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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

Traditional banks and investing platforms are prime for disruption. Based on CBInsights research, Fintech companies represent about 17% of all unicorns around the world, with companies like Stripe and Square. This environment reveals a clear message: people want to have frictionless participation in financial services and markets. Today we will break down Robinhood ($HOOD), the fintech company that wants to become the go-to app for money.

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📖What is Robinhood?

Robinhood is a stock-trading, investing tech company that provides everyone commission-free trading. The company is proud to have created an intuitive platform that makes investing easy.

• The company’s mission and vision: The company’s mission is to democratize finance for all. Their vision is to become the most trusted, lowest-cost, and most culturally relevant money app worldwide. They simply want to allow everyone to participate in the financial system regardless of wealth, income, or background.

Customer Landscape and Partnerships:

• Users:

  • Net Cumulative Funded Accounts: Q1 2021: 18.0M (151%) | FY 2020: 12.5M (143%)

  • Monthly Active Users (MAU): Q1 2021: 17.7M (106%) | FY 2020: 11.7M (172%)

  • Average Revenue Per User (ARPU): Q1 2021: $137 (65%) | FY 2020: $109 (65%)

  • Cohort Annual Revenue: 2017 Cohort returned $130M (7.6x) in revenue in 4 years | 2018 Cohort returned $186M (4.2x) in revenue in 3 years | 2019 Cohort returned $175M (3.9x) in revenue in 2 years | 2020 Cohort returned $326M (1.0x)

  • > 50% of users are first-time investors

  • > 80% of user were mainly acquired through the Robinhood Referral Program and the remainder organically

  • Referral Program cost $57M in 2021 (56% of marketing expense) and $26M in 2020 (37% of marketing expense)

  • The referral program awards free shares upon bank linking rather than account approval (share price ranging from $2.50 to $225)

  • CAC has steadily declined by 60% from $53 in 2019 to $20 in 2020 and now $15 in 2021

  • Robinhood states most of the investors buy and hold investors

  • 70% of assets under custody came from ages 18-40

  • Tripled the number of women using the platform

  • Claims diverse user base: 9% are African Americans | 16% Hispanic |

  • 65% have credit scores of prime or better and 65% have a debt to income ratios of less than 20%

  • 50% of internal Robinhood surveys responded that the application helped motivate to save money

• Contract Customers:

  • Market Makers: Revenue from market makers represented 75% of total revenue in 2020 and 81% in 2021

    • Q1 2021: Citadel Securities (27%), Susquehanna International Group (12%), Tai Mo Shan (11%), Wolverine Holdings (9%), All others represented about 22%

  • Financial Performance (Growth, Margins, Debt, Profit):

  • Revenue: Q1 2021: $522M (309% YoY) | FY 2020: $959M (245% YoY)

  • Net Income: Q1 2021: -$1.4B | FY 2020: $7M (Breakeven)

    • Loss in 2021 was driven by $1.4B in convertible note (considered a liability) that had to be raised (GameStop Party)

  • Assets Under Custody: Q1 2021: $81B (3.2x) | FY 2020: $63B (4.5x)

    • Q1 2021: 80% - Equities | 14% Crypto | 9% Cash | 3% Options | -6% Customer Margin Balance

    • FY 2020: 84% - Equities | 6% Crypto | 13% Cash | 3% Options | -6% Customer Margin Balance

  • Cash: $4.7B

• Team DNA and Culture:

  • The company is founder-led by Vladimir Tenev and Baiju Bhatt. Their executive team is composed of leaders from CapitalG, Amazon, Facebook, Google, and former SEC Commissioner.

  • In Glassdoor, the company received a 4.4-star review with 87% approval to recommend to a friend and 88% approval of CEO (pool of 266 reviews)

  • The company is planning to increase its engineering team by 20%, customer service by 20%, and regulatory and compliance by 30%

  • Review Comments: Pros: “Company culture is open and friendly” | Cons: “Growing pains have definitely been real”

📈Market Opportunity

The stock market is defined as one of the greatest inventions in the capital markets to increase wealth. Historically the S&P 500 has produced on average a 10-13% annual return. But many Americans experienced limited or no access at all in the wealth generation process by the markets. With finance technology, the barriers that once existed preventing ordinary citizens from access are deteriorating rapidly. Realizing this some market dynamics are evolving:

• 2019 Pew Research Survey revealed that 60% of Americans do not have investments outside of their retirement accounts

• 2020 Gallop Poll revealed 68% of young adults (18-29) have no money invested

• 2020 Harris Poll revealed two-thirds of Americans would consider financial products from technology platforms

• Retail Investing represents about 20% of all American households.

• 30% of Retail Investors place orders using a mobile app and 59% for participants at age 18-34 – FINRA survey.

The company reports from insights by Charles Schwab that U.S. retail investors have total assets of $50 trillion. With over half of the retail investors revealing Robinhood as their first brokerage account, a strong market share is inevitable. Additionally, the crypto market is currently valued at $1.3T (with Bitcoin representing about 46% of the market cap). As young retail investors are open to the developing ecosystem, the ability to access crypto investments is crucial. Simultaneously, the opportunity to offer FDIC ensured cash management solutions like traditional banks opens additional market opportunities. There are over $1 trillion in brokered deposits in the U.S and $3.6 trillion in credit card purchase volumes as well. Robinhood is positioned to operate in an ecosystem that is ripe for disruption.

👨‍💻What are the Strategic Resources?

Product Portfolio:

• Technology Platform: the company has a proprietary ordering system that can evaluate past user orders and automatically route orders to market makers. The company claims that this ensures users have the best prices. The company also implements a self-clearing system that clears and settles trades across stocks, ETFs, and options. In addition, their machine learning platform enhances fraud detection and curates a personal, relevant newsfeed for users regarding equities and cryptocurrencies. To continue to enhance this platform Robinhood has a team of 550 engineers (26% of their workforce).

The platform offers some key critical features as well for users:

• Investing Solutions: Invest in commission-free stocks, ETFs, options, fractional shares, recurring investment functionality, and IPO access.

• Robinhood Crypto: Invest in seven different cryptocurrencies (Bitcoin, Bitcoin Cash, Bitcoin SV, Dogecoin, Ethereum, Ethereum Classic and Litecoin). Currently, users cannot deposit or withdraw fiat and cryptocurrencies directly from the Robinhood Crypto subsidiary.

• Robinhood Gold: Monthly subscription service that offers instant access to deposits ($5k-$50k), stock research, access to investing in margin (eligibility criteria need to be met). Currently, there are 1.4 million customers subscribed.

• Cash Management: Users can earn interest on cash account and currently there are 3.4M debit cardholders (MasterCard partnership). They have removed traditional bank fees (minimum balances, overdraft, and transfer).

• Learning & Education Solutions: The company offers educational tools and resources like the podcast, newsfeeds, and a learning library of articles and tutorials.

To protect its assets the company has 55 issued patents, three pending design patents, and their Cash Management product card designs. Technology and development expenditures represent about 22% of their revenue.

💪Key Strategic Moats

1. Product Design: Design is at the center of Robinhood, creating a platform that is intuitive, informative, and aesthetically familiar. In 2020, half of all new investing and trading app downloads were driven by Robinhood.

2. Brand: When you think of Robinhood, you immediately associate retail investors and zero-commission trading. Investing is now socially relevant among younger generations due to Robinhood. 80% of newly funded accounts joined the platform through their referral program, which signifies brand relevance.

3. Scale: The company offers a variety of services ranging from news, watch lists, ability to manage cash balances, invest, and manage personal portfolios. Users on average visited the app nearly seven times a day. With this scalability, the company has 3.4M debit cardholders, 11 million users that have used fractional trades, and 32 million subscribers to their newsletter and podcast, and 7 million views on their Robinhood Learn initiative.

4. Team: The team is founder-led with experienced executive leadership, strong culture, and an overall positive work environment. The team strongly believes that the financial system should be accessed by all.

🧬Business Model and Growth

When you follow the breadcrumbs, three distinct revenue streams define Robinhood’s business model:

• Transaction-based revenue: Represented about 75% of total revenue in 2020 and 81% in Q1 of 2021. Essentially, when a user puts in an order for a trade (equities, options, cryptocurrencies), Robinhood uses their ordering system to route orders to market makers to execute and they in return receive a fee. This strategy is called payment for order flow (“PFOF”). Similarly, on the crypto trades, it’s called a “transaction rebate”. Let us dig a little deeper and understand some facts about the fee structures:

  • Equities: Fee is a fixed percentage based on the difference between the quoted bid and ask (spread)

  • Options: Fee is on a per-contract basis

  • Cryptocurrencies: Fee is a fixed percentage on the order size of the transaction

  • *Majority of this revenue is also mainly driven by options (~47%), equities (~32%), cryptocurrencies (~20%),

  • *The fee structure is identical across all market makers and Robinhood states that they route orders to market makers that they believe offer the best execution and in the cryptocurrency space the best competitive price.

• Net interest revenue: Represented about 18% in 2020 and 11% in Q1 2021 of total revenue. The company earns interest by lending securities, margin loans, cash balance.

• Robinhood Gold Membership: Represented about 6% in 2020 and 8% in Q1 2021 of total revenue. To get access to margin investing and additional privileges, you must be a subscriber.

The company also intends to deploy the following growth strategies:

• User Acquisition: The Referral Program was successful and will expand to deliberate marketing resources to acquire users. Uniquely, Robinhood is intending to allocate 35% of its IPO shares to retailers.

• User Support: Resources will be deployed to increase customer support (“add the human touch”)

• Product Innovation: The company intends to evolve its product to potentially including all aspects of financial management and services such as (loans, and mortgage services, etc.)

• International Expansion: The Credit Suisse Research Institute estimates that total global wealth is estimated at over $250 trillion. Asian and European expansion are necessary.

Investor Facts:

• Investors: DST Global, Ribbit Capital, New Enterprise Associates, Index Ventures

• Stock Price across the various fundraises: Series A: $0.19 | Series G: $18.6 (100x return) | Potential Valuation at $40B

• Class A shares: One vote | Class B shares: 10 votes

🤯Key Insights for Time Investors:

⚠️Key Critical Risks

1. Revenue Risk: Majority of the revenue generated by Robinhood comes from payment of order flows. This is highly driven by option trading, which is one of the riskiest forms of trades to make as an investor. A reduction in spreads between the bid and ask price, reduction in trading activity, and any regulation regarding the relationship with market makers can severely impact 81% of the company’s revenue. Additionally, a substantial driver for growth in Q1 was driven by cryptocurrency trading, and more specifically Dogecoin, which represented 34% of the cryptocurrency transaction-based revenue.

2. Brand Degradation: There has been a wave of negative media coverage as well as litigation/settlements with government entities regarding the Robinhood practices, “gamification” of investing, and operational outages.

   • December 2019: Robinhood settled with a $1.2M fine for noncompliance with best execution practices with FINRA, a self-regulatory organization.

   • December 2020: Robinhood paid $65M to SEC for an investigation into best execution and PFOF practices.

   • More recently, FINRA fined Robinhood ~$70M for the systematic outages, misleading communication, and trading practices (this is the largest penalty from FINRA)

   • There are a host of other class actions in play as well.

3. Competition: The ecosystem is also extremely competitive with incumbents like Charles Schwab (32M accounts), Fidelity (83M accounts), E-Trade (7M accounts), and TD Ameritrade (11M accounts). In the space, Consolidation is occurring to secure market share. Similarly, new entrants like Etoro (20M), Webull, and Public are in direct competition.

4. Government Regulations: The GameStop/Meme stock fiesta has certainly raised the flag causing government regulatory bodies to increase their focus. Payment of order flows is on the table with the potential legislation that is recently introduced to completely prohibit the practice. In addition, Gary Gensler, Chairman of the SEC, has proposed key focus on the following concepts: 1) PFOF 2) Gamification 3) Disclosures under trading restrictions 4) Margin requirement sufficiency 5) Managing liquidity risk 6) Mobile-app features such as rewards, push notification.

• Robinhood, spawned from the idea of democratizing finance and with a grandiose vision of becoming the go-to app for money! This idea is very addictive, especially when it involves the traditional story of Wall Street. When I think about Wall Street and the narratives that have circulated across for years, three words come to mind: wealth, fraud, and privilege. Keeping this in mind, any company that delivers a message of enabling anyone regardless of wealth, income, or background can suddenly become extremely popular.

• Robinhood began with a splash introducing a simple, beautiful, and intuitive design for any user regardless of their experience. They did a great job removing friction caused by learning a new technology platform. Once you get approved and funds are deposited, you can immediately start investing and trading. To continue with this success, they pioneered a “commission-free” trading business model that took the industry by surprise causing all the incumbents to follow suit in 2019. They coupled this strategy with a stock referral program and BOOM you have significant growth. In eight years, they added 18M users with funded accounts and in the first quarter of 2021, they attracted 5.5M users. This is explosive and a success that the company should take pride in. From a brand perspective, Robinhood has associated itself with retail investing and if interests are high in participating in the markets, they will remain a strong player.

• But this growth and brand awareness has not come without any costs. If a Wall Street Soap Opera were to be made, Robinhood would be the theme. First, to achieve their “commission-free trading” on the front-end to the user, they must generate a substantial amount of revenue through a controversial practice known as the payment of order flow. Now this strategy, incentivizes high volume trading specifically regarding options (as shown in the S-1 filing), and the routing to market makers for a fee raises questions on whether that is truly in the best interest of the user and whether it gets you the best market price. This practice is banned in some countries due to the conflict of interest. The CFA institute published a paper summarizing the ban in the U.K. for the sole purpose of the incentive of maximizing fees from selling order flows. This practice has attracted a $65M fine from the SEC and in 2020 and $1.2M fine in 2019 from FINRA. Legislation in the U.S. is also being created to potentially ban this practice. This would be terrible news for Robinhood in the short-term. Second, the concept of gamification has hit some scrutiny as well. Young untrained users are practically gambling on the app (reported minimum average seven times daily visit per user). Now Robinhood claims they want to enable their “customers” to become long-term investors and take greater control of their finances. But the behavior by users tells a different story. Now, I know we are all adults and if we can buy alcohol, gamble in casinos, why not the stock market. This is where the conflict resides. A casino is a casino and its common knowledge that you do not enter a casino with the expectation of creating wealth. Robinhood on the other hand claims to be that trusted brand that empowers you to build wealth, which is walking a fine line based on what’s actually happening. Finally, there is a problem with transparency with Robinhood. The outages during the GameStop and Meme stock rally created a bad taste in many retail investors (including myself). Restricting trades during the period of increased volatility created outrage and 50 class suits. While there are mechanics behind why that tactic was necessary, Robinhood lacks proper “user” support to communicate transparently. This event resulted in the largest fine by FINRA, amounting to $70M.

• As a Time, Investor, it is important to understand Robinhood holistically. As a fintech company, they are performing quite well, and they have made investing easier for everyone. However, there are serious regulatory and brand issues that Robinhood needs to navigate to truly democratize finance and become “the most trusted, lowest cost, and most culturally-relevant money app worldwide”. In my opinion, the fact that Robinhood is still here and widely used with all the negative media attention, reveals how unique their product design is and how resilient their brand is as well. As a long-term public investor, I would personally wait and see how everything develops over the next two years. Now, I do wish I were part of the seed round or Series A round in Robinhood, which for those who participated will exceed a 100x return (congratulations!). I am personally curious to see how Robinhood evolves in the public eye and hopefully, they can accomplish their mission and vision regarding investing and money.

Stay curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, join me on Commonstock, and/or subscribe (if you have not already)!

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Additional resources and sources I used for all the Time Investors

• Robinhood S-1 Filing

• This Week in Startups - Emergency Pod! Robinhood files to go public: S-1 breakdown

• All In Podcast - E38: Bestie brawl, Robinhood's $70M fine & S-1, Delta variant, next-gen candidates & more

• How Robinhood Transformed Retail Trading Ahead of Its IPO | WSJ

• Meritech Capital - Robinhood Breakdown

• Robinhood files for Nasdaq IPO at what's expected to be a $40B valuation (update)

• Should You Invest In Robinhood’s IPO? - Finimize

• Payment of Over Flow - United Kingdom - CFA Institute

• Robinhood - Glassdoor

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

We can all agree that our world is evolving at an exponential pace due to technology. The transformation to a fully digitized society is inevitable and thus creating the foundation of an AI-centric world. This is a world where machines will be able to learn and act intelligently and revolutionize the exchanges of ideas, healthcare, commerce, and all aspects of human life. The AI revolution has just started and by 2030 it is expected to deliver more than $15 trillion to the world economy. What an opportunity for humanity, to embrace such a revolution that will surpass the economic value of the internet. Now as curiosity and excitement tango, a question brews: “What resources, companies, or individuals are necessary to fuel and propel the success of this AI-centric reality?” The answer: Fearless vision, a lot of money, a lot of talent, a lot of data, and the ability to “produce golden eggs”!

Time Investors, today we will break down the Softbank Vision Fund: the largest tech fund in the world, who is determined to be an agent of change to accelerate the AI revolution.

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📖What is the SoftBank Vision Fund?

The inception of the Vision Fund begins with the samurai grit, discipline, vision, and fearlessness of Japanese billionaire, Masayoshi Son, founder and CEO of SoftBank Group. SoftBank Group is built on the spirit of the Kaientai, a company led by Japan’s renaissance man and samurai Sakamoto Ryōma. The Kaientai had a 100-year vision for the future of Japan, and they put everything on the line including sacrificing their lives to transform Japan into a modern and prosperous state. Fast forward 145 years later, from the day the seeds were planted in SoftBank Group, Masa embarked on his journey with a remarkable superpower to anticipate the future and build the capital systems to propel the reality of that future. Today SoftBank Group stands among giants as the world’s third most profitable company in the world delivering $45.8 billion in net profits. This success is shaped by a consistent vision built on the spirit of innovation, visionary leaders, a talented pool of human capital, and a successful track record in lucrative investments such as the Alibaba Group, Sprint/T-Mobile, Arm, Yahoo Japan, and many others.

Now, Masa is fundamentally convinced that an AI revolution is exponentially evolving and will consume every industry in the world. This ultimate thesis spawns the birth of the Vision Fund which amassed $100B in under 8 months by May of 2017. To put this in perspective the entire Global VC industry invested near $300B in 2020. Ultimately, to understand the feat of this achievement you must observe the Jedi powers of Masa and Rajeev Misra, CEO of SoftBank Vision Fund, which during the fundraising process for the Vision Fund 1 raised $45B in 45 minutes ($1B per minute) from Saudi Arabia’s Public Investment Fund. This was followed by a personal commitment of $30B from the SoftBank Group and then the world’s most profitable company Apple, Qualcomm, Foxcomm, Larry Ellison, and Muabadala (UAE) as the key Limited Partners to achieve the jaw-dropping target. The sheer size of the Vision Funds cannot be ignored, and thus competition will follow through. Large investors like Tiger Global, T. Rowe Price, China New Era Technology Fund, Sequoia, and many others will attempt to ride the wave of the “mega-funds”. SoftBank Vision Funds has tapped the power of financial markets and rattled the VC world. And as we all know when disruptors arrive you either must evolve and compete or end up losing out.  The game has changed and SoftBank has redefined the technology investing ecosystem. Now let us break down some critical facts:

What is the Vision Fund Goal?

• The goal of the Vision Funds are to accelerate the AI revolution, by $130 billion in the businesses and technologies that will help make it possible.

What regions and sectors has the Vision Fund invested in?

• The Vision Fund has a strong unmatched global presence:  Americas: 36% | EMEA: 18% | Asia: 46% (China 28%)

• The Vision Fund is industry agnostic.

What is the market value of the total Vision Fund and where does it sit in the SoftBank Group family?

• The SoftBank Group net asset value is $236B with the Vision Funds contributing about 25%. Masa expects the Vision Funds to be the largest contributor soon. Uniquely, unlike the Vision Fund 1, Vision Fund 2 is solely funded by the SoftBank Group.

How large is the Vision Fund ecosystem?

• The Vision Fund seems to be building the framework for the Berkshire Hathaway of the future!

What stage of investing does the Vision Fund focus and what is the average size of investment?

• The Vision Fund focuses on late stage investing when the company has established itself to be a potential market leader.

• The average investment amount for the Vision Fund 1 was between $300M to $400M. For Vision Fund 2, the average investment amount is $190M.

What level of ownership do the Vision Funds require and what is the time duration of the fund?

• The sizable investments allow the Vision Funds to achieve a ~20-40% stake of a company.

• The fund does not take operational control of the companies they invest. The founder is in full control in running his/her business.

• Vision Fund 1 has a focus between 12-14 years. The SVFs believe this decade will be transformative.

💪What competitive edge does the SoftBank Vision Fund have?

To sustain a long-term business, the founder must have a competitive edge in the market. To build a 300-year technological empire, you need an ecosystem that collects a basket of strategic resources to execute a consistent vision. The SoftBank Vision Fund stands as an outlier with its position in the global investment community. And the keyword here is GLOBAL. With so much dry powder in the investing realm, as an established entrepreneur looking to hit that next stage in hopes of an exit, there are extremely limited players with the cross-section of technology investing and financial skills. So, why would someone want SoftBank money?

1. Ecosystem: SoftBank has amassed a diverse global portfolio across a variety of sectors. The company has direct investments in Alibaba Group, ARM, T-Mobile, 187 Vision Fund companies, and 37 companies in their SoftBank Latin America Fund. All these companies are solving different problems in inefficient markets but possess one core vision: embracing the technological advancements of AI. Now the benefits from this ecosystem are limitless.

   • First, Masa and his leadership team execute a strategy called “gun-senryaku”, which means a flock of birds flying in formation. This strategy enforces the idea that collectively the companies can grow much faster. SoftBank has a dedicated 100+ team building the framework of their value creation division which will provide portfolio companies the ability to learn from each other. For example, you have Paytm in India that can benefit from the experience and resources of Alipay.

   • Second, Rajeev Misra, CEO, highlighted in the Milken Institute interview that a company in the Softbank ecosystem becomes a customer of another company in the portfolio. He shared that Automation Anywhere, which had no presence in Japan, expanded with 300 employees and instantly had access to SoftBank Mobile, which has 35 million customers, thousands of retail locations, and a large sales and administrative force. In addition, in this same spirit, Masa hosts dinners and events to ensure executives from each company build a family-like bond and trust between each other. Uber and Mapbox, an AI-powered navigation system, closed a deal to build a partnership. This is the definition of the power of the SoftBank family.

2. Global Scalability: When it comes to growth, SoftBank Vision Fund helps design global business strategies. With limited resources, companies are mainly focused on establishing a strong market position in their local markets. They need the infrastructure support, market intelligence, and cohesive relationships to navigate international markets such as China. The SoftBank Vision Fund leverages their global ecosystem to immediately help portfolio companies access market share in international markets.

3. Special Know-How knowledge: Softbank Vision Fund sets itself apart from others with its ability to converge its skillset in financial markets with technology investing. They have the level of expertise with the leadership of Rajeev Misra, to skillfully access debt capital, which is significantly cheaper than equity capital. This debt capital is then deployed to fuel growth initiatives and re-enforce scalability. For example, when Coupang needs to finance warehouses for the e-commerce platform, the Vision Fund team is well equipped with resources from ex-bankers and traders from Deutsche Bank and UBS.

4. Power of Data: The Finance function in the SoftBank Vision Fund, has raised the bar in the ecosystem. They understand the power of data and the key insights they can deliver to “business enablers” in the organization and across the portfolio companies. Within the team, the CFO, Navneet Govil, has pioneered a new AI intelligence web-based tool built from one of their portfolio companies called Automation Anywhere to transform Finance into a strategic asset. The FinSight platform is designed to collect and visualize critical data that delivers insights regarding the Fund and each individual portfolio company. This has empowered executive teams, investing teams, Limited Partners, and SoftBank to leverage a “knowledge platform” that delivers insights on public market analysis, liquidity controls, performance, sector analysis, and portfolio reviews. All the business enablers are empowered with the ability to understand data frameworks, isolate critical risks, and more importantly build a finance structure that leverages AI-based technology across all portfolio companies. Imagine having the ability to pick the next company and founder based on the data insights collected from the SoftBank Vision Fund ecosystem.

🧬What process does SoftBank Vision Fund team follow when constructing their portfolio and vetting their investment opportunities?

The SoftBank Vision Fund deploys a unique investment model when constructing their portfolio relative to its competitors in the space. This strategy would incorporate the combined top VC expertise skills of selecting entrepreneurs with the savvy financial and management skills of running a conglomerate like Berkshire Hathaway. Going back to the competitive edges that the Vision Fund exhibits; Masa and the team want to build a cluster (flock of birds) of “No.1 AI strategy” companies. The core thesis is identifying companies that deploy artificial intelligence and machine learning to optimize every industry that affects our lives – healthcare, real estate, food, transportation, and many others. Masa and Rajeev seek to build a diverse portfolio of market leaders. So now let us look behind the curtain and understand the criteria framework the investment teams deploy when selecting the next family members of the Vision Funds.

The Selection Process:

The firm evaluates investment opportunities from three angles.

1. They invest in businesses that use next-generation technology platforms leveraging data and AI that can rapidly scale and have a clear path to profitability.

2. They target massive global markets where there is an opportunity for a new leader to emerge.

3. They also look for ambitious founders with a clear vision and a deep understanding of their customers.

When a company meets these three key thresholds, each founder will then meet with Masa in a personal meeting. To test the ambitions of the founder, Masa focuses his interactions on one central question, “What would [you] do if money were no object?”

Now, this selection process is constantly evolving and as the ecosystem becomes larger, the Vision Fund will have the ability to leverage AI technology to truly deliver data-driven insights. A key highlight is the FinSight tool pioneered by the CFO, Navneet Govil. As more data is collected in this knowledge platform, the value of insights highlighting the success and failures of portfolio companies will exponentially increase. Investment teams will be equipped to instantly contribute, influence, and impact a data-driven selection process for future investment opportunities.

📈What performance has the SoftBank Vision Fund delivered?

The Vision Funds collectively delivered strong results with a series of successful exits. As of the full fiscal year in 2020, the Funds produced ~$62B of gains and distributed to investors ~$22B, netting ~$40B in realized and unrealized gains. The gains this year were mainly driven by one of SoftBank Vision Fund’s favorite children:

• Coupang: South Korea’s E-commerce Company: $28B in gains | (10.3x return as of 03/2021)

• Some additional exists in the public markets for Vision Fund 1 are Doordash, (~$8.3B), Guardant (~$2.9B), Auto1 Group (~$2.3B), Opendoor (~1.6B), and Uber (~$12.1B return)

• For Vision Fund 2, Beike, a Chinese Proptech Company, delivered $6B in gains.

Additional success can also be seen in the private markets with additional rounds raised for some key players who on average exceeded their previous valuations by more than 2x.

• Cruise ($25.8B), GoPuff ($7.8B), Tessera ($550M), Whoop ($1.1B), Cameo ($900M), Ordermark ($280M)

I would like to also emphasize that a good portion of the gains are still unrealized. The Vision Fund has realized about 15% of the cumulative gains. This simply enforces the fact that the Vision Fund is a long-term fund that will capitalize on the returns during this decade.

Now it is important to note that some hurdles were also experienced. In 2019, the Vision Funds recorded heavy losses amounting to ~$17B driven by WeWork and Uber. However, with a persistent vision and some calculated “lucky investments”, the Vision Funds have come out with some home runs delivering staggering profits.  

Overall, Vision Fund 1 has delivered 7% (fixed percentage) preferred equity IRR, 30% equity IRR, and blended 22% IRR for partners. From the SoftBank Group perspective, the Vision Fund 1 delivered a net equity of 39% IRR. Between the two funds, the investments have delivered a ~43% net equity IRR. This performance is expected to continue, as SoftBank Vision Fund 2 has already exceeded the number of companies from the Vision Fund 1. The management team and Masa continue to put their capital behind their vision with a strong level of confidence that AI-based companies in the private markets will outperform with lucrative exists on the horizon.

🤯Future of the Vision Funds

The SoftBank Vision Funds goal can be summarized into one movement: The AI Revolution. Masa and Rajeev continue to emphasize that their Alpha is the ecosystem that is constantly being built and evolving. The 224 companies across the portfolio will produce substantial financial and social impact to humanity.

As a start-up, growth investment firm, the Vision Fund is now entering a chapter of building a sustainable system that can achieve recurring gains, or as Masa puts it “produce golden eggs”. The systematic approach is necessary to ensure consistency across the discovery process, and more importantly the financing process which is a strategic resource of SoftBank.

Vision Fund 1 is now in the value creation phase. Alongside the operational and financial support, the firm is giving its companies, they also continue to monetize select investments with the goal of maximizing IRR and distributions to LPs.

Last year 26% of the Vision Fund 1 portfolio – based on fair value – was comprised of exited and public investments. Now that figure is 58%, which provides remarkable valuation transparency into the fund.

There is a significant number of private Fund 1 companies that are yet to be monetized. When they are, it will extend the fund's track record of distributions to investors.

In the next journey of the Vision Fund 2, SoftBank Group is the sole beneficiary with the initial $30 billion capital. An obvious observation is that an emphasis has been placed on healthcare with massive disruptive opportunities. With the pandemic and advancements in DNA sequencing driven by AI, SoftBank Vision Fund has executed 29 investments in US-based healthcare companies with a staggering average valuation of $1 billion each. However, the Fund will continue to be dynamic in their capital allocations across diverse sectors.

The formula is clear: Identify Companies utilizing AI + Be Fearless + Deploy Strong Financial Market Skills + Build and Leverage an Ecosystem = Golden Eggs

With strong public markets, SoftBank Vision Fund should expect a stream of exits through IPOs and M&As. Large deals will continue to develop, and the Vision Fund is at the forefront of that transformation.

In the latest earnings presentation, Masa shared a photo and a message that highlighted the origin of the SoftBank Group and its future.

“Back in 1981, at the year that we founded SoftBank in Fukuoka,” Masa stated, “at an exceedingly small town called Zasshonokuma. The most important thing is summarized here is on this one photo. Over the rail crossing, there is a huge dream. Grab that dream, no matter what it takes. And so long as I have this passion, excitement, and heartbeat, I will keep chasing my dream over the rail cross: Information Revolution – Happiness for Everyone.”

Time Investors, now that is a clear vision, which is one with the Force. When you dream, you dream big because “life is too short to think small.”

There are 1,000 unicorns around the world focusing on AI, and each represents an opportunity to realize the SoftBank Vision Fund’s dream.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

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Masterworks: What’s the one thing in every hedge fund titan’s portfolio that you’re probably not investing in? 

A-R-T. In fact, 84% of ultra-high-net-worth individuals collect art according to a 2019 Deloitte survey. It makes sense—contemporary art prices rose 14% per year from 1995-2020 vs. 9.5% returns for the S&P 500 (with virtually no correlation). And with the total art market expected to balloon from $1.7T to $2.6T by 2026, it’s no wonder that the price of paintings has steadily risen. One New York startup is at the center of it all: Masterworks.

They’ve fractionalized multimillion-dollar masterpieces by KAWS, Basquiat, Banksy, and more—and you can be a part of it. If you're looking for an elite, real asset class, check out Masterworks today. They’ve allowed Equity Breakdown subscribers to skip their 25,000 person waitlist with this link.*

*See important information

Additional resources and sources I used for all the Time Investors

• SoftBank Investor Relations

• What is SoftBank? CNBC Explains

• SoftBank soars on strength in Vision Fund | CNBC

• Talks at GS - Rajeev Misra: Creating Capital of the Future

• Capital Allocators - Jeff Housenbold – Inside Softbank Vision Fund (EP.186)

• SoftBank Vision Fund - Redefining Technology Investing

• Softbank just shocked its critics by landing the biggest profit in the history of a Japanese company - CNBC

• Masayoshi Son’s secret to running his $100 billion funds: Telling start-ups to treat each other like family - CNBC

• Future of PE; SoftBank Vision Fund CFO - Case Study

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

Gaming is eclipsing the entertainment industry and surpassing traditional streaming services. Within this $161 billion market, the fastest growing segment is mobile gaming. Today we will breakdown, Skillz ($SKLZ). The company that is aiming to tap into the competive nature of gamers and transform the future of electronic gaming.

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📖What is Skillz?

Skillz provides a platform for users to socially compete and watch multi-player esports games.

The company empowers developers to share their creations and for gamers to compete. The company is creating an gaming ecosystem that fuels the “competition layer of the internet”.

The company offers three types of games:

1. Gamers can play the exact game at different times and then scores are compared

2. Gamers can play a multi-player game where they take turns (like chess) and then a winner is determined at the end

3. Gamers can play live making moves simultaneously between each other and then a winner is determined at the end

Now top games on the platform alternate year by year. In 2020, the top three games were Solitaire Club, 21 Blitz, and Blackout Bingo.

The three key values the company continues to reiterate are trust, fairness, and competition when building their ecosystem.

📈Market Opportunity

According to Statista, over half the world’s population uses smart phones and based on additional studies around 33% of app downloads are games and within those games users allocate 10% of their time. Newzoo highlights, that the global games market has expanded from $70B in 2012 to $180B in 2021. Within the market the fastest growing segment is mobile gaming at a CAGR of 27% from $12B in 2012 to $106B in 2021.

Majority of gamers are usually young adults with a median age of 29 years old. According to the Entertainment Software Association, 64% of American adults played video games in 2020. Now when it comes to esports, the competition sparks an immense amount of passion and engagement from fans. Millions of fans will want to watch their favorite performers and are also more willing to consume and spend on content.

In this market, there is a high demand for content with an engaged and passionate user base. Over the years, content creation in the gaming industry has democratized with standardized game development and distribution platforms (Unity and Unreal) resulting in over 15 million game developers making content.

👨‍💻What are the Strategic Resources?

Product Portfolio:

The company’s main strategic resource is their proprietary, highly scalable software platform. The goal behind the platform is to align developer and gamers interest and ensure user monetization. The formula is simple. The more contests and time spent by gamers in a specific game the more revenue is generated for developers. Okay so now let us understand the platform in more detail. The platform provides three key features connected by the power of data science.

• Gamer Competition Engine: The software development kits provide 200 features in a 15-megabyte package to allow for seamless updates that improve gameplay, engagement, and retention. Focusing on retention, the company has found an efficient way to match skill rating and timely match gamers as well. Simultaneously to ensure engagement, the company has embedded social features such as in-game chat and participation within leagues or with friends to build community strengths.

• Live Operations: The system technologies allow for multivariate testing to enhance engagement and retention. Additionally, with the segment management tool the company can create cross-application personalization and player incentive optimization.

• Developer Console: Dashboard allows for developers integrate quickly and check the performance of their games. The developers are also able to onboard with little obstacles and are ready to use their software development kits in about a day.

*The company utilizes algorithms and machine learning capabilities to connect all the features of the software platform. This includes anti-cheat, anti-fraud, player rating, matching and segmentation. To ensure the best experience for a gamer, the company has identified 65 different behavior sets that can be implemented. Additionally, the company collects 300 data points during each gameplay session to feed their algorithms for optimization.

Developing Resources:

As of 12/31/2020, the company has 58 patents in total with 39 patents granted. The company has been steadily increasing their R&D investment amounting to $23M in 2020, representing a 110% YoY increase. To put in perspective, the investment represents 10% of revenue generated during that fiscal year.

Customer Landscape + Partnerships:

The Skillz Flywheel is built by a developer and gamer community. To date the company has 9,000 registered game developers. Top developer is 42% of revenue. From the gamer community the company has 2.6 million active users. Between these communities they company hosts on average 5 million daily tournaments with 1.4 million paid entry daily tournaments.

In Q1 2021, Skillz announced partnership with Play Mechanix Partners which will bring the arcade franchise Big Buck Hunter exclusive to mobile on the Skillz platform. Play Mechanix Partners has sold around 46k arcade machines worldwide.

In Q2 2021, Skillz announced a partnership with the NFL to host a global game developer challenge that will develop an NFL-themed mobile game. The challenge has launched.

Business Model and Growth Strategies:

How does Skillz achieve a business model that aligns the interest of developers and gamers? The company monetizes through competition. Players pay an entry fee and Skillz recognizes a 14.6% cut out that fee as revenue. The remaining is divided between prizes, incentives, and game developer profit share. Now it is important to understand that the entry fee break-out that is reported is not all cash deposits. It is currently 11% cash deposit, 82% cash winnings that have not been withdrawn, and 7% end-user incentives.

The company generated the following financial performance:

• 2020A Gross Margin Value: $1.6B (80% YoY) | 2021A Q1: $567M (85% YoY)

• 2020A Revenue: $230M (92% YoY) | 2021A Revenue: $83.7M (92% YoY)

• 2020A Paying Monthly Average User: 0.3M (88% YoY) | 2021A PMAU: 0.47M (81% YoY)

• 2020A Average Revenue Per Paying Monthly Active User: $59 (-5% YoY) | 2021A ARPPMAU: $60 (7%)

• 2020A User Acquisition Marketing Investment: $136.7M (160% YoY) | 2021A UA Marketing Investment: $54.3M (101%)

• 2020 – 60% of Revenue | 2021A Q1: 64% of Revenue

• Based on GAAP measure the company is not profitable. However, the company believes if they exclude the UA Marketing Investment and apply their business model, they will result in 30% Adjusted EBITDA Margins for 2020A and 28% Adjusted EBITDA Margin for 2021A Q1.

• The company claims their Gross Margins are 95%

The company plans to continue accelerating growth through the following initiatives:

1. International Expansion: 10% of Revenue was generated from the international market, which is a 4x larger market than North America

2. Increase Engagement: Estimated average time spent on Skillz platform is 60 minutes per user. Tap into the desire for competition.

3. Monetization Models: 16% of MAUs enter paid contest. The other 84% will be monetized with virtual goods and low friction ads.

🧬Team DNA and Vision

Key Leaders:

• Andrew Paradise, CEO and Co-Founder – Andrew is a serial entrepreneur with a strong track record. He sold a mobile self-checkout to a public company and built many other private companies as well. Now Andrew makes sure his entire team at Skillz is playing video games. Personally, he has locked in 3,363 games (170 hours) of Bubble Shooter himself. He understand the convergence of human behavior, mobile gaming, and esports.

• Casey Chafkin, Chief Revenue Officer and Co-Founder – Casey was the VP of Business Development for AisleBuyer working with Andrew. His business experience and has propelled him to build a great business model at Skillz.

• The executive teams experience ranges from e-sports, finance, film production, and private equity investments at top tier companies.

Team Composition:  The company has instilled a healthy culture that is realistically mission driven. First and foremost, all employees must play games at least 35 times per week. Over the course of their history, the company has been recognized for great leadership and an innovative environment. On Glassdoor, 83% approve the leadership of the CEO, and 75% would recommend their friends to work at Skillz. Let us see what employees have to say about the company

Pros:

• "Skillz is a fast- paced and exciting place to work"

• "Better work life balance than most companies I have worked for"

Cons:

• "Normal startup growing pains: Everyone is busy with many responsibilities and there are long hours"

• "Mid-market location on market street is convenient to Bart and Muni but not a great neighborhood" 

🤯Key Insights for Time Investors:

• Mobile gaming is taking over and in 2020 accounts for 51% of total gaming revenue. Based on trends presented from Will Hershey of Roundhill Investments, more people are watch gaming and Esports than Netflix, HBO, Hulu, and ESPN combined.

• Scale will matter in Mobile. It’s quite common that many mobile games need to spend significantly to acquire users through paid marketing channels. With scale the company can generate additional content to ensure engagement. Sophisticated player segmentation tools that allow for customization will be essential to maximize the lifetime value of gamers.

• Now let’s look at an investor’s perspective on gaming. Blake Robbins, Partner at Ludlow Ventures, was interviewed in Invest Like the Best about investing in gaming and highlighted an interesting concept about a platform that would be the “Webflow for games look alike”. This would empower creators to design games without friction spawning some top hits. Additionally, you are now able to build multiple games a year and when you have one game that is successful you can funnel that growth to other games creating a sustainable game publishing platform. This is interesting as Skillz has accomplished something similar in nature.

  ---

💪Key Strategic Moats

• Technology: Company collects 300 data points during each gameplay and has identified 65 different behavior sets to product an optimal customized experience for gamers.

• Strong Network Effects: The economic model incentivizes developers to produce greater content which in effect attracts more gamers. This flywheel effect creates an expanding community.

• Business Model: By aligning incentives between gamers and developers, the company avoids adding consuming ads that create friction between users. This translates in strong unit economics resulting in 95% margin and 25% profit (ex-user acquisition investments)

• Brand: Trust and Fairness are the two descriptions associated with the Skillz Brand.

• Team: The company is lead by two serial entrepreneurs who have created a positive mission driven culture and connected the entire 277-member team with the gaming products produced in the platform.  

⚠️Key Critical Risks

• Competition: The company states that they compete with “alternative monetization services for mobile game content”. Companies that are competitors and partners are Sony, Amazon, Facebook, Apple, Google, and Unity. Other competitors are Zynga and Gluu Mobile.

• Revenue: Two games from Tether Studios and one from Big Run accounted for 79% of the revenue. In total games developed by each of these two studios generated 87% of the revenue.

• Game Development: The company relies on third-party developers to develop the games on their platform. Successful commercial relationships with developers are essential to ensuring quality content.

• Gamer Community Risk: 80% of total paid entry fees are prior cash winnings that have not been withdrawn. Currently $2.8 million of end-user deposits have not been withdrawn for 2020.

• Distribution: Company relies on Apple App Store, for distribution. Fee structures or policy changes can create significant risk.

• The company states that they are connecting the world through competition. They want to focus on trust and fairness for users which enable game developers to build great content. This sounds like a good start.

• Their platform enables developers to learn, grow, and share success through analytics while allowing users to connect, and experience a frictionless community which allows for competition.

• To ensure great content the company monitors metrics such as the player liquidity inside each game based on number of daily active users, the stability of each game based on crash rates, the user satisfaction based on app store ratings, and user issues based on support tickets. The company wants to provide fair competition, network exposure, and financial success.

• On the flip side, Wolfpack research has highlighted that there are some huge risks to Skillz. They have stated that the company’s growth projections can not be sustained when majority of the revenue is generated by three games. They have also denounced the NFL partnership that the company highlighted during its SPAC merger.

• Wolfpack research has also highlighted that in-app purchases have declined and they have spoken with the third-party developers of those games to confirm the contraction. Essentially, they are claiming a shark fin effect. The research firm also highlighted poor leadership performance questioning the “serial entrepreneur” label of the CEO and the quality of the work environment.

• While these reports have certainly introduced a new perspective, top tier investors/institutions continue to add a vote of confidence for the company:

  • Cathie Wood – ARK Invest: +18M shares - $288M

  • Atlas Ventures - $372M

  • Wildcat Capital Management - $344M

  • Morgan Stanley Investment Management - $322M

  • The Vanguard Group - $309M

• Now, the company addressed their concerns from the short reports during their earnings call and with the continued positive performance they are on track in building an ecosystem greater than mobile gaming, according to the CEO. He quoted "We started with mobile gaming, but we think about the world as digital competition, and this is about building out the future of digital competition."

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

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Additional resources and sources I used for all the Time Investors

• Mobile Games and Esports Marketing

• 2021 Perspective - Griffing Gaming Partners

• Esports and Gaming Trends - Ark Invest

• Blake Robbins - Investing in Gaming - Colossus

• Best Practices for Skillz Game Design - Video

• Skillz Q1 2021 Financial Results

• Skillz Q1 Stockholder Letter

• Skillz Q4 Investor Presentation

• Skillz 10K SEC Report

• Skillz S1 SEC Report

• America's Fastest-Growing Company Turned Video Games Into a $54 Million Cash Cow - Inc.

• Skillz Can Pay The Bills With Its High Growth - Seeking Alpha

• Skillz Back to Earth - Seeking Alpha

• Skillz Costing Too Much To Acquire Customers - Seeking Alpha

• SKLZ: It Takes Little Skill to See This SPACtacular Disaster Coming - WolfPack Research

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Masterworks: What’s the one thing in every hedge fund titan’s portfolio that you’re probably not investing in? 

A-R-T. In fact, 84% of ultra-high-net-worth individuals collect art according to a 2019 Deloitte survey. It makes sense—contemporary art prices rose 13.6% per year from 1995-2020 vs. 8.9% returns for the S&P 500 (with virtually no correlation). And with the total art market expected to balloon from $1.7T to $2.6T by 2026, it’s no wonder that the price of paintings has steadily risen. One New York startup is at the center of it all: 

Masterworks

They’ve fractionalized multimillion-dollar masterpieces by KAWS, Basquiat, Banksy, and more—and you can be a part of it. If you're looking for an elite, real asset class, check out Masterworks today. They’ve allowed Equity Breakdown subscribers to skip their 25,000 person waitlist with this link below:

Special Link

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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

Today we will understand the indirect benefits that space technology delivers on Earth. I want you to focus on three key works: GPS, automation, and agriculture. Now the company breakdown today is for Trimble Inc., ($TRMB). The company is on a mission to transform how the world works by bridging the physical and digital world with technologies in “positioning, modeling, connectivity and data analytics”.

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📖What is Trimble Inc.?

Trimble is a 42-year industrial technology company that delivers hardware, software, and service solutions to bridge the physical world and the digital world. The company has a spirit of innovation by pioneering the world’s first GPS positioning machine in 1984. In the span of 40 years, it has evolved its technology stack from the GPS to technologies in positioning, productivity, and integrated work processes. Across construction, transportation, and agriculture the company delivers solutions that ensure productivity, quality, safety, and sustainability.

Trimble has designed a formula that converges technology across machines, vehicles, tools, and human labor to deliver real work to society. When you think of Trimble think about four key phrases:

• Agriculture Autonomy

• Construction Intelligence

• Transportation Fleet Optimization

• AI Industrial Company

📈Market Opportunity

The business sectors that Trimble operates in are buildings and infrastructure, geospatial, resource and utilities, and transportation. Ultimately, all these sectors will be impacted by automation in some fashion. Increased automation and productivity will ultimately result in greater economic benefits. The ARK Invest team has highlighted that automation will deliver higher wages, lower prices, higher margins, and higher investments. Based on their research GDP is expected to deliver 2.5% CAGR and with automation accelerate to 3.4% CAGR. Ultimately, automation will deliver $1.2 trillion in the next five years.

Now within each of these sectors, Trimble expects accelerations as each sector has shown increased demand regardless of the economic shutdown that occurred in 2020. Government stimulus has helped and with the new Biden proposed budget, capital will continue to flow. Let us break this down into the four segments to understand the expected growth:

• Building and Infrastructure segment involves architecture, engineering, construction, and operations and maintenance.

  • The Global construction market is expected to grow at a CAGR of 9% valued at 12.5 trillion

  • U.S. Govt Budget: Buildings, schools, and hospitals: $250B+, Digital Infrastructure: $100B+

• Geospatial segment involves surveying, engineering, and government

  • Global Geospatial market is expected to grow at a 12.9% CAGR valued at $96.3B

  • U.S. Govt Budget: Digital Infrastructure $100B+, NASA $24.7B

• Resource and Utilities segment involves agriculture, forestry, and utilities

  • Global Precision Farming Market is expected to grow from at a 13.1% CAGR valued at $16.4B

  • U.S. Govt Budget: Cleantech and related infrastructure: $300B+, Water Utilities: $111B+, Agriculture: $27.8B

• Transportation segment involves long-haul trucking and freight shipper markets

  • The global long-distance general freight trucking market is expected to grow at an 8.3% CAGR valued at $826B

  • U.S. Govt Budget: Transportation Budget: $621B+

As we consider the growth projections within the next five years and the U.S. Govt budget for 2022, Trimble at an enterprise valuation of $22B seems to be at the intersection of the industrial economy that is poised for transformation.

👨‍💻What are the Strategic Resources?

Product Portfolio:

• Buildings and Infrastructure Technology: Program management solutions for contractors, 3D conceptual design and modeling software, building information modeling software used across the entire cycle of construction of a building, and enterprise resource planning and project management. The critical platform is Trimble Connect, which streamlines project processes across the entire construction team. The goal is to automate and create productivity. Additionally, in 2020 the company in partnership with Caterpillar is developing the next generation of autonomous products for earth-moving machines.

• Geospatial Technology: Solutions offering field-based data and the ability to generate analytical insights, high precision GNSS, robotic measurement systems, 3D laser scanning, digital imaging, and optical and laser measurement. The company recently launched their new GNSS receiver, Trimble R12i, that enables points to be measured while the survey rod is tilted (does not require leveling) allowing for accuracy and speed. The goal here is to give customers benefit to improve productivity, insights, and safety in the field and back-office activities.

• Resource and Utilities Technology: In the agriculture realm the company delivers autonomous steering, automated and variable-rate application, and information management software to help farmers improve crop yield, profitability, and environmental quality. The technology provides automated navigation guidance for tractors and other machines used in spraying, planting, cultivating, harvesting applications, pesticide, and seeding. Water management solutions are also offered to deliver cost reductions and limit waste. Ultimately, Trimble Positioning Services delivers precision and automation across agriculture and construction.

• Transportation Technology: The company delivers software that provides fleet management, analytics, routing, mapping, reporting, and predictive modeling solutions.

• Technologies Acquired: In 2018 the company acquired e-Builder and Viewpoint for a total of $1.6B.

Developing Resources:

• The company continues to make significant investments across positioning, communication, and information technologies with R&D averaging around ~$421M in the past five years representing 13% of revenue. To date, they have over 1,000 unique issued and enforceable patents covering key technology areas such as:

  • “Precision global navigation satellite systems, optical and inertial positioning solutions, artificial intelligence, and machine learning, IoT, cloud computing, laser scanning, 3D modeling, point cloud processing, augmented reality”

  • 65% of R&D is spent in Software

  • 3,4k (30%) of employees focused on product development

  • The company is not dependent on any patent or license

Customer Landscape + Partnerships:

• Trimble’s customers range from construction owners, contractors, engineering and construction firms, surveying companies, farmers and agricultural companies, energy and utility companies, trucking companies, and local, state, and federal governments.

  • 81% of the revenue was generated by customers in North America and Europe with expansion across the rest of the world.

  • A key point to take into consideration is that no single customer accounted for 10% or more of the revenue in 2020 and 2019 and no single customer accounted for 10% of accounts receivable. Revenue is diversified across the key business segments.

• Geospatial Sector: 10,000 surveyor and mapping firms + Joint Venture with Nikon

• Construction: 29 million SketchUp activations + 10 million users of Trimble Connect + joint ventures with Caterpillar and Hilti

• Agriculture: 155M acres using Trimble technology (The state of Texas is around 171M acres) + 115K customers subscribing to Trimble correction services for high precision GNSS + 98M acres (The state of California is around 100M acres) covered using Trimble Ag Software

• Transportation: Trimble technology 99% of top 200 trucking fleets in U.S. + >2 million assets managed with Trimble technology

Business Model and Growth Strategies:

Trimble’s business model has evolved from selling hardware to building out recurring revenue with subscriptions from software and services. This transition over the past 42 years has improved the operating margin from 7.5% in 1999 to 22.8% in 2020. In 2020, their revenue was split 42% Hardware and 58% Software. This gives you a strong indication as over time the company has strategically placed its focus on delivering software and ensuring the expansion of a recurring revenue model.

• 2020A Revenue: $3.1B | 2022E Revenue: $3.6B – 7.5% CAGR

  • Recurring Revenue: $1.6B

  • ARR: $1.3B

• 2020A Gross Margin: $1.8B (59%)

  • Recurring Gross Margin: 0.8B (73.8%)

• 2020A EBITDA: $0.79B (25.3%) | 2022E EBITDA: $0.9B (25%)

• 2020A FCF: $0.62B | 2022E FCF: $0.63B (70% of EBITDA)

The company plans to continue accelerating growth through the following initiatives:

1. The company’s main objective that is spearheaded by the new CEO is executing the Connect & Scale 2025 strategy. Trimble’s leadership wants to accelerate infrastructure to connect data and customers and create deeper workflow integration. Solutions will be available to customers through the cloud and through subscription. Additionally, they want to ensure they have the people and culture that is well equipped for the age of digitization.

2. The company is also placing focus on expanding digitization deeper into the construction, agriculture, and transportation sectors. These sectors have been resistant to technology implementation and Trimble stands as a strong partner to transform their operations.

3. Resources will also be deployed to expand software and services across the vertical end markets.

4. International expansion is also a key focus with established distribution channels across 85 countries.

5. Strategic acquisitions are also critical to ensure market position. The company is well experience over the years when it comes to integrating the appropriate technologies to serve the customers in the industrial sectors.

🧬Team DNA and Vision

Key Leaders:

• Steven W. Berglund, Executive Chairman – Prior, Steven served as CEO of Trimble since 1999. His deep engineering experience and operational experience built the foundation for the software business to support the underpenetrated industrial markets.  

• Peter Platzer, CEO, - Peter joined Trimble in 2006 and has built a 15-year career with various leadership roles across the construction business of the company.

• Key positions in various business sectors such as SVP of Construction Businesses, SVP of Surveying and Geospatial Businesses, and SVP of Natural Resources have 52 years of collective experience at Trimble.

• Team Composition:  The company has had three CEOs since its inception in 1978. The executive leaders have long tenures in the company reflecting stability and industry expertise. This reflection of leadership translates to a strong culture within the company that focuses on innovation and growth. Trimble exhibits strong values across its employee base which in reinforces the belief in the company’s mission. They understand the importance of culture and how that transforms a company’s future.

🤯Key Insights for Time Investors:

• The industries that Trimble operates are heavily supported also by the government. The Biden Administration is proposed $1.2 trillion to revitalize America’s infrastructure.

• The statement ‘software is eating up the world’ certainly applies to many industries. However, when it comes to industries like construction the pace of software penetration slows down quite a bit. These large industries are usually resistant to full technology transformations. As a result, the problems these industries suffer from are productivity, quality, safety, transparency, and environmental stability. Realizing the difficulty, Trimble has spent 42 years building out its foundation to ensure they deliver innovative hardware and software to customers. Time has been on Trimble’s side.

• Now, one thing that certainly was surprising is the fact that Trimble has been in autonomy, specifically in the agricultural industry, for the last couple of decades. The CEO claimed that they called it “machine control and guidance”. Similarly, the company has been in IoT before it became an acronym. It looks like the technology trends are playing in Trimble’s favor after years of building out their network.

• The company has shown consistent and tenured leadership which is rare in today’s market. In their 42-year history, there have been three CEOs, with the past two serving around 20 years. This is the type of rare leadership that you will not find across many technology companies.

• The company is cash-flow positive and profitable since 2010. Over the last 10 years, they have continuously increased cash flow. In 2015 profit started increasing as the software sector began to grow more steadily.

• In the past 15 years, the company has also conducted 100 acquisitions to integrate the right technologies and talent into its ecosystem.

• When it comes to technology, the CEO stated that the most mature product categories would be the GPS guidance system. Now, this maturity is present in America, but in other parts of the world, it could still be the first inning. However, the opportunities lie in water management, software, and autonomy since they are just developing.

💪Key Strategic Moats

• Technology: The company has integrated technology and software to large industries that are typically resistant to transformation. Core technologies in positioning, modeling, connectivity and data analytics are protected by 1,000+ patents and implemented across various workflows for customers to increase productivity and profits. The company has achieved autonomous technology, AI/ML models to produce rich data analytics for customers, and construction intelligence applications that allow customers to control the entire workflow process of building a variety of structures.

• Scale: Trimble has built world-class distribution networks and partnerships that drive deep customer relationships. This moat has allowed Trimble to enable technologies and common platforms vertically for industry-specific solutions.

• Team and Culture: Peter Platzer is the third CEO in Trimble’s 42-year history, following 2 20-year CEO’s. This tenured leadership reflects the strong values Trimble has across its employees. The mission at Trimble is to transform the way the ‘real’ world works! As a result, with stable leadership that is open to change, you cultivate a culture of innovation and success.

• Network Effects: As various customers across sectors utilize the technology applications and workflows, the entire ecosystem will benefit from enhanced productivity, profitability, and sustainability. 

⚠️Key Critical Risks

• Competition: Now the company does face competition across each of its business sectors. The competitors in the building and infrastructure sector usually provide optical, laser, or GNSS positioning products and some software specific to the construction process. In the Geospatial sector, the competitors are survey instrument companies that deliver 3D measurement and imaging solutions. Finally, in the resources and utilities sector, competitors (Deere, AGCO) are vertically integrated farm equipment and implement companies and agricultural instrument companies.

• Partnerships Risks: The company’s success regarding some business operations is highly dependent on Caterpillar, Nikon, Hilti, and CNH Global. Similarly, these companies also offer distribution network access to Trimble for their products as well. Any change that does not provide benefit to the key partners can result in a drastic impact on performance.

• Acquisitions: The company has a long list of acquisitions over the past 42 years. However, poor acquisitions could be costly and require more additional resources than anticipated to integrate. Acquisitions are a key strategy for the company to continue market share.

• Dependent on availability of allocated bands within the radio frequency spectrum: The company’s GNSS technology application is highly dependent on satellite signals and terrestrial communication bands. Changes in regulation, by the Federal Communications Commission for private actors to come in, can create severe implications.

• GNSS Technology relies heavily on satellite systems: GPS satellites were originally designed to have lives of 7.5 years and any repair of damaged satellites currently is not possible. As a result, the company is heavily dependent on the Russian GLONASS and the European Galileo GNSS Systems.

• Debt Risk: Total debt for the company is $1.3B (38% of revenue). As the debt matures the company will have to allocate cash reserves or re-finance. The company will need to watch this and ensure they can continue to expand to meet the debt obligations.

Trimble sits at the intersection of industries that are embracing digitization. When it comes to infrastructure build, the CEO of Trimble was quoted, “our goal is to make it greener and more autonomous”.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Global X - President Biden’s American Budget Plan

• ARK Invest - Automation in the Agriculture Industry

• The impact of the tractor in American Agriculture (*Sourced from Ark’s research)

• Autonomous Performance with fewer sensor costs

• The GPS Playbook

• Trimble - Connecting the Physical and Digital World - Video

• Trimble CEO Interview on CNBC - Benefits from government spending

• Trimble’s History of Innovation - Video

• Trimble 10-K SEC Filing

• Trimble Investor Deck March 2021

• Trimble Investor Deck Q4 & FY 2020

• Trimble Financial Performance Data

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Masterworks: What’s the one thing in every hedge fund titan’s portfolio that you’re probably not investing in? 

A-R-T. In fact, 84% of ultra-high-net-worth individuals collect art according to a 2019 Deloitte survey. It makes sense—contemporary art prices rose 13.6% per year from 1995-2020 vs. 8.9% returns for the S&P 500 (with virtually no correlation). And with the total art market expected to balloon from $1.7T to $2.6T by 2026, it’s no wonder that the price of paintings has steadily risen. One New York startup is at the center of it all: 

Masterworks

They’ve fractionalized multimillion-dollar masterpieces by KAWS, Basquiat, Banksy, and more—and you can be a part of it. If you're looking for an elite, real asset class, check out Masterworks today. They’ve allowed Equity Breakdown subscribers to skip their 25,000 person waitlist with this link below:

Special Link

*See important information

⚡This is Equity Breakdown, where you will find short, no bullshit overviews of public companies! Join me in breaking down industries and companies that will become leaders embracing disruptive technologies and innovating change! Subscribe Now!

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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

Today we are going to understand a company that is fueling the space industry with its 3D printing technology. In fact, they are a critical supplier for SpaceX’s most critical rocket engine. We will breakdown Velo3D, a company on a mission to build the impossible.

🔴Download Equity Breakdown Report

📖What is Velo3D?

Velo3D is a 3D printing company that utilizes metal additive manufacturing technology to produce high-value metal parts. They focus on delivering end-use parts for aerospace, energy, and specialty industrial applications.

Why enter 3D manufacturing when you have existing supply chains? Benny Buller, founder, and CEO of Velo3D believes that there are two key reasons for 3D manufacturing:

1. Ability to design better-customized products that are driven by simulation.

2. To reduce lead times for parts that are difficult to sustain in today’s manufacturing infrastructure

Now, understanding these two reasons why Velo3D? This is the only company to date that broke the barriers of limited additive manufacturing technologies and now delivers user-friendly solutions for customers to optimally design their products that are manufacturable.

📈Market Opportunity

Currently, the high values metal parts market is valued at $101B with metal additive manufacturing at $2B (2% market share). By 2030, the market is expected to grow to $180B with 3D metal additive manufacturing at $35B (20% market share). Now the market today is fragmented and traditional players controlling less than 10%. If the technology scales and the market compounds at an annual rate of ~60%, Velo 3D is in a position to serve $20B of the market by 2030 (11% market share).

It is important to understand that additive metal manufacturing technology is critical for complex parts such as jet engines, fuel delivery systems, and many more. It will continue to propel technological breakthroughs such as autonomous technology, electric vehicles, supersonic aircraft volume, and space.

👨‍💻What are the Strategic Resources?

Product Portfolio:  Velo3D has introduced game-changing support-free technology that can produce any design with complex internal geometries without compromising optimal design.

1. Sapphire Printer Family: next-generation printers that enable manufacturing with “impossible” geometries. The family of printers, especially with their latest XC design, can achieve 5x productivity improvement and 75% cost reduction per part.

2. Flow Print Preparation Software: Simulation-driven software identifies predictable outcomes and reduces print preparation time.

3. Assure Quality Validation: The software works in tandem with Flow and Sapphire to provide reporting insights on machine health, part integrity, and build process.

Velo3D delivers a full-stack offering from design, production, and quality control to ensure high-quality optimal designs.

Developing Resources: The company has claimed that it has the strongest IP portfolio in the metal AM market. The company has 91 patent applications with 48 granted patents. The technology development for high-value metal additive manufacturing took 6 years and $150 million.

Customer Landscape + Partnerships:

The company delivers 3D manufacturing solutions to a series of key customers across three core industries:

• Space: SpaceX, Lockheed Martin Space Systems, Aerojet Rocketdyne, Astra, Wagner Machine Co., Launcher

• Aviation / Defense: Leading Jet Engine Manufacturer, Raytheon, Honeywell, Kratos, Boom

• Energy: Knust-Godwin, Siemens, ConocoPhillips, Mitsubishi Electric

• Other: Taiyo Nippon Sanso, Lam Research

*The company’s largest customer is SpaceX (the company placed a large order of 22 AM printers to support the production of their starship engines). In 2019 and 2020, SpaceX represented 70% and 30% of the company’s revenue.

Business Model and Growth Strategies:

The company has a pure sale model and a recurring subscription revenue model for its software. Customers can purchase the printers and pay a subscription fee to access its software, or they can lease the printers and software from Velo3D.  Each sector between aerospace, energy, and specialty industrial applications contributes about 15-35% of the 2020 revenue.

Both revenue models highlight strong unit economics based on the investor presentation ranging from 50-60% gross margin. Additionally, as revenue expands the capital expenditures for the company are light (3% of revenue) since 80% of the production is performed by reliable contract manufacturers.

• 2020A Revenue: $19M | 2026E Revenue: $937M | 91% CAGR

• 2020A Gross Profit: $5M (33%) | 2026E Gross Profit: $490M (52%) | 114% CAGR

• 2020A EBITDA: -$19M (-99%) | 2026E EBITDA: $318M (34%)

• Enterprise Value: $1.6B

  • 71% company ownership post-merger

The company plans to continue accelerating growth through the following initiatives:

1. Merger: The company will go public through a SPAC with JAWS Spitfire. The company will be fueled with $470M in cash to continue to make investments in engineering, product development, and sales support.

2. “Blue Ocean Market”: The company is the only one positioned now to deliver high-value performance, reduced lead times, and significant cost savings.

3. Sapphire XC Production: The large printer will be available in 2021 with the capability to produce parts of 400% larger volume and dropping part costs by 65-80%.

4. Accelerate new customer acquisition: With distribution partners such as GoEngineer and Taiyo Nippon Sanso the company aims to acquire new customers.

💪Key Strategic Moats

1. Technology: The company has created a full-stack package with hardware and software that includes design, metal 3D printers, and quality control processes. Their technology is SupportFree Powder Bed Fusion which does not use supports during the print process. This sets them apart from their competitors.

2. Scale: The company utilized contract manufacturers to assemble the hardware component and to also allow customers to print. Ultimately, the company has low CAPEX and the potential to quickly scale through its distribution partners and through their software and services. This creates the ultimate environment for strong unit economics and high margins.

3. Team: The company is founder-led with deep experience in applied materials and manufacturing and backed by top-tier investors and strategic business partners such as SpaceX.  

⚠️Key Critical Risks

1. Competition: The additive manufacturing industry is fragmented and competitive. Legacy competitors such as GE, Reinshaw, and 3D systems have far more capital resources and are also developing 3D printing powder bed fusion systems. New competitors such as Desktop Metal and Relativity, which is building the world’s largest 3D printer for rocket production, are also entering the market.

2. Product Differentiation: The majority of the revenue was driven by the company’s sale of their Sapphire printers. The strong unit economics is highly dependent on the company’s ability to build recurring revenue streams through AM software systems and service contracts.

3. Customer Risk: SpaceX is the company’s largest customer consisting of 70% revenue in 2019 and 30% in 2020. While the share of revenue is being dispersed that still poses a high risk early in the growth stage.

🧬Team DNA and Vision

• Benny Buller, CEO, Co-Founder – Prior, executive leadership experience at Applied Materials and First Solar. Benny was also an investor at Khosla Ventures. I think this quote he published on LinkedIn perfectly summarizes what he stands for “Not everything that is hard is worth doing, but almost everything worth doing is hard.”

• Bill McCombe, CFO – Prior, CFO of HZO, and Executive Vice President of Maxar Technologies. Proven track record to deliver growth and strong financial results.

• Dr. Greg Brown, VP Technology – Prior, executive engineering leadership in Applied Materials and Nanosolar. Strong experience in material sciences and process engineering.

• Alex Varlahanov, VP Engineering – Prior, leadership in Finisar and Guzik. Strong experience leading teams developing manufacturing equipment and precision test equipment.

Team Composition:  The team is composed of highly technical and capable leaders with the expertise to grow and scale the business. The team is continuing to expand their engineering talent and will also focus resources on building out their sales capabilities. Additionally, they have investors such as Bessemer Venture Partners, Khosla Ventures, and partners such as SpaceX, and Lam Research to ensure they are equipped with the appropriate resources to scale and dominate the AM market.

🤯Key Insights for Time Investors:

• If we look at the industry from a bird’s eye view, then we can agree 3D printing will empower optimal designs of products, reduce lead times and supply chain complexities, improve efficiency, and ultimately reduce costs significantly compared to traditional manufacturing. Research conducted by third-party resources and by respected investment institutions such as ARK invest suggests the market will continue to compound at 60% by 2030. More importantly, the integration of AI will enable highly optimized designs that are impossible to build with traditional manufacturing.

• Now Velo3D, unlike its competitors, offers a full-stack additive manufacturing solution that allows engineers to deliver mission-critical components without supports for any geometry. This ensures that design is not compromised, and the company can deliver components for space rockets, jet engines, fuel delivery systems, and energy production at faster speeds, lower costs, and more importantly at high levels of optimal designs. Traditional additive manufacturing requires supports to be added to prevent the destruction of the part thus limiting design.

• As we analyze the financial performance, Velo3D is one of the few SPACs that highlights strong demand from reputable customers who are leaders in their respective industries and a strong pipeline of revenue. With $19M in sales for 2020, the company has a clear path to hit $89M by 2022. This is heavily supported with $15.8M in bookings for the Sapphire XC and $26.4M in pre-orders as well. This also assumes their revenue subscription model starts growing as well through their AM systems and services.

• Barry Sternlicht's from Jaws Spitfire informed CNBC that "Elon wanted to buy Velo3D, they didn't want to sell, so we had an opportunity to take them public." 

• Here are some comments from customers and investors, that have worked for competitors in the space, regarding the technology that Velo3D has developed:

  • “Velo3D is at least 5 years ahead of any competition” – Head of Additive Manufacturing at SpaceX

  • “I was impressed by the technology that they developed. They had a really easy-to-use design software tool [and] they had this really deep quality control and assurance component.” – CEO of Piva and Managing director at GE Ventures (Source: TechCrunch)

• Now, while there are benefits, it’s important to note that the company does face competition from legacy players like GE, Renishaw and new incumbents like Desktop Metal and Markforged. Acquisitions will happen as the highly fragmented 3D market becomes more consolidated. Product innovation will also accelerate. So it’s important to understand which of these companies will come out dominant based on the market they are serving and the proprietary technology they claim to be dominant. Wait for inflated expectations to dry out and then pay attention to the key customers that are demanding their services. This will create a clearer path of understanding who can potentially lead the path with talent, technology, and execution.

• The new Sapphire XC platform will open growth opportunities that will deliver larger parts and significant cost savings and is scheduled to be deployed in Q4 of 2021. Keep an eye on this because it’s critical to achieving the next growth stages of the company. With this technology, Velo3D believes they can achieve $20B TAM which equates to an 11% market share. This is the company’s greatest benefit but also the greatest risk.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Velo3D Investor Presentation

• Why Customers stay with Velo3D - CNBC Interview

• Velo3D - Another 3D Printing Metal Stocks? - Nanalyze

• Velo3D is the 6th 3D printing firm - 3DPrint.com

• SpaceX Supplier Getting SPACced - Seeking Alpha

• Interview with the CEO of Velo3D

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies.

Masterworks: What’s the one thing in every hedge fund titan’s portfolio that you’re probably not investing in? 

A-R-T. In fact, 84% of ultra-high-net-worth individuals collect art according to a 2019 Deloitte survey. It makes sense—contemporary art prices rose 13.6% per year from 1995-2020 vs. 8.9% returns for the S&P 500 (with virtually no correlation). And with the total art market expected to balloon from $1.7T to $2.6T by 2026, it’s no wonder that the price of paintings has steadily risen. One New York startup is at the center of it all: 

Masterworks

They’ve fractionalized multimillion-dollar masterpieces by KAWS, Basquiat, Banksy, and more—and you can be a part of it. If you're looking for an elite, real asset class, check out Masterworks today. They’ve allowed Equity Breakdown subscribers to skip their 25,000 person waitlist with this link below:

Special Link

*See important information

⚡This is Equity Breakdown, where you will find short, no bullshit overviews of public companies! Join me in breaking down industries and companies that will become leaders embracing disruptive technologies and innovating change! Subscribe Now!

Subscribe now

Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

We are all aware of the amazing accomplishments that SpaceX continues to deliver in transforming the new space economy. While there is a key leader in the $400B markets, a series of players are entering the space after years of development regarding their space technology assets and services. Today we will focus on Rocket Lab, one of the only two U.S. commercial companies delivering successful access to Earth’s orbit.

🔴Download Equity Breakdown Report

📖What is Rocket Lab?

Rocket Lab is a pure-play space company that offers “end-to-end” solutions that provide rockets, satellites, and assets supporting space infrastructure. They are one of the two companies [you can certainly guess the other one] that have delivered consistent launch services to orbit commercially in the U.S.

📈Market Opportunity

The $368B space economy is estimated to grow to $1T by 2040. From the company’s perspective, they are in the position to operate in a TAM of $62B (16.8% market share). The TAM is broken out into the following categories:

Launch: $10B

• Small satellite constellations will drive 83% of the demand for launches by 2028

Space Systems: $20B

• Growth will be present in small satellite constellations for commercial Earth observations and telecommunication applications

• Defense focuses on building out space infrastructure

Space Applications: $32B

• Demand to connect the entire world and data management and analytics

👨‍💻What are the Strategic Resources?

Product Portfolio:  In 6 years the company has achieved 18 launches to space, 97 satellites deployed to orbit, 3 launch pads built, and 2 mission control centers. Now let us go deep into the technology assets propelling Rocket Lab to potential success.

1. Electron Rocket: the reusable carbon composite rocket is powered by the world’s first 3D printed rocket engine and first electric pump-fed rocket

   • 16 successful orbital launches, deployed 97 satellites, across 3 launch pads has 132 launch opportunities a year, delivered 180 3D printed engines to space, and ~600-pound payload capacity

   • Kick stage allows for precision and unique orbits of satellites

2. Launch Infrastructure: Launch Complex one is located in New Zealand, and Launch Complex two is located in Virginia, U.S.

   • 132 launch slots annually, the world’s private licensed orbital launch site, and the ability for 24-hr launch regarding defense and constellation needs

3. Neutron Rocket: this is a medium-sized rocket with an 8-ton load capacity (~220 satellites per launch)

   • Tailored for defense and constellation satellite launches. The rocket is also capable of human space flight and crew resupply for the international space station

4. Photon: In-orbit satellite (spacecraft bus) that delivers assistance for specific missions for payloads, power, propulsion, and communications. The company has a low earth orbit and interplanetary design.

5. Satellite Components: The company has secured its supply chain of satellites and spacecraft with components like reaction wheels and star trackers. They incorporate these components in their own products and sell them to other space companies.

Developing Resources:

In building out the Neutron Rocket the company has invested $200M to meet the demand for constellation satellites. The company is also planning on building the factory for Neutron close to the launch site to minimize issues with transporting the vehicle. Fundamentally to protect its resources the company has 6 registered patents in Aircraft, Aviation, and Cosmonautics categories.

Customer Landscape + Partnerships:

The company has conducted 18 missions for more than 20 organizations. 50% of its customer base is commercial and the rest is divided between civil at 20% and defense at 30%.

• NASA (2 missions), DARPA (1 mission), Air Force + Space Force (2 missions), Planet (3 missions), Black Sky (2 missions), Spaceflight (4 missions), Spire (2 missions) *Competitors rely on Rocket Lab for the launch of their satellites as noted above

• In 2020, the company acquired Sinclair Interplanetary which manufactures small sat components

Business Model and Growth Strategies:

The company generates its revenue specifically from contracts awarded based on the launch missions. Because of their small reusable rockets, they can deliver cost-effective launches for small payloads. CNBC reported that the company’s Electron rockets are priced at $7 million per launch.

• 2020 A Revenue: $35M | 2025E Revenue: $749M – 115% CAGR

  • The company is expected to hit $69M this year and has $2.2B in the pipeline

• 2020A EBITDA: -$36M (-102%) | 2025E EBITDA: $168M (22%)

  • The company is expected to become profitable by 2023

• 2020A FCF: $-45M | 2025E FCF: $149M (88% of EBITDA)

  • Cash flow positive by 2024

• Enterprise Value: $4.1B

  • 82% company ownership for existing Rocket Lab shareholders post-merger

The company plans to continue accelerating growth through the following initiatives:

1. Merger: The company will go public through a SPAC with Vector Acquisition Corp. The company will be fueled with $745M in cash to continue building the Neutron Rocket and pursue supply chain acquisitions

2. Technology: The demand for constellation satellites is expanding and the company needs to pursue the completion of the Neutron Rocket which will have a capacity of ~220 satellites per launch

3. Business Channel: The company will heavily invest in expanding their space system capabilities utilizing personal satellites for services required by companies

💪Key Strategic Moats

1. Technology: The company is pioneering 3D technology in the production of its rockets. They have built the world’s first 3D printed engine rocket that can be reused and to date has conducted 18 successful missions. In addition, they also provide satellite technology and components that are capable of low earth orbit and interplanetary planetary applications.

2. Vertical Integration: The company controls 90% of its production from rockets, satellites, space components, and launch sites. They want to ensure that the company has no friction when it comes to the supply chain process. This allows the company to achieve efficient unit economics and ensure low-cost launches in the market.

3. Team Leadership: The company is lead by veterans in space with experience from SpaceX, NASA, Air Force, Intel, and Broadcom. They are equipped with a team that understands scalability, space technology, and operational effectiveness.

⚠️Key Critical Risks

1. Competition: The company’s key competitor is SpaceX who can carry heavier payloads, dominates the satellite constellation market and poses similar reusable rocket technology. Additionally, with an attraction towards the “new space economy”, new players such as Astra, Virgin Orbit, and Relativity Space are entering the medium-lift rockets to feed the rising demand for constellation satellites.

2. Neutron Rocket Production: The expected launch for Neutron is 2024. The company will have to re-design the rocket to ensure that its first stage booster lands vertically in an ocean platform like SpaceX. This is different from how they currently retrieve the Electron Rocket. This can create challenges as rigorous testing is needed and with SpaceX being the only one to achieve this accomplishment.

3. Supply Chain: The space supply chain is very fragile. Any delays from customers that are building satellites to be launched will impact revenue for Rocket Lab.

🧬Team DNA and Vision

Key Leaders:

• Peter Beck, CEO, Founder, Chief Engineer – Peter is a visionary founder and engineer whose passion for building rockets stemmed from childhood. Prior he worked at Industrial Research focusing on smart materials, composites, and superconductors.

• Adam Spice, CFO, - Prior, Adam served as CFO of MaxLinear, helping scale the business from $70M to $421M and has 20 years of Finance experience. He will solidify the company’s ambition for growth and acquisitions.

• Vector Capital Team: The company has a 25-year track record with $3B of capital under management, 100+ tech company acquisitions.

Team Composition:  The company is 530 employees strong with approximately ~200 engineers (40%). The executive team and the engineering team are built with talent hailing from companies like SpaceX and NASA.

🤯Key Insights for Time Investors:

• Tess Hatch, Partner at Bessemer Ventures, highlights that when it comes to space companies there are two key indicators that identify success: launch vehicles and satellites. As an investor, you want to look at the number of launches and the number of satellites that it deployed to space. When it comes to satellites you want to look at how many assets are in orbit and the type of sensors that are equipped in the satellites.

• SpaceX is the first U.S. commercial company to lead the number of launches and satellite deployments in space. The second one to follow is Rocket Lab with 18 launches to space and 97 satellites deployed in orbit. Rocket Lab has not only proven technology, but they have backed it up with execution and efficiency.

• The company promises, launch on-demand services, frequent launches, tailored orbits, and the ability for the customer to control their schedule. They are separating themselves from the ride-sharing concept and as result, the customer can expect a $7M price tag.

• Unlike some of the other space SPACs, the company is generating revenue and has $2.2B in the pipeline from expected missions.

  • Awarded the NASA capstone mission to the moon in 2021 to support a moon-orbiting outpost.

  • Private mission to Venus to search for life

  • Mission to Mars to deliver a satellite that studies the atmosphere

• Rocket Lab also sees the demand for small satellites. To meet this, they are planning to create a mid-sized rocket with the capability to carry 220 satellites to space. This puts in a similar competitive pace with SpaceX.

• Overall, Rocket Lab has the infrastructure to conduct small, more frequent, and economically viable launches. The company is aiming to fully integrate across its entire supply chain and beyond launches offer a full package to customers involving satellites (currently the own 1 orbit) and other space components.

• However, as an investor, you should also understand the risks regarding the difficulty in operating in a high capital-intensive industry. The design of the Neutron rocket will be from scratch to ensure the vertical landing of the boosters like SpaceX. Currently, the company recovers its rockets from the sky using parachutes and helicopters to snatch them.

• The space supply chain is fragile and as result full of delays from reliable customers with substantial contracts. This can put financial pressure on Rocket Lab especially with the regulatory obligations that come from being a public company.

• The space market is also attracting a series of other companies that will be operating in the small to mid-size launch sector. Astra is one that comes to mind in which they have been marketing a “Model-T” type production of rockets and launch pads that could be produced within months.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Rocket Lab Investor Presentation

• Rocket Lab Techcrunch

• Rocket Lab Space News - Neutron Rocket

• Rocket Lab Venture Capital Investment in Space - Seeking Alpha

• Rocket Lab could be SpaceX biggest rival - MIT Technology Review

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe now

“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

As we dive deeper into the Space Industry, I wanted to focus on the series of SPACs that have monopolized all of our interests. Among the many that have announced going public, there are a few interesting companies that stick out. Today we are going to break down the third-largest satellite provider in the world in terms of satellites in orbit. The company is called Spire Global ($NSH - $SPIR) and it is planning to go public this year at a valuation of $1.6B.

🔴Download Equity Breakdown Report

📖What is Spire Global?

Spire is a Space-as-a-Service company that operates satellites and delivers data and predictive analytics to customers. The company collects space-based data using a proprietary constellation of nanosatellites. The company utilizes the power of data to deliver insights across the following categories:

• Maritime Activity: global vessel tracking and monitoring, and high traffic zones for route optimization

• Global weather coverage and forecasts

• Aviation Activity: tracking and monitoring of flight operations

• Space Software Services: deployment of software to existing satellites, host satellites on a full integrated space, ground, and web platform, and manufacturing of cost-effective nanosatellites

https://www.youtube.com/watch?v=IDFxnVpZi-g

📈Market Opportunity

The $368B space economy is estimated to grow to $1T by 2040. The company believes that it can dominate three subsectors within the overall market:

1. Space-Based Data and Analytics (weather, aviation, maritime): $52B by 2025E

2. Orbital Services: $39B by 2025E

3. Weather Forecast: $180B by 2025E

The company believes that they are in a position to pioneer the space-as-a-service model and help solve some of the planet’s problems.

👨‍💻What are the Strategic Resources?

Product Portfolio:  As of January 2021, the company has 141 nanosatellites launched and covering the earth.

1. Spire LEMUR (low-earth multiuse receivers) Constellation and Ground Stations:

   • The company’s in-house nanosat design and assembly cost $30k/month and takes about 3-6 months to be launch-ready (~$180K total cost). This is about 0.1% of a traditional satellite ($180M)

   • Proprietary ground station network (~30 ground stations) that enhance the collection of data, provides operational resiliency and security

   • 550+ software updates deployed to the fleet

   • 245M automatics identification system messages (maritime), 415M automatic dependent surveillance-broadcast messages (aviation), and 11k radio occultation profiles (weather)

2. Spire Data Platforms:

   • The company can cleanse, standardize, and fuse data collected from ground stations to provide predictive analytics. The company claims to have 99.9% system uptime.

3. SpireSight Software Analytics

   • Customers receive the refined data seamlessly through simple APIs. Customers receive 1 terabyte of data per day.

Developing Resources:

Spire Global has 24 registered patents and 20 licenses to operate commercially with assets in space and in the ground. The company continues to expand its R&D from $13M in 2018 to $21M in 2020 representing about 75% of its revenue.

Customer Landscape + Partnerships:

The company delivers proprietary data and insights to 150+ product customers.

• Currently, they have annual recurring revenue of $235K per customer, a net revenue retention rate of 145%, and less than seven months of payback customer acquisition cost.

• Top customers include NASA, Aerion Supersonic, VesselBot, Oldendroff, Australian Office of National Intelligence.

  • More recently Spire entered into a collaboration agreement with Findus Venture to launch satellites for debris detection rates and climate change patterns.

• To launch the satellites the company partners with every single launch services company (SpaceX, Rocket Lab, etc).

Business Model and Growth Strategies:

Unlike traditional space companies, Spire Global executes a subscription-based model for its customers with monthly payments. The company has not specified the specific subscription amount it charges its customers and whether the customer pays for a specific period upfront versus a flexible month-to-month model. However, the average contract length is ~21 months.

The company can achieve a subscription model because they have ensured that the cost of each satellite is 0.1% of a traditional satellite and the cost to launch is 1/100th of a traditional launch due to the strategy of sharing payloads.

• 2020A Revenue: $28M | 2025E Revenue: $913M – 139% CAGR

• 2020A ARR: $36M | 2025E ARR: $1.2B

• 2020A Gross Profit: $18M (63%) | 2025E Gross Profit: $830M (91%) – 160% CAGR

• 2020A EBITDA: -$18M (-63%) | 2025E EBITDA: $425M (47%)

• 2020A FCF: $-29M | 2025E FCF: $357M (84% of EBITDA)

• Enterprise Value: $1.2B

  • 67% company ownership post-merger

The company plans to continue accelerating growth through the following initiatives:

1. Merger: The company will go public through a SPAC with NavSight Holdings. The company will be fueled with $408M in cash to continue market share expansion in the commercial satellite and analytics space.

2. Market Capture: Expand external product, sales, and marketing team to equip sales operations

3. Geographic Expansion: Focus resources to increase presence in Latin America and the Middle East

4. Acquisitions: Acquire third party data provides to enrich the library of data collected

5. Proprietary Data Set Development: Significantly expand DoD and Intel community footprint

💪Key Strategic Moats

1. Technology: The company has built satellites that are cost-effective, high quality, rapidly produced, and with the ability to deliver proprietary data. The company has then closed the circle to provide predictive analytics to the end customer (optimization of routes of airplanes/ships, the expected weather around the globe). The company can deliver 20 satellites into orbit for global coverage in under 12 months at a cost of $12M.

2. Vertical Integration: The company designs 95% of the components of its satellites and produces 100% in-house. The company also controls the ground equipment and its entire data analytics platform/solutions. The entire supply chain except for the launch into space is controlled.

3. Scale: Spire can produce 10x the number of satellites than the next largest manufacturer. Satellites can be completed within 3-6 months and the company aims to launch at least 20+ a year. The company owns 5% of the earth’s orbit based on the number of satellites.

⚠️Key Critical Risks

1. Competition: While the company has been around since 2012, there are larger competitors armed with more capital. SpaceX and Planet Labs are private competitors who have a higher share of the orbital space. It is inevitable that the company’s high margin and low-cost assets will attract competition in the space.

2. Product Waste: While the industry is young, the earth’s orbit is about to be congested with ~23k satellites by 2040. These satellites will surely create “space junk” that will require maintenance and costs. Companies will be held responsible to manage the waste thus incurring unforeseen costs and profit reduction. Currently, 60% of the satellites are space junk.

3. Subscription Model: Customer churn can certainly accelerate as satellite providers compete on price. With more low-cost satellites entering the market the company must be able to adapt to customers’ dynamic needs and ensure competitive value propositions.

🧬Team DNA and Vision

Key Leaders:

• Peter Platzer, CEO, Co-Founder – Prior, Pete was a Senior Portfolio Manager for Vegasoul Capital, trading commodities and global futures. He also led quant teams for Deutsche Bank and the Rohatyn Group. From a space perspective, he has focused on space commercialization and nanosatellites where he holds a series of patents.

• Jeroen Cappaert, CTO, Co-Founder – Prior, Jeroen was the Lead Payload & Avionics engineer. He specialized in spacecraft avionics and payload design and low-thrust astrodynamics in NASA.

• Joel Spark, VP Space Systems, Co-Founder – Prior, Joel has led the management of the Spire space program as Lead Engineer. He ultimately designed, built, and operated the companies first satellites.

Team Composition: The company is composed of a highly technical workforce amounting to 140 engineers and scientists. This represents about 56% of the workforce highlighting strong domain expertise in space and satellite technology.

🤯Key Insights for Time Investors:

• The massive data collected from satellites will be a competitive advantage as the space economy continues to grow. Spire Global is the third-largest satellite company in terms of satellites in orbit. SpaceX leads the pack followed by Planet Labs. In this market, the winner will be the one that contains the most data to deliver the insights necessary for customers. With 100+ satellites and 5 terabytes of data processed every day, Spire Global is certainly in a position to continue growth and market expansion.

• Most of its supply chain except for the launch portion is in control by Spire. This is powerful because as the company continues to enhance its space infrastructure, it will see a dramatic drop in CAPEX requirements. Ultimately, this allows Spire to expand and preserve SAAS-like margins. By 2025 the company is expected to high 91% margins.

• While traditional satellites are time-sensitive and capital intensive, Spire has built out proprietary nanosatellites that deliver quality proprietary data and are also cost-effective. This gives the company an advantage as they continue to launch ~20 satellites per year to further their mission.

• Spire has been around since 2012 and supported by some well-respected investment teams (Bessemer Venture Partners, RRE Ventures, Seraphim Capital, Qualcomm, and Mitsui & Co.) attracting $180 million of capital to date. Unlike many of the space SPACs, the company has a working subscription software-based business model with a 5% share of the orbital space around the earth.

• It is important to note however that SpaceX does lead the pack in the industry. Other large players with growing space divisions will also be attracted to the concept of nanosatellites and high margins. Expect increased competition as funding continues to accelerate in the space economy.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Investor Presentation March 2021

• Spire Global Joins Rush to the Public Markets - SpaceNews

• Visualizing all of Earth’s Satellites

• Optimistic Article by Seeking Alpha

• Spire Global Case Studies

• Satellite Operator going public through SPAC - TechCrunch

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe now

“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

I was personally shocked at how much space impacted our daily lives. Our quality of life is convenient and well thanks to the infrastructure built-in space. Space-based communications, navigation, weather, remote sensing services, are all benefits. Every time we wake up and look at the weather, use our GPS, swipe our credit cards, and etc…we need to pause and look up and think about space. Today we will being our space journey by breaking down Maxar Technologies, "MAXR”, whose high-resolution images from space of the Suez Canal blockage by EverGreen were globally shared.

🔴Download Equity Breakdown Report

📖What is Maxar Technologies?

The pure-play space company is a combination of four companies that play a critical role on earth and space. Within this ecosystem, the company builds satellites, provides commercial radar, delivers commercial imagery with impeccable quality and capabilities, and provides geospatial data and analytics to the military, government agencies, and key commercial stakeholders. Maxar is a global player with ~4,300 employees, 20 strategic locations around the globe, and a strong partner with long-lasting relationships with key governments and commercial customers.

The company is divided into two core components:

Space Infrastructure: This segment includes space robotics, satellite hardware, satellite integration, system integration.

• Communications and Earth observation satellites

• Deep space exploration

• On-orbit vehicles to service satellites

• Robotics for space exploration and operations

Earth Intelligence: This segment includes the industry-leading geospatial data and analytics, analytics platform, and data services such as insights for military and commercial use.

• Data for military intelligence purposes

• Sensor and ground system that deliver geographical data

• High-resolution, and electro-optical satellite imagery (Ever Green, Suez Canal blockage)

• AI and Machine Learning at a global scale

📈Market Opportunity

The ~$368B space economy can be broken out into three categories:

• $95B non-satellite industry which involves government space budgets, commercial human spaceflight, etc.

• $123B satellite services spanning from telecommunications, remote sensing, and science-related activities

• $132B ground equipment which involves network equipment and consumer products (radio, GPS)

• $13B satellite manufacturing

• $4.9B launch industry

Maxar believes that the earth observation market which encompasses satellite services, ground equipment, will be highly impacted by the need for data, solutions, and insights. AI-enabled data analytics is a common phrase that is consistent in Maxar’s communication. Sectors such as defense & intelligence, energy & natural resources, industrials, agriculture, finance, insurance, news and media, and weather are common beneficiaries of this market. Ultimately the quality of resolutions, accuracy, frequency, and delivery of the data will be a competitive selling point.

Additionally, the company believes satellite manufacturing will continue to evolve. Low earth orbit constellation satellites which are cheaper to launch and have less latency will expand in share. Large geostationary satellite technology will also advance which further the benefits of more coverage, enhanced telecom capacity, and advanced imagery. Overall, we can expect to see a combination of 25,000 active satellites in orbit from 2,600 satellites today.

The industry is expected to grow to $1 trillion by 2040 (CAGR 5%) driven by reusable rockets and more advanced lower-cost, high bandwidth satellites.

👨‍💻What are the Strategic Resources?

Product Portfolio: Designed and built 285 spacecraft with a combined service of 2,750 years of orbit service.

1. 90 (1300-class platform) geostationary satellites in service that are placed 22,336 miles out in space directly above the Earth’s equator. The satellite is in place and takes a full 24 hours to circle the Earth.

   • The 1300 spacecraft is the world’s most popular platform of satellites due to cost and scalability

   • Earth observation satellites, direct broadcast satellites, two-way broadband satellites, digital audio radio satellites, digital multimedia satellites, meteorological satellites

   • In 2005, the company launched the first high throughput satellites that delivered applications such as consumer broadband and 4G/5G cellular backhaul.       

   • The average cost for deploying a GEO satellite can range from $150-$200 million based on data from Euroconsult, an advisor specializing in satellite manufacturing

2. The company has operated a constellation of four satellites: GeoEye-1, WorldView-1, WorldView-2 and WorldView-3 that have a collection capacity of 1.4 billion square kilometers yearly

3. World View Legion LEO constellation satellites (6) will be launched this year.

   • This is a new generation of high-resolution earth imaging constellation satellites for government and commercial applications.

   • This will triple the companies high-resolution 37-year coverage and imaging capacity. Many areas will be captured 15 times in a single day to ensure timely and accurate data feeds for customers.

   • It will also benefit autonomous technology applications.

4. Robotics technologies are being embedded to create self-service spacecraft that can inspect, repair, tow, and fuel other spacecraft. The company wants to avoid losing high Capex assets or as they metaphorically put it “we don’t want to throw away a brand-new Ferrari after one tank of gas!”

   • The company has built robotic arms for five successful missions NASA Mars missions, including the Spirit, Opportunity, and Curiosity rovers as well as the Phoenix and Insight landers. The famous Perseverance rover is the sixth Maxar robotic arm.

   • OSAM-1 is being built in partnership with NASA, which will be a new generation of satellite spacecraft with robotic arms that can conduct “space surgery” on other satellites.

   • SPIDER is also being built which will signify on-orbit assembly of satellites with built-in robotic applications. This will reduce the demand to launch a fully assembled satellite spacecraft in the future since assembly can occur in space.

   • SAMPLR will be the first robotic arm to the moon in 50 years as part of NASA’s Artemis program along with SpaceX. The mission will aim to send the first woman and the next man on the moon by 2024.

   • ImageLibrary is a collection of 125 petabytes of high-resolution imagery from satellites.

     • Provide critical and accurate data for military mission planning, crop management, oil and gas exploration, and infrastructure management.

     • Maxar offers subscription services such as SecureWatch— which provides customers with extensive imagery and geospatial intelligence platform and addresses a broad spectrum of uses.

     • The company provides regular updates of images to over 6,000 major cities around the world.

     • 3D mapping and modeling capabilities

Developing Resources:

Maxar Technologies holds 22 patents and 8 U.S. patent applications pending based on third-party sources. In 2020, the company spent $226 million and $22 million on Earth Intelligence and Space Infrastructure Capex. This represents about 15% of revenue. The company also received $93 million in tax credits for research and development activities and had an additional $15 million dedicated to pure research and development activities regarding new technologies in the space.

Customer Landscape + Partnerships:

Government

• U.S. government is the largest customer for Earth Intelligence segment. They drive around 72% of the revenue generated from the Earth Intelligence segment and 40% from the space infrastructure segment.

  • NASA Contracts for missions to the moon, asteroids, and MARS.

  • U.S. National Geospatial-Intelligence Agency (“NGA”) contract that delivers land cover classifications

  • U.S. Department of Homeland Security contract to develop an analytics system that tracks the behavior of vehicles in many strategic locations

  • Renewal of five key contracts with international defense and intelligence customers for access to the current satellite constellations amounting to $120 million.

  • U.S. Army Geospatial Center contract to deliver geospatial intelligence for tactical ground purposes.

  • U.S. Space Force contract to build out data processing applications

  • U.S. Army’s One World Terrain project to build out 3D products

Commercial players impact about 28% of the revenue from the Earth Intelligence Segment and about 60% from the Space Infrastructure segment of the business:

• Amazon, Google, Palantir, Uber, and GM are but a few customers.

Business Model and Growth Strategies:

Maxar’s revenue is highly dependent on multi-year contracts established with the U.S. Government, Civil Agencies, and commercial customers. Specifically for the Earth intelligence segment revenue is generated from the imagery and geospatial service contracts. As satellite capacity is made for the customer revenue is recognized for that period. Examples of revenue strategies are below:

• The EnhancedView Contract, a multi-year contract, from the U.S. Government is around ~$300million and has been extended to 2023.

• SecureWatch Program generates subscription revenue for access to high-resolution imagery for on-the-ground intelligence.

• Rapid Access Program which allows customers to access satellite constellations, while the company manages and owns the ground infrastructure

• DAP (Direct Access Program): The company sells ground system infrastructure to customers to allow them to download data and imagery from the constellation satellites Maxar manages.

As of 2020, Maxar generates 63% of the revenue from the Earth Intelligence segment and 37% from the Space Infrastructure segment.

• 2020A: Revenue: $1.7B | 2022E: Revenue: $1.8B – 3.0% CAGR

• $1.9 billion in backlog driven by new contracts with civil agencies involving new space missions.

• 2020E: EBITDA: $422M (24.5%) | 2022E: EBITDA: $541M (29.6%) – 13.2% CAGR

• 2020E: FCF: $-65M | 2023E: FCF: $325M

• Market Cap $2.7B | Enterprise Value: $5.4B

The company plans to continue accelerating growth through the following initiatives:

1. Acquisitions: In Q1 of 2020, the company finalized its acquisition of Vricon, a company that is a global leader in 3D data from satellites for defense and intelligence applications (military simulations, and precision-guided missiles).

2. Earth Intelligence Expansion: Leverage 3D data and 3D capabilities to expand relationships with U.S. government and commercial customers. This will be accelerated by the launch of the WorldView Legion constellations, Vricon acquisition, and data platforms that have AI/ML capabilities. Maxar needs to service the demand for geospatial intelligence data.

3. Space Infrastructure Expansion: Maxar will expand the manufacturing of LEO satellites that are more cost-effective for commercial purposes. They are also heavily investing in space robotics, solar electric propulsion, and spacecraft buses to support critical missions in the next three to five years with strategic partners such as NASA and SpaceX.

4. Commercial Markets: There is a high demand for autonomous applications, wireless network planning, voice and data communications, video distribution, broadband, and resource and logistics planning as the world becomes more digital. Maxar’s technology applications will focus on provided such services.

💪Key Strategic Moats

1. Technology: Satellite constellations that will deliver 30-cm capacity and will be able to get to any point on the planet. The company also has designed space robots for critical missions to the moon and Mars. Additionally, with their most recent acquisition, 3D mapping and elevation services will become a differentiator. To top it off, Maxar has over 125 petabytes of data collected over a 20-year history.

2. Team: The majority of the management team is composed of experienced leaders from DigitalGlobe, a company that built the industry largest library of high-resolution satellite imagery. There is a high demand for satellite-generated data and insights for military and commercial purposes. The team is operationally focused to ensure that the most profitable segments of the business in this case geospatial data and analytics have all the dedicated resources to grow.

3. State-Granted: The U.S. Government heavily depends on the Earth Intelligence services provided by Maxar. The EnhancedView program is a 20-year program that is utilized to support data and analytics for 400k users in the government and intelligence community. The company is also positioned well with defense strategy across cyber and space, missile defense, and autonomous systems.

4. Brand: The company has delivered over 60 years of innovation and reliability in space with 90 geostationary satellites, 285 spacecraft, and 3.5B square kilometers of earth imagery (~24x Earth’s total landmass).

⚠️Key Critical Risks

1. Competition: The company faces heavy competition with companies like the Boeing Company, Lockheed Martin Corporation, Northrop Grumman Corporation, and Thales S.A. which are much larger in terms of revenue and market value. The company needs to also ensure that they are leaders in the emergence of new remote imaging technologies or the continued demand of low-cost imaging satellites.

2. Operational Risks: Satellites are capital and time-intensive. Construction and launch delays, launch failures, and damages can severely impact revenue for months to come. In 2019, Maxar lost the WorldView-4 satellite impacting revenue.

3. Revenue Risk: Revenue from U.S. Government agencies is mainly generated from the EnhancedView Contract to provide image-tasking capabilities. Any lag in service could result in immediate termination of the contract.

4. Manufacturing Risk: Maxar has highlighted that they rely on a single vendor or a limited number of vendors to provide certain key products for manufacturing satellites. This reliance can put them at risk for pricing pressures as the demand for satellites increases with the expansion of the space economy. Additionally, aluminum and titanium are critical raw materials that are necessary for the productions of the spacecraft.

5. Debt Risk: The execution of revenue strategies such as launching the satellite constellations and the various services for government agencies require a lot of capital. As a result, the company has highlighted that they have a significant amount of debt amounting to $2.1B (4x EBITDA) as of 2020.

🧬Team DNA and Vision

Key Leaders:

• Daniel L. Jablonsky - Chairman and CEO: President of DigitalGlobe since October 2017, which offered high-resolution satellite imagery. Jablonsky has a strong academic and professional background in law and served in U.S. Navy as a surface warfare officer and nuclear engineer.

• Dr. Walter Scott – Chief Technology Officer: Previous founder and Chief Technology Officer of DigitalGlobe. He was responsible for the platform, business units, and space system acquisitions.  

• Tony Frazier – Global Field Operations: He currently leads business development and service delivery activities. Prior, served as President of Radiant Solutions, and General Manager of DigitalGlobe’s services business.

• Jeff Culwell - Chief Product Officer:  Prior served as DigitalGlobe’s SVP and Operations, delivering low latency imagery from direct access to satellites. His responsibility ensured satellite constellations, remote ground terminals, and customer installations.

• Paul Estey – Space Programs Delivery: His role ensures the creation of advanced satellites and spacecraft systems for customers. Estey has decades of experience in the space business since 1997 serving various engineering and leadership roles.

🤯Key Insights for Time Investors:

• The satellite consists of many small electronic, mechanical, and thermal systems that have to undergo a lot of tests and endure space-like conditions. A satellite takes about four years if it is new or about one to two years if it’s an existing satellite to manufacture or repair and prepare for launch. On launch day after years of work the fate of the satellite depends on an equivalent 4 million pounds of TNT and metaphorically speaking one button. Ultimately, the asset that is meant to generate revenue is very delicate and very risky.  

• The space economy is expanding and with many players entering the market, investors are looking for the next opportunities. While this is an intensive capital business the players that will ultimately succeed will have top engineering teams, strong relationships with the U.S. government and civil agencies, and the ability to build business models that generate revenue.

• To put this into perspective the U.S. Government and its agencies (National Security Space, Intelligence Agencies, NASA) have allocated a total budget of $101 billion for 2021. This represents about a third of the total space economy industry. As a result, while commercial use is expanding the relationships between the government and its agencies are critical for economical success.

• When highlighting the risks, Maxar during the year 2019 restructured their satellite service business to preserve and enhance it. The GEO satellites are very capital intensive and the failure of their WorldView-4 satellite drove additional financial risk. Ultimately with new leadership from their merger with DigitalGlobe in 2017, the company will focus on LEO constellation satellites. All eyes are on the launch of their new WorldView Legion constellations in 2021. This monumental step will be pivotal to the company’s success in the next years. With the large debt, the company has accumulated any failure at this point could be detrimental for the company and for investors.

• Ultimately, as the demand for data increases and launch costs decrease, Maxar needs to continue to be a leader in providing data with AI/ML capabilities towards strategic customers and ensure they are embracing leading technologies in their satellites.

• Additionally, the company is diversifying its revenues beyond earth intelligence and satellite manufacturing towards space robotics. They are key partners with important missions like NASA’s Artemis program to the moon, and NASA’s Perseverance Mars mission that happened earlier this year.

• As an investor, I would like to see Maxar Technologies diversify its revenue model to remove dependence from long-term contracts and build services that allow recurring subscriptions with the delivery of insightful data and the use of its space infrastructure products. As a $2 billion dollar market cap, the company has $25 billion in pipeline activity across these next five years. If the company can achieve its key milestone launch this year, preserve its dominance in satellite technology, data intelligence, and maintain critical strategic partnerships it could put the company on the right path.  

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Maxar Annual Report - 2020

• Maxar 2021 Investor Presentation

• Maxar Technology - “Is it Making Money in Space?” Article

• Satellite Industry Overview

• Maxar Worldview Legion Constellation Video

• Maxar Overview company video

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe now

“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

Coinbase ($COIN) will go public today on the NASDAQ through a direct listing. The company that is propelling a decentralized infrastructure with decentralized assets will let the market decide its value. In their S-1 filing, the company listed some pre-IPO share sales which also gives us a peak in terms of the demand of interest. In Q3 of 2020, they sold shares weighted at an average of $28.83, and then in March of 2021 that price went up to a weighted average of $343.58. Now with trading activity today and an outstanding share balance of 261.3 million the company’s shares oscillated between $381 at the open, peaking at $429 and ending up with a closing price of $328 resulting in a valuation of $86B.

To put this in perspective, Coinbase could potentially surpass the value of Goldman Sachs, an institution that has been around for 151 years.

Now as a profitable company and an arsenal of increasing revenue and cash, Coinbase will not need to raise any money and thus the shares will come internally. Below is a snapshot from my previous write-up that highlights some heavy hitters in terms of share ownership:

• Top Tier VCs: Andreesen Horowitz (15.8%) and Union Square Ventures (7.5%)

• Top Investors: Marc Andreesen (15.8%) | Frederick Ernest Ehrsam (9.5%)

• Brian Armstrong (CEO): (21.3%)

• As a group the executive leaders and directors: (58%)

Coinbase is the first large player in the space that gives you the seamless ability to access and own the crypto assets that are molding a decentralized digital world. This success will ignite entrepreneurs and attract even more competition. Regardless of the price the company ends today, this is a milestone that will now bring focus into blockchain technology, crypto assets (i.e Bitcoin, Ethereum, Cardano), and the supporting infrastructure required to build out this market.

💪Coinbase Q1 KPIs

Post their S-1 filing the company posted their Q1 results this year indicating strong performance:

With the rise in the price of Bitcoin and other additional crypto assets, Coinbase is benefiting from a 30% increase in users resulting in strong financial performance.

The company highlighted three scenarios forecasting their transacting users in which it derives the majority of its revenue based on some key drivers.

Ultimately, Coinbase’s performance in the short term will be dependent on Bitcoin’s price and transacting volume. But on the flip side, the company is positioned to set the foundation for the “cryptoeconomy”.

📈The impact of Bitcoin

The global crypto market is at $2.91 trillion with Bitcoin representing ~38% at $1.1 trillion. The price of Bitcoin has now hit ~$62.8k. Fundamentally, from a supply and demand point of view, we know that supply is capped at 21 million Bitcoin. Now this leaves the demand component. At the point in time based on macro conditions such as suspected inflation and concept of digital scarcity, the demand for Bitcoin as an asset for wealth protection is certainly increasing.

In a three part research series Yassine Elmandjra, cryptocurrency analyst from ARK Invest, and David Puell, cryptocurrency on-chain analyst, highlight some key conclusions for bitcoin based on some fundamental metrics/trends:

To measure the health of the Bitcoin Network they focus three concepts: monetary integrity, security, and usage.

• Monetary integrity provides investors at any point in time visibility in terms of the supply of Bitcoin. Using graph’s from glassnode, analytics platform, the circulating supply is ~18.6 million BTC. Additionally with each halving (three havings with the fourth one in 2024), the issuance of Bitcoin is cut in half. Ultimately, as the Bitcoin market cap increases supply is constrained.

  

• Bitcoin’s security is also another critical component adding to value. The hash rate, reveals the processing power miners utilize to secure the Bitcoin network and as the market cap of Bitcoin has increased the hashrate as exponentially increased as well.

• Usage is also the final component in the inital valuation of Bitcoin. It shows investors or users network activity, adoption, and economic activity. As of right now there are ~1 million active addresses. This number is highly dependent on the price of Bitcoin. Additionally, overtime the share of invidiuals holding less than 10 BTC has increased while those holding greater than 1,000 BTC has decreased.

  

  From an economic activity perspective, BTC has an average of ~250-300k transactions daily with a total transaction volume of ~600M since inception. To give you a comparison point, Visa has 65k transactions per second.

From these three components one can highlight that Bitcoin has strong features that justify its digital scarcity and its role in the class of assets that represets a preservation of wealth. You can see why now, Bitcoin is the market leader in terms of crypto assets and why it plays such an important role for Coinbase.

🤯Key Insights for Time Investors:

• Coinbase’s IPO is a critical milestone for the crypto world. The crypto market is at its infancy and Coinbase represents the stepping stone to a great market that is developing.

• Based on their Q1 results, Coinbase is in a strong position financially and in terms of market share realizing the fact that 90% of their customers to date have been acquired for free (organically). They will leverage their brand equity and the services they provide to continue maintaing their position as a market leader.

• As the company enters the public markets, competition from existing exchanges as well up-coming crypto players will create revenue pressure. Coinbase derives majority of revenues from transaction fees in their platform and is currently one of the highest in market at around ~0.5%. This will certainly challenge their top-line if Coinbase is slow to diversity its revenue streams.

• The company at its current structure is also highly sensitive towards Bitcoin’s market volatility. Because of the appreciation in Bitcoin price, users have gravitated to Coinbase to gain an entry point. A potentail price adjustment can result in an opposite effect.

• Security is also an additional risk. Potential hack and the loss of crypto assets will inevitably create a loss of brand equity.

• Brian Armstrong, CEO of Coinbase quoted on CNBC today “We are the first Fintech that is vertically integrated. We start from the customer relationship and all the way down to integration with the underlying rails {financial system framework] themselves. As blockchains scale, we will build on the new rails and create a new type of company: a crypto company.” This will bring new waves of companies in the crypto economy that will ultimately spawn greater opportunities for investors.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Coinbase Q1 2021 SEC Filing

• Coinbase S-1 SEC Filing

• Coinbase Reference Price - CNBC

• Coinbase CEO Interview with Squawk Box - CNBC

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe now

“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

Today we are beginning our passage to understand the SPACE industry and as such, I think we can start off with the opening theme song from a childhood show…“Five, four, three, two, one…rangers in space. Set controls to outer space now.” Well, I’ll stop there before it’s too late.

When anything remote to Space comes up, I just enter another world out of excitement. There is so much to learn especially as the industry evolves from a niche defense government-sponsored sector to a thriving global economic industry fueled by new advanced technologies and private companies.

Space is now a central focus to many long-term investors. This is perfect as we begin our learning process this month by breaking down the new Space ETF ($ARKX) relative to some existing ones such as the Procure Space ETF (UFO) and the SPDR ETF (ROKT).

🔴Download Equity Breakdown Report

📖What is ARKX?

The ARK Space Exploration & Innovation Fund is created to give investors exposure to companies spearheading the use of reusable rockets, technologies in orbital and suborbital aerospace, aerial drones, 3D printing, and enabling technologies. The fund is composed of 38 individuals companies and ARK’s 3D printing ETF ($PRNT) as their second-largest holding.

📈Market Opportunity

Currently today, the space industry can be valued at ~$400 billion with projections to hit ~$1 trillion by 2040. Now the industry can be divided into three sectors: products & services, infrastructure, and government.

• Products and Services: telecommunications, GPS, observation, sensing, & monitoring (weather tracking)

• Infrastructure: Space vehicles (rockets, shuttles), ground & space stations, terminals, and receivers (satellites)

• Government: geopolitical monitoring, defense (missile tracking), government agencies (NASA)

The space economy is prime to experience greater growth driven by sustained investment, technological advances, and the need for resource exploration and extraction. To really get an idea of the amount of interest from investors in the industry, Space Capital, an early-stage venture capital firm exclusively focused on space technologies, reported that since 2011 $177 billion of cumulative equity has been invested across 1,343 companies. The majority of these investments are coming from the U.S. (47%) and China (29%).

From ARK’s perspective, the space industry is divided between three core ideas: global connectivity, hypersonic travel, and multi-planetary space travel. Each of these big ideas focuses on technologies that can drastically transform economic expansion. Ark believes that in the near time connectivity and hypersonic travel will deliver great opportunities.

Currently, half of the world’s population (3.7 billion) do not have internet access. In the U.S., more than 19 million households have no internet connection and 157 million do not have access to broadband speed. To tackle this problem, more satellites are needed in the lower orbit of our plant. This can only be achieved by ensuring launch costs are economically feasible to meet the rate of demand. With reusable rockets, companies are taking advantage of the drastic drop in costs and are launching more frequently in low earth orbit.

As of 2020, there are ~2.6k active satellites in orbit and ARK estimates that in the next coming years ~25k actives satellites are planned to be in orbit. As more people are connected to the digital world, ARK estimates that in the next five years the market can be valued at $10 billion annually in the U.S. and $40 billion annually across the globe. If you also include the expansion to all devices of the internet of things and additional space services, ARK estimates $100 billion annually.

Simultaneously, global economic expansion requires efficient commercial travel. Hypersonic travel will be essential for point-to-point connections. This access will be economically appealing towards business travel and high net worth individuals. ARK estimates that ~2.7 million passengers will be willing to pay $100k to save 13 hours of international travel resulting in a $270 billion market annually.

🧬ETF DNA and Vision

ARK’s Space ETF has attracted over ~$542 million in inflow since its launch on March 30th. Based on an analysis from Seeking Alpha, the average ETF usually takes three years to achieve $100 million. This is astounding and truly reveals the brand equity that ARK has built with investors during these past two years. At the same time, ARK has also received some negative feedback from some of the positions that do not traditionally fall under the “space theme”. Now excluding the 3D Printing ETF selection in ARKX, the top 10 holdings are identified below:

• Trimble Inc. ($TRMB) | Enterprise Value: $21.6B | Electronic Equipment Instruments and Components

  • The company started as a GPS company and now offers full technology solutions for positioning, modeling, connectivity, and data analytics across agriculture, geospatial, construction, civil engineering, forestry, and rail.

• Kratos Defense & Security Solutions Inc. ($KTOS) | Enterprise Value: $3.5B | Aerospace and Defense

  • Defense company that delivers microwave electronic products, space, training and cybersecurity/ warfare, satellite communications, C5ISR/ modular systems, turbine technologies, and defense and rocket support services.

• L3Harris Technologies Inc. ($LHX) | Enterprise Value: $49.3B | Aerospace and Defense

  • The company delivers mission-critical solutions ranging from pace payloads, sensors, and full-mission solutions; classified intelligence and cyber defense solutions; mission avionics; and electronic warfare systems.  Satellites, defense satellite imaging, and weather satellite imaging are some initial functions.

• JD.com Inc. ($JD) | Enterprise Value: $115.0B | Internet and Direct Marketing Retail

  • The e-commerce company out of China will need precise data for its customers as the channel grows. The quality of data, such as the location of people or their daily movements in their environment, will be heavily dependent on satellites.

• Iridium Communications Inc. ($IRDM) | Enterprise Value: $7.0B | Diversified Telecommunication Services

  • The telecommunication company offers voice and data connectivity through a constellation of 66 crosslinked LEO satellites.

• Lockheed Martin Corporation ($LMT) | Enterprise Value: $117.7B | Aerospace and Defense

  • The company is heavily involved in defense and national security space offering services and assets in aeronautics, missiles and fire control, mission systems, and space. The company has over 100 years of aerospace experience.

• Komatsu Ltd. ($6301) | Enterprise Value: $37.2B | Machinery

  • A Japanese company that manufactures large construction, mining, forestry, and military vehicles/equipment. The use of satellite data will help guide autonomous equipment.

• Thales S.A. ($HO) | Enterprise Value: $20.4B | Aerospace and Defense

  • Aerospace and defense conglomerate that offers communications, command, and control systems. They supply orbital infrastructure equipment to the International Space Station and are also in the business of building satellite constellations, and unmanned robots for space exploration.

• NVIDIA Corporation ($NVDA) | Enterprise Value: $351.2B | Semiconductors and Semiconductor Equipment

  • The company operates in graphics, compute and networking, and rapidly expanding in AI. The company’s embedded GPUs can be applied to a multitude of space-based applications. Their computing platforms are famously known for their contributions to artificial intelligence and data mining.

• The Boeing Company ($BA) | Enterprise Value: $188.4B | Aerospace and Defense

  • Boeing is also an incumbent defense conglomerate that builds airplanes, rockets, satellites, telecommunications equipment, and missiles worldwide. They are focused on deep space exploration as well as offering advanced space and communications systems for military, commercial and scientific uses.

From an industry breakdown, 66% of the mix is concentrated in Aerospace and Defense, Internet and Direct Marketing Retail, Electronic Equipment Instruments, and Semiconductors. Similarly, 75% of their portfolio is built by mega (>$100 billion) and large (>$10 billion) market cap companies in the industry. ARK is placing their calculated bets on industry leaders that have been involved in the space industry directly and that benefit from space technologies on Earth.

Cathie has emphasized when it comes to space it sometimes takes big companies to fuel big ideas. Interestingly some of these large and mega-cap companies are implementing a cohesive strategy that spans beyond rocket production and technology and also focuses on space communications and drone technology. With low costs in satellite technology, low-orbital space infrastructure can scale supporting a multitude of businesses on earth.

Now there are some unique picks here that at first glance do not connect directly with the space industry. Amazon, Google, and Netflix are three mega-cap companies that stick out. Amazon Web Services launched a new unit called Aerospace and satellite solutions. Projects such as the satellite connection service called AWS Ground Station, and the satellite internet venture called Project Kuiper reveals their interest in using space technologies to enhance connectivity. Google is also utilizing its computing power in the cloud and AI to support space projects regarding imaging and mapping. Now Netflix is a unique outlier. When you think of streaming you should also think of the high demand for broadband. Entertainment is one of the tops uses for broadband. More satellites in low orbit mean more efficient broadband and access to streaming services across populations that had no internet connectivity. Also as cars become autonomous and internet access available across the globe, Netflix will benefit.

Surprisingly, Virgin Galactic the first public pure-play space company did not make it on the top 10 list for ARK. The company is famously known for leading the charge on commercializing space tourism. In an interview, Cathie Wood mentioned that beyond internet connectivity, they view hypersonic travel as another additional opportunity. At the moment, Virgin Galactic has mentioned hypersonic travel but has not identified any specific long-term plans to operate in the space, thus making them holding #20 on the ARKX fund. With their space shuttles and assets, the company is well-positioned to make some breakthroughs if they can successfully accomplish their launch targets in the next couple of months.

On the other hand, there are 9 pure-play SPACs that have announced mergers this year specifically focused on space. Companies like Rocket Lab, Black Sky, and Momentus Space are all jumping in the action. When it comes to SPACs, ARK has decided to ignore all of the pure-plays with the exception of three SPACs that benefit indirectly from space technologies:

• Workhorse Group ($WKHS) |

  • EV Company that produces last-mile delivery vehicles. They will need satellite technology to track their vehicles and optimize their performance.

• Atlas Crest Investment ($ACIC)

  • The SPAC is merging with air taxi startup Archer Aviation in a $3.8 billion deal. The vehicles aim to be autonomous thus requiring an air data system, radar and laser altimeter, and other technologies supported by low orbit space infrastructure.

• Jaws Spitfire Acquisition ($SPFR)

  • The SPAC is merging with 3D-printing company Velo3D, valued at $1.6 billion. Velo3D is known for producing components for space rockets, jet engines, fuel delivery systems, and energy production. SpaceX is one of their most recent clients.

A common theme one will notice across ARK’s space ETF is that they believe mobile connectivity, 3D printing, robotics, sensors, artificial intelligence, and rocket technologies will all converge together to deliver the $1 trillion market.

⚠️ETF Competition

When comparing other ETFs in the space nothing comes close to the AUM that ARKX has accumulated in the past week and a half. However, there are some formidable players that have some similarities to ARKX and some stark differences as well. The UFO Procure SPACE ETF is the first ETF that tracks the S-Network Space Index, which is concentrated on companies that have significant space-related activities. The fund is composed of 33 positions and has an AUM of $136 million. The top 10 positions for UFO are as follows:

• Orbcomm Inc ($ORBC) | Enterprise Value: $1.1B | Diversified Telecommunication Services

• Trimble Inc ($TRMB) | Enterprise Value: $21.6B | Electronic Equipment Instruments and Components

• Garmin LTD ($GRMN) | Enterprise Value: $23.1B | Household Durables

• Dish Network ($DISH) | Enterprise Value: $32.3B | Media

• Eutelsat Communica ($ETL) | Enterprise Value: $5.6B | Media

• Sirius XM Holdings ($SIRI) | Enterprise Value: $35.0B | Media

• SES SA ($SESG) | Enterprise Value: $7.1B | Media

• Iridium Communications Inc ($IRDM) | Enterprise Value: $7.0B | Diversified Telecommunication Services

• Sky Perfect Jsat H ($9412) | Enterprise Value: $1.5B | Media

• Weathernews Inc ($4825) | Enterprise Value: $464M | Professional Services

Based on the fund build, UFO has 82.8% of its market cap in Media, Aerospace and Defense, Diversified Telecommunications Services, and Communications Equipment. The fund is also more heavily concentrated in medium and large-cap companies ranging from $2B - $10B. Based on their top picks you can vividly see that the team is heavily placing their bets on satellite-based consumer products, satellite manufacturing, space technology hardware, and space-based imagery and intelligent services.

Another competitor would be ROKT SPDR S&P Kensho Final Frontiers ETF, which runs $24M in AUM and holds 30 positions. This fund also has some similarities to both ARKX and UFO but more concentrated in Aerospace and Defense with Maxar Technologies ($MAXR) and Aerojet Rocketdyne Holdings ($AJRD) as their top two holdings.

Between these three funds, there are some overlaps that highlight common strategies and confidence in terms of the companies role in the space industry. Trimble, L3Harris technologies, and Iridium are represented across all three funds. This signifies the importance of satellite technologies, GPS, and communication devices that are essential for industries on Earth.

🤯Key Insights for Time Investors:

• It is important to understand that space investments are highly capital-intensive investments that will take years to see business models come to fruition. However, with that said companies like SpaceX and the allure of deep space travel have sparked the imagination of ordinary citizens and investors. Since 2011 $177 billion of cumulative equity has been invested across 1,343 companies. In Q4 2020, $5.7 billion was invested across 80 companies.

• As an investor, the greatest reward within this decade will involve companies that operate in satellite technologies due to the dropping costs in rocket launches. Additionally, companies on earth that will benefit from greater connectivity will also be great investment avenues to research.

• When it comes to space, ARK believes that technologies will converge supporting accelerating growth opportunities. Automation and artificial intelligence will play a significant in space-related activities that will impact industries on Earth such as the agricultural industry and construction industries.

• In an article from Michael Sheetz, Space Reporter, he highlights a comment from CEO Chad Anderson that states, “Space is the vantage point that allows us to do business.” “It’s what links our financial markets, shipping lanes — the global economy as it exists today would not exist without space.” http://cnb.cx/2NyWvki

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Cathie Wood Interview for ARKX

• ARKX Analysis - Seeking Alpha

• ARK Invest Video about the opportunity in Space

• ARKX SPACE ETF

• UFO SPACE ETF

• ROKT FINAL FRONTIERS ETF

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe now

“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

The modern world has experienced vast prosperities and knowledge accumulation relative to our ancestors in the recent century. This achievement can be summarized by one word: innovation! Matt Ridley, journalist, and author of How Innovation Works, claims that innovation is the most important fact about the modern world, but the least well understood. Today we will summarize ARK’s Big Ideas report for 2021 that gives us a framework on how to understand the impact of innovation in the coming decade.

🔴Download Equity Breakdown Report

📖Why is ARK investing in disruptive technologies?

Historically, innovations leading to technologies such as the steam engine, electricity, internal combustion engine, computers, and the internet were transformative to humans globally. They lead to new industries and further innovation that ultimately resulted in great economic expansion.

As investors, we must embrace the power of innovation and attempt to understand what technologies are next in line to transform society. To tackle this idea, we will focus on research conducted by Cathie Wood and the ARK team whose thesis is based on the effects of innovation. In their white paper, ARK believes that these next 10 years will be viewed by history as an era that experienced significant disruptive innovations. The five key technology platforms in their research are artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology. Before we understand the impact of these technologies it is important to get some quick summaries of what they are designed to deliver:

• Artificial Intelligence: Learning systems that use data, automate knowledge work, and accelerate the infiltration of technologies to solve complex problems in society. AI will transform all sectors in the economy, especially the ones that have been resistant to complete digital change such as healthcare and financial services.

• DNA Sequencing: The cost to map the whole human genome has fallen drastically. This will spark new innovations in healthcare such as precision medicine, diagnostic testing, preventative cures of rare diseases, and treatments for the longevity of life.

• Robotics: With advanced software, sensors, and new inventions in critical hardware robots will assist humans across all aspects of life. Productivity and lower unit costs will replace repetitive laborious tasks with more meaningful work for humans.

• Energy Storage: The supply of electricity will be transformed with the declining costs of lithium-ion batteries and new innovations such as solid-state batteries. Energy will need to be dispersed more efficiently in a profitable manner to meet society’s demands across electric vehicles, micro-mobility, and clean energy. Across many sectors and more particularly the mobility sectors, infrastructure to support the “electrification” movement will be essential.

• Blockchain Technology: Open-source protocols that verify proof of ownership and ensure digital scarcity will penetrate financial services and remove friction imposed by legacy systems. When it comes to access to capital the world will become more liquid.

All these technologies will deliver cost declines, impact diverse industries globally, and foster additional innovations. Ultimately, the platforms will create similar transformation effects in a society like the steam engine that sparked the industrial revolution, electricity, or the internet. In the next ten to fifteen years, the five technology platforms will expand from less than $6 trillion to $50 trillion in value and wealth creation globally. This massive expansion is unprecedented.

What are ARK’s Big Ideas for 2021?

To understand these platforms in a little more depth, ARK has released their Big Ideas for this year which highlights the latest developments in innovation and foundation for investors to understand where to seek out wealth-generating opportunities.

1.Deep Learning: This is a form of AI in which companies can use data to write software.

• Conversation Computers, Self-Driving Cars, Consumer Apps (TikTok)

• Hardware and software costs are declining but the cost of AI training models will increase 100x to $100 million by 2025 (GPT-3, AlphaFold 2)

• OpenAI’s GPT-3 is the first artificial intelligence to understand language

Market Value: $30 trillion from $2 trillion resulting in 17% CAGR

• More economic value than the internet

2.Re-invention of the data center: Cheaper and more powerful processors will be dominant

• ARM/RISC-V processors will displace Intel’s x86 architecture resulting in 71% market share by 2030.

• 82% of developer PCs (Microsoft and Apple) will be powered by ARM

• Accelerators, dominated by GPUs will be the dominant processors in data centers

Market Value: $19 billion in CPU revenue, $100 billion in Server revenue, $41 billion in Accelerator (GPUs) revenue

3.Virtual Worlds: Think of video games, augmented reality, and virtual reality

• Revenue from in-game virtual good purchases has increased from 20% to 75%

• AR tools from Snapchat, Facebook, and Apple could scale to $130 billion annually

• VR needs to achieve complete human immersion at a cost like PCs to gain adoption by 2030

Market Value:

• Global gaming will compound 16% in the next five years and become $365 billion by 2025.

• AR and VR will hit $28 billion by 2025.

4.Digital Wallets: Traditional banking systems will be challenged by applications such as Venmo, PayPal, and Cash App. Digital wallets will become a central element towards commerce-related activities

• In China, mobile payments are 2.5x GDP

• In seven years, Cash App and PayPal have 60 million active users reaching the same amount of J.P. Morgan’s deposit account holders

• Traditional banks spend $1,000 to acquire a customer while digital wallets spend $20 due to peer-to-peer environments

Market Value: With 230 million estimated users, ARK predicts a value of $4.6 trillion by 2025

5.Bitcoin’s Fundamentals + Institutional Involvement: Bitcoin is emerging as a store of value monetary system in the digital world

• As of November 2020, 60% of Bitcoins supply is held by owners instead of traded. The market is long-term focused

• Financial institutions and companies such as Tesla have now placed Bitcoin in their personal treasuries and consider it a long-term wealth strategy. This has now opened the gates for more financial innovation through cryptocurrencies like Ethereum.

• Institution allocation between 2.5% and 6.5% could impact bitcoin’s price to reach between $200k to $500k

Market Value: Currently, the bitcoin market is valued at $1 trillion with the ability to exceed the golds market cap of ~$10 trillion

6.Electric Vehicles: Electric vehicles are becoming increasingly affordable and with battery technology achieving performance and scalability.

• Electric vehicles have been growing at 33% in sales in 2020 from 2019

• Battery costs have fallen by 28%

• The total cost of ownership is comparable to traditional (internal combustion engine) vehicles

Market Value: Ark estimates that vehicle sales can achieve 82% CAGR resulting in 40 million in unit sales by 2025. If one assumes a traditional price of around $25k the EV industry will be valued at ~$1 trillion.

7.Automation: The integration of robots across industries will play an impactful role towards productivity and also more value-based job creation

• Ark estimates that robots will accelerate from 20 robots per 10k employees to 180 robots per 10k employees

• Higher wages, lower prices, higher margins, and higher investments will be the result of this expansion

• Unpaid labor will also decrease and when labor share declines operating margins will double more than 20%

Market Value: 5% or $1.2 trillion can be added to U.S. GDP during the next five years

8.Autonomous Ride-Hailing: This opens massive opportunities for efficient transportation across all sectors on the road and air. Consumers will no longer need to own vehicles and can save time to be more productive in other activities

• Since 1934 the cost per mile has remained stable at $0.70. By 2025 with autonomous driving, it can drop to $0.25.

• Autonomous driving could result in 50% margin

• Adoption could approach 20% by 2025 if Tesla launches its autonomous service by 2022

Market Value: Ark believes that the market could be $1 trillion in operating earnings annually by 2030. Auto manufacturers could generate $250 billion in earnings by 2030 and individual fleet owners could generate $70 billion in earnings.

9.Delivery Drones: The previous technologies will also accelerate drone commercial use. The cost to transport people and products will be changed drastically.

• The cost for a 10-mile drone delivery will decline from $7.80 (remote pilot) to $0.25 (autonomous)

• Lower costs for drug delivery, public transportation, product delivery, and commercial use such as inspections will be seen once this technology has scaled

Market Value: Drone Delivery will generate $50 billion in sales, $14 billion in hardware sales, and $3 billion in mapping revenues by 2025

10.Orbital Aerospace: The space industry is evolving from a sector dominated by government-sponsored investment to a thriving global economic industry fueled by advancements in reusable rockets and satellite technologies.

• Original rocket launch costs in 2016 were about $14k/kg and now with reusable rockets are around $2k/kg (~85% drop in costs)

• Lower launch costs are allowing for more satellites in low earth orbit improving internet connectivity. An estimated 25k active satellites are planned.

• Hypersonic travel is also critical to transforming the global economy. Long international flights from economic hubs can be reduced to two-three hours.

Market Value:

• Ark estimates $40 billion to provide broadband connectivity to the internet. Including commercial connectivity and government space services, the total market is $100 billion annual TAM.

• Regarding hypersonic travel, Ark estimates that from a commercial perspective, companies are willing to pay $100k for long-haul hypersonic flights to save time. This results in a $270 billion annual TAM.

11.3D Printing: New technological additive manufacturing that builds objects layer-by-layer. It has optimized the design and final production of objects at an accelerated pace.

• The early stages of the industry were concentrated on prototype design. The next phase is in the mass production of end-use parts

• Critical industries that will benefit from end-use parts will be aerospace, semiconductor, and healthcare.

• 3D printing and AI will also converge resulting in unique designs that will not be possible with traditional manufacturing capabilities

Market Value: TAM is estimated to expand at a 60% CAGR from $12 billion to $120 billion annually.

12.Long Read Sequencing: This technology is focused on mapping the humane genome to understand the make-up and functionality of genes.

• The cost to sequence a whole human genome with long-read technology will eventually drop to $200 from $100k in 2010.

• Cancers, rare diseases, and hereditary diseases will be understood and mapped utilizing the power of deep learning algorithms.

Market Value: The total market for the long-read sequencing market will amount to $5 billion by 2025.

13.Multi-Cancer Screening: Cancer detection at an early stage will save many lives. To accomplish early detection, liquid biopsies such as blood tests will offer efficient and non-invasive multi-screen cancer tests.

• Costs can decrease substantially from $30k to $250 using machine learning algorithms to analyze liquid biopsies.

• $1.5k will unlock multi-screen tests for the elderly population at risk of cancer and then expand to the rest saving 1.4 million lives annually

Market Value: By 2025 multi-screening should scale to a $150 billion market

14.Cell and Gene Therapy: Gene therapy treatments for solid tumors and genetic disorders are early in the commercial stage.

• Currently, FDA has approved 10 gene therapies and by 2030 it is expected to have 170 gene therapies to treat solid tumors which represent 88% of diagnosed cancers.

Market Value: The market for oncology gene therapy is estimated to be $260 billion.

🤯Key Insights for Time Investors:

• The ARK team has laid out 14 technologies within their five technology platforms that are estimated to deliver substantial growth. Based on these platforms, Artificial Intelligence, specifically deep learning, will penetrate and support the rest of the specific technologies. Companies that are heavily involved in the production of artificial intelligent models and the ability to commercialize them will greatly benefit.

• Many seasoned investors caution that this period resembles similar characteristics to the Dot-com bubble. However, in their more recent podcast, Cathie Wood has emphasized that during that period a lot of capital was chasing very few opportunities that involved technologies in their infant stage.

• Based on wright’s law for every cumulative doubling of units produced, costs will decline by a constant percentage, the ARK team believes that costs and technology are at the right point creating exponential growth opportunities for the right players. GDP in the U.S. in 2035 will be $40 trillion from $20.9 trillion today due to the convergence of the various technology platforms that ARK believes will impact every facet of the economy.

• As time investors, this research is a great starting point to understand how the technologies will impact our economy and ultimately identify companies that are embracing them at a fundamental level. Across all of ARK’s ETFs the companies that they have heavily concentrated on support their convictions regarding deep learning, autonomous ride-hailing, electric vehicles, digital wallets, re-invention of data centers, and genomic sequencing.

• Below you will find the ARK’s team top 20 holdings across all their active and passive ETFs:

  

• I will leave a quote that perfectly summarizes how we view innovation from Matt Ridley in his book How Innovation Works. “Innovation often disappoints in its early years, only to exceed expectations once it gets going, a phenomenon I call the Amara hype cycle, after Roy Amara, who first said that we underestimate the impact of innovation in the long run but overestimate it in the short run.”

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• ARK Invest Big Ideas

• ARK Invest Disruptive Technology Whitepaper

• ARK Invest Big Ideas Discussion Video

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe now

“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

What does it take to build a world with more economic freedom for every person and business regardless of their location. Today, we will breakdown, Coinbase ($COIN), a company building the infrastructure to propel a crypto revolution that is decentralizing the world of money and finance.

🔴Download Equity Breakdown Report

📖What is Coinbase?

Coinbase is the largest cryptocurrency exchange in the US. The company is positioned to provide end-to-end financial infrastructure and technology supporting crypto assets.  The crypto ecosystem is shaped by three types of customers:

• Retail: The everyday citizen can invest, store, spend, earn, and use crypto assets, such as Bitcoin, in a safe and secure space

• Institutions: Financial institutions (corporations) can access crypto markets with safe trading and storage tools. The ecosystem ensures liquidity for transactions using crypto assets.

• Ecosystem Partners: Merchants, developers, and asset issuers (governments) can build applications that use crypto protocols and participate in the crypto network.

Coinbase is positioned to power the evolving crypto economy. The invention of Bitcoin created a revolution of digital scarcity. This scarcity does not require authenticity or approval from central institutions. Scarcity is proven through the decentralized ecosystem. This has enabled the company to potentially be a leader in creating an open financial system.

📈Market Opportunity

Technology is sweeping human society, while the existing financial system continues to experience legacy limitations. The crypto economy is organically evolving due to a series of fundamental shifts:

• The need for financial access, efficiency, and cost: Humans should have no intermediary barriers, inefficient procedures and protocols, or high costs to exchange in the financial system.

• The need to cultivate value from the internet: The exchange of digital assets (NFTs) in the past has been difficult to ensure authenticity and scarcity. The crypto ecosystem ensures secure exchange and consensus-backed record-keeping (blockchain technology) to ensure resiliency and value. Additionally, the network is on 24 hours allowing for peer-peer financial transactions (DeFi applications).

• The need for frictionless applications: The crypto economy is built on software networks on top of the internet. This ultimately ensures programmable smart contracts, which are self-reinforcing agreements between parties, and removes the need for intermediaries.

• The need for a reliable store of value: Inefficient institutions have been notorious for wiping out wealth. The need for a digital asset class that can maintain its scarcity and preserves wealth is critical.

As a result, today the addressable crypto market is valued at $1.5 trillion which is about 10-13% of the value of all mined gold on the planet. Coinbase re-iterates that the market is still in the early stages. Coinbase will aim to target the 3.5B customers connected to the internet through smartphones around the world or translating into ~228 million monthly transacting users.

👨‍💻What are the Strategic Resources?

Coinbase has built the infrastructure to support its customer base and create a powerful flywheel for an open financial system.

Product Portfolio:

Coinbase has reported $316.1M in crypto assets as of 12/30/2020.

• Bitcoin represents 63%, Ethereum 8%, all other crypto assets 29%. The market value for BTC at the time was ~$28K and no is around ~$51K.

• With the integration of 15 blockchain protocols, the company can support 45+ assets for investment purposes and 90+ assets for storage.

Retail:

1. Coinbase exchange - allows to buy, sell, and send 42 different types of crypto assets

2. Wallet - store cryptocurrency

3. Applications in the ecosystem to earn rewards and interest on crypto assets

4. Coinbase pro - provides advance cryptocurrency trading of 90+ assets

Ecosystem:

1. Prime exchange - allows trading for institutions

2. Asset Hub - allows customers to list their digital asset

3. Commerce applications - accept payments in crypto assets

4. Custody - provides secure storage of 90+ crypto assets for institutions

Developing Resources:

Coinbase has filed 107 patents and currently has 21 granted patents for their intellectual properties. After analyzing the patent applications, the top five keywords appear:

• Blockchain | protection | digital | transaction | stable

• In 2019, Coinbase was granted a patent to essentially make sending Bitcoin as easy as e-mails. Email addresses are linked to wallet addresses and can be used to make payments instantly.

The company is driven by innovation and talent as it currently invests $271 million in technology and development as of 12/31/2020, which represents about 21% of revenue. The investment increased by ~86 million (47%) from last year driven by an increase in headcount supporting platform enhancement, software licenses, website hosting, and product development.

Customer Landscape + Partnerships:

Coinbase is breaking boundaries in the financial system and has created the following customer base:

1. Retail: 43 million users as of 12/31/20 and ~2.8 million monthly transacting users (180% QoQ).

   • $32,1k trading volume per transacting user

2. Institutions: 7,000 institution customers (67% YoY)

   • Coinbase facilitated MicroStrategy’s $425 million bitcoin earlier this year.

   • Coinbase also handled Tesla’s $1.5 billion purchase of bitcoin

3. Ecosystem Partners: 115,000 partners composed of organizations that build blockchain protocols, create DeFi applications supporting the protocols, creators of new tokens, merchants, and organizations that monitor blockchain transactions (Government).

   • The company has a program called “Day 1 Launch” to support new crypto assets.

     • Compound is a key investment that stemmed from the program. Many using Compound earn interest on many crypto assets such as $700 million in USDC (digital USD in Coinbase).

   • Additional partners: Visa (release of debit card in European markets) and BlockFi

Resource Deployment + Growth Strategies + Acquisitions:

Business Model and Growth Strategies:

The company derives its revenues through three streams:

• Transaction Fees – 86% of Revenue: The majority of revenue is generated from transaction fees related to trades (bought, sold, and withdrawn) of crypto assets on the platform. Since inception, the revenue generated from transactions is 96% from an average transaction fee of 0.50%.

• Subscription and Services – 3% of Revenue: This is focused on custodial fees for services such as storing crypto assets, staking revenue from crypto assets in staking protocols, and revenue of crypto-asset earn campaigns.

• Other Revenue – 11% of Revenue: This involved the sale of crypto assets to fulfill customer transactions. In some cases, customers need to meet the minimum trade size for execution in which Coinbase steps in for support.

• 2020A: Revenue: $1.3B (137% YoY) driven by $192B (143% YoY) of trading volume

  • 62% of trading volume is driven by institutional and 38% by retail

• 2020A: Gross Margin: ~80% (6.6% YoY)

• 2020A: EBITDA: $322M (25% of Revenue)

• 2020A: Operating Cash Flow: $3B ($2.7B driven by customer custodial funds which are restricted cash and cash equivalents held for customers and regulatory requirements). The net estimated free cash flow is $294M.

The company plans to continue accelerating growth through the following initiatives:

1. Customer Expansion: Currently, Coinbase has spent 5% of revenue on customer acquisition for verified users. 90% of the users have come to use the product organically. The company will spend heavily on educating institutions and retail investors with the expansion of supporting teams and customer service. Additionally, 76% of the revenue was driven by the U.S. market, and expansion into emerging markets will open a greater pool of customers.

2. Expansion of Crypto Assets: Expand the tokenization of new assets, and enhancing blockchain protocol features such as staking, and decentralized identity.

3. Innovation: Plans to expand innovation infrastructure focusing on distribution, access and identity, and developer toolkits, and payments. The company also plans to utilize its venture arm to grow the ecosystem at large furthering its mission.

4. Strategic Acquisitions: The company reported the acquisition of two key players:

   • Xapo ($68M): provides cryptocurrency wallet and custody services. Specifically, the company is known for having physical vaults in the Swiss mountains to store crypto assets offline.

   • Neutrino ($2.8M): provides blockchain analytics technology that highlights trends to identify new tokens in the space.  

💪Key Strategic Moats

1. Scale: The company reported $90 billion in fiat and crypto assets stored through their services. This represents ~11% share relative to the value of the crypto market. With 115,000 partners, 43 million verified users, 7,000 institutional customers, and supports 90+ crypto assets, the company leads the pack in the space.

2. Technology Platform: The company’s technological platform spans beyond just trading and selling of crypto assets. The one-stop-shop allows for customers to store their assets, borrow against their holdings, and participate in the decentralized networks that are built through the ecosystem. The company has ensured network effects through breadth and depth of products, trust, and diverse use of their products. Ultimately, the platform allows for “24/7/365 real-time cross-border payments”

3. Brand: With the rise of Bitcoin since 2012, Coinbase has been the leading face supporting the infrastructure of the crypto economy. The company has ensured that trust is attached to its brand by dedicating 15% of its workforce to legal, compliance, and security. They want to ensure that their customers’ assets are secured, and they have ease of use to transact.

4. Marketplace Ecosystem: Between retail users, institutions, and developers Coinbase built a foundation that ensures great synergies. This ultimately results in a deep pool of liquidity to transact the multitude of crypto assets in the ecosystem.

5. Specialized Team: The company is founder-led with support from top-tier talent in the crypto space. 40% of the team is composed of engineers and about 10% of the team is composed of talents related to security and risk.

⚠️Key Critical Risks

1. Competition: Coinbase states that it is operating in a fragmented and heavily regulated market. Certain competitors have an advantage since they do not have to adhere to the same standards.

   • From a retail user’s perspective, the key competition comes from Square, Robinhood, and PayPal who also allow their users to transact in certain crypto assets. A key difference here is that users in these other platforms do not actually own the crypto asset.

   • From an exchange perspective Binance, the world’s largest crypto exchange is a key competitor internationally. Coinbase claims they have “varying degrees of regulatory adherence.”

2. Bitcoin and Ethereum Concentration: Total revenue from Coinbase is highly dependent on the crypto market and specifically the price of Bitcoin and Ethereum which represent 83% of the crypto assets. The decline in trading volume, price, or risk to market liquidity can create some drastic impact.

3. Government Regulation: The government regulation in the crypto space is still undetermined. The company will need to adhere to evolving regulations to maintain appropriate licenses and financial offerings for customers.

4. Security Risk to Crypto Platforms: In 2019, Binance was hacked resulting in $40M in losses. This could certainly harm the brand image of any exchange and with the increasing demand of Bitcoin, Coinbase stands as a prime target.

🧬Team DNA and Vision

Key Leaders: As of December 31, 2020, the company has 1,249 employees, of which over 40% are dedicated to engineering, product, or design roles.

• Brian Armstrong – Co-Founder and CEO: Currently Brian is also the founder and CEO of ResearchHub Technologies, a scientific research platform. Prior, Brian was a software engineer at Airbnb, Inc and also a previous founder of Universitytutor.com

• Surojit Chatterjee – Chief Product Officer: Prior served as Vice President of Product Management for Google Shopping at Google LLC and Global Head of Product in Google

• Emilie Choi – Chief Operating Officer: Prior to the role, Emilie served as VP of Business, Data, and Implementation in Coinbase. Prior she served as VP and Corporate Development for LinkedIn Corporation

• Melissa Strait – Chief Compliance Officer: Prior, Melissa served as Global Head of Financial Crimes at Stripe and as a US Compliance Officer

Vision: Based on the Founder Letter, Coinbase is focused on creating economic freedom for their customers no matter their location. The future they are building will be decentralized and ultimately merge the digital and real-world economies.

🤯Key Insights for Time Investors:

• Your location in the world unfortunately will define the opportunities you are presented. The current financial system is built with many obstacles to access financial services. However, with the invention of Bitcoin, a new movement emerged that could provide the core pillars to economic freedom to any individual. The current market to Bitcoin is around ~1.5 trillion representing about 10% of the Gold market. To propel this future, Coinbase emerged as one of the first trusted largest brands in America and currently the second-largest crypto exchange in the world.

• The company also operates in a heavily regulated environment and will experience new regulations as the political climate wraps its thoughts around the co-existence of a crypto ecosystem in the current financial world. Coinbase dedicates 10% of its employees and has ensured appropriate leadership to meet security and compliance risks.

• It is important to note that Coinbase’s success is tied to the overall growth of the crypto-economy and specifically the demand for Bitcoin and Ethereum. As Bitcoin and Ethereum scale, Coinbase will also benefit as it stands to be the one-stop-shop for a multitude of assets.

• The company has experienced rapid growth (137% YoY) and more importantly, 90% of their customers to date have been acquired for free (organically).

• The fact that Coinbase is founder-led with the mission of creating an open financial system brings assurance and clarity to the overall goal the company is trying to achieve. The company maintains an 11% share in the market and holds $90 billion assets in its platform with 43 million verified users and 2.8 million monthly transacting users.

• It is important as Coinbase attempts to expand into international markets and their digital asset framework evolves beyond their core business model of generating transaction fees. What will Coinbase do with their $1B in cash to expand share? For long-term growth, the company is well-positioned to maintain market leadership.  

  

• Investor Lineup + Equity Stake:

  • Top Tier VCs: Andreesen Horowitz (15.8%) and Union Square Ventures (7.5%)

  • Top Investors: Marc Andreesen (15.8%) | Frederick Ernest Ehrsam (9.5%)

  • Brian Armstrong (CEO): (21.3%)

  • As a group the executive leaders and directors: (58%)

  • In their most recent secondary share sale, Coinbase has sold shares ranging from ($200-$373) resulting in a potential $100B valuation

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

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Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Coinbase S-1 SEC Filing

• Coinbase Mission, Vision, and Strategy

• Coinbase Strategy Teardown - CBInsights

• Crypto Terminology from the S-1 SEC Filing

• Coinbase Public Filing - Tech Crunch

• Coinbase Public Filing Overview - CNBC

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe now

“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

Vertical integration across the EV supply chain will define the winners of the industry. Today, we will breakdown, Proterra ($ACTC - $PTRA). The company is planning to become public through a reverse merger (SPAC) with ArcLight Clean Transition Corp ($ACTC).

🔴Download Equity Breakdown Report

📖What is Proterra?

Proterra is electrifying the commercial vehicle space through the three symbiotic business lines that ultimately create their ecosystem:

• Proterra Powered: In this business segment the focus is to design, manufacture, integrate, and sell top-tier battery systems and electrification solutions such as drive-trains, and controls for their vehicles and OEM (Original Equipment Manufacturers) customers.

• Proterra Transit: the focus is to design, manufacture, and sell electric buses for public and commercial fleets.

• Proterra Energy: the focus is to provide “high-power” charging solutions and software services to support the company’s platforms.  Specifically, the company has built the end-to-end infrastructure to optimize energy costs and ensure vehicle-to-grid functionality.

Proterra is the “Tesla” of the commercial vehicle space by harnessing the power of the electrification supply chain.

📈Market Opportunity

The electric vehicle revolution groundwork is established with the advancements in battery technologies, infrastructure, and government policies. Regarding the commercial vehicle space, the focus is on the total cost of ownership and achieving faster zero-emission target goals spearheaded by industry leaders and governments. According to the Environmental Protection Agency (EPA), the transportation sector represents about 28% of the GHG emissions in the U.S., and large size commercial vehicles account for 23% of those emissions. Based on the GHG emissions, Greenbiz revealed in their survey of global fleet companies that 60% of companies have GHG targets.

With 85% decline in battery costs, 40% cheaper operating costs than diesel vehicles, the electrification of buses and commercial vehicles will expand with reports from Frost & Sullivan highlighting 50% market penetration by 2025. As of 12/31/2020, there are 25,000 buses in operations that are targeted to achieve zero-emission by 2040. Governments, communities, and companies are all aligned in the demand for sustainable solutions.

As a result, Proterra believes they have an addressable market of $225 billion or 4.4 million commercial vehicles by 2023 and with an infrastructure opportunity of $37 billion charging investment or 40 TWh of annual energy need.

👨‍💻What are the Strategic Resources?

Proterra offers a technology platform that delivers a holistic portfolio of products and services across the electrification ecosystem.

Product Portfolio:

1. Battery System: designs, manufactures, and tests high-voltage battery packs used in their own portfolio of buses and other commercial uses with customers

   • Structure: Battery modules have best-in-class thermal and structure architecture, patented flexible battery management systems, and seamless software integration. This ensures multiple widths and heights, scalable lengths, stackable qualities, dynamic voltage options, and versatile designs to be applied across many different commercial vehicles. Battery cells are supplied by LG Chem with a contract that secures ~2 GWh through 2022

   • Economics: The fourth and fifth-generation battery systems delivered 20% cost reduction and increase in energy density resulting in greater scale performance. Next-generation will deliver 25% cost reduction and domestic supply of battery cells

   • Benefits: The battery systems minimize space requirements, extend range, ensure higher cargo/passenger capacity, have a long-life span, designed with ballistic-grade materials for any climate conditions or impact, and equipped with preventive diagnostic tools to ensure state-of-the-art reliable safe operations

2. Electric Drivetrains: designs and manufactures best-in-class drivetrains which impact vehicle performance. The drivetrain consumes the majority of the battery energy since it includes the traction motor, inverter, controller, and transmission

   • Structure: Multi-speed (2-speed) drivetrain that delivers 550 horsepower capability. The company is planning to develop 4-speed transmission in their new generation of drivetrains to meet any terrain conditions

   • Economics: Maintenance costs have been reduced since now EV drivetrains contain less than 20 parts versus 200 parts in traditional gas-fueled cars. Motor weighs less than a diesel engine and can be removed in 4 hours instead of 12 hours

   • Benefits: The drivetrain outperforms all direct-drive systems by delivering a longer range with 5x efficiency and 2x the acceleration of diesel buses

3. ZX5 Transit Bus: designs and manufactures their electric bus which launched in 2014. To date, there are 550 vehicles on the road today with 16 million cumulative miles.

   • Structure: the vehicles come with a variety of batteries sizes 225 kWh, 450 kWh, and 675 kWh with ~329 miles per charge

   • Economics: 75% less energy per mile than the average diesel bus

   • Benefits: Low operating costs, high uptime, long-range, greatest horsepower, fast acceleration, and zero tailpipe emission

4. Fleet-Scale Charging Solutions: designed charging solutions that deliver scalability, autonomous charge docking, and charge management. To date, the company has installed approximately 54 MW of charging infrastructure across more than 425 charge points throughout North America.

   • Structure: offers four charger capacities for small fleet solutions and 1.5 MW charger for fleet solutions. The system of fleet charges connects directly to medium-voltage power lines reducing costs and inefficiencies from transformers or switch gears

   • Economics: 50% fewer charges and optimizes charging time and energy costs

   • Benefits: the Proterra charge dispenser allows for multiple charge points (20-40 vehicles) at a time from one central power control system and enables vehicles to turn into utility grid assets when they are not on the road.

5. Apex Software: in-house software that optimizes fleet ownership and operations

   • Benefits: delivers real-time monitoring, diagnostics, analytics, fleet management, over-the-air updates, and smart charging. The software solutions reduce energy costs and maintenance costs giving the customer the lowest possible cost of ownership

Developing Resources:

Proterra holds 57 U.S. patents and had 28 U.S. patent applications pending which expire in 2029 and 2039. The company also holds 24 issued patents and 31 patent applications pending internationally.

1. The company’s battery research and development laboratory which opened in 2017 is in headquarters in Burlingame, California. The team delivers prototype assembly, environmental testing, life testing, electrical safety testing, and cell lifecycle testing. The max annual capacity in the factory is 345 MWh

   • The engineering team is composed of battery and charging system engineers that focus on the following technical areas: battery structure, thermal battery management systems, charging systems, high-voltage power distribution

2. The vehicle engineering team is in Greenville, South Carolina and includes technical expertise in body, pneumatics, mechanical systems, thermal systems, and drivetrains. The factory in South Carolina has a capacity of 400 vehicles and is about 210k square feet

3. The company has a bus and battery manufacturing facility in Los Angeles at 157k square feet. The bus factory has been operational since 2017 with 280 vehicle capacity. The battery manufacturing facility was completed in 2020 with 675 MWh capacity within 12 months under $20 million. The battery manufacturing facility is also a template to be scaled across the nation near distribution centers for customers

With the cash proceeds the company raises, it intends to reinvest about $300 million in research and development and $345 million in capital investments that further the advancement of their battery technologies, drivetrain platforms, and software services.

Customer Landscape + Partnerships:

Proterra is one of the few electric technology companies that has built and delivered their product portfolio to their customers. Their core relationships are highlighted across the three business lines:

1. Proterra Powered: Thomas Built Buses (subsidiary of Daimler Trucks North America LLC) – build 1 in 3 school buses in North America, Freightliner Custom Chassis, Van Hool, Komastsu, Optimal Electric Vehicles, and BusTech Pty Ltd. The products range from school buses, coach and double-decker transit buses, and construction and mining contracts

2. Proterra Transit: 133 customers nationwide which include municipal transit agencies, corporations, airports, and universities. Some prominent names are Foothill Transit – Los Angeles County, Transit agencies in Canadian provinces, University of Georgia, and Harvard

3. Proterra Energy: Edmonton Transit Services is a large customer that includes 33 charge points totaling about 4.3 MW to support 40 ZX5 Proterra Buses. Additional customers are L.A. Department of Transportation, and Chicago Transit Authority

4. Battery Partnership: Proterra has strong partnerships primarily with LG Chem and Panasonic as a reserve supplier for battery cells

5. Only 4 customers accounted for more than 10% of revenue and no customer surpasses 20% of revenue

Resource Deployment + Growth Strategies + Acquisitions:

The company intends to deploy its resources through the following business model and growth strategies:

Deployment Timeline:

The company intends to deploy resources utilizing their manufacturing capacity to produce more than 1 GWh of battery modules and 680 electric buses per year. Proterra has executed their strategy across 130+ communities in 43 states with 550+ vehicles in the road. Here are some milestones the company completed as they expanded:

• In 2018: 135 vehicles delivered | 2019: 177 vehicles | 2020: 122 vehicles delivered

• In 2018: Battery systems for 3 vehicles sets | 2019: battery systems for 20 vehicle sets | 2020: battery systems for 74 vehicle sets

• The company has sold for 2020 a total of 1,000 buses

Business Model and Growth Strategies:

Proterra generates revenue through primarily the sale of electric buses, the sale of battery packs and powertrain systems, the sale and installation of charging systems and related equipment, and sale of spare parts.

*The company recognizes the sale of a vehicle once the customer has accepted it by conducting vehicle inspection and ensuring its operational.

Proterra executes using business development team and channel sales teams across markets. The company has also built strong relationships with public utilities, local governments, transit agencies, and federal government to increase education about their offerings. Based on this model the company is expected to deliver the following financial metrics:

• 2020E: Revenue: $193M | 2025E: Revenue: $2.6B – mainly driven by Proterra Powered & Energy | 68% CAGR

• $750million in backlog and orders

• 2020E: GM: $8M (4%) | 2025E: GM: $642M (25%)

• 2020E: EBITDA: $-66M | 2025E: EBITDA: $539 (21%)

• 2020E: FCF: $-95M | 2025E: FCF: $390M

💪Key Strategic Moats

1. Scale: Charging solutions represent a large obstacle for commercial EV expansions. Proterra has integrated fleet charging solutions with their APEX software to deliver fleet modeling/planning, energy storage capability, and fast charging capabilities with up to 40 vehicles at a time. The company removes barriers for customer expansions in the EV space

2. Value Chain Innovation: Proterra utilizes their core three business lines to deliver a full package of solutions for their customers. The customer receives customized battery systems, drivetrain systems, charging infrastructure, and reliable and proven commercial vehicles (buses). Customers can be assisted through development and integration of the vehicles and the supporting components

3. Contracts with largest OEM customers in the space: Daimler is the world’s largest commercial vehicle manufacturer. The company has active programs with two subsidiaries, the market leader of school buses and the market leader of class 4 and class 6 last-mile delivery vans. Prototypes are already built with full production in 2021

4. Proven Ecosystem: Proterra is the first commercial electric vehicle company in North America with proven on-road experience of their 100% EV buses. They have delivered electric buses for over 10 years and integrated battery packs for more than seven years. The company has 16 million cumulative miles of actual performance in the market.

5. Specialized Team: The company has 614 employees with ~140 engineers featured on LinkedIn. The core engineering team has top industry human capital with battery engineering and charging systems experience

⚠️Key Critical Risks

1. Competition: The company faces competition from all three business lines:

   • Traditional diesel, hybrids legacy bus/truck companies such as NFI Group Inc, Gillig Corporation, Nova Bus Company are also entering into the EV space. Arrival and Rivian are also comparable EV companies with bus and van prototypes and large contracts with UPS and Amazon

   • The company also faces competitors in the battery technology space from Romeo Power and Akasoi, and electric powertrain alternatives from Cummins ($36B Market Cap)

   • From a charging infrastructure space companies such as ChargePoint, and Rhombus pose certain market share risks

2. Limited number of suppliers for critical components in the supply chain: Lithium-ion cells that are used to manufacture battery packs are dependent on LG Chem. Additionally, the sole source supplier for the bus body is TPI Composites, Inc

3. Transit Buses is heavily dependent on government funding: Transit customers are transit authorities that depend on government funds. 70% of the transit buses that ordered buses were recipients of grants through no emission vehicle programs

4. Revenue heavily dependent on a small set of customers: Southeastern Pennsylvania Transportation Authority, Regional Transportation Commission of Washoe County and District Department of Transportation accounted for 15%,12% and 12% of total revenue in 2018. In 2020, 50% of electric buses were delivered to Port Authority of New York and 40% of the buses delivered to City of Edmonton

   ---

🧬Team DNA and Vision

Key Leaders: Proterra’s team reflects strong professional backgrounds with industry leaders from Tesla, Apple, Honda, Bosch, GM, and Bloom Energy.

• Jack Allen - Chairman and CEO: Previous leader at Navistar International Corporation, conglomerate trucking/bus company, with three decades of experience

• Gareth T. Joyce - President of Proterra Powered and Energy: Previous leadership roles in Delta Air Lines, and Mercedes-Benz

• Dustin Grace - Chief Technology Officer: Built the engineering team responsible for power systems development and energy storage. His focus is on battery technology, and he brings nine years of powertrain development expertise from Tesla

• Joshua P. Ensign - Chief Operating Officer:  Previous leadership as Vice President of Manufacturing at Tesla. He was responsible for ramping up Model S production, production launch of Model X, and building the seat manufacturing factory

• Richard Huibregtse – Senior Vice President of Engineering: Previous leadership as SVP of Engineering at Edisun Microgrids, developer of distributed solar power solutions

Vision: Proterra’s mission is to advance electric vehicle technology to deliver the world’s best-performing commercial vehicles. The company has embedded innovation in their DNA with a heavy engineering team and technology across the value chain.

🤯Key Insights for Time Investors:

• Market forces have reacted from the alignment of government, communities, companies, and technology.

  • States are targeting 100% zero-emission for last-mile-delivery and heavy-duty trucks by 2050

  • The world’s largest logistic companies (UPS, FEDEX, AMAZON) are transitioning their fleets to electric

  • 85% decline in battery costs and 40% decline in operating costs versus diesel vehicles

• Unlike passenger vehicles, commercial vehicle electrification poses different challenges such as high mileage, weight, and lifecycle requirements. Proterra has designed, manufactured, and proven the formula to accomplish this since 2014.  

• When it comes to electrification, the focus should be in the technological advancements that ultimately monopolize the value chain. Proterra not only builds their vehicles, but they also build their proprietary drivetrains, and more importantly the end-to-end charging infrastructure needed for scale.

  • Large R&D is being invested to domestically produce battery cells (similar to Tesla)

  • Best in class battery systems enables greater range and weight loads with lifespan of 4k cycles

• Proterra has proven their products are successful with ~16M real-world miles, 450+ charge points, and 1000+ vehicle sales

• Proterra is built with innovation at the foundation and is positioned to become the “Tesla” of the commercial space.

• Investor Lineup:

  • Daimler Trucks + Tao Capital Partners

  • BMW i Ventures + Edison Energy + Constellation + Kleiner Perkins Caufield & Byer + Federal Transportation Administration

  • Chamath Palihapitiya – Social Capital (PIPE Investor)

• Post SPAC Merger with ACTC, ~68% ownership will remain with existing Proterra shareholders

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Subscribe now

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Proterra (ArcLight Clean Transition Corp) Form S-4 SEC Form

• Proterra Investor Presentation

• Proterra Conference Call

• Chamath Palihapitiya - One Page Summary

• UPS Electrification Whitepaper

• Proterra Battery Technology Video

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe now

“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

The race has just started in the commercial electric vehicle space and today we will breakdown, Arrival ($ARVL). The company is planning to become public through a reverse merger (SPAC) with CIIG Merger Group ($CIIC).

🔴Download Equity Breakdown Report

📖What is Arrival?

Arrival is aiming to revolutionize the electric vehicle industry with the production of commercial electric vans and buses. The company was founded in 2015 and personally funded by founder and CEO, Denis Sverdlov to transform the automotive industry. In stealth mode, the company patiently focused on amassing top tier human capital and building layers of intellectual properties across the manufacturing and services sections of the supply chain. Fundamentally, leadership is focused in creating an ecosystem that transforms the design, assembly, and scale distribution of the electric vehicle industry.

📈Market Opportunity

The share of electric vehicle sales is expanding from 2.7% to 58% by 2040. This movement is accelerated by the advancement of technology, unit-economics, climate change commitments from automakers, and rising government policy pressures.

Arrival has decided to focus its business strategy within the commercial vehicle space in the EV industry. This focus is driven by two key variables that are impacting commerce: the rise of e-commerce and the willingness of large fleet owners such as UPS, Amazon, or governments to reduce carbon emissions and adopt vehicle electrification.

Digital Commerce 360 has reported that e-commerce accounted for 21% of retail sales in 2020 and 37% by 2024, making vans a critical component. Additionally, logistic based companies, governments, and other corporations have put policies in place to transform their fleets and reduce carbon emissions. The U.S. government has confirmed that they will transition all their fleet to electric. Additionally, cost will play a critical role in the transition of these fleets.

Realizing these trends, Arrival has positioned itself with three key components to lead the commercial vehicle market.

• New advanced manufacturing of EV vans and buses

• Total cost of ownership

• Top-Tier user experience and quality

Beyond the passenger vehicles race, the fastest tipping points will be in commercial vans and public transit such as buses. In the electric commercial vehicle market, Arrival believes the TAM is ~$70 billion for vans and ~$40 billion for buses. If you include fossil fuel commercial vehicles, the TAM expands to ~$280 billion for vans and $154 billion for buses.

👨‍💻What are the Strategic Resources?

Product Portfolio:

1. Arrival Van: Constructed from the ground up with 70% of the material intellectual property owned/controlled by the company.

   • Structural advantages: The company claims it is lighter, 80% better payload, and larger volume of packages. The model also enhances driver experience with space and in-house software

   • Economics: Total Cost of Ownership is ~$92k (~$0.25km/~$0.40miles) | 17% cheaper than comparable Diesel Van and 28% cheaper than OEM Electric Vehicle

   • Battery: Flexible battery pack configuration to adjust appropriate range required by the customer

2. Arrival Bus: Constructed from the ground up with 40% of the material intellectual property owned/controlled by the company.

   • Structural advantages: Lowest gross weight in its class (16 metric tons), At 8 metric tons weighs 40% less in unladen weight than competition leading to better range efficiency. Maintains the same passenger capacity as conventional buses but with greater user experience in terms of space, safety, security

   • Economics: Total Cost of Ownership is ~$396k (~$0.43km/~$0.70miles) | 47% cheaper than comparable Diesel Van and 50% cheaper than OEM Electric Vehicle

   • Battery: Flexible battery pack configuration to adjust appropriate range required for 35feet, 40 feet, 45 feet, and double-decker

   • Buses have completed ~1,000 km / ~620 miles of testing

3. Microfactory: The factory is built of a multitude of technology cells. In each cell, you have autonomous mobile robots that produce the electrical vehicle. The vehicle can move dynamically in any order through technology cells with software and autonomous robots. Each microfactory can adjust to build multiple vehicle types.

   • Structural advantages: ~20k sqm or ~215k sqft (11x smaller than traditional OEM factory) with 6 months expected construction timeline | no paint shop requirement | existing warehouse can be outfitted (no tesla-like gigafactories required)

   • Production Rate: 10,000 vans per year or 1,000 buses per year with 250 employees and two shifts

   • Economics: $45-$50M capital investment with $12 million in operating expense | 50% reduction in capex and opex costs relative to comparable OEM factory | low break-even point achieving $100M a year in gross margin per microfactory

   • Customer Advantage: Design flexibility for customers based on their local environment and close proximity to customers’ location.

     *Check out Arrival’s Microfactory Video

Developing Resources:

Arrival prides itself on being a technology company first. The patent portfolio consists of 180 innovations filed in patent applications and 27 patents granted in the US as reported by IPqwery in Crunchbase. ~60% of the innovations are concentrated on composite materials, microfactory and design flow, robotics, and battery-related innovations. Key technology components in the ecosystem are:

1. Composite Materials: Sheet metals are replaced with proprietary materials that are lightweight and strong and used for internal/external body panels

   • Structural Advantages: The composite materials do not need metal stamping or painting.

   • Economics: 25x lower tooling costs and does not require frequent repairs and maintenance

     *Check out Arrival’s Proprietary Composite Materials Video

2. Modular Components: DCDC modules, input-output modules, HMI modules, battery modules, and the drive control unit is designed internally, while safety systems are outsourced. The internal modules are the most important components regarding electrification.  The company uses Tier 2 and Tier 3 suppliers to manufacture fill in components.

   • Structural Advantages: Components have had two years of road testing

   • Economics: Tier 1 supplier development costs are avoided resulting in 20% cost savings from suppliers

   • Production: New vehicle platforms can be developed in 18 months versus 3 years

3. Modular Skateboard: The platform creates flexible and automated microfactory assembly for the plug-in-play components.

   • Structural Advantages: Composed of aluminum structure for strength and can be used across multiple vehicle types

   • Economics: Extrusions, castings, composite panels, and adhesive joining processes reduce costs by eliminating high-wage specialist labor

   • Customer Advantage: The platform allows for different battery pack configurations can be adjusted based on needs

4. Software Architecture: The company has designed internal software, in-vehicle software, and customer-facing software.

   • Allow for control of automated robots, on the air modular component upgrades, and support functions in the microfactory

   • Allow for route planning, route status information, and access to vehicle data with API interface

   • Provide diagnostic tools to monitor vehicle performance and health. In the portal, you will be able to also schedule predictive maintenance.

5. Autonomous Technology: The company has acquired autonomous technology that it deploys through its Robocar vehicle in a racing environment.

   

   • Arrival is developing software with algorithms that drive the autonomous race car and hardware regarding the sensors and vehicle to create a closed-loop integration. The system can be deployed in racing and public street environment for the company’s vans and buses.

     *Check out Arrival’s Autonomous Robocar

6. Research and Development Investments: In 2020 the company is projected to spend $25M and by 2024E $237M (20% of revenue). —>*Inside look into Arrival’s R&D

Customer Landscape + Partnerships:

The company has built some critical relationships to sell its core products and expand its footprint in the industry. The company’s relationships are defined in the following groups:

1. UPS: The customer has committed to purchase 10k vans from Arrival during 2021 to 2025. They have an opportunity to also purchase an additional 10k if needed. Arrival has worked with UPS since 2016 to ensure all cargo efficiency, improved driver experience, and a direct link to UPS systems through Arrival’s software

2. Arrival revealed in their F-4 report 16 customers have shown interest through letters of intent. Additionally, companies in the logistics, grocery, and e-commerce segments in the UK have sent intent of purchase for 3k vans and in discussions for additional 5k vehicles

3. Hyundai Motor Company and Kia Motors Corporation: This relationship will involve joint development of vehicles. HKMC will offer engineering talent and supply chain benefits in return for microfactories and software innovation benefits. The expiration of this venture is 2024. Apple has also entered the mix here to utilize Kia’s plant in the creation of their autonomous vehicle.

4. LG Chem, Ltd: The South Korean company is the number one producer of lithium-ion batteries in the world. The companies have built a long-term partnership.

5. Comau (Fiat Chrysler Automotive subsidiary): The company provides automation systems for factories and will initially support Arrival in their microfactory layouts.

Resource Deployment + Growth Strategies + Acquisitions:

The company intends to deploy its resources through the following business model and growth strategies:

Deployment Timeline:

1. Arrival has two microfactories. In South Carolina, the bus factory will begin operations in Q2 2021 and production in Q2 2022. In Bicester, UK the van factory will begin operations in Q1 2022 and production in Q3 2022. Additionally, the composite material lab has been set up and pilot line being installed to meet production schedule.

Business Model and growth strategies:

Arrival plans to use a direct sales model to target large fleet owners for their vans and buses. Currently, the company has not generated any revenue and has only produced prototypes for select customers. Beyond its deployment timeline the company has initiated the following projections regarding its product portfolio:

• 2024 E: Revenue: $14.1B | EBITDA less CapEx: $1.4B (~10%)

• 2024 Revenue Distribution: Van/Large Van: 66% | Bus: 22% | Small Vehicle: 12%

• 2024 Volume: Van/Large Van: 168k | Bus: 11k | Small Vehicle: 79k

• 2024 Margins: Bus: 38% | Large Van: 34% | Van: 21% | Small Vehicle Platform: 18%

The company believes its growth can be fueled by three additional key strategies:

1. 31 microfactories are expected to be built by 2024

2. Modular skateboard platform will allow customization and the ability to quickly scale into new vehicle segments

   • Arrival plans to launch a small vehicle platform from 2023, composing about 12% of future revenue

3. Arrival’s vehicles have all the capabilities for autonomous driving

4. Emission credits issued by governments to accelerate zero-emission targets. These credits can be sold to other OEM’s an additional stream of revenue.

Strategic Acquisitions:

1. CIIG: SPAC merger led by Peter Cuneo, former CEO of Marvel Entertainment, resulting in Arrival’s total enterprise valuation of $5.4 billion

2. TRA Robotics for $1.8 million in 2018

3. Roborace Limited for $61.1 million euros in 2019 – robocar autonomous technology

💪Key Strategic Moats

1. Microfactory Production Deployment (Scale): Arrival is deploying the only microfactory concept in the production of EV. The platform contains in-house produced software, autonomous robots, and critical plug-in-play components

   • The microfactory achieves superior cost savings, smaller footprint, decentralized scalability, and rapid manufacturing

2. Product Composition (Technology): Arrival’s core products contain 40-70% in house IP that delivers superior products to the market

   • The proprietary composite materials, plug-in-play components, dynamic skateboard modular and in-vehicle software contribute to competitive unit economics, scalable designs, optimized energy efficiency, maximum performance, and low maintenance costs

3. Total Cost of Ownership (Unit Profitability): The technology and state-of-the-art manufacturing platform provide significant savings for customers. The savings span across the actual purchase of the vehicle, infrastructure cost, and maintenance costs. Across all three components, Arrival can achieve double-digit cost savings relative to traditional fossil fuel vans and buses. Additionally, the strategic resources the company deploys creates profitability at low production volumes

4. Tier-One Management:  The company is led by the original founder who privately funded the operations initially with $26 million. The company’s workforce is composed of talented engineers across a variety of specialties ranging from material composition, software, mechanical, robotics and design.

⚠️Key Critical Risks

1. Competition: The company faces competition from traditional OEM’s and two comparable EV companies in the space.

   • Traditional OEMs. Majority of the fossil fuel van market is controlled by Ford, GM, and Fiat Chrysler. These companies have a massive footprint in terms of scale and have plans to introduce EV product line.

   • EV Companies: Rivian and Proterra are the company’s key competitors in terms of talent and product line. Rivian is private van/truck company that is hand in hand with Arrival when it comes to engineering talent, IP technology filings/granted, and critical partnerships. Amazon will launch 10,000 Rivian vans in 16 cities this year. Proterra is also another key player regarding buses. The company already has deployed and sold 1,000 EV buses.

2. Customer Concentration: Arrival partnership with UPS is the only source of projected revenue currently. Termination of the 10k vehicles will eliminate the $1.2 billion order backlog

3. Construction of Microfactory production model: The foundation in manufacturing, deploying, and servicing electric vehicles is strictly dependent on the microfactory concept. If this model fails implementation and execution within the proposed cost structures, then the company will be at high risk

4. Supply Chain Dependence: The battery is one of the most critical and expensive components for all EVs. Currently, Arrival is dependent on LG Chem Ltd for supply.

🧬Team DNA and Vision

Team Dynamics:

The leadership team is composed of ex-founders with unicorn companies on their resume, world-renowned experts, and talent from large OEMs and EV companies such as Tesla. Overall, Arrival has a dedicated team focused on research and development. As of 12/1/2020 the company had 1,456 employees with 500 software engineers and 500 mechanical engineers ensuring a 1:1 ratio. 85% of the workforce is dedicated to research and development.

Key Leaders:

• Denis Sverdlov - Founder and CEO: Previous founder of $1.5B company and superior experience in managing distributed organizations

• Avinash Rugoobur – President: Prior, lead strategy team to acquire Cruise +$1B for GM to compete in the AV industry

• Mike Ableson - CEO Automotive: Prior, various leadership positions in GM ranging from vehicle development, engineering, and innovation

• Tim Holbrow - CFO: Prior, strong finance leadership that lead to +$900M startup sales to Nokia. CFO experience in fintech, digital product consulting.

• Rob Thompson - Lead for Materials: Global materials expert with 7+ books in manufacturing technology and experience in LG Electronics, Panasonic, and Nokia

• Sergey Sulgin – CEO Solutions: Prior, founder of IT outsourcing provider that grew to ~6k engineers and 20 years of IT experience

• Alex Kozyrev – CEO Mobility: Prior, launched one of Russia’s first internet banks and experience with machine learning and AI platforms

Vision:

I personally had the privilege to interview Arrival’s CFO Tim Holbrow to discuss the company’s vision and the key growth platform that positions Arrival to become a leader in the commercial EV space. Tim Holbrow summarized Arrival’s position relative to their EV peers emphasizing the disruptive play. “A key differential about Arrival is that it’s not just about building an electric van or bus, but more specifically reinventing the automotive industry, from the beginning to end of the process.”  The company is a technology company that will use its microfactory platform to disrupt manufacturing and deliver exceptional products.

Microfactories are cheaper than traditional mega-factories, can be installed in existing warehouses across cities, and take up to six months to launch and begin production. As a result, Arrival will harness the demand of local communities to quickly supply the products at the most efficient level.  This platform ensures cost savings, relevant product demand, and economically the best-predetermined pipelines for production. Ultimately, Tim highlighted that in the complexity of the technological inputs, Arrival has achieved a level of simplicity from design to manufacturing. They are positioned to disrupt traditional methods in the automobile industry and deliver exceptional results.

🤯Key Insights for Time Investors:

• Demand for vans and buses is expected to rise substantially due to the rise of e-commerce and government climate change policies. Arrival is positioned to deliver products that minimize the total cost of ownership with superior technology that is proven and tested.

• Microfactories are the companies most critical asset to ensure flexible, scalable, and local production of their commercial electric vehicles. The factories are 50% cheaper from a CAPEX and OPEX relative to traditional factories and can be installed in existing spaces, in local communities, and in under 6 months.

  • “You can build vehicles in New York with the unit economics of China,” Sverdlov says.  – Forbes reporter

• They have partnered with UPS from the beginning securing 10k vans and a $1.2 billion order backlog.

  • “There are a lot of startups with EV ideas. Unfortunately, we’ve not seen a lot of that materialize in terms of products that come to the market,” says Luke Wake, UPS’s international director of automotive engineering and advanced technology. “What helps set Arrival apart is the way that they were well funded to actually turn some of these ideas and visions into a reality.” – Forbes reporter

• The company has 1.4k employees with 85% focused on research and development. They have secured talents across `1,000 engineers and have built a leadership team with top-tier talent in their respective fields

• Investor Lineup:

  • ~$1.2 billion investment and signed purchase agreement with UPS in 2020

  • ~$150 million euros led by BlackRock in Nov 2020

  • ~$100 million euros investment by Hyundai Motor Company and Kia Motors Corporation in Q4 2019

  • Post SPAC merger with CIIG, ~88% ownership will remain with existing Arrival shareholders

-Igli G. Laçi

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Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Arrival F-4 SEC Form

• Arrival Investor Presentation

• Arrival Fact Sheet

• Bloomberg EV Outlook

• Forbes | Let Elon Musk Go Giga: A U.K. Upstart Says Microfactories Are The Profitable Way To Build Electric Vehicles

• TechCrunch | Arrival becomes latest electric vehicle startup to test the public markets with a SPAC

• IndustryWeek | Why is UPS Betting on the Arrival of a New EV?

• Changing the Traditional Automotive Industry Video

  Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

This is Equity Breakdown, where you will find short, no bullshit overviews of public companies! Join me in breaking down industries and companies that will become leaders embracing disruptive technologies and innovating change! Subscribe Now!

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

A resurgence in the electrification of the automobile industry to combat global climate change is exponentially erupting. This next decade will bring change across the entire EV value chain creating lucrative opportunities for investors and of course, for our society’s survival in the future. To ensure the EV revolution expands rapidly, the U.S. government will fuel the largest mobilization of public investment, infrastructure, and R&D across the industry. They will put action behind their words by revitilizign their own fleet of ~650,000 vehicles:

Pres. Biden: "The federal government also owns an enormous fleet of vehicles, which we're going to replace with clean electric vehicles made right here in America, by American workers."

The EV industry, which currently accounts for only 1% of global car stock as of 2019, will create a domino effect across many companies in the value chain. As Time Investors, we will breakdown the framework of the EV industry. This will help us identify companies with strategic assets that will deliver decades of wins and support our climate initiatives.

💡What will you learn in the Equity Breakdown Report?

• EV Brief History

• Industry Breakdown

• EV Value Chain

• Strategic Resources

• Winners

• Challenges

• Key Insights for Time Investors

🔴Download Equity Breakdown Report

📜Blast from the Past:

Electric cars first spawned during the mid-1800s, a half-century before the invention of the gasoline cars. They gained a wide adoption across cities for ease of operation, no gas emission, and producing little noise. By 1900, electric vehicles represented 38% of US automobiles (~38k). This movement attracted prominent figures like Ferdinand Porsche, founder of Porsche car company, who created the world’s first hybrid car, the electric P1, powered by gasoline and battery power. Similarly, Henry Ford and Thomas Edison worked on projects to produce an electric vehicle that could run 100 miles, which eventually was scrapped due to costs. While the benefits for electric vehicles were obvious, interests in electric cars eventually declined because of three forces: infrastructure, mass production, and battery technology.

Most homes lacked electricity, lead-acid batteries weighed 500-1,000 pounds with heavy maintenance requirements, and the demand for the mass-produced Model-T accelerated. The inventions were present during the turn of the century; unfortunately, the infrastructure for innovation to spearhead electric vehicles was not practical enough to reach mass scale.

Now in the 21st century, we have a different narrative in place. The infrastructure to spearhead innovation across the EV space is vibrant and on the precipice of exponentially revolutionizing urban life.

📈The Industry Makeup:

Electric cars currently represent 2.6% of global car sales and 1% of global stock, amounting to a stock of ~7.2 million vehicles. In November 2020, 400,000 EVs were sold, with expected sales of 500,000 in December setting record highs. During the pandemic crisis, gas-powered vehicles experienced a serious decline in sales while EVs accelerated by 33%. According to Ark Invests predictions, the industry is expected to grow to 40 million vehicle sales in 2025, resulting in an 82% CAGR, and more than 30% of the stock to be electric.

This trajectory is a result of a series of factors fueling the EV market.  

1.       Government policies requiring zero-emission mandates

2.       Environmental pollution

3.       Technological advancement in cell batteries which represents the largest cost component of EVs

4.       Competitive cost structures that are comparable with gasoline cars

5.       Evolving Infrastructure to support the increase in EV demand 

Currently, the leader in terms of vehicle output and adoption rests in China as they currently maintain 38% of the market share followed by the collective European countries and then the U.S. Within each internal market, European countries have achieved 20-30% market share while China hit an 8.6% market share. 

The top 5 global EV car manufactures are Tesla (16%), Volkswagen (7%), BYD (6%), BMW (5%), and SGMW (5%) making up ~40% of the global market share. 

The market can be broken out between passengers’ cars, commercial vehicles, and two-three wheelers (common in India/China). The majority of the share will be focused on passenger cars and more specifically mid-priced cars.

🖇️EV Value Chain:

Now as an investor, it is important to understand the supply chain of the EVs to position opportunities that offer monopolistic environments resulting in higher margins and sustainable profits.

The value chain can be divided into four categories with varying levels of economic characteristics.

1.       Upstream: Raw material mining

2.       Manufacturing: Battery Cell Manufacturing, Battery Pack Assembling, EV manufacturing

3.       Downstream: EV Services, and EV sales infrastructure

4.       Recycling of batteries

Specifically, when it comes to the various cycles of production, investors need to isolate opportunities that offer high barriers to entry, competitive advantages, and the ability to scale with strong unit economics.

👨‍💻What are the strategic resources in the EV world?

Developing Resources:

1.       Exclusive mining rights: Essential in the production of batteries which is one of the most expensive components of EVs. The raw materials are classified as rare earth elements with a high concentration in China, South America, Australia, and one world-class location in North America, specifically in the Mountain Pass deposit in California.

• Mountain Pass Materials is developing the most advanced eco-friendly mining facility

• High Barriers to Entry, Capital Intensive, Limited Supply

Research and Development:

1.       Battery Technology: Batteries are one of the most important elements in EVs. The amount of energy that can be stored in a battery will determine the range and performance of the vehicle. The most common type of battery is Lithium-ion batteries making up about 70% of the rechargeable battery market.

• There are three core components in making batteries: cell -> module -> packs

  • Cells: smallest, but most critical component that produces energy and make up 75% of the cost

    • China and the U.S. are expected to have 84% of the lithium-ion cell production

  • Module: contains several cells with terminals to connect and make up 11% of the cost

  • Packs: consist of modules that are assembled with cooling equipment and make up 14% of the cost

• Ark’s research indicates that leaders are manufacturing cell-to-battery packs/vehicles without modules to produce more kilowatt-hours and increase the range of vehicles.

• Battery costs have also improved drastically falling by 28% to below $100/kilowatt-hour (kWh)

• Research is heavily focused in cathode materials that can deliver higher energy density

• Tesla/Panasonic partnership leads the pack in battery production followed by LG Chemical, AESC, and Samsung SDI, QuantumScape

2.       Semiconductors: The brain behind EV companies are chips. They enable the electrical sophistication of powering the batteries, supporting tech components in the vehicles, and providing software.

• Nvidia, Taiwan Semiconductor Manufacturing Co, NXP Semiconductors, TE Connectivity, Infineon Technologies, Renesas

3.       Autonomous Technology: EVs with the software capability to achieve self-driving autonomy will create an initial competitive advantage. There are assumptions that Tesla plans to launch a fully autonomous taxi network.

• Camera-based strategy, Lidar and HD Mapping, and infrastructure sensors are three main technologies deployed to achieve autonomous driving

• Ark’s research is forecasting $1trillion in earnings by 2030

Brand & Vertical Integration across the supply chain:

1.       Distribution and scalability to increase market share will be defined by brand strength and infrastructure to produce rapidly. Vehicles with the most advanced technologies that achieve reliability, performance, and practicality will benefit. Additionally, many young EV companies are partnering with existing auto manufacturers who have the appropriate infrastructure to produce at scale, except for Tesla. Companies that develop their own production facilities with practical scalability will have an advantage initially.

2.       High margin opportunities will also be present in the recycling process of batteries. Recycling batteries will require unique expertise in chemical management and logistical constraints in terms of the location of facilities.

🏆How to evaluate the winners?

1.       Do not fall into the Nikola trap. EV companies with only a story will likely end-up last in this race. Companies that have proven tested prototypes with near sighted production plans have an opportunity. The most idealistic position will be EV companies that already have vehicles in the market and expanding their footprint.

2.       Manufacturing infrastructure with high capacity. Very few EV companies can expand their footprint at the scale of traditional automakers. Usually, they must acquire and restore old plants or partner with legacy automakers who also are competitors in the market. It is important to identify players that can invest quickly in smart factories and scale rapidly without the significant support of existing large automakers. Profitable production at scale is key.

3.       Unit economics plays a significant role, especially among commercial vehicles. It is important that the EV vehicles can compete in price with traditional gasoline-powered vehicles. The economic feasibility check will make it a no brainer for companies like Amazon, UPS, and other commercial fleets to make the switch towards EVs at scale.

4.       Technology advancement and IP preservation will also become a critical factor. EV companies that have consistent R&D investments to generate future cash flows will have an advantage. Regarding the EV product, Ark highlights that $/charging rate or miles of range added per minute of charging will set companies apart from competitors. Beyond the vehicle itself, identify companies that will develop revenue streams from the collection of data, implementation of autonomous networks, and production of high margin products in the supply chain.

5.       Teams with a high count of engineers and experts in the space will have a talent pool advantage. Look for EV companies with management that is experienced across the supply chain, leaders with expertise from legacy automobile companies, and existing talent from EV leaders such as Tesla.

6.       Mass-Market demand needs to be available in the very near future. Identify companies that have high commitment and long-term relationships with customers. Usually, many EV companies that will become public will have very little revenue. As a result, relationships with large customers will make or break the company.

⛰️What challenges will the EV space experience?

1.       Energy infrastructure to support the EV revolution. Consistent charging infrastructures at profitable business models are a necessity. Right now, there is a lack of consistency in supporting this infrastructure. User experience from payment platforms, uptime, performance, and ability to reserve a charger needs to be defined. Currently, user experience is not the best and one does not have the patience to wait for many minutes to drive an additional 20-40 miles. Charging should be as easy as filling up the car with gas.

2.       Integration of Electric Vehicles with existing power systems: As EVs continue to expand, electricity demand and supply will need to adapt. Managing charging patterns as well as incorporating renewable-based electricity generation (such as solar panels) will play a key role.

3.       Cybersecurity Risks: As vehicles become connected across all components and we shift to a stage of autonomous driving, cybersecurity becomes more important. Cars today have over 100+ electronic control units and millions of lines of code. Risks of hackers accessing ECUs can lead to severe public safety issues. Consumer trust can destroy a product or propel its adoption.

4.       Recycling Infrastructure: Extraction of rare earth minerals like lithium is a difficult and lengthy process. Since a higher concentration of these metals already exists in batteries, recycling becomes a critical component. If EV companies are targeting a sustainable future, then a solution to recycle battery cells and other components in the supply chain is critical.

🧠Key Insights for Time Investors:

• There is a major push from governments to reduce greenhouse gas emissions. The Biden administration has made it clear that they will support many changes that will transform the automobile industry

• Understand the supply chain process and focus on the stages that will have less competition and higher margins. Raw Material Mining, EV brands that have advanced and protected technologies, and the recycling stage will present great opportunities

• More specifically identify companies with the greatest engineering talent, heavily focused on R&D, have viable products, and realistic strategy to scale rapidly

• There are four key segments in the space: passenger vehicles, light commercial vehicles, 2 Wheelers, Municipal Buses

• As e-commerce is exploding and governments support policy the initial growth based on pure economics will be on “last-mile delivery” and buses.

-Igli

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

The next couple of breakdowns will focus on the best companies that I believe will be strong players across the EV Supply Chain! Get ready Time Investors!

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Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Ark Invest Big Ideas 2021 - Electric Vehicle Section

• The Evolution of Electric Vehicles

• Special Video on EV Breakdown

• The Supply Chain for Electric Batteries

• Electric Vehicle Outlook by Bloomberg

• Global EV Look 2020 Report

• Where is the money in EV by Seeking Alpha

Disclaimer:  The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies.

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harri

To all the Time Investors:

I came across a quote recently from Robert Harris that states, “the true currency of life is time, and we’ve all got a limited stock!”. Now, this is an intuitive concept, but do we really step back and realize the impact and value of time and how that relates to our personal growth. Last week Pomp, wrote about a concept called “Time Billionaires” in his daily newsletter that was referenced from an episode with Tim Ferris and Graham Duncan, the co-founder of East Rock Capital. Here is a quick excerpt below:

Graham Duncan: I was listening to a guy introduced a speaker a while ago. And he was saying people don’t really understand the difference between billionaires and millionaires. He said a million seconds is like 11 days. A billion seconds is 31 years. And I was thinking of time billionaires that when I see, sometimes, 20-year-olds – the thought I had was they probably have two billion seconds left. But they aren’t relating to themselves as time billionaires…What’s startling about the picture – again, to this question of how long a billion seconds is – is how short it is.

This concept is profound, and it inspired me to think about what I would like Equity Breakdown to evolve into as we build a repository of knowledge in the community of modern investors focused on disruptive industries. Moving forward, I would like for all of us to consider ourselves not just value investors, trend investors, growth investors, or contrarian investors, but more importantly Time Investors.

Now, let us define a Time Investor?

A Time Investor focuses on using the true currency, time, to build fundamental long-term wealth. As a Time Investor, you invest in society by finding wonderful companies in disruptive industries and then use the currency of life, time, to deliver strong returns. A Time Investor needs to maintain five key important principles:

1. Always have an owners’ mindset

2. Have an open mind with an independent point of view and always be willing to change, refine, or re-design with important and new information

3. Understand the most valuable currency of life, time, and build a relationship with it knowing full-fledge you are investing for decades

4. Poses composure and stronger risk tolerance because of the strong level of honest competency

5. Have the courage to act big when you experience a painful feeling of being right

The logic is simple and clear, but very difficult to maintain. This leads us to one key question:

1. What investment framework should a Time Investor deploy to achieve returns?

To equip Time Investors in the game that will be played, I am adopting an investing framework that will be centered on one key term, strategic resources. Professor Baruch Lev from NYU Stern sets the stage by defining the three core qualities highlighted below that makeup strategic resources in his book, “The End of Accounting and the Path Forward for Investors and Managers”.

Strategic Resources provide value, rarity, and are difficult to imitate:

1. Valuable: Assets create a stream of benefits, exceeding costs, such as patents for profitable products and services.

2. Rare: Assets are limited like the Mountain Pass rare earth mining center in North America.

3. Difficult to imitate: Assets can not be replicated easily and require significant resources to be acquired or imitated by competitors.

As outlined in the theory of the firm, the purpose of the existence of a company is to maximize sustained economic profits. To maximize profits, the company needs to achieve sustained competitive advantages. To achieve sustained competitive advantages, the company needs to efficiently operate its strategic resources.

Our investment philosophy, which is investing in society, will be like a mosaic where we will focus on growth, value investing attributes, and more importantly strategic resources. This will support our ability to identify and break down long-term investment opportunities that we believe will have the strategic resources to lead and dominate in disruptive industries.  The approach will be an “inside-out process” that will map a visual framework of what these resources are, how they are deployed, and what value they generate for the company.

The Strategic Resource Breakdown Investment framework will focus on providing Time Investors with five key attributes:

1. An inventory of strategic assets, characteristics, and value in their industry. Examples of these will be patents, brands, landing rights, disruptive technologies like mass-producing 3D printing systems, or proprietary algorithms. To generate value an organization must build an organization around its strategic assets.

2. A map that links strategic resources and companies’ investments. We will build information that focuses on R&D expense and SG&A expense to understand the company’s investments in developing new technologies, acquisitions, employee development, or internal infrastructure team development. Whether a company fundamentally develops its technology or acquires it, the map will give us an idea of how much benefit will be generated, how quickly, and the risk level.

3. Identify the strategies management is taking to mitigate risks associated with strategic assets. Certain risks can be caused by disruptive technologies, regulation, management shifts, and infringement. An organization that becomes complacent because they currently have strategic assets is at risk of losing the game of wealth. The pace of disruption has accelerated and thus strategies that protect these resources are critical.

4. Track the company’s value by outlining how the strategic resources are deployed. Rather than focus our efforts on revenue and earnings which simply reflect what has already happened, we will build knowledge on what path was taken to create these outcomes. Ultimately, this is the best part of the recipe because it will truly give us a picture of whether management’s strategies are continuous or short term. As a pricing expert, I have seen how my organization gets excited when they increase profits by simply increasing prices. Unfortunately, that is not the right way to play the game of wealth when understanding the benefits of time.

5. Quantify the managers’ actions in creating, preserving, and deploying strategic resources. An effective management team needs to manage the entire chain of developing, protecting, and deploying strategic resources. They need to exhibit skills in competitive strategy. Professor Baruch Lev argues that today's company’s reporting does not provide an investor benefit by expensing R&D, or major strategic investments and ignoring the value of changes in strategic resources over time. As a result, a specific cashflow formula highlighted below will remove that ambiguity and quantify a company’s actions indicating systematic value creation by the company.

   • Residual Cashflow indicator:

     • Cash Flow from Operations +

     • Cash Flows from investments in strategic resources (R&D, Brands) –

     • Cash Flow capital expenditure (average over 3-5 years) –

     • Cost of Equity of Capital =

     • The value created by the management team to develop, protect, and deploy strategic resources

*Professor Baruch Lev and his research team have shown that this “lemonade stand” profit concept, beats the earnings bottom line and yields the highest returns.

For a visual framework please see below the proposed investment framework that we will apply to companies that indicate sustainable growth, growing residual cashflow, effective management team and a strong portfolio of strategic resources.

The Strategic Resource Breakdown will be applied across disruptive industries to identify common attributes across assets and then extrapolated to the companies that satisfy a strategic resource scoring system built on the data collected within each industry.

Cathie Wood for Ark Invest, clearly supports that humanity is experiencing the largest technological transformation in history across many sectors concentrated in blockchain technology, healthcare, robotics, energy storage, and artificial intelligence. The era is being compared to that of a century ago when the combustion engine, electrification, and communication technology of the telephone swept through the economy. Comrade Lenin put it best, “there are decades where nothing happens, and there are weeks where decades happen.”

The investment framework proposed will breakdown the true narratives of companies in disruptive industries and allows us to make decisions on a company’s potential role in the future.

Equity Breakdown will deliver for Time Investors no bullshit overviews and ultimately reveal the critical assets of companies through deep research in simple, short, and digestible forms.

Get ready guys, you are about to see from the beginning what it takes to transform from Level 1: Apprentice to Level 4: Master, in a very non-traditional way!

-Igli

You can access and download the detailed report which will include the summary for your records.

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

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Additional resources for all the Time Investors (Leeeetttsss Gooooooo!!!)

• Professor Baruch Lev - The End of Accounting

• Pomp Newsletter - “Time Billionaire”

• Graham Duncan Blog - “Start a new investment framework”

• Ark’s Invest - Investment Process

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To all the Equity Contrarians,

We are living in a golden age of massive technology disruption spanning from blockchain technology, genome sequencing, artificial intelligence, robotics, energy storage and the topic for today, 3D printing. The manufacturing industry is a $12.8 trillion monster that is prime for change. A new method is necessary that ensures domestic supply chains, custom designs of products at mass scale, and green production. 3D printing is now back on the radar to bring about this revolution and bridge the gap between design and production, empowering designers, and producing products with new architectures and less waste. There are many players who have existed in this space for a while but without the ability to achieve mass production. Today we will breakdown Desktop Metal, ($DM), a company that wants to revolutionize 3D printing by introducing mass-scale production.

Business Summary:

Desktop Metal is a manufacturing company that produces metal 3D printing systems. The company is leading the industry with additive manufacturing technologies with a focus on the production of end-use parts. Desktop Metal was created in 2015, by a team of renowned experts in materials science, mechanical engineering, and metallurgy to advance metal 3D printing to be faster, less complex, and affordable to be used in the most scalable fashion. The company delivers a solution that starts from product development to ultimately mass production across various industries, making it the first 3D company that is focused on volume production of end-use parts instead of just design and prototyping.

Technology Platforms: The company will aim to change the way parts of almost all materials are designed, manufactured, and sold around the world. They will accomplish this feat with key technology platforms:

1. Production System: first 3D printing system for mass production. The Single Pass Jetting technology makes it the fastest metal 3D printer in the world with the highest capacity. This is scheduled to ship in volume 2H 2021. The system ensures excellent part quality, competitive part costs, repeatability, and supports a variety of metals as inputs.

2. Studio System: is the world’s first office-friendly system designed to 3D print for the shop floor. Engineer teams can produce highly complex parts without leaving the office at 10x less cost than traditional metal 3D printers. The system uses Bound Metal Deposition and does not require lasers and powders. With power, internet connection, and CAD you will be producing immediately. The studio has been shipping in volume since Q4 2018. The key phrases to remember here are high-quality parts, easy to use, designed for the office.

3. Shop System: provides additive manufacturing to the machine shop market. Businesses can produce batches of complex, end-use metal parts. The system is easy to use and operate and ensure high productivity of 10x the speed legacy PBF additive manufacturing. Volume commercial shipments to begin in Q4 2020.

4. Fiber: first desktop 3D printer to produce high-resolution parts with “aerospace/industrial grade” fiber composite tape. Customers can print strong, stiff parts in a broad range of materials used in industrial Automated Fiber Placement ("AFP") processes. This is scheduled to ship in volume Q4 2020.

*Software is also a critical component streamlining the process of setting up to print.

*120+ patents issued or pending

The company’s mission is “to make 3D printing accessible to all Engineers, Designers, and Manufactures.”

Industry:

The global manufacturing industry is a $12 trillion behemoth (60% of US GDP). Currently, there are significant limitations in conventional machining methods. High upfront costs of tools/equipment, long lead times for design and production, design limitations, lack of customization, waste, and minimum order quantities to achieve cost efficiencies. 3D printing, or additive manufacturing, has emerged as the solution. The following benefits stem from the use of 3D printing:

• Design flexibility

• Assembly consolidation

• Supply chain evolutions

• Sustainability

• Mass customization

• End-use production

According to research from ARK, 3D printing will revolutionize manufacturing, growing to $97 billion in 2024 at an average annual rate of 65%. In its infancy, 3D printing 1.0 was focused on design and prototyping which lacked scale. Now, 3D printing 2.0 has emerged with its primary focus on mass production and end-use parts. According to E&Y global survey, 83% of industrial businesses planning to apply 3D printing technologies which resulted in a spending boom that has doubled from $6 billion to $12 billion from 2016 – 2019.

Market Opportunity:

Desktop Metal is positioned to lead the industry in deploying 3D technologies for scalable, end-use production. The company provides easy-to-use, high-quality, integrated manufacturing solutions built on hardware, software, materials, and services. The legacy 3D technologies have reached high penetration in the $12.5 billion prototype market. Desktop Metal has a TAM of $490 billion with growth expected to transform from $12 billion in 2019 to $146 billion by 2030.

Business Model Landscape:

Desktop Metal generates revenue from the sales of their products. Studio Systems was their first product that was shipped in Q4 of 2018. To date, the company has generated 86% of the revenue from selling Studio System with consumables such as metallic/ceramic materials and 14% from software and support services. The company is in the late stages of developing the three additional 3D systems which have already been installed in early customers.

Desktop Metal markets and sells 3D solutions through a global distribution network. The team is heavily resourced towards product development and as a result majority of revenue results through sales to resellers, who in return resell the company’s products and provide services to the customers.

The following customer landscape is created through Desktop Metal’s platform:

• Primary customers are global distribution network of 80 resellers experienced in the 3D space and across 60 countries

• Customers range from automotive, aerospace, healthcare, consumer products, heavy industry, and machine design. No single customer accounts for more than 10% of revenue.

  • BMW and Ford have provided strategic investments

  • Adidas, Bosch, Google, U.S. Army, Lockheed Martin, StanleyBlack&Decker

• 89% of the revenue is generated in North America and Europe.

Competitive Strengths (Moats):

Desktop Metal has classified a series of core strengths to dominate the additive manufacturing space:

1. Technology Platform: The company has three core key print process innovations that are unique to the market:

   • Single Pass Jetting | Bound Metal Deposition | Micro Automated Fiber Placement

   • The company has developed proprietary sintering technology, which means to compact and form solid objects, with software to make strong end-use products in an office setting.

2. Team: The team is founder-led with the majority being engineers in mechanical engineering, materials science, software, robotics, and industrial design. More than 25 employees hold PhDs.

3. Global Distribution Network: The network of resellers is global with vast experience across digital modeling and 3D printing. The network brings an existing base of customers and supports all commercial functions to generate revenue.

4. Diverse Product Portfolio: The company provides four system solutions that are defensible and difficult to replicate. The company offers office-friendly, entry-level, low-volume production of metal parts to industrial, high-end mass production.

5. Printer Speeds & Turnkey Solutions: Production system can achieve speeds of 12,000 cubic centimeters per hour allowing customers to print millions of parts per year. More importantly, the company also maintains consistency and accuracy. Additionally, with software and a special furnace, it enables customers with minimal 3D printing experience or materials expertise to process complex metal parts entirely in-house without third-party equipment required.

6. Green Manufacturing: The company delivers mass-scale production with near-zero waste. The vast majority of metal is transformed into parts and the powder produced is reusable.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

1. Competition: Desktop Metal is active in the metal filament space and binder jetting space.

   • Metal Filament Space: BASF, Apium, Triditive

   • Binder Jetting: HP, Stratasys, Digital Metal, 3DEO, ExOne

   • HP has metal 3D printing systems in development, likely to be a binder jetting system

2. Business Model dependence on recurring revenue: Purchasing input metal materials or related service contracts to be incorporated in the future 3D printing systems orders is essential. Customers are sensitive to pricing and demand needs to continue for the Production systems which directly impact the input metal materials.

3. Dependence on Network of resellers: Company does not have channels that directly sell to end-customers. Heavy dependence on the 80 sellers places the commercial efforts at heavy risk.

4. Reservations for the Production System may not convert to orders: There are currently 90+ reservations with shipment visibility through the first half of 2024E. The current economic climate created by Covid and price points does create risk with customers’ ability to follow through on purchases. The Production system is necessary for mass production.

Team:

The company is still founder based and is composed of the following key members:

• Ric Fulop, Founder, and CEO: Prior, Fulop was GP at North Bridge Venture Partners and Founder of A123 Systems, Inc., Boston’s largest IPO and one of the largest automotive lithium-ion suppliers

• Steve Billow, President: Prior, Billow served as VP and CTO of Inkjet Solution of Electronics

• Jonah Myerberg, Co-Founder and CTO: Prior, Myerberg served as Director of Technology for A123 Systems.

• Leo Hindrey, Jr., Chariman and CEO of Trine Acquisition Group: Hindrey is an accomplished leader and investor. He has served as CEO of AT&T Broadband, CEO of GlobalCenter Inc, and CEO of the YES Network, and recognized as one of the cable industry’s “25 most influential executives”.

• 6 Co-Founders (4/6 – MIT Professors)

• Existing DM shareholders will retain 74% of the company with SPAC trust shares at 12%,Founder shares at 2%, and Pipe Equity at 11%.

Financial Performance:

The company post-merger with TRNE will have an implied Enterprise Value of $1.8 billion representing 1.90x 2025 revenue.

The company has achieved $26.4 million in revenue for the year 2019, a (2,457%) increases over the $1.0 million earned in 2018. This instant increase is a direct benefit from a full year of product shipment. More recently the company earned $5.5million in six months ended 06/30/20 resulting in a (-54%) YOY from $12.1 million. The drop in sales in 2020 was related to the Covid economic shutdown. However, the company is expected to hit $15-$25 million in 2020 and $941 million by 2025.

As of 12/31/2019, and 2018, the company’s net losses were $103.6 million and $121.4 million. Gross margins for the business as of 2019 are -$24.4 million. The company is expected to achieve positive gross margins by 2021 of $19.8 million (25.6%) and $508 million ( 54%) by 2025.

The business is asset-light with completed manufacturing and systems ready for delivery. Reservations amounting to ~$500M of revenue is scheduled in the span of five years.

Post-transaction the company will be equipped with $625 million of cash and $9.9 million in debt.

The company provides the following forecasts:

• Revenue - 2025E: $941.5M (211.6% CAGR)

• Gross Profit – 2025E: $508.3M (54.0%)

• Adj EBITDA – 2025E: $268.2M (28.5% margin)

• Free Cash Flow – 2025E: $230.5M (200% CAGR)

• EV / Revenue – 2025E: 1.9x

Desktop Metal plans to continue growth through the following strategies:

1. Strategic Acquisitions: The company is equipped with cash to accelerate market penetration and build a long virtuous cycle between parts, materials, and printers. This will help achieve vertical integration.

   • 10+ opportunities in contract

   • 60+ opportunities ~$2B revenue opportunity identified

2. Expand service related to parts: The company intends to manufacture parts for sale to customers. This will allow customers with low CAPEX abilities to purchase parts before fully integrating in-house production through the platform systems Desktop Metal offers.

3. Extend distribution channels: The company will increase its direct sales efforts to expand its footprint with Fortune 500 companies. The majority of the networks are focused on North America and Europe. Currently, the company is generating only 11% revenue in Asia-Pacific, with strong opportunities in the Middle East and Africa.

-Igli

You can access and download the detailed report which will include the summary and a company info-graphic for your records.

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

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Additional resources for all the Equity Contrarians (Leeeetttsss Gooooooo!!!)

• Desktop Metal One Page Infographic

• Desktop Metal Company Filings

• Desktop Metal Chamath Palihapitiya One Page Memo

• Desktop Metal Investor Conference Call Transcript 08.26.2020

• Desktop Metal Investor Presentation

• Desktop Metal Timeline Achievements

• NewsThink 3D Printing Industry Video

• Desktop Metal Virtual Tour

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To all the Equity Contrarians,

One thing that is certain after this pandemic, is that consumers purchasing behavior is permanently shifting online. As e-commerce is exploding, key features such as trust, transparency, frictionless spending, and consumer analytics will propel certain Fintech players to dominate the $5.4 trillion global e-commerce market. There is a company that will be going public in December, co-founded by a former co-Founder of Paypal, that claims to be have the exact recipe for success in the lending space. Tonight we will breakdown Affirm, (AFRM), a company that wants to transform the way consumers buy and merchants do business.

Business Summary:

Affirm is a fintech company that provides installment loans at point-of-sale purchase for US Consumers. In fact, I was on the verge on purchasing a Peloton bike thanks to Affirms special offer, 0.00%, 39 months, $48.59/mo, but my impulse was tamed. The company offers online and mobile platform for lending and credit services for customers to purchase items and pay over period of months. The company wants to accomplish three goals with their technology:

• Deliver trust and transparency

• Responsible and confident spending for consumers

• Fluid conversions and sales growth for merchants

Platform Features: Affirms platform consists of a point-of-sale payment solution, merchant commerce solutions, and consumer-focused app. The following features are present:

Consumers:

• Integrated Checkout – pay overtime with 0% interest

• Virtual Card – widely accepted payment method

• Split Pay – built fixed payment plans with specific time frames for purchases under <$250

• Market Place – Personal product recommendations

• Savings – Insured interest-bearing account

Merchants:

• Merchant dashboard: highlights transaction data, manage charges, review analytics on product performance and consumer purchasing behavior

• Brand Sponsored Promotion: Suppliers can provide brand-specific promotions and offers can be personalized based on consumer analytics

• Integration: Direct API, provides smooth site integration into payment and product pages with dedicated support team.

Technology: The tool leverages rich data landscape from deep behavioral, financial, shopping, and payment data as well capabilities such as fraud detection, credit check functionality, and pricing.

The company’s mission is “to deliver honest financial products that improves lives”.

Industry:

Commerce is experiencing transformation from positive effects of technology. The simple interaction between consumers and merchants are now changing after years of limitations. In the past, consumers experienced complex payment options, opaque fees and penalties, and lack of flexibility to complete or tailor purchases. Merchants on the other hand were also limited to offering consumer friendly solutions, discounts were not used based off data insights resulting in loss of brand value, and they received no benefits from old legacy payment networks. New trends have now emerged in the industry tackling the problems faced in the past

• “Buy now pay later” market expansion: People want flexible payment options. Based on Wordplay’s 2020 Global payments report, “buy now pay later” is the fastest growing e-commerce platform. In 2023, it is expected to be 3% of the ecommerce payments. In EMEA, it already accounts for 6% of the e-commerce payment network, with expected growth to 10% by 2023.

• Gen Z and Millennials: 25% of Millennials do not carry credit cards. Over 160 million people in the category prefer to build relationships with brands and receive engagement. According to a Harris Poll in 2020, 64% of Americans aged between 18 – 34 years prefer financial products through a technology platform.

Market Opportunity:

Online sales grew 20% to $3.4 trillion in 2019 and accelerated in 2020. By 2023, it is estimated to grow to $5.8 trillion. E-commerce represents 14% of total retail sales and in 2020 it has jumped to 16%. Based on Statista, 70% of Millennials prefer shopping online as well. This market is prime for growth and Affirm is positioned to take a position. The TAM is broken out in a couple of segments:

• E-Commerce: $600 billion dollar market opportunity with potential expansion to $1 trillion by 2023.

• Omni-Channel: $7.6 trillion was processed by credit cards in 2019. Virtual card and consumers being able to pay in store with application will shift this opportunity.

• Merchant Marketing: According to B2B Lead, $1 trillion is spent by merchants to acquire customers.

Business Model Landscape:

Affirm earns revenue from both merchants and consumers.

Merchants: Affirm receives a fee conversion of sales and offering of payment options. This revenue stream amounts to ~50% of revenue.

• 0% APR financing represented 43% of GMV

Consumers: Affirm receives interest revenue on loans that are purchased from their partnered banks and currently amount to ~37% of revenue.

• Consumers are not charged deferred, compounding interest fees, late fees, or penalties.

• Interchange fee from the use of Virtual cards which represented 4% of revenue

Bank Loans: The company generates ~9% of revenue from gain on sale of loans.

The following customer landscape is created through Affirm’s platform:

Consumers:

• The company has 6.2 million consumers as of 09/30

• 47.8% are Millennials, Gen X (32.3%), Baby Boomers (12.4%), and Gen Z (6.8%)

• 3 million out of 230 million Millennials participating in the platform

• 68% of consumers accessed Affirm through mobile device

Merchants:

• 6,500 merchants integrated

• Merchant base has expanded by 84%

• Dollar-based merchant retention has exceeded 100%

• Customers are concentrated in industries such as, sporting goods, furniture and homewares, travel, apparel, accessories, consumer electronics, and jewelry (Neiman Marcus, Peloton, Inntopia, NutriBullet, Bonobos, Shopify, Eventbrite, and etc)

Competitive Strengths (Moats):

Affirm has classified a series of core strengths to dominate the lending space:

1. Network Effects: As consumers increase in using Affirm, merchants will gain significant value by understanding consumer insights. This will attract more merchants to participate. As more merchants integrate, better solutions are offered which attract more consumers. The ecosystem expands resulting in increased efficiencies.

2. Engineering Team: 47% of the employees are in technology or engineering related roles. Affirm can be easily integrated through their direct API regardless of the size of customer. Additionally, they designed their own ledger “to handle point-in-time reporting on millions of concurrent simple interest obligations. “

3. Proprietary Risk Models: The company prides itself on assessing risk better than competitors at a transaction level. The company approves 20% more customers than competitors and resulted in a weighted average delinquency rate of 1.1%. The company can quickly and accurately assess, price, and manage risk.

4. Technology Infrastructure: The infrastructure to source, aggregate, protect, and analyze data is considered a moat. The company uses 7.5 million loans and 6 years of repayments to train their models. The company can leverage SKU-level data and with their claims on ML capabilities can detect fraud, price rick, and offer custom solutions to consumers.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

1. Competition: The company’s primary competition is legacy payment methods, such as credit and debit cards, mobile wallets, and other pay-over-time solutions

   • JP Morgan, Bank of America, Capital One, PayPal, Afterpay, and Klarna

2. Revenue concentrated in one Merchant Partner: Top merchant partner, Peloton, represented almost ~28% of total revenue. Top 10 Merchants represent 35% of revenue. If the home fitness trend fades this can severely impact Affirm.

3. Agreement with Originating Bank Partners is non-exclusive and short term: Cross River Bank originates a substantial amount loans that are present in the platform. The current loan program agreement ends in Nov. 2023 and they do not prevent the bank from working with competitors.

4. Funding Sources are key to supporting Affirm Network: Capital efficient fund model is key to provide a successful commerce platform. If funds seize due to economic conditions or loss of banking relationship, then Affirm cannot offer the flexible payment solutions that are core to its business.

Team:

The company is still founder based and is composed of the following key members:

• Max Levchin, Founder and CEO:Prior, Mr. Levchin co-founded PayPayl and served as Chief Technology Officer. He then founded Slide, a personal media sharing service, and Glow, a women’s health company.

• Libor Michalek, President, Technology: Prior, Mr. Michalek served as Engineering Director at Youtube and Google and Chief Technology Officer at Slide.

• Sandeep Bhandari, Chief Risk and Strategy Officer: Prior, Mr. Bhandari served as Chief Credit Officer at LendingClub Corporation.

Financial Performance:

The company has yet to release its target raise during its IPO debut but based on some past rounds we can see an increasing pattern. In 2019 the company raised $300 million at a weighted average of $13.18. More recently in their Series G, they raised $500 million at a weighted average share price of $19.93. With current outstanding shares this puts the speculative value of the company between $2.3 billion to $3.3 billion.

The company has achieved $509.5 million in revenue for year fiscal year ending 06/30/2020, a 93% YoY over the $264.4 million earned in fiscal year ending 06/30/2019. For the three months ended September 30, 2020 the company achieved $174.0 million representing a 97.9% increase YoY from $87.9 million. As of 06/30/2020, and 2019, Affirm has yet to be profitable with net losses of -$112.6 million and -$120.5 million.

Affirm however is showing significant growth. The Gross Merchandise Volume (measures volume of transactions) as of FY 06.30.20 increased by 76.9% from 2018 to $4.6 billion and 626% from 2017. The company also uses a key metric known as contribution profit to highlight growth unit economics of their transactions in their platform. As a result, they remove technology, data analytics, sales, and marketing, general administrative, and loss on loan purchase amount expenses from their operating loss. This results in a $180 million (3.9%) contribution profit over the $4.6 billion gross merchandise volume in 2020.

Affirm also has experienced increased customer engagement with 77% increases YoY in 2020. Transactions per active consumer has slightly increased as well. Based on the most recent consumer base, repeat consumers spent an additional $2.2k in the next 12 months after making their first purchase on Affirm.

As mentioned, the company does depend on funding relationships with banking partners to continue scale and ensure low consumer acquisition. To date they have $4.2 billion of funding capacity.

Affirm plans to continue growth through the following strategies:

1.       Expand to Higher Frequency Purchases:

• Consumer Reach: Increase brand awareness through different channels with additional customer features such as managing debt obligations as well.

  

• Merchant Reach: Affirm will be working with Shopify so U.S. merchants can offer buy now, pay later to their customers from a B2B perspective.

2.       Expand to New Markets in Asia

-Igli

You can access and download the detailed report which will include the summary and a company info-graphic for your records.

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

Subscribe now

Additional resources for all the Equity Contrarians (Leeeetttsss Gooooooo!!!)

• Affirm One Page Infographic

• Affirm Company Filings

• Affirm Blueprint (Medium Article)

• Affirm Pitchbook Analysis

• Affirm CEO Interview on the Future of Credit

• Affirm Company News

As our economic infrastructure transforms incorporating technologies like wind turbines, electric vehicles, drones, or any advanced motion technology, certain rare minerals become strategic assets to maintain a competitive advantage in the near future. A key component for these technologies to function is through the use of magnets derived from rare earth minerals. However, rare earth minerals are hard to get to and dispersed in specific locations on the planet, with a high concentration in China. Now there is a company that aims to balance the scale of power and ensure the U.S. regains its title in the production of rare earth minerals and more importantly the magnets that will fuel the 21st-century technology applications. Today we will breakdown Mountain Pass Materials (MP).

Business Summary:

MP Materials owns and operates the largest, rare earth materials mining and processing facility in the Western Hemisphere.

The Mountain Pass facility has been around since 1952 and represents the only developed commercial source of rare earth materials in the Western hemisphere. It contains an open-pit mine and infrastructure associated with crushing, mining, flotation, and separation is available and in the process of being reactivated. The mine contains the following rare earths in its ore body.

It is estimated that Mountain Pass has the following reserves and average ore grade which defines the amount and difficulty of mining the rare earth materials. The ore body is world-class with significant opportunities to extract valuable rare earth minerals. Based on the reserves without exploratory drilling, the expected life of the mine is 24 years.

All of the assets were acquired out of bankruptcy in 2017 by MP Materials. The company now has raised $545 million to execute a multi-phase plan to achieve the domestic supply of rare earth materials and production of permanent magnets. Below are the three stages that will secure profitability:

1. Stage I: Rare Earth concentrate production

2. Stage II: Separated rare earth oxide production

3. Stage III: NdPr Magnet Production

The company’s mission is “to restore the full rare earth supply chain to the United States of America”.

Industry:

Rare Earths are a family of 17 elements. The “rarity” of the minerals does not come from the limited supply but from the fact that they are hard to get at, difficult to separate/extract, and dispersed across the planet. The value in the minerals is derived from the creation of the first rare earth magnet in the 1960s. These magnets became key components that are essential to modern century applications in transportation, national defense, consumer electronics, and clean energy. The permanent magnets of today are composed of iron, boron, neodymium, and dysprosium (key ingredient for magnets to operate in high temperatures). As mentioned, rare earths are concentrated, and China controls the production of 98% of the world’s dysprosium and 83% of the global rare earth oxide production.

The Rare Earth minerals are part of a global market that is worth $3.4 billion annually, or 165,000 metric tons. It is growing at a rate of 3.7% and are used specifically in the following applications:

• Clean-Energy Technologies: traction motors in EVs and generators in wind turbines, linear motors in mag-lev trains

• Hi-tech applications: miniaturization of smart phones, computing devices, fiber optics, lasers, robotics, and medical devices

• Defense applications: drones, control systems, radar, and sonar, communications

• Industrial applications: catalyst application in oil refineries, pollution control systems in combustion engines, LED lighting and phosphors

The Neodymium and Praseodymium (NdPr) magnets make up a significant majority of the market and are expected to grow to 6.1% CAGR from 2020 to 2035. The largest drivers will be the electrification of the transportation industry from EVs, trains, etc. Additionally, clean energy technologies and robotic industry will also be a key contributor to the market expansion of rare earth demand.

Market Opportunity:

As economies transform, the rare earth minerals will supply the electrification transformation to fuel that transformation.

The company will focus its efforts on the eventual production of NdPr magnets. As it stands today the magnets are a critical component and widely accepted as a standard in the EV industry. This results in a TAM of $10.7B by 2030.

• Annual production of EVs is expected to grow to 57 million units by 2035. Each EV will require the NdPr magnet, which ultimately means high demand

• The EV industry will consume 100% of the NdPr magnet demand with current production today

Business Model Landscape:

MP Materials currently produces rare earth concentrate that they sell to Shenghe Resources (Singapore). The company has successfully achieved Stage I where they can mine and produce rare earth concentrates. The business model will eventually expand to deliver the final production of NdPr Magnets.

The following customer landscape is currently present for MP Materials:

• Shenghe Resources (Singapore) is the only customer the company currently sells to. The Singaporean company in turn sells the rare earth concentrate to end customers in China. The contract established is a “take or pay basis” which means the company will pay for the product even if they can’t take the delivery

  • The company advanced $50 million to help restart operations in Mountain Pass

  • Shenghe Resources will receive all the production of rare earths until the investment resources are recovered

• Secure Natural Resources LLC (“SNR”), a company controlled by MP Materials majority equity holder holds the mineral rights to Mountain Pass mine as well

Competitive Strengths (Moats):

MP Materials has identified a series of strengths.

1. Location: Mountain Pass is the only scaled source for critical rare earths in operation in the Western Hemisphere. There is a high barrier of entry due to the financial burden and expertise of operating the mine making it very difficult to replicate.

2. Platform: The company is positioned to deliver rare earth supply, at a low-cost, domestic, and environmentally sustainable way. MP Materials has government support through the National Defense and Authorization Act of 2019 which has deemed NdPr magnets as critical to the defense and industrial security of the country. On Sept. 30, President Donald Trump signed Executive Order 13817, which seeks to return rare earth production to the United States and break China’s supply chain dominance.

3. Resource: With 60 years of operation the company owns one of the world’s largest and highest-grade rare-earth deposit

4. Sustainability: 95% of the water used is recycled and the facility uses natural gas to power its cogeneration facility that in return uses steam to provide power to the entire facility. The facility demonstrates superiority in terms of environmental impact.

5. Operating Strategy: Mountain Pass has re-established stable, scaled production of rare earth concentrate. The company has accumulated additional capital resources through its merger with FVAC to eventually build down-stream operations to separate rare earth minerals at lower costs to ultimately produce higher-value NdPr.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

1. Competition: The main competitors in the rare earth mining and processing markets are six major rare earth producers in China. Lynas is another smaller competitor that operates in Malaysia. Chinese producers historically have benefited from producing at low costs due to domestic regulations and low environmental regulations.

2. Environmental Regulation:  Regulations relating to emissions, water usage, wastewater and stormwater discharges, air quality standards, GHG emissions, waste management, plant and wildlife protection, and disposal of hazardous and radioactive substances can severely impact operations. Permits will be based on ensuring the company keeps up with government regulations in the areas listed previously.

3. Depend on Shenghe Resources (Singapore) to purchase all the rare earth concentrate: All sales are conducted from the contractual agreement with Shenghe Resources. A breach of an agreement can seize current revenue risking Stage II and III operations for MP Materials.

4. Changes in China’s political environment and policies: Chinese government exercises control in nearly all sectors. Changes in laws and regulations can reduce shipments of rare earth concentrates impacting current revenue.

5. An increase in the global supply of rare earth products: China accounts for approximately 83% of the global production for rare earths and dominates the manufacture of NdPr magnets. The Chinese government is experiencing significant restructuring and consolidation and will potentially implement aggressive pricing measures and flood the market with NdFeb magnets to inhibit US production.

Team:

The company’s leadership team are high performing capital allocators specialized in scaling businesses.

• James Litinsky, Co-Chairman, CEO: James is also the CEO and CIO of JHL Capital Group, an alternative investment management firm. He was also part of the investment group at Fortress Investment Group. He holds a J.D./MBA from Northwestern.

• Michael Rosenthal, Chief Operating Officer: Michael has managed Mountain Pass since the company acquired the site in 2017. He was a partner at QVT Financial, an investment management firm. He focused his investment in the automotive sector and China.

• Ryan Corbett, Chief Financial Officer: Ryan was Managing Director at JHL Capital Group LLC. He has a strong career in investment banking and corporate finance.

Current Ownership of >5%

• JHL Capital Group (26.7%)

• Shenghe Resources Holding (7.7%) – only customer for MP Materials

• Fortress Acquisition Sponsor (6.4%)

• James Litinsky (37.0%)

• Daniel Gold (12.8%)

Financial Performance:

The company's recent closing share price is $22.29 resulting in a market cap of ~$3.5 billion and an enterprise value of ~$3.1 billion.

The company has achieved $73.4 million in revenue for year 2019, an 8.9% YoY over the $67.0 million earned in 2018. More recently the company in Q3 reported $41.0 million resulting in $92.1 million as of 09/30. This represents a 52% YoY in Q3 and 76% YoY YTD in 2020. A substantial majority of the sales are generated by the sale of concentrate to Shenghe Resources (Singapore).

As of 12/31/2019, and 2018, the company experienced net losses of $6 million and $13.4 million. However, the company has reported a positive Adjusted EBITDA of $1.9 million in 2019 and $24.6 million YTD in 2020 mainly driven by a strong Q3 of $11.6 million (159% YoY).

Originally the Mountain Pass facility had $1.7 billion of capital investments before it went bankrupt from their previous owner. With the completed merger with FVAC, MP Materials is now armed with $512 million in cash to continue their efforts to create the only scaled, fully integrated Western Hemisphere supply of rare earth magnetics with profitable operations.

MP Materials plans to continue growth through the following strategies:

1. Recommission the largest, most efficient integrated REO processing facility

2. Stage II completion will allow the company to leverage low-cost position to maximize earnings power

3. Build a marketing and sales organization to develop relationships with the largest American consumers of rare earth materials

4. Long-term vertical integration process REO into rare earth metals, alloys, and finished magnets.

-Igli

You can access and download the detailed report which will include the summary and a company info-graphic for your records.

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

Subscribe now

Additional resources for all the Equity Contrarians (Leeeetttsss Gooooooo!!!)

• MP Materials One Page Infographic

• MP Materials Company Filings

• MP Materials Chamath Palihapitiya One Page Analysis 

• MP Materials MP Materials CEO Interview

• MP Materials National Defense Magazine Article

• MP Materials Reuters Article

• MP Materials Company Video

One of the most anticipated IPO’s of the year is finally happening. This would represent the third-largest IPO of the year after Snowflake’s snowstorm and Bill Ackman’s Goliath-like SPAC. Tonight we will breakdown Airbnb, (ABNB), a company that wants to revolutionize human connection through authenticity, community, and design.

Business Summary:

Airbnb is a technology company that fosters a marketplace for home-sharing at a global scale. The peer-to-peer exchange platform of homes and cultural experiences creates a natural marketplace for guests and hosts. The company claims that after 13 years with over 4 million hosts and 825 million guest arrivals, they have helped millions of people satisfy a strong human connection. The company has three core principles:

• Community is based on connection and belonging

• Creativity and design are at the center of strategy

• Responsibility to all stakeholders that support the natural marketplace

The Airbnb ecosystem is made of up guest and hosts who experience the following features:

• Guests: 54 million active bookers worldwide booked 327 million nights and experiences on the platform. They can experience unique spaces, visit real communities, be hosted with authenticity, and more importantly, rely on a trusted platform

• Hosts: Hosts are represented globally, and benefit from the platform with earned income, connecting guests to their communities, and ultimately sharing skills and passions. 90% of the hosts were individual hosts, and 79% of those hosts had just a single listing. And as of December 31, 2019, 72% of the nights booked were with individual hosts. 

Technology Platform: The platform is designed to drive organic attraction through ease of use and more importantly the ability to allow millions of strangers to trust one another. They system contains many components:

• Reviews | Secure messaging | Risk scoring | Secure payments | Watchlist and background checks | Cleanliness | Fraud and Scam Prevention | Booking Restrictions | Guest Refund Policy |

• Delivers deep business intelligence insights to manage the marketplace from pricing to occupancy optimization

The company’s mission is “to allow people to experience a deeper connection to the communities they visit and the people who live there. They want you to “travel like a human”.

Industry:

The travel industry is composed of many diverse facets ranging across lodging, transport, and attractions. According to the U.S. Travel Association in 2019, $1.1 trillion was spent by travelers amounting to $2.6 trillion in economic output and supporting 15.8 million jobs. To put this in perspective direct spending by residents and international travelers in the U.S. spent an average of $3.1 billion a day, $128.6 million an hour, $2.1 million a minute, and $35,700 a second. Globally, travel and tourism’s direct contribution to GDP was around ~$2.9 trillion with a significant portion contributed from the U.S. The World Travel and Tourism Council estimated that travel spend will grow at a 3.5% compounded annual growth rate from 2019 to 2030.

Traditionally, the travel industry has developed around standardized hotels and selected attractions. However, with the sudden economic impact of Covid and integration of technology, the industry is experiencing democratization at an accelerated pace brewing new trends.

• Demand Evolution: Domestic and regional destinations are preferred during Covid times. This consumer behavior is creating abundant support for the local communities.

• Health & Hygiene: 89% of Americans are more conscious of germs now than before. Many fears contracting the virus and as result cite cleanliness & health as a critical factor for traveling.

• Innovation & Digitization: Remote work and will create new destinations for human migration. This will spur local community growth in terms of spending and digital infrastructure.

• Authenticity: Travelers are seeking authentic experiences in their destinations. Leisure activities and housing will need to bring to life the cultural elements of destinations.

Market Opportunity:

The company believes its serviceable addressable market (SAM) is $1.5 trillion.

• $1.2 trillion is for short-term stays (* short-term stays = fewer than 28 nights)

  • Long-term stays represented 14% of nights booked in 2019 and 24% for nine months ending 09/30. This however was excluded from the SAM estimate

  • The company accounts for 20% of the vacation rental industry

• $239 billion represents experiences (spend of travelers on attractions, including spas but not casinos)

The total addressable market (TAM) is $3.4 trillion.

• $1.8 trillion is for short-term stays, and $210 billion for long-term stays.

• $1.4 trillion represents experiences (includes spend of local residents on recreational and cultural attractions such as sporting events, summer camps, etc.)

Business is global so the TAM can also be broken out in the following geographies:

• $1.5 trillion in Asia Pacific region, $1.0 trillion in EMEA, $0.7 trillion in North America, and $0.2 trillion in Latin America

Business Model Landscape:

Airbnb has created a marketplace where hosts offer guests stays and experiences on their platform. The company produces revenue through service fees charged to hosts and guests net of incentives and refunds. They also collect lodging taxes that must be paid to the respective authorities.  Below is an example of the revenue model:

The following customer landscape is created through Airbnb’s platform:

• 4 million hosts as of 09/30/2020

  • 55% are women with 86% of hosts located outside the U.S.

• 7.4 million available listings of homes and experiences (5.6 million are active listings)

• Listings (private rooms, entire rooms, luxury villas, treehouses, and experiences) are in 100,000 cities across 200+ countries

• In 2019 the company had 54 million active bookers (booked stay or experience) and 247 million guest arrivals

• 84% of the revenue in 2019 came from guests stays with existing hosts who had completed at least on the check-in

• 69% of the revenue was generated by stays within the year in 2019 from repeated guests

• 63% of the revenue was generated by listings outside of the U.S. – global business

Competitive Strengths (Moats):

Airbnb has classified a series of core strengths that helped them revolutionize the travel industry.

1. Host Community: The hosts are unique and participate in the platform organically. Hosts recruit hosts and guests often become hosts. In 2019, 23% of new hosts were guests on the platform. The majority of the listings are available only on Airbnb

2. Guest Community: 69% of the revenue was driven by returning guests. They are actively involved in the community with 68% of them leaving reviews for their stay. Guests come to the platform directly, actively participate, and return regularly

3. Global Brand: “Airbnb” has evolved into a noun or verb when one wants to book an experience or travel. Google trends highlighted that Airbnb was searched worldwide more than any other travel brand. 91% of all traffic to the platform came from organic channels

4. Global Network: The ecosystem on the platform allows hosts and guests to attract each other. This frictionless interaction has created a global web that has broken boundaries and continues to attract new hosts which in turn attract new guests with new experiences

5. Platform with design focus: The platform offers unique needs to hosts and guests. Hosts get global demand, activation, merchandising, pricing recommendations, scheduling, integrated payments, community support, Superhost programs, reviews, and feedbacks. The process is fast, intuitive, and easy. Guests can explore unique homes and experiences through the web and app platform

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

1. Competition: The company has many competitors across certain categories in the industry

   • Online travel agencies such as Booking Holdings | Hotel Chains such as Marriott | Chinese short-term rentals such as Tujia | Online platforms offering experiences such as Viator | 

2. Covid/Adverse Effects on Travel Industry: With strict lockdowns to mitigate the spread of the virus, the travel industry experienced record losses. In the near term, this contributed to a decrease in bookings in the most infected regions. In addition, the company experienced a reduction in workforces and restructuring costs considering the economic situation resulting in $135-$150 million of charges in 2020

3. Regulations/Laws/Rules that limit short-term rental and home-sharing: Affordable housing and over-tourism are common complaints across some cities. In Europe, 22 majors representing cities (London, and Barcelona) want to increase regulatory control to the short-term rental option. Restrictions, bans, caps on days to rent are common reactions from authorities

4. Tax Liabilities: The company collects lodging taxes that they distribute to local authorities. The cost of doing business can certainly change with new tax liabilities currently underplay such as digital platform revenue-based taxes targeting online sharing/marketplace platforms. This can potentially increase prices for guests and deter hosts from participating due to costs

5. Large Debt: Company has an outstanding debt of ~$2.0 billion as of 09/30/2020

Team:

The company is still founder based and is composed of the following key members:

• Brian Chesky, Co-Founder and CEO:Brian is a designer at heart graduating with a Bachelor of Fine Arts from Rhode Island School of Design.

• Joseph Gebbia, Co-Founder and Chariman of Board and Samara: Joseph leads Samara, in-house design, and innovation studio. He has dual degree in graphic design and industrial design from Rhode Island School of Design.

• Nathan Blecharczyk, Co-Founder and Chief Strategy Officer and Chairman of Airbnb China: Nathan received his Computer Science degree from Harvard and held several engineering roles before co-founding Airbnb

• Executive talent beyond the founders spans from engineers at Alphabet (Google) to great leadership from Disney.

• Equity ownership is mainly concentrated in two key groups: Three Founders - 43.8%, Sequoia Capital – 16.6%,

Financial Performance:

The company is aiming to raise $1 billion (SEC) to $3 billion (Analysts) in its IPO debut potentially at the end of November. In the previous two private raises, the company’s stock was ranged between $52.55 - $62.30 to raise $2 billion. The company has 263k outstanding shares as of 09/30/2020 and the assumed share price from previous private rounds puts it at a conservative valuation of $16 billion. There is speculation that the company could be worth $30 billion.

The company has achieved $4.8 billion in revenue for the year 2019, a 29.7% YoY over the $3.7 billion earned in 2018. As of nine months ended September 30, 2020, the company achieved $2.5 billion representing a (-32.4%) decrease YoY from $3.7 billion over the same period and currently holds $4.5 billion in cash. The decline in revenue by $1.2 billion was primarily driven by a (-42%) decrease in the number of check-ins during the Covid pandemic.

As of 12/31/2019, and 2018, Airbnb has yet to be profitable with net losses of -$674 million and -$16 million. In addition, in September, the Company received a Draft Notice of Proposed Adjustment from the IRS which could result in additional income tax expense and cash liability of $1.35 billion.

Airbnb however is showing signs of recovery post-Covid. In 2019, on average 81 million quarterly nights and experiences booked. In 2020, Q2 experienced 28 million booked while Q3 increased to 61.8 million. Similarly, Gross Booking Value in 2019 averaged $9.5 billion a quarter while in 2020 experienced a significant drop in Q2 to $3.2 billion and a recovery in Q3 to $8.0 billion.

In Q3, guests are showing resilience and desire to travel as well with shifting trends. Domestic traveling with shorter distances is increasing and specifically across smaller cities and destinations.

Airbnb plans to continue growth through the following strategies:

1. More Hosting: Company plans to extend new opportunities regarding long-term stays. The company plans to also invest in providing tools that offer host training and education

2. Global Network expansion: Penetration is low in India, China, and Latin America. The product will become more localized to attract hosts and guests such as their brand in China, Aibiying

3. Design new products and offerings: Features that support emerging travel trends such as local travel and remote working are essential (Airbnb online experience).

-Igli

You can access and download the detailed report which will include the summary and a company info-graphic for your records.

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Additional resources for all the Equity Contrarians (Leeeetttsss Gooooooo!!!)

• Airbnb One Page Infographic

• Airbnb Company Filings

• Airbnb TechCrunch Articles

• Airbnb Founder Letter

• Airbnb IPO Bloomberg