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A 6-Month Roadmap for TSLA

A 6-Month Roadmap for TSLA

  • We remain positive on the Tesla story, given our view that near-term results (Sep-18 and Dec-18) will likely ease investor concerns regarding cash. Longer-term, talent retention will be a key indicator of greater upside to the Tesla story. Here’s a quick preview of the key metrics in the Sep-18 quarter:
  • Based on comments made in Musk’s September 7th blog post, we expect Tesla to produce 78.3k vehicles (including 53.5k Model 3s) in the Sep-18 quarter, up from 53.3k total vehicles (including 28.6k Model 3s) in the Jun-18 quarter.
  • We expect Model 3 gross margins of 15%, in line with guidance. Our expectation is based on the company limiting configurations to more expensive options, along with high-margin software conversion, yielding a higher ASP ($55k). We also expect the company to maintain its 20% Model 3 target for Dec-18.
  • We believe Tesla can generate more than $500M in free cash flow, compared to negative cash flow of $130M last quarter.

Bull-Bear Debate Will Likely Continue

While the company will likely hit its targets for production and profitability in Sep-18 and maintain similar profitability in Dec-18, the bull-bear discussion will continue. In place of concerns about production velocity, the central question of the continued debate will be Model 3 demand and gross margin. The U.S. tax credit will begin to fade, going from $7,500 through the end of 2018 to $3,750 in 2019. As Tesla works through pent-up demand and backlog of preorders, questions will arise about sustained demand. Further, investors will look for increasing gross margins as the company begins to sell lower-priced Model 3s, moving toward the base price of $35,000. 

Our Central Belief

Tesla has the best-positioned product roadmap in tech, creating and capturing value from the simultaneous transitions to EVs, autonomy, and sustainable energy. While demand for Model 3 may be lumpy over the next several years, we believe the car will successfully drive the electric transformation of the auto industry. In other words, if Model 3 can deliver on the demand that we anticipate, the company will have the resources to pursue other legs of its mission.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such 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 any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.

Autonomous Vehicles, Tesla
2 min. read Show less
Major Publishers Can Learn from Fortnite’s Monetization Model
Source: Dexerto

Major Publishers Can Learn from Fortnite’s Monetization Model

  • Fortnite surpassed the $1B mark for total revenue in July by employing a unique monetization model compared to typical franchise games. Instead of selling its game for an upfront fee, Epic Games, the publisher of Fortnite, gives the game away and bets on its ability to monetize content in other ways.
  • While major publishers are not likely going to give their IP away, they can learn a lot from the success that Epic has had monetizing Fortnite.
  • Last week, Activision released the beta for Blackout, the upcoming battle royale game mode that will be included in the next installment of the Call of Duty franchise.

Fortnite still has a long way to go in order to catch up to other major game franchises. The way in which Fortnite became a success is far different. Most major franchises require initial purchases of the game. While Fortnite’s single-player PvE does have an upfront cost, its massively popular Battle Royale mode is free-to-play. By offering the game mode for free, Fortnite has been able to amass a giant following in a short period of time because there’s minimal friction to download the game and start playing with your friends without an upfront purchase. Despite Fortnite’s success, major publishers aren’t likely to start giving their IP away for free. They can, however, follow the way Epic has built in-app purchases into the game to better monetize their upcoming titles. 

Taking a look at some of the most popular video game franchises, many require upfront purchases of the content, including Call of Duty, FIFA, GTA, Madden, and Battlefield. Others, like Warcraft, offer their game for a monthly subscription fee.

Fortnite has taken a different path. Outside of the purchase of its single-player game mode, there are two ways in which Fortnite earns in-app revenue:

  • Battle Pass. Fortnite’s online multiplayer mode is broken up into seasons, which fluctuate in duration but tend to last about 75 days. Each season starts a player at Rank 0 and Tier 0. Throughout the season, players try to improve both their rank and tier. In-game items are unlocked at certain tier levels, but the majority of those in-game items can only be unlocked if a player purchases a Battle Pass for 950 V-Bucks. For context, 1,000 V-Bucks = $9.99 USD. At any point throughout the season, players can purchase a Battle Pass and retroactively own any items they have earned.
  • Item Shop. Fortnite’s item shop gives users the ability to purchase skins, emotes, pickaxes, gliders, and back bling not offered in the Battle Pass. Items range in price from 200-2000 V-Bucks and are changed daily. You can find out what items are offered today here.

While major publishers might consider offering a season pass for their games, it’s unlikely that they will sell the pass given the requirement for users to purchase the games up-front already. Instead, Activision and EA will likely rely on item shops to monetize the game mode. Across both the season pass and item shop, Fortnite has done a few things exceptionally well that Activision and EA can learn from.

  • Refreshing Content. While a subscription model isn’t new to video games, Fortnite has made each season fresh and interesting, adding new game elements and modifying the map throughout the season. They’ve also experimented with limited-time game modes to give players a new way to play the game. These changes have helped keep existing players engaged while giving them something new to share with their friends who aren’t playing the game yet. When it comes to the item shop, Fortnite offers a small number of items that change each day but are often new items that are being introduced to players for the first time.
  • Artificial Scarcity. Offering fresh new items is great, but the scarcity that Fortnite adds is key to getting users to purchase items they are interested in. If a player sees a skin they like, an emote that Ninja uses, or a glider to match a skin they own, they need to purchase the item before it gets removed from the store or there is a good chance they won’t have an opportunity to purchase it again. Unlike other skins marketplaces, item availability is short-lived, and FOMO exists within the game. This is also part of the Battle Pass, as the best items typically come at the highest tier. As seasons come to an end, players are going to do everything they can to reach tier 100 and unlock all items for the current season.

    Scarcity impacts both the willingness of players to spend money in the game and the amount they play the game.

  • Authenticity. Fortnite offers authentic content unique to the world and story Epic has created. Activision and EA including battle royale in their IP is expected, but their games should keep authentic styles and elements that made their franchises a success and refrain from trying to replicate too many details of Fortnite. We don’t expect the new games to include build battles, one of the most unique parts of Fortnite, and we don’t think they should. Build battles should remain in Fortnite, it’s what makes the game authentic.

Fortnite has a long way to go before catching up to the lifetime revenues of other top franchises, but we think its popularity and authenticity give it a good chance to stay in the company of the top earners and maybe even move up a few spots. Advice to Activision and Electronic Arts as they vie for a Victory Royale: keep your content fresh and authentic, and offer unique items that users are incentivized to buy.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such 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 any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.

Gaming
4 min. read Show less
iPhone Lead Times: Peeling Back the Layers
Source: Apple

iPhone Lead Times: Peeling Back the Layers

  • At 3:00 AM ET today, Apple began taking preorders for iPhone Xs, Xs Max, and Apple Watch.
  • Compared to last year’s iPhone X launch, lead times were, on average, 68% shorter for the iPhone Xs, and 43% shorter for the iPhone Xs Max.
  • Positive for ASPs, we noted longer lead times for the Xs Max and the higher capacity configurations overall.
  • This year’s shorter lead times are consistent with our expectations, given we are modeling for almost 2x greater demand for the iPhone Xr compared to the Xs and Xs Max combined (21% vs 38% of units).
  • At 10:00 AM ET we observed that lead times for the iPhone Xs Max had shortened by an average of one week. This does not change the fact that Xs Max lead times are longer than the Xs.
  • Separately, these lead times indicate that iPhone Xs demand will be lower than iPhone Xs Max demand. This is consistent with our model, in which we anticipate 9% of units to be Xs and 12% of units to be Xs Max.

Lead Times Broken Down

Compared to the iPhone X launch last year, this year’s iPhone Xs lead times were, on average, 68% shorter, and the Xs Max lead times were 43% shorter. Put a different way, for every minute after 3:00 AM you waited to order an iPhone Xs, it cost you 3.2 hours in delayed delivery. For every minute you waited to order the Xs Max, it cost you 5.8 hours. Last year, for every minute you waited to order the X, it cost you 10.1 hours.

Methodology

Similar to last year, we checked iPhone Xs and Xs Max lead times 8 times between 3:00 AM and 10:00 AM ET, as outlined in the tables below. Reflecting on lead times is not a science, given we don’t know how many phones Apple is able to produce. That said, over the years, longer lead times have historically been an indicator of healthy demand and shorter lead times softer demand (e.g. iPhone 8 and 5C).

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such 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 any investment decisions and provided solely for informational purposes. We hold no obligation to update any of our projections and the content on this site should not be relied upon. We express no warranties about any estimates or opinions we make.

Apple
2 min. read Show less