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Snap’s IPO And The Road Ahead

Snap’s IPO And The Road Ahead

Snap priced its IPO at $17 per share, implying a $23.6 billion market cap.  To put the valuation in perspective, we think Snap could grow revenues by 100% to ~$800 million in 2017 and believe some buy side investors think the number will be closer to $1 billion.  Therefore, Snap is trading at about 29.5x our CY17 revenue expectation and 23.6x the early bullish whisper.  For comparison, Facebook trades at about 10x the Street’s CY17 revenue estimate of $37.8 billion.  There is a vast difference in forward growth that helps justify the difference in multiples: 100%+ y/y growth for Snap this year vs 36% for Facebook.  Snap is obviously at a much different stage in its lifecycle as a company vs Facebook and is actually attacking social networking from a different angle – the camera.

We believe investors will have questions over the next year as to what being a “camera company” means.  Philosophically, we think of it as Snap trying to own the tech stack one step above social.  The camera has already established itself as the future of communication.  Snapchat, Snap’s flagship product, relies on smartphone cameras to enable its service.  Without connected cameras, Snapchat doesn’t exist.  By trying to own, or at least influence, the camera layer itself, Snap evolves beyond a social media app into an enabler of communications.  In that sense, Snap’s focus on the camera is not all that dissimilar from Facebook with its experiments with VR and AR.  The difference is Snap appears to be all in.

Trying to own the camera layer may come through multiple products.  Most obvious is software that uses and enhances current cameras.  Snap already does this with products like Lenses.  We expect the company to continue to develop software that utilizes the camera both in core Snapchat and perhaps outside of it as well.  The second camera product is Spectacles, which we view as the most useable AR glasses on the market today.  There is next to no learning curve because the glasses focus on one simple task: recording video through a camera.  Spectacles aren’t the future of AR, but they are a baby step toward the next phase that will add a little more functionality.   Beyond Spectacles, we believe the company is experimenting with other hardware, which may be other consumer wearables or may be products they look to partner with existing hardware manufacturers.

We don’t know how the stock will react tomorrow or over the next year.  What we do know is that the camera is at the centerpiece of communication already, and if Snap can find a way to own the camera they will be rewarded handsomely.

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.

Augmented Reality, Facebook, Snapchat, Virtual Reality
2 min. read Show less
Apple Working With Tesla Is A Fairy Tale

Apple Working With Tesla Is A Fairy Tale

There’s been a lot of talk about Apple buying Tesla, but what if Apple simply made a $10 billion equity investment in the company instead? It sounds so good — Apple working with Tesla. In theory, it would make our lives so much better. Imagine all of the things you love about your iPhone, perfectly integrated with all the things Tesla owners rave about. The two tech giants could take over the auto industry over the next 20 years as consumers embrace electric vehicles and automation. Unfortunately, an investment from Apple, nonetheless an acquisition, would be hard to pull off. At the end of the day, that might be better for consumers if not investors.

Before we discuss why it won’t happen, let’s go over why it sounds so good.

For Tesla. A $10 billion cash infusion would all but eliminate any current or future cash problems for the company. While $10 billion equity investment would cause about 20% dilution today, it’s likely it would have a long-term benefit on Tesla stock given the removal of the cash question. Aside from the cash, we believe Apple could and would want to provide resources from their world class hardware, software, and AI teams to make Tesla’s the entertainment system and autopilot better. The investment would likely remove Apple as a potential direct or indirect competitor. Additionally, Tesla’s Model 3 could be showcased in Apple’s 490 retail stores in 20 countries.

For Apple. Investors would feel like they are actually doing something with their cash, which should be a positive for AAPL’s multiple. Apple would be investing in a company that has the potential to be multiple times bigger over the next decade. They would not be spending on the impossible, which would be building its own car to try to catch Tesla, but rather investing in making the leader even better. The impact of AI and robotics on the automotive sector is one of the next mega tech trends, and Apple would have a pole position within that theme.

Now, why the pairing won’t work.

  • Single product visionaries. It’s hard to imagine Apple doing a deal without some deeper operational partnership or influence on the product given their work in the auto sector. An investment in Tesla, an American automaker, has very different strategic implications than the investment in Didi Chuxing, a ride-sharing platform in China. Apple has a board seat at Didi. Similarly, it’s hard to imagine Tesla management welcoming outside influence on their products when they already make the best car in the world. Musk won’t let it happen, and more importantly shouldn’t let it happen. Single product visionaries create world class consumer products. Steve Jobs with the iPhone and Mac and Musk with Tesla. These visionaries are able to construct their own unique cultures to build great products, but if you try to merge two great cultures, we believe you end up with mediocrity. If we as consumers want the best products, we should want Apple and Tesla to keep their cultures separate and do it their way, even if it means competing with each other in auto.
    The deal Tesla might accept, Apple likely wouldn’t. Tesla might agree to a $10 billion cash investment from Apple if Apple were to accept non-voting shares and have no operational influence. Basically be a silent equity investor. The issue with operational influence relates to the last paragraph, but regarding voting rights, if Apple were to invest $10B and get voting shares, they would actually be the largest voting shareholder in the company, making Elon Musk second. As has been popular with large Internet companies, Tesla could create a non-voting share class that would enable Musk to retain his position as the largest voting shareholder in the event of an Apple investment; however, we don’t see Apple agreeing to non-voting shares because their philosophy on use of cash outside of repatriation has been to generate operational benefits. We believe would want some influence on Tesla.
  • Why an outright sale won’t happen: Tesla doesn’t want it. So a $10 billion investment could make some sense, but the deal Tesla would accept, Apple wouldn’t and the deal Apple would accept, Tesla wouldn’t. Then why doesn’t Apple just try to buy Tesla outright? It’s important to understand how much Musk loves Tesla. On this week’s earnings call he said “I expect to remain with Tesla essentially forever.” We believe Musk as a very long-term vision for Tesla and money doesn’t motivate him. To that end, while Tesla doesn’t have dual class stock arrangements like some other companies, it does have supermajority voting provisions that protect the company from “unsolicited acquisition attempts and hostile takeover initiatives.” The supermajority provision means an acquirer would need two thirds of shareholders to vote for change of control. Since Musk owns 21% of the company, it would require 83% of the non-Musk shares to vote for the sale, which would be unlikely given shareholder support for Musk and other insiders loyal to Musk. It’s fun to talk about Apple buying Tesla, but we don’t think Tesla is for sale.

Apple has a long road ahead in auto.
One of the appealing parts of Apple investing in Tesla would be Apple getting to partner with a world class auto manufacturer. As Musk said on this week’s earnings call, the “factory will be a more important product than the car itself” and the “goal is to be the best manufacturer on earth”. Tesla has a giant lead in terms of manufacturing on the entire automotive industry. The company is investing in robotics and AI to increase their speed of production. Musk added on the call, “I refocused most of Tesla engineering, including design engineering into designing the factory.” The auto industry and auto hopefuls (WayMo, Apple, Baidu, Uber) will have a hard time catching up. So where does that leave Apple? Likely looking for a different auto partner or scrapping the program altogether.

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.

Apple, Artificial Intelligence, Google, Robotics, Tesla
4 min. read Show less
When Will Apple Win Its First Oscar?

When Will Apple Win Its First Oscar?

We think Apple will win an Oscar in the next five years. That’s how long it will take for Apple to scale its original content spend from less than $200m today to $5-7b. The reason why expect $5-7b in Apple original content spend in five years is because Apple must catch up to Netflix and Amazon, the former of which will likely be spending more than $10b per year at that point. Before diving more into the question, here are a few key data points that we think are relevant to the discussion:

  • Amazon recently beat rival Netflix to be the first streaming service to receive significant Academy Award acknowledgement for Manchester By The Sea, with 6 nominations including one for best picture.
  • Netflix has received a total of five Oscar nominations, all in the best documentary category, since it began purchasing the rights to original content.
  • Apple is serious about content. The company will debut two exclusive shows, “Planet of the Apps” and “Carpool Karaoke”, this spring on the Apple Music platform.
  • Revenue from Apple’s Services segment, including the iTunes Store and Apple Music, is a key growth driver for Apple over the next several years. See more on Apple’s Services business in our piece, The 5 Focuses, which outlines Apple’s top five priorities, including Services.
  • We expect 2017 original content spend of about $7b from Netflix, and $6b from Amazon. Amazon includes a la cart cost.  Excluding a la cart we estimate Amazon original content spend is $4b. While we expect Apple to increase its content spend gradually over several years, the company has more than enough resources to participate in the same way.

As we’ve written before, we believe Apple innovates by taking small but deliberate steps forward (see our piece on Apple’s baby steps here). They did it with the iPod, they did it again with the iPhone and the iPad, and we see them doing the same in original content for their entertainment platforms. On their most recent earnings call, Tim Cook said, “In terms of original content, we’ve put our toe in the water doing some original content for Apple Music, and that will be rolling out throughout the year. We’re learning from that, and we’ll go from there.” His comments remind us of the way the company has talked about Apple TV for the last decade, often describing their work in the category as “pulling a string” to see where it leads.

Any vibrant entertainment ecosystem needs exclusive content. iTunes and Apple Music, for example, already leverage exclusive relationships with app developers, music labels, and artists, along with TV and film content providers in order to gain an edge over competing services. Owned content is the ultimate exclusivity. Apple’s new “Planet of the Apps” show, for example, will give the company the freedom to reach viewers in new ways. The show, which is a “Shark Tank”-like reality show for app developers to pitch their latest apps, creates obvious synergies for Apple. For example, we envision “Planet of the Apps” streaming on iPhones and Apple TVs, with a direct links to download the winning apps in the App Store.

But Apple’s new TV shows are just the beginning. We expect Netflix, Amazon, and Apple to continue to increase their spend on content over the next several years. And you pay for what you get. Eventually, Netflix and Apple will achieve the type of critical acclaim for their exclusive content that Amazon has already seen. We’re big believers in the benefits of disaggregated content delivery and disaggregated content owners. Apple is well positioned to invest significantly in original content, distribute it in new ways, and drive synergies across it’s massive device and user ecosystem. That virtuous cycle, we believe, will eventually result in a big winner for the company. Until then, enjoy the Oscars!

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.

Amazon, Apple, Netflix
3 min. read Show less