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It's Sunday, July 28, 2019. Please enjoy ARK's weekly newsletter curated by our thematic analysts and designed to keep you engaged with disruptive innovation.

Tesla’s Earnings Call Suggests Sustainable Gross Margin Gains and Significant Battery Ambitions

Follow Sam on Twitter @skorusARK


While its stock dropped this week after Tesla reported lower gross margins in its second quarter report, regulatory credits obfuscated some progress. Excluding regulatory credits, Tesla’s automotive gross margin increased roughly 200 basis points to 17.2% despite a drop in average selling prices (ASPs). While still below 20%, Tesla’s gross margin should continue to increase as its production scales and battery costs continue to fall. Moreover, once Tesla releases full self-driving capability, we believe its margins should expand even faster as its revenue base shifts towards software-based, recurring revenue products and services.


Tesla also announced that CTO JB Staubel is stepping aside and that Drew Baglino, his deputy for more than a decade, will succeed him. While ARK is sad to see this battery visionary shift into an advisory role, his decision is understandable for three reasons: first, he needs some down time after an intense 16 years; second, Tesla’s strategic priorities have shifted toward manufacturing at scale and artificial intelligence for autonomy, both of which are not his core competency; and third, he recently founded a company, Redwood Materials, which could be setting up to recycle lithium-ion batteries.


Perhaps most noteworthy in the call, Musk disclosed that Tesla is aiming to ramp battery production from 28 gigawatt hours (GWh) today to 2 terawatt hours (TWh) over time. ARK’s research suggests that 2 TWh could accommodate 26 million EVs, as shown in the tweet below, to which Musk responded that 25-50% of the battery capacity would go towards stationary energy storage. In other words, Tesla plans to ramp EV production from 360,000-400,000 this year to the 13-19 million range. In our bull case, Tesla will produce and sell 3 million EVs in 2023.



DeepMind Aims to Help Waymo Up Its Autonomous Game

Follow Tasha on Twitter @TashaARK


This week we learned that Waymo is using DeepMind’s population based training (PBT) in its neural nets and, as a result, has cut in half the necessary computing power and the time to develop its autonomous driving platform. Owned by Alphabet, DeepMind used the same methodology to train AlphaStar which this year beat some of the best StarCraft players in the world. Interestingly, DeepMind published its paper on PBT in 2017, well before reports that Waymo’s autonomous vehicles were having trouble making left turns in Arizona.


Also this week on its earnings call, Alphabet reiterated that Waymo’s cars have driven 10 billion simulated miles, though ARK would add that they have driven only 15 million miles in the real world. In comparison, equipped with first- and second-generation Autopilot hardware, Tesla’s EVs have driven roughly 10 billion cumulative real-world miles,[1] encountering esoteric corner cases that are training its autonomous driving software. While Waymo may or may not have more simulation-based miles, real world miles seem essential in identifying corner cases critical to training autonomous vehicles. 


[1] Sources: ARK Investment Management LLC and MIT’s Tesla Autopilot research:


Microsoft Invests $1 Billion in OpenAI

Follow James on Twitter @jwangARK


After changing its structure from non-profit to profit early this year, this week OpenAI received its first major investment, $1 billion from Microsoft. Under the terms of the deal, OpenAI will use Microsoft Azure as its preferred cloud provider and will license its AI technologies to Microsoft, while the two companies collaborate in designing new supercomputing hardware.


For OpenAI, the deal provides cash to recruit talent and buy the AI hardware necessary for training neural networks. This deal not only secures Microsoft as a cloud partner but also gives OpenAI some control in the design of the supercomputers that will be vital to training AI networks.

For Microsoft, OpenAI raises the profile and reputation of its Azure cloud computing platform.  Today, AI developers typically select Amazon Web Services (AWS) for its comprehensive cloud tools and Google for its Tensor Processing Units (TPUs). With OpenAI as a customer and collaborator, Microsoft should be able to improve its cloud hardware instances, its AI software offerings, and its reputation among developers.



#SuperCashAppFriday Offers Bitcoin as a Reward

Follow Yassine on Twitter @yassineARK


This week, Square Cash App’s viral customer acquisition strategy expanded to include bitcoin. #SuperCashAppFriday incorporated bitcoin into its giveaways. Users replied to its tweets with their $Cashtags, hoping to be selected as winners by the Cash App’s marketing team. As detailed in Max Friedrich’s recent blog, “Thanks to the Cash App’s viral marketing strategy, Square is acquiring users at a large discount to traditional banks’ cost of customer acquisition.”


This week marks the largest #CashAppFriday giveaway to date: $50,000 worth of cash and bitcoin (BTC), including one BTC to a lucky $Cashtag recipient. All that Cash App users will need to receive BTC is their $Cashtag.


In other words, Cash App’s 15 million monthly active users are beginning to understand how simple it is to send, receive, and deposit bitcoin…all through the Cash App. In fact, the Cash App could become the digital wallet that accommodates not only fiat cash but also cryptocurrencies.



SoftBank Announces Its Second Vision Fund

Follow Max on Twitter @mfriedrichARK


On Friday, SoftBank announced Vision Fund II, a $108 billion late-stage Venture Capital Fund focused on artificial intelligence (AI) startups. According to SoftBank, the second Vision Fund will have at least 13 Limited Partners (LPs) besides SoftBank, including US tech giants like Apple and Microsoft, Japan’s largest banks, and Kazakhstan’s sovereign wealth fund. According to the initial LP list, Saudi Arabia’s Public Investment Fund (PIF) and Abu Dhabi’s Mubadala Investment Company are not participating in Vision Fund II, after accounting for $65 billion of the $100 billion raised for Vision Fund I (VFI). As Softbank was deploying VFI, PIF voiced concerns about the outsized valuations of its deals.


Yet to be disclosed is whether or not Softbank will structure Vision Fund II like Vision Fund I, requiring investors to put up 62% of their contribution in debt yielding 7%. Now, VFI has to pay $3.8 billion in interest per year for the 12-year life of the Fund. Interestingly, when Uber went public a few months ago, SoftBank’s capital gain was $1.9 billion, not all of which has been realized, just half of the interest it will pay to its Vision Fund I partners this year. Now, Vision Fund I reportedly plans to take out a $4 billion loan collateralized by the positions in its portfolio.


Perhaps to avoid debt this time, Softbank seems to be including more LPs and urging its portfolio companies to support them. In its pitch to Microsoft, for example, Softbank apparently said that it would name Azure as the Vision Funds’ preferred cloud partner. Earlier this year, it entered a strategic partnership with Wirecard, the German payments company, which soon thereafter announced a deal with a Vision Fund portfolio company. With this strategy, SoftBank seems to be enabling portfolio companies to scale globally more efficiently and effectively.



“Alexa, Play Amazon Music”

Follow Nicholas on Twitter @GrousARK


According to a recent report by The Financial Times, this past year the number of Amazon Music paid subscribers grew 70% to 32 million. The rapid growth of Amazon Music has caught the industry off guard, as it seemed that Spotify and Apple would dominate music streaming, with 100 and 60 million paid subscribers, respectively.


Launched in 2016, Amazon Music Unlimited seems to have only one competitive edge, distribution. Other than distribution, the three competitors have priced their seemingly similar services competitively. Amazon’s distribution - Prime Members and Alexa speaker owners - is its primary competitive advantage.  For example, Amazon Prime members, now more than 100 million in the US, have access to Prime Music at no cost as well as a freemium option and Amazon Music Unlimited at a discount.  


Perhaps more significant is Amazon’s dominant control of the booming smart speaker industry in the US. With roughly 60% share, Alexa includes Amazon Music as the default music streaming option. To capitalize on its leading position in speakers, Amazon recently began offering an “Alexa Only” option for $4 per month, a low cost, frictionless way to listen to music, as most users already have payment capabilities linked to their devices.  


Amazon’s ability to leverage its Prime ecosystem and Alexa smart speaker user base should continue to drive its growth in streaming music, a market that seems to be entering S-curve territory. ARK believes that US streaming music could push total music sales back to $20 billion for the first time in 25 years in 2025, as shown in the chart below, and that one of the main customer acquisition channels could be smart speakers.

Screen Shot 2019-07-28 at 9.40.31 AM

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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