Yet Another Value Podcast - Eric Markowitz worms his way through the Tesla bull thesis... plus a little Spotify $SPOT $TSLA

Episode Date: November 10, 2021

Eric Markowitz, Director of research at Worm Capital, discusses the bull thesis for Tesla. Key topics include all of Tesla's growth options, the biggest misperceptions of Tesla, and why comparing Tesla's valuation to legacy auto manufacturers doesn't make sense.We wrap up with 15 minutes of discussion on Spotify and what's misunderstood with that company as well.Reading links:Worm's Q3 letter: https://www.wormcapital.com/the-wormhole-source/q3-2021My background tweet on Tesla: https://twitter.com/AndrewRangeley/status/1458061963439878145?s=20Chapters0:00 Intro1:15 Tesla overview4:15 Tesla's big misperceptions5:35 How is Tesla different than other car companies?8:45 Tesla's neural nets and R&D efficiency13:30 Tesla's recruiting edge16:55 Worm's investing philosophy19:05 The power of winner take most markets23:30 Framing Tesla's valuation26:05 How strong is Tesla's manufacturing edge?28:30 Does competition actually expand the EV industry?31:30 What's the most exciting growth optionality at Tesla?35:20 Tesla's battery opportunity36:50 Tesla's red flags and the Solar City Potemkin village43:05 Tesla's brand strength45:35 The myth of the Tesla killer49:45 Flipping to Spotify49:55 What's the biggest misperception with SPOT?52:05 Spotify as Netflix 2.054:20 Spotify's advertising opportunity56:15 What worries Eric most about Spotify?59:40 Spotify's relationship with labels

All right. Hello and welcome to yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm happy to have Eric McCauwitz. Eric is the director of research at Worm Capital. I believe he's referred to himself as the head research grunt. Eric, how's it going? Yeah, I'm good. Thank you. Research grunt. That's fine with me. Well, hey, let me start this podcast the way I do every podcast. First, the disclaimer to remind everyone who's listening. Nothing on here is investing advice. Please do your own work, consult your own advisor. And then second, a pitch with you, my guest. I've heard of Worm for a couple years in 2019 when I was kind of deep in the Tesla Q universe. I think I've heard of Worm and said, oh, those guys are swinging really hard at Tesla? What crazy guys. But you and I connected after I read Worm's Q3 letter, which I said online, I'll say it again. It was just so enlightening to me. I really enjoyed it. It was really thought provoking. It was all about marginal gains. And I'll be sure to include into the show notes for anyone who wants to go follow it. But after that, we connected. I've just found you to be a really thoughtful investor.

I think that's going to come out in the combo we have today. And I've really enjoyed getting the weekly Wormcrawler emails that you send out some great links in there. So really happy to have you on the show. That out the way, let's just turn to the company we're going to talk about. It's this little known, underfollowed car manufacturer, Tesla. We can start by talking about how you guys found it. We can start by talking about all the misperception that everyone have.

But I'll just turn it over to you. What do you want to talk about with Tesla? Yeah. I mean, it's been a position for more than five years now. So it's a company we've covered and followed and, you know, really spent years researching really goes back to our founder and CIO, Arnie Allison, you know, really sort of experienced the product himself firsthand, you know, drove model S.

And I think for him that was the aha moment, you know, getting in the car, driving it, realizing what the potential was. And then also, I think, seeing the people on the street. look at the car. Yeah. So that was like, you know, late 2015. I think this was really before kind of, you know, Tesla had overtaken the media. I mean, there was still even back then a lot of commentary about the company.

Obviously, it's led by a fairly well-known individual. And, you know, we can start wherever. But fundamentally, you know, we believe that the company has really been transforming the overall transportation and energy industries. You know, obviously it's a company with a massive vision. It's a company that's that I think is for better or worse, largely still misunderstood in a lot of ways. I think that we are attracted to companies that are complex. And I think that we personally, as investors, find a lot of opportunity when there's a lot of disagreement about what a company is and isn't. So we're kind of, you know, drawn to companies like Tesla because they

are, their vision is so large and so grand. And they're actually, you know, sort of putting the pieces together to make that future a reality. So I remember visiting the Gigafactory, you know, four years ago at this point. And, and just seeing sort of the enormity of what they were trying to build and what they're still building today, that's expanding, you know, internationally with gigafactories in Shanghai and Texas and Berlin. So, you know, big picture, you know, it's a true disruptor. It attracts a ton of scrutiny, which is good. I think, you know, there's an element of if it's easy, it's probably not a great investment. You know, this should be hard. We are attracted to super complex situations. Tesla just happens to be one of them.

Yeah. So I've got a lot of baggage with Tesla. You know, I've always like, hate, loved Elon Musk, if that makes sense. Like, I love the vision, but a lot of the stuff he does, I always look at it. I'm like, oh, but you mentioned several times you think Tesla is misunderstood. And we're going to talk valuation. We're going to talk some of the questions I've had with Elon and Tesla and everything going on. But what do you think the main, maybe one of the main or a couple of the main misunderstandings of Tesla today is? I mean, a classic one is, and you see it all the time, it's like, you know, Tesla's value. stacked up against the other car manufacturers. That was going to be one of my questions, yeah. Right. You know, that's a chart crime, if I ever saw one. You know, I guess my perspective on that is it's fundamentally not a car company. You know, this has been said by other Tesla analysts and investors, but it is very much

fundamental to trying to understand what the company is building, which it's a highly vertically integrated hardware and software manufacturing firm, with a lot of optionality baked in with artificial intelligence and other sort of software-enabled platforms. You know, the first modality of transportation is a, you know, consumer-facing sedan. Eventually, we'll have the cyber truck, and, you know, longer term, we'll have the semi. But there are other verticals that Tesla is really pushing forward into. do. And so it's just not fair to necessarily lump it into, you know, how it values, you know, the valuation versus a GM or a Ford. It's just a, it's a company with a much

different DNA. So that would be maybe the first sort of. Anyway, I see, yeah, go ahead. Yeah, let me push back on it. So you said it is a company that is a vertically integrated hardware and software, which I don't disagree. Like, if you've ever driven in a Tesla and then driven in another car company's car, like the difference in integration, it reminds me that that old Apple thing, like, yeah, you could go buy another smartphone or something, but Apple, it just works. There's just like a little magic in the consumer DNA in the company. And Tesla's clearly got that. But, you know, why couldn't I go say, hey, GM is a relatively integrated hardware and software company. And yeah, they produce cars, but they're collecting lots of data, right? They've

got a vision of doing other stuff. Like, why does that apply to every other car company or why is Tesla particularly unique in that? And for a lot of reasons. I mean, You know, start with, A, GM is not building electric vehicles at scale. I mean, they've only built about 150,000 bolts, and they all had to be recalled recently. You know, I think the principal difference is that, you know, Tesla has manufactured these cars since the very beginning with eight cameras around them that's collecting data constantly. It's feeding into the neural net. No other car manufacturer is doing this. So, you know, Tesla at this point has many billions of miles of data collected from its fleet of, you know, million plus vehicles around the world.

That's a data advantage that is not easily replicable. And the incumbents really have no chance of competing with at this stage. So, you know, we see a lot, I mean, frankly, going back like four or five years at this point, you know, GM and Ford, you know, they, they've put out a lot of press releases about sort of the future of electric vehicles and their participation in that future. If you look at just wheels on the ground at the actual ability of these companies to manufacture at scale, it's a much different story. And I think that if I'm thinking about sort of the existential risk for investors, it's really, you know, looking five years out, if the incumbents really have the ability to sell a product that consumers really want.

I mean, at the end of the day, you know, the consumer decides who wins this disruption. I think it's fairly clear that Tesla does have a head start and an advantage and consumers have gravitated towards Tesla. You know, as investors, we like to keep an open mind and look at other brands and even look at the incumbents and their ability to scale up and compete with. with Tesla. But if you look just a snapshot of today, the ability of the current incumbents to put a product that is really, you know, from a range perspective or software perspective, it's just not comparable. And I think you're seeing the result of that playing out in market

share and sales. And ultimately, you know, like I said, the customer decides. And that's really sort of how we view, not just investing in Tesla, but, you know, across all of our positions, we look at sort of where customers are going to. And it's a pretty clear winner right now. I might come back to valuation a second, but you mentioned something with the neural net, the neural nets with Tesla. You know, they've got the cameras around their cars. They've had these for years. So they've got all the, they've got this data advantage. And one thing I remember from when, I don't really like, I think anyone who was a Tesla Q person, which I was for a while, right, It has been proven dramatically wrong.

And now my questions are being like on valuation and I don't super care, right? I don't super care. No horse in this rate anymore. But when I was really deep into it, one question I always had was, okay, they had the neural nets and that was great. But I would always wonder like to use something with that data would require huge amounts of R&D, a huge R&D budget, right? You look at what something like a Waymo or something would spend interpreting that or even just simple neural nets that people run online. It actually takes a lot of R&D, huge computing budget. And you don't really see that on Tesla's balance sheet, right?

Like, I'm just looking at their 10Q. They spent $2 billion in R&D. I would assume neural nets included somewhere inside of that. Like with that, they're doing cyber truck. They're doing everything else. Like, it's not a huge research budget. So what gives you the confidence that neural net is the edge is one of the edges that they're going to have? Yeah.

I mean, for one, experiencing it myself, you know, I think that even Tesla autopilot is a, incredible product that, again, it draws a lot of scrutiny, but if you actually sit in the car and take it out and, you know, even, I'm not even talking about FSD beta right now, but just basic autopilot, it's best in class. As far as R&D spend, you know, I take a bit of a different perspective there, which is they're highly efficient. I mean, so Tesla attracts some of the best software engineers in the world. There's no doubt in my mind that the team that they've collected you know, is one of the best, if not the best in the world working on this problem around artificial intelligence. So I think that you see it playing out sort of in some ways as planned.

You know, the FSD rollout for as much attention as it's gotten, maybe to the downside, if you watch some of the, you know, currently available videos on YouTube just of the beta testers, I mean, this is a product that's in my mind, the closest to achieving full autonomy at scale. It's clearly not there yet, but we're, you know, we're progressing towards that future. You know, we've looked at companies like Waymo and a bunch of the other LiDAR-based technologies. You know, you hit a local maximum with LiDAR pretty quickly. It's an expensive piece of hardware. And ultimately, the only true way to solve full autonomy is through vision. I mean, you know, the car really just has to be incrementally better

than a human at driving. You know, we think that the car can do it with eight cameras. You know, it was impressive that the team took radar off of the camera for, you know, the next iteration of both self-driving beta. I think the system's only going to get better with time. And so one of the sort of, I think, limitations of the human brain is considering exponential growth. And, You know, the full self-driving capabilities, I think, is a perfect example of how hard it is to conceptualize how, you know, the increasing production of Tesla vehicles, having more data being collected out in a real world fleet, having more edge cases being solved, being fed back into the neural net. You know, and plus, you know, the, like just the insane efforts that the team is going through with Dojo and just the training computer, the system is getting better with time. So I think that, you know, there is a bit of patience required to sort of see this future play out. But everything that, you know, I've experienced and seen and people have spoken with, it's highly encouraging about the future.

Again, like, I want to caution it's not perfect yet, right? And Tesla knows this and it's an iterative process. And this is sort of what I was hinting at in the Q3 letter about just trying to, you know, keep improving the product. And it will get better over time. It won't be perfect, but it is all about, like, the striving of improving the system. And so we see that, you know, certainly with neural nets, but also in the production capabilities at Tesla, you know, just sort of reducing costs throughout the company while increasing the efficiency of the products.

So, you know, it's just a culture of constantly improving and trying to increase the efficiencies across the board. Yeah. You know, one of the things you said on the best team, it just reminds me of when I was very bearish Tesla, people would, they do the semi day or the AI day and you'd hear everybody be like, oh, there's nothing new here. And then somebody told me once they're like, you don't get it. This isn't for financial analysts, right? This is part consumer marketing, right? Like tons of consumers are going to watch it. It's going to build up Tesla buzz. It's part marketing. Tesla has a

$0 budget and they're more buzzy than every other thing because Elon can, you know, attract tons of people with tweets and stuff, but it's part consumer marketing. And it's part, hey, if you're the world's top AI researchers, come work for us. You're going to be at the sharpest, most fun, most edgy place to work. So it's consumer marketing and it's marketing to potential people to work there because, you know, the best engineer is worth a hundred times more than the second best engineer or something. So that was one of the things that just really changed the way I perceived Tesla. And it speaks to the quality of the team you mentioned there. Yeah, no, I think like we're always attracted. I do think that talent can be a leading indicator for the success

of a business. And so when you see top talent flowing to a certain organization, it's a good reason to take a close look at the business. And same thing with an exodus of talent. I do think though, because I'm sort of thinking through some of the headlines that I've seen over the last few years with Tesla, but also other companies about, you know, so-and-so executive left the company and went to a competitor. As you know, I mean, all investing is part psychology and just weighting information appropriately. And so, you know, as far as like if you see headlines around while so-and-so is leaving a company, it's just an input to factor in. But I think that you have to go a little bit deeper and really try to understand like the organization.

DNA and the types of people that work at these places, turnover will be high at super hard charging, you know, fast growth tech companies. I mean, you saw that with, you know, Amazon was another big position of ours and it still is. I remember stories in 2016, 2017, how how tough it was to work at Amazon, you know, the turnover. You know, as far as- The famous email from Jeff Bezos with either one character was either a question mark or an exclamation point. And either way, it wasn't good. Right. But, you know, those are the sorts of organizations that you kind of want to bet on. And so I think that as an investor, I'm personally attracted to companies where there is a sort of mentality around like, you know, pushing hard and pushing things forward and not being, you know, slow and just being sort of obsessed with the product and obsessed with perfection.

Because ultimately that will, you know, bear out success. And you'll see over time, I think, that the investment returns of companies that sort of have this obsession with product and obsession with consumer, those companies will likely win over time. And those companies also probably happen to be run by founders. They happen to be, you know, very hard places to work. They attract top people. But, yeah, I mean, I think the goal with any sort of, you know, like we want to find companies where just the top. people are going there. It's a good indicator for us. You and I've talked and, you know, people can read your letters and see the positions were Tesla, Amazon, Spotify is one that we

have in common that we talked about. But you just mentioned the hard charging. It's returns to scale, these winner take all type dynamics in these markets with, you know, infinite scale possibility. Do you, that's obviously a common theme through what you're investing in, what worms investing in. 20 years ago, that type of theme didn't exist. Do you think worm could have invested like 20 years ago? Or is it, is it style just like particularly suited for today's market, which is likely to be even better suited for tomorrow's market? Yeah. So, I mean, just some historical background on Worm Capital. I mean, it was founded by Arne Allison, who I speak to you every day. He, you know, he was a turnaround investor for many years in the 90s and early

2000s. And he was, you know, kind of classic cigar butts looking for value, really had a transformation in 2010, 2011, 2012. He was reading a lot of, like, Clinton Christensen, Innovator's Dilemma, thinking a lot about disruption, really focusing at that point on Amazon and AWS. So, you know, his sort of, I think, aha moment going back to 2011, 2012, was, you know, the Internet itself was like our Big Bang. I mean, it was the defining moment for what changed the future of business.

business. So we have this sort of like internal, you know, lexicon at Worm Capital. We call it the fully connected world. And it's the single room hypothesis. So the internet created this entirely new structure of business where everything happens and everything's out in the open. There's full transparency. And so what does that do to valuations? What does that do to the ability to scale businesses? Ultimately, you know, a lot of the reason why we believe this is a winner take-all dynamic is just full transparency. No one wants the second best product. Yeah. I think a good example that everyone can relate to is Google. I mean, you probably, I'm guessing, don't use Bing, right? I mean, because everyone knows Google has really the best search

engine. You know, we saw this. For a while, Bing had something where like, if you, I can't remember the exact, it was several years ago, but if you Binged, they would basically give you a rebate for Binging, right? So if you did a thousand searches, you would get a dollar. So it was very small, but they were literally paying you to use the second thing. And I'm a value investor. I was like, oh, I'll get paid for it. And I couldn't, it wasn't even the quality search. I just couldn't bring myself to break the habit of when I want to search for something,

I go to Google or I just type it in my browser. But it just speaks to what you're saying, right? They literally couldn't give away. They couldn't pay you to use the second best product. For sure. And I think that that will continue to happen both in consumer businesses, you know, in transportation business. it'll happen to every vertical. And so this was sort of the, the core thesis to our firm is,

you know, disruption is happening and it's going to happen to every vertical. It's just a matter of time. You know, back when, if you looked at the portfolio 10 years ago, because our long, only track record goes back to 2012, Arnie was really focused on the disruption of brick and mortar retail, looking at Amazon and the ability for Amazon to just scale, you know, it was just this incredible scale business. And so the valuation techniques needed to change. Yep. You know, like in a disrupted vertical cash earnings, you know, it's just not that important. We're just not focused on cash earnings. You know, you can, the goal with any sort of disruptive business is land grab. I mean, it's just a territory shift. We just need to get new customers,

you know, grow our product or service. And so earnings will come. And, you know, you have to find the right leadership and the right businesses that can eventually, you know, spin off a ton of cash. But, but I think, you know, just going back to your, your comment about the internet and just sort of winner take all, that that's very much how we view, you know, every vertical that we study, which is the likely, I mean, everything is, you know, probabilities, right? And so is there a problem, is there, is there a chance that the future of transportation is evenly split among 10 companies, like, sure, there is a small chance that's something like that. I think the more likely reality is that we'll begin to see a winner-take-most dynamic continue to expand across the

industry. And so that, you know, that creates, you know, natural pair trades that this is a super messy time. I think, like, if you just look at sort of the industry, we're still really early and it's going to get even messier over the next decade, you know, specifically in transportation. think that you're you're going to see small companies today get really, really big. I think you're going to see big companies today get really small. And for us, that that just creates opportunity. I mean, all this change creates opportunity. It's healthy. You know, we're going from less than really, you know, 5% of new sales being electric deals to eventually 100%. I mean, no question in my mind that eventually it'll be 100%. It's just a question of, you know, when that

happens. And I think it could be a lot sooner than people realize. And so I think the core focus for us right now is like, you know, every day is a new day, we just sort of start with everything with the first principles approach and just ask, you know, who's got the best product today, who most likely has the best product tomorrow? And then, you know, we kind of make our decisions accordingly from there. I like that you said first principles. It's one of the things, again, coming from a little bit of a Tesla queue, which is the symbol for people who thought Tesla was going to go bankrupt thing. One of the big pushbacks on the AI driving was, hey, Tesla doesn't use LIDAR and everyone

else uses LIDAR. And one time I heard Elon must say, hey, humans don't use LIDAR and humans are able to drive right now. And LIDAR is this big expensive thing. Like, if you really want to solve this and cheaply and cost effectively, like you need to do it without LIDAR. So it's just one of those things. He went to first principles and he rebutted this thing that, again, that had been a big

bear point for a long time. But let's go back to valuation for a second. So when we first started talking, one of the first things we said was, you said it was a chart prime, right? Tesla is valued against every other car company and they're worth more than every other car company. And people obviously look at them and they say Toyota selling a hundred times the amount of cars, Tesla sells, and look at all these big plants and all this history. Obviously, a lot of that goes away in the technological change. But at some point, valuation has to matter, right? So Tesla's over a trillion dollars worth more than every car company

combined, worth more than every car company combined at the height of all of the their values and stuff. So how do you look at the Tesla valuation? You have to look forward. I mean, with any sort of business like Tesla, you have to look, you know, at least three to five years out. We look out three to five years and then ideally we're even looking, you know, towards 2030, but three to five years is where we can really get a significant degree of confidence in where the business will be operating at. I mean, look, there are very few, if any, historical examples of manufacturing firms at scale growing 50% a year. Yeah.

I would challenge anyone to really, you know, find a $10 billion or more market cap company with hard manufacturing growing 50% a year for the next decade. They just don't exist. Tesla really is, in my opinion, the only large-scale manufacturing firm that has this growth trajectory. And so when you look at some of the, I suppose, maybe like the sell side analysts and sort of how they're modeling out the growth over the next three to five years, I don't think that they're really factoring in necessarily truly 50% growth. The company is opening, you know, factories today. I think it's more than likely that they will be opening new giga factories years

from now as well. And that growth will compound over time. So, you know, the, The other sort of, like, I think, main thing that we focus on is really the manufacturing techniques that are completely new to the auto industry. And this is really one of Tesla's core competencies and core advantages is being able to, not just manufacture at scale, but manufacture with improving margins over time. So I think, you know, in Q3, you started to get a glimpse of some of the gap margins. It was like 14.6% I think in Q3, you know, at a time when the average selling price of each vehicle is going down like 5, 6%. So this is like a result of just completely retooling what it looks like to actually make a, in this case a car over time there'll be other products.

that's like a profound revolution across the manufacturing industry. Why isn't that, because this reminds me of the stuff with Toyota in the 70s and 80s. At some point, there is a limit to how far ahead you can get with this, you know, the marginal efficiency, right? There's a limit to how far ahead you can get in terms of manufacturing. So why is that such a sustainable advantage for Tesla? Like if GM, now there is the question, could they really commit themselves for five years, they're the cultural imperative, but, you know, maybe a Riven.

or something. Like, if one of these guys really commits themselves, is Tesla really going to be able to have that big of an edge for that long from manufacturing EVs better? Yeah, it's not purely also a hardware. It's also the software that labels these cars to actually improve over time with increased range abilities. You know, I think the 4680 production line we'll see, you know, when it gets up and running, but the sort of scale on efficiencies that it can reach. I mean, I don't know what the future looks like in five years. All I know is kind of what's in front of us today. And Tesla is probably at least five, six years ahead of the competition. So I think that you will find the, you know, competitors coming to market. I think you're already seeing it with both startups like Lucid and Fisker and all these other, you know, EV companies, but also GM and Ford. You know, they are producing electric vehicles. They're not doing it. necessarily at a level of scale and profitability that's anywhere close to Tesla right now. And I think that the other thing that's sort of hard to conceptualize, but I think is very

realistic is, you know, Tesla's gains in manufacturing capabilities only compound over time. Because they have this culture of innovation and just constant retooling the process, it's not a static sort of production line, right? the production capabilities are only going to increase from here, and the efficiencies are only going to increase. So, you know, three to five years out, I don't really see a meaningful competitor to Tesla that's able to produce cars at scale with a certain level of operating margin. You know, and so we'll see, though. I mean, it's very encouraging to see companies like Rivian come to market. You know, we love to see this competition. I think that

having more electric vehicle companies expands the market for Tesla. I think that you see that with just how the whole auto industry has kind of woken up in the last year about talking about this. Does it expand the industry? The way I've thought about it is the competition, like in general competition is a bad thing for business, right? But in many ways, electric vehicle competition expands the industry because it builds out all the infrastructure needed for electric vehicles. Like, first you get the consumer adoptions, which helpful. But, you know, you get one big question.

If you're doing a cross-country road trip, how are you going to do that? Well, if electric vehicle adoption expands, then there's going to be charging stations everywhere. Maybe it's a Tesla charger or maybe it's just the convenience store down the streets, which is from gas to electric. So is that why it would expand the market? Because I think a lot of value investors would hear competition coming and say, oh, Eric's being silly, competition's bad, but it actually grows the market for everyone.

Yeah, I mean, absolutely. I think that like we're going, like the customer decides. And I think that if you just talk to people over the next year, you will increasingly find people say, yeah, I think my next car is going to be electric. And I think that's on an exponential growth curve, right? I don't think that's a linear thing where, you know, 20% a year, more and more people are going to buy electric. No.

And so then it becomes, well, who has the best value proposition? And value proposition is not, you know, it's not just the quality of the car, it's not just price, it's all the things wrapped up into one. And you hinted at the, you know, the charging network, you know, if you try to take a road trip in a non-Tesla vehicle, it's really challenging. You know, the supercharger network is an incredible advantage for Tesla as a selling point as, you know, just something for the products experience. The thing that, you know, keeps me sort of up at night, it makes me nervous about the industry is seeing how slowly some of the incumbents have actually moved. I think a lot of the focus on Tesla's around just, just the

valuation, you know, obviously that's something we think about a lot. But the real risk I see in the auto industry over the next five years are what if some of these companies can't transition? What if they just can't do it? What if despite their best efforts to create new products, customers just don't want them? And so you could really see a potential for a big blowup across the auto industry where these are companies like GM and Ford. I mean, they have significant amount of debt. You know, their ability to survive, I think, over the next decade will be

decided in the next couple of years. So it's a really interesting time in the auto industry. You know, if we will see this like true consolidation into one company, it remains to be seen. I think that right now, you know, Tesla is building more and more durable advantage. And their competitors have been really slow. So we'll see what happens. You know, we're watching it obviously pretty closely. Yeah. So there's lots of growth optionality with Tesla. I mean, one of the things I think investors have learned over the past 10 years is if you've got a company that consumers love, there's always going to be lots of great growth optionality.

But Tesla in particular has some pretty interesting. You know, if consumers love you and they give you $100 for your product, that's one thing. But if consumers love you and they give you $50,000 for your product, that's another thing. So Tesla's got lots of great growth optionality. are, you know, I think the biggest one obviously would be if they win self-driving, autonomous network of vehicles going across the country, you know, that's cajillions. But there's been lots of debates around things like Tesla insurance operations or a couple other.

Do you think there's any particular like places where there's debate that you just think silly or are there any growth optionalities that you think are particularly exciting that you think might be understated? Yeah. That's a great question. So I think when we think about Tesla internally, we think that there's a, there's a, there's There's a few lot of tickets, right? So for me, I mean, I focus a lot on just the possibilities of end-to-end trucking logistics.

Yeah. So that's a trillion dollar vertical that Tesla has a meaningful ability to really disrupt. Another one really is energy storage. So if you look at sort of what the future of energy distribution looks like, it's more than likely a much more decentralized future than what we have today. So right now you have, you know, local utility and you buy your energy from them. Great. That's great for the utility companies.

But what if you have, you know, a battery pack in your car, a battery in your home, and you're able to sell excess energy back into the grid when you're, you know, not using it? So I think that virtual power plants and Tesla's auto bidder software are another potential lever of optionality. In addition, just the overall energy storage business, you know, if you look at some of the projects that they've done, particularly in Australia, the Hornsdale project is one, is really compelling just for stationary storage. I think, you know, this is just based on pure cost and efficiency.

we are headed towards a solar and wind and battery-powered future. You know, the limitation right now is just battery production capability. Yep. So over time, you're going to see Tesla just continue to grow their battery energy business. Over time, I think also, you know, the consumer solar business will grow. That's obviously not a super, you know, like it's not the most focused part of the business right now because Tesla's just going after bigger opportunities with Megapac and some of the utility scale projects that they're working on.

But I think that there's a ton of optionality within energy. Elon's commented, I think, going back to Q3 2019 or maybe 2020, but just that, you know, energy revenues could eventually eclipse the auto revenues. You know, that's a big, that's a big statement. And I think that what's so attractive about it is it's recurrent. revenue. You know, it's recurring revenue. They take a transaction fee off of any sort of on auto bidder or just just the utility level energy distribution software. It's super scalable. We just kind of need the batteries right now. I used to cover utilities. And this was,

this is always the dream. And this is what you hoped. And I'll come to the solar study stuff in a second, but this is what you hoped, right? The dream would be if you can get batteries cheap enough and they can store enough energy. You literally give every home on the block of battery. You put four solar tires on the roof. And when they're not using energy, it just stores it in the battery. And then when they are using energy, solar tiles or the battery charges it. And you basically, yeah, you're going to need a grid for backup for high demands and stuff. But you can pretty much power every home. And if you're Tesla and you've got the best battery, like battery and solar panel, you're going to own that consumer once you put it in their house. It's a pretty crazy option.

I mean, what's the EV of every electric utility in the country? Because that's pretty much what that could replace if successful. Obviously, you said it was a lot of a ticket. So I'm fine saying that's probably a lot of ticket, but that's the dream, right? Yeah. I mean, you know, Tesla's filed to become an electric utility in a couple of places. And so I think, I think over time, I mean, this is, you know, it's uncharted territory. And there are other companies that are competing for this business. So we're kind of watching a bunch. But, you know, as far as the ability for one company to both manufacture the batteries, to distribute the energy, and to, you know, really expand globally with footprints pretty much everywhere, you know, it's a massive opportunity.

So it's just something to keep an eye on, you know, X auto and, you know, X truck and all the other stuff that they're working on. So let me come for 45 minutes in this conversation. So Tesla, obviously, the story is great and they dream big, but let me come back to the thing that was always a sicking point in my mind, right? And that's just the red flags that come out of Tesla. And the biggest one to me, I mean, you can go on Tesla Q Twitter and find some really quirky red flags if you want to get really into it. But the biggest one to me was always the first thing that jumped out to me, I remember the Ashley Vance Tesla book where I think it was

Kimball who said, when Tesla was struggling in like 2009, he said, oh, Elon pulled some tricks that I think if it hadn't gone well, he would have gone to jail for, right? And that always stuck in the back of my mind because then when the solar city thing came up and there was the Potomacan village of solar city houses that he used to sell the deal to Tesla shareholders. When I saw those two things together, I was like, oh, that is, you know, that was just the screaming red flag. And there are a couple of others that we can talk about that I'm happy to talk about. But that was the biggest one where I saw that quote. And then seven years later, I saw the Potomacan village. Are you familiar with it? I'll put the Vanity Fair or rolling store and or whatever was in the show. It's really a little

Yeah, I'm familiar with all of it. I mean, there's, I was sure you were. I was just, yeah, but that was the red flag that jumped out to me that I wanted to ask you about. Yeah, I mean, look, I've read everything that you've probably read to. You know, I think that like what's, what's so shocking to me, and frankly, it's probably a good thing, which is I just take such the opposite approach of how I think about Elon. And he's a, he's obviously like a, you know, quote-unquote controversial guy. But I think that, like, he's done some incredible things for, you know, the transportation industry. I mean, he's a guy who's landed rockets that like no one has ever. So it's just like, I suppose that I'm, I'm so kind of, I'm not a fanboy

whatsoever, but I'm, I'm more just shocked at how much negativity is associated with Elon. The craziest thing is when people say, when you hear Elon haters say, oh, it's SpaceX did isn't impressive. Like, are you kidding me? The man revitalized American space flight and like we, this is insanely impressive. What are you talking about? Yeah. And like, this isn't, this is business. I mean, this is not like a popularity contest. Like, I, I get that people don't like the guy. I think that, you know, he's, there's, you know, Elon is an individual and he's a super interesting guy. Obviously, I think he's one of the, you know, smartest. leaders out there in corporate America today. I think if you kind of like stack up a bunch of

CEOs, he's an engineer. Elon fundamentally understands how his products are made. He's not a sales guy. I think he's a brilliant sort of marketer, but principally he's an engineer. And so that's, that's his focus. He's super quirky. But at the end of the day, I mean, he has like 65 million Twitter followers and, you know, he sets the conversation, Tesla's never spent a dollar on advertising. And so there's all these sort of benefits of him being sort of out there in the media and capturing headlines. You know, I think that like this is another one of those situations where investors historically maybe get a little bit tripped up with like waiting information and, you know, they weigh the information of what they see of Elon acting sort of, you know,

quirky. But if you actually go and spend time at the factory at Tesla and talk to customers, Tesla is a much bigger organization than Elon himself. He has built this organization for sure. I think he's like imparted his own sort of, you know, he's very much imparted his own DNA into this organization. But the company is way bigger than Elon at this point. And I think that, you know, takes a lot of risk off the table, which is, you know, they're going to be producing next year over a million cars. I mean, they have some of the best engineers in the world. So I think that the

whole Elon hating thing, you know, over time, I think that kind of goes away. You know, does he do things that are provocative? Like, absolutely. But when I look at some other CEOs and sort of listen to kind of how they manage their businesses, you know, that honestly makes me, a little more queasy. Just just thinking about like, especially some of the competitors in, you know, in the auto industry, just talking about the supposed transition to electric vehicles and then, you know, not seeing it. So I don't know. I take very much the opposite perspective

on Elon. Yeah. You get bored following other companies after following Tesla for a while. Like, oh, this company, they're trying to go earnings 4% per year and the CEO isn't tweeting at tweeting at Senators that their profile picture looks like they just, they're post-coitus. Yeah, no comment. I mean, I just think that he has created a product and a company that people are fascinated by. And I think that there is a ton of value in that. I mean, you can't really see it, you know, maybe today,

but I think over time, the value of the test. the brand will become pretty apparent. I mean, it's, you know, people love the product, of course, but people just know the brand internationally. I think that this is a huge strategic advantage for the company going forward, which is that they simply don't really have to do much advertising. Yeah. They've spent zero.

And in fact, now you see other companies using Tesla in their own advertising campaigns like the Hertz deal with Tom Brady. I think that's just an incredible situation to be in as an investor. where you own a company that doesn't have to advertise and you have other companies advertising on your behalf. So you talk about NPS scores and just consumer satisfaction. I mean, I think another huge element here is just the brand, especially in a sort of post-internet world where everyone's connected. Everyone knows everything. The Tesla brand is a massive advantage.

It's legit crazy. You know, I watch my beloved saints on Sundays and I see if there's five commercials per commercial break, three of them are for cars. And at this point, maybe one or two or for car manufacturers trying to pump their new electric vehicle. And so, you know, their auto manufacturers are advertising everywhere. And despite that, you know, when you talk to someone is getting a new car, the top of their wish list is probably going to be a Tesla. And Tesla has spent, again, zero dollars. It just speaks to the consumer love. I think we've addressed most of the thoughts I wanted to do. Is there anything else on, I've got one more Tesla on Tesla, one more question on Tesla and then I want

to talk Spotify for a quick second. But is there anything else on, you know, the red flags at Tesla that we have an address that you think maybe get people up in arms that you wanted to address? I think that, no, I think a lot of those red flags are frankly kind of bullshit. I think that Tesla is so fascinating to me because it's like it's a Rorschach test. I mean, two people can look at the same bit of information, the same data, and walk away with it with two totally different perspectives. So I think that, you know, I, I just like love messy situations like this. I think like we're, we're just drawn to, I mean, part of our ethos is a firm, it's just like we're drawn to this complexity because, you know, this is all a big puzzle. We're just trying to put

together the pieces. What's the red flag at Tesla that you see bears cite the most that you think is the silliest or, you know, you guys see and y'all just laugh at the most? You know, There's a whole bunch, but, I mean, like, that, you know, Tesla will never be profitable. I mean, that's something. That's been disproven. Yeah. You know, and that's okay. I mean, I don't mind any of these critiques.

I think that they're healthy. They've created a great opportunity for us. You know, if all information was accurate and there was no misleading articles, our edge would decay. A lot of edge just comes from knowledge and time arbitrage. And so this has been historically sort of one of the most divisive companies, which creates opportunity. So it's frustrating when I hear the bear's arguments, but I also have to kind of give thanks for them.

My favorite is just because it's so disproven is the competition is going to kill Tesla. I think if you were citing this three or four years ago, it made sense. And there's a particular Tesla bear who, you know, just publishes the list of all the upcoming EVs that are going to be Tesla killer. It's like, okay, but you've been saying this for eight years. And there is, there's not really a demand problem for Tesla. We haven't seen one. Like, if competition was going to kill them, it's not to say that Tesla, a new product

can't come along and supplant Tesla or, you know, markets evolve. But at this point, that's been so disproven, is somebody's not going to, GM's not going to come all of a sudden with a Tesla killer or something. It's been so disproven. And you're just citing the same old things for seven years at this point. I mean, we don't look. I mean, every day is a new day. Maybe tomorrow, you know, there is a competitor that comes out with a product that

has a better value proposition. So I always want to keep it open mind. I will say it's pretty shocking to me how I used to live in New York. So I feel like I can, you know, criticize New York guys. But a lot of guys that are- Hey, watch it. You're talking to someone coming to you from Manhattan right now. I live in Manhattan for, you know, 10 plus years. So I can, I have a little Manhattan street

credit. You know, but there's like a New York mentality of like, you know, saying things, but not really being able to back it up. And that's one example of this whole competitors are coming from Tesla. You know, I, you know, I go out and I speak to dealers and I test drive all of the competitors. I think that, you know, the research process, you kind of have to just get out there and talk to people and experience these products for yourself. I mean, it's, it's crazy to me that, you know, people talk about the Tesla competitors and then have never actually driven any of these cars themselves. I mean, it's ludicrous. This is, it's a product that you can just go easily walk into an Audi dealership and, you know, test drive the ETRON. And I guarantee

that a lot of these guys who are, you know, criticizing Tesla and saying that ETRON is going to, you know, kill the Model 3. They've probably never even driven one. So I think that's just, it's maybe a bit of laziness or I'm not sure exactly what it is that compels people to have such a strong opinion about something without really just kind of doing the basic homework. You know, but again, that's good for just the market and creating opportunity. Yeah, there's a limit to what you can do, right? Like if you're looking at a space shuttle company, obviously you can't go fly a space shuttle yourself to test drive the product. But it I was very bearish peloton for a long time until I got the product and tried it.

And then I was like, oh, like there is, you can debate whether the stock's undervalued or an opportunity or not, but there is something different about this product. And in hindsight, I look at it and I was like, Andrew, that was pretty lazy, right? Like, you could, you don't have to go buy the Peloton, but you could have at least gone to the Peloton store down the street and like tried the product or something, right? So I agree with you on Tesla. Last thing on Tesla, we mentioned valuation a few times. I just want to come back to it.

You know, Tesla, I don't know where it is right now. It's around $1,100 per share, about a $1 trillion market cap. And we've mentioned valuation a few times. So I just want to ask, what's the fairish valuation for Tesla? Obviously, there's a whole range of outcomes. But how do you guys look at fair value for Tesla? I don't want to use specifics because I think that's just out of deference to our partners and just how we view proprietary information.

Yep. But we have really like a three to five year outlook. And we just think that the business is. is really early innings. I think we look for just the risk-adjusted opportunity of businesses that can really compound at at least 20 to 25 percent a year. Tesla is materially higher than that. So in addition to sort of just the basing, the baseline of growth at the business, we think

there's a lot of optionality, especially on the software side. So our value is, let's just say, significantly higher than where it's price today. If you've got two minutes, I know we've gone for almost an hour, but if you've got two minutes, I just wanted to ask you a couple questions on one of my favorite companies, Spotify, if you've got a second. I love Spotify. Yeah. Spotify. Let's start. Same question I asked with Tesla. What is the biggest misperception about Spotify? You know, that it's a commoditized music service and that they're forever going to be paying out, you know, 75% to the labels and, you know, they'll never be profitable. And, you know, the podcast bet didn't work out.

I think that's probably the maybe the perception among the bears, at least. I think that dramatically underestimates just the power of the platform to grow to a billion users and find new ways to monetize those users. But more importantly, just create opportunities for creators. You know, you're now a part-time podcaster in addition to an excellent investor. And so you know that this is like early. we're early in this, you know, journey of audio in general. And so Daniel Eck likes to say that, you know, video is a trillion-dollar industry.

And there's no reason that audio can't also be a trillion-dollar industry. I very much believe that he's right and that over time, the audio industry will be much more than just music and, um, audiobooks and, you know, frankly, more than just podcasts as well. I think it'll be more interactive. I think it will be sort of of a hybrid between video and audio. And so I think that when I look at companies that are really trying to disrupt, you know, an incumbent industry, I just see what Spotify is doing is they're going after, you know, linear radio.

They're going after sort of, you know, the music industry by potentially disaggregating the labels. You know, there's a lot of optionality in what Spotify is building. The number one thing that the company is focused on is just market share, just growing the business. And so Daniel talks a lot about this about growing the, you know, the user base to about a billion users. But more importantly, even growing the creator base from, you know, about I think it's like 8 million on the platform, getting up to 50 million. And eventually maybe they'll have 200 million creators on the platform. So, you know, earnings are not really a prime concern for a company like Spotify right now. It's really just land grab and territory growth. Oh, I 100% agree with you.

You know, I think I can't remember his name, the old Spotify CFO, who was also the old Netflix CFO. He was so great because he framed it for investors so simple. He'd be like, look, I was at Netflix. This is Netflix 2.0, right? Everybody doubted it said Netflix. And every time we said, we're going to go into own content. It's going to create this sticky platform. Our skill is going to be unbelievable. And he would say the same thing at Spotify. Do you think the Netflix 2.0 comparisons are fair? Because over time, I've started to think that it's actually going to be, I think the stock's got the same potential, but I think it's going to look a lot different for Spotify. So if I said Netflix 2.0, would you agree, disagree? Do you have tweaks to that?

There are elements that I agree with, which is the structural shift to own content through exclusive podcast is certainly a Netflix-like sort of dynamic. I'd say what's more unlike Netflix is the growth in the advertising business. And so you heard Daniel talk about this, that the business is really going. In the future, the advertising revenue at Spotify won't just be 10% of overall revenue. You know, the goal is really 20%, but maybe even 30, 40%. So unlike Netflix, I think that Spotify is creating some really compelling opportunities for advertisers. And this is like uncharted territory. I mean, no one really has built.

What really Spotify is doing is building like Google AdSense for audio. I mean, that doesn't exist at scale right now. I mean, if you look at like how media buys work across the radio industry, it's all like regional. It's just based on personal relationships. You can't just go and have like a 30 second audio ad and just distribute. immediately to the world and hit your demographic because it's available and you know anyone can do this if people are curious about Spotify sign up for you know an ad account if you were an advertiser and just see what the platform looks like and see if you were going to advertise a product

or service you know how the the back end looks because I've done it and it's it's remarkable I mean it's it's very much like a Google like platform for advertising and I think that's going to be a real differentiator for the company going forward. this off the seat of my pants, but you said, hey, I think they could get up to 40% revenue from advertising. I think it could be higher in the long term if they really pushed on the podcast and the own content. Because, you know, I think people just don't get podcast the original. They're so untargeted with the advertisements. I use this example all the time, but I listened to Bill Simmons podcast once where he did an ad read for Fandual Online Sports

Betting. And at the time, online sports betting was legalized in eight states. And they weren't even eight of the largest states in the in uh in the u.s you know it wasn't new york which is where i live it wasn't california wasn't texas but he didn't add for eight states and i just listened to that and that was one of the things that clicks for me i was like if spotify figures this out they could just have bill simmons do two adories right here one for the eight states where sports betting is legal and then one for the eights for 42 other states which could be anything they could just segment it and phanduel would probably play the exact same rate just to get those eight states and then the other 42 states they could do a different thing.

It's a better experience for me because I'm not hearing something for Fandle and saying, God, I wish I could bet on the Saints this weekend. And it's a better experience for, it's a better experience for everyone, makes a ton more money. And that was just one of the little things that I heard where I was like, oh, my God, the advertising opportunity on podcasting could be huge. I listen to podcasts and music. I know this is unique, but pretty much 10 hours a day. You know, I'm listening to music in the background.

It's just so much opportunity with that user base and everything. And somebody tweeted this day, how many companies are there with the potential to get to a billion users in the world that are trading for under $100 billion right now, Spotify might be the only one. Yeah, there's only a handful. I totally agree with all of that. And I think that if you just look at the CPMs on some of those ads, it's really attractive. And so, you know, we'll see how it shakes out over time with those percentages look like.

But it's triple-digit growth on the ad business right now at Spotify. And they're firing on all cylinders. What worries you most about Spotify? that's a good question so there isn't anything that is like materially um threatening in the short term i suppose you can make the argument that um some of the bigger tech companies like apple and google really um prevent Spotify from from growing into what they can be so i think that with you know kind of the Apple tax, just paying out and just Apple limiting the ability for, you know, apps within their ecosystem to kind of grow and flourish. So that's, I suppose, just a headwind

or something that's concerning. Isn't that Spotify playing on hard mode right now, though? And at some point, if that headwind ever dissipated, like the company would be free to really unshackle? I think so, yeah. And, you know, and I think that, you know, you just kind of have to think through some of the downside. And, you know, maybe growth is slower than anticipated. I think that's very unrealistic. I think that everything that I've seen and all the leading indicators are, you know, there's ample opportunity ahead for the company to grow internationally. Some of the developing markets, especially where it's hard, right? I mean, it's hard to launch in a developing market where you're still trying to figure out pricing options, you know, advertisement. But I think over

time, you know, as long as management kind of stays focused on this goal, you know, there's no material concern on that front. You know, but like any company, I mean, if they lose the plot, you know, if if the strategy shifts, you know, like we already had this sort of maximum of like, you know, every day just start with the blank sheet of paper. So, you know, every day is day one to us. So if Spotify, if the position, if it's not working out, you know, if things aren't going as kind of we planned, you know, we'll reassess. But, you know, for now, we're really liking kind of the next couple of years in particular. I didn't hear anything on music labels in that question. Music labels don't concern you? Not particularly. I mean, the way I look at the music

labels is, you know, the value of the two-way marketplace to them is huge. So, I mean, at the end of the day, Spotify serves the artists. And so artists want a bigger fan base. Everyone wants to be a superstar. That is the, that is the core value proposition that Spotify can offer the artists. You know, there's a great podcast a couple weeks ago from an investor in UMG and just talking about, you know, why Taylor Swift still signs with with a label. Was that the invest like the best one? Yeah, yeah, it was. He did a lot of work with, it was the Rohn-Kunf guy. I really enjoyed that one. I did a lot of work on UMG when PSTH was going to buy them. I really enjoyed that.

Yeah. So I guess my thought there is, you know, it's a complementary relationship between Spotify and the label. So as much as, you know, there's this tension and sort of, you know, the pay-all ratio and all that, which is healthy. I think that Spotify will have more and more leverage over time. And I think that it's not like a, it's not a zero-sum sort of relationship. I think that they both win.

You know, as long as you grow the audience, as long as you grow the amount of people on the platform, both sides win. that equation. It's not perfect, but I came to look at it as Spotify is the loss leader for music labels and artists where they get paid. It's not even a loss leader, right? They get paid money for streaming on Spotify, but they need Spotify to get the money from where they're really going to get the money, which for artists, it's streaming, it's advertising, or sorry, it's tickets, it's advertising, sponsorships, all that. And then for the labels, they're really going to get paid from all the external things, like getting paid from Peloton streaming,

getting paid from TikTok, for Roblox, from all this sort of stuff. So that's kind of how I came to look at it. And are you familiar with what the one of the things that really clicked it for me was in South Korea, one of the small labels pulled their music from Spotify, and all the South Korean fans and the artists blamed the label, and eventually the label caved and came back to Spotify on Spotify term. So that was one of the things that really instructed me on the dynamic there. Yeah, I firmly believe that, you know, Spotify.

mission is to serve creators and enable creators to kind of augment their craft for a wider audience. And so if you just look at the creator tools for podcasters and then similarly, like just the ability for an up-and-coming artist to really get discovered and to push their craft on Spotify's platform, I mean, the value proposition for them is having an audience of, you know, right now, about 400 million people, but eventually about a billion people worldwide. What that can do for your, you know, if you're an artist and you're going on, you know, a tour, to be able to advertise locally to fans that listen to your stuff on, you know, Spotify and, you know, if you're going to Duluth or if you're going to, you know, Des Moines to be able to kind of push just ticketing to those areas via,

I mean, it's an incredible, you know, just data-driven platform that, you know, I think, again, is like working complimentary with the labels for, you know, positive outcome on both sides. Perfect. Well, hey, any longer, I'm going to have to just turn this into a two-part podcast or something. But Eric, this has been fantastic. Thanks so much for coming on. I'm looking forward to keeping the dialogue going forward, both offline and maybe having

you on for another podcast because you guys run a concentrated tech book. So it's pretty easy to call you out and talk about one of the things you guys are working on. But this has been great and we'll keep it going. All right. Thanks, Andrew. Thanks for having me.