Tesla Is Doubling the Model 3’s Addressable Market with a Mid-Range Version

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August was replete with anecdotes that Tesla couldn’t ramp production of the Model 3, all of which it dispelled during the first week of October with an announcement that production had hit 53,239 during the third quarter.

Now, the negative narrative revolves around demand for the Model 3. Thursday night, Elon Musk announced the mid-range rear wheel drive Model 3, which accelerates from 0 to 60 mph in 5.6 seconds with a range of 260 miles per charge at a cost of $45,000 before any incentives. While bears jumped to the conclusion that demand for the high-end Model 3 had been saturated, ARK’s research suggests that Tesla is following a well-orchestrated strategic plan. As shown below, the addressable market for a car like the mid-range Model 3 with a $45,000 price tag should be twice as large as that for a high-performance version of the Model 3 with a $65,000 price tag.

Among the top trade-ins for the Long Range Model 3 have been the Toyota Prius, the BWM 3 Series, the Honda Accord, the Honda Civic, and the Nissan Leaf, all with lower price points.  In other words, as it is segmenting the market, Tesla is expanding it. Tesla has increased its market share of both the electric and the gas powered vehicle market since the launch of the Model 3, suggesting that it is not suffering from a lack of demand.   

How Will Autonomous Vehicles Impact Traffic?

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This week we learned that the San Francisco Transportation Authority concluded that Uber and Lyft accounted for 50% of the city’s increase in traffic between 2010 and 2016. ARK estimates that autonomous taxi networks could exacerbate this trend, boosting traffic three-fold globally by 2030. While convenience and competitive pricing have attracted passengers to the ride-sharing market, autonomous taxi networks should turbocharge this trend with a cost of only 30 cents per mile, less than half that of a personal car and one tenth that of a taxi.

The recent 2018 NYC Taxi Factbook offers more clues about this market. As shown below, taxis saw average daily trip volume drop from roughly 500,000 in 2012 to 300,000 in 2018, while average daily ride-hailing trips soared to 600,000. Ride-hailing was a particularly welcome addition to boroughs previously underserved by New York taxis.

We estimate that low cost ride-sharing will cause a dramatic increase in traffic and traffic congestion in the developing world as well. With fewer licensed drivers as a percent of the eligible population, China should gravitate to autonomous travel much faster than will the US.

Is the Tether Controversy Overblown?

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Tether, a dollar-pegged crypto token which has served as a source of liquidity for several cryptocurrency exchanges, has caused significant controversy during the past few weeks. For some time, critics have asserted that the issuance of Tether has subjected bitcoin to severe price manipulation and now they purport that it might be insolvent and could cripple the cryptoasset markets.

This week, announcements surrounding Tether's unstable banking relationships fueled more speculation, as it  reportedly cut ties with Noble Bank, its longtime bank partner, replacing it with HSBC. 

At the same time Bitfinex, one of the largest crypto exchanges run by Tether, announced that it had halted all USD deposits. Fear of Bitfinex’s potential insolvency led to a large sell-off in Tether which traded at a large discount to par.

Since then, Tether has recovered strongly, as allegations appear to have been unwarranted according to several reports. In the first report, "USDT [Tether] makes up only 29% of bitcoin’s liquidity while USD makes up 57% and EUR 14%."  The second report highlights that Tether used this sell-off to buy back USDT at a discount, profiting from the arbitrage opportunity.

Why Do Banks Continue to Invest in Bank Branches?

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Before the 2008-2009 financial crisis, banks relied on their branches to attract new deposits.  Since then and until recently, they have been cutting back, as shown below. Increasing usage of digital channels and rising costs have led to a decline of branches in the US. Recently, however, banks have returned to branch expansion as a go-to market strategy.

Large banks such as JP Morgan Chase and Bank of America have announced plans to expand by 400-500 branches. FDIC data also illustrates an increase in the buildout of banks’ physical infrastructure, as shown below.

What is motivating banks to increase investment in physical infrastructure?  Perhaps they are looking backwards at trends suggesting that higher bank branch shares lead to higher deposit shares.

Offline competitors may be doubling down on physical infrastructure to acquire customers, but digital wallets are taking more share thanks to much lower customer acquisition costs. Banks branches can spend anywhere from $350-1,500 to acquire a customer, while companies such as Square and PayPal pay only $20 and could become a much more effective channel for distribution for banks.   

Arm Goes After the Infrastructure Market with Its Neoverse Chip  

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Having conquered the smartphone market, Arm now is going after the compute infrastructure market with a new lineup of chip intellectual property (IP) called Neoverse.

Until now, Arm has offered the same chip IP for all markets, whether consumer, enterprise, or industrial. The new Neoverse IP is custom designed to appeal to compute infrastructure markets such as servers, gateways, and cellular base stations. Unlike in the smartphone market, Arm is competing against industry heavyweights such as Intel, Avago, and Cisco, and yet has increased its share of the infrastructure market from 5% in 2011 to 30% today.

Arm’s strategy is straight out of the disruption handbook: start at the low end and move upmarket. As Intel struggles to manufacture 10nm chips and demand for customized, power-efficient processors increases, ARM appears well positioned to capture share.

What Is the Wright Interpretation of Next-Generation Sequencing?

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Moore’s Law does not seem to apply to DNA sequencing, particularly next-generation sequencing (NGS) platforms. These platforms leverage novel biochemical workflows and parallel sequencing technology to fragment genomes, read genetic data, and reassemble the contents digitally.

Moore’s Law illustrates the profound impact that NGS platforms have had on cost declines in the genomic research space, as shown below. NGS has enabled much more rapid cost declines than would have been predicted by Moore’s Law. While the curve in recent years seems to be pointing to a return to Moore’s Law, innovation could cause another step function drop in costs relative to the curve.

Wright’s Law – calculating the unit cost decline for every cumulative doubling in units produced – has done a better job of forecasting the growth of whole human genomes sequenced as NGS costs declines: as shown below, for every cumulative doubling, costs have dropped by roughly 52%. Forecasting cost declines as a function of production, instead of time, seems to be the Wright idea!