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It's Sunday, August 11th, 2019. Please enjoy ARK's weekly newsletter curated by our thematic analysts and designed to keep you engaged with disruptive innovation.
 
Industrial_-Innovation

Wright’s Law Suggests Tesla Could Double its Gross Margin on the Model 3 by the End of 2020

Follow Sam on Twitter @skorusARK

 

Applied to technologically enabled innovation, Wright’s Law states that for every cumulative doubling of production, costs fall by a consistent percent. As of the second quarter, Tesla reported auto gross margins of 17.2% excluding regulatory credits. Wright’s Law suggests that by the end of 2020, if its average selling price (ASP) were to remain at roughly $49,000, Tesla could make the Model 3 with a gross margin of over 30%.

 

The Model 3 appears to have an 85% learning curve, as shown below. For every cumulative doubling of its production, Model 3 costs fall by 15%. An important consideration in understanding this calculation is the word cumulative, meaning the number of Model 3s Tesla has produced since its launch.

Screen Shot 2019-08-11 at 7.12.27 AM

While 85% sounds like an outlier for a learning curve, it is not. In fact, as shown below, the Model T appears to have had exactly the same learning curve.

Screen Shot 2019-08-11 at 7.19.50 AM

Even if Tesla were to flatten the Model 3’s production rate through the end of 2020, according to Wright’s Law its average cost should fall to ~$33,000, suggesting a gross margin of more than 30% at the $49,000 price point. Instead, Tesla is ramping production, suggesting the cost to produce a Model 3 should drop to $31,500. As a result, Tesla should be able to absorb the last $1,875 tax credit reduction and increase margins. Alternatively, it could drop its ASP to ~$39,000 and increase the Model 3’s gross margin nearly 300 basis points to 20%.

 

 

Uber and Lyft Probably Will Lose Share of Ride-Hailing Revenues in the Future

Follow Tasha on Twitter @TashaARK

 

Uber’s and Lyft’s earnings reports this week were illuminating. Uber reported another quarter of slower gross bookings growth which has dropped from 44% on a year over year basis during the first quarter of 2018 to 22% last quarter. For some reason, Lyft does not report this seemingly important metric.

 

While ARK’s research suggests that autonomous driving will supercharge the adoption of ride-hailing, Uber and Lyft are unlikely to be the leaders. In fact, while their best shot at the market probably will be partnering with technology providers like Waymo or Cruise Automation, they are unlikely to sustain their current take rates in the 20-30% range. Indeed, in diminished roles as lead generators for their technology partners, they probably will garner fees in the low to mid single-digit percentage points.

 

ARK also expects both firms to face continued regulatory pushback. Traffic congestion will build as an issue, as will electric scooters which are causing serious injuries and littering the environment. Not only a political liability, scooters also will be another hit to profitability.

 

While Uber and Lyft will continue to play a role in mobility-as-a-service, their current valuations seem unjustified giving the looming and changing dynamics.

 

Internet-Innovations

Is ‘Walmart Coin’ a Blockchain Revolution or a Next-Gen Loyalty Program?

Follow Max on Twitter @mfriedrichARK

 

Last week, Walmart filed a patent to launch a digital currency tied to a fiat currency like the dollar for Walmart and its partner stores globally. The patent lays out a number of use cases for the ‘Walmart Coin’ or ‘stable coin’, from a closed-loop payments ecosystem removing the need for debit and credit cards, to lending, rewards programs, and gig-economy style marketplaces.

 

For some time, Walmart has been critical of card fees which, according to our estimates, cost it roughly $8 billion in 2018. With control over a digital currency, not only would it avoid such fees but it also could capitalize on a data and information advantage by targeting customers more directly, predicting their shopping behavior, and reducing inventory costs.

 

As Facebook learned after announcing Libra, however, politics and regulation could hamper Walmart’s attempt to disengage from the traditional financial system. Many of the products named in the patent require a banking license or bank partners, diminishing the economic incentives to break away. In fact, in 2007 political and regulatory objections forced Walmart to abandon its 10 year effort to obtain a bank license. Today, even without a bank license, Walmart offers a range of financial services from reward cards to Walmart Pay, its mobile payment application.

 

Politics aside, we wonder how a ‘Walmart Coin’ would differ from a loyalty card tied to Walmart Pay and whether digital deposit fragmentation would limit its potential. As more brands launch their own digital currencies, deposits could fragment into company-specific wallets, potentially diluting the impact of any one of them. In that case, a neutral Digital Wallet like Paypal’s Venmo or Square’s Cash App could aggregate them, putting it in what we believe to be the most powerful and interesting position.

 

Until then, in our view, very little will differentiate Walmart’s stable coin from Fortnite’s V-Bucks, worth a penny a piece.

 

 

Blockstream Announces Two Mining-Focused Products

Follow Yassine on Twitter @yassineARK

 

This week, Bitcoin technology company Blockstream announced two mining-focused products. In an effort to help maintain the decentralized security of the Bitcoin network, Blockstream announced Blockstream Mining, a service providing mining equipment colocation services tailored to institutional and enterprise customers. To help them overcome the high barriers to entry, Blockstream Mining should enable prospective miners with the logistics and operational support to mine at scale.

 

The second product, Blockstream Pool, will be the world’s first production mining pool based on the BetterHash protocol. With the BetterHash mining protocol, individual miners will be able to control which bitcoin transactions are included in a newly mined block while still receiving the stable payout associated with traditional mining pools.

 

Based on both of these announcements, Blockstream seems determined to decentralize Bitcoin mining further, enhancing its security. Hopefully, BetterHash will attract individual miners, encouraging other mining pools to follow Blockstream and do the same.


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