further behind, with BMW, Audi, Mercedes, Ford and GM likely shipping L3 autos in 2019. Note that L5 is the highest level of autonomy, for vehicles capable of all aspects of the dynamic driving under all roadway and environmental conditions that can be managed by a human driver, followed by L4, L3 and so on.  This begs the question, why would anyone interested in an autonomous car buy an L3 compatible vehicle if it was priced similar to an L4 vehicle? We don’t know how Tesla’s autopilot AI stacks up against the market, but based on comments from our industry contacts, Tesla sees AI as one of its two core competencies and is structuring its future around it.

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Face Off: Amazon Echo vs. Google Home

As digital assistants continue to improve, more and more users are integrating them into their daily routines. In our Robot Fear Index, we found that 43% of Americans had used a digital assistant in the last three months. But we believe that we are still in the early innings of how natural language processing will improve our daily lives and our interactions with machines.

To see how far along our digital companions are, we chose to review the two most popular home assistants: Amazon Echo and Google Home.  We put the devices to the test by asking them 800 different everyday queries.  Google Home came out on top, answering 39.1% of the queries correctly vs. the Echo at 34.4%.

Methodology

For this experiment, we asked the same 800 queries of both the Echo and Home.  We graded the queries on two metrics:  First, did the device understand what we asked correctly?  Second, did the device answer the query correctly? In our study, Amazon Echo understood 94.4% of the queries we asked and answered 34.4% of all queries correctly. Google Home understood only 77.0% of the queries we asked, but was able to answer 39.1% correctly.

In our study, Amazon Echo understood 94.4% of the queries we asked and answered 34.4% correctly.  Google Home understood only 77.0% of the queries we asked, but was able to answer 39.1% correctly.

One reason that the Amazon Echo had a higher rate of understanding queries was due to our ability to confirm the data using the companion app.  This app gives the user a live feed of what Amazon Echo heard.  Google Home does not offer a transcript of what the device picked up.  Because of this, it was difficult to tell if Google Home understood the queries but couldn’t answer them, or if it truly had a harder time understanding queries. Since we were unable to see exactly how well Google Home understood our queries, we assumed that if Google Home responded that it was unable to perform a certain function, then it had understood the query correctly.  For example, if we asked “Hey Google, send a text to John” and received a response “Sorry, I can’t send texts yet,” then the query would be marked as understood correctly, but answered incorrectly.

Results

The queries that we asked divide into five buckets: local, commerce, navigation, information, and command.  When breaking down the comparison of correct answers between the Echo and Home, Amazon predictably performed better at commerce and Google at information, in-line with their stated missions.

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Envisioning The Future Perfect

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.

An Open Letter To Snap Ahead Of Its IPO

Dear Snap, Inc.,
Congratulations on your S-1 filing this past week.  It’s a great accomplishment as a company and great for the tech industry.  During our 35+ collective years as stock analysts, we’ve helped a lot of companies go public.  We know you have great banks working on your deal that will give you good advice, but we thought we’d share our most important learnings about how the best companies handle IPO’ing and being a public company.
  1. Manage Expectations.  Set an achievable bar for revenue and earnings and stick to it.  Obvious, but easier said than done.  You want to be Bill Belichick (go Pats), not Rex Ryan here.  We’ve seen too many companies agree that this is the right approach, only to miss a quarter out of the gate or within the first year.  The easiest quarter to get right should be the first one out of the gate, your first quarter as a public company.  If you miss your first quarter out, you’re in for a year of buy side investors disbelieving everything you say and you’ll have to slowly rebuild your credibility.  We believe it’s better to take a slight hit on your valuation at the IPO with conservative numbers you have a very good chance to beat than more aggressive numbers you think you might hit, but aren’t 100% certain.  The slight hit to IPO valuation may not even happen because smart investors will work through your conservative numbers and recognize that you understand the game.
  2. Guidance.  Give some level of guidance because it will make your life easier.  Every great tech company takes a different approach to guidance.  Neither Google nor Facebook offer formal quarterly or annual guidance, but both occasionally give directional color.  Facebook more than Google.  An example is Facebook’s policy of offering verbal expense growth guidance quarter-to-quarter.  Both Apple and Amazon offer one quarter out guidance for total revenue and the ability to work toward an operating number.  Microsoft offers one quarter out guidance with segment level detail as well as high-level thoughts for the full year.  Tesla also offers one quarter out color on units shipped with a full-year expectation.  The bottom line is this: guidance gives you the ability to influence the conversation around your numbers, particularly as a new company, so we think it makes sense to offer it.  When we were analysts, we always had a lot of positive feedback on how Microsoft handled guidance and we didn’t even cover that stock, so a quarter out with a little color on the full year will make investors happiest.  We’d recommend the full-year color be high level and about things you directly control (expenses, CAPEX, product launches, etc.) without commenting on revenue.  One additional thing we’d suggest around guidance, while not formal, is to directionally explain the long-term model (5+ years out).  The company is investing heavily in product and talent, thus operating at a loss today.  What do operating margins look like in 5 years?  Should we expect Facebook margins?  This leads in to the next suggestion…
  3. Paint The Long-Term Picture.  While every great tech company treats guidance differently, they treat talking about the long-term the same.  Explaining the long-term strategy brings in long-term investors, not all that dissimilar to pitching venture investors.  Hedge funds and traders might move your stock day-to-day, but long-term investors will shape your stock chart over years.  Facebook and Google are among the best at painting the long-term picture of their businesses.  Facebook explicitly updates its 3, 5, and 10 year plan every earnings call, which tends not to change much, as it shouldn’t.  Google tends to speak more thematically and has been emphasizing AI and machine learning as the future of their business over the past several quarters.  Use your time with investors on the roadshow to explain what it means to be a camera company and why that’s important for the future because text is dead.  Explain how this is good for advertisers.  Incorporate AR into the discussion.  The camera is the basis for computer vision.  Lenses is emerging as a product to do interesting things with AR in the near term and Spectacles are the most usable AR product on the market today.  Tell investors how those products evolve over the next few years.  Facebook’s 3/5/10 window presentation is the cleanest and would suggest something similar.  It’s not like they haven’t borrowed from you before.
  4. Optionality.  All great tech companies have optionality to their stories.  We define optionality as key products or services that have little to no direct revenue contribution today, but do have the potential to be significant in the future.  Usually stocks with optionality are rewarded with higher multiples.  Some examples: Amazon with Alexa and original content, Facebook with VR and Messenger/WhatsApp, Google with Waymo and Cloud, Tesla with Powerwall/Powerpack and Solar City, Apple with the car and AR.  Snap’s optionality story is probably in AR wearables.  As noted above, Spectacles are the most usable AR product on the market today.  They focus on one simple feature: the camera.  Give investors enough of your vision here so they can dream about the future.

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Google Moving From Mobile-First World To AI-First

Key Message from Google’s Earnings Call: AI-First. On tonight’s Q4 earnings call, Google CEO Sundar Pichai reiterated that we are quickly moving from a mobile-first world to an AI-first one.

“Looking to the future, the next big step will be for the very concept of the ‘device’ to fade away. Over time, the computer itself — whatever its form factor — will be an intelligent assistant helping you through your day. We will move from mobile-first to an AI-first world” – Sundar Pichai

We couldn’t agree more. As we detailed in our recent piece, The 5 Focuses, Google, Amazon, and Apple have all made artificial intelligence a core focus. AI touches most of the Internet products we use from the tech giants. From a user standpoint, AI makes products better and more effective. It makes them more of a joy to use, meaning we spend more time with them. From a financial standpoint, AI-enhanced products mean consumers spend more money. For Google, more time spent is more opportunities to show relevant ads. For Amazon, more time spent means more opportunities to unearth products the consumer didn’t know about, but might want to buy. For Apple, more time spent means more opportunity for them to provide you with their emerging Services or time to prove the value of your device and retain you as a loyal upgrader.  

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