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Mid-Year Update on Our 2020 Predictions

Mid-Year Update on Our 2020 Predictions

We publish our annual predictions around New Year’s and, per tradition, do a mid-year check-in in July. Here’s how our predictions for 2020 are tracking:

1. Apple will be the best performing FAANG stock in 2020 (by Gene Munster)

Mid-year update: AAPL is meaningfully behind Netflix and Amazon Year-to-date (see table below). Despite the stock performance gap, we continue to believe that Apple will be the top-performing FAANG stock in 2020. This belief is based on our original thesis that shares will benefit this year from:

  • Easy iPhone comparables
  • Continued growth in Apple Watch
  • Five new iPhone models in 2020
  • Investor anticipation of 5G
  • AAPL will be rewarded with a proper tech multiple

2. Tesla will exceed street deliveries estimate of 463k (by Gene Munster)

Mid-year update: While behind plan, we still believe deliveries will exceed 463k. In the March and June quarters, Tesla had delivered a combined 179k vehicles, which leaves 284k additional deliveries in the back half of 2020 to exceed the original Street estimate of 463k. That is, of course, an average of 142k deliveries per quarter, compared to 91k in the second quarter. We believe this is possible given the ramp in China Gigafactory production, along with growing demand for Model 3 and Model Y.

3. Direct listings become a well-accepted alternative to an IPO (by Doug Clinton)

Original prediction: We expect at least three direct listings in 2020 to establish this fact.

Mid-year update: There have been no direct listings of tech companies in 2020. The pandemic created an uncertain market in the first half of 2020 with limited tech IPO activity, but public capital raised hit a record. We continue to view direct listings as a viable alternative to a traditional IPO that, when paired with private capital raises prior to the listing, can be superior to an IPO. Recent reports suggest that both Coinbase and Palantir are considering direct listings in the next year.

4. Amazon will add 30 Amazon Go stores (by Andrew Murphy)

Original prediction: We expect Amazon to add another 30 Amazon Go stores in 2020, and we may also see Amazon open its first store with Amazon Go technology but in a location with a footprint larger than the typical 1,000 square foot Amazon Go locations that exist today.

Mid-year update: Amazon has slowed its pace of small format Amazon Go store openings, adding just two new stores in the first half of 2020 compared to our prediction of 30 new stores in all of 2020. However, in February, Amazon announced the opening of the first Go Grocery store, a first-of-its-kind larger format automated retail store in downtown Seattle. In doing so, the company partially fulfilled our original prediction. At 11,400 square feet, the new Go Grocery store is 5x larger than the largest Amazon Go convenience store. The company has a second Go Grocery store ‘coming soon’ to Redmond, WA. The large format concept is the end-goal for Amazon’s automated retail initiative, so we expect Go Grocery store openings to continue.

Somewhat surprisingly, Amazon has opened 22 new Amazon 4-Star stores year-to-date. In total, Amazon’s physical retail store count (excluding Whole Foods) has gone from 61 at the end of 2019 to 89 as of July 2020 (including a few that are temporarily closed and a few that are ‘coming soon’).

5. Netflix will meet paid net add expectations (by Gene Munster)

Original prediction: Despite the threat of increased competition, we believe Netflix will achieve analysts’ paid net add estimates in 2020. The Street is expecting paid net adds of 26.6m (domestic 2.7m international 23.9m) exiting next year with a base of 192.5m paid subscribers.

Mid-year update: The company added 15.8m paid subs in Mar-20 (a staggering 92% upside to analyst estimates) and guided for 7.5m adds in Jun-20. Applying a typical Netflix beat for Jun-20, suggests halfway through the year the company has already added about 26m subs, compared to the Streets original 2020 paid net add estimate of 26.7m.

6. 2020 will be a year of reckoning for mobility (by Andrew Murphy)

Original prediction: 2020 will see consolidation amongst some of the largest mobility companies; specifically, we expect scooter startups like Bird to be consolidated by mobility aggregators like Uber and Lyft.

Mid-year update: In the wake of the pandemic, much has changed in the broader mobility space. Much of the M&A activity has focused on food delivery companies, including Uber’s recent $2.65 billion acquisition of Postmates. In Autonomy, Amazon’s recently announced acquisition Zoox for $1.2 billion could be the start of a new trend. The challenging private fundraising environment may push autonomy startups to accept acquisition offers from big, cash-rich tech companies playing catch-up in autonomous driving.

But the central thesis of our prediction was that micromobility would see consolidation, which has started to play out. Uber led Lime’s May 2020 $170m funding round. At the same time, Lime acquired Uber’s micromobility subsidiary Jump. Here, we see Uber consolidating scooters (Lime) and e-bikes (Jump) under their mobility platform.

The pandemic has brought new challenges for micromobility companies. They were stressed by the high cost of charging and redistribution; now, appropriately cleaning scooters and bikes further strains the economics. We continue to expect consolidation in the micromobility space to achieve scale and improve the prospects for long-term profitability.

7. No AR glasses from Apple or Facebook (by Gene Munster)

Mid-year update: On track. While there have rumblings that Apple will preview AR glasses this year, we still believe the product won’t be revealed until 2021 and ship until 2022 at the earliest. Last year Facebook announced they’re working on their own AR glasses, also likely to be available at the earliest 2022.

8. Oculus will release a new Quest with hardware improvements (by Gene Munster)

Mid-year update: We continue to believe the new Quest hardware will be released by the end of this year. One encouraging data point, in the past six months, Facebook has discontinued some of its other VR models to focus on Quest.

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Amazon, Apple, Facebook, Google, Netflix, Tesla, Uber
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Any TikTok Ban Would Likely Be Temporary

Any TikTok Ban Would Likely Be Temporary

It’s unclear whether or not TikTok will be banned in the US. What’s more clear is that any ban would likely be temporary.

By now you know that TikTok is a social media app owned and developed by the Chinese company Bytedance. The app is best known for 15 seconds long, music-themed, often funny, curated videos, posted by teenagers and influencers — frequently described by its users as “addictive.” TikTok’s leading competitor in the US is YouTube, which is the most used app in terms of time spent.

Bytedance is the highest valued private tech company at around $100 billion with over 65 million monthly active users in the US and over 800 million worldwide. This compares to Facebook with 260 million monthly active users the US and Canada and 2.6 billion worldwide. The US represents the company’s largest growth opportunity. After India recently banned the app, President Trump has indicated that his administration is “looking at” banning TikTok based on the view that TikTok poses a risk to national security, including the threat of espionage and the unknown related to the platform’s power to influence the global political conversation.

Two cases for banning TikTok in the US

First, while TikTok has been clear that its servers are based outside of China and the company does not share data with Chinese authorities, validating that claim is difficult. If the Trump administration can show evidence that there is in fact data sharing, the case for banning TikTok would likely gain bipartisan support. Second, over the past two years, the US-China relationship has been contentious around trade discussions, Huawei 5G infrastructure, and the handling of the pandemic. Now, TikTok’s success in gaining users in the US lands the company in the middle of the conversation. Given the recent history between the two countries, banning TikTok could be seen as a sign of US strength to energize a voting base.

Two cases for allowing TikTok in the US

First, a ban would frustrate US users. There are about 65 million monthly active TikTok users in the US, of which we estimate about half are not old enough to vote. As a point of reference, there are about 42 million adolescents in the US. We estimate the next largest user demographic is 18-30 year olds, which account for about 35% of the US user base. Second, a ban would increase the risk of retaliation from China to US companies operating in the region. This would likely take the form of changes to Chinese policies that would make it more difficult for US-based companies to operate in China.

Long-term is more clear: TikTok will likely be around

Putting our four cases together, we’re undecided whether or not TikTok will be banned in the US within the next six months. That said, we believe that if it is banned, any ban would be temporary. Over time, elections will pass and tensions will likely fade just as they did with the US and Huawei. Separately, the company’s potential to create wealth for its current shareholders could lead to the company making structural changes to satisfy US national security concerns.

TikTok 101

  • Experience. TikTok is best known for its 15-second viral video challenges, collaborations, memes, and remixes.
  • Usage statistics. As a private company, Bytedance doesn’t report user statics for TikTok but there is evidence the app is already one of the top media consumption platforms in the world. In March of 2020, SilmilarWeb noted that the average TikTok user spends 62 minutes per day on the platform compared to 55 minutes for Instagram and 75 minutes for YouTube. In 2019, TikTok was the second most downloaded app worldwide on Apple’s App Store and the Google Play store and in March 2020, TikTok was the most downloaded media/social network app in the US according to Sensor Tower. In June 2020, Wallaroomedia, a digital marketing firm, estimates that TikTok has over 65 million monthly active users in the US and over 800 million monthly active users worldwide.
  • The mechanics of the platform. TikTok users create short-form video that emphasizes user engagement. The speed of user swipes, along with the video playtime, likes, and shares, give signals to the platform to identify viral content. To monetize the content, these short videos integrate relatively well with advertising interruptions. Ultimately, TikTok’s format seems to allow for more ad insertions than other social platforms. The company is still building its ad platform in the US, as evidenced by multiple openings for advertising positions in Los Angeles. The current TikTok cost per engagement is rumored to be less expensive than pricing on the Facebook Ads Network, although with a more limited targeting toolset. The company has agreements with all major music labels to license music used in videos on the platform.
  • Employees and revenue. TikTok’s parent company, Bytedance, had an estimated $17B in revenue and $3B in profit in 2019 and is expected to go public sometime in the next few years. The company has over 50,000 employees, mostly based in China, but also operates out of Mountain View, Los Angeles, London, and Singapore. Bytedance recently announced plans to grow its employee base to 100,000 within two years. By contrast, Facebook has 48,000 employees. Twitter, Snapchat, and Pinterest have less than 10,000 employees combined.

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TikTok
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The Rest of the Auto Industry Is in Trouble

The Rest of the Auto Industry Is in Trouble

June quarter deliveries are further evidence that Tesla has the auto industry backed into a corner. It’s becoming more and more difficult to envision a scenario in which legacy automakers will find a way to meaningful expand the small share of EVs that they have today. We expect, over the next two years, other auto OEMs will struggle to gain measurable ground on Tesla’s 80% US EV share. Ten years from now, once dominant manufacturers will be largely irrelevant in the conversation on the future of transportation.

A supercharged gap between Tesla and the auto industry

  • For the June quarter, Tesla reported deliveries of 90,700, down 5% year-over-year (vs. 95,200 in Jun-19), compared to GM down 34%, Toyota down 35%, and Fiat Chrysler down 39%. While an incomplete comparison, in March, Tesla’s global delivery numbers were up 40% year over year compared to the US auto industry down 29%.
  • Tesla deliveries in June were up 3%  quarter-over-quarter from (88,400 in Mar-20), despite the 33 day Fremont shutdown headwind in the June quarter compared to 8 days in the March quarter.
  • Tesla produced 82,300 vehicles in Jun-20, vs. 102,000 in Mar-20. A year ago the company made 87,000 cars.
  • Tesla is winning because they have a product that is measurably better than both gas and electric competitors.

Structurally unprofitable concern likely to fade away

Previously there were 4 pillars to the cautionary view on Tesla. To date, two of those concerns have been meaningfully diminished: the company will run out of cash and Tesla can’t manufacture at scale. We believe when the company releases earnings in about a month, the view that Tesla is structurally unprofitable will be meaningfully diminished. Based on the just reported June quarter delivery numbers, we expect the company to report better than expected earnings, potentially near a profit despite the shutdown, and favorable details on continued profitability trends driven by the Shanghai factory and Model Y.

Valuation concern will remain

Reducing the concern related to profitability leaves valuation as the only remaining pillar to the cautious view on shares of TSLA. If Tesla can continue to capture 70-80% share of the US EV market, we expect shares to remain richly valued and continue higher given the vast market potential over the next 10-20 years.

The auto industry’s dilemma

It’s becoming more clear that it will be difficult for traditional automakers to catch up to Tesla, as demand for Teslas continues to outpace the broader industry. As the company scales to meet demand, Tesla’s price-performance gap versus other carmakers will widen, because other carmakers are producing EVs sub-scale, creating a dilemma:

  • If traditional auto releases a car with features and range at parity and sells the car at cost, it will be priced 10-25% higher than a comparable Tesla. This will soften demand and lead to further market share loss.
  • If traditional auto subsidizes vehicles to gain market share they will lose money with limited margin cushion. The more they sell, the more money they lose. Taking it to the logical end, we believe car companies that have been around for 50+ years will eventually (10 years from now) be forced to restructure or go out of business.

The Move to electric is just beginning

This year, we believe 3-5% of cars sold in the US will be electric. Musk has been right on production to date and expects deliveries to grow at 40-50% per year over the next decade, which implies ramping annual production from about 500k vehicles today to over 15 million in 2030.

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Tesla
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