It's Monday, July 27, 2020. Please enjoy ARK's weekly newsletter curated by our thematic analysts and designed to keep you engaged with disruptive innovation.
Ride-Hailing Is Overlooked as an Opportunity for Tesla
Although it did not face many such questions on its earnings call this week, ARK believes that Tesla has strategic and tactical reasons to launch a ride-hailing service with human drivers before its robotaxi network launches next year. With a more competitive cost structure than Uber or Lyft, Tesla could enjoy a recurring revenue business model with software-like margins well above its current EV margin structure.
Based on our research, Tesla could launch its ride-hailing service at a premium price of $4 per mile, slightly more than Uber‘s average price in New York City, and could lower prices over time to penetrate more price-sensitive markets. ARK estimates that Tesla’s ride-hailing service could deliver roughly 50% EBITDA margins, a premium to Uber’s in cities it dominates and, that at global scale and an average of $1 per mile, its addressable market would be roughly $50 billion.[1]
While ARK still believes that Tesla will be the market leader in autonomous driving, certainly in the US, if it were to launch a human-driven ride-hailing network, the bridge to autonomous would increase its margins and lower its risks considerably. For more on this opportunity, stay tuned for our upcoming research.
During Tesla’s second quarter earnings call, Elon Musk claimed that the standard EPA range for electric vehicles (EVs) will be 300-miles, well above that for most EVs in the market today. ARK’s research suggests that incumbent automakers will not be able to compete with Tesla on traditional metrics like range and performance at any given price point. Perhaps their survival will depend on their ability to create neighborhood electric vehicles or electric bikes.
Cash App is Revolutionizing Consumer Finance with a Brand That Customers Actually Like
In the US, most customers do not like their banks. In a survey ranking the 100 most popular companies by customer satisfaction, banks took three of the bottom ten places. According to another survey, 71% of Millennials would prefer to visit their dentists than engage with their banks.
Why? ...because bank services are expensive. According to the FDIC, Americans paid more than$11 billion in overdraft fees in 2017 and, based on other data, paid $329 in fees on average per year. Moreover, 12% of US adults would not be able to afford $400 in emergency expenses, and 27% would not be able to pay in cash.*
Square’s Cash App, seemingly the fastest growing consumer financial product in the US, has taken a different tack, offering products for free and building a brand that consumers like. Among recent marketing initiatives, it sent a limited number of users ‘fun boxes’ with Cash App branded socks and stickers – products typically associated with sports clubs or music groups, not banks.
Importantly, Cash App’s branding goes beyond its own marketing efforts. Bill Pulte, a private equity investor who coined the phrase ‘Twitter philanthropy’, typically attracts 150,000 Twitter users when using Cash App to help out those in need. (Thank you, Bill, for joining our brainstorm and sharing with us the ways you in which you are using Twitter and Cash App to help change the world!)
While investors are beginning to understand and acknowledge the commercial potential of Cash App, in our view they are underestimating the value of a consumer finance brand that customers trust and want to support.
* According to the FDIC, 61% of US adults would be able to cover a $400 emergency expense in cash, 12% would not be able to cover it, and 27% would have to rely on credit cards and other funding sources.
According to a Bloomberg report, Nvidia is interested in buying ARM from SoftBank. Does such a deal make sense?
Our first reaction was a strong no. Nvidia sells chips to computer companies while ARM sells chip IP to chip companies like Nvidia, Qualcomm, and Apple. Many of ARM’s customers compete against Nvidia in data centers and cars. We believe that if Nvidia were to own ARM, customers like Xilinx and NXP probably would seek alternatives, destroying ARM’s core value proposition as a neutral provider of IP.
Questioning our hypothesis, does ARM’s value proposition need an update? If RISC-V were to disrupt its micro controller business, would ARM need to offer anything more than low power CPU cores?
While Nvidia has the world’s leading AI hardware and software stack, winning every market vertical has been a slog. With an impressive $4 billion run rate in data center business, Nvidia barely has made a dent in edge applications such as robotics, healthcare, and 5G.
ARM could help Nvidia distribute its AI IP.* With world class AI capabilities, each ARM chip could ship with an ARM Cortex CPU and an Nvidia Tensor Core GPU, enabling the distribution of billions of embedded GPU cores to every industry vertical. Nvidia alone never might achieve such scale.
*Credit for this thesis goes to Paul Teichof Liftr Insights.
The Ethereum Improvement Proposal (EIP) 1559 could be the most important change to the Ethereum network in history, with positive long-term implications for the price of ether. Introduced in April 2019, EIP 1559 has increased the usage of the network significantly. EIP 1559’s goal is not only to improve Ethereum’s user interface and miner fee estimation but also to optimize the average block size, enhance the security of the Ethereum network, and make the abstraction of ether more difficult.
To improve miner fee estimation, EIP 1559 aims to replace auctions with fixed fees. To optimize the average block size, EIP 1559 is proposing to incorporate elastic block sizes, with variances based on demand, while enforcing longer-term average block size limits. To improve network security, EIP 1559 is aiming to decouple transaction fees from network security by burning the fees and enabling perpetual block subsidies. Burning ETH transactions is deflationary, making economic abstraction more difficult.
By reducing its supply relative to demand, EIP 1559 should increase the price of ether, a simple narrative. While the timeline for its implementation is unclear, ARK will be paying close attention.
A COVID-19 Vaccine Might Not Be Approved Until 2021
Innovation is gaining traction in these pandemic times, with 25 COVID-19 vaccines in the clinic and more than 141 in development. Whiles most vaccines have focused on the spike protein, which binds to the ACE2 receptor, none is correlated with protection, suggesting that large pivotal trials will be necessary.
Among the challenges with COVID-19 vaccines are variations among platforms and data. Variances among cell cultures, doses, and titers have focused the FDA and Operation Warp Speed on standardization. Moderna, for example, excluded the most vulnerable population, those 55 years and older, from its trials while most others have targeted primarily Caucasians, making it difficult to generalize results.
During the next few months, Moderna, Pfizer/BioNTech, and AstraZeneca/Oxford will enter Phase III trials, hoping to recruit more than 130,000 patients for a first dose and then 30 days later a second dose. Arcturus Therapeutics is the only company that does not believe at this time that its vaccine will require a booster 30 days after administration.
This week, Arcturus announced that Israel ordered four million doses of its vaccine for roughly $275 million, approximately $70 per dose. By contrast, pending FDA approval, Pfizer/BioNTech announced that the US government ordered 100 million doses of its vaccine for $1.95 billion, or $40 per patient and roughly $20 per dose. Apparently, Israel believes that Arcturus’s one-shot vaccine is worth a 70% premium to the two-shot vaccines entering the market.
This week, the FDA also announced that it will require six months of safety data before it will approve a vaccine, suggesting that a vaccine broadly available in 2020 or early 2021 is unlikely, though one for emergency use authorization still is possible.
Be kind, stay safe, and we hope you find this information useful.
ARK's statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. For a list of all purchases and sales made by ARK for client accounts during the past year that could be considered by the SEC as recommendations, click here. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. For full disclosures, click here.
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