2017 Loup Ventures Holiday Gift Guide

Here are a few gift recommendations for the 2017 holiday season:

And here’s a look ahead to 2018 with some of the products we’re hoping for:

  • Apple HomePod | Apple’s foray into the smart speaker market.
  • Apple iPhone X Plus | We’d love a larger screen for our iPhone Xs.
  • Oculus Go | Oculus’ $199 standalone VR headset.
  • Magic Leap | Augmented Reality glasses.
  • Tesla Model 3 | Already on the market, we’re hoping to see shorter reservation times.

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.

Nvidia Foundational Player In Future of Tech; Introducing 5-Yr Model

Today we’re rolling out our 5-year model for Nvidia, joining Loup Ventures’ Apple, Tesla, and iRobot model coverage. It’s important we write on Nvidia given its products are an integral part of the future of technology, based on their use in datacenters, autonomous vehicles, virtual and augmented reality platforms, cryptocurrency mining and eSports. We’re believers in the long-term story of Nvidia. While shares of NVDA has performed exceptionally well this year, up 100% YTD (market cap of $129 billion), we think there is further upside given Nvidia’s foundational exposure to frontier technologies.

25+% CAGR Story Through 2023. We expect Nvidia’s core gaming business to continue to grow, but decrease as an overall percentage of revenue (57% today, to 41% by 2023). In addition, we see Nvidia’s datacenter and automotive segments taking second and third place, growing to 36% and 14% of revenues respectively.  We believe Nvidia will see 20+% annual revenue growth through 2023, driven primarily by four catalysts:

Catalyst #1 – Demand for core gaming business products remains strong.  Historically, Nvidia has been known for providing high-quality GPUs for gaming. Nvidia was well-known in the PC gaming space in the mid-t0-late 1990s, and even won the contract to provide graphics hardware for the original Microsoft Xbox. Nvidia has maintained its leadership in the space, and stands as the go-to GPU component for gamers. Despite competition from AMD, ASUS, and Intel, Nvidia has remained a leader. In addition there are two trends that add to the growth of Nvidia’s gaming business:

ESports continues to rise in popularity. Newzoo expects the ESports market to reach $1.5B by 2020, up from $696M in 2017. Not only are more users participating in ESports, but more advertisers are flocking to the industry as well.

Gaming is becoming more social. This is driving engagement and bringing more people on to various platform, including PC platforms where Nvidia’s products are often used. While this can partially explain the rise in ESports, the trend impacts users that opt out of participating in eSports in favor of playing with their friends. Most platforms are spending more time creating online communities where users can interact with each other. Separately, with more kids using tablets and mobile phones at an early age, the exposure and transition to gaming is greater than ever before. As parents continue to let devices act as virtual babysitters, the number of children that get into gaming grows.

Catalyst #2 – Companies are adopting artificial intelligence in order to remain competitive. Nvidia’s datacenter business (20% of revenue today, to 36% by 2023) has seen triple digit growth for the past six quarters. A big part of this growth is due to the expanding use of artificial intelligence by companies, specifically deep learning. Even more positive for Nvidia, we are only in the early innings of the game. Just as all companies evolved to be internet companies in the late 1990s and early 2000s, and mobile companies in the late 2000s, they will soon evolve to be AI companies. On Nvidia’s last earnings call, CEO Jensen Huang shared:

“…Artificial intelligence and its emergence and applications to solving problems that we historically thought were unsolvable. Solving the unsolvable problems is a real realization. I mean, this is happening across just about every industry we know, whether it’s Internet service providers, healthcare, manufacturing, transportation, logistics, you name it.” – Jensen Huang

We expect Nvivia’s datacenter segment to continue to see high growth as companies rely more on artificial intelligence. By 2023, we expect Nvidia’s datacenter business to account for over one-third of its revenues and be growing at 30% annually.

Catalyst #3 – The market for autonomous vehicles will be bigger than most people think. Nvidia’s opportunity in the automotive space (6% of revenue today, to 14% by 2023) is bigger than many anticipate. As stated in our Auto Outlook 2040, we expect 90% of vehicles on the road in 2040 to have level 4 or 5 automation, which would require a platform such as Nvidia’s DRIVE PX. Nvidia’s products are used in two different instances as it relates to autonomous vehicles. First, Nvidia’s DGX system is used to train neural networks at data centers. Second, Nvidia’s DRIVE PX platform provides cars with the necessary on-board computing strength for autonomous capabilities. Currently, Nvidia has partnered with Toyota, Mercedez-Benz, Audi, Volvo, and Tesla, among other. We see the ramp of autonomous vehicles beginning in late 2020 as autonomous taxis enter the field, and further expanding in 2021 as autonomous consumer vehicles enter the market. By 2023, we expect Nvidia’s automotive segment growth to accelerate from 16% in 2017 to 100% y/y in 2023. 2023 is only the beginning of autonomous vehicles, and Nvidia’s automotive segment will continue to accelerate past the 5-year window. Based on our auto outlook, we feel 2028 is the year where there will be an influx of demand for level 4 and level 5 autonomous vehicles. We expected Nvidia’s automotive segment growth will continue to accelerate until that time.

Catalyst #4 – Nvidia has planted seeds in other industries with bright futures. OEM & IP is 8% of revenue today, to 3% by 2023.

Virtual Reality. Nvidia’s GPUs are a core component for virtual reality solutions. Today, high-quality VR solutions require a headset tethered to a desktop or laptop computer, which are often running off of an Nvidia GPU. While we believe that VR content will move to standalone devices in the future, those devices will still require enough processing power to delivery high-quality experiences. Nvidia’s solution, the Tegra mobile processor line, is currently a leading option for manufacturers. Nvidia is well-positioned to benefit from the growth of virtual reality gaming, as its products are used in three (mobile, PC-based, standalone) of the four VR solutions, missing out on only console-based VR; for now.

Augmented Reality. We’ve written many times before about the future of augmented reality and the impact that it will have on how we interact with the world in the future. Similar to VR, AR requires sufficient computing capacity on any device. As the market for AR develops, Nvidia will benefit as either a manufacturer of specific solutions for customers, or tangentially through expanding cloud use for deep learning algorithms used by AR applications.

Cryptocurrencies. Lastly, Nvidia is poised the benefit from the continued growth of cryptocurrencies. Cryptocurrencies require individuals to dedicate computing power to the the blockchain, those that do are referred to as miners. Miners often turn to GPUs for the necessary processing power to complete blocks on the blockchain. Here is an explanation of how mining works, and why it is necessary.

If you read that article, your reaction might match James Franco’s above. Putting it another way, miners rely on GPUs to provide a cryptocurrency network with the necessary processing power to function. As a particular cryptocurrency is mined (with GPUs), customers will ask for specific ASICs to be built by companies such as Nvidia (positively impacting OEM and IP). As these custom ASIC components are deployed, the specific coin’s mining market becomes monopolized, and forces smaller miners to move a different currency in order to remain profitable. The smaller miners will turn back to GPU-based solutions (positively impacting Gaming) before the cycle repeats itself. Because of this ebb-and-flow and the volatile nature of cryptocurrencies, modeling the impact of cryptocurrency mining is difficult. While highly speculative and volatile, we feel that cryptocurrencies will be a part of the future. We are modeling OEM and IP business to grow by the low single digits in the future.

Bottom Line. Artificial intelligence, autonomous vehicles, virtual reality, and augmented reality are technologies that will have a profound impact on our lives. As these technologies take hold, companies supporting the development of the underlying components are sure to benefit. Betting on Nvidia is betting on frontier technologies, and Nvidia has planted seeds in numerous areas that we are optimistic about. Despite competition from Intel and AMD, Nvidia will continue to be the dominant component supplier in various spaces.

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.

Waymo Unleashes Autonomous Cars – Now Must Earn Public’s Trust

On November 7th, Waymo reached a new milestone by removing the safety net and testing fully autonomous vehicles on public roads without someone behind the wheel to take over in case of an emergency. Waymo has been testing in the Phoenix, AZ area for some time now, and other companies like Uber, Cruise, and NuTonomy have similar operations. But there has always been an employee in the driver’s seat. November 7th marked a new stage of testing self-driving cars. Along with last Tuesday’s test, which took place in Chandler, AZ, Waymo has recently made an exciting push to prepare the public for the cars that, as they just proved, are closer to full deployment than many people believe.

Largely considered the leader in autonomy, Waymo has driven a collective 3.5 million autonomous miles on public roads across 20 cities (that’s the equivalent of the average American driving for 291 years). They have also completed over 20,000 different scenario tests at their facility in California, and simulate 10 million miles per day. “In short: we’re building our vehicles to be the most experienced driver on the road,” they write in a blog post. Along with a growing crowd of other competitors, Waymo gets closer each day to deploying a fleet of self-driving cars available to summon at your convenience. Regardless of how advanced the tech may be, however, the reality remains that people simply aren’t ready to be driving down the road next to an empty car – perhaps the biggest hurdle facing autonomy is widespread acceptance of them.

Being realistic about autonomy. Waymo knows that in order for mass adoption to take place, the public must first trust autonomous vehicles. Successfully building a vehicle that can operate autonomously is a feat of engineering, but educating the public on its benefits is a different task entirely.

Realizing this fact, Waymo has recently made an impressive effort to prepare the public for what’s coming. They have partnered with organizations like the National Safety Council and Mothers Against Drunk Driving, trained law enforcement departments on how to deal with incidents involving self-driving vehicles, and attempted to be transparent by releasing a comprehensive Safety Report and inviting reporters to a test drive at their facility in Atwater, CA. According to a AAA survey this year, only 20% of Americans would trust an autonomous vehicle to drive itself with them in it. This leaves no doubt that we have a long way to go before this technology becomes mainstream. Waymo, more than any other player in the space, is attacking the problem head on, opening up a dialogue with the public and taking an inclusive approach to educating everyone on the risks and benefits of a new type of mobility.

Partnerships. By engaging the public and partnering with organizations outside of tech and auto, Waymo hopes not only to raise awareness and educate people on self-driving cars, but to demonstrate how they are, in fact, a much safer and smarter mode of transportation. Here are some of the groups that Waymo has teamed up with:

  • The National Safety Council – Focused on areas where the greatest number of preventable injuries or deaths occur, including workplace safety, prescription medicine abuse, teen driving, and cell phone use while driving. 40,000 Americans die on the road each year.
  • Foundation for Senior Living – Believes age shouldn’t slow anyone down. 80% of seniors live in vehicle-dependent suburbs, and there are 45M people in the U.S. over the age of 65.
  • Mothers Against Drunk Driving – Intoxicated driving is the number one cause of death on roadways.
  • The Foundation for Blind Children – Focused on empowering the blind with independence. There are 1.3 million legally blind individuals in the U.S., growing to over 2 million by 2050.
  • East Valley Partnership – Concerned with improving quality of business and life in the East Valley region. Americans spend 50 minutes on average commuting to and from work each day

Waymo’s Safety Report. “Fully self-driving vehicles will succeed in their promise and gain public acceptance only if they are safe.” This thesis, stated in the early pages of a recently released Safety Report, resonates throughout the next 43 pages, as Waymo lays everything on the table. The report details safety procedures, how vehicles respond to numerous situations, how the autonomous systems function, and several other elements that must be understood before feeling comfortable riding in a self-driving car. It quickly becomes clear that safety is at the core of Waymo’s pitch. As the first voluntary safety assessment of its kind, much of its contents will likely be mandated by regulatory bodies going forward.

Law Enforcement Training. Yes, there will still be accidents on the road when cars drive themselves. While we believe there will be radically fewer of them, law enforcement must still understand how to respond to an incident involving a driverless car. Waymo has designed their systems to interact with law enforcement and first responders with audio sensors to discern where sirens are coming from, and responses like safely yielding or pulling over to a complete stop. They have also briefed authorities in every city in which they test, and conducted on-site trainings to help police and emergency vehicles identify and access self-driving cars.

Test Drives. On October 31st, Waymo hosted a group of journalists at their usually secret testing compound in Atwater, CA. This act is not unprecedented; however, coupled with Waymo’s other recent actions, it represents a level of transparency unmatched by any of their competitors. The group was given a test drive in a mock town they have created, complete with an array of real-life scenarios like an unexpected cyclist cutting in front of the car, or a man standing beside a broken-down Hyundai. Find a detailed write-up of the test drive here or here.

The idea was to give riders a feel for what it’s like to use Waymo’s Chrysler Pacifica minivans as on-demand vehicles. It will function a lot like current ride-hailing platforms – a rider summons a car on a smartphone app, the car locates the rider, and navigates to their destination. Press a friendly, blue “Start Ride” button to embark, and passenger-facing screens show a rider-friendly version of what the car is seeing.

Trust building 101 – with transparency. As a cyclist rides by or a car passes, it appears on the monitor – it even shows trees, parked cars, and buildings in your surroundings. The level of detail that Waymo focuses on in terms of user experience leads one to believe they are months, not years, from deploying their much talked-about fleet. A video from Waymo exhibits how remarkably smooth the process is. Between a groundbreaking and successful test, and a new level of transparency focused on building trust and engaging the public, we believe Waymo has earned its pole position in the race for autonomy. Their next step will likely be the deployment of a small fleet to a limited group of participants in AZ – stay tuned.

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.

Tesla’s Falling Behind on Production, but Maintains Lead in Future of Transportation

Tesla’s production challenges outlined on yesterday’s earnings call beg the question – is Tesla falling behind in the race to be a key player in the future of transportation?

Tesla is struggling to produce the Model 3, and at the same time firmly holds its pole position in EV and autonomy. In 10 years we expect 3-5 companies will own the market for EV and autonomy, compared to 8 major auto companies today. Of the 3-5 winners of the future we expect 2-3 to be tech companies. That means of the 8 major auto OEMs today, only 2-3 will be relevant in the future.

EV. Taking a step back, Tesla is struggling to make the Model 3. Musk gave the reasons on the call but the bottom line is it’s hard to make a car that advanced for that price at scale. The reason why Tesla’s manufacturing struggles don’t suggest their falling behind is none of the other auto OEMs have started EV project as ambitious as Model 3. These OEMs have EV offerings, but consumers largely don’t want to buy them so the OEM don’t have to travel through “manufacturing hell” like Tesla is today.

Autonomy. This one is a wild card. Most of the major car companies have made statements about why they’ll be important in autonomy and some have made acquisitions to advance that cause. GM has done a notable job of catching up. Tesla’s real competition in autonomy is Waymo. Waymo has been making progress and is now testing in several states. But Tesla has all of the hardware (they think) being added to their vehicles today for autonomy. No other car manufacturer makes a claim close to that.

Bottom line: Even if you soften Musk’s hype (i.e. Model 3 production ramp will be liken to a jet fighter in a vertical climb) with a dose of reality, Tesla is still in the driver’s seat (pun intended) to be one of only a few winners in the future of transportation.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. 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.

Tesla: It Will Be Worth The Wait

Special thanks to Austin Bohlig for his work on this note. 

Tonight’s Tesla results once again add further evidence that the shift to EV, autonomy, and renewable energy will take longer than we expect. That said, we believe investors will be rewarded for their patience as Tesla works through the production difficulties of the Model 3. Looking into years 2019 through 2023, we continue to expect a vertical Model 3 production ramp that will shift the company into profitability starting in 3Q20.

The 2nd wave of autonomy will likely be at the end in 2020, and is unchanged from our previous expectation, as Tesla turns on level 5 autonomous driving. The last wave to the Tesla story generally will begin gaining traction in 2020, and continue through 2030 as the company begins to inch towards its mission statement of accelerating the global adoption or renewable energy driven by Tesla solar and storage solutions. Putting it all together we believe the Tesla story represents the biggest opportunity in tech over the next 5 years. (Link to updated model here.)

What Has Changed In Our Thinking?

  • “Tesla is in manufacturing hell!” – Due to difficulties ramping production of Model 3, we are lowering our Dec-17 Model 3 deliveries from 5,400 to 2,500. For Mar-18, we are lowering our model 3 deliveries from 35,000 to 10,700. We continue to expect a ramp in Sep-18 and Dec-18 quarter, which results in 190,582 Model 3 deliveries in 2018, which is lower than our previous estimate of 200,660. Our model S and X deliveries remain unchanged, and expect flat year/year growth in 2018.
  • Company introduces “scaling back” investment strategy. The bear case on Tesla is still around the belief that the company will not be able to ramp production in a profitable way, and eventually run out of money. Tonight’s results will fuel the bear case given the company, for the first time, introduced a concept that it will be scaling back investment to conserve capital. In the past, the company has not been concerned with the level of investment, so the acknowledgment of more prudent investing will be viewed as a subtle testimony by Tesla that they have a cash-burn problem. Our take is Tesla is taking the right steps to prevent a cash crisis by metering some of its investments.
  • Taking a more conservative approach to profitability and gross margin. This may sound like a contradiction. On one hand, we are reiterating our confidence in the Tesla story, but on the other hand pushing back our profitability by two quarters (from Dec-19 to Sep-20). To further complicate our confidence, we are reducing our 2023 gross margin target from 30.5% to 28%. The reason why we can be more conservative on profitability and more positive on Tesla’s story is because our changes to profitability are nulled in the grand scheme of things. Said another way, a 2 qtr push out in profitability along with 200 bps decline in gross margin is immaterial to the story.
  • What about Model 3 preorders? The company did not update the number of Model 3 preorders. The last number they gave was August 2nd, 455k pre-orders. Tonight, the company indicated the total value of preorders has increased, implying the number of preorders has also increased. Our best guess is the number of preorders is now closer to 475k. The company indicated they are not giving Model 3 reservations because they view it as “noise.”  We believe that this is an important metric, but a vastly more important metric will be the number of Model 3 deliveries a year from now, which we expect to grow exponentially.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. 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.