- Tesla’s Battery Day did not disappoint…
- This is how innovation dies
- As predicted, this streaming business is in big trouble
Tuesday or Wednesday will be one of the most exciting days of the year for high tech.
One of the largest and most successful artificial intelligence companies in the world is set to go public. Palantir was founded back in 2004, and early investors have been clamoring for an exit for a very long time.
Palantir will go public via a direct listing, not via the traditional IPO route, which makes this IPO all the more interesting.
Direct listings and reverse mergers into special purpose acquisition corporations (SPACs) are two of the best ways for private companies to access the public markets on their own terms and not be subject to investment banks controlling the process.
Companies with strong brand recognition like Spotify and Slack have used the direct listing route successfully in the past. That made a lot of sense.
Plenty of people were either customers or users of their products. This increases the likelihood that a certain percentage of those people will become investors in the stock after the IPO.
Palantir is different.
For many years, the company intentionally kept a low profile since so much of its work was with governments and intelligence agencies. It’s not exactly the kind of work they could talk openly about.
Palantir is not a household name, but it is a name that pretty much every venture capitalist, private equity firm, and hedge fund knows very well.
The company is rumored to list around $10 a share, which would equate to a fully diluted valuation of $22 billion. With 2020 revenues expected to be right around $1 billion, that would result in an enterprise value to sales ratio of 22.
Remember that Palantir is an enterprise software company with large exposure to the public sector. It is high growth, but it’s still losing a lot of money, with losses of $579 million in 2019 alone. In a normal market, this valuation for Palantir would be at least two times too high.
But this is one of the hottest IPO markets of the last two decades. Software companies like Snowflake are going public at 177 times annual sales. So I wouldn’t be surprised to see Palantir open up trading well above a $40 billion valuation.
This isn’t a recommendation for Palantir.
After all, those same venture capital and private equity firms are going to be taking 90% of investment value off the table. And that will leave just the scraps for normal investors at these elevated valuation levels.
Please be careful trading a stock like this. Palantir is a great company to keep our eyes on, understand its numbers, review its products, and look for an opportunity to invest in at valuations that will stack the deck in the favor of investors.
And while Palantir’s IPO will get all of the headlines, I’d like to also mention that there is another class of IPOs that often goes overlooked. But these IPOs present some of the best risk/reward profiles available today.
I call these investments “Penny IPOs.” I recently gave a presentation on “Penny IPOs” to my readers. If any subscribers missed it, be sure you catch up right here.
Now for our insights…
Insights from Tesla’s Battery Day…
Tesla finally had its annual Battery Day last week. This is the much-anticipated event that was originally scheduled for March but delayed due to COVID-19.
Battery Day is so important because batteries tend to make up more than half the cost of electric vehicles (EVs). That’s why Tesla’s advanced battery technology has such a competitive advantage over other EV makers.
And this year’s event did not disappoint.
Perhaps the biggest news is that Tesla’s next-generation battery will allow it to offer an EV for just $25,000 by 2023. That would make it less expensive than the average gas-powered car today.
And that’s the point at which we will see Tesla’s cars become mass market vehicles.
It’s simple economics.
Tesla’s EVs are already cheaper to fuel and much cheaper to maintain than traditional cars. That’s because electric vehicles have far fewer moving parts than cars with an internal combustion engine. The days of oil changes and periodic trips to the shop for repairs are over.
The only thing holding Tesla back right now is the sticker price. Once that comes down, Tesla’s cars will be cheaper to buy than traditional cars. Then we’ll see Tesla models on the road everywhere.
Last week’s other big insight is that Tesla is working to strip cobalt out of its batteries entirely.
Cobalt is the most expensive material in an EV battery. And the cobalt supply chain is hard to manage because the mineral comes from far-flung places that are often mired in geopolitical tensions.
Tesla has already made incredible progress by reducing its use of cobalt by more than 60%. This has been a major contributor in getting the price of the Model 3 down to where it is today. So getting rid of cobalt will bring battery costs down even further and get Tesla closer to its goal of a low-end, $25,000 model.
To that end, Tesla announced that it can’t rely on its battery manufacturing partners 100% anymore.
Tesla has been working with Panasonic and Chinese battery producer CATL to make its batteries up to this point. That will continue, but current production is not enough to keep up with demand.
So Tesla will launch its own battery manufacturing operation to keep up with rising demand. The company is going to build out enough production capacity so that it can make 20 million cars a year by 2030.
That would make Tesla the largest car maker in the world.
That’s impressive, especially considering Tesla isn’t just another car maker. It’s really a technology company with some of the best artificial intelligence (AI) software in the world.
This is something that the mainstream press hasn’t caught onto yet. And it is why Tesla’s best days are still ahead of it.
The Death of Open AI…
Last month, we talked about how Silicon Valley was humming over OpenAI’s new product GPT-3.
For the benefit of newer readers, OpenAI started as a nonprofit AI research institute in 2015. Its goal was to work through the ethical issues around how AI and machine learning are used.
OpenAI then spun out a commercial arm last year, and its latest product – GPT-3 – is impressive. It can complete our sentences as we are typing. It has been used to write entire technical manuals.
And GPT-3 even learned to code. Users can tell it something like “please produce a button on my website that performs this action and looks like this.” Then GPT-3 will write and implement the proper code, just as instructed.
It is easy to see why the Valley was so excited about this product.
The industry was brimming with ideas of how GPT-3 could be used for so many applications.
And then, Microsoft announced that it had extracted an exclusive license deal for GPT-3. Uh oh.
It’s not yet clear exactly how exclusive the deal is. Microsoft says GPT-3 will still be available to the public, but it will be the only company that can access GPT-3’s underlying code.
And that means independent developers won’t be able to experiment with it, improve upon it, tweak it for new applications, or even just verify that Microsoft hasn’t changed the code.
What’s especially sad about this is that OpenAI was founded to be a nonprofit institute pursuing AI for the benefit of mankind, completely independent of profit motives and corporate competition.
As part of that mission, OpenAI was to write open-source code. Open source means that the code is published for anyone to see. That allows developers to understand how it works, experiment with it, and try to improve upon it. Such an open system leads to perpetual growth and innovation.
Yet here we have OpenAI putting this fantastic technology into the hands of a single company, which is a massive incumbent and already a monopoly in its own industry. This is the exact opposite of what was supposed to happen.
At this stage, I wouldn’t be surprised if OpenAI itself was folded into Microsoft, only to disappear forever.
I’m not happy about this outcome. I feel that this was a lost opportunity for OpenAI to exist as an independent company openly licensing its technology on fair terms to all industries.
However, there will be others to step in and fill the void. It won’t take long before new startups are outdoing what OpenAI did with GPT-3. That’s the nature of research and development for AI and machine learning (ML).
The whole field is experiencing a period of extraordinary growth right now fueled by incredible innovation in semiconductor technology purposed for AI.
Another one of my predictions is coming true…
Back in May, we talked about Quibi, the streaming service founded by media mogul Jeffrey Katzenberg and former CEO of Hewlett Packard, Meg Whitman. They built Quibi around the idea of “short-form” content. Essentially, it offers TV shows in ten-minute segments.
And I didn’t mince words. I said that Katzenberg and Whitman completely misread the market.
Sure, they threw billions of investor dollars at the platform. But that’s the corporate fallacy. Big executives often think throwing money at an idea will bring success.
I knew better. To me, it looked like investors had just flushed $1.75 billion down the drain.
Well, Quibi’s launch numbers are out… and it came nowhere close to hitting its targets.
Katzenberg famously said, “I attribute everything that has gone wrong to coronavirus.” I think that is my favorite quote of the year. It must be the media executive’s equivalent of a child’s “the dog ate my homework.”
Thinking that way might help Katzenberg sleep at night. But it’s not the truth.
Quibi was doomed from the start, virus or no virus. And we know that media companies are thriving during the pandemic. Netflix, Snap, Facebook, TikTok, Triller, and so many others are making a killing right now despite the virus.
Now Katzenberg and Whitman are trying to dump the company as fast as possible. They are hoping to get some money out of it before the whole thing collapses.
But the situation is getting dire.
Quibi is almost out of money. It will need an infusion of cash just to make it to 2021.
To make this happen, the team is trying to go public through a reverse merger into a Special Purpose Acquisition Company (SPAC). They are hoping there’s some dumb money out there that doesn’t understand how bad their business is.
Please heed my warning – investors should absolutely avoid any public vehicle, be it an IPO or a SPAC, involving Quibi.
The business will be dead on arrival.
Editor, The Bleeding Edge
P.S. There’s still time to watch the replay of my Penny IPO presentation from last week. My publisher has agreed to keep the replay open for a few more days.
For those who missed it, I’ve found a way to turn the tables on the venture capitalists and private equity sharks who have locked normal investors out of the best tech investments over the last decade.
It all comes down to a small subset of the technology market where companies go public 100 – 300 times cheaper than most tech stocks today. That’s why I call them “Penny IPOs”. Some of these companies go public at levels even cheaper than Amazon did way back in 1997… before it delivered gains of as much as 180,000% to average retail investors.
This is the closest thing I’ve found to “turning back the clock” to a time when technology companies went public during their early years.
And the reason I’ve been pounding the table on these Penny IPOs for the last two weeks is that they are entering what’s called the “4X Window” right now. This is window in which we often get catalysts that send these stocks soaring hundreds of% in a short time.
And that’s not hypothetical. My top Penny IPO from last year shot up 432% during the 4X Window.
So for readers who missed the event, there’s still time to watch the replay at no cost. In it, I explain what Penny IPO’s are, why they still go public so early in their life cycle, and what this 4X Window is that’s going to send the top Penny IPO’s into overdrive in the coming weeks.
For anyone interested, just go right here for the replay.
Like what you’re reading? Send your thoughts to [email protected].