The recent move in shares of TSLA (up 30% in the past month) has largely been driven by short sellers covering positions based on the emerging consensus that Tesla will stay in business long-term. That said, Tesla has not won over many long-term investors. The story still has material risks related to demand, production expansion, talent retention, and Elon’s behavior. We believe that, over the next two years, Tesla will slowly win over long-term investors with the potential of a business miracle.
Winning Over the Short Sellers With Demand & Production Efficiencies
We attribute the recent move in TSLA shares to short seller covering. Over the past six months, short interest in Tesla has decreased from 24% (Jun) to 15% (as of Dec 13th), which compares to Netflix at 6%, Apple at 1.5%, Facebook at 1% and Google at 0.5%. The catalyst for the short covering has been the reduced risk of the company running out of money. Demand continues to increase and cash burn has stabilized with improved production efficiencies. But in order for shares of TSLA to see a sustained move higher in the years to come, the company needs to win over more buy and hold investors.
Winning Over Investors With the Potential of a Business Miracle
The thesis for Tesla’s business miracle is rooted in the handful of years that the company operated with effectively no competition. They have invested aggressively and built expertise in areas that will make a new EV buyer more likely to buy a Tesla than a new EV from a traditional automaker. Tesla has nearly a decade head start in EVs because other automakers have under-invested in the space, giving the company deeper knowledge related to battery design, a charging network with greater coverage, a better user experience, and more advanced self-driving capabilities.
Three Foundational Advantages
- A More Efficient Battery. Range is one of the most important factors of an EV buying decision. Range anxiety represents the biggest headwind for mass adoption of EVs in the near-term. Once the entire industry has gone through the massive transition to electric, components like long-range batteries, electric drive trains, and a ubiquitous charging network will be largely commoditized. That said, in the next ~10 years, differentiation in these areas will be important in gaining market share. Tesla’s accumulation of advantages in these areas lies at the center of its potential business miracle.
- Vertically Integrated Charging Network. There are 15,000 Tesla fast charging stalls worldwide, which is 10x greater than ChargePoint’s 1,500 fast charging stalls. It is generally accepted that Tesla’s charging network is preferred to generic EV charging stations, because of its near ubiquity (99% of the US population lives within 150 miles of one) and ease of use (integrated route planning and payment). This has been a huge area of investment for Tesla and will continue to be a focus for years to come. Although we believe that that EV charging will eventually be commoditized similar to current fuel infrastructure, it represents a huge comparative advantage for Tesla. Nothing eases range anxiety like knowing you can charge your car at several locations nearby, and it’s a compelling selling point when EV buyers are considering their options.
- Software Updates and Deferred Revenue. In September, Tesla released Software Version 10.0. The most notable new feature, Smart Summon, allows Tesla owners who have purchased Full Self-Driving (FSD) or Enhanced Autopilot to request their vehicles to self-navigate a driveway or parking lot and pick them up. The company sells its Full Self-Driving (FSD) software upgrade for $7,000 per vehicle. Tesla is the only car company that incrementally recognizes revenue on high-margin software as they roll out new versions and features. This creates a unique system of taking in money to continuously develop and improve the system that consumers have paid for up-front. Another advantage is Tesla’s proprietary hardware, which is capable of powering more advanced features as Tesla inches closer to full autonomy.
1. Apple Will Be the Best Performing FAANG Stock in 2020 (by Gene Munster). There are five reasons why we believe Apple will be the top-performing FAANG stock in 2020.
- 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
When compared to other tech and services companies, we consider the fair value for AAPL to be $350 (21% upside) to $400 (38% upside). Details here.
2. Tesla Will Exceed Street Deliveries Estimate of 463k (by Gene Munster). With the addition of China Gigafactory, which just started producing Model 3, along with the release of Model Y in the fall, we believe the company can grow deliveries by 28% in 2020 compared to the overall auto industry that will likely be flat. We expect Tesla to increase deliveries quarter-over-quarter, giving credibility to the belief that the electric car theme is here today and opening up a vast addressable market — 97% of cars sold today are internal combustion. If our prediction is correct, shares of TSLA will continue to move higher. Tesla is a pure-play investment in the undeniable truth that the future of the automotive industry is both electric and autonomous. We expect Tesla to exit next year with above 60% US EV market share, compared to about 75% today. As a point of reference, in 2018 GM lead the overall US auto market with 17% share.
3. Direct Listings Become a Well-Accepted Alternative to an IPO (by Doug Clinton). Expect at least three direct listings in 2020 to establish this fact. Both Airbnb and DoorDash are rumored to be considering it, as are many other private unicorns. Companies that successfully do a direct listing in 2020 will likely need to be close to profitable and have substantial cash in the bank or do a private financing shortly before the listing. While it won’t always be the case, 2020’s direct listing class will most likely consist of household names. The important thing for market participants to adapt to is how to judge the success of a direct listing: it’s not about the first-day pop, but rather the lack of it and more about the ongoing performance of the stock driven by the success of the underlying business.
The WeWork debacle and poor performance of many larger unicorn IPOs has created a pessimism around the late-stage financing markets. Some have even described the market as a bubble. However, large amounts of capital remain allocated for private deployment which we believe means the late-stage bubble isn’t the same as the Internet bubble in 2000. We expect to see a decrease in unicorn financings as less sophisticated and faster money that entered the late-stage game exits, but believe that valuations of those unicorns that do raise in 2020 will look similar to those of 2019 if only from fewer good companies chasing less smarter money.
4. Amazon Will Add 30 Amazon Go Stores (by Andrew Murphy). Amazon isn’t done with physical retail—not even close. The company hasn’t acquired another big retailer as we predicted they would in 2018, but 2020 will see the continued rollout of Amazon’s various physical retail formats (Amazon Go, Amazon Books, Amazon 4-Star, Whole Foods). Amazon doubled the number of physical retail stores (excluding Whole Foods) from 27 in 2018 to 54 by the end of 2019, including nearly 3x the number of Amazon Go stores (from ~9 in 2018 to 24 by the end of 2019). 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.
5. Netflix Will Meet Paid Net Add Expectations (by Gene Munster). 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. Apple TV+ and Disney+are essentially free today through various promotions and Netflix can increase paid subs despite competition from Amazon’s Prime Video offering, which is also essentially free. Turning to 2021, consumers will have to make more thoughtful streaming decisions given promotional pricing from Apple TV+ and Disney+ will come to an end. We believe the increased competition will ultimately weigh on the Street’s 2021 paid net add estimates of 26.1m (domestic 2.5m, international 23.6m) in total exiting the year at 218.6m
6. 2020 Will Be a Year of Reckoning For Mobility (by Andrew Murphy). We are excited about all the innovation happening in mobility. Many of the same technologies that enabled the smartphone are enabling new forms of mobility — batteries, GPS, integrated software, etc. (see Horace Dedieu’s When Smartphones Get Wheels). In our view, new and better forms of mobility are an undeniable truth, given new capabilities in electrification, sensors, and autonomy. But 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.
7. No AR Glasses from Apple or Facebook (by Gene Munster). We don’t expect any announcements from Apple or Facebook regarding augmented reality glasses in 2020. While Apple has yet to make any public comments confirming AR glasses, Facebook has announced they are working on their own pair. Despite their continued efforts, we are still at least three years away from seeing Apple or Facebook AR glasses in the market. Companies still need to lower the cost, figure out the right design, and identify killer use cases in order to drive sales. According to The Information, Magic Leap has only sold 6,000 headsets to date, indicating that these problems are not quite solved.
8. Oculus Will Release a New Quest with Hardware Improvements (by Gene Munster). Last year, we predicted that Oculus Quest would be the first VR headset ready for the mainstream. While the standalone headset has been well received, we believe Oculus needs to make further improvements in order to reach more widespread consumer adoption. This starts with a faster processor that allows for higher-end content on its standalone headsets. With better content, Oculus will also need to make ergonomic improvements so that the headsets are more comfortable for players to wear for longer sessions.
Here’s a look back at our 2019 tech predictions:
1. Apple will be the best performing FAANG stock in 2019 👍
- As of the December 26th close, Apple is up 83% year-to-date. Facebook is up 53%, Google is up 30%, Netflix is up 24% and Amazon is up 21%.
2. Reducing Technology Use Will Be a Top 10 New Year’s Resolution 👎
- The collective concern about device usage and social media addiction seemed to cool off throughout 2019 as our attention shifted to data privacy.
3. At Least Four $10B+ Tech Unicorns IPO 👍
- 2019 tech IPOs of more than $10B or more include Lyft, Uber, Slack, Zoom, Pinterest, and Chewy.
4. Despite Increased Competition, Tesla Will Maintain Its 50+% Market Share in the US 👍
- Through September 2019 (latest available data), Tesla has sold 75% (136k of 180k) of all battery electric vehicles in the US, according to the InsideEVs Sales Scorecard
5. Apple Will Launch a New Streaming Service 👍
- Apple announced Apple TV+ on March 25th, and the service launched on November 1st. There are nine shows available now and more than 20 in the works.
6. Legislation to Regulate Tech Company Data Usage Will Be Introduced and Passed 👎
- Formal legislation regarding data practices was not introduced at the federal level in 2019. However, signs are pointing to eventual regulation, as several presidential candidates cite it as a top issue, and the FTC and DOJ are actively investigating most of the tech giants.
7. Oculus Quest Will Be the First VR Headset Ready for the Mainstream 👎
- In October, it was reported that the Quest has sold nearly 400K units. The install base expanded further in the holiday season, evidenced by product sellouts and long lead times. While the install base remains small, user feedback has been positive. It’s clear that the Quest is a major step forward for VR.
There are five reasons why we believe Apple will be the top-performing FANNG stock in 2020. When compared to other tech and services companies, we consider the fair value for AAPL to be $350-$400. For example, applying FB’s current year multiple to shares of AAPL suggests a $395 share price. We believe the base case of $350 (21% upside) is achievable in 2020 and $400 (38% upside) is achievable sometime in 2021 (38% upside).
5 Reasons Why:
- Easy iPhone Comps. Apple is likely to meet or exceeded analyst expectations in 3 of the 4 quarters in 2020 based on easy iPhone comps. iPhone will account for about 52% of revenue in 2020 with favorable year-over-year comparables: -15% in Dec-19, -17% in Mar-20, -12% in Jun-20, and-9% in Sep-20.
- Continued Growth in Apple Watch. Wearables growth should continue to benefit from widespread consumer adoption, along with a new version of AirPods (better battery), Apple Watch, and the release of Apple Tags (like Tile) late in the year. Next year, wearables will be bigger than Mac, accounting for 11% of revenue, up from 8% in CY19. We believe AirPods will account for 5.8% of Apple’s overall revenue, Apple Watch 5.5%, and Beats at 0.3%. Our model suggests despite larger numbers, wearables growth will remain impressive at 45% next year, compared to 58% in CY19 and 44% in CY18. As mentioned, Apple Tags will likely be new to the category in 2020, contributing fractional revenue in 2020. Apple Tags will attach to keys, wallets, and other belongings to keep track of their location. Beyond 2020, Apple Watch has significant room to grow, given that global Apple Watch adoption remains nascent. We expect 20-30% Apple Watch unit growth for the next five years. We estimate that about 9% of iPhone owners use an Apple Watch today, based on a 3-year expected life. Long-term, we believe the attach rate could reach 40%, which implies about 125m units a year compared to our 36.8m estimate for Cy20. This implies that about 12% of Apple’s overall revenue will be from the Apple Watch in 2025 ($48B in Apple Watch revenue out of $385B in overall revenue in 2025).
- Five New iPhone Models in 2020. Revenue growth will be driven by the release of up to five new iPhone models compared to 3 new phones in the each of the past two years. Most notably, we expect a new version of the iPhone SE in the first half of the year and two iPhone models with 5G announced in September.
- Investor Anticipation of 5G. 5G will be the biggest iPhone upgrade cycle since CY15, which benefited from the first full year of the larger screen iPhone 6. Beginning in 2020, investors will begin to anticipate the upcoming cycle. Long-term, we believe the 5G cycle can deliver two years of 10% iPhone revenue growth, compared to our expectation of iPhone revenue essentially flat in CY20. That said, the iPhone 5G cycle will hit full stride in CY22 and CY23. We expect the product’s first full year (CY21) to disappoint investors due to lack of 5G coverage from wireless carriers, which will act as a governor on iPhone 5G adoption.
- AAPL Will Be Rewarded With a Proper Tech Multiple. We expect AAPL’s earnings multiple to increase in 2020. Investors will begin to recognize Apple’s combination of hardware and services as a high-visibility and sticky business. The prevailing investor view is that shares of AAPL should be undervalued relative to peers based on a belief that the company’s risk profile is relatively higher, because 75% of its revenue comes from hardware. Over the past decade, Apple’s results have shown that the combination of hardware, software, and services can deliver earnings, the most important measure of financial strength, that exceed other tech companies with higher multiples. Over the next year, we believe investors will gain confidence in applying a more services-like multiple to AAPL given the hardware business (iPhone and wearables) will deliver revenue visibility similar to traditional services businesses.