Latest Research
Tesla Capitalizes on Its Surge

Tesla Capitalizes on Its Surge

Tesla plans to capitalize on its recent surge in value by issuing 2.65M new shares with expected proceeds of $2.3B. With the stock down as much as 7% in pre-market trading and up 5.5% during the day, investors are signaling mixed feelings about this move. Here’s how we assess it and why, ultimately, we believe it to be a positive for the company:

  • We estimate that Tesla needs $2.5B in cash to fund ongoing operations. This number will expand as they bring Gigafactory Shanghai and other initiatives up to speed. Tesla ended Q4 2019 with $6.3B in cash, so this new capital raise would bring that total to $8.6B. While past capital raises have been in conjunction with high-capex projects like production expansion, we see this as purely an insurance policy that strengthens Tesla’s case for continued success.
  • We do not believe, as some may expect based on the seemingly unneeded raise, that Tesla plans to use the proceeds for M&A.
  • The stock initially traded down because 1) issuing new shares dilutes current owners and earnings (in this case by ~1.9%), and 2) it sends a signal that management believes the stock is fairly (or richly) valued.
  • Musk had previously assured investors that he did not plan to raise additional capital. However, while Elon backpedaling on his promises is a common criticism of Tesla, the company’s balance sheet is a much more common (and valid) criticism.
  • Cash in the bank is the backbone of success for a high-growth technology company. Being able to weather the inevitable yet unpredictable ebbs and flows of the EV market and the macroeconomy is critical for Telsa. The company has one of the most compelling product roadmaps in the world and the likelihood of it coming to fruition just increased.
  • We’re also not surprised to see Tesla, a company that admits to having faced several near-death experiences, investing in an insurance policy that will all but put to rest any fears of running out of cash.
  • Long-term, we believe a company that has a pole position in the future of transportation related to electrification and autonomy will be worth more than its current $144B market cap.


2 min. read Show less
Path to Profitability: One Size Does Not Fit All

Path to Profitability: One Size Does Not Fit All

Lyft shares are down 5% in the aftermarket, reflecting investors’ disappointment that the company’s track to profitability will be a full year behind Uber’s Dec-20 target. This reaction captures current investor group-think that all companies must meet profitability as fast as possible. We believe Lyft is making the right decision to continue to invest in growth at the cost of near-term profitability, given ridesharing in the US is still nascent. We believe Lyft will grow US revenue at around 30% in the current quarter compared to Uber’s US revenue growth, which we estimate will be about 15% in March.

Other Takeaways:

  • For Q1, Lyft guided revenue essentially in line with the Street and adjusted EBITDA fractionally better than expectations.
  • As mentioned, what surprised investors was commentary related to the track to profitability, which Lyft expects to reach in Dec-21, a few quarters later than investors had hoped. This is only a fractional negative and is essentially the same as Uber’s expectations (a quarter or two over a 10-year trend is not significant).
  • Lyft’s growth in revenue, active riders, and revenue per rider all decelerated, but still remain above 23%+, which is respectable. We expect overall growth to stabilize in the 15%-20% range in the next two years.
  • The e-bike category is underappreciated by investors, and Lyft reiterates that unit economics are turning favorable for that segment. While immaterial to revenue today, it’s a positive in the company’s hunt for profitability.
  • Because rideshare is a commodity service, Lyft and Uber highlight partnerships with airlines, hotels, credit cards, hospitals, etc. to drive loyalty and repeat use. Expect the land grab for partners to continue, as it effectively acts as sales and marketing spend.
  • Note that Lyft will likely grow revenue in Q1 2020 at 37% vs Uber at 29%. We believe the US ridesharing market is still in the early innings. Adjusting for those under the age of 16, we estimate only 13% of the population actively uses ridesharing, so it’s the right long-term strategy for Lyft to invest in the business in 2021 at the cost of profit.
  • Lyft avoided the question about future price increases but left the door open. This is a duopoly in the US. We believe Lyft and Uber’s prices will follow each other, likely increasing ~10% per year for the next several years.
  • An underappreciated aspect of Lyft’s approach is the company’s culture, which puts a greater emphasis on drivers and cost savings.


2 min. read Show less
The Five Categories of Tech Investing

The Five Categories of Tech Investing

Most investors think about the world in terms of growth or value. Growth investments tend to be in companies relatively early in their growth curve with high revenue growth. Growth companies are often unprofitable as they invest heavily to capture the dominant position in their market. Growth valuations are based on assumptions about future growth and profitability. A value investment assumes some company is underpriced relative to its intrinsic value. Traditionally, value investments are in companies that are relatively mature with profits off of which to value the business.

In either case, an investor’s job is to buy an asset that should be worth significantly more based on its underlying earnings and assets. Growth investing is about future underlying earnings and assets, assuming they come to fruition. Value investing is about current underlying earnings and assets, assuming they are sustainable.

We believe this framework obscures the reality of tech investing (perhaps all investing, although we are not experts beyond tech), where there are five categories of investing, not two:

  1. Customer discovery
  2. Growth
  3. Transition
  4. Value
  5. Compounder

These categories of tech investments are also the natural progression of a technology company along a market growth curve via the work of Everett Rogers, built on by Geoff Moore. Understanding these categories is important because if a tech investor doesn’t understand the category an investment fits in, their expectations will veer from reality and results will disappoint.

A true technology company is either growing rapidly or harvesting tremendous profit from winning a huge market. Otherwise, the company is dying.

Five Categories of Tech Investing

Customer Discovery

Customer discovery is where pre-seed and seed-stage investors live. These investors fund companies that have yet to answer the core question: for whom does our product solve a real problem? Pre-seed and seed investors are looking for a potentially large market with a decent team capable of figuring out if their solution addresses a real customer need. Growth isn’t the key goal of this phase — defining your customer is — though growth is the key indicator of finding a real customer need.

The customer discovery phase is where every company must start, selling to innovators willing to try new solutions. Most companies die in this phase, some pivot to try to serve different customers, some pivot to completely different ideas, and a few graduate to the growth phase.


Growth investing is what most commonly comes to mind for tech investing. This makes logical sense because innovative technology companies should be growing rapidly if their products resonate with the market. However, growth investing spans a wide swath of an industry growth curve — from early market through much of the early majority — and each subset has particular nuances.

Growth investors can be early-stage venture investors who are looking for companies that have found customers for their solution and need to build a repeatable success engine for bringing those customers into their business. Early-stage investors typically deal with companies addressing the early market phase of the curve.

Growth investors can be late-stage venture investors looking to supply companies that have a proven success engine with large amounts of capital to scale quickly and win the market. Late-stage investors typically deal with companies in the late early market or the beginning of the early majority of a growth curve.

Growth investors can also be public market investors. Generally, these investors look for companies similar to late-stage venture investors, but with diminishing capital requirements as the companies work deeper into the early majority of their growth curve and transition to sustainable businesses.

In our view, the best growth investments come when the market is in the later stages of the early market to the beginning of the early majority period and the investor community under appreciates the true size of the market. Any time the investor community fully appreciates or, even worse, over appreciates a market opportunity, the potential for returns is diminished because the opportunity is factored into the valuation of the equity.


Of all the tech investing categories, we believe the transition category is the least well understood. As a tech company matures along its market growth curve, it has to demonstrate a profitable underlying business for the company to be self-sustaining. Every tech company eventually reaches a phase in its lifecycle where investors don’t really view it as a growth company anymore, but the company also hasn’t yet crossed into the value or compounder category. Per our mantra above, a true technology company must either be growing rapidly or harvesting profit. The transition phase is the period of shifting from the former to the latter.

Transition companies generally have a strong market position, otherwise, they would have died along the way. They’re also usually still “growth” companies by the raw numbers. The minimum hurdle to be a growth company as a public entity is 20% annual revenue growth, although many investors expect much higher growth to give a company a true growth multiple. Where exactly the transition category hits on the market growth curve is therefore not driven solely by slowing revenue growth and varies company to company. It seems to be driven by some combination of the stage of the company’s market curve and the valuation of the company.

Uber and WeWork are transition companies. Uber, based on revenue growth, had matured fairly deep into its market curve. It grew gross booking 31% in its first quarter as a public company. On the other hand, WeWork showed 100%+ revenue growth in its S-1 in the first six months of 2019. Based on those revenue growth rates, Uber appeared to be far deeper into its market curve than WeWork, but WeWork’s valuation at the time, $47 billion, more than priced in the company’s growth potential despite the rapid growth rate. With a large-cap growth valuation, investors want to see beyond large-cap growth potential that would have enabled WeWork to transcend to the holy grail of technology investments — the compounder. Instead, investors only saw rapid growth with poor margins and WeWork got a bailout.

The transition category is difficult to invest in because the only way for the investor to continue to see returns is if the company in question can become a compounder with solid growth and a high return on invested capital — a status reserved for truly rare companies. If the transition company can’t become a compounder, the investor has to believe the company can build into another market in the near term that can augment growth, move the company back down into the growth category of the tech investment framework, and ultimately have that new market become the core business of the company. More often than not, transition companies turn into tech value plays, which are not good long-term investments.

Transition companies can live in this category for several years on the path to proving compounder status or falling into the value category.

Value Tech

There is no such thing as a value company in tech. We’ve lived by this mantra for more than 10 years and still believe it true today.

When technology companies stop growing, best case it’s because the underlying market is mature but stable with underwhelming growth prospects. More often than not, the company’s technology is obsolete and the market is ripe for disruption. The value category in tech is comprised of companies with modest to poor revenue growth rates — generally 20% or below — and disappointing profit margins with minimal chance for improvement.

Tech companies that fit into the value category live in a sort of purgatory. There is minimal opportunity to reaccelerate growth in their existing markets, and investors aren’t likely to be excited to give value tech companies more capital to explore new markets. Modest margins also make it difficult for the companies to self-fund exploration into new markets. On top of capital constraints, retaining tech talent is difficult with a languishing stock price.

Capital accrues to winners in tech, per Alfred Lin. Capital accrual comes in the form of both investment and profit for tech, particularly in Internet-distributed companies where winners often take all. Locality encourages winner-take-all dynamics, and the Internet makes the world local.

Value tech companies will not accrue capital in the form of profit or investment for seeking new market opportunities, making them long-term losers. Investors should only consider tech companies in the value category as shorter-term trades, if at all.

Best to just avoid value tech companies because there is really no such thing.


Compounders are the true unicorns of tech investing — the exceptional company that you should invest in at a fair price and hold indefinitely. Morgan Stanley defines a compounder as ”high quality, franchise businesses, ideally with recurring revenues, built on dominant and durable intangible assets, which possess pricing power and low capital intensity.”

We define tech compounders internally as market-leading companies with high profit margins driven by a differentiated product and defensible business model. Tech compounders also require a culture that embraces constant innovation at a relentless pace. Because of the competitive position of compounders, they often also have solid to strong growth in the low-double digits y/y even at relative maturity. These companies generate significant free cash flow that can be reinvested in the business at high rates of return and/or returned to shareholders.

One or two companies often win dominant positions in local markets. For example, most towns or neighborhoods only have one or two pizza places, not five or six. Over the long term, customers will gravitate to whichever has the best product, creating a winner that takes most or all.

The Internet made the world local. As a result, compounders almost always show winner-take-all dynamics in the markets they compete in. Software businesses demonstrate this most obviously. Tech businesses that require physical infrastructure can easily make states and countries local instead of towns or neighborhoods, but tech infrastructure companies deal with more friction to make the world local than software companies.

Investors can easily fool themselves about the progress of a company at every stage, but because there are so few compounders, this category is especially easy to incorrectly assign. As a rule, if you think you have a compounder, you probably don’t.

If you do have a compounder, it should stand alongside companies like Apple, Google, and Facebook.


Startup, Technology
6 min. read Show less