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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

Traditional banks and investing platforms are prime for disruption. Based on CBInsights research, Fintech companies represent about 17% of all unicorns around the world, with companies like Stripe and Square. This environment reveals a clear message: people want to have frictionless participation in financial services and markets. Today we will break down Robinhood ($HOOD), the fintech company that wants to become the go-to app for money.

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📖What is Robinhood?

Robinhood is a stock-trading, investing tech company that provides everyone commission-free trading. The company is proud to have created an intuitive platform that makes investing easy.

The company’s mission and vision: The company’s mission is to democratize finance for all. Their vision is to become the most trusted, lowest-cost, and most culturally relevant money app worldwide. They simply want to allow everyone to participate in the financial system regardless of wealth, income, or background.

Customer Landscape and Partnerships:

Users:

Net Cumulative Funded Accounts: Q1 2021: 18.0M (151%) | FY 2020: 12.5M (143%)

Monthly Active Users (MAU): Q1 2021: 17.7M (106%) | FY 2020: 11.7M (172%)

Average Revenue Per User (ARPU): Q1 2021: $137 (65%) | FY 2020: $109 (65%)

Cohort Annual Revenue: 2017 Cohort returned $130M (7.6x) in revenue in 4 years | 2018 Cohort returned $186M (4.2x) in revenue in 3 years | 2019 Cohort returned $175M (3.9x) in revenue in 2 years | 2020 Cohort returned $326M (1.0x)

50% of users are first-time investors

80% of user were mainly acquired through the Robinhood Referral Program and the remainder organically

Referral Program cost $57M in 2021 (56% of marketing expense) and $26M in 2020 (37% of marketing expense)

The referral program awards free shares upon bank linking rather than account approval (share price ranging from $2.50 to $225)

CAC has steadily declined by 60% from $53 in 2019 to $20 in 2020 and now $15 in 2021

Robinhood states most of the investors buy and hold investors

70% of assets under custody came from ages 18-40

Tripled the number of women using the platform

Claims diverse user base: 9% are African Americans | 16% Hispanic |

65% have credit scores of prime or better and 65% have a debt to income ratios of less than 20%

50% of internal Robinhood surveys responded that the application helped motivate to save money

Contract Customers:

Market Makers: Revenue from market makers represented 75% of total revenue in 2020 and 81% in 2021

Q1 2021: Citadel Securities (27%), Susquehanna International Group (12%), Tai Mo Shan (11%), Wolverine Holdings (9%), All others represented about 22%

Financial Performance (Growth, Margins, Debt, Profit):

Revenue: Q1 2021: $522M (309% YoY) | FY 2020: $959M (245% YoY)

Net Income: Q1 2021: -$1.4B | FY 2020: $7M (Breakeven)

Loss in 2021 was driven by $1.4B in convertible note (considered a liability) that had to be raised (GameStop Party)

Assets Under Custody: Q1 2021: $81B (3.2x) | FY 2020: $63B (4.5x)

Q1 2021: 80% - Equities | 14% Crypto | 9% Cash | 3% Options | -6% Customer Margin Balance

FY 2020: 84% - Equities | 6% Crypto | 13% Cash | 3% Options | -6% Customer Margin Balance

Cash: $4.7B

Team DNA and Culture:

The company is founder-led by Vladimir Tenev and Baiju Bhatt. Their executive team is composed of leaders from CapitalG, Amazon, Facebook, Google, and former SEC Commissioner.

In Glassdoor, the company received a 4.4-star review with 87% approval to recommend to a friend and 88% approval of CEO (pool of 266 reviews)

The company is planning to increase its engineering team by 20%, customer service by 20%, and regulatory and compliance by 30%

Review Comments: Pros: “Company culture is open and friendly” | Cons: “Growing pains have definitely been real”

📈Market Opportunity

The stock market is defined as one of the greatest inventions in the capital markets to increase wealth. Historically the S&P 500 has produced on average a 10-13% annual return. But many Americans experienced limited or no access at all in the wealth generation process by the markets. With finance technology, the barriers that once existed preventing ordinary citizens from access are deteriorating rapidly. Realizing this some market dynamics are evolving:

2019 Pew Research Survey revealed that 60% of Americans do not have investments outside of their retirement accounts

2020 Gallop Poll revealed 68% of young adults (18-29) have no money invested

2020 Harris Poll revealed two-thirds of Americans would consider financial products from technology platforms

Retail Investing represents about 20% of all American households.

30% of Retail Investors place orders using a mobile app and 59% for participants at age 18-34 – FINRA survey.

The company reports from insights by Charles Schwab that U.S. retail investors have total assets of $50 trillion. With over half of the retail investors revealing Robinhood as their first brokerage account, a strong market share is inevitable. Additionally, the crypto market is currently valued at $1.3T (with Bitcoin representing about 46% of the market cap). As young retail investors are open to the developing ecosystem, the ability to access crypto investments is crucial. Simultaneously, the opportunity to offer FDIC ensured cash management solutions like traditional banks opens additional market opportunities. There are over $1 trillion in brokered deposits in the U.S and $3.6 trillion in credit card purchase volumes as well. Robinhood is positioned to operate in an ecosystem that is ripe for disruption.

👨‍💻What are the Strategic Resources?

Product Portfolio:

Technology Platform: the company has a proprietary ordering system that can evaluate past user orders and automatically route orders to market makers. The company claims that this ensures users have the best prices. The company also implements a self-clearing system that clears and settles trades across stocks, ETFs, and options. In addition, their machine learning platform enhances fraud detection and curates a personal, relevant newsfeed for users regarding equities and cryptocurrencies. To continue to enhance this platform Robinhood has a team of 550 engineers (26% of their workforce).

The platform offers some key critical features as well for users:

Investing Solutions: Invest in commission-free stocks, ETFs, options, fractional shares, recurring investment functionality, and IPO access.

Robinhood Crypto: Invest in seven different cryptocurrencies (Bitcoin, Bitcoin Cash, Bitcoin SV, Dogecoin, Ethereum, Ethereum Classic and Litecoin). Currently, users cannot deposit or withdraw fiat and cryptocurrencies directly from the Robinhood Crypto subsidiary.

Robinhood Gold: Monthly subscription service that offers instant access to deposits ($5k-$50k), stock research, access to investing in margin (eligibility criteria need to be met). Currently, there are 1.4 million customers subscribed.

Cash Management: Users can earn interest on cash account and currently there are 3.4M debit cardholders (MasterCard partnership). They have removed traditional bank fees (minimum balances, overdraft, and transfer).

Learning & Education Solutions: The company offers educational tools and resources like the podcast, newsfeeds, and a learning library of articles and tutorials.

To protect its assets the company has 55 issued patents, three pending design patents, and their Cash Management product card designs. Technology and development expenditures represent about 22% of their revenue.

💪Key Strategic Moats

Product Design: Design is at the center of Robinhood, creating a platform that is intuitive, informative, and aesthetically familiar. In 2020, half of all new investing and trading app downloads were driven by Robinhood.

Brand: When you think of Robinhood, you immediately associate retail investors and zero-commission trading. Investing is now socially relevant among younger generations due to Robinhood. 80% of newly funded accounts joined the platform through their referral program, which signifies brand relevance.

Scale: The company offers a variety of services ranging from news, watch lists, ability to manage cash balances, invest, and manage personal portfolios. Users on average visited the app nearly seven times a day. With this scalability, the company has 3.4M debit cardholders, 11 million users that have used fractional trades, and 32 million subscribers to their newsletter and podcast, and 7 million views on their Robinhood Learn initiative.

Team: The team is founder-led with experienced executive leadership, strong culture, and an overall positive work environment. The team strongly believes that the financial system should be accessed by all.

🧬Business Model and Growth

When you follow the breadcrumbs, three distinct revenue streams define Robinhood’s business model:

Transaction-based revenue: Represented about 75% of total revenue in 2020 and 81% in Q1 of 2021. Essentially, when a user puts in an order for a trade (equities, options, cryptocurrencies), Robinhood uses their ordering system to route orders to market makers to execute and they in return receive a fee. This strategy is called payment for order flow (“PFOF”). Similarly, on the crypto trades, it’s called a “transaction rebate”. Let us dig a little deeper and understand some facts about the fee structures:

Equities: Fee is a fixed percentage based on the difference between the quoted bid and ask (spread)

Options: Fee is on a per-contract basis

Cryptocurrencies: Fee is a fixed percentage on the order size of the transaction

*Majority of this revenue is also mainly driven by options (~47%), equities (~32%), cryptocurrencies (~20%),

*The fee structure is identical across all market makers and Robinhood states that they route orders to market makers that they believe offer the best execution and in the cryptocurrency space the best competitive price.

Net interest revenue: Represented about 18% in 2020 and 11% in Q1 2021 of total revenue. The company earns interest by lending securities, margin loans, cash balance.

Robinhood Gold Membership: Represented about 6% in 2020 and 8% in Q1 2021 of total revenue. To get access to margin investing and additional privileges, you must be a subscriber.

The company also intends to deploy the following growth strategies:

User Acquisition: The Referral Program was successful and will expand to deliberate marketing resources to acquire users. Uniquely, Robinhood is intending to allocate 35% of its IPO shares to retailers.

User Support: Resources will be deployed to increase customer support (“add the human touch”)

Product Innovation: The company intends to evolve its product to potentially including all aspects of financial management and services such as (loans, and mortgage services, etc.)

International Expansion: The Credit Suisse Research Institute estimates that total global wealth is estimated at over $250 trillion. Asian and European expansion are necessary.

Investor Facts:

Investors: DST Global, Ribbit Capital, New Enterprise Associates, Index Ventures

Stock Price across the various fundraises: Series A: $0.19 | Series G: $18.6 (100x return) | Potential Valuation at $40B

Class A shares: One vote | Class B shares: 10 votes

🤯Key Insights for Time Investors:

⚠️Key Critical Risks

Revenue Risk: Majority of the revenue generated by Robinhood comes from payment of order flows. This is highly driven by option trading, which is one of the riskiest forms of trades to make as an investor. A reduction in spreads between the bid and ask price, reduction in trading activity, and any regulation regarding the relationship with market makers can severely impact 81% of the company’s revenue. Additionally, a substantial driver for growth in Q1 was driven by cryptocurrency trading, and more specifically Dogecoin, which represented 34% of the cryptocurrency transaction-based revenue.

Brand Degradation: There has been a wave of negative media coverage as well as litigation/settlements with government entities regarding the Robinhood practices, “gamification” of investing, and operational outages.

December 2019: Robinhood settled with a $1.2M fine for noncompliance with best execution practices with FINRA, a self-regulatory organization.

December 2020: Robinhood paid $65M to SEC for an investigation into best execution and PFOF practices.

More recently, FINRA fined Robinhood ~$70M for the systematic outages, misleading communication, and trading practices (this is the largest penalty from FINRA)

There are a host of other class actions in play as well.

Competition: The ecosystem is also extremely competitive with incumbents like Charles Schwab (32M accounts), Fidelity (83M accounts), E-Trade (7M accounts), and TD Ameritrade (11M accounts). In the space, Consolidation is occurring to secure market share. Similarly, new entrants like Etoro (20M), Webull, and Public are in direct competition.

Government Regulations: The GameStop/Meme stock fiesta has certainly raised the flag causing government regulatory bodies to increase their focus. Payment of order flows is on the table with the potential legislation that is recently introduced to completely prohibit the practice. In addition, Gary Gensler, Chairman of the SEC, has proposed key focus on the following concepts: 1) PFOF 2) Gamification 3) Disclosures under trading restrictions 4) Margin requirement sufficiency 5) Managing liquidity risk 6) Mobile-app features such as rewards, push notification.

Robinhood, spawned from the idea of democratizing finance and with a grandiose vision of becoming the go-to app for money! This idea is very addictive, especially when it involves the traditional story of Wall Street. When I think about Wall Street and the narratives that have circulated across for years, three words come to mind: wealth, fraud, and privilege. Keeping this in mind, any company that delivers a message of enabling anyone regardless of wealth, income, or background can suddenly become extremely popular.

Robinhood began with a splash introducing a simple, beautiful, and intuitive design for any user regardless of their experience. They did a great job removing friction caused by learning a new technology platform. Once you get approved and funds are deposited, you can immediately start investing and trading. To continue with this success, they pioneered a “commission-free” trading business model that took the industry by surprise causing all the incumbents to follow suit in 2019. They coupled this strategy with a stock referral program and BOOM you have significant growth. In eight years, they added 18M users with funded accounts and in the first quarter of 2021, they attracted 5.5M users. This is explosive and a success that the company should take pride in. From a brand perspective, Robinhood has associated itself with retail investing and if interests are high in participating in the markets, they will remain a strong player.

But this growth and brand awareness has not come without any costs. If a Wall Street Soap Opera were to be made, Robinhood would be the theme. First, to achieve their “commission-free trading” on the front-end to the user, they must generate a substantial amount of revenue through a controversial practice known as the payment of order flow. Now this strategy, incentivizes high volume trading specifically regarding options (as shown in the S-1 filing), and the routing to market makers for a fee raises questions on whether that is truly in the best interest of the user and whether it gets you the best market price. This practice is banned in some countries due to the conflict of interest. The CFA institute published a paper summarizing the ban in the U.K. for the sole purpose of the incentive of maximizing fees from selling order flows. This practice has attracted a $65M fine from the SEC and in 2020 and $1.2M fine in 2019 from FINRA. Legislation in the U.S. is also being created to potentially ban this practice. This would be terrible news for Robinhood in the short-term. Second, the concept of gamification has hit some scrutiny as well. Young untrained users are practically gambling on the app (reported minimum average seven times daily visit per user). Now Robinhood claims they want to enable their “customers” to become long-term investors and take greater control of their finances. But the behavior by users tells a different story. Now, I know we are all adults and if we can buy alcohol, gamble in casinos, why not the stock market. This is where the conflict resides. A casino is a casino and its common knowledge that you do not enter a casino with the expectation of creating wealth. Robinhood on the other hand claims to be that trusted brand that empowers you to build wealth, which is walking a fine line based on what’s actually happening. Finally, there is a problem with transparency with Robinhood. The outages during the GameStop and Meme stock rally created a bad taste in many retail investors (including myself). Restricting trades during the period of increased volatility created outrage and 50 class suits. While there are mechanics behind why that tactic was necessary, Robinhood lacks proper “user” support to communicate transparently. This event resulted in the largest fine by FINRA, amounting to $70M.

As a Time, Investor, it is important to understand Robinhood holistically. As a fintech company, they are performing quite well, and they have made investing easier for everyone. However, there are serious regulatory and brand issues that Robinhood needs to navigate to truly democratize finance and become “the most trusted, lowest cost, and most culturally-relevant money app worldwide”. In my opinion, the fact that Robinhood is still here and widely used with all the negative media attention, reveals how unique their product design is and how resilient their brand is as well. As a long-term public investor, I would personally wait and see how everything develops over the next two years. Now, I do wish I were part of the seed round or Series A round in Robinhood, which for those who participated will exceed a 100x return (congratulations!). I am personally curious to see how Robinhood evolves in the public eye and hopefully, they can accomplish their mission and vision regarding investing and money.

Stay curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, join me on Commonstock, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors

Robinhood S-1 Filing

This Week in Startups - Emergency Pod! Robinhood files to go public: S-1 breakdown

All In Podcast - E38: Bestie brawl, Robinhood's $70M fine & S-1, Delta variant, next-gen candidates & more

How Robinhood Transformed Retail Trading Ahead of Its IPO | WSJ

Meritech Capital - Robinhood Breakdown

Robinhood files for Nasdaq IPO at what's expected to be a $40B valuation (update)

Should You Invest In Robinhood’s IPO? - Finimize

Payment of Over Flow - United Kingdom - CFA Institute

Robinhood - Glassdoor

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

We can all agree that our world is evolving at an exponential pace due to technology. The transformation to a fully digitized society is inevitable and thus creating the foundation of an AI-centric world. This is a world where machines will be able to learn and act intelligently and revolutionize the exchanges of ideas, healthcare, commerce, and all aspects of human life. The AI revolution has just started and by 2030 it is expected to deliver more than $15 trillion to the world economy. What an opportunity for humanity, to embrace such a revolution that will surpass the economic value of the internet. Now as curiosity and excitement tango, a question brews: “What resources, companies, or individuals are necessary to fuel and propel the success of this AI-centric reality?” The answer: Fearless vision, a lot of money, a lot of talent, a lot of data, and the ability to “produce golden eggs”!

Time Investors, today we will break down the Softbank Vision Fund: the largest tech fund in the world, who is determined to be an agent of change to accelerate the AI revolution.

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📖What is the SoftBank Vision Fund?

The inception of the Vision Fund begins with the samurai grit, discipline, vision, and fearlessness of Japanese billionaire, Masayoshi Son, founder and CEO of SoftBank Group. SoftBank Group is built on the spirit of the Kaientai, a company led by Japan’s renaissance man and samurai Sakamoto Ryōma. The Kaientai had a 100-year vision for the future of Japan, and they put everything on the line including sacrificing their lives to transform Japan into a modern and prosperous state. Fast forward 145 years later, from the day the seeds were planted in SoftBank Group, Masa embarked on his journey with a remarkable superpower to anticipate the future and build the capital systems to propel the reality of that future. Today SoftBank Group stands among giants as the world’s third most profitable company in the world delivering $45.8 billion in net profits. This success is shaped by a consistent vision built on the spirit of innovation, visionary leaders, a talented pool of human capital, and a successful track record in lucrative investments such as the Alibaba Group, Sprint/T-Mobile, Arm, Yahoo Japan, and many others.

Now, Masa is fundamentally convinced that an AI revolution is exponentially evolving and will consume every industry in the world. This ultimate thesis spawns the birth of the Vision Fund which amassed $100B in under 8 months by May of 2017. To put this in perspective the entire Global VC industry invested near $300B in 2020. Ultimately, to understand the feat of this achievement you must observe the Jedi powers of Masa and Rajeev Misra, CEO of SoftBank Vision Fund, which during the fundraising process for the Vision Fund 1 raised $45B in 45 minutes ($1B per minute) from Saudi Arabia’s Public Investment Fund. This was followed by a personal commitment of $30B from the SoftBank Group and then the world’s most profitable company Apple, Qualcomm, Foxcomm, Larry Ellison, and Muabadala (UAE) as the key Limited Partners to achieve the jaw-dropping target. The sheer size of the Vision Funds cannot be ignored, and thus competition will follow through. Large investors like Tiger Global, T. Rowe Price, China New Era Technology Fund, Sequoia, and many others will attempt to ride the wave of the “mega-funds”. SoftBank Vision Funds has tapped the power of financial markets and rattled the VC world. And as we all know when disruptors arrive you either must evolve and compete or end up losing out. The game has changed and SoftBank has redefined the technology investing ecosystem. Now let us break down some critical facts:

What is the Vision Fund Goal?

The goal of the Vision Funds are to accelerate the AI revolution, by $130 billion in the businesses and technologies that will help make it possible.

What regions and sectors has the Vision Fund invested in?

The Vision Fund has a strong unmatched global presence: Americas: 36% | EMEA: 18% | Asia: 46% (China 28%)

The Vision Fund is industry agnostic.

What is the market value of the total Vision Fund and where does it sit in the SoftBank Group family?

The SoftBank Group net asset value is $236B with the Vision Funds contributing about 25%. Masa expects the Vision Funds to be the largest contributor soon. Uniquely, unlike the Vision Fund 1, Vision Fund 2 is solely funded by the SoftBank Group.

How large is the Vision Fund ecosystem?

The Vision Fund seems to be building the framework for the Berkshire Hathaway of the future!

What stage of investing does the Vision Fund focus and what is the average size of investment?

The Vision Fund focuses on late stage investing when the company has established itself to be a potential market leader.

The average investment amount for the Vision Fund 1 was between $300M to $400M. For Vision Fund 2, the average investment amount is $190M.

What level of ownership do the Vision Funds require and what is the time duration of the fund?

The sizable investments allow the Vision Funds to achieve a ~20-40% stake of a company.

The fund does not take operational control of the companies they invest. The founder is in full control in running his/her business.

Vision Fund 1 has a focus between 12-14 years. The SVFs believe this decade will be transformative.

💪What competitive edge does the SoftBank Vision Fund have?

To sustain a long-term business, the founder must have a competitive edge in the market. To build a 300-year technological empire, you need an ecosystem that collects a basket of strategic resources to execute a consistent vision. The SoftBank Vision Fund stands as an outlier with its position in the global investment community. And the keyword here is GLOBAL. With so much dry powder in the investing realm, as an established entrepreneur looking to hit that next stage in hopes of an exit, there are extremely limited players with the cross-section of technology investing and financial skills. So, why would someone want SoftBank money?

Ecosystem: SoftBank has amassed a diverse global portfolio across a variety of sectors. The company has direct investments in Alibaba Group, ARM, T-Mobile, 187 Vision Fund companies, and 37 companies in their SoftBank Latin America Fund. All these companies are solving different problems in inefficient markets but possess one core vision: embracing the technological advancements of AI. Now the benefits from this ecosystem are limitless.

First, Masa and his leadership team execute a strategy called “gun-senryaku”, which means a flock of birds flying in formation. This strategy enforces the idea that collectively the companies can grow much faster. SoftBank has a dedicated 100+ team building the framework of their value creation division which will provide portfolio companies the ability to learn from each other. For example, you have Paytm in India that can benefit from the experience and resources of Alipay.

Second, Rajeev Misra, CEO, highlighted in the Milken Institute interview that a company in the Softbank ecosystem becomes a customer of another company in the portfolio. He shared that Automation Anywhere, which had no presence in Japan, expanded with 300 employees and instantly had access to SoftBank Mobile, which has 35 million customers, thousands of retail locations, and a large sales and administrative force. In addition, in this same spirit, Masa hosts dinners and events to ensure executives from each company build a family-like bond and trust between each other. Uber and Mapbox, an AI-powered navigation system, closed a deal to build a partnership. This is the definition of the power of the SoftBank family.

Global Scalability: When it comes to growth, SoftBank Vision Fund helps design global business strategies. With limited resources, companies are mainly focused on establishing a strong market position in their local markets. They need the infrastructure support, market intelligence, and cohesive relationships to navigate international markets such as China. The SoftBank Vision Fund leverages their global ecosystem to immediately help portfolio companies access market share in international markets.

Special Know-How knowledge: Softbank Vision Fund sets itself apart from others with its ability to converge its skillset in financial markets with technology investing. They have the level of expertise with the leadership of Rajeev Misra, to skillfully access debt capital, which is significantly cheaper than equity capital. This debt capital is then deployed to fuel growth initiatives and re-enforce scalability. For example, when Coupang needs to finance warehouses for the e-commerce platform, the Vision Fund team is well equipped with resources from ex-bankers and traders from Deutsche Bank and UBS.

Power of Data: The Finance function in the SoftBank Vision Fund, has raised the bar in the ecosystem. They understand the power of data and the key insights they can deliver to “business enablers” in the organization and across the portfolio companies. Within the team, the CFO, Navneet Govil, has pioneered a new AI intelligence web-based tool built from one of their portfolio companies called Automation Anywhere to transform Finance into a strategic asset. The FinSight platform is designed to collect and visualize critical data that delivers insights regarding the Fund and each individual portfolio company. This has empowered executive teams, investing teams, Limited Partners, and SoftBank to leverage a “knowledge platform” that delivers insights on public market analysis, liquidity controls, performance, sector analysis, and portfolio reviews. All the business enablers are empowered with the ability to understand data frameworks, isolate critical risks, and more importantly build a finance structure that leverages AI-based technology across all portfolio companies. Imagine having the ability to pick the next company and founder based on the data insights collected from the SoftBank Vision Fund ecosystem.

🧬What process does SoftBank Vision Fund team follow when constructing their portfolio and vetting their investment opportunities?

The SoftBank Vision Fund deploys a unique investment model when constructing their portfolio relative to its competitors in the space. This strategy would incorporate the combined top VC expertise skills of selecting entrepreneurs with the savvy financial and management skills of running a conglomerate like Berkshire Hathaway. Going back to the competitive edges that the Vision Fund exhibits; Masa and the team want to build a cluster (flock of birds) of “No.1 AI strategy” companies. The core thesis is identifying companies that deploy artificial intelligence and machine learning to optimize every industry that affects our lives – healthcare, real estate, food, transportation, and many others. Masa and Rajeev seek to build a diverse portfolio of market leaders. So now let us look behind the curtain and understand the criteria framework the investment teams deploy when selecting the next family members of the Vision Funds.

The Selection Process:

The firm evaluates investment opportunities from three angles.

They invest in businesses that use next-generation technology platforms leveraging data and AI that can rapidly scale and have a clear path to profitability.

They target massive global markets where there is an opportunity for a new leader to emerge.

They also look for ambitious founders with a clear vision and a deep understanding of their customers.

When a company meets these three key thresholds, each founder will then meet with Masa in a personal meeting. To test the ambitions of the founder, Masa focuses his interactions on one central question, “What would [you] do if money were no object?”

Now, this selection process is constantly evolving and as the ecosystem becomes larger, the Vision Fund will have the ability to leverage AI technology to truly deliver data-driven insights. A key highlight is the FinSight tool pioneered by the CFO, Navneet Govil. As more data is collected in this knowledge platform, the value of insights highlighting the success and failures of portfolio companies will exponentially increase. Investment teams will be equipped to instantly contribute, influence, and impact a data-driven selection process for future investment opportunities.

📈What performance has the SoftBank Vision Fund delivered?

The Vision Funds collectively delivered strong results with a series of successful exits. As of the full fiscal year in 2020, the Funds produced ~$62B of gains and distributed to investors ~$22B, netting ~$40B in realized and unrealized gains. The gains this year were mainly driven by one of SoftBank Vision Fund’s favorite children:

Coupang: South Korea’s E-commerce Company: $28B in gains | (10.3x return as of 03/2021)

Some additional exists in the public markets for Vision Fund 1 are Doordash, (~$8.3B), Guardant (~$2.9B), Auto1 Group (~$2.3B), Opendoor (~1.6B), and Uber (~$12.1B return)

For Vision Fund 2, Beike, a Chinese Proptech Company, delivered $6B in gains.

Additional success can also be seen in the private markets with additional rounds raised for some key players who on average exceeded their previous valuations by more than 2x.

Cruise ($25.8B), GoPuff ($7.8B), Tessera ($550M), Whoop ($1.1B), Cameo ($900M), Ordermark ($280M)

I would like to also emphasize that a good portion of the gains are still unrealized. The Vision Fund has realized about 15% of the cumulative gains. This simply enforces the fact that the Vision Fund is a long-term fund that will capitalize on the returns during this decade.

Now it is important to note that some hurdles were also experienced. In 2019, the Vision Funds recorded heavy losses amounting to ~$17B driven by WeWork and Uber. However, with a persistent vision and some calculated “lucky investments”, the Vision Funds have come out with some home runs delivering staggering profits.

Overall, Vision Fund 1 has delivered 7% (fixed percentage) preferred equity IRR, 30% equity IRR, and blended 22% IRR for partners. From the SoftBank Group perspective, the Vision Fund 1 delivered a net equity of 39% IRR. Between the two funds, the investments have delivered a ~43% net equity IRR. This performance is expected to continue, as SoftBank Vision Fund 2 has already exceeded the number of companies from the Vision Fund 1. The management team and Masa continue to put their capital behind their vision with a strong level of confidence that AI-based companies in the private markets will outperform with lucrative exists on the horizon.

🤯Future of the Vision Funds

The SoftBank Vision Funds goal can be summarized into one movement: The AI Revolution. Masa and Rajeev continue to emphasize that their Alpha is the ecosystem that is constantly being built and evolving. The 224 companies across the portfolio will produce substantial financial and social impact to humanity.

As a start-up, growth investment firm, the Vision Fund is now entering a chapter of building a sustainable system that can achieve recurring gains, or as Masa puts it “produce golden eggs”. The systematic approach is necessary to ensure consistency across the discovery process, and more importantly the financing process which is a strategic resource of SoftBank.

Vision Fund 1 is now in the value creation phase. Alongside the operational and financial support, the firm is giving its companies, they also continue to monetize select investments with the goal of maximizing IRR and distributions to LPs.

Last year 26% of the Vision Fund 1 portfolio – based on fair value – was comprised of exited and public investments. Now that figure is 58%, which provides remarkable valuation transparency into the fund.

There is a significant number of private Fund 1 companies that are yet to be monetized. When they are, it will extend the fund's track record of distributions to investors.

In the next journey of the Vision Fund 2, SoftBank Group is the sole beneficiary with the initial $30 billion capital. An obvious observation is that an emphasis has been placed on healthcare with massive disruptive opportunities. With the pandemic and advancements in DNA sequencing driven by AI, SoftBank Vision Fund has executed 29 investments in US-based healthcare companies with a staggering average valuation of $1 billion each. However, the Fund will continue to be dynamic in their capital allocations across diverse sectors.

The formula is clear: Identify Companies utilizing AI + Be Fearless + Deploy Strong Financial Market Skills + Build and Leverage an Ecosystem = Golden Eggs

With strong public markets, SoftBank Vision Fund should expect a stream of exits through IPOs and M&As. Large deals will continue to develop, and the Vision Fund is at the forefront of that transformation.

In the latest earnings presentation, Masa shared a photo and a message that highlighted the origin of the SoftBank Group and its future.

“Back in 1981, at the year that we founded SoftBank in Fukuoka,” Masa stated, “at an exceedingly small town called Zasshonokuma. The most important thing is summarized here is on this one photo. Over the rail crossing, there is a huge dream. Grab that dream, no matter what it takes. And so long as I have this passion, excitement, and heartbeat, I will keep chasing my dream over the rail cross: Information Revolution – Happiness for Everyone.”

Time Investors, now that is a clear vision, which is one with the Force. When you dream, you dream big because “life is too short to think small.”

There are 1,000 unicorns around the world focusing on AI, and each represents an opportunity to realize the SoftBank Vision Fund’s dream.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

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Commonstock: Join me in one of the most authentic social investing communities in the space. You will be part of a community that creates an environment of learning and transparency about all things finance and investing.

Masterworks: What’s the one thing in every hedge fund titan’s portfolio that you’re probably not investing in?

A-R-T. In fact, 84% of ultra-high-net-worth individuals collect art according to a 2019 Deloitte survey. It makes sense—contemporary art prices rose 14% per year from 1995-2020 vs. 9.5% returns for the S&P 500 (with virtually no correlation). And with the total art market expected to balloon from $1.7T to $2.6T by 2026, it’s no wonder that the price of paintings has steadily risen. One New York startup is at the center of it all: Masterworks.

They’ve fractionalized multimillion-dollar masterpieces by KAWS, Basquiat, Banksy, and more—and you can be a part of it. If you're looking for an elite, real asset class, check out Masterworks today. They’ve allowed Equity Breakdown subscribers to skip their 25,000 person waitlist with this link.*

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Additional resources and sources I used for all the Time Investors

SoftBank Investor Relations

What is SoftBank? CNBC Explains

SoftBank soars on strength in Vision Fund | CNBC

Talks at GS - Rajeev Misra: Creating Capital of the Future

Capital Allocators - Jeff Housenbold – Inside Softbank Vision Fund (EP.186)

SoftBank Vision Fund - Redefining Technology Investing

Softbank just shocked its critics by landing the biggest profit in the history of a Japanese company - CNBC

Masayoshi Son’s secret to running his $100 billion funds: Telling start-ups to treat each other like family - CNBC

Future of PE; SoftBank Vision Fund CFO - Case Study

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

Gaming is eclipsing the entertainment industry and surpassing traditional streaming services. Within this $161 billion market, the fastest growing segment is mobile gaming. Today we will breakdown, Skillz ($SKLZ). The company that is aiming to tap into the competive nature of gamers and transform the future of electronic gaming.

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📖What is Skillz?

Skillz provides a platform for users to socially compete and watch multi-player esports games.

The company empowers developers to share their creations and for gamers to compete. The company is creating an gaming ecosystem that fuels the “competition layer of the internet”.

The company offers three types of games:

Gamers can play the exact game at different times and then scores are compared

Gamers can play a multi-player game where they take turns (like chess) and then a winner is determined at the end

Gamers can play live making moves simultaneously between each other and then a winner is determined at the end

Now top games on the platform alternate year by year. In 2020, the top three games were Solitaire Club, 21 Blitz, and Blackout Bingo.

The three key values the company continues to reiterate are trust, fairness, and competition when building their ecosystem.

📈Market Opportunity

According to Statista, over half the world’s population uses smart phones and based on additional studies around 33% of app downloads are games and within those games users allocate 10% of their time. Newzoo highlights, that the global games market has expanded from $70B in 2012 to $180B in 2021. Within the market the fastest growing segment is mobile gaming at a CAGR of 27% from $12B in 2012 to $106B in 2021.

Majority of gamers are usually young adults with a median age of 29 years old. According to the Entertainment Software Association, 64% of American adults played video games in 2020. Now when it comes to esports, the competition sparks an immense amount of passion and engagement from fans. Millions of fans will want to watch their favorite performers and are also more willing to consume and spend on content.

In this market, there is a high demand for content with an engaged and passionate user base. Over the years, content creation in the gaming industry has democratized with standardized game development and distribution platforms (Unity and Unreal) resulting in over 15 million game developers making content.

👨‍💻What are the Strategic Resources?

Product Portfolio:

The company’s main strategic resource is their proprietary, highly scalable software platform. The goal behind the platform is to align developer and gamers interest and ensure user monetization. The formula is simple. The more contests and time spent by gamers in a specific game the more revenue is generated for developers. Okay so now let us understand the platform in more detail. The platform provides three key features connected by the power of data science.

Gamer Competition Engine: The software development kits provide 200 features in a 15-megabyte package to allow for seamless updates that improve gameplay, engagement, and retention. Focusing on retention, the company has found an efficient way to match skill rating and timely match gamers as well. Simultaneously to ensure engagement, the company has embedded social features such as in-game chat and participation within leagues or with friends to build community strengths.

Live Operations: The system technologies allow for multivariate testing to enhance engagement and retention. Additionally, with the segment management tool the company can create cross-application personalization and player incentive optimization.

Developer Console: Dashboard allows for developers integrate quickly and check the performance of their games. The developers are also able to onboard with little obstacles and are ready to use their software development kits in about a day.

*The company utilizes algorithms and machine learning capabilities to connect all the features of the software platform. This includes anti-cheat, anti-fraud, player rating, matching and segmentation. To ensure the best experience for a gamer, the company has identified 65 different behavior sets that can be implemented. Additionally, the company collects 300 data points during each gameplay session to feed their algorithms for optimization.

Developing Resources:

As of 12/31/2020, the company has 58 patents in total with 39 patents granted. The company has been steadily increasing their R&D investment amounting to $23M in 2020, representing a 110% YoY increase. To put in perspective, the investment represents 10% of revenue generated during that fiscal year.

Customer Landscape + Partnerships:

The Skillz Flywheel is built by a developer and gamer community. To date the company has 9,000 registered game developers. Top developer is 42% of revenue. From the gamer community the company has 2.6 million active users. Between these communities they company hosts on average 5 million daily tournaments with 1.4 million paid entry daily tournaments.

In Q1 2021, Skillz announced partnership with Play Mechanix Partners which will bring the arcade franchise Big Buck Hunter exclusive to mobile on the Skillz platform. Play Mechanix Partners has sold around 46k arcade machines worldwide.

In Q2 2021, Skillz announced a partnership with the NFL to host a global game developer challenge that will develop an NFL-themed mobile game. The challenge has launched.

Business Model and Growth Strategies:

How does Skillz achieve a business model that aligns the interest of developers and gamers? The company monetizes through competition. Players pay an entry fee and Skillz recognizes a 14.6% cut out that fee as revenue. The remaining is divided between prizes, incentives, and game developer profit share. Now it is important to understand that the entry fee break-out that is reported is not all cash deposits. It is currently 11% cash deposit, 82% cash winnings that have not been withdrawn, and 7% end-user incentives.

The company generated the following financial performance:

2020A Gross Margin Value: $1.6B (80% YoY) | 2021A Q1: $567M (85% YoY)

2020A Revenue: $230M (92% YoY) | 2021A Revenue: $83.7M (92% YoY)

2020A Paying Monthly Average User: 0.3M (88% YoY) | 2021A PMAU: 0.47M (81% YoY)

2020A Average Revenue Per Paying Monthly Active User: $59 (-5% YoY) | 2021A ARPPMAU: $60 (7%)

2020A User Acquisition Marketing Investment: $136.7M (160% YoY) | 2021A UA Marketing Investment: $54.3M (101%)

2020 – 60% of Revenue | 2021A Q1: 64% of Revenue

Based on GAAP measure the company is not profitable. However, the company believes if they exclude the UA Marketing Investment and apply their business model, they will result in 30% Adjusted EBITDA Margins for 2020A and 28% Adjusted EBITDA Margin for 2021A Q1.

The company claims their Gross Margins are 95%

The company plans to continue accelerating growth through the following initiatives:

International Expansion: 10% of Revenue was generated from the international market, which is a 4x larger market than North America

Increase Engagement: Estimated average time spent on Skillz platform is 60 minutes per user. Tap into the desire for competition.

Monetization Models: 16% of MAUs enter paid contest. The other 84% will be monetized with virtual goods and low friction ads.

🧬Team DNA and Vision

Key Leaders:

Andrew Paradise, CEO and Co-Founder – Andrew is a serial entrepreneur with a strong track record. He sold a mobile self-checkout to a public company and built many other private companies as well. Now Andrew makes sure his entire team at Skillz is playing video games. Personally, he has locked in 3,363 games (170 hours) of Bubble Shooter himself. He understand the convergence of human behavior, mobile gaming, and esports.

Casey Chafkin, Chief Revenue Officer and Co-Founder – Casey was the VP of Business Development for AisleBuyer working with Andrew. His business experience and has propelled him to build a great business model at Skillz.

The executive teams experience ranges from e-sports, finance, film production, and private equity investments at top tier companies.

Team Composition: The company has instilled a healthy culture that is realistically mission driven. First and foremost, all employees must play games at least 35 times per week. Over the course of their history, the company has been recognized for great leadership and an innovative environment. On Glassdoor, 83% approve the leadership of the CEO, and 75% would recommend their friends to work at Skillz. Let us see what employees have to say about the company

Pros:

"Skillz is a fast- paced and exciting place to work"

"Better work life balance than most companies I have worked for"

Cons:

"Normal startup growing pains: Everyone is busy with many responsibilities and there are long hours"

"Mid-market location on market street is convenient to Bart and Muni but not a great neighborhood"

🤯Key Insights for Time Investors:

Mobile gaming is taking over and in 2020 accounts for 51% of total gaming revenue. Based on trends presented from Will Hershey of Roundhill Investments, more people are watch gaming and Esports than Netflix, HBO, Hulu, and ESPN combined.

Scale will matter in Mobile. It’s quite common that many mobile games need to spend significantly to acquire users through paid marketing channels. With scale the company can generate additional content to ensure engagement. Sophisticated player segmentation tools that allow for customization will be essential to maximize the lifetime value of gamers.

Now let’s look at an investor’s perspective on gaming. Blake Robbins, Partner at Ludlow Ventures, was interviewed in Invest Like the Best about investing in gaming and highlighted an interesting concept about a platform that would be the “Webflow for games look alike”. This would empower creators to design games without friction spawning some top hits. Additionally, you are now able to build multiple games a year and when you have one game that is successful you can funnel that growth to other games creating a sustainable game publishing platform. This is interesting as Skillz has accomplished something similar in nature.

💪Key Strategic Moats

Technology: Company collects 300 data points during each gameplay and has identified 65 different behavior sets to product an optimal customized experience for gamers.

Strong Network Effects: The economic model incentivizes developers to produce greater content which in effect attracts more gamers. This flywheel effect creates an expanding community.

Business Model: By aligning incentives between gamers and developers, the company avoids adding consuming ads that create friction between users. This translates in strong unit economics resulting in 95% margin and 25% profit (ex-user acquisition investments)

Brand: Trust and Fairness are the two descriptions associated with the Skillz Brand.

Team: The company is lead by two serial entrepreneurs who have created a positive mission driven culture and connected the entire 277-member team with the gaming products produced in the platform.

⚠️Key Critical Risks

Competition: The company states that they compete with “alternative monetization services for mobile game content”. Companies that are competitors and partners are Sony, Amazon, Facebook, Apple, Google, and Unity. Other competitors are Zynga and Gluu Mobile.

Revenue: Two games from Tether Studios and one from Big Run accounted for 79% of the revenue. In total games developed by each of these two studios generated 87% of the revenue.

Game Development: The company relies on third-party developers to develop the games on their platform. Successful commercial relationships with developers are essential to ensuring quality content.

Gamer Community Risk: 80% of total paid entry fees are prior cash winnings that have not been withdrawn. Currently $2.8 million of end-user deposits have not been withdrawn for 2020.

Distribution: Company relies on Apple App Store, for distribution. Fee structures or policy changes can create significant risk.

The company states that they are connecting the world through competition. They want to focus on trust and fairness for users which enable game developers to build great content. This sounds like a good start.

Their platform enables developers to learn, grow, and share success through analytics while allowing users to connect, and experience a frictionless community which allows for competition.

To ensure great content the company monitors metrics such as the player liquidity inside each game based on number of daily active users, the stability of each game based on crash rates, the user satisfaction based on app store ratings, and user issues based on support tickets. The company wants to provide fair competition, network exposure, and financial success.

On the flip side, Wolfpack research has highlighted that there are some huge risks to Skillz. They have stated that the company’s growth projections can not be sustained when majority of the revenue is generated by three games. They have also denounced the NFL partnership that the company highlighted during its SPAC merger.

Wolfpack research has also highlighted that in-app purchases have declined and they have spoken with the third-party developers of those games to confirm the contraction. Essentially, they are claiming a shark fin effect. The research firm also highlighted poor leadership performance questioning the “serial entrepreneur” label of the CEO and the quality of the work environment.

While these reports have certainly introduced a new perspective, top tier investors/institutions continue to add a vote of confidence for the company:

Cathie Wood – ARK Invest: +18M shares - $288M

Atlas Ventures - $372M

Wildcat Capital Management - $344M

Morgan Stanley Investment Management - $322M

The Vanguard Group - $309M

Now, the company addressed their concerns from the short reports during their earnings call and with the continued positive performance they are on track in building an ecosystem greater than mobile gaming, according to the CEO. He quoted "We started with mobile gaming, but we think about the world as digital competition, and this is about building out the future of digital competition."

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors

Mobile Games and Esports Marketing

2021 Perspective - Griffing Gaming Partners

Esports and Gaming Trends - Ark Invest

Blake Robbins - Investing in Gaming - Colossus

Best Practices for Skillz Game Design - Video

Skillz Q1 2021 Financial Results

Skillz Q1 Stockholder Letter

Skillz Q4 Investor Presentation

Skillz 10K SEC Report

Skillz S1 SEC Report

America's Fastest-Growing Company Turned Video Games Into a $54 Million Cash Cow - Inc.

Skillz Can Pay The Bills With Its High Growth - Seeking Alpha

Skillz Back to Earth - Seeking Alpha

Skillz Costing Too Much To Acquire Customers - Seeking Alpha

SKLZ: It Takes Little Skill to See This SPACtacular Disaster Coming - WolfPack Research

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

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When you think of Trimble think about four key phrases: Agriculture Autonomy
• Construction Intelligence
• Transportation Fleet Optimization
• AI Industrial Company

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Masterworks: What’s the one thing in every hedge fund titan’s portfolio that you’re probably not investing in?

A-R-T. In fact, 84% of ultra-high-net-worth individuals collect art according to a 2019 Deloitte survey. It makes sense—contemporary art prices rose 13.6% per year from 1995-2020 vs. 8.9% returns for the S&P 500 (with virtually no correlation). And with the total art market expected to balloon from $1.7T to $2.6T by 2026, it’s no wonder that the price of paintings has steadily risen. One New York startup is at the center of it all:

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“Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

Today we are going to understand a company that is fueling the space industry with its 3D printing technology. In fact, they are a critical supplier for SpaceX’s most critical rocket engine. We will breakdown Velo3D, a company on a mission to build the impossible.

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📖What is Velo3D?

Velo3D is a 3D printing company that utilizes metal additive manufacturing technology to produce high-value metal parts. They focus on delivering end-use parts for aerospace, energy, and specialty industrial applications.

Why enter 3D manufacturing when you have existing supply chains? Benny Buller, founder, and CEO of Velo3D believes that there are two key reasons for 3D manufacturing:

Ability to design better-customized products that are driven by simulation.

To reduce lead times for parts that are difficult to sustain in today’s manufacturing infrastructure

Now, understanding these two reasons why Velo3D? This is the only company to date that broke the barriers of limited additive manufacturing technologies and now delivers user-friendly solutions for customers to optimally design their products that are manufacturable.

📈Market Opportunity

Currently, the high values metal parts market is valued at $101B with metal additive manufacturing at $2B (2% market share). By 2030, the market is expected to grow to $180B with 3D metal additive manufacturing at $35B (20% market share). Now the market today is fragmented and traditional players controlling less than 10%. If the technology scales and the market compounds at an annual rate of ~60%, Velo 3D is in a position to serve $20B of the market by 2030 (11% market share).

It is important to understand that additive metal manufacturing technology is critical for complex parts such as jet engines, fuel delivery systems, and many more. It will continue to propel technological breakthroughs such as autonomous technology, electric vehicles, supersonic aircraft volume, and space.

👨‍💻What are the Strategic Resources?

Product Portfolio: Velo3D has introduced game-changing support-free technology that can produce any design with complex internal geometries without compromising optimal design.

Sapphire Printer Family: next-generation printers that enable manufacturing with “impossible” geometries. The family of printers, especially with their latest XC design, can achieve 5x productivity improvement and 75% cost reduction per part.

Flow Print Preparation Software: Simulation-driven software identifies predictable outcomes and reduces print preparation time.

Assure Quality Validation: The software works in tandem with Flow and Sapphire to provide reporting insights on machine health, part integrity, and build process.

Velo3D delivers a full-stack offering from design, production, and quality control to ensure high-quality optimal designs.

Developing Resources: The company has claimed that it has the strongest IP portfolio in the metal AM market. The company has 91 patent applications with 48 granted patents. The technology development for high-value metal additive manufacturing took 6 years and $150 million.

Customer Landscape + Partnerships:

The company delivers 3D manufacturing solutions to a series of key customers across three core industries:

Space: SpaceX, Lockheed Martin Space Systems, Aerojet Rocketdyne, Astra, Wagner Machine Co., Launcher

Aviation / Defense: Leading Jet Engine Manufacturer, Raytheon, Honeywell, Kratos, Boom

Energy: Knust-Godwin, Siemens, ConocoPhillips, Mitsubishi Electric

Other: Taiyo Nippon Sanso, Lam Research

*The company’s largest customer is SpaceX (the company placed a large order of 22 AM printers to support the production of their starship engines). In 2019 and 2020, SpaceX represented 70% and 30% of the company’s revenue.

Business Model and Growth Strategies:

The company has a pure sale model and a recurring subscription revenue model for its software. Customers can purchase the printers and pay a subscription fee to access its software, or they can lease the printers and software from Velo3D. Each sector between aerospace, energy, and specialty industrial applications contributes about 15-35% of the 2020 revenue.

Both revenue models highlight strong unit economics based on the investor presentation ranging from 50-60% gross margin. Additionally, as revenue expands the capital expenditures for the company are light (3% of revenue) since 80% of the production is performed by reliable contract manufacturers.

2020A Revenue: $19M | 2026E Revenue: $937M | 91% CAGR

2020A Gross Profit: $5M (33%) | 2026E Gross Profit: $490M (52%) | 114% CAGR

2020A EBITDA: -$19M (-99%) | 2026E EBITDA: $318M (34%)

Enterprise Value: $1.6B

71% company ownership post-merger

The company plans to continue accelerating growth through the following initiatives:

Merger: The company will go public through a SPAC with JAWS Spitfire. The company will be fueled with $470M in cash to continue to make investments in engineering, product development, and sales support.

“Blue Ocean Market”: The company is the only one positioned now to deliver high-value performance, reduced lead times, and significant cost savings.

Sapphire XC Production: The large printer will be available in 2021 with the capability to produce parts of 400% larger volume and dropping part costs by 65-80%.

Accelerate new customer acquisition: With distribution partners such as GoEngineer and Taiyo Nippon Sanso the company aims to acquire new customers.

💪Key Strategic Moats

Technology: The company has created a full-stack package with hardware and software that includes design, metal 3D printers, and quality control processes. Their technology is SupportFree Powder Bed Fusion which does not use supports during the print process. This sets them apart from their competitors.

Scale: The company utilized contract manufacturers to assemble the hardware component and to also allow customers to print. Ultimately, the company has low CAPEX and the potential to quickly scale through its distribution partners and through their software and services. This creates the ultimate environment for strong unit economics and high margins.

Team: The company is founder-led with deep experience in applied materials and manufacturing and backed by top-tier investors and strategic business partners such as SpaceX.

⚠️Key Critical Risks

Competition: The additive manufacturing industry is fragmented and competitive. Legacy competitors such as GE, Reinshaw, and 3D systems have far more capital resources and are also developing 3D printing powder bed fusion systems. New competitors such as Desktop Metal and Relativity, which is building the world’s largest 3D printer for rocket production, are also entering the market.

Product Differentiation: The majority of the revenue was driven by the company’s sale of their Sapphire printers. The strong unit economics is highly dependent on the company’s ability to build recurring revenue streams through AM software systems and service contracts.

Customer Risk: SpaceX is the company’s largest customer consisting of 70% revenue in 2019 and 30% in 2020. While the share of revenue is being dispersed that still poses a high risk early in the growth stage.

🧬Team DNA and Vision

Benny Buller, CEO, Co-Founder – Prior, executive leadership experience at Applied Materials and First Solar. Benny was also an investor at Khosla Ventures. I think this quote he published on LinkedIn perfectly summarizes what he stands for “Not everything that is hard is worth doing, but almost everything worth doing is hard.”

Bill McCombe, CFO – Prior, CFO of HZO, and Executive Vice President of Maxar Technologies. Proven track record to deliver growth and strong financial results.

Dr. Greg Brown, VP Technology – Prior, executive engineering leadership in Applied Materials and Nanosolar. Strong experience in material sciences and process engineering.

Alex Varlahanov, VP Engineering – Prior, leadership in Finisar and Guzik. Strong experience leading teams developing manufacturing equipment and precision test equipment.

Team Composition: The team is composed of highly technical and capable leaders with the expertise to grow and scale the business. The team is continuing to expand their engineering talent and will also focus resources on building out their sales capabilities. Additionally, they have investors such as Bessemer Venture Partners, Khosla Ventures, and partners such as SpaceX, and Lam Research to ensure they are equipped with the appropriate resources to scale and dominate the AM market.

🤯Key Insights for Time Investors:

If we look at the industry from a bird’s eye view, then we can agree 3D printing will empower optimal designs of products, reduce lead times and supply chain complexities, improve efficiency, and ultimately reduce costs significantly compared to traditional manufacturing. Research conducted by third-party resources and by respected investment institutions such as ARK invest suggests the market will continue to compound at 60% by 2030. More importantly, the integration of AI will enable highly optimized designs that are impossible to build with traditional manufacturing.

Now Velo3D, unlike its competitors, offers a full-stack additive manufacturing solution that allows engineers to deliver mission-critical components without supports for any geometry. This ensures that design is not compromised, and the company can deliver components for space rockets, jet engines, fuel delivery systems, and energy production at faster speeds, lower costs, and more importantly at high levels of optimal designs. Traditional additive manufacturing requires supports to be added to prevent the destruction of the part thus limiting design.

As we analyze the financial performance, Velo3D is one of the few SPACs that highlights strong demand from reputable customers who are leaders in their respective industries and a strong pipeline of revenue. With $19M in sales for 2020, the company has a clear path to hit $89M by 2022. This is heavily supported with $15.8M in bookings for the Sapphire XC and $26.4M in pre-orders as well. This also assumes their revenue subscription model starts growing as well through their AM systems and services.

Barry Sternlicht's from Jaws Spitfire informed CNBC that "Elon wanted to buy Velo3D, they didn't want to sell, so we had an opportunity to take them public."

Here are some comments from customers and investors, that have worked for competitors in the space, regarding the technology that Velo3D has developed:

“Velo3D is at least 5 years ahead of any competition” – Head of Additive Manufacturing at SpaceX

“I was impressed by the technology that they developed. They had a really easy-to-use design software tool [and] they had this really deep quality control and assurance component.” – CEO of Piva and Managing director at GE Ventures (Source: TechCrunch)

Now, while there are benefits, it’s important to note that the company does face competition from legacy players like GE, Renishaw and new incumbents like Desktop Metal and Markforged. Acquisitions will happen as the highly fragmented 3D market becomes more consolidated. Product innovation will also accelerate. So it’s important to understand which of these companies will come out dominant based on the market they are serving and the proprietary technology they claim to be dominant. Wait for inflated expectations to dry out and then pay attention to the key customers that are demanding their services. This will create a clearer path of understanding who can potentially lead the path with talent, technology, and execution.

The new Sapphire XC platform will open growth opportunities that will deliver larger parts and significant cost savings and is scheduled to be deployed in Q4 of 2021. Keep an eye on this because it’s critical to achieving the next growth stages of the company. With this technology, Velo3D believes they can achieve $20B TAM which equates to an 11% market share. This is the company’s greatest benefit but also the greatest risk.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

Velo3D Investor Presentation

Why Customers stay with Velo3D - CNBC Interview

Velo3D - Another 3D Printing Metal Stocks? - Nanalyze

Velo3D is the 6th 3D printing firm - 3DPrint.com

SpaceX Supplier Getting SPACced - Seeking Alpha

Interview with the CEO of Velo3D

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies.

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Compound interest is the eighth wonder of the world.” - Albert Einstein

To all the Time Investors,

We are all aware of the amazing accomplishments that SpaceX continues to deliver in transforming the new space economy. While there is a key leader in the $400B markets, a series of players are entering the space after years of development regarding their space technology assets and services. Today we will focus on Rocket Lab, one of the only two U.S. commercial companies delivering successful access to Earth’s orbit.

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📖What is Rocket Lab?

Rocket Lab is a pure-play space company that offers “end-to-end” solutions that provide rockets, satellites, and assets supporting space infrastructure. They are one of the two companies [you can certainly guess the other one] that have delivered consistent launch services to orbit commercially in the U.S.

📈Market Opportunity

The $368B space economy is estimated to grow to $1T by 2040. From the company’s perspective, they are in the position to operate in a TAM of $62B (16.8% market share). The TAM is broken out into the following categories:

Launch: $10B

Small satellite constellations will drive 83% of the demand for launches by 2028

Space Systems: $20B

Growth will be present in small satellite constellations for commercial Earth observations and telecommunication applications

Defense focuses on building out space infrastructure

Space Applications: $32B

Demand to connect the entire world and data management and analytics

👨‍💻What are the Strategic Resources?

Product Portfolio: In 6 years the company has achieved 18 launches to space, 97 satellites deployed to orbit, 3 launch pads built, and 2 mission control centers. Now let us go deep into the technology assets propelling Rocket Lab to potential success.

Electron Rocket: the reusable carbon composite rocket is powered by the world’s first 3D printed rocket engine and first electric pump-fed rocket

16 successful orbital launches, deployed 97 satellites, across 3 launch pads has 132 launch opportunities a year, delivered 180 3D printed engines to space, and ~600-pound payload capacity

Kick stage allows for precision and unique orbits of satellites

Launch Infrastructure: Launch Complex one is located in New Zealand, and Launch Complex two is located in Virginia, U.S.

132 launch slots annually, the world’s private licensed orbital launch site, and the ability for 24-hr launch regarding defense and constellation needs

Neutron Rocket: this is a medium-sized rocket with an 8-ton load capacity (~220 satellites per launch)

Tailored for defense and constellation satellite launches. The rocket is also capable of human space flight and crew resupply for the international space station

Photon: In-orbit satellite (spacecraft bus) that delivers assistance for specific missions for payloads, power, propulsion, and communications. The company has a low earth orbit and interplanetary design.

Satellite Components: The company has secured its supply chain of satellites and spacecraft with components like reaction wheels and star trackers. They incorporate these components in their own products and sell them to other space companies.

Developing Resources:

In building out the Neutron Rocket the company has invested $200M to meet the demand for constellation satellites. The company is also planning on building the factory for Neutron close to the launch site to minimize issues with transporting the vehicle. Fundamentally to protect its resources the company has 6 registered patents in Aircraft, Aviation, and Cosmonautics categories.

Customer Landscape + Partnerships:

The company has conducted 18 missions for more than 20 organizations. 50% of its customer base is commercial and the rest is divided between civil at 20% and defense at 30%.

NASA (2 missions), DARPA (1 mission), Air Force + Space Force (2 missions), Planet (3 missions), Black Sky (2 missions), Spaceflight (4 missions), Spire (2 missions) *Competitors rely on Rocket Lab for the launch of their satellites as noted above

In 2020, the company acquired Sinclair Interplanetary which manufactures small sat components

Business Model and Growth Strategies:

The company generates its revenue specifically from contracts awarded based on the launch missions. Because of their small reusable rockets, they can deliver cost-effective launches for small payloads. CNBC reported that the company’s Electron rockets are priced at $7 million per launch.

2020 A Revenue: $35M | 2025E Revenue: $749M – 115% CAGR

The company is expected to hit $69M this year and has $2.2B in the pipeline

2020A EBITDA: -$36M (-102%) | 2025E EBITDA: $168M (22%)

The company is expected to become profitable by 2023

2020A FCF: $-45M | 2025E FCF: $149M (88% of EBITDA)

Cash flow positive by 2024

Enterprise Value: $4.1B

82% company ownership for existing Rocket Lab shareholders post-merger

The company plans to continue accelerating growth through the following initiatives:

Merger: The company will go public through a SPAC with Vector Acquisition Corp. The company will be fueled with $745M in cash to continue building the Neutron Rocket and pursue supply chain acquisitions

Technology: The demand for constellation satellites is expanding and the company needs to pursue the completion of the Neutron Rocket which will have a capacity of ~220 satellites per launch

Business Channel: The company will heavily invest in expanding their space system capabilities utilizing personal satellites for services required by companies

💪Key Strategic Moats

Technology: The company is pioneering 3D technology in the production of its rockets. They have built the world’s first 3D printed engine rocket that can be reused and to date has conducted 18 successful missions. In addition, they also provide satellite technology and components that are capable of low earth orbit and interplanetary planetary applications.

Vertical Integration: The company controls 90% of its production from rockets, satellites, space components, and launch sites. They want to ensure that the company has no friction when it comes to the supply chain process. This allows the company to achieve efficient unit economics and ensure low-cost launches in the market.

Team Leadership: The company is lead by veterans in space with experience from SpaceX, NASA, Air Force, Intel, and Broadcom. They are equipped with a team that understands scalability, space technology, and operational effectiveness.

⚠️Key Critical Risks

Competition: The company’s key competitor is SpaceX who can carry heavier payloads, dominates the satellite constellation market and poses similar reusable rocket technology. Additionally, with an attraction towards the “new space economy”, new players such as Astra, Virgin Orbit, and Relativity Space are entering the medium-lift rockets to feed the rising demand for constellation satellites.

Neutron Rocket Production: The expected launch for Neutron is 2024. The company will have to re-design the rocket to ensure that its first stage booster lands vertically in an ocean platform like SpaceX. This is different from how they currently retrieve the Electron Rocket. This can create challenges as rigorous testing is needed and with SpaceX being the only one to achieve this accomplishment.

Supply Chain: The space supply chain is very fragile. Any delays from customers that are building satellites to be launched will impact revenue for Rocket Lab.

🧬Team DNA and Vision

Key Leaders:

Peter Beck, CEO, Founder, Chief Engineer – Peter is a visionary founder and engineer whose passion for building rockets stemmed from childhood. Prior he worked at Industrial Research focusing on smart materials, composites, and superconductors.

Adam Spice, CFO, - Prior, Adam served as CFO of MaxLinear, helping scale the business from $70M to $421M and has 20 years of Finance experience. He will solidify the company’s ambition for growth and acquisitions.

Vector Capital Team: The company has a 25-year track record with $3B of capital under management, 100+ tech company acquisitions.

Team Composition: The company is 530 employees strong with approximately ~200 engineers (40%). The executive team and the engineering team are built with talent hailing from companies like SpaceX and NASA.

🤯Key Insights for Time Investors:

Tess Hatch, Partner at Bessemer Ventures, highlights that when it comes to space companies there are two key indicators that identify success: launch vehicles and satellites. As an investor, you want to look at the number of launches and the number of satellites that it deployed to space. When it comes to satellites you want to look at how many assets are in orbit and the type of sensors that are equipped in the satellites.

SpaceX is the first U.S. commercial company to lead the number of launches and satellite deployments in space. The second one to follow is Rocket Lab with 18 launches to space and 97 satellites deployed in orbit. Rocket Lab has not only proven technology, but they have backed it up with execution and efficiency.

The company promises, launch on-demand services, frequent launches, tailored orbits, and the ability for the customer to control their schedule. They are separating themselves from the ride-sharing concept and as result, the customer can expect a $7M price tag.

Unlike some of the other space SPACs, the company is generating revenue and has $2.2B in the pipeline from expected missions.

Awarded the NASA capstone mission to the moon in 2021 to support a moon-orbiting outpost.

Private mission to Venus to search for life

Mission to Mars to deliver a satellite that studies the atmosphere

Rocket Lab also sees the demand for small satellites. To meet this, they are planning to create a mid-sized rocket with the capability to carry 220 satellites to space. This puts in a similar competitive pace with SpaceX.

Overall, Rocket Lab has the infrastructure to conduct small, more frequent, and economically viable launches. The company is aiming to fully integrate across its entire supply chain and beyond launches offer a full package to customers involving satellites (currently the own 1 orbit) and other space components.

However, as an investor, you should also understand the risks regarding the difficulty in operating in a high capital-intensive industry. The design of the Neutron rocket will be from scratch to ensure the vertical landing of the boosters like SpaceX. Currently, the company recovers its rockets from the sky using parachutes and helicopters to snatch them.

The space supply chain is fragile and as result full of delays from reliable customers with substantial contracts. This can put financial pressure on Rocket Lab especially with the regulatory obligations that come from being a public company.

The space market is also attracting a series of other companies that will be operating in the small to mid-size launch sector. Astra is one that comes to mind in which they have been marketing a “Model-T” type production of rockets and launch pads that could be produced within months.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

Rocket Lab Investor Presentation

Rocket Lab Techcrunch

Rocket Lab Space News - Neutron Rocket

Rocket Lab Venture Capital Investment in Space - Seeking Alpha

Rocket Lab could be SpaceX biggest rival - MIT Technology Review

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

As we dive deeper into the Space Industry, I wanted to focus on the series of SPACs that have monopolized all of our interests. Among the many that have announced going public, there are a few interesting companies that stick out. Today we are going to break down the third-largest satellite provider in the world in terms of satellites in orbit. The company is called Spire Global ($NSH - $SPIR) and it is planning to go public this year at a valuation of $1.6B.

🔴Download Equity Breakdown Report

📖What is Spire Global?

Spire is a Space-as-a-Service company that operates satellites and delivers data and predictive analytics to customers. The company collects space-based data using a proprietary constellation of nanosatellites. The company utilizes the power of data to deliver insights across the following categories:

Maritime Activity: global vessel tracking and monitoring, and high traffic zones for route optimization

Global weather coverage and forecasts

Aviation Activity: tracking and monitoring of flight operations

Space Software Services: deployment of software to existing satellites, host satellites on a full integrated space, ground, and web platform, and manufacturing of cost-effective nanosatellites

https://www.youtube.com/watch?v=IDFxnVpZi-g

📈Market Opportunity

The $368B space economy is estimated to grow to $1T by 2040. The company believes that it can dominate three subsectors within the overall market:

Space-Based Data and Analytics (weather, aviation, maritime): $52B by 2025E

Orbital Services: $39B by 2025E

Weather Forecast: $180B by 2025E

The company believes that they are in a position to pioneer the space-as-a-service model and help solve some of the planet’s problems.

👨‍💻What are the Strategic Resources?

Product Portfolio: As of January 2021, the company has 141 nanosatellites launched and covering the earth.

Spire LEMUR (low-earth multiuse receivers) Constellation and Ground Stations:

The company’s in-house nanosat design and assembly cost $30k/month and takes about 3-6 months to be launch-ready (~$180K total cost). This is about 0.1% of a traditional satellite ($180M)

Proprietary ground station network (~30 ground stations) that enhance the collection of data, provides operational resiliency and security

550+ software updates deployed to the fleet

245M automatics identification system messages (maritime), 415M automatic dependent surveillance-broadcast messages (aviation), and 11k radio occultation profiles (weather)

Spire Data Platforms:

The company can cleanse, standardize, and fuse data collected from ground stations to provide predictive analytics. The company claims to have 99.9% system uptime.

SpireSight Software Analytics

Customers receive the refined data seamlessly through simple APIs. Customers receive 1 terabyte of data per day.

Developing Resources:

Spire Global has 24 registered patents and 20 licenses to operate commercially with assets in space and in the ground. The company continues to expand its R&D from $13M in 2018 to $21M in 2020 representing about 75% of its revenue.

Customer Landscape + Partnerships:

The company delivers proprietary data and insights to 150+ product customers.

Currently, they have annual recurring revenue of $235K per customer, a net revenue retention rate of 145%, and less than seven months of payback customer acquisition cost.

Top customers include NASA, Aerion Supersonic, VesselBot, Oldendroff, Australian Office of National Intelligence.

More recently Spire entered into a collaboration agreement with Findus Venture to launch satellites for debris detection rates and climate change patterns.

To launch the satellites the company partners with every single launch services company (SpaceX, Rocket Lab, etc).

Business Model and Growth Strategies:

Unlike traditional space companies, Spire Global executes a subscription-based model for its customers with monthly payments. The company has not specified the specific subscription amount it charges its customers and whether the customer pays for a specific period upfront versus a flexible month-to-month model. However, the average contract length is ~21 months.

The company can achieve a subscription model because they have ensured that the cost of each satellite is 0.1% of a traditional satellite and the cost to launch is 1/100th of a traditional launch due to the strategy of sharing payloads.

2020A Revenue: $28M | 2025E Revenue: $913M – 139% CAGR

2020A ARR: $36M | 2025E ARR: $1.2B

2020A Gross Profit: $18M (63%) | 2025E Gross Profit: $830M (91%) – 160% CAGR

2020A EBITDA: -$18M (-63%) | 2025E EBITDA: $425M (47%)

2020A FCF: $-29M | 2025E FCF: $357M (84% of EBITDA)

Enterprise Value: $1.2B

67% company ownership post-merger

The company plans to continue accelerating growth through the following initiatives:

Merger: The company will go public through a SPAC with NavSight Holdings. The company will be fueled with $408M in cash to continue market share expansion in the commercial satellite and analytics space.

Market Capture: Expand external product, sales, and marketing team to equip sales operations

Geographic Expansion: Focus resources to increase presence in Latin America and the Middle East

Acquisitions: Acquire third party data provides to enrich the library of data collected

Proprietary Data Set Development: Significantly expand DoD and Intel community footprint

💪Key Strategic Moats

Technology: The company has built satellites that are cost-effective, high quality, rapidly produced, and with the ability to deliver proprietary data. The company has then closed the circle to provide predictive analytics to the end customer (optimization of routes of airplanes/ships, the expected weather around the globe). The company can deliver 20 satellites into orbit for global coverage in under 12 months at a cost of $12M.

Vertical Integration: The company designs 95% of the components of its satellites and produces 100% in-house. The company also controls the ground equipment and its entire data analytics platform/solutions. The entire supply chain except for the launch into space is controlled.

Scale: Spire can produce 10x the number of satellites than the next largest manufacturer. Satellites can be completed within 3-6 months and the company aims to launch at least 20+ a year. The company owns 5% of the earth’s orbit based on the number of satellites.

⚠️Key Critical Risks

Competition: While the company has been around since 2012, there are larger competitors armed with more capital. SpaceX and Planet Labs are private competitors who have a higher share of the orbital space. It is inevitable that the company’s high margin and low-cost assets will attract competition in the space.

Product Waste: While the industry is young, the earth’s orbit is about to be congested with ~23k satellites by 2040. These satellites will surely create “space junk” that will require maintenance and costs. Companies will be held responsible to manage the waste thus incurring unforeseen costs and profit reduction. Currently, 60% of the satellites are space junk.

Subscription Model: Customer churn can certainly accelerate as satellite providers compete on price. With more low-cost satellites entering the market the company must be able to adapt to customers’ dynamic needs and ensure competitive value propositions.

🧬Team DNA and Vision

Key Leaders:

Peter Platzer, CEO, Co-Founder – Prior, Pete was a Senior Portfolio Manager for Vegasoul Capital, trading commodities and global futures. He also led quant teams for Deutsche Bank and the Rohatyn Group. From a space perspective, he has focused on space commercialization and nanosatellites where he holds a series of patents.

Jeroen Cappaert, CTO, Co-Founder – Prior, Jeroen was the Lead Payload & Avionics engineer. He specialized in spacecraft avionics and payload design and low-thrust astrodynamics in NASA.

Joel Spark, VP Space Systems, Co-Founder – Prior, Joel has led the management of the Spire space program as Lead Engineer. He ultimately designed, built, and operated the companies first satellites.

Team Composition: The company is composed of a highly technical workforce amounting to 140 engineers and scientists. This represents about 56% of the workforce highlighting strong domain expertise in space and satellite technology.

🤯Key Insights for Time Investors:

The massive data collected from satellites will be a competitive advantage as the space economy continues to grow. Spire Global is the third-largest satellite company in terms of satellites in orbit. SpaceX leads the pack followed by Planet Labs. In this market, the winner will be the one that contains the most data to deliver the insights necessary for customers. With 100+ satellites and 5 terabytes of data processed every day, Spire Global is certainly in a position to continue growth and market expansion.

Most of its supply chain except for the launch portion is in control by Spire. This is powerful because as the company continues to enhance its space infrastructure, it will see a dramatic drop in CAPEX requirements. Ultimately, this allows Spire to expand and preserve SAAS-like margins. By 2025 the company is expected to high 91% margins.

While traditional satellites are time-sensitive and capital intensive, Spire has built out proprietary nanosatellites that deliver quality proprietary data and are also cost-effective. This gives the company an advantage as they continue to launch ~20 satellites per year to further their mission.

Spire has been around since 2012 and supported by some well-respected investment teams (Bessemer Venture Partners, RRE Ventures, Seraphim Capital, Qualcomm, and Mitsui & Co.) attracting $180 million of capital to date. Unlike many of the space SPACs, the company has a working subscription software-based business model with a 5% share of the orbital space around the earth.

It is important to note however that SpaceX does lead the pack in the industry. Other large players with growing space divisions will also be attracted to the concept of nanosatellites and high margins. Expect increased competition as funding continues to accelerate in the space economy.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

Investor Presentation March 2021

Spire Global Joins Rush to the Public Markets - SpaceNews

Visualizing all of Earth’s Satellites

Optimistic Article by Seeking Alpha

Spire Global Case Studies

Satellite Operator going public through SPAC - TechCrunch

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe at equitybreakdown.substack.com

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

I was personally shocked at how much space impacted our daily lives. Our quality of life is convenient and well thanks to the infrastructure built-in space. Space-based communications, navigation, weather, remote sensing services, are all benefits. Every time we wake up and look at the weather, use our GPS, swipe our credit cards, and etc…we need to pause and look up and think about space. Today we will being our space journey by breaking down Maxar Technologies, "MAXR”, whose high-resolution images from space of the Suez Canal blockage by EverGreen were globally shared.

🔴Download Equity Breakdown Report

📖What is Maxar Technologies?

The pure-play space company is a combination of four companies that play a critical role on earth and space. Within this ecosystem, the company builds satellites, provides commercial radar, delivers commercial imagery with impeccable quality and capabilities, and provides geospatial data and analytics to the military, government agencies, and key commercial stakeholders. Maxar is a global player with ~4,300 employees, 20 strategic locations around the globe, and a strong partner with long-lasting relationships with key governments and commercial customers.

The company is divided into two core components:

Space Infrastructure: This segment includes space robotics, satellite hardware, satellite integration, system integration.

Communications and Earth observation satellites

Deep space exploration

On-orbit vehicles to service satellites

Robotics for space exploration and operations

Earth Intelligence: This segment includes the industry-leading geospatial data and analytics, analytics platform, and data services such as insights for military and commercial use.

Data for military intelligence purposes

Sensor and ground system that deliver geographical data

High-resolution, and electro-optical satellite imagery (Ever Green, Suez Canal blockage)

AI and Machine Learning at a global scale

📈Market Opportunity

The ~$368B space economy can be broken out into three categories:

$95B non-satellite industry which involves government space budgets, commercial human spaceflight, etc.

$123B satellite services spanning from telecommunications, remote sensing, and science-related activities

$132B ground equipment which involves network equipment and consumer products (radio, GPS)

$13B satellite manufacturing

$4.9B launch industry

Maxar believes that the earth observation market which encompasses satellite services, ground equipment, will be highly impacted by the need for data, solutions, and insights. AI-enabled data analytics is a common phrase that is consistent in Maxar’s communication. Sectors such as defense & intelligence, energy & natural resources, industrials, agriculture, finance, insurance, news and media, and weather are common beneficiaries of this market. Ultimately the quality of resolutions, accuracy, frequency, and delivery of the data will be a competitive selling point.

Additionally, the company believes satellite manufacturing will continue to evolve. Low earth orbit constellation satellites which are cheaper to launch and have less latency will expand in share. Large geostationary satellite technology will also advance which further the benefits of more coverage, enhanced telecom capacity, and advanced imagery. Overall, we can expect to see a combination of 25,000 active satellites in orbit from 2,600 satellites today.

The industry is expected to grow to $1 trillion by 2040 (CAGR 5%) driven by reusable rockets and more advanced lower-cost, high bandwidth satellites.

👨‍💻What are the Strategic Resources?

Product Portfolio: Designed and built 285 spacecraft with a combined service of 2,750 years of orbit service.

90 (1300-class platform) geostationary satellites in service that are placed 22,336 miles out in space directly above the Earth’s equator. The satellite is in place and takes a full 24 hours to circle the Earth.

The 1300 spacecraft is the world’s most popular platform of satellites due to cost and scalability

Earth observation satellites, direct broadcast satellites, two-way broadband satellites, digital audio radio satellites, digital multimedia satellites, meteorological satellites

In 2005, the company launched the first high throughput satellites that delivered applications such as consumer broadband and 4G/5G cellular backhaul.

The average cost for deploying a GEO satellite can range from $150-$200 million based on data from Euroconsult, an advisor specializing in satellite manufacturing

The company has operated a constellation of four satellites: GeoEye-1, WorldView-1, WorldView-2 and WorldView-3 that have a collection capacity of 1.4 billion square kilometers yearly

World View Legion LEO constellation satellites (6) will be launched this year.

This is a new generation of high-resolution earth imaging constellation satellites for government and commercial applications.

This will triple the companies high-resolution 37-year coverage and imaging capacity. Many areas will be captured 15 times in a single day to ensure timely and accurate data feeds for customers.

It will also benefit autonomous technology applications.

Robotics technologies are being embedded to create self-service spacecraft that can inspect, repair, tow, and fuel other spacecraft. The company wants to avoid losing high Capex assets or as they metaphorically put it “we don’t want to throw away a brand-new Ferrari after one tank of gas!”

The company has built robotic arms for five successful missions NASA Mars missions, including the Spirit, Opportunity, and Curiosity rovers as well as the Phoenix and Insight landers. The famous Perseverance rover is the sixth Maxar robotic arm.

OSAM-1 is being built in partnership with NASA, which will be a new generation of satellite spacecraft with robotic arms that can conduct “space surgery” on other satellites.

SPIDER is also being built which will signify on-orbit assembly of satellites with built-in robotic applications. This will reduce the demand to launch a fully assembled satellite spacecraft in the future since assembly can occur in space.

SAMPLR will be the first robotic arm to the moon in 50 years as part of NASA’s Artemis program along with SpaceX. The mission will aim to send the first woman and the next man on the moon by 2024.

ImageLibrary is a collection of 125 petabytes of high-resolution imagery from satellites.

Provide critical and accurate data for military mission planning, crop management, oil and gas exploration, and infrastructure management.

Maxar offers subscription services such as SecureWatch— which provides customers with extensive imagery and geospatial intelligence platform and addresses a broad spectrum of uses.

The company provides regular updates of images to over 6,000 major cities around the world.

3D mapping and modeling capabilities

Developing Resources:

Maxar Technologies holds 22 patents and 8 U.S. patent applications pending based on third-party sources. In 2020, the company spent $226 million and $22 million on Earth Intelligence and Space Infrastructure Capex. This represents about 15% of revenue. The company also received $93 million in tax credits for research and development activities and had an additional $15 million dedicated to pure research and development activities regarding new technologies in the space.

Customer Landscape + Partnerships:

Government

U.S. government is the largest customer for Earth Intelligence segment. They drive around 72% of the revenue generated from the Earth Intelligence segment and 40% from the space infrastructure segment.

NASA Contracts for missions to the moon, asteroids, and MARS.

U.S. National Geospatial-Intelligence Agency (“NGA”) contract that delivers land cover classifications

U.S. Department of Homeland Security contract to develop an analytics system that tracks the behavior of vehicles in many strategic locations

Renewal of five key contracts with international defense and intelligence customers for access to the current satellite constellations amounting to $120 million.

U.S. Army Geospatial Center contract to deliver geospatial intelligence for tactical ground purposes.

U.S. Space Force contract to build out data processing applications

U.S. Army’s One World Terrain project to build out 3D products

Commercial players impact about 28% of the revenue from the Earth Intelligence Segment and about 60% from the Space Infrastructure segment of the business:

Amazon, Google, Palantir, Uber, and GM are but a few customers.

Business Model and Growth Strategies:

Maxar’s revenue is highly dependent on multi-year contracts established with the U.S. Government, Civil Agencies, and commercial customers. Specifically for the Earth intelligence segment revenue is generated from the imagery and geospatial service contracts. As satellite capacity is made for the customer revenue is recognized for that period. Examples of revenue strategies are below:

The EnhancedView Contract, a multi-year contract, from the U.S. Government is around ~$300million and has been extended to 2023.

SecureWatch Program generates subscription revenue for access to high-resolution imagery for on-the-ground intelligence.

Rapid Access Program which allows customers to access satellite constellations, while the company manages and owns the ground infrastructure

DAP (Direct Access Program): The company sells ground system infrastructure to customers to allow them to download data and imagery from the constellation satellites Maxar manages.

As of 2020, Maxar generates 63% of the revenue from the Earth Intelligence segment and 37% from the Space Infrastructure segment.

2020A: Revenue: $1.7B | 2022E: Revenue: $1.8B – 3.0% CAGR

$1.9 billion in backlog driven by new contracts with civil agencies involving new space missions.

2020E: EBITDA: $422M (24.5%) | 2022E: EBITDA: $541M (29.6%) – 13.2% CAGR

2020E: FCF: $-65M | 2023E: FCF: $325M

Market Cap $2.7B | Enterprise Value: $5.4B

The company plans to continue accelerating growth through the following initiatives:

Acquisitions: In Q1 of 2020, the company finalized its acquisition of Vricon, a company that is a global leader in 3D data from satellites for defense and intelligence applications (military simulations, and precision-guided missiles).

Earth Intelligence Expansion: Leverage 3D data and 3D capabilities to expand relationships with U.S. government and commercial customers. This will be accelerated by the launch of the WorldView Legion constellations, Vricon acquisition, and data platforms that have AI/ML capabilities. Maxar needs to service the demand for geospatial intelligence data.

Space Infrastructure Expansion: Maxar will expand the manufacturing of LEO satellites that are more cost-effective for commercial purposes. They are also heavily investing in space robotics, solar electric propulsion, and spacecraft buses to support critical missions in the next three to five years with strategic partners such as NASA and SpaceX.

Commercial Markets: There is a high demand for autonomous applications, wireless network planning, voice and data communications, video distribution, broadband, and resource and logistics planning as the world becomes more digital. Maxar’s technology applications will focus on provided such services.

💪Key Strategic Moats

Technology: Satellite constellations that will deliver 30-cm capacity and will be able to get to any point on the planet. The company also has designed space robots for critical missions to the moon and Mars. Additionally, with their most recent acquisition, 3D mapping and elevation services will become a differentiator. To top it off, Maxar has over 125 petabytes of data collected over a 20-year history.

Team: The majority of the management team is composed of experienced leaders from DigitalGlobe, a company that built the industry largest library of high-resolution satellite imagery. There is a high demand for satellite-generated data and insights for military and commercial purposes. The team is operationally focused to ensure that the most profitable segments of the business in this case geospatial data and analytics have all the dedicated resources to grow.

State-Granted: The U.S. Government heavily depends on the Earth Intelligence services provided by Maxar. The EnhancedView program is a 20-year program that is utilized to support data and analytics for 400k users in the government and intelligence community. The company is also positioned well with defense strategy across cyber and space, missile defense, and autonomous systems.

Brand: The company has delivered over 60 years of innovation and reliability in space with 90 geostationary satellites, 285 spacecraft, and 3.5B square kilometers of earth imagery (~24x Earth’s total landmass).

⚠️Key Critical Risks

Competition: The company faces heavy competition with companies like the Boeing Company, Lockheed Martin Corporation, Northrop Grumman Corporation, and Thales S.A. which are much larger in terms of revenue and market value. The company needs to also ensure that they are leaders in the emergence of new remote imaging technologies or the continued demand of low-cost imaging satellites.

Operational Risks: Satellites are capital and time-intensive. Construction and launch delays, launch failures, and damages can severely impact revenue for months to come. In 2019, Maxar lost the WorldView-4 satellite impacting revenue.

Revenue Risk: Revenue from U.S. Government agencies is mainly generated from the EnhancedView Contract to provide image-tasking capabilities. Any lag in service could result in immediate termination of the contract.

Manufacturing Risk: Maxar has highlighted that they rely on a single vendor or a limited number of vendors to provide certain key products for manufacturing satellites. This reliance can put them at risk for pricing pressures as the demand for satellites increases with the expansion of the space economy. Additionally, aluminum and titanium are critical raw materials that are necessary for the productions of the spacecraft.

Debt Risk: The execution of revenue strategies such as launching the satellite constellations and the various services for government agencies require a lot of capital. As a result, the company has highlighted that they have a significant amount of debt amounting to $2.1B (4x EBITDA) as of 2020.

🧬Team DNA and Vision

Key Leaders:

Daniel L. Jablonsky - Chairman and CEO: President of DigitalGlobe since October 2017, which offered high-resolution satellite imagery. Jablonsky has a strong academic and professional background in law and served in U.S. Navy as a surface warfare officer and nuclear engineer.

Dr. Walter Scott – Chief Technology Officer: Previous founder and Chief Technology Officer of DigitalGlobe. He was responsible for the platform, business units, and space system acquisitions.

Tony Frazier – Global Field Operations: He currently leads business development and service delivery activities. Prior, served as President of Radiant Solutions, and General Manager of DigitalGlobe’s services business.

Jeff Culwell - Chief Product Officer: Prior served as DigitalGlobe’s SVP and Operations, delivering low latency imagery from direct access to satellites. His responsibility ensured satellite constellations, remote ground terminals, and customer installations.

Paul Estey – Space Programs Delivery: His role ensures the creation of advanced satellites and spacecraft systems for customers. Estey has decades of experience in the space business since 1997 serving various engineering and leadership roles.

🤯Key Insights for Time Investors:

The satellite consists of many small electronic, mechanical, and thermal systems that have to undergo a lot of tests and endure space-like conditions. A satellite takes about four years if it is new or about one to two years if it’s an existing satellite to manufacture or repair and prepare for launch. On launch day after years of work the fate of the satellite depends on an equivalent 4 million pounds of TNT and metaphorically speaking one button. Ultimately, the asset that is meant to generate revenue is very delicate and very risky.

The space economy is expanding and with many players entering the market, investors are looking for the next opportunities. While this is an intensive capital business the players that will ultimately succeed will have top engineering teams, strong relationships with the U.S. government and civil agencies, and the ability to build business models that generate revenue.

To put this into perspective the U.S. Government and its agencies (National Security Space, Intelligence Agencies, NASA) have allocated a total budget of $101 billion for 2021. This represents about a third of the total space economy industry. As a result, while commercial use is expanding the relationships between the government and its agencies are critical for economical success.

When highlighting the risks, Maxar during the year 2019 restructured their satellite service business to preserve and enhance it. The GEO satellites are very capital intensive and the failure of their WorldView-4 satellite drove additional financial risk. Ultimately with new leadership from their merger with DigitalGlobe in 2017, the company will focus on LEO constellation satellites. All eyes are on the launch of their new WorldView Legion constellations in 2021. This monumental step will be pivotal to the company’s success in the next years. With the large debt, the company has accumulated any failure at this point could be detrimental for the company and for investors.

Ultimately, as the demand for data increases and launch costs decrease, Maxar needs to continue to be a leader in providing data with AI/ML capabilities towards strategic customers and ensure they are embracing leading technologies in their satellites.

Additionally, the company is diversifying its revenues beyond earth intelligence and satellite manufacturing towards space robotics. They are key partners with important missions like NASA’s Artemis program to the moon, and NASA’s Perseverance Mars mission that happened earlier this year.

As an investor, I would like to see Maxar Technologies diversify its revenue model to remove dependence from long-term contracts and build services that allow recurring subscriptions with the delivery of insightful data and the use of its space infrastructure products. As a $2 billion dollar market cap, the company has $25 billion in pipeline activity across these next five years. If the company can achieve its key milestone launch this year, preserve its dominance in satellite technology, data intelligence, and maintain critical strategic partnerships it could put the company on the right path.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

Maxar Annual Report - 2020

Maxar 2021 Investor Presentation

Maxar Technology - “Is it Making Money in Space?” Article

Satellite Industry Overview

Maxar Worldview Legion Constellation Video

Maxar Overview company video

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

Coinbase ($COIN) will go public today on the NASDAQ through a direct listing. The company that is propelling a decentralized infrastructure with decentralized assets will let the market decide its value. In their S-1 filing, the company listed some pre-IPO share sales which also gives us a peak in terms of the demand of interest. In Q3 of 2020, they sold shares weighted at an average of $28.83, and then in March of 2021 that price went up to a weighted average of $343.58. Now with trading activity today and an outstanding share balance of 261.3 million the company’s shares oscillated between $381 at the open, peaking at $429 and ending up with a closing price of $328 resulting in a valuation of $86B.

To put this in perspective, Coinbase could potentially surpass the value of Goldman Sachs, an institution that has been around for 151 years.

Now as a profitable company and an arsenal of increasing revenue and cash, Coinbase will not need to raise any money and thus the shares will come internally. Below is a snapshot from my previous write-up that highlights some heavy hitters in terms of share ownership:

Top Tier VCs: Andreesen Horowitz (15.8%) and Union Square Ventures (7.5%)

Top Investors: Marc Andreesen (15.8%) | Frederick Ernest Ehrsam (9.5%)

Brian Armstrong (CEO): (21.3%)

As a group the executive leaders and directors: (58%)

Coinbase is the first large player in the space that gives you the seamless ability to access and own the crypto assets that are molding a decentralized digital world. This success will ignite entrepreneurs and attract even more competition. Regardless of the price the company ends today, this is a milestone that will now bring focus into blockchain technology, crypto assets (i.e Bitcoin, Ethereum, Cardano), and the supporting infrastructure required to build out this market.

💪Coinbase Q1 KPIs

Post their S-1 filing the company posted their Q1 results this year indicating strong performance:

With the rise in the price of Bitcoin and other additional crypto assets, Coinbase is benefiting from a 30% increase in users resulting in strong financial performance.

The company highlighted three scenarios forecasting their transacting users in which it derives the majority of its revenue based on some key drivers.

Ultimately, Coinbase’s performance in the short term will be dependent on Bitcoin’s price and transacting volume. But on the flip side, the company is positioned to set the foundation for the “cryptoeconomy”.

📈The impact of Bitcoin

The global crypto market is at $2.91 trillion with Bitcoin representing ~38% at $1.1 trillion. The price of Bitcoin has now hit ~$62.8k. Fundamentally, from a supply and demand point of view, we know that supply is capped at 21 million Bitcoin. Now this leaves the demand component. At the point in time based on macro conditions such as suspected inflation and concept of digital scarcity, the demand for Bitcoin as an asset for wealth protection is certainly increasing.

In a three part research series Yassine Elmandjra, cryptocurrency analyst from ARK Invest, and David Puell, cryptocurrency on-chain analyst, highlight some key conclusions for bitcoin based on some fundamental metrics/trends:

To measure the health of the Bitcoin Network they focus three concepts: monetary integrity, security, and usage.

Monetary integrity provides investors at any point in time visibility in terms of the supply of Bitcoin. Using graph’s from glassnode, analytics platform, the circulating supply is ~18.6 million BTC. Additionally with each halving (three havings with the fourth one in 2024), the issuance of Bitcoin is cut in half. Ultimately, as the Bitcoin market cap increases supply is constrained.

Bitcoin’s security is also another critical component adding to value. The hash rate, reveals the processing power miners utilize to secure the Bitcoin network and as the market cap of Bitcoin has increased the hashrate as exponentially increased as well.

Usage is also the final component in the inital valuation of Bitcoin. It shows investors or users network activity, adoption, and economic activity. As of right now there are ~1 million active addresses. This number is highly dependent on the price of Bitcoin. Additionally, overtime the share of invidiuals holding less than 10 BTC has increased while those holding greater than 1,000 BTC has decreased.

From an economic activity perspective, BTC has an average of ~250-300k transactions daily with a total transaction volume of ~600M since inception. To give you a comparison point, Visa has 65k transactions per second.

From these three components one can highlight that Bitcoin has strong features that justify its digital scarcity and its role in the class of assets that represets a preservation of wealth. You can see why now, Bitcoin is the market leader in terms of crypto assets and why it plays such an important role for Coinbase.

🤯Key Insights for Time Investors:

Coinbase’s IPO is a critical milestone for the crypto world. The crypto market is at its infancy and Coinbase represents the stepping stone to a great market that is developing.

Based on their Q1 results, Coinbase is in a strong position financially and in terms of market share realizing the fact that 90% of their customers to date have been acquired for free (organically). They will leverage their brand equity and the services they provide to continue maintaing their position as a market leader.

As the company enters the public markets, competition from existing exchanges as well up-coming crypto players will create revenue pressure. Coinbase derives majority of revenues from transaction fees in their platform and is currently one of the highest in market at around ~0.5%. This will certainly challenge their top-line if Coinbase is slow to diversity its revenue streams.

The company at its current structure is also highly sensitive towards Bitcoin’s market volatility. Because of the appreciation in Bitcoin price, users have gravitated to Coinbase to gain an entry point. A potentail price adjustment can result in an opposite effect.

Security is also an additional risk. Potential hack and the loss of crypto assets will inevitably create a loss of brand equity.

Brian Armstrong, CEO of Coinbase quoted on CNBC today “We are the first Fintech that is vertically integrated. We start from the customer relationship and all the way down to integration with the underlying rails {financial system framework] themselves. As blockchains scale, we will build on the new rails and create a new type of company: a crypto company.” This will bring new waves of companies in the crypto economy that will ultimately spawn greater opportunities for investors.

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

Coinbase Q1 2021 SEC Filing

Coinbase S-1 SEC Filing

Coinbase Reference Price - CNBC

Coinbase CEO Interview with Squawk Box - CNBC

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe at equitybreakdown.substack.com

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

Today we are beginning our passage to understand the SPACE industry and as such, I think we can start off with the opening theme song from a childhood show…“Five, four, three, two, one…rangers in space. Set controls to outer space now.” Well, I’ll stop there before it’s too late.

When anything remote to Space comes up, I just enter another world out of excitement. There is so much to learn especially as the industry evolves from a niche defense government-sponsored sector to a thriving global economic industry fueled by new advanced technologies and private companies.

Space is now a central focus to many long-term investors. This is perfect as we begin our learning process this month by breaking down the new Space ETF ($ARKX) relative to some existing ones such as the Procure Space ETF (UFO) and the SPDR ETF (ROKT).

🔴Download Equity Breakdown Report

📖What is ARKX?

The ARK Space Exploration & Innovation Fund is created to give investors exposure to companies spearheading the use of reusable rockets, technologies in orbital and suborbital aerospace, aerial drones, 3D printing, and enabling technologies. The fund is composed of 38 individuals companies and ARK’s 3D printing ETF ($PRNT) as their second-largest holding.

📈Market Opportunity

Currently today, the space industry can be valued at ~$400 billion with projections to hit ~$1 trillion by 2040. Now the industry can be divided into three sectors: products & services, infrastructure, and government.

Products and Services: telecommunications, GPS, observation, sensing, & monitoring (weather tracking)

Infrastructure: Space vehicles (rockets, shuttles), ground & space stations, terminals, and receivers (satellites)

Government: geopolitical monitoring, defense (missile tracking), government agencies (NASA)

The space economy is prime to experience greater growth driven by sustained investment, technological advances, and the need for resource exploration and extraction. To really get an idea of the amount of interest from investors in the industry, Space Capital, an early-stage venture capital firm exclusively focused on space technologies, reported that since 2011 $177 billion of cumulative equity has been invested across 1,343 companies. The majority of these investments are coming from the U.S. (47%) and China (29%).

From ARK’s perspective, the space industry is divided between three core ideas: global connectivity, hypersonic travel, and multi-planetary space travel. Each of these big ideas focuses on technologies that can drastically transform economic expansion. Ark believes that in the near time connectivity and hypersonic travel will deliver great opportunities.

Currently, half of the world’s population (3.7 billion) do not have internet access. In the U.S., more than 19 million households have no internet connection and 157 million do not have access to broadband speed. To tackle this problem, more satellites are needed in the lower orbit of our plant. This can only be achieved by ensuring launch costs are economically feasible to meet the rate of demand. With reusable rockets, companies are taking advantage of the drastic drop in costs and are launching more frequently in low earth orbit.

As of 2020, there are ~2.6k active satellites in orbit and ARK estimates that in the next coming years ~25k actives satellites are planned to be in orbit. As more people are connected to the digital world, ARK estimates that in the next five years the market can be valued at $10 billion annually in the U.S. and $40 billion annually across the globe. If you also include the expansion to all devices of the internet of things and additional space services, ARK estimates $100 billion annually.

Simultaneously, global economic expansion requires efficient commercial travel. Hypersonic travel will be essential for point-to-point connections. This access will be economically appealing towards business travel and high net worth individuals. ARK estimates that ~2.7 million passengers will be willing to pay $100k to save 13 hours of international travel resulting in a $270 billion market annually.

🧬ETF DNA and Vision

ARK’s Space ETF has attracted over ~$542 million in inflow since its launch on March 30th. Based on an analysis from Seeking Alpha, the average ETF usually takes three years to achieve $100 million. This is astounding and truly reveals the brand equity that ARK has built with investors during these past two years. At the same time, ARK has also received some negative feedback from some of the positions that do not traditionally fall under the “space theme”. Now excluding the 3D Printing ETF selection in ARKX, the top 10 holdings are identified below:

Trimble Inc. ($TRMB) | Enterprise Value: $21.6B | Electronic Equipment Instruments and Components

The company started as a GPS company and now offers full technology solutions for positioning, modeling, connectivity, and data analytics across agriculture, geospatial, construction, civil engineering, forestry, and rail.

Kratos Defense & Security Solutions Inc. ($KTOS) | Enterprise Value: $3.5B | Aerospace and Defense

Defense company that delivers microwave electronic products, space, training and cybersecurity/ warfare, satellite communications, C5ISR/ modular systems, turbine technologies, and defense and rocket support services.

L3Harris Technologies Inc. ($LHX) | Enterprise Value: $49.3B | Aerospace and Defense

The company delivers mission-critical solutions ranging from pace payloads, sensors, and full-mission solutions; classified intelligence and cyber defense solutions; mission avionics; and electronic warfare systems. Satellites, defense satellite imaging, and weather satellite imaging are some initial functions.

JD.com Inc. ($JD) | Enterprise Value: $115.0B | Internet and Direct Marketing Retail

The e-commerce company out of China will need precise data for its customers as the channel grows. The quality of data, such as the location of people or their daily movements in their environment, will be heavily dependent on satellites.

Iridium Communications Inc. ($IRDM) | Enterprise Value: $7.0B | Diversified Telecommunication Services

The telecommunication company offers voice and data connectivity through a constellation of 66 crosslinked LEO satellites.

Lockheed Martin Corporation ($LMT) | Enterprise Value: $117.7B | Aerospace and Defense

The company is heavily involved in defense and national security space offering services and assets in aeronautics, missiles and fire control, mission systems, and space. The company has over 100 years of aerospace experience.

Komatsu Ltd. ($6301) | Enterprise Value: $37.2B | Machinery

A Japanese company that manufactures large construction, mining, forestry, and military vehicles/equipment. The use of satellite data will help guide autonomous equipment.

Thales S.A. ($HO) | Enterprise Value: $20.4B | Aerospace and Defense

Aerospace and defense conglomerate that offers communications, command, and control systems. They supply orbital infrastructure equipment to the International Space Station and are also in the business of building satellite constellations, and unmanned robots for space exploration.

NVIDIA Corporation ($NVDA) | Enterprise Value: $351.2B | Semiconductors and Semiconductor Equipment

The company operates in graphics, compute and networking, and rapidly expanding in AI. The company’s embedded GPUs can be applied to a multitude of space-based applications. Their computing platforms are famously known for their contributions to artificial intelligence and data mining.

The Boeing Company ($BA) | Enterprise Value: $188.4B | Aerospace and Defense

Boeing is also an incumbent defense conglomerate that builds airplanes, rockets, satellites, telecommunications equipment, and missiles worldwide. They are focused on deep space exploration as well as offering advanced space and communications systems for military, commercial and scientific uses.

From an industry breakdown, 66% of the mix is concentrated in Aerospace and Defense, Internet and Direct Marketing Retail, Electronic Equipment Instruments, and Semiconductors. Similarly, 75% of their portfolio is built by mega (>$100 billion) and large (>$10 billion) market cap companies in the industry. ARK is placing their calculated bets on industry leaders that have been involved in the space industry directly and that benefit from space technologies on Earth.

Cathie has emphasized when it comes to space it sometimes takes big companies to fuel big ideas. Interestingly some of these large and mega-cap companies are implementing a cohesive strategy that spans beyond rocket production and technology and also focuses on space communications and drone technology. With low costs in satellite technology, low-orbital space infrastructure can scale supporting a multitude of businesses on earth.

Now there are some unique picks here that at first glance do not connect directly with the space industry. Amazon, Google, and Netflix are three mega-cap companies that stick out. Amazon Web Services launched a new unit called Aerospace and satellite solutions. Projects such as the satellite connection service called AWS Ground Station, and the satellite internet venture called Project Kuiper reveals their interest in using space technologies to enhance connectivity. Google is also utilizing its computing power in the cloud and AI to support space projects regarding imaging and mapping. Now Netflix is a unique outlier. When you think of streaming you should also think of the high demand for broadband. Entertainment is one of the tops uses for broadband. More satellites in low orbit mean more efficient broadband and access to streaming services across populations that had no internet connectivity. Also as cars become autonomous and internet access available across the globe, Netflix will benefit.

Surprisingly, Virgin Galactic the first public pure-play space company did not make it on the top 10 list for ARK. The company is famously known for leading the charge on commercializing space tourism. In an interview, Cathie Wood mentioned that beyond internet connectivity, they view hypersonic travel as another additional opportunity. At the moment, Virgin Galactic has mentioned hypersonic travel but has not identified any specific long-term plans to operate in the space, thus making them holding #20 on the ARKX fund. With their space shuttles and assets, the company is well-positioned to make some breakthroughs if they can successfully accomplish their launch targets in the next couple of months.

On the other hand, there are 9 pure-play SPACs that have announced mergers this year specifically focused on space. Companies like Rocket Lab, Black Sky, and Momentus Space are all jumping in the action. When it comes to SPACs, ARK has decided to ignore all of the pure-plays with the exception of three SPACs that benefit indirectly from space technologies:

Workhorse Group ($WKHS) |

EV Company that produces last-mile delivery vehicles. They will need satellite technology to track their vehicles and optimize their performance.

Atlas Crest Investment ($ACIC)

The SPAC is merging with air taxi startup Archer Aviation in a $3.8 billion deal. The vehicles aim to be autonomous thus requiring an air data system, radar and laser altimeter, and other technologies supported by low orbit space infrastructure.

Jaws Spitfire Acquisition ($SPFR)

The SPAC is merging with 3D-printing company Velo3D, valued at $1.6 billion. Velo3D is known for producing components for space rockets, jet engines, fuel delivery systems, and energy production. SpaceX is one of their most recent clients.

A common theme one will notice across ARK’s space ETF is that they believe mobile connectivity, 3D printing, robotics, sensors, artificial intelligence, and rocket technologies will all converge together to deliver the $1 trillion market.

⚠️ETF Competition

When comparing other ETFs in the space nothing comes close to the AUM that ARKX has accumulated in the past week and a half. However, there are some formidable players that have some similarities to ARKX and some stark differences as well. The UFO Procure SPACE ETF is the first ETF that tracks the S-Network Space Index, which is concentrated on companies that have significant space-related activities. The fund is composed of 33 positions and has an AUM of $136 million. The top 10 positions for UFO are as follows:

Orbcomm Inc ($ORBC) | Enterprise Value: $1.1B | Diversified Telecommunication Services

Trimble Inc ($TRMB) | Enterprise Value: $21.6B | Electronic Equipment Instruments and Components

Garmin LTD ($GRMN) | Enterprise Value: $23.1B | Household Durables

Dish Network ($DISH) | Enterprise Value: $32.3B | Media

Eutelsat Communica ($ETL) | Enterprise Value: $5.6B | Media

Sirius XM Holdings ($SIRI) | Enterprise Value: $35.0B | Media

SES SA ($SESG) | Enterprise Value: $7.1B | Media

Iridium Communications Inc ($IRDM) | Enterprise Value: $7.0B | Diversified Telecommunication Services

Sky Perfect Jsat H ($9412) | Enterprise Value: $1.5B | Media

Weathernews Inc ($4825) | Enterprise Value: $464M | Professional Services

Based on the fund build, UFO has 82.8% of its market cap in Media, Aerospace and Defense, Diversified Telecommunications Services, and Communications Equipment. The fund is also more heavily concentrated in medium and large-cap companies ranging from $2B - $10B. Based on their top picks you can vividly see that the team is heavily placing their bets on satellite-based consumer products, satellite manufacturing, space technology hardware, and space-based imagery and intelligent services.

Another competitor would be ROKT SPDR S&P Kensho Final Frontiers ETF, which runs $24M in AUM and holds 30 positions. This fund also has some similarities to both ARKX and UFO but more concentrated in Aerospace and Defense with Maxar Technologies ($MAXR) and Aerojet Rocketdyne Holdings ($AJRD) as their top two holdings.

Between these three funds, there are some overlaps that highlight common strategies and confidence in terms of the companies role in the space industry. Trimble, L3Harris technologies, and Iridium are represented across all three funds. This signifies the importance of satellite technologies, GPS, and communication devices that are essential for industries on Earth.

🤯Key Insights for Time Investors:

It is important to understand that space investments are highly capital-intensive investments that will take years to see business models come to fruition. However, with that said companies like SpaceX and the allure of deep space travel have sparked the imagination of ordinary citizens and investors. Since 2011 $177 billion of cumulative equity has been invested across 1,343 companies. In Q4 2020, $5.7 billion was invested across 80 companies.

As an investor, the greatest reward within this decade will involve companies that operate in satellite technologies due to the dropping costs in rocket launches. Additionally, companies on earth that will benefit from greater connectivity will also be great investment avenues to research.

When it comes to space, ARK believes that technologies will converge supporting accelerating growth opportunities. Automation and artificial intelligence will play a significant in space-related activities that will impact industries on Earth such as the agricultural industry and construction industries.

In an article from Michael Sheetz, Space Reporter, he highlights a comment from CEO Chad Anderson that states, “Space is the vantage point that allows us to do business.” “It’s what links our financial markets, shipping lanes — the global economy as it exists today would not exist without space.” http://cnb.cx/2NyWvki

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

Cathie Wood Interview for ARKX

ARKX Analysis - Seeking Alpha

ARK Invest Video about the opportunity in Space

ARKX SPACE ETF

UFO SPACE ETF

ROKT FINAL FRONTIERS ETF

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe at equitybreakdown.substack.com

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

The modern world has experienced vast prosperities and knowledge accumulation relative to our ancestors in the recent century. This achievement can be summarized by one word: innovation! Matt Ridley, journalist, and author of How Innovation Works, claims that innovation is the most important fact about the modern world, but the least well understood. Today we will summarize ARK’s Big Ideas report for 2021 that gives us a framework on how to understand the impact of innovation in the coming decade.

🔴Download Equity Breakdown Report

📖Why is ARK investing in disruptive technologies?

Historically, innovations leading to technologies such as the steam engine, electricity, internal combustion engine, computers, and the internet were transformative to humans globally. They lead to new industries and further innovation that ultimately resulted in great economic expansion.

As investors, we must embrace the power of innovation and attempt to understand what technologies are next in line to transform society. To tackle this idea, we will focus on research conducted by Cathie Wood and the ARK team whose thesis is based on the effects of innovation. In their white paper, ARK believes that these next 10 years will be viewed by history as an era that experienced significant disruptive innovations. The five key technology platforms in their research are artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology. Before we understand the impact of these technologies it is important to get some quick summaries of what they are designed to deliver:

Artificial Intelligence: Learning systems that use data, automate knowledge work, and accelerate the infiltration of technologies to solve complex problems in society. AI will transform all sectors in the economy, especially the ones that have been resistant to complete digital change such as healthcare and financial services.

DNA Sequencing: The cost to map the whole human genome has fallen drastically. This will spark new innovations in healthcare such as precision medicine, diagnostic testing, preventative cures of rare diseases, and treatments for the longevity of life.

Robotics: With advanced software, sensors, and new inventions in critical hardware robots will assist humans across all aspects of life. Productivity and lower unit costs will replace repetitive laborious tasks with more meaningful work for humans.

Energy Storage: The supply of electricity will be transformed with the declining costs of lithium-ion batteries and new innovations such as solid-state batteries. Energy will need to be dispersed more efficiently in a profitable manner to meet society’s demands across electric vehicles, micro-mobility, and clean energy. Across many sectors and more particularly the mobility sectors, infrastructure to support the “electrification” movement will be essential.

Blockchain Technology: Open-source protocols that verify proof of ownership and ensure digital scarcity will penetrate financial services and remove friction imposed by legacy systems. When it comes to access to capital the world will become more liquid.

All these technologies will deliver cost declines, impact diverse industries globally, and foster additional innovations. Ultimately, the platforms will create similar transformation effects in a society like the steam engine that sparked the industrial revolution, electricity, or the internet. In the next ten to fifteen years, the five technology platforms will expand from less than $6 trillion to $50 trillion in value and wealth creation globally. This massive expansion is unprecedented.

What are ARK’s Big Ideas for 2021?

To understand these platforms in a little more depth, ARK has released their Big Ideas for this year which highlights the latest developments in innovation and foundation for investors to understand where to seek out wealth-generating opportunities.

1.Deep Learning: This is a form of AI in which companies can use data to write software.

Conversation Computers, Self-Driving Cars, Consumer Apps (TikTok)

Hardware and software costs are declining but the cost of AI training models will increase 100x to $100 million by 2025 (GPT-3, AlphaFold 2)

OpenAI’s GPT-3 is the first artificial intelligence to understand language

Market Value: $30 trillion from $2 trillion resulting in 17% CAGR

More economic value than the internet

2.Re-invention of the data center: Cheaper and more powerful processors will be dominant

ARM/RISC-V processors will displace Intel’s x86 architecture resulting in 71% market share by 2030.

82% of developer PCs (Microsoft and Apple) will be powered by ARM

Accelerators, dominated by GPUs will be the dominant processors in data centers

Market Value: $19 billion in CPU revenue, $100 billion in Server revenue, $41 billion in Accelerator (GPUs) revenue

3.Virtual Worlds: Think of video games, augmented reality, and virtual reality

Revenue from in-game virtual good purchases has increased from 20% to 75%

AR tools from Snapchat, Facebook, and Apple could scale to $130 billion annually

VR needs to achieve complete human immersion at a cost like PCs to gain adoption by 2030

Market Value:

Global gaming will compound 16% in the next five years and become $365 billion by 2025.

AR and VR will hit $28 billion by 2025.

4.Digital Wallets: Traditional banking systems will be challenged by applications such as Venmo, PayPal, and Cash App. Digital wallets will become a central element towards commerce-related activities

In China, mobile payments are 2.5x GDP

In seven years, Cash App and PayPal have 60 million active users reaching the same amount of J.P. Morgan’s deposit account holders

Traditional banks spend $1,000 to acquire a customer while digital wallets spend $20 due to peer-to-peer environments

Market Value: With 230 million estimated users, ARK predicts a value of $4.6 trillion by 2025

5.Bitcoin’s Fundamentals + Institutional Involvement: Bitcoin is emerging as a store of value monetary system in the digital world

As of November 2020, 60% of Bitcoins supply is held by owners instead of traded. The market is long-term focused

Financial institutions and companies such as Tesla have now placed Bitcoin in their personal treasuries and consider it a long-term wealth strategy. This has now opened the gates for more financial innovation through cryptocurrencies like Ethereum.

Institution allocation between 2.5% and 6.5% could impact bitcoin’s price to reach between $200k to $500k

Market Value: Currently, the bitcoin market is valued at $1 trillion with the ability to exceed the golds market cap of ~$10 trillion

6.Electric Vehicles: Electric vehicles are becoming increasingly affordable and with battery technology achieving performance and scalability.

Electric vehicles have been growing at 33% in sales in 2020 from 2019

Battery costs have fallen by 28%

The total cost of ownership is comparable to traditional (internal combustion engine) vehicles

Market Value: Ark estimates that vehicle sales can achieve 82% CAGR resulting in 40 million in unit sales by 2025. If one assumes a traditional price of around $25k the EV industry will be valued at ~$1 trillion.

7.Automation: The integration of robots across industries will play an impactful role towards productivity and also more value-based job creation

Ark estimates that robots will accelerate from 20 robots per 10k employees to 180 robots per 10k employees

Higher wages, lower prices, higher margins, and higher investments will be the result of this expansion

Unpaid labor will also decrease and when labor share declines operating margins will double more than 20%

Market Value: 5% or $1.2 trillion can be added to U.S. GDP during the next five years

8.Autonomous Ride-Hailing: This opens massive opportunities for efficient transportation across all sectors on the road and air. Consumers will no longer need to own vehicles and can save time to be more productive in other activities

Since 1934 the cost per mile has remained stable at $0.70. By 2025 with autonomous driving, it can drop to $0.25.

Autonomous driving could result in 50% margin

Adoption could approach 20% by 2025 if Tesla launches its autonomous service by 2022

Market Value: Ark believes that the market could be $1 trillion in operating earnings annually by 2030. Auto manufacturers could generate $250 billion in earnings by 2030 and individual fleet owners could generate $70 billion in earnings.

9.Delivery Drones: The previous technologies will also accelerate drone commercial use. The cost to transport people and products will be changed drastically.

The cost for a 10-mile drone delivery will decline from $7.80 (remote pilot) to $0.25 (autonomous)

Lower costs for drug delivery, public transportation, product delivery, and commercial use such as inspections will be seen once this technology has scaled

Market Value: Drone Delivery will generate $50 billion in sales, $14 billion in hardware sales, and $3 billion in mapping revenues by 2025

10.Orbital Aerospace: The space industry is evolving from a sector dominated by government-sponsored investment to a thriving global economic industry fueled by advancements in reusable rockets and satellite technologies.

Original rocket launch costs in 2016 were about $14k/kg and now with reusable rockets are around $2k/kg (~85% drop in costs)

Lower launch costs are allowing for more satellites in low earth orbit improving internet connectivity. An estimated 25k active satellites are planned.

Hypersonic travel is also critical to transforming the global economy. Long international flights from economic hubs can be reduced to two-three hours.

Market Value:

Ark estimates $40 billion to provide broadband connectivity to the internet. Including commercial connectivity and government space services, the total market is $100 billion annual TAM.

Regarding hypersonic travel, Ark estimates that from a commercial perspective, companies are willing to pay $100k for long-haul hypersonic flights to save time. This results in a $270 billion annual TAM.

11.3D Printing: New technological additive manufacturing that builds objects layer-by-layer. It has optimized the design and final production of objects at an accelerated pace.

The early stages of the industry were concentrated on prototype design. The next phase is in the mass production of end-use parts

Critical industries that will benefit from end-use parts will be aerospace, semiconductor, and healthcare.

3D printing and AI will also converge resulting in unique designs that will not be possible with traditional manufacturing capabilities

Market Value: TAM is estimated to expand at a 60% CAGR from $12 billion to $120 billion annually.

12.Long Read Sequencing: This technology is focused on mapping the humane genome to understand the make-up and functionality of genes.

The cost to sequence a whole human genome with long-read technology will eventually drop to $200 from $100k in 2010.

Cancers, rare diseases, and hereditary diseases will be understood and mapped utilizing the power of deep learning algorithms.

Market Value: The total market for the long-read sequencing market will amount to $5 billion by 2025.

13.Multi-Cancer Screening: Cancer detection at an early stage will save many lives. To accomplish early detection, liquid biopsies such as blood tests will offer efficient and non-invasive multi-screen cancer tests.

Costs can decrease substantially from $30k to $250 using machine learning algorithms to analyze liquid biopsies.

$1.5k will unlock multi-screen tests for the elderly population at risk of cancer and then expand to the rest saving 1.4 million lives annually

Market Value: By 2025 multi-screening should scale to a $150 billion market

14.Cell and Gene Therapy: Gene therapy treatments for solid tumors and genetic disorders are early in the commercial stage.

Currently, FDA has approved 10 gene therapies and by 2030 it is expected to have 170 gene therapies to treat solid tumors which represent 88% of diagnosed cancers.

Market Value: The market for oncology gene therapy is estimated to be $260 billion.

🤯Key Insights for Time Investors:

The ARK team has laid out 14 technologies within their five technology platforms that are estimated to deliver substantial growth. Based on these platforms, Artificial Intelligence, specifically deep learning, will penetrate and support the rest of the specific technologies. Companies that are heavily involved in the production of artificial intelligent models and the ability to commercialize them will greatly benefit.

Many seasoned investors caution that this period resembles similar characteristics to the Dot-com bubble. However, in their more recent podcast, Cathie Wood has emphasized that during that period a lot of capital was chasing very few opportunities that involved technologies in their infant stage.

Based on wright’s law for every cumulative doubling of units produced, costs will decline by a constant percentage, the ARK team believes that costs and technology are at the right point creating exponential growth opportunities for the right players. GDP in the U.S. in 2035 will be $40 trillion from $20.9 trillion today due to the convergence of the various technology platforms that ARK believes will impact every facet of the economy.

As time investors, this research is a great starting point to understand how the technologies will impact our economy and ultimately identify companies that are embracing them at a fundamental level. Across all of ARK’s ETFs the companies that they have heavily concentrated on support their convictions regarding deep learning, autonomous ride-hailing, electric vehicles, digital wallets, re-invention of data centers, and genomic sequencing.

Below you will find the ARK’s team top 20 holdings across all their active and passive ETFs:

I will leave a quote that perfectly summarizes how we view innovation from Matt Ridley in his book How Innovation Works. “Innovation often disappoints in its early years, only to exceed expectations once it gets going, a phenomenon I call the Amara hype cycle, after Roy Amara, who first said that we underestimate the impact of innovation in the long run but overestimate it in the short run.”

Stay incurably curious!

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

ARK Invest Big Ideas

ARK Invest Disruptive Technology Whitepaper

ARK Invest Big Ideas Discussion Video

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe at equitybreakdown.substack.com

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

What does it take to build a world with more economic freedom for every person and business regardless of their location. Today, we will breakdown, Coinbase ($COIN), a company building the infrastructure to propel a crypto revolution that is decentralizing the world of money and finance.

🔴Download Equity Breakdown Report

📖What is Coinbase?

Coinbase is the largest cryptocurrency exchange in the US. The company is positioned to provide end-to-end financial infrastructure and technology supporting crypto assets. The crypto ecosystem is shaped by three types of customers:

Retail: The everyday citizen can invest, store, spend, earn, and use crypto assets, such as Bitcoin, in a safe and secure space

Institutions: Financial institutions (corporations) can access crypto markets with safe trading and storage tools. The ecosystem ensures liquidity for transactions using crypto assets.

Ecosystem Partners: Merchants, developers, and asset issuers (governments) can build applications that use crypto protocols and participate in the crypto network.

Coinbase is positioned to power the evolving crypto economy. The invention of Bitcoin created a revolution of digital scarcity. This scarcity does not require authenticity or approval from central institutions. Scarcity is proven through the decentralized ecosystem. This has enabled the company to potentially be a leader in creating an open financial system.

📈Market Opportunity

Technology is sweeping human society, while the existing financial system continues to experience legacy limitations. The crypto economy is organically evolving due to a series of fundamental shifts:

The need for financial access, efficiency, and cost: Humans should have no intermediary barriers, inefficient procedures and protocols, or high costs to exchange in the financial system.

The need to cultivate value from the internet: The exchange of digital assets (NFTs) in the past has been difficult to ensure authenticity and scarcity. The crypto ecosystem ensures secure exchange and consensus-backed record-keeping (blockchain technology) to ensure resiliency and value. Additionally, the network is on 24 hours allowing for peer-peer financial transactions (DeFi applications).

The need for frictionless applications: The crypto economy is built on software networks on top of the internet. This ultimately ensures programmable smart contracts, which are self-reinforcing agreements between parties, and removes the need for intermediaries.

The need for a reliable store of value: Inefficient institutions have been notorious for wiping out wealth. The need for a digital asset class that can maintain its scarcity and preserves wealth is critical.

As a result, today the addressable crypto market is valued at $1.5 trillion which is about 10-13% of the value of all mined gold on the planet. Coinbase re-iterates that the market is still in the early stages. Coinbase will aim to target the 3.5B customers connected to the internet through smartphones around the world or translating into ~228 million monthly transacting users.

👨‍💻What are the Strategic Resources?

Coinbase has built the infrastructure to support its customer base and create a powerful flywheel for an open financial system.

Product Portfolio:

Coinbase has reported $316.1M in crypto assets as of 12/30/2020.

Bitcoin represents 63%, Ethereum 8%, all other crypto assets 29%. The market value for BTC at the time was ~$28K and no is around ~$51K.

With the integration of 15 blockchain protocols, the company can support 45+ assets for investment purposes and 90+ assets for storage.

Retail:

Coinbase exchange - allows to buy, sell, and send 42 different types of crypto assets

Wallet - store cryptocurrency

Applications in the ecosystem to earn rewards and interest on crypto assets

Coinbase pro - provides advance cryptocurrency trading of 90+ assets

Ecosystem:

Prime exchange - allows trading for institutions

Asset Hub - allows customers to list their digital asset

Commerce applications - accept payments in crypto assets

Custody - provides secure storage of 90+ crypto assets for institutions

Developing Resources:

Coinbase has filed 107 patents and currently has 21 granted patents for their intellectual properties. After analyzing the patent applications, the top five keywords appear:

Blockchain | protection | digital | transaction | stable

In 2019, Coinbase was granted a patent to essentially make sending Bitcoin as easy as e-mails. Email addresses are linked to wallet addresses and can be used to make payments instantly.

The company is driven by innovation and talent as it currently invests $271 million in technology and development as of 12/31/2020, which represents about 21% of revenue. The investment increased by ~86 million (47%) from last year driven by an increase in headcount supporting platform enhancement, software licenses, website hosting, and product development.

Customer Landscape + Partnerships:

Coinbase is breaking boundaries in the financial system and has created the following customer base:

Retail: 43 million users as of 12/31/20 and ~2.8 million monthly transacting users (180% QoQ).

$32,1k trading volume per transacting user

Institutions: 7,000 institution customers (67% YoY)

Coinbase facilitated MicroStrategy’s $425 million bitcoin earlier this year.

Coinbase also handled Tesla’s $1.5 billion purchase of bitcoin

Ecosystem Partners: 115,000 partners composed of organizations that build blockchain protocols, create DeFi applications supporting the protocols, creators of new tokens, merchants, and organizations that monitor blockchain transactions (Government).

The company has a program called “Day 1 Launch” to support new crypto assets.

Compound is a key investment that stemmed from the program. Many using Compound earn interest on many crypto assets such as $700 million in USDC (digital USD in Coinbase).

Additional partners: Visa (release of debit card in European markets) and BlockFi

Resource Deployment + Growth Strategies + Acquisitions:

Business Model and Growth Strategies:

The company derives its revenues through three streams:

Transaction Fees – 86% of Revenue: The majority of revenue is generated from transaction fees related to trades (bought, sold, and withdrawn) of crypto assets on the platform. Since inception, the revenue generated from transactions is 96% from an average transaction fee of 0.50%.

Subscription and Services – 3% of Revenue: This is focused on custodial fees for services such as storing crypto assets, staking revenue from crypto assets in staking protocols, and revenue of crypto-asset earn campaigns.

Other Revenue – 11% of Revenue: This involved the sale of crypto assets to fulfill customer transactions. In some cases, customers need to meet the minimum trade size for execution in which Coinbase steps in for support.

2020A: Revenue: $1.3B (137% YoY) driven by $192B (143% YoY) of trading volume

62% of trading volume is driven by institutional and 38% by retail

2020A: Gross Margin: ~80% (6.6% YoY)

2020A: EBITDA: $322M (25% of Revenue)

2020A: Operating Cash Flow: $3B ($2.7B driven by customer custodial funds which are restricted cash and cash equivalents held for customers and regulatory requirements). The net estimated free cash flow is $294M.

The company plans to continue accelerating growth through the following initiatives:

Customer Expansion: Currently, Coinbase has spent 5% of revenue on customer acquisition for verified users. 90% of the users have come to use the product organically. The company will spend heavily on educating institutions and retail investors with the expansion of supporting teams and customer service. Additionally, 76% of the revenue was driven by the U.S. market, and expansion into emerging markets will open a greater pool of customers.

Expansion of Crypto Assets: Expand the tokenization of new assets, and enhancing blockchain protocol features such as staking, and decentralized identity.

Innovation: Plans to expand innovation infrastructure focusing on distribution, access and identity, and developer toolkits, and payments. The company also plans to utilize its venture arm to grow the ecosystem at large furthering its mission.

Strategic Acquisitions: The company reported the acquisition of two key players:

Xapo ($68M): provides cryptocurrency wallet and custody services. Specifically, the company is known for having physical vaults in the Swiss mountains to store crypto assets offline.

Neutrino ($2.8M): provides blockchain analytics technology that highlights trends to identify new tokens in the space.

💪Key Strategic Moats

Scale: The company reported $90 billion in fiat and crypto assets stored through their services. This represents ~11% share relative to the value of the crypto market. With 115,000 partners, 43 million verified users, 7,000 institutional customers, and supports 90+ crypto assets, the company leads the pack in the space.

Technology Platform: The company’s technological platform spans beyond just trading and selling of crypto assets. The one-stop-shop allows for customers to store their assets, borrow against their holdings, and participate in the decentralized networks that are built through the ecosystem. The company has ensured network effects through breadth and depth of products, trust, and diverse use of their products. Ultimately, the platform allows for “24/7/365 real-time cross-border payments”

Brand: With the rise of Bitcoin since 2012, Coinbase has been the leading face supporting the infrastructure of the crypto economy. The company has ensured that trust is attached to its brand by dedicating 15% of its workforce to legal, compliance, and security. They want to ensure that their customers’ assets are secured, and they have ease of use to transact.

Marketplace Ecosystem: Between retail users, institutions, and developers Coinbase built a foundation that ensures great synergies. This ultimately results in a deep pool of liquidity to transact the multitude of crypto assets in the ecosystem.

Specialized Team: The company is founder-led with support from top-tier talent in the crypto space. 40% of the team is composed of engineers and about 10% of the team is composed of talents related to security and risk.

⚠️Key Critical Risks

Competition: Coinbase states that it is operating in a fragmented and heavily regulated market. Certain competitors have an advantage since they do not have to adhere to the same standards.

From a retail user’s perspective, the key competition comes from Square, Robinhood, and PayPal who also allow their users to transact in certain crypto assets. A key difference here is that users in these other platforms do not actually own the crypto asset.

From an exchange perspective Binance, the world’s largest crypto exchange is a key competitor internationally. Coinbase claims they have “varying degrees of regulatory adherence.”

Bitcoin and Ethereum Concentration: Total revenue from Coinbase is highly dependent on the crypto market and specifically the price of Bitcoin and Ethereum which represent 83% of the crypto assets. The decline in trading volume, price, or risk to market liquidity can create some drastic impact.

Government Regulation: The government regulation in the crypto space is still undetermined. The company will need to adhere to evolving regulations to maintain appropriate licenses and financial offerings for customers.

Security Risk to Crypto Platforms: In 2019, Binance was hacked resulting in $40M in losses. This could certainly harm the brand image of any exchange and with the increasing demand of Bitcoin, Coinbase stands as a prime target.

🧬Team DNA and Vision

Key Leaders: As of December 31, 2020, the company has 1,249 employees, of which over 40% are dedicated to engineering, product, or design roles.

Brian Armstrong – Co-Founder and CEO: Currently Brian is also the founder and CEO of ResearchHub Technologies, a scientific research platform. Prior, Brian was a software engineer at Airbnb, Inc and also a previous founder of Universitytutor.com

Surojit Chatterjee – Chief Product Officer: Prior served as Vice President of Product Management for Google Shopping at Google LLC and Global Head of Product in Google

Emilie Choi – Chief Operating Officer: Prior to the role, Emilie served as VP of Business, Data, and Implementation in Coinbase. Prior she served as VP and Corporate Development for LinkedIn Corporation

Melissa Strait – Chief Compliance Officer: Prior, Melissa served as Global Head of Financial Crimes at Stripe and as a US Compliance Officer

Vision: Based on the Founder Letter, Coinbase is focused on creating economic freedom for their customers no matter their location. The future they are building will be decentralized and ultimately merge the digital and real-world economies.

🤯Key Insights for Time Investors:

Your location in the world unfortunately will define the opportunities you are presented. The current financial system is built with many obstacles to access financial services. However, with the invention of Bitcoin, a new movement emerged that could provide the core pillars to economic freedom to any individual. The current market to Bitcoin is around ~1.5 trillion representing about 10% of the Gold market. To propel this future, Coinbase emerged as one of the first trusted largest brands in America and currently the second-largest crypto exchange in the world.

The company also operates in a heavily regulated environment and will experience new regulations as the political climate wraps its thoughts around the co-existence of a crypto ecosystem in the current financial world. Coinbase dedicates 10% of its employees and has ensured appropriate leadership to meet security and compliance risks.

It is important to note that Coinbase’s success is tied to the overall growth of the crypto-economy and specifically the demand for Bitcoin and Ethereum. As Bitcoin and Ethereum scale, Coinbase will also benefit as it stands to be the one-stop-shop for a multitude of assets.

The company has experienced rapid growth (137% YoY) and more importantly, 90% of their customers to date have been acquired for free (organically).

The fact that Coinbase is founder-led with the mission of creating an open financial system brings assurance and clarity to the overall goal the company is trying to achieve. The company maintains an 11% share in the market and holds $90 billion assets in its platform with 43 million verified users and 2.8 million monthly transacting users.

It is important as Coinbase attempts to expand into international markets and their digital asset framework evolves beyond their core business model of generating transaction fees. What will Coinbase do with their $1B in cash to expand share? For long-term growth, the company is well-positioned to maintain market leadership.

Investor Lineup + Equity Stake:

Top Tier VCs: Andreesen Horowitz (15.8%) and Union Square Ventures (7.5%)

Top Investors: Marc Andreesen (15.8%) | Frederick Ernest Ehrsam (9.5%)

Brian Armstrong (CEO): (21.3%)

As a group the executive leaders and directors: (58%)

In their most recent secondary share sale, Coinbase has sold shares ranging from ($200-$373) resulting in a potential $100B valuation

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

Coinbase S-1 SEC Filing

Coinbase Mission, Vision, and Strategy

Coinbase Strategy Teardown - CBInsights

Crypto Terminology from the S-1 SEC Filing

Coinbase Public Filing - Tech Crunch

Coinbase Public Filing Overview - CNBC

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe at equitybreakdown.substack.com

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“The true currency of life is time…and we have all got a limited stock!” - Robert Harris

To all the Time Investors,

Vertical integration across the EV supply chain will define the winners of the industry. Today, we will breakdown, Proterra ($ACTC - $PTRA). The company is planning to become public through a reverse merger (SPAC) with ArcLight Clean Transition Corp ($ACTC).

🔴Download Equity Breakdown Report

📖What is Proterra?

Proterra is electrifying the commercial vehicle space through the three symbiotic business lines that ultimately create their ecosystem:

Proterra Powered: In this business segment the focus is to design, manufacture, integrate, and sell top-tier battery systems and electrification solutions such as drive-trains, and controls for their vehicles and OEM (Original Equipment Manufacturers) customers.

Proterra Transit: the focus is to design, manufacture, and sell electric buses for public and commercial fleets.

Proterra Energy: the focus is to provide “high-power” charging solutions and software services to support the company’s platforms. Specifically, the company has built the end-to-end infrastructure to optimize energy costs and ensure vehicle-to-grid functionality.

Proterra is the “Tesla” of the commercial vehicle space by harnessing the power of the electrification supply chain.

📈Market Opportunity

The electric vehicle revolution groundwork is established with the advancements in battery technologies, infrastructure, and government policies. Regarding the commercial vehicle space, the focus is on the total cost of ownership and achieving faster zero-emission target goals spearheaded by industry leaders and governments. According to the Environmental Protection Agency (EPA), the transportation sector represents about 28% of the GHG emissions in the U.S., and large size commercial vehicles account for 23% of those emissions. Based on the GHG emissions, Greenbiz revealed in their survey of global fleet companies that 60% of companies have GHG targets.

With 85% decline in battery costs, 40% cheaper operating costs than diesel vehicles, the electrification of buses and commercial vehicles will expand with reports from Frost & Sullivan highlighting 50% market penetration by 2025. As of 12/31/2020, there are 25,000 buses in operations that are targeted to achieve zero-emission by 2040. Governments, communities, and companies are all aligned in the demand for sustainable solutions.

As a result, Proterra believes they have an addressable market of $225 billion or 4.4 million commercial vehicles by 2023 and with an infrastructure opportunity of $37 billion charging investment or 40 TWh of annual energy need.

👨‍💻What are the Strategic Resources?

Proterra offers a technology platform that delivers a holistic portfolio of products and services across the electrification ecosystem.

Product Portfolio:

Battery System: designs, manufactures, and tests high-voltage battery packs used in their own portfolio of buses and other commercial uses with customers

Structure: Battery modules have best-in-class thermal and structure architecture, patented flexible battery management systems, and seamless software integration. This ensures multiple widths and heights, scalable lengths, stackable qualities, dynamic voltage options, and versatile designs to be applied across many different commercial vehicles. Battery cells are supplied by LG Chem with a contract that secures ~2 GWh through 2022

Economics: The fourth and fifth-generation battery systems delivered 20% cost reduction and increase in energy density resulting in greater scale performance. Next-generation will deliver 25% cost reduction and domestic supply of battery cells

Benefits: The battery systems minimize space requirements, extend range, ensure higher cargo/passenger capacity, have a long-life span, designed with ballistic-grade materials for any climate conditions or impact, and equipped with preventive diagnostic tools to ensure state-of-the-art reliable safe operations

Electric Drivetrains: designs and manufactures best-in-class drivetrains which impact vehicle performance. The drivetrain consumes the majority of the battery energy since it includes the traction motor, inverter, controller, and transmission

Structure: Multi-speed (2-speed) drivetrain that delivers 550 horsepower capability. The company is planning to develop 4-speed transmission in their new generation of drivetrains to meet any terrain conditions

Economics: Maintenance costs have been reduced since now EV drivetrains contain less than 20 parts versus 200 parts in traditional gas-fueled cars. Motor weighs less than a diesel engine and can be removed in 4 hours instead of 12 hours

Benefits: The drivetrain outperforms all direct-drive systems by delivering a longer range with 5x efficiency and 2x the acceleration of diesel buses

ZX5 Transit Bus: designs and manufactures their electric bus which launched in 2014. To date, there are 550 vehicles on the road today with 16 million cumulative miles.

Structure: the vehicles come with a variety of batteries sizes 225 kWh, 450 kWh, and 675 kWh with ~329 miles per charge

Economics: 75% less energy per mile than the average diesel bus

Benefits: Low operating costs, high uptime, long-range, greatest horsepower, fast acceleration, and zero tailpipe emission

Fleet-Scale Charging Solutions: designed charging solutions that deliver scalability, autonomous charge docking, and charge management. To date, the company has installed approximately 54 MW of charging infrastructure across more than 425 charge points throughout North America.

Structure: offers four charger capacities for small fleet solutions and 1.5 MW charger for fleet solutions. The system of fleet charges connects directly to medium-voltage power lines reducing costs and inefficiencies from transformers or switch gears

Economics: 50% fewer charges and optimizes charging time and energy costs

Benefits: the Proterra charge dispenser allows for multiple charge points (20-40 vehicles) at a time from one central power control system and enables vehicles to turn into utility grid assets when they are not on the road.

Apex Software: in-house software that optimizes fleet ownership and operations

Benefits: delivers real-time monitoring, diagnostics, analytics, fleet management, over-the-air updates, and smart charging. The software solutions reduce energy costs and maintenance costs giving the customer the lowest possible cost of ownership

Developing Resources:

Proterra holds 57 U.S. patents and had 28 U.S. patent applications pending which expire in 2029 and 2039. The company also holds 24 issued patents and 31 patent applications pending internationally.

The company’s battery research and development laboratory which opened in 2017 is in headquarters in Burlingame, California. The team delivers prototype assembly, environmental testing, life testing, electrical safety testing, and cell lifecycle testing. The max annual capacity in the factory is 345 MWh

The engineering team is composed of battery and charging system engineers that focus on the following technical areas: battery structure, thermal battery management systems, charging systems, high-voltage power distribution

The vehicle engineering team is in Greenville, South Carolina and includes technical expertise in body, pneumatics, mechanical systems, thermal systems, and drivetrains. The factory in South Carolina has a capacity of 400 vehicles and is about 210k square feet

The company has a bus and battery manufacturing facility in Los Angeles at 157k square feet. The bus factory has been operational since 2017 with 280 vehicle capacity. The battery manufacturing facility was completed in 2020 with 675 MWh capacity within 12 months under $20 million. The battery manufacturing facility is also a template to be scaled across the nation near distribution centers for customers

With the cash proceeds the company raises, it intends to reinvest about $300 million in research and development and $345 million in capital investments that further the advancement of their battery technologies, drivetrain platforms, and software services.

Customer Landscape + Partnerships:

Proterra is one of the few electric technology companies that has built and delivered their product portfolio to their customers. Their core relationships are highlighted across the three business lines:

Proterra Powered: Thomas Built Buses (subsidiary of Daimler Trucks North America LLC) – build 1 in 3 school buses in North America, Freightliner Custom Chassis, Van Hool, Komastsu, Optimal Electric Vehicles, and BusTech Pty Ltd. The products range from school buses, coach and double-decker transit buses, and construction and mining contracts

Proterra Transit: 133 customers nationwide which include municipal transit agencies, corporations, airports, and universities. Some prominent names are Foothill Transit – Los Angeles County, Transit agencies in Canadian provinces, University of Georgia, and Harvard

Proterra Energy: Edmonton Transit Services is a large customer that includes 33 charge points totaling about 4.3 MW to support 40 ZX5 Proterra Buses. Additional customers are L.A. Department of Transportation, and Chicago Transit Authority

Battery Partnership: Proterra has strong partnerships primarily with LG Chem and Panasonic as a reserve supplier for battery cells

Only 4 customers accounted for more than 10% of revenue and no customer surpasses 20% of revenue

Resource Deployment + Growth Strategies + Acquisitions:

The company intends to deploy its resources through the following business model and growth strategies:

Deployment Timeline:

The company intends to deploy resources utilizing their manufacturing capacity to produce more than 1 GWh of battery modules and 680 electric buses per year. Proterra has executed their strategy across 130+ communities in 43 states with 550+ vehicles in the road. Here are some milestones the company completed as they expanded:

In 2018: 135 vehicles delivered | 2019: 177 vehicles | 2020: 122 vehicles delivered

In 2018: Battery systems for 3 vehicles sets | 2019: battery systems for 20 vehicle sets | 2020: battery systems for 74 vehicle sets

The company has sold for 2020 a total of 1,000 buses

Business Model and Growth Strategies:

Proterra generates revenue through primarily the sale of electric buses, the sale of battery packs and powertrain systems, the sale and installation of charging systems and related equipment, and sale of spare parts.

*The company recognizes the sale of a vehicle once the customer has accepted it by conducting vehicle inspection and ensuring its operational.

Proterra executes using business development team and channel sales teams across markets. The company has also built strong relationships with public utilities, local governments, transit agencies, and federal government to increase education about their offerings. Based on this model the company is expected to deliver the following financial metrics:

2020E: Revenue: $193M | 2025E: Revenue: $2.6B – mainly driven by Proterra Powered & Energy | 68% CAGR

$750million in backlog and orders

2020E: GM: $8M (4%) | 2025E: GM: $642M (25%)

2020E: EBITDA: $-66M | 2025E: EBITDA: $539 (21%)

2020E: FCF: $-95M | 2025E: FCF: $390M

💪Key Strategic Moats

Scale: Charging solutions represent a large obstacle for commercial EV expansions. Proterra has integrated fleet charging solutions with their APEX software to deliver fleet modeling/planning, energy storage capability, and fast charging capabilities with up to 40 vehicles at a time. The company removes barriers for customer expansions in the EV space

Value Chain Innovation: Proterra utilizes their core three business lines to deliver a full package of solutions for their customers. The customer receives customized battery systems, drivetrain systems, charging infrastructure, and reliable and proven commercial vehicles (buses). Customers can be assisted through development and integration of the vehicles and the supporting components

Contracts with largest OEM customers in the space: Daimler is the world’s largest commercial vehicle manufacturer. The company has active programs with two subsidiaries, the market leader of school buses and the market leader of class 4 and class 6 last-mile delivery vans. Prototypes are already built with full production in 2021

Proven Ecosystem: Proterra is the first commercial electric vehicle company in North America with proven on-road experience of their 100% EV buses. They have delivered electric buses for over 10 years and integrated battery packs for more than seven years. The company has 16 million cumulative miles of actual performance in the market.

Specialized Team: The company has 614 employees with ~140 engineers featured on LinkedIn. The core engineering team has top industry human capital with battery engineering and charging systems experience

⚠️Key Critical Risks

Competition: The company faces competition from all three business lines:

Traditional diesel, hybrids legacy bus/truck companies such as NFI Group Inc, Gillig Corporation, Nova Bus Company are also entering into the EV space. Arrival and Rivian are also comparable EV companies with bus and van prototypes and large contracts with UPS and Amazon

The company also faces competitors in the battery technology space from Romeo Power and Akasoi, and electric powertrain alternatives from Cummins ($36B Market Cap)

From a charging infrastructure space companies such as ChargePoint, and Rhombus pose certain market share risks

Limited number of suppliers for critical components in the supply chain: Lithium-ion cells that are used to manufacture battery packs are dependent on LG Chem. Additionally, the sole source supplier for the bus body is TPI Composites, Inc

Transit Buses is heavily dependent on government funding: Transit customers are transit authorities that depend on government funds. 70% of the transit buses that ordered buses were recipients of grants through no emission vehicle programs

Revenue heavily dependent on a small set of customers: Southeastern Pennsylvania Transportation Authority, Regional Transportation Commission of Washoe County and District Department of Transportation accounted for 15%,12% and 12% of total revenue in 2018. In 2020, 50% of electric buses were delivered to Port Authority of New York and 40% of the buses delivered to City of Edmonton

🧬Team DNA and Vision

Key Leaders: Proterra’s team reflects strong professional backgrounds with industry leaders from Tesla, Apple, Honda, Bosch, GM, and Bloom Energy.

Jack Allen - Chairman and CEO: Previous leader at Navistar International Corporation, conglomerate trucking/bus company, with three decades of experience

Gareth T. Joyce - President of Proterra Powered and Energy: Previous leadership roles in Delta Air Lines, and Mercedes-Benz

Dustin Grace - Chief Technology Officer: Built the engineering team responsible for power systems development and energy storage. His focus is on battery technology, and he brings nine years of powertrain development expertise from Tesla

Joshua P. Ensign - Chief Operating Officer: Previous leadership as Vice President of Manufacturing at Tesla. He was responsible for ramping up Model S production, production launch of Model X, and building the seat manufacturing factory

Richard Huibregtse – Senior Vice President of Engineering: Previous leadership as SVP of Engineering at Edisun Microgrids, developer of distributed solar power solutions

Vision: Proterra’s mission is to advance electric vehicle technology to deliver the world’s best-performing commercial vehicles. The company has embedded innovation in their DNA with a heavy engineering team and technology across the value chain.

🤯Key Insights for Time Investors:

Market forces have reacted from the alignment of government, communities, companies, and technology.

States are targeting 100% zero-emission for last-mile-delivery and heavy-duty trucks by 2050

The world’s largest logistic companies (UPS, FEDEX, AMAZON) are transitioning their fleets to electric

85% decline in battery costs and 40% decline in operating costs versus diesel vehicles

Unlike passenger vehicles, commercial vehicle electrification poses different challenges such as high mileage, weight, and lifecycle requirements. Proterra has designed, manufactured, and proven the formula to accomplish this since 2014.

When it comes to electrification, the focus should be in the technological advancements that ultimately monopolize the value chain. Proterra not only builds their vehicles, but they also build their proprietary drivetrains, and more importantly the end-to-end charging infrastructure needed for scale.

Large R&D is being invested to domestically produce battery cells (similar to Tesla)

Best in class battery systems enables greater range and weight loads with lifespan of 4k cycles

Proterra has proven their products are successful with ~16M real-world miles, 450+ charge points, and 1000+ vehicle sales

Proterra is built with innovation at the foundation and is positioned to become the “Tesla” of the commercial space.

Investor Lineup:

Daimler Trucks + Tao Capital Partners

BMW i Ventures + Edison Energy + Constellation + Kleiner Perkins Caufield & Byer + Federal Transportation Administration

Chamath Palihapitiya – Social Capital (PIPE Investor)

Post SPAC Merger with ACTC, ~68% ownership will remain with existing Proterra shareholders

-Igli G. Laçi

If you like the content please make sure to share this newsletter, share this post, follow me on Twitter, and/or subscribe (if you have not already)!

Additional resources and sources I used for all the Time Investors (Leeeetttsss Gooooooo!!!)

Proterra (ArcLight Clean Transition Corp) Form S-4 SEC Form

Proterra Investor Presentation

Proterra Conference Call

Chamath Palihapitiya - One Page Summary

UPS Electrification Whitepaper

Proterra Battery Technology Video

Disclaimer: The companies mentioned in my newsletter are not investment advice. This is simply information researched to help you learn about industries and various public companies

Subscribe at equitybreakdown.substack.com

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Listen now (19 min) | WELCOME BACK TIME INVESTORS! This is Equity Breakdown, where you will find short, no b**t overviews of public companies! Join me in breaking down industries and companies that will become leaders embracing disruptive technologies and innovating change!

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Welcome to Equity Breakdown, where you will find short, no b**t overviews of public companies! Join me from the beginning and lets each develop our investment philosophy that ultimately generates personal growth! Subscribe Now!

“The true currency of life is time…and we have all got a limited stock!” - Robert Harri

To all the Time Investors:

I came across a quote recently from Robert Harris that states, “the true currency of life is time, and we’ve all got a limited stock!”. Now, this is an intuitive concept, but do we really step back and realize the impact and value of time and how that relates to our personal growth. Last week Pomp, wrote about a concept called “Time Billionaires” in his daily newsletter that was referenced from an episode with Tim Ferris and Graham Duncan, the co-founder of East Rock Capital. Here is a quick excerpt below:

Graham Duncan: I was listening to a guy introduced a speaker a while ago. And he was saying people don’t really understand the difference between billionaires and millionaires. He said a million seconds is like 11 days. A billion seconds is 31 years. And I was thinking of time billionaires that when I see, sometimes, 20-year-olds – the thought I had was they probably have two billion seconds left. But they aren’t relating to themselves as time billionaires…What’s startling about the picture – again, to this question of how long a billion seconds is – is how short it is.

This concept is profound, and it inspired me to think about what I would like Equity Breakdown to evolve into as we build a repository of knowledge in the community of modern investors focused on disruptive industries. Moving forward, I would like for all of us to consider ourselves not just value investors, trend investors, growth investors, or contrarian investors, but more importantly Time Investors.

Now, let us define a Time Investor?

A Time Investor focuses on using the true currency, time, to build fundamental long-term wealth. As a Time Investor, you invest in society by finding wonderful companies in disruptive industries and then use the currency of life, time, to deliver strong returns. A Time Investor needs to maintain five key important principles:

Always have an owners’ mindset

Have an open mind with an independent point of view and always be willing to change, refine, or re-design with important and new information

Understand the most valuable currency of life, time, and build a relationship with it knowing full-fledge you are investing for decades

Poses composure and stronger risk tolerance because of the strong level of honest competency

Have the courage to act big when you experience a painful feeling of being right

The logic is simple and clear, but very difficult to maintain. This leads us to one key question:

What investment framework should a Time Investor deploy to achieve returns?

To equip Time Investors in the game that will be played, I am adopting an investing framework that will be centered on one key term, strategic resources. Professor Baruch Lev from NYU Stern sets the stage by defining the three core qualities highlighted below that makeup strategic resources in his book, “The End of Accounting and the Path Forward for Investors and Managers”.

Strategic Resources provide value, rarity, and are difficult to imitate:

Valuable: Assets create a stream of benefits, exceeding costs, such as patents for profitable products and services.

Rare: Assets are limited like the Mountain Pass rare earth mining center in North America.

Difficult to imitate: Assets can not be replicated easily and require significant resources to be acquired or imitated by competitors.

As outlined in the theory of the firm, the purpose of the existence of a company is to maximize sustained economic profits. To maximize profits, the company needs to achieve sustained competitive advantages. To achieve sustained competitive advantages, the company needs to efficiently operate its strategic resources.

Our investment philosophy, which is investing in society, will be like a mosaic where we will focus on growth, value investing attributes, and more importantly strategic resources. This will support our ability to identify and break down long-term investment opportunities that we believe will have the strategic resources to lead and dominate in disruptive industries. The approach will be an “inside-out process” that will map a visual framework of what these resources are, how they are deployed, and what value they generate for the company.

The Strategic Resource Breakdown Investment framework will focus on providing Time Investors with five key attributes:

An inventory of strategic assets, characteristics, and value in their industry. Examples of these will be patents, brands, landing rights, disruptive technologies like mass-producing 3D printing systems, or proprietary algorithms. To generate value an organization must build an organization around its strategic assets.

A map that links strategic resources and companies’ investments. We will build information that focuses on R&D expense and SG&A expense to understand the company’s investments in developing new technologies, acquisitions, employee development, or internal infrastructure team development. Whether a company fundamentally develops its technology or acquires it, the map will give us an idea of how much benefit will be generated, how quickly, and the risk level.

Identify the strategies management is taking to mitigate risks associated with strategic assets. Certain risks can be caused by disruptive technologies, regulation, management shifts, and infringement. An organization that becomes complacent because they currently have strategic assets is at risk of losing the game of wealth. The pace of disruption has accelerated and thus strategies that protect these resources are critical.

Track the company’s value by outlining how the strategic resources are deployed. Rather than focus our efforts on revenue and earnings which simply reflect what has already happened, we will build knowledge on what path was taken to create these outcomes. Ultimately, this is the best part of the recipe because it will truly give us a picture of whether management’s strategies are continuous or short term. As a pricing expert, I have seen how my organization gets excited when they increase profits by simply increasing prices. Unfortunately, that is not the right way to play the game of wealth when understanding the benefits of time.

Quantify the managers’ actions in creating, preserving, and deploying strategic resources. An effective management team needs to manage the entire chain of developing, protecting, and deploying strategic resources. They need to exhibit skills in competitive strategy. Professor Baruch Lev argues that today's company’s reporting does not provide an investor benefit by expensing R&D, or major strategic investments and ignoring the value of changes in strategic resources over time. As a result, a specific cashflow formula highlighted below will remove that ambiguity and quantify a company’s actions indicating systematic value creation by the company.

Residual Cashflow indicator:

Cash Flow from Operations +

Cash Flows from investments in strategic resources (R&D, Brands) –

Cash Flow capital expenditure (average over 3-5 years) –

Cost of Equity of Capital =

The value created by the management team to develop, protect, and deploy strategic resources

*Professor Baruch Lev and his research team have shown that this “lemonade stand” profit concept, beats the earnings bottom line and yields the highest returns.

For a visual framework please see below the proposed investment framework that we will apply to companies that indicate sustainable growth, growing residual cashflow, effective management team and a strong portfolio of strategic resources.

The Strategic Resource Breakdown will be applied across disruptive industries to identify common attributes across assets and then extrapolated to the companies that satisfy a strategic resource scoring system built on the data collected within each industry.

Cathie Wood for Ark Invest, clearly supports that humanity is experiencing the largest technological transformation in history across many sectors concentrated in blockchain technology, healthcare, robotics, energy storage, and artificial intelligence. The era is being compared to that of a century ago when the combustion engine, electrification, and communication technology of the telephone swept through the economy. Comrade Lenin put it best, “there are decades where nothing happens, and there are weeks where decades happen.”

The investment framework proposed will breakdown the true narratives of companies in disruptive industries and allows us to make decisions on a company’s potential role in the future.

Equity Breakdown will deliver for Time Investors no b**t overviews and ultimately reveal the critical assets of companies through deep research in simple, short, and digestible forms.

Get ready guys, you are about to see from the beginning what it takes to transform from Level 1: Apprentice to Level 4: Master, in a very non-traditional way!

-Igli

You can access and download the detailed report which will include the summary for your records.

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

Additional resources for all the Time Investors (Leeeetttsss Gooooooo!!!)

Professor Baruch Lev - The End of Accounting

Pomp Newsletter - “Time Billionaire”

Graham Duncan Blog - “Start a new investment framework”

Ark’s Invest - Investment Process

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Welcome to Equity Breakdown, where you will find short, no b**t overviews of public companies! If you would like to receive it directly in your inbox, subscribe now!

To all the Equity Contrarians,

We are living in a golden age of massive technology disruption spanning from blockchain technology, genome sequencing, artificial intelligence, robotics, energy storage and the topic for today, 3D printing. The manufacturing industry is a $12.8 trillion monster that is prime for change. A new method is necessary that ensures domestic supply chains, custom designs of products at mass scale, and green production. 3D printing is now back on the radar to bring about this revolution and bridge the gap between design and production, empowering designers, and producing products with new architectures and less waste. There are many players who have existed in this space for a while but without the ability to achieve mass production. Today we will breakdown Desktop Metal, ($DM), a company that wants to revolutionize 3D printing by introducing mass-scale production.

Business Summary:

Desktop Metal is a manufacturing company that produces metal 3D printing systems. The company is leading the industry with additive manufacturing technologies with a focus on the production of end-use parts. Desktop Metal was created in 2015, by a team of renowned experts in materials science, mechanical engineering, and metallurgy to advance metal 3D printing to be faster, less complex, and affordable to be used in the most scalable fashion. The company delivers a solution that starts from product development to ultimately mass production across various industries, making it the first 3D company that is focused on volume production of end-use parts instead of just design and prototyping.

Technology Platforms: The company will aim to change the way parts of almost all materials are designed, manufactured, and sold around the world. They will accomplish this feat with key technology platforms:

Production System: first 3D printing system for mass production. The Single Pass Jetting technology makes it the fastest metal 3D printer in the world with the highest capacity. This is scheduled to ship in volume 2H 2021. The system ensures excellent part quality, competitive part costs, repeatability, and supports a variety of metals as inputs.

Studio System: is the world’s first office-friendly system designed to 3D print for the shop floor. Engineer teams can produce highly complex parts without leaving the office at 10x less cost than traditional metal 3D printers. The system uses Bound Metal Deposition and does not require lasers and powders. With power, internet connection, and CAD you will be producing immediately. The studio has been shipping in volume since Q4 2018. The key phrases to remember here are high-quality parts, easy to use, designed for the office.

Shop System: provides additive manufacturing to the machine shop market. Businesses can produce batches of complex, end-use metal parts. The system is easy to use and operate and ensure high productivity of 10x the speed legacy PBF additive manufacturing. Volume commercial shipments to begin in Q4 2020.

Fiber: first desktop 3D printer to produce high-resolution parts with “aerospace/industrial grade” fiber composite tape. Customers can print strong, stiff parts in a broad range of materials used in industrial Automated Fiber Placement ("AFP") processes. This is scheduled to ship in volume Q4 2020.

*Software is also a critical component streamlining the process of setting up to print.

*120+ patents issued or pending

The company’s mission is “to make 3D printing accessible to all Engineers, Designers, and Manufactures.”

Industry:

The global manufacturing industry is a $12 trillion behemoth (60% of US GDP). Currently, there are significant limitations in conventional machining methods. High upfront costs of tools/equipment, long lead times for design and production, design limitations, lack of customization, waste, and minimum order quantities to achieve cost efficiencies. 3D printing, or additive manufacturing, has emerged as the solution. The following benefits stem from the use of 3D printing:

Design flexibility

Assembly consolidation

Supply chain evolutions

Sustainability

Mass customization

End-use production

According to research from ARK, 3D printing will revolutionize manufacturing, growing to $97 billion in 2024 at an average annual rate of 65%. In its infancy, 3D printing 1.0 was focused on design and prototyping which lacked scale. Now, 3D printing 2.0 has emerged with its primary focus on mass production and end-use parts. According to E&Y global survey, 83% of industrial businesses planning to apply 3D printing technologies which resulted in a spending boom that has doubled from $6 billion to $12 billion from 2016 – 2019.

Market Opportunity:

Desktop Metal is positioned to lead the industry in deploying 3D technologies for scalable, end-use production. The company provides easy-to-use, high-quality, integrated manufacturing solutions built on hardware, software, materials, and services. The legacy 3D technologies have reached high penetration in the $12.5 billion prototype market. Desktop Metal has a TAM of $490 billion with growth expected to transform from $12 billion in 2019 to $146 billion by 2030.

Business Model Landscape:

Desktop Metal generates revenue from the sales of their products. Studio Systems was their first product that was shipped in Q4 of 2018. To date, the company has generated 86% of the revenue from selling Studio System with consumables such as metallic/ceramic materials and 14% from software and support services. The company is in the late stages of developing the three additional 3D systems which have already been installed in early customers.

Desktop Metal markets and sells 3D solutions through a global distribution network. The team is heavily resourced towards product development and as a result majority of revenue results through sales to resellers, who in return resell the company’s products and provide services to the customers.

The following customer landscape is created through Desktop Metal’s platform:

Primary customers are global distribution network of 80 resellers experienced in the 3D space and across 60 countries

Customers range from automotive, aerospace, healthcare, consumer products, heavy industry, and machine design. No single customer accounts for more than 10% of revenue.

BMW and Ford have provided strategic investments

Adidas, Bosch, Google, U.S. Army, Lockheed Martin, StanleyBlack&Decker

89% of the revenue is generated in North America and Europe.

Competitive Strengths (Moats):

Desktop Metal has classified a series of core strengths to dominate the additive manufacturing space:

Technology Platform: The company has three core key print process innovations that are unique to the market:

Single Pass Jetting | Bound Metal Deposition | Micro Automated Fiber Placement

The company has developed proprietary sintering technology, which means to compact and form solid objects, with software to make strong end-use products in an office setting.

Team: The team is founder-led with the majority being engineers in mechanical engineering, materials science, software, robotics, and industrial design. More than 25 employees hold PhDs.

Global Distribution Network: The network of resellers is global with vast experience across digital modeling and 3D printing. The network brings an existing base of customers and supports all commercial functions to generate revenue.

Diverse Product Portfolio: The company provides four system solutions that are defensible and difficult to replicate. The company offers office-friendly, entry-level, low-volume production of metal parts to industrial, high-end mass production.

Printer Speeds & Turnkey Solutions: Production system can achieve speeds of 12,000 cubic centimeters per hour allowing customers to print millions of parts per year. More importantly, the company also maintains consistency and accuracy. Additionally, with software and a special furnace, it enables customers with minimal 3D printing experience or materials expertise to process complex metal parts entirely in-house without third-party equipment required.

Green Manufacturing: The company delivers mass-scale production with near-zero waste. The vast majority of metal is transformed into parts and the powder produced is reusable.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: Desktop Metal is active in the metal filament space and binder jetting space.

Metal Filament Space: BASF, Apium, Triditive

Binder Jetting: HP, Stratasys, Digital Metal, 3DEO, ExOne

HP has metal 3D printing systems in development, likely to be a binder jetting system

Business Model dependence on recurring revenue: Purchasing input metal materials or related service contracts to be incorporated in the future 3D printing systems orders is essential. Customers are sensitive to pricing and demand needs to continue for the Production systems which directly impact the input metal materials.

Dependence on Network of resellers: Company does not have channels that directly sell to end-customers. Heavy dependence on the 80 sellers places the commercial efforts at heavy risk.

Reservations for the Production System may not convert to orders: There are currently 90+ reservations with shipment visibility through the first half of 2024E. The current economic climate created by Covid and price points does create risk with customers’ ability to follow through on purchases. The Production system is necessary for mass production.

Team:

The company is still founder based and is composed of the following key members:

Ric Fulop, Founder, and CEO: Prior, Fulop was GP at North Bridge Venture Partners and Founder of A123 Systems, Inc., Boston’s largest IPO and one of the largest automotive lithium-ion suppliers

Steve Billow, President: Prior, Billow served as VP and CTO of Inkjet Solution of Electronics

Jonah Myerberg, Co-Founder and CTO: Prior, Myerberg served as Director of Technology for A123 Systems.

Leo Hindrey, Jr., Chariman and CEO of Trine Acquisition Group: Hindrey is an accomplished leader and investor. He has served as CEO of AT&T Broadband, CEO of GlobalCenter Inc, and CEO of the YES Network, and recognized as one of the cable industry’s “25 most influential executives”.

6 Co-Founders (4/6 – MIT Professors)

Existing DM shareholders will retain 74% of the company with SPAC trust shares at 12%,Founder shares at 2%, and Pipe Equity at 11%.

Financial Performance:

The company post-merger with TRNE will have an implied Enterprise Value of $1.8 billion representing 1.90x 2025 revenue.

The company has achieved $26.4 million in revenue for the year 2019, a (2,457%) increases over the $1.0 million earned in 2018. This instant increase is a direct benefit from a full year of product shipment. More recently the company earned $5.5million in six months ended 06/30/20 resulting in a (-54%) YOY from $12.1 million. The drop in sales in 2020 was related to the Covid economic shutdown. However, the company is expected to hit $15-$25 million in 2020 and $941 million by 2025.

As of 12/31/2019, and 2018, the company’s net losses were $103.6 million and $121.4 million. Gross margins for the business as of 2019 are -$24.4 million. The company is expected to achieve positive gross margins by 2021 of $19.8 million (25.6%) and $508 million ( 54%) by 2025.

The business is asset-light with completed manufacturing and systems ready for delivery. Reservations amounting to ~$500M of revenue is scheduled in the span of five years.

Post-transaction the company will be equipped with $625 million of cash and $9.9 million in debt.

The company provides the following forecasts:

Revenue - 2025E: $941.5M (211.6% CAGR)

Gross Profit – 2025E: $508.3M (54.0%)

Adj EBITDA – 2025E: $268.2M (28.5% margin)

Free Cash Flow – 2025E: $230.5M (200% CAGR)

EV / Revenue – 2025E: 1.9x

Desktop Metal plans to continue growth through the following strategies:

Strategic Acquisitions: The company is equipped with cash to accelerate market penetration and build a long virtuous cycle between parts, materials, and printers. This will help achieve vertical integration.

10+ opportunities in contract

60+ opportunities ~$2B revenue opportunity identified

Expand service related to parts: The company intends to manufacture parts for sale to customers. This will allow customers with low CAPEX abilities to purchase parts before fully integrating in-house production through the platform systems Desktop Metal offers.

Extend distribution channels: The company will increase its direct sales efforts to expand its footprint with Fortune 500 companies. The majority of the networks are focused on North America and Europe. Currently, the company is generating only 11% revenue in Asia-Pacific, with strong opportunities in the Middle East and Africa.

-Igli

You can access and download the detailed report which will include the summary and a company info-graphic for your records.

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

Additional resources for all the Equity Contrarians (Leeeetttsss Gooooooo!!!)

Desktop Metal One Page Infographic

Desktop Metal Company Filings

Desktop Metal Chamath Palihapitiya One Page Memo

Desktop Metal Investor Conference Call Transcript 08.26.2020

Desktop Metal Investor Presentation

Desktop Metal Timeline Achievements

NewsThink 3D Printing Industry Video

Desktop Metal Virtual Tour

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Welcome to Equity Breakdown, where you will find short, no b**t overviews of public companies! If you would like to receive it directly in your inbox, subscribe now!

To all the Equity Contrarians,

One thing that is certain after this pandemic, is that consumers purchasing behavior is permanently shifting online. As e-commerce is exploding, key features such as trust, transparency, frictionless spending, and consumer analytics will propel certain Fintech players to dominate the $5.4 trillion global e-commerce market. There is a company that will be going public in December, co-founded by a former co-Founder of Paypal, that claims to be have the exact recipe for success in the lending space. Tonight we will breakdown Affirm, (AFRM), a company that wants to transform the way consumers buy and merchants do business.

Business Summary:

Affirm is a fintech company that provides installment loans at point-of-sale purchase for US Consumers. In fact, I was on the verge on purchasing a Peloton bike thanks to Affirms special offer, 0.00%, 39 months, $48.59/mo, but my impulse was tamed. The company offers online and mobile platform for lending and credit services for customers to purchase items and pay over period of months. The company wants to accomplish three goals with their technology:

Deliver trust and transparency

Responsible and confident spending for consumers

Fluid conversions and sales growth for merchants

Platform Features: Affirms platform consists of a point-of-sale payment solution, merchant commerce solutions, and consumer-focused app. The following features are present:

Consumers:

Integrated Checkout – pay overtime with 0% interest

Virtual Card – widely accepted payment method

Split Pay – built fixed payment plans with specific time frames for purchases under <$250

Market Place – Personal product recommendations

Savings – Insured interest-bearing account

Merchants:

Merchant dashboard: highlights transaction data, manage charges, review analytics on product performance and consumer purchasing behavior

Brand Sponsored Promotion: Suppliers can provide brand-specific promotions and offers can be personalized based on consumer analytics

Integration: Direct API, provides smooth site integration into payment and product pages with dedicated support team.

Technology: The tool leverages rich data landscape from deep behavioral, financial, shopping, and payment data as well capabilities such as fraud detection, credit check functionality, and pricing.

The company’s mission is “to deliver honest financial products that improves lives”.

Industry:

Commerce is experiencing transformation from positive effects of technology. The simple interaction between consumers and merchants are now changing after years of limitations. In the past, consumers experienced complex payment options, opaque fees and penalties, and lack of flexibility to complete or tailor purchases. Merchants on the other hand were also limited to offering consumer friendly solutions, discounts were not used based off data insights resulting in loss of brand value, and they received no benefits from old legacy payment networks. New trends have now emerged in the industry tackling the problems faced in the past

“Buy now pay later” market expansion: People want flexible payment options. Based on Wordplay’s 2020 Global payments report, “buy now pay later” is the fastest growing e-commerce platform. In 2023, it is expected to be 3% of the ecommerce payments. In EMEA, it already accounts for 6% of the e-commerce payment network, with expected growth to 10% by 2023.

Gen Z and Millennials: 25% of Millennials do not carry credit cards. Over 160 million people in the category prefer to build relationships with brands and receive engagement. According to a Harris Poll in 2020, 64% of Americans aged between 18 – 34 years prefer financial products through a technology platform.

Market Opportunity:

Online sales grew 20% to $3.4 trillion in 2019 and accelerated in 2020. By 2023, it is estimated to grow to $5.8 trillion. E-commerce represents 14% of total retail sales and in 2020 it has jumped to 16%. Based on Statista, 70% of Millennials prefer shopping online as well. This market is prime for growth and Affirm is positioned to take a position. The TAM is broken out in a couple of segments:

E-Commerce: $600 billion dollar market opportunity with potential expansion to $1 trillion by 2023.

Omni-Channel: $7.6 trillion was processed by credit cards in 2019. Virtual card and consumers being able to pay in store with application will shift this opportunity.

Merchant Marketing: According to B2B Lead, $1 trillion is spent by merchants to acquire customers.

Business Model Landscape:

Affirm earns revenue from both merchants and consumers.

Merchants: Affirm receives a fee conversion of sales and offering of payment options. This revenue stream amounts to ~50% of revenue.

0% APR financing represented 43% of GMV

Consumers: Affirm receives interest revenue on loans that are purchased from their partnered banks and currently amount to ~37% of revenue.

Consumers are not charged deferred, compounding interest fees, late fees, or penalties.

Interchange fee from the use of Virtual cards which represented 4% of revenue

Bank Loans: The company generates ~9% of revenue from gain on sale of loans.

The following customer landscape is created through Affirm’s platform:

Consumers:

The company has 6.2 million consumers as of 09/30

47.8% are Millennials, Gen X (32.3%), Baby Boomers (12.4%), and Gen Z (6.8%)

3 million out of 230 million Millennials participating in the platform

68% of consumers accessed Affirm through mobile device

Merchants:

6,500 merchants integrated

Merchant base has expanded by 84%

Dollar-based merchant retention has exceeded 100%

Customers are concentrated in industries such as, sporting goods, furniture and homewares, travel, apparel, accessories, consumer electronics, and jewelry (Neiman Marcus, Peloton, Inntopia, NutriBullet, Bonobos, Shopify, Eventbrite, and etc)

Competitive Strengths (Moats):

Affirm has classified a series of core strengths to dominate the lending space:

Network Effects: As consumers increase in using Affirm, merchants will gain significant value by understanding consumer insights. This will attract more merchants to participate. As more merchants integrate, better solutions are offered which attract more consumers. The ecosystem expands resulting in increased efficiencies.

Engineering Team: 47% of the employees are in technology or engineering related roles. Affirm can be easily integrated through their direct API regardless of the size of customer. Additionally, they designed their own ledger “to handle point-in-time reporting on millions of concurrent simple interest obligations. “

Proprietary Risk Models: The company prides itself on assessing risk better than competitors at a transaction level. The company approves 20% more customers than competitors and resulted in a weighted average delinquency rate of 1.1%. The company can quickly and accurately assess, price, and manage risk.

Technology Infrastructure: The infrastructure to source, aggregate, protect, and analyze data is considered a moat. The company uses 7.5 million loans and 6 years of repayments to train their models. The company can leverage SKU-level data and with their claims on ML capabilities can detect fraud, price rick, and offer custom solutions to consumers.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: The company’s primary competition is legacy payment methods, such as credit and debit cards, mobile wallets, and other pay-over-time solutions

JP Morgan, Bank of America, Capital One, PayPal, Afterpay, and Klarna

Revenue concentrated in one Merchant Partner: Top merchant partner, Peloton, represented almost ~28% of total revenue. Top 10 Merchants represent 35% of revenue. If the home fitness trend fades this can severely impact Affirm.

Agreement with Originating Bank Partners is non-exclusive and short term: Cross River Bank originates a substantial amount loans that are present in the platform. The current loan program agreement ends in Nov. 2023 and they do not prevent the bank from working with competitors.

Funding Sources are key to supporting Affirm Network: Capital efficient fund model is key to provide a successful commerce platform. If funds seize due to economic conditions or loss of banking relationship, then Affirm cannot offer the flexible payment solutions that are core to its business.

Team:

The company is still founder based and is composed of the following key members:

Max Levchin, Founder and CEO:Prior, Mr. Levchin co-founded PayPayl and served as Chief Technology Officer. He then founded Slide, a personal media sharing service, and Glow, a women’s health company.

Libor Michalek, President, Technology: Prior, Mr. Michalek served as Engineering Director at Youtube and Google and Chief Technology Officer at Slide.

Sandeep Bhandari, Chief Risk and Strategy Officer: Prior, Mr. Bhandari served as Chief Credit Officer at LendingClub Corporation.

Financial Performance:

The company has yet to release its target raise during its IPO debut but based on some past rounds we can see an increasing pattern. In 2019 the company raised $300 million at a weighted average of $13.18. More recently in their Series G, they raised $500 million at a weighted average share price of $19.93. With current outstanding shares this puts the speculative value of the company between $2.3 billion to $3.3 billion.

The company has achieved $509.5 million in revenue for year fiscal year ending 06/30/2020, a 93% YoY over the $264.4 million earned in fiscal year ending 06/30/2019. For the three months ended September 30, 2020 the company achieved $174.0 million representing a 97.9% increase YoY from $87.9 million. As of 06/30/2020, and 2019, Affirm has yet to be profitable with net losses of -$112.6 million and -$120.5 million.

Affirm however is showing significant growth. The Gross Merchandise Volume (measures volume of transactions) as of FY 06.30.20 increased by 76.9% from 2018 to $4.6 billion and 626% from 2017. The company also uses a key metric known as contribution profit to highlight growth unit economics of their transactions in their platform. As a result, they remove technology, data analytics, sales, and marketing, general administrative, and loss on loan purchase amount expenses from their operating loss. This results in a $180 million (3.9%) contribution profit over the $4.6 billion gross merchandise volume in 2020.

Affirm also has experienced increased customer engagement with 77% increases YoY in 2020. Transactions per active consumer has slightly increased as well. Based on the most recent consumer base, repeat consumers spent an additional $2.2k in the next 12 months after making their first purchase on Affirm.

As mentioned, the company does depend on funding relationships with banking partners to continue scale and ensure low consumer acquisition. To date they have $4.2 billion of funding capacity.

Affirm plans to continue growth through the following strategies:

Expand to Higher Frequency Purchases:

Consumer Reach: Increase brand awareness through different channels with additional customer features such as managing debt obligations as well.

Merchant Reach: Affirm will be working with Shopify so U.S. merchants can offer buy now, pay later to their customers from a B2B perspective.

Expand to New Markets in Asia

-Igli

You can access and download the detailed report which will include the summary and a company info-graphic for your records.

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

Additional resources for all the Equity Contrarians (Leeeetttsss Gooooooo!!!)

Affirm One Page Infographic

Affirm Company Filings

Affirm Blueprint (Medium Article)

Affirm Pitchbook Analysis

Affirm CEO Interview on the Future of Credit

Affirm Company News

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Listen now | To all the Equity Contrarians, As our economic infrastructure transforms incorporating technologies like wind turbines, electric vehicles, drones, or any advanced motion technology, certain rare minerals become strategic assets to maintain a competitive advantage in the near future. A key component for these technologies to function is through the use of magnets derived from rare earth minerals. However, rare earth minerals are hard to get to and dispersed in specific locations on the planet, with a high concentration in China. Now there is a company that aims to balance the scale of power and ensure the U.S. regains its title in the production of rare earth minerals and more importantly the magnets that will fuel the 21st-century technology applications. Today we will breakdown

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Listen now (16 min) | To all the Equity Contrarians, One of the most anticipated IPO’s of the year is finally happening. This would represent the third-largest IPO of the year after Snowflake’s snowstorm and Bill Ackman’s Goliath-like SPAC. Tonight we will breakdown Airbnb, (ABNB),

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To all the Equity Contrarians,

Last Sunday, I launched the Community Pick of the week to make sure everyone is part of the process. The results were amazing and I would like to thank you all for participating. This will be a weekly survey that will be sent out every Sunday, so please keep them coming. The responses were rich ranging from growth investments to value investments, and also a desire for ETFs.

The overwhelming choice was narrowed down to a healthcare company that is using technology to personalize healthcare and reduce costs. This company has announced to merge with SPAC IPOC sponsored by Chamath Palihapitiya. Today we will breakdown Clover Health (IPOC), a company that wants to deliver “the right care, in the right place, at the right time, to the right person.”

Business Summary:

Clover Health is a health insurance company, offering a Medicare advantage plan to the patients. The company is utilizing its leverage and access to data to shape the healthcare system. The founders, who are technologists and veterans in the healthcare space, realized that currently traditional healthcare is plagued by legacy technology/processes, and focused on financial results. Their conclusion: “Healthcare is broken” and it empowers the wrong people. As a result, the center of their strategy is the deployment of technology that focuses on improving patient health. The company empowers two key groups:

Empowers people with high-quality healthcare and more choices

Empowers physicians with technology tools to deliver personalized, data-driven care

Technology Features: The company’s secret sauce is centered around their software called Clover Assistant, that utilizes machine learning to deliver data-driven patient care. The free software platform is centered on three approaches:

Synthesis: Collects a variety of healthcare data sources (claims data, medical charts, medication data, diagnostic data, and EHR-generated data) that is personalized

Insights: Intelligent engine that utilizes machine learning and clinically driven business rules to produce actional insights.

Action: Physicians will have actional insights that they can deliver at the point of care with patients.

The platform also has introduced telemedicine solutions (office/virtual visits, in-home visits)

The company’s mission is “to improve every life” by empowering physicians to deliver better, personalized, evidence-based care to patients at scale.

Industry:

Rising costs are an unfortunate reality for the healthcare system in the US. 80% of Americans are suffering from 1+ chronic disease and 68% are suffering from 2+ chronic disease. The total estimated spending in the U.S. healthcare market is $4 trillion and expected to grow to $6.2 trillion by 2028. This spending is a result of a series of challenges that the industry faces:

Incentives are misaligned between health insurance companies, physicians/hospitals, and patients.

Health Insurance Companies are focused on their own profitability by increasing premiums to offset health costs increases. In some severe cases to limit costs they deny health care.

Physicians/Hospitals spend resources on administrative tasks to ensure payment. This removes focus from patient care.

Patients experience the brunt of the system with limited options and poor-quality care.

Fragmented patient data from legacy systems create hurdles regarding personalized health care.

Poor cost-curve and wasteful spending, resulting in reports from the National Academy of Medicine confirming ~30% of health expenditures in 2019 was wasteful amounting to $1.1 trillion.

The industry is demanding next-gen healthcare companies that focus on the following actions:

Breakdown barriers to limited care and ensure high-quality care

Improve cost-curve and reduce wasted spending

Utilize technology platforms to produce data-driven personalized healthcare

Remove friction between physicians and health insurance companies to focus on primary care for patients

Clover is positioned to deliver personalized care and experience through a consumer-facing brand in both the digital and physical world.

Market Opportunity:

Total addressable Medicare Market: 60 million people (65 years older & people with disabilities) amounting to $1 trillion in spending by 2023.

Medicare Advantage Market: $270 billion current spend and expected to grow to $590 billion by 2025

Clover has 8% shares of Medicare Advantage participants across the 34 markets in seven states.

Clover is launching 74 new markets and together with current markets represents 4.2 million in Medicare beneficiaries.

10,000 new people become eligible for Medicare every day which equates to $150M each day, $1B each week, $55B each year.

Business Model Landscape:

The company generates the majority of the revenue based on the number of members enrolled in plans under contract with the Center for Medicare & Medicaid Services. The CMS offers premiums based on enrollment. Additionally, the company also receives revenue directly from enrolled members as well.

Clover utilizes its software platform to accurately capture peoples’ healthcare costs on a timely basis for CMS to ensure revenue to cover the care of patients.

The following customer landscape is created based on the companies “every provider, every member” business model:

The company has 56,815 members across 34 markets, ~73,000 members in 2021E, and ~138,000 members by 2023E

LTV contribution: $5,100 and LTV/CAC: 4.5x

This ratio is high performing due to stable revenue, strong retention, and margin enhancement

The Clover Assistant has delivered a medical care ratio, which measures net medical expenses incurred divided by premiums earned, of 82% from 89.2% in 2020.

For members, the company has created lifetime cost savings of 17% relative to private competitors and 41% relative to Medicare

2,100 physicians use Clover Assistant platform

Competitive Strengths (Moats):

The company aims to improve healthcare with technology as an asset. According to the SEC filings, Clover has identified a series of advantages.

Platform – Clover Assistant: The platform delivers better healthcare outcomes at lower costs. With machine learning, it recognizes evidence-based treatment options and empowers physicians to address them at the point of care. The use of the platform has resulted in 20% fewer emergency room visits and inpatient hospital admissions

Network Effects: As members increase across a greater pool of physician networks, greater insights are created from the machine learning capabilities of the platform. The technology is built to serve all Medicare patients and as a result, will deliver personalized healthcare solutions for patients across the community

Scalability with rapid software improvement: Physicians can onboard within an hour using the Clover software platform. Updates are released on average every three weeks as well to ensure up to date data insights. The cloud-based platform also provides a flexible system which resulted in the telemedicine feature to be built in five days during the pandemic. Physicians have given the platform an NPS of 64, comparable to Netflix and Amazon

Growth Cycle: The company captures and synthesizes data, creates personalized data-driven insights, improves clinical decision making, secures economics with members due to low costs, and ultimately spawns strong organic membership growth

Management Team: The founder-led team has created a mission-driven culture with vast experiences in healthcare and technology. The team contains talent focused on building healthcare technology companies with machine learning, data management, and pharmaceutical/consumer experience. Additionally, the team is composed of individuals with vast clinical expertise.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: Medicare Advantage market is highly competitive. Large national insurers like UnitedHealth, Aetna, Humana, Cigna, Blue Cross Blue Shield, and Original Medicare are key competitors. The industry is experiencing high consolidation between large competitors which will pose market share risk.

Membership is Concentrated in few limited markets: 97.6% of members are concentrated in two metropolitan areas in New Jersey. This creates risk in the event of health care regulation changes, benefit costs, and government reimbursement rates.

Government Regulation: Medicare Advantage premiums paid by the federal government currently represent all the revenues. Profitability is highly dependent on government funding for Medicare programs.

Intellectual Property: As of June 30, 2020, the company does not own any U.S. or foreign patents and had 23 U.S. patent applications pending and 7 foreign patent applications pending. The company is currently relying on unpatented internally developed technology

Economics of New Markets: The company will continue its goal to offer affordable and high-quality healthcare to patients with the goal of impact all Medicare patients. With higher health risks in the concentrated membership pool, healthcare plans are at risk of losing their cost-competitive structure with other larger and more diversified health insurance groups.

Team:

The company’s founders and executive team are veterans in the healthcare and technology space with the addition of the IPOC team post-merger:

Vivek Garipalli, Co-Founder and CEO: Prior, Vivek founded five health care companies before the age of 40

Andrew Toy, Co-Founder, and CTO: Prior, Toy served as Product Director at Google LLC

Dr. Sophia Cheng, Chief Clinical Information Officer: Prior, Dr. Cheng served as Chief Clinical Innovation Officer at CareMore Health, a subsidiary of Anthem

Dr. Kumar Dharmarajan, Chief Scientific Officer: Prior, Dr. Dharmarajan served as Assistant Professor at Yale’s School of Medicine and research faculty at Yale’s New Haven Hospital Center

Dr. Mark Spektor, Chief Medical Officer: Prior, Dr. Spektor served as Chief Clinical Integration Officer at CarePoint Health System

Post-Merger with Social Capital Holdings ownership will be distributed as follows: 67.6% to existing clover shareholders, 18.7% IPOC shareholders, 9.0% to PIPE investors, and 4.7% IPOC sponsors

Financial Performance:

The company post-merger with IPOC, Clover will have an Enterprise Value of $3.7 billion.

The company has achieved $462 million in revenue for year 2019, a 31% YoY over the $358 million earned in 2018. More recently the company is expected to earn $670 million in 2020 representing 45% increase YoY. The company is expecting to maintain a CAGR of 37% based on 2023 projections.

As of 12/31/2019, and 2018, the company delivered net incomes of -$364 million and -$202 million. Gross Margins for the business as of 12/31/2019 were around ~2.5% amounting to 12 million. The company is projecting Gross Margins to improve to ~16.3% by 2023 amounting to $281 million.

The company provides the following forecasts:

Revenue - 2023E: $1.7B (41% growth rate)

Adj EBITDA – 2023E: $16M (0.9%)

MCR – 2023E: 84.0%

EV/Revenue – 2023E: 2.1x

Clover plans to continue growth through the following strategies:

Accelerate adoption of Clover Assistant: Physician adoption of platform has grown by 500%+ due to easy implementation and actionable insights

Expand share in existing markets: Spending for member acquisition will increase, increase awareness to shop during Medicare’s annual election period, and deliver low cost health plans

Business Model: Clover wants to utilize a physician-led framework to expand use of Clover Assistant. The company wants to deploy new innovative Medicare payment models such as Direct Contracting

Expansion in New Markets: New partnership with Wal-Mart to make co-branded Clover-Walmart plans in eight George counties that represented 370k Medicare-eligible beneficiaries

-Igli

You can access and download the detailed report which will include the summary and a company info-graphic for your records.

If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

Additional resources for all the Equity Contrarians (Leeeetttsss Gooooooo!!!)

Chamath Palihapitiya One Page Analysis

Chamath Palihapitiya CNBC - SQUAWK Exclusive

Clover Health and IPOC Company Filings

Clover Health Investor Presentation

Clover Health Founder Letter

Clover Health Clinician Letter

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There is a renaissance brewing and the goal is to target your mind!

To all the equity contrarians,

It’s time for a breakdown!

Mental health is a crisis that will continue to create social and economic burdens in society. Over 300+ million people suffer from major depressive disorders. But recently, the American people have spoken and a record amount of voters have come out to express their views regarding mental health. This week, Oregon voters have successfully passed an initiative, Measure 109 or commonly known as Psilocybin Services Act, to legalize “psilocybin mushroom therapy”. People want an innovative and responsible way to tackle this crisis, and it seems “magic mushrooms” might just be the solution. Today we will breakdown Compass Pathways (CMPS), a company with the mission to use psychedelics to transform mental healthcare.

Business Summary:

Compass Pathway is a biotechnology company that focuses on tackling the mental health crisis through the development of psilocybin therapy and psychological support resources. The company focuses on “treatment-resistant depression” which currently can’t be treated effectively by traditional medicine.

What is Psilocybin? – It is a naturally occurring chemical compound harvested from certain species of hallucinogenic mushrooms. These mushrooms are more commonly known as “Magic Mushrooms”. Usually, the hallucinations are visual and auditory. Early research highlights that psilocybin therapy has significant positive outcomes for people who suffer from depressions. One properly administered dose can create a significant drop in depression symptoms and last for six months.

The company’s primary asset is in a product that was developed named, COMP360. It contains the following features:

The product is a proprietary, high-purity polymorphic crystalline formulation of psilocybin

Optimal dosage is currently under study (1mg, 10mg, 25mg)

The company has developed a Psilocybin Therapy Protocol focused on three stages:

Preparation: An online platform has been created to educate the patients on what to expect from the experience and how to prepare for it. This creates an environment for therapists and patients to communicate.

Psilocybin Administration Session: The session lasts between 6 – 8 hours with a therapist and assistant therapist present. The therapist minimizes any anxiety and ensures psychological stability. Their goal is to allow the patient to be open without fear to the experience. The room is ambient, calm, and comfortable with a curated music playlist.

Post-Administration Integration: After the session, the therapist conducts a series of sessions that allow the patient to process the experience. The ideas and reflection will help the patient come to certain behavioral changes.

Training Protocol: It is important to note that the company has created an effective training program with input from psychologists, psychiatrists, and psychedelic experts. All therapists must be registered as mental health professionals with experience in counseling or psychotherapy.

The company’s mission is to, “create a world of mental wellbeing.”

Industry:

Globally, the World Health Organization estimates that more than 320 million people suffer from a major depressive disorder. Treatment for these symptoms relies on antidepressants and psychological interventions. 100 million are resistant to the current treatments resulting in 800,000 suicide deaths per year. To date, there are only two approved pharmacotherapies in the U.S.: esketamine and a combination of olanzapine and fluoxetine. This has created an industry plagued with underserved patients suffering from depression which ultimately creates a social and economical burden. The industry requires a combination of technology developments to access therapy and new synthetic compounds that go beyond just treating symptoms.

Market Opportunity:

In the U.S., an estimated $200 billion is spent a year on psychiatric conditions. 47% of the cost is directly from the healthcare system and the rest of the cost can be associated with loss of productivity and more severe life. The economic burden rose by 21.5% annually with an estimated $37 billion. Compass has an opportunity to impact 100 million+ lives. Additionally, Johnson and Johnson’s current nasal treatment approved by the FDA, using esketamine, is projected by analyst from Jeffries to generate $3 billion in sales with a price of $4,720 - $6,785. Compass is positioned to offer significant health benefits from a naturally occurring substance and effectively treat a large group of individuals who suffer from mental health.

Business Model Landscape:

The company currently does not generate any revenue and does not expect to generate any revenue from COMP360.

Commercialization Strategy: Upon approval from the FDA, the company will target healthcare providers and clinic networks in the U.S. and Europe. Compass Pathways will offer additional services such as therapist training, an education platform for healthcare providers, implementation services for treatment services, and material support to ensure quality.

A significant amount of investment has been placed in conducting clinical trials and establishing a portfolio of intellectual properties.

Phase I clinical trial: The trial included 89 healthy volunteers with an average of 36 years across both genders. This was the largest controlled psilocybin trial administered with individual support from therapists at King’s College in London. COMP360 was administered simultaneously to six people in the clinic and resulted in no negative trends in cognition or emotional responses.

Phase II clinical trial: The trial will administer active doses of COMP360 (10mg or 25mg) to patients suffering from treatment-resistant depressions. The company has 20 trial sites in nine countries in North American and Europe. This trial will include 216 patients and will focus on identifying the optimal dosage and confirm efficacy and safety. Data will be released in 2021.

Competitive Strengths (Moats):

The company believes everyone has a story and wants to tackle the mental health crisis in the most effective way. According to the SEC filings, Compass Pathway has the following advantages:

Proprietary Psilocybin Compound: In 2018, the company received a Breakthrough Therapy designation from the FDA for COMP360 for treatment. The company has been granted a patent in the U.S., Germany, and UK.

Therapist Training and Protocol: FDA approved request for 1:1 model of visual therapist support during the drug administration process. This protocol is necessary to ensure safety and efficacy of the psilocybin compound. Additionally, the company has created program that to date has trained 65 therapists. Scale will be achieved across academic institutions to ensure accredited training programs for psilocybin therapists.

Digital Technology Platform: The company wants to ensure access to the therapy through digital tools that enable self-care, remote consultations, and remote data collection. Sharing knowledge is key and they want to provide value across the entire process from the initial patient preparation to the effectiveness of the treatment.

Team: The board of directors and investors all provide significant credibility to the firm. The board includes former EVP and Chief Strategic Officer of Otsuka (one of the largest pharmaceutical companies and leaders in the depression sector). It also includes Chief Medical Officer at Theil Capital and former executives/chairmen of large companies like Johnson and Johnson. The direct leadership team also has great experience as biotech entrepreneurs with medical and research backgrounds across pharmacology, psychology, and psychiatry.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: In the U.S. there are currently two approved therapies for treatment-resistant depression patients: Johnson and Johnson’s Spravato (Esketamine) and generic medication with olanzapine and fluoxetine hydrochloride. Additionally, Sage Therapeutics and Axsome Therapeutics are also utilizing these existing therapies.

Controlled substance laws and regulations: The company has been granted government approval to conduct the clinical trials but adverse public perception of psilocybin can severely harm the business. The government has yet to provide specific requirements and restrictions on the use of therapists in the process. Additionally, Psilocybin is still classified as a Schedule I drug with heavy oversight from the DEA.

Clinical drug development is risky, lengthy, and costly: The success of the clinical trials is essential to the success of the company. A lot of investment is required, and any failure will delay regulatory approval and commercialization.

Dependence on therapist: The company heavily relies on therapists to administer the drug to patients. As a result, training, resources, and regulatory requirements are still in the early phases.

Team:

The company is led by the original founder and is composed of a team specialized in pharmacology and mental health expertise:

George Goldsmith, CEO/Chair of Board/Co-Founder: George served as Chairman and CEO at Tapestry Networks which he co-founded. He has served as CEO of TomorrowLab@McKinsey and has a strong background in psychology and clinical psychology.

Lars Christian Wilde, President, Co-Founder, and former COO: Lars was the co-founder of Springlane, a leading European direct to consumer kitchen and BBQ brand, and co-founder of Atai Life Science AG.

Ekaterina Malievskaia, M.D. Co-Founder and Chief Innovation Officer: Ekaterina served as the Head of Research and Development and Chief Medical Officer.

Top shareholders for the company are Atai Life Sciences (29%), the co-founding team, and critical investors like Thiel Capital (Peter Thiel).

Financial Performance:

The company is trading at $38.71 resulting in a market cap of $1.35 billion. During its IPO debut, the company raised $146.6 million.

As mentioned previously the company does not generate any revenue. As a result, it is incurring losses due to the heavy investment in research and development.

The costs involving R&D are the following:

Development Costs: Expenses related to research organizations, and investigative sites to conduct clinical trials.

Manufacturing and scale-up expenses: Costs for laboratories and trial set up supplies and equipment

Personal Expenses: Salaries for the 60 employees, and expenses related to employee research and development activities.

Share-based compensation: Equity rewards granted to employees conducting research.

Compass Pathways plans to continue growth through the following strategies:

Development of Drug Discovery Center: The focus will be to optimize the development of psychedelic and related compounds targeting neurotransmitters. The company also has acquired an 8% stake in Delix Therapeutics which develops molecules that allow psychedelics to carry benefits without hallucinogenic effects.

Center of Excellence: The company wants to create a new mental health model and create a center with research and innovation labs. Compass is calling them the “clinics of the future” which will utilize data analytics to gather evidence and improve therapy models and digital technology solutions to improve patient experience and support healthcare providers. The first facility will be created in Washington D.C.

Phase III registrational program: The company is currently undergoing Phase II clinical trial preparations with patients suffering from treatment-resistant depression. Based on the data in 2021, the goal will be to expand to Phase III clinical trials

-Igli

You can access and download the detailed report here which will include the summary and a company info-graphic.

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Hi Everyone,

Social media has earned a toxic reputation throughout the years. The ecosystems have amplified the addictive qualities of human nature. However, there is one platform that stands out from the rest and is focused to deliver high-value content. Imagine a positive social media network with one of the most powerful visual discovery engines in the market. Today we will breakdown Pinterest (PINS), the company that aims to discover your ideas and turn them into action.

Business Summary:

Pinterest is a social network that gives users the ability to bookmark photos online and create boards with many themes about any personal interest. You can then share your boards with friends and exchange new ideas by following each other. The company classifies itself a media-rich utility platform that gives users the ability to visually discover their ideas and put them into action. During the discovery phase, users, or Pinners, are undecided when it comes to the brands or services that will satisfy their idea or action. Based on a survey by Comscore, Users have stated that they discovered new ideas and inspiration. Additionally, according to Talk Shoppe, users discovered new brands, products, or services. The users seek commercial content creating opportunities for advertisers. The company offers the following products:

Standard Pins: Images that show products/recipes/etc.

Product Pins: Shoppable images that have up-to-date pricing and links to purchase

Collections: Shop for products while viewing general inspiring content

Video Pins: Short videos on how-to content

Technology Features: The technology behind the platform allows for the creation of two types of value propositions:

Value Proposition for Users (Pinners):

Visual Experience: Images and videos help users develop and discover ideas without using words. Ideas can sometimes be difficult to describe and as a result, the company offers visual inspiration at scale. Investment in “computer vision” provides models the ability to see the content of each pin and optimize billions of recommendations.

Human Curation and Personalization: When photos or images are bookmarked or pinned, the ecosystem that is created is handpicked and personalized. It’s important to note here that when people save their pictures/videos they reveal how one contextualizes an idea. Using machine learning and computer vision the company can better predict what users’ needs because users reveal how they organize their ideas.

Designed for Action: 85% of users say they go to Pinterest to start a new project. Each pin has a link to a useful source that outlines products/services/how-to instructions. Up to date pricing and stock information is available and the consumer is taken directly to the checkout page. Users can also use the “Shop to Lock” feature to identify products on sale.

Value Proposition for Advertisers:

Empowering Environment: Users on Pinterest feel inspired and engaged in creative ways. The positive digital experience opens the ability for advertisers to emotionally connect their brands in a creative and positive way as well. Advertisers after all are in the business of inspiration.

Valuable Audience: More people are using Pinterest to purchase products and as a result, Pinterest households were 39% more likely to buy retail products and spent 29% more than the average household. The majority of Pins saved on platforms are from businesses which in result create native content that allowed users and advertisers to exchange naturally.

The company’s mission is to, “bring everyone the inspiration to create a life they love.”

Industry:

The global advertising market is projected to grow to $826 billion in 2022 from $693 billion in 2018. This represents a 5% CAGR, based on the IDC. Digital marketing specifically is experiencing a 12% CAGR which will amount to $423 billion in 2022. CPG and retail accounted for $64 billion of this digital advertising spend and technology, financial services, and entertainment accounted for $144 billion. Ultimately, the United States is the largest digital advertising market accounting for $166 billion in 2022 (~40%).

Market Opportunity:

Pinterest’s total addressable market includes brand advertising and performance-based advertising across many formats.

Online brand advertising: Users on Pinterest have a high intention of buying a product a service. They are undecided as they explore ideas. Majority of the popular searches on Pinterest are unbranded opening an opportunity for advertisers to raise awareness. The potential is projected around $279 billion.

Offline brand advertising: Traditional offline advertising options – specifically print, direct mail, television, and radio – accounted for $378 billion in global advertising spend in 2018. This will eventually transfer to online and Pinterest feels confident they will be the platform to consume this market. This represents a 45% market share.

Online performance advertising: Users on Pinterest browse ideas, and eventually buy products and services. Advertisers want to target the early stage of consumers looking for ideas and as a result, are willing to spend around $169 billion by 2022.

Business Model Landscape:

The company’s revenue is primarily generated by delivering ads on the website and mobile application. Advertisers purchase ads directly with the Pinterest team or relationships with advertising agencies. Based on this model the company recognizes revenue based on user clicks on ads (cost per clicks), views on ads (cost per thousand impressions), and views on video ads (cost per view). The majority of the revenue is generated in the U.S. with expansion opportunities abroad.

The following customer landscape is present for Pinterest:

The company has 442 million monthly active users (343 international MAUs versus 98 US MAUs)

Growth among users under 25

Two-thirds of the total audience is female

8 out of 10 moms were part of the base who are often primary decision-makers when buying products and services

In the U.S. total audience includes 43% internet uses

The average revenue per user in the U.S. is $3.85. The majority of the ads are purchased by CPG and retail companies.

Target, Procter & Gamble, Albertsons, Rothy’s, Pie Provisions, Hubble, and STX Entertainment.

Competitive Strengths (Moats):

The company aims to become a network that delivers positive emotion as consumers discover ideas and purchase products and services to make them a reality. According to SEC filings, Pinterest has the following advantages:

Technology Platform: Pinterest expresses significant value in its database of image-rich pins. This gives the company the ability to generate insights related to trends, understanding consumer intent, and predict consumer behavior. The company aims to invest in resources to realize fine-grained image recognition, object-to-object visual search, and large-scale visual search infrastructure. “An image” is certainly worth 1,000 words to Pinterest.

Network Effects: Pinterest has 442 million monthly active users. Users can search and pin their images and share them between friends and the community at large. The platform creates a positive reaction and a personalized reaction to users. In fact, 82% of users, or Pinners, feel their Pinterest is personalized according to surveys from Talk Shoppe. There is something for everyone to enjoy while using the Platform.

Empowering User: Social media usually permeates a toxic environment. Users, however, view Pinterest as an environment that offers non-judgmental space to explore personal ideas through beautiful high-value content. 91% of users believe Pinterest is filled with positivity.

Advertising Product Suite: The platform allows advertisers to fully tap into the entire sales funnel, from discovery, consideration, and finally the action in terms of sales. The users also come on Pinterest with an intent to realize an idea and execute the value of this alignment between Pinners and advertisers coexist naturally where high-value ads are sought to by users.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: The company’s main competitors are Amazon, Facebook (Instagram), Google, and Snap. Additionally, smaller players like Allrecipes, and Houzz, and Tastemade also compete in the same space.

One main revenue stream: The company generates its revenue from advertisers. Monetization of users still has not occurred and that can create significant risks when advertisers have reduced funds. Most advertisers also do not have long term commitments.

Brand Reputation: Because of the many business and products the company does not filter out sites that could be copycats of certain products. These sites are unreliable and sometimes turn out to be scams that could harm the brand reputation that the loyal fan base perceives.

Users authenticate through third-party providers: A large number of users use Facebook or Google login to access Pinterest. While this is a growth strategy it is a double edge sword that can inhibit the platform. Facebook and Google are also competitors with Pinterest. Each operates in its respective space currently, but monetization strategies can create friction.

Team:

The company is led by the original founders and is composed of a team specialized in the content and design space.

Benjamin Silberman: Chairman, CEO, and Co-Founder: Silberman worked in Google before founding the company. He holds a Bachelor of Arts from Yale University.

Evan Sharp: Co-Founder and Chief Design and Creative Officer: Sharp worked on Facebook as a product designer prior to founding Pinterest.

Aya Kanai: Head of Content and Editorial Partnerships: Kanai was previously Marie Claire’s Editor-In-Chief prior to joining Pinterest.

Recent additions to the board of directors are former Disney Executive Salaam Coleman Smith and Former Harpo Studios Executive Andrea Wishom.

Based on new additions to the team and directors the company wants to heavily focus in delivering high quality and inspirational content.

Financial Performance:

The company is trading at $58.38 resulting in a market cap of $36 billion.

The company has achieved $1.1 billion in revenue for the fiscal year ending 12/31/2019, a 51% increase over the $0.8 billion earned in the fiscal year 2018. More recently the company earned $443 million in revenue in Q3 2020, a 58% increase over $280million earned in the same timeframe in 2019. This results in an LTM of $1.3 billion.

Across its 442 million monthly active users the company generates an average revenue per user globally of $1.03 which is 14% YoY.

As of FY 2019 and 2018, the company incurred a net loss of -$1.4 billion and a net loss of -$0.06 billion. The majority of the loss in 2019 was driven by R&D expenses related to the platform. LTM Gross margins are $0.9 billion and ~70.0%.

Pinterest is trading at 24.9x the last twelve months revenue and 16.3x based on an estimate of the next twelve months’ revenue.

Pinterest plans to continue growth through the following strategies:

Utilize computer vision such as “Lens” to improve visual recommendations

Make Pinterest more shoppable

Expand beyond CPG and retail to automotive, technology, financial service, and entertainment

Localizing product and content for global reach

Create high-quality commercial content with brands, retailers, and content creators

-Igli

You can access and download the detailed report here which will include the summary and a company info-graphic. If you like the content please make sure to share this newsletter, share this post, or subscribe (if you have not already)!

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Hi Everyone,

Thank you to all the listeners and readers for taking the time to read the company breakdowns. We started this journey in September as an experiment. Since then it has naturally evolved providing value to you to deliver short and no b**t breakdowns.

Anthony and I are ready to scale Equity Breakdown to new levels and in the process, we would like to hear from you.

We want to create an amazing product that you feel confident using when conducting research during your investment process.

Please take the time to fill out the short survey below as we build our community in the coming weeks.

Link: Equity Break Down Survey

We will share the results later in the week and highlight the next phase of improvements for Equity Breakdown.

Remember, you are the reason for our success.

It’s going to be a wild week!

Igli

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Hi Everyone,

It’s time for a change in the financial world ruled by suited bankers and plagued by antiquated systems and operations. 'Disruption' in financial services is currently on overdrive. Consumers and businesses expect effortless, secure, and scalable finance services ranging from the entire payment life cycle, personal financial management, and access to capital. Today we will breakdown Square (SQ), the company that aims to allow businesses and individual consumers to participate in the economy and reap the benefits of fintech services across its cohesive ecosystem.

Business Summary:

Square was founded in 2009 as a financial technology company aimed to enable businesses (sellers) to accept credit card payments. Initially, Square was solving payment processing problems experienced by small businesses. Since then the company has continued with innovation in technology and currently offers more than 30 distinct products and services. The 30 products funnel two ecosystems:

The seller ecosystem offers businesses a combination of software, hardware, and financial services to help start, run, and grow. It has removed fragmented offerings and weaved all the services together into a cohesive commerce ecosystem.

The cash ecosystem provides customers with financial products and services through Cash App. Individuals can quickly store, send, receive, spend, and invest their money.

Technology Features: The company delivers the following technology capabilities:

Software: Suite of cloud-based software solutions that focus on efficient operations. Point of sale products allow sellers to ring up sales, send digital receipts, and receive instant customer feedback. The features integrate payments, sales tracking, inventory management, customer purchase history, and business management capabilities

Hardware: Custom designed hardware that processes all major credit cards. The portfolio consists of a magstripe reader, contactless and chip reader, square stand, square register, and square terminal. The tools provide a comprehensive point-of-sale solution

Financial Services: The company offers services that manage payments, instantly transfer funds, square card to facilitate spending and managing of funds, square capital to offer loans, and payroll features to hire, onboard, pay, and manage taxes and employee benefits

Cash App: The ecosystem offers customers peer-to-peer transfer of money, cash card to spend money, and investing opportunities in equities and more recently the ability to buy and sell Bitcoin

The company’s mission is to, “ensure that no one is left out of the economy because the cost is too great or the technology too complex.”

Industry:

Technology is penetrating the finance industry introducing digitization and decentralization. For years, the industry has remained heavily regulated with outdated practices and plagued by inefficient infrastructure and legacy technology. Consumers and businesses specifically small and medium-sized businesses, however, are craving efficient participation in the economy. They have resorted to financing technology features that aim to breakdown barriers and offer integrated seamless solutions regarding the transaction of money. According to the Global Fintech Adoption survey in 2019, a whopping 96% of the respondents are aware of at least one fintech service, and 75% have used at least a product, app, or service relating to the transfer of money. Disruptions in the industry are happening across the following categories:

Banking/Insurance

Transaction and payment services

Mobile wallet payments

Blockchain/Bitcoin

Wealth-management/personal finance

Market Opportunity:

Square has divided the market among sellers and individual customers based on their core ecosystems.

Seller Ecosystem TAM: $85-$100 billion (3% market share):

Transaction Profit: $39B | Software: $30B | Square Capital: $12B | Financial Services $5B

Cash Ecosystem TAM: $60 billion (2% market share):

Sending: $20B | Spending: $41B | Investing: $2B

Business Model Landscape:

The company’s revenue is primarily generated through four key streams:

Transaction-based revenue (65% of revenue): Sellers are charged a transaction fee that is calculated based on a percentage of the total transaction amount processed

Subscription and service-based revenue (22% of revenue): revenue from cash app, square capital, and instant transfers

Hardware Revenue (2% of revenue): revenue from sales of chip readers, square stand, register, and terminals

Bitcoin Revenue (11% of revenue): revenue is recognized when customer’s purchase bitcoin

The company continues to see greater growth through Cash App which mainly contributes to its subscription revenue stream. Additionally, Bitcoin revenue has increased by 550% amounting to $1.1 billion six months ending 06.30.20 due to growth in bitcoin users and customer demand.

The following customer landscape is present for Square:

Seller Ecosystem:

The company processed $106.2 billion of gross payment volume (total dollar amount of all card payments processed) which was generated from $2.3 billion card payments

Point of sale ecosystem had 180 million buyer profiles in 2019

55% of the total GPV was driven by large sellers who generate more than $125 thousand in annualized GPV

No customer accounted for greater than 10% of gross payment volume or total net revenue

In Q2 2020, GPV from online channels was up 50% and made up more than 25% of the Seller GPV. One in three online stores onboarded in the second quarter were new to Square

Cash Ecosystem:

30 million active customers who had at least one cash inflow or outflow

Cash app customers who use two or more products generated 2x to 3x more revenue

In Q2 2020, Cash App customers transacted more than 15x per month on average

Cash card users have been at 7 million (2x growth from last year)

Direct deposits were the most engaged cash card users and spent 2x to 3x more than other cash card activities

In Q2 2020, Cash App customers have more than $1.7 billion in cash balances stored in their accounts

Competitive Strengths (Moats):

The company aims to create a cohesive ecosystem that manages and grows business while simultaneously helping individuals manage their money. According to SEC filings, Square has the following advantages:

Strong Network Effects: Cash App has more than 30 million active customers transacting 15x per month

Efficient Customer Acquisition: Low acquisition costs contributed by the peer-to-peer payments, seamless onboarding, and trustworthy brand

Technology and Design Platform: Platform is integrated end-to-end encompassing hardware, software and data. The full service helps businesses manage the entire payment life cycle

Omni-Channel Capabilities: High NPS score of 63 regarding the brand, 14,000 retail stores with hardware products, third-party developers, and direct and scalable online marketing solutions all contribute to the diverse expansion of Square

Founder based team: Square is led by one of the best CEOs and Founders known as Jack Dorsey. He is also the CEO of Twitter. The company has exceptional talent and focuses on consistent innovation and re-inventing their ecosystems

Two complementary ecosystems: Square offers Square capital, Weebly, and Cash App holistically with all the other services. The company can drive traffic from customers using Cash App to its seller ecosystem

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: The company’s main competitors are Paypal (iZettle, and Venmo), Stripe, Tencent Holdings, Shopify, and Clover

Majority of revenue driven by one source: Company is dependent on payment services from businesses. While the company has four revenue streams, additional innovation needs to occur where all their cost centers are converted into revenue streams.

Increased competition: Customer needs are changing with rapid technological change. In 2019, Apple introduced the Apple Card, which was not traditionally in payment services. Pricing pressures and stronger brand recognition from competitors like PayPal will put pressure

Regulation: Company is heavily dependent on privacy and banking/lending restrictions. The recent involvement in Bitcoin also poses potential risks as it is not considered a legal tender and regulation is currently evolving

Liquidity Control: The company holds $2 billion of the principal amount of convertible senior notes as of 06/30/2020 that mature by 2023. As the company grows and lacks profitability it relies heavily on debt and equity financing.

Team:

The company is lead by the original founder and is composed of a team specialized in the fintech environment:

Jack Dorsey, CEO: Jack is CEO and chairman of Square and CEO of Twitter. He co-founded both companies and actively oversees both companies.

Brian Grassadonia, Cash App Lead: Brian has held numerous positions in Square including launching the company’s credit card reader.

Alyssa Henry, Seller Lead: Alyssa leads PM, design, and engineering for the seller facing products. She previously served as VP of Amazon Web Services.

Jacqueline Reses, Square Capital Lead: Jackie oversees banking and lending products. She previously served as Yahoo’s Chief Development Officer and was on the board of Alibaba Group.

Morgan Stanley, Vanguard Group, Fidelity Management, BlackRock, and Wellington are the top five owners of the company’s shares.

Financial Performance:

The company is trading at $171.02 resulting in a market cap of $75.8 billion.

The company has achieved $4.7 billion in revenue for the fiscal year ending 12/31/2019, a 43% increase over the $3.2 billion earned in the fiscal year 2018. More recently the company earned $3.3 billion in revenue for six months ended 06/30/2020, a 55% increase over $2.1 billion earned in the same timeframe 2019.

As of 06/30/2020, the company had $48.5 billion in gross payment volume versus $49.3 billion in 2019. The 1.6% drop was driven by Covid related activities specifically for their seller ecosystem involving payment services. Additionally, it’s important to note that the cash app was a primary driver for the growth experienced in 2020. In the second quarter, Cash App generated $1.2 billion of revenue and $281 million of gross profit.

As of FY 2019 and 2018, the company earned a net income of $375 million and a net loss of -$38.4 million. Gross Margins as of 06/30/2020 for the seller ecosystem was around ~42.5% and cash app ecosystem ~26.8%.

The company has also generated AEBITDA income of $83.2 million resulting in an AEBITDA margin of ~1.7% and 505.6% YoY growth.

Square’s current market value is 12.8x its 2020 LTM revenue.

Square plans to continue growth through the following strategies:

Seller Ecosystem growth:

$16B transaction profit opportunity in international markets

New product and use cases

New markets focusing on large sellers ($20M-$100M+ in size)

Cash Ecosystem growth in a $9 trillion market:

New products and use cases focusing on cryptocurrencies (Bitcoin).

purchased 4,709 bitcoin amount to $50 million

Expansion in international markets in Africa

-Igli

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Hi Everyone,

Climate change is front and center with the current elections. One thing is certain, the government will floor the gas pedal regarding investing in clean energy. Over the years, solar energy has reached competitive levels through innovation and subsidies relative to fossil-fuels and is poised to experience rapid growth. There is a demand for technologies and hardware to allow solar projects to become more efficient. Today we will breakdown Array Technologies (ARRY), the company that aims to harness the sun and become a leader in the solar solutions space.

Business Summary:

Array Technologies produces and implements a ground mounting system for utility-scale projects. Their core products are solar tracking systems that move solar panels during the day to efficiently harness light from the sun and ultimately convert it to energy. Trackers are important because they result in greater increases in energy production. A tracker can generate up to 25% more energy and deliver a 22% lower cost of energy. Additionally, a tracker represents about 10-15% of the cost of constructing ground-mounted solar systems for projects. This favorable cost structure has made trackers available in 70% of all ground-mounted solar energy projects.

Technology Features: The tracker is a product composed of steel supports, electric motors, gearboxes, and electronic controllers. The company refers to the tracker as the “DuraTrack” system and complements it with SmarTrack Software.

The tracker uses one electric motor to multiple rows of solar panels

Site design flexibility to adjust to terrain

Minimization of dead space by locating gearbox and drive shafts below solar panels

Automatic stowing in high wind conditions

Software and machine learning capabilities

The company’s mission is to, “address the inefficiencies of the energy market by offering smart technology-led solutions based on innovation and customer focus, helping to provide flexibility and de-carbonise the energy system and the environment.”

Industry:

Solar energy is the fastest-growing sector in the renewable energy space. Ground-mounted solar systems are growing at a compound rate of 20% and represented 22% of all new generation over one megawatt brought in the grid. The HIS Markit and Federal regulatory bodies estimated annual instillations will maintain a growth of 16% resulting in 19.6 GWs in 2023 from 10.9 GWs in 2019. The drivers accelerating this growth are fundamental pieces for Array.

Regulation requiring certain production of energy sold must be sourced from renewables (solar). Renewable Portfolio Standards are becoming common

12% of total U.S. utility-scale generation from fossil fuel plants will transition to solar energy production

Economic competitiveness of solar versus fossil fuel generation

Electrification of energy in transportation, space heating, and water heating are increasing due to demand requiring new forms of energy production.

Utility-scale battery storage: Storing the energy generated is critical and making it available during the various periods of the day and night makes energy a viable alternative.

Market Opportunity:

The US tracker market is experiencing rapid growth. The TAM for solar trackers is currently at $9 billion and is estimated to grow to $22.3 billion by 2027. 60% of ground-mounted installations included trackers and in 2019 it will be around 70%. U.S. installations of trackers with more than one megawatt of capacity grew at a CAGR of 35% which is 1.5x greater than all ground-mounted solar systems. Greater demand for trackers is expanding globally as customers require efficient energy production and low cost of generation and maintenance as well. Excluding China, the installation of trackers for systems with more than one megawatt of capacity grew at a CAGR of 71%.

Business Model Landscape:

The company’s revenue is primarily generated from the sale of solar tracking systems and parts. The average contract value and duration for the company was $6 million and three months. 87% of the revenue generated through the sales of solar tracking systems was concentrated in the U.S and 8% in Australia. The rest of the sales were generated from international markets.

The following customer landscape is created by Array due to the demand of its products

Since 01/01/17, 80 customers around the world have installed the solar tracking systems

Average of 18 new customers per year since 2017

Engineering, Procurement, and Construction companies (EPCs) are the largest customers.

Construct solar projects for large solar developers, independent power producers and utilities.

EPCs usually contract for multiple projects at a time with different owners

One EPC customer represented 17% of sales and the trackers they purchased were used in 15 different solar projects with five different owners

Blattner Energy Inc. (EPC) and EDF Renewables (independent power producer) together represented 29% of revenue in 2019

Competitive Strengths (Moats):

The company is a leader in the ground-mounting systems for solar projects. According to the S-1 filings, Array has the following advantages:

Experienced engineering team: 30% of the team are engineers with software, electronics, material science, structural mechanic, and civil engineering backgrounds. This has resulted in three generations of trackers.

Intellectual property: The company’s core patent involves a linked-row, rotating gear drive tracker, and six additional patents for technologies covering clamps/brackets, and torque limiters. The patents are set to expire in 2030 and 2037.

Low cost of ownership with high reliability: Projects using the tracker system achieved a 6.7% lower LCOE and 31% lower operations and maintenance cost than projects that used competing single-row control architectures. The independent verification adds brand trust attracting and retaining customers.

Solar panel technology-agnostic: Currently all solar panels require mounting systems, and any form of solar panel can be attached. The manufacturer's risk of solar panels or technology change does not impact the company.

Scalable manufacturing with low capital intensity: The company’s primary manufacturing facility is in New Mexico. 80% of the cost of goods is associated with purchased parts like motors, gearboxes, etc, and the rest is labor to assemble and create the parts of the mounting system. Minimal capital with an optimal assembly-focused manufacturing model that generates cash flow is currently there.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: The company’s main competitors regarding its principal tracker are NEXtracker Inc, PV Hardware, and Arctech Solar. The main areas of competition are product performance, the total cost of ownership, and reliability of the product

ITC Stepdown Incentives: The investment tax credit for solar is a driving force for customers’ behaviors. Originally the rate is 30% but is expected to drop as little as 10% by 2022. While solar is cost-competitive with conventional forms, the changes in the incentive program spark periodic downturns and customer loss. These incentives also apply to the company as well which will impact EBITDA.

Customer Concentration: Top two customers composed 1/3 of the company’s revenue and the top five customers constituted 50% of the revenue in 2019. Additionally, some of the limited ECP customers have multiple projects, and any loss can create substantial revenue loss. The company must continue to gain customers and reduce revenue concentration.

Alternative Energy Source causing a deep drop in electricity: Decreases in the price of electricity can negatively impact the owners of solar projects. This can lower demand as projects turn out to lose profits. Additionally, technology developments can introduce new competitors at a lower cost or alternative sources of energy that produce cheaper electricity.

Manufacturing Facility and Tariffs: The mounting system contains components made from steel which recently have experienced political tariffs from the US. This can impact margins and hinder the demand for solar projects. Additionally, the company has one large facility ~43,000 square feet. Any damages to the facility would halt the company’s operations immediately.

Team:

The company’s founders and executive team are veterans in leading large organizations with various roles in energy and strong backgrounds as engineers.

Jim Fusaro, CEO: Prior Mr. Fusaro served as senior executive for Amkor Technology, Honeywell aerospace, and Avent.

Jeff Krantz, CCO: Responsible for building and scaling Array’s sales/marketing initiatives. Prior Mr. Krantz served as VP of Sales in SMA North America, a leader in solar inverters.

Lucas Creasy, Chief Technology Officer: Responsible for product design, development, and engineering experience. Prior, Mr. Creasy worked as VP of Engineering at Local Motors.

Brad Forth, Director Chairman: Energy veteran and senior advisor to Oaktree’s GFI Energy Group since 2016.

ATI Investment Parent, an entity controlled by Oaktree Capital will own most of the Array’s stock (~60%) and executives/directors will maintain 22% ownership.

Financial Performance:

The company is trading at $38.50 resulting in a market cap of $4.8 billion. The company raised on its IPO debut $1 billion by selling 47 million shares at a price of $22.

The company has achieved $647 million in revenue for fiscal year ending 12/31/2019, a 123% increase over the $291 million earned in fiscal year 2018. More recently the company earned $552 million in revenue for six months ended 06/30/2020, a 145% increase over $225 million earned in the same timeframe 2019.

Total megawatts delivered, which highlights sales performance and product acceptance, has also increased 132% in the last six months driven more recently by large customers trying to take advantage of the investment tax credit. Deliveries are being taken ahead of build schedules.

As of September 30, 2020, the company had $703 million of executed contracts and awarded orders for tracker systems with anticipated shipment dates in 2020 and 2021, representing a 31% increase relative to the same date last year.

As of FY 2019 and 2018, the company earned a net income of $39.7 million and a net loss of $60 million. Gross Margins for the business as of 06/30/2020 was around ~25%.

The company has also generated AEBITDA income of $121 million resulting in an AEBITDA margin of ~18.6%.

Array’s current market value is 7.4x its 2019 fiscal revenue.

Array plans to continue growth through the following strategies:

Core product Innovation – currently building the next generation of DuraTrack systems

Growing International Business – international market for ground-mounting systems is 4x larger than the U.S. market

New Revenue stream in existing installed base – software, services related to trackers, and preventative maintenance

Expanding into related products and services in adjacent markets – acquisitions or development of new products

-Igli

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Listen now (14 min) | Hi Everyone, Covid has flipped a lot of industries forcing companies to instantly pivot or face the market forces that will eventually come to fruition. There are certain industries however that have spawned and accelerated their growth during this tumultuous year. For a while at-home fitness has evaded the technology invasion. However, there is one company that seems to have created the perfect recipe so you can finally escape the Tony Horton torture. Today we will breakdown Peloton (PTON), the company that aims to revolutionize fitness at home.

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Hi Everyone,

The modern internet requires fast, secure, and personalized data experience. What would be the cost of two to five seconds of latency when booking the next flight (maybe in 2021)? Today we will breakdown Fastly (FSLY), a company with the goal to empower developers to build a better internet.

Business Summary:

Fastly is a content delivery network that makes content transmission faster. The company ensures that digital experiences are fast, secure, and personalized. Today almost everyone is using websites or apps to conduct some form of digital transaction. By definition, the experience must be seamless and secure. As a result, Fastly empowers developers by delivering the edge cloud platform. The company classifies the edge cloud platform as a new category that converges the traditional functionality of content delivery networks with edge computing to move computing power closer to the end-user. Why is this important? As the internet evolves, individuals like you and me have higher demands when it comes to user experience. We want our web pages to load faster, updates to be timely, and no latency when it comes to viewing our videos. Fastly solves all of these demands by moving data and applications to the network edge, (as close to the users as possible). It’s simple, Fastly gives developers the ability to make changes instantly so users can consume content more quickly. The platform contains the following features:

Programmable Edge: Developers have real-time control and visibility to changes they program. They simply deploy the code to the edge. With the launch of Compute@Edge, developers can build advance edge applications with more security, logic, and better performance levels.
Software-Defined Modern Network: The company has an 88 terabit software-centric network located in 72 unique designed points of presence (“POPs”) across 55 markets around the world. This empowers scalability.
Customer Empowerment: Developers are given frictionless tools and strong technical support immediately. This frees up constraints so developers can focus on innovation.

Technology Features: The edge cloud platform is globally distributed, and programmable for high performing and secure web and application delivery. The single, software-centric network offers the following capabilities:

Edge Compute: Developers can create their own programmable logic

Edge Delivery: Full site delivery and streaming for media. The service ensures speed and quality

Edge Security: Functionality involving Distributed Denial of Serice, Web Application Firewalls, Application Delivery Controllers, and Bot Detection

Edge Application: Effective load balancer and image optimizer

The company’s vision as stated in their website is: “create a trustworthy internet, where good thrives.”

Industry:

Organizations need to keep up with the most recent and complex end-user engagements. As a result, the digital experience must be reliable. As customers evolve in their digital transformation process it becomes crucial that they need the infrastructure to deliver performance. Latency, security and developer customization are the new trends emerging in the industry. Customers today need to be able to manage traffic across multiple Infrastructure as a service providers, data centers, and hybrid clouds. The modern internet has the following new requirements in the industry:

Digital Transformation

Application Built and Customizable

Network Architecture

Operational Efficiency

Market Opportunity:

The total addressable market for edge computing, content delivery, streaming, cloud security, and application delivery is estimated at $23.1 billion. The market is expected to grow to $35.4 billion in three years estimating a CAGR of 15%.

Business Model Landscape:

Fastly, derives its revenue primarily from user-based fees as customers use the platform. The company charges customers based on their usage. The customer agrees to a minimum requirement of gigabytes to use and usually generate billings that exceeds that amount. In the usage-tier based business model, customers are also provided discounts based on their use of the data. The company also generates a portion of its revenue through implementation services and recurring technical service. The services are usually a flat-fee to the customer.

The following customer landscape is created based on the revenue model Fastly has created:

1,951 total customers from 1,627 in 2019

304 enterprise customers as of Q2 2020.

The customers represent 88% of the revenue

Average spend per customer $716K

Contracts for customers are usually a year and include a minimum monthly billing commitment

Dollar based net retention rate of customers: 138%

Net retention rate: 137.8%

Example of Customers that use Fastly: (Microsoft, Google, Shopify, Slack, The New York Times, Github, Vimeo, Stripe, etc)

Partner Ecosystem allows companies to build edge applications that integrate with Fastly’s platform:

Logging and Analytics Companies: Google, Microsoft, Datadog, Sumo Logic

Pass Partners ensuring scale and security: Heroku, Magento, Drupal and Wordpress

Competitive Strengths (Moats):

The company aims to build a better internet with the developers at the center. According to the S-1 filing, Fastly has identified a series of advantages.

Ease of Integration and Programmability: Developers can write and deploy their own custom code. The platform has reusable modules that don’t require developer experience, real-time visibility and control using log data to troubleshoot, and the ability for developers to build Fastly in their technology stack to enhance integration and deployment.

Platform Scalability and Performance: The use of a proprietary software-defined networking stack with storage system, massive data pipeline to send logs, a cache system to purge content around the world, and a proprietary control panel that allows developers to configure and update applications.

Ability to support modern Application Processes: Serverless security designed to deploy custom applications without interfering with performance. This ensures security is integrated in the architecture, programming, and operations phases.

Image Optimization & Video Streaming: Instant purging of content giving customers the ability to simply load content faster.

Credibility with Developers: the company has a phrase stating that the platform was built by developers for developers. A flexible support model and a partner-friendly model empower developers to focus on innovation.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: There are other established content delivery network companies that have had the luxury of time.

Legacy CDN: Akami, EdgeCast

Small Business Focused CDNs: InStart, Cloudflare

Cloud Providers: Amazon’s cloudfront, AWS Lambda, Google Cloud Platform

Data Center and Appliance Vendors: F5, Citrix, Cisco

Limited Customers generating substantial revenue: In 2019, top 10 customers accounted for 29% of revenue. Dependence on the customers will continue and a loss of any of the major customers will affect performance drastically.

Transmission Bandwidth and Colocation Space risking disruption: The bandwidth provided by third-party telecommunications network and access to facilities to house servers can create problems. Service outages, payment disputes, network providers going out of business, and the monopolistic nature of network providers can create significant pressures.

Security Risks: Transmission of customer’s data is natural in the business Fastly provides. As a result, security is integral to the company’s brand and core offering. Cyber-attacks are increasing annually and the proper measure to mitigate are essential to the trust that the company has built with customers.

Government Regulation: The ability for consumers and customers to access the internet is key. TikTok represents 12% of Fastly’s revenue and when it was in risk of being banned it created significant risk. Heavy regulation based on the specific customer can certainly result in negative performance. Additionally, 29% of revenue was driven by international customers which in part represents a risk if regulation is implemented due to national security risks.

Team:

The company was founded in 2011 by developers for developers. The team is well equipped for the cloud edge space:

Joshua Bixby, CEO: Mr. Bixby has been an executive in Fastly since 2015. Prior he served as VP of Acceleration at Radware, a cybersecurity and application delivery solutions company. He was also the founder of Strangeloops networks.

Artur Bergman, Co-Founder and Chief Architect: Prior, Mr. Bergman served as manager, vice president, and CTO of Wikia, a global community knowledge-sharing platform.

Tyler Mcmullen, CTO: He is responsible for evolving the system architecture and the company’s technology vision. He built the first version Fastly’s instant purging system, API, and real-time analytics.

Financial Performance:

The company has market share price of $126.55 resulting in a market cap of $11.8 billion and Enterprise Value of $11.5 billion.

The company has achieved $200.4 million in revenue for the year 2019, a 39% increase over the $144.6 million earned in 2018. More recently the company earned $137.6 million in six months ended 06/30/2020 resulting in a 50% YoY.

The company has yet to make profits. As of 2019 and 2018 net losses were $51.5 million and $30.9 million. Gross Margins for the business for 2019 were around ~56%.

Additionally, the net dollar retention rate for customers is 137.8% and annual revenue retention rate was 99.3%. The company has experienced an ARR of 44% in 2019. It will continue to focus on strong top-line growth to achieve a path towards profitability.

The following valuation ratios are below:

Firm Value / Revenue: 2019A: 58.8x | 2020E: 41.0x

Fastly plans to continue growth through the following strategies:

Land and Expand: Vertical expansion into enterprise customers

Platform Expansion: Continue innovation with a focus on solutions for vertical expansion (security, Comput@Edge)

Leverage Partners: Expand technology ecosystem with partners like Google, Microsoft, Amazon

International Expansion: Current revenue share outside of the US is around ~29% and room for growth.

-Igli

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Listen now (16 min) | Hi Everyone, You can order groceries to be delivered in as little as an hour. You can purchase a car at your convenience through the tap of a button. How about your home? Today we will breakdown Opendoor (IPOB), a company aiming to disrupt the real estate market.

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Hi Everyone,

Massive disruptions in the healthcare industry are evolving post-pandemic crisis. With rising costs, and a complex relationship between patients, physicians, and insurance companies, technology solutions will shake up the industry. The U.S. will grow to $6.2 trillion in healthcare spending by 2028. The demand to transform the current inefficiencies in the value chain and offer low costs are high. Today, we will break down Multiplan (MPLN), a company that has been around since the 1980s that merged Churchill Capital Corp II SPAC to tackle the healthcare problems at a staggering valuation of $11.1 billion.

Business Summary:

Multiplan is a data-analytics driven technology company that processes medical claims data to provide cost management solutions. Consumers (patients) receive care from providers (physicians) who then file claims with a payor (health insurance company). Multiplan aggregates the data through their platform focusing on claim settlement, pricing, and accuracy with the goal of reducing the cost of the claim for the payor (health insurance company) before a provider (physician/hospital) is paid. The company strives to reduce costs downstream in the healthcare value process by offering three solutions:

Analytics Based Services: Reduce medical costs by detecting claims irregularities for payors via data-driven algorithms

Network-Based Services: Reduce medical costs through contracted discounts. Also, Multiplan is one of the largest independent providers in the U.S.

Payment-Integrity Services: Reduce medical costs by removing unnecessary or wrong charges before claims are processed and paid

Technology Features: Multiplan’s platform leverages data and analytics to transform healthcare transactions into savings.

The transaction processing system (claims processing system) is the engine that drives savings for customers and revenue for the company. Each transaction adds more data to the engine and data warehouse

The company can process transactions through electronic data interchange batch files, web services and online through customers and provide portals. Integration into the customer’s systems and claims processed as EDIs result in efficient connected processes. 98% of claims are processed through EDI

The company’s mission as stated in the SEC filings, is: “deliver affordability, fairness, and efficiency for healthcare payers, their consumers and the medical providers that treat them.”

Industry:

Rising costs are an unfortunate reality for the healthcare system in the US. The total estimated spending in the U.S. healthcare market is $4 trillion and expected to grow to $6.2 trillion by 2028. This growth is driven by an increase in aging population, new medical technologies, and current inefficiencies in the value chain process. Payors want to focus on solutions that create efficient methods to reduce costs. Specific to Multiplan’s business the following industry trends are present:

Increasing costs per claim due to medical inflation

Unclear pricing driven by complex rules

Negative effects of legacy technologies

Market Opportunity:

The total addressable market across the healthcare customer management solutions space is identified by Multiplan to be around $50 billion across payors, providers, and consumers. Today they stand as a leader in the “Payor Out-of-Network” segment with a TAM of around $8 billion. The market opportunity is broken out between the following segments:

Group Health: Cost of healthcare to employers

Government Programs: Medicare and Medicaid are expected to grow increasing costs

Workers’ Compensation: Settlement costs and medical costs of insured workers are also growing

Auto Medical: 79% of claimed loss were due to medical expenses. These costs will continue to grow as well

Business Model Landscape:

Multiplan’s revenue is dependent on the ability to lower medical costs through savings for payors. The medical charges are a key driver in generating earnings. The company is compensated by payors through a percentage of savings (“PSAV”) and a per employee/member per month (“PEPM”). Below we have the business model and the various revenue segments broken down:

The following customer landscape is created based on the revenue models Multiplan has created:

700+ payers including the top 10 insurers

Blue Cross Blue Shield, United Healthcare, Cigna, Anthem, Aetna, Humana, Centene etc.

Top 10 customers have been customer for 25 years

Contracts with large customers have 2-5-year terms

Mid-to small-sized customers have annual terms on contracts

Top 2 customers accounted for 35% and 20% of the company’s full-year 2019 revenues

Network includes 5,600 hospitals (91%),164,000 ancillary facilities, 1.1M practitioners.

Multiplan logos are on 60M member ID cards

Competitive Strengths (Moats):

The company aims to make healthcare affordable. According to the SEC filings, Multiplan has identified a series of advantages.

Platform: The company believes their proprietary IT platform provides an advantage allowing them to process and store significantly more transactions. The proprietary network pricing application can return 99.96% of network claims to payors within one business day. The platform accesses historical claims data for 1 billion claims and processes 370k claims per day.

Customer relationships: Top 10 customers have been customers for an average of 25 years. Customers are retained based on the EDI claims which are linked to customer’s time-sensitive claims processing functions. This creates a high switching cost

Experienced Management Team: CEO, CFO, and CRO have 100+ years of combined experience in healthcare cost management industry. Strong track record in growing profit, acquiring, integrating, and managing healthcare businesses. In addition, with the (CCXX) SPAC merger, the company will experience a management team led by Michael Klein, a well-known investor, and operator

Comprehensive Services: The company employs 450 negotiators, 100 clinicians, medical coders, 600 IT, and 500 operations staff focused on medical reimbursement analysis. The extensive resources allow Multiplan to offer the three solutions in analytics, network, and payment integrity services

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: Multiplan’s competitors will depend on the services they offer:

Analytics Service: Zelis, Advanced Medical Pricing Solutions, ELAP Services are key players in offering negotiation and pricing services to save costs

Network Service: Direct competition with PPO providers (regional), First Health, and Zelis regarding network discounts, access, quality, independence, and price

Payment-Integrity Service: Cotiviti, Change Healthcare, Optum, and Discovery Health Partners also are key players. They originated as post-payment specialists while Multiplan focused on examining claims before payment occurs

Customer Risk: The top two customers account for a total of 55% of revenue in 2019. The contracts with these two customers are also terminable without a case on short notice. If termination, reduction of service, or price negotiations with less favorable terms occur then Multiplan will experience a significant loss in performance

Multiplan Depends on Providers: Healthcare providers are an integral part of the process that helps generate the claims process. The more providers in the network the more valuable they become to payors. Contracts with providers have renewed annually and negotiations regarding the number of price concessions are critical since a portion drives the company’s revenues

PPO Networks Decrease in Discounts: As an independent preferred provider organization, Multiplan could experience a reduction in discounts from providers. This can make Multiplan’s network less attractive

Changes in the Healthcare Industry: Multiplan’s businesses are heavily dependent on creating contracts with payors (insurance companies) and providers (physicians/hospitals). With technology aiming to change healthcare empowering payors to directly deal with providers regarding pricing more efficiently can severely impact Multiplan’s business. Risks such as a single-payer healthcare system, government regulations specifically “surprise” billing, and regulation of the PPO market will certainly impact business

Multiplan’s Significant Debt: Multiplan Parent has debt amounting to $5.4 billion. $1.1 billion is from a subsidiary Polaris Intermediate Corp and is expected to be paid with the CCXX transaction. $4.2 billion comes from MPH holdings another subsidiary. This creates a risk that the company’s cash flow may not be able to cover the debt and fulfill other financial obligations

Team:

The company’s founders and executive team are veterans in the healthcare cost management space with the addition of the CCXX team post-merger:

Mark Tabak, Chief Executive Officer: Tabak has served as CEO of Multiplan Parent since 2002 and prior to that held executive roles at Healthcare Capital Partners and International Management Care Advisors which is now part of AIG

Dale White, President, Payor Markets: Served as Chief Revenue officer prior to merger with CCXX and has been with the company since 2004

Michael Klein, Director of Board and CEO of (CCXX):Klein has experience in operating companies, changing strategies, acquiring and integrating companies, and recruiting world talent. He is the founder of his global strategic advisory firm and has two decades of experience at Citi.

Paul Galant will join as President, New Markets: Paul Galant currently serves as an Operating Partner at Churchill Capital and prior to that CEO of many companies like Brightstar.

Ownership of the Company is constructed as follows:

Financial Performance:

The company post-merger with CCXX will have an Enterprise Value of $11.1 billion.

The company has achieved $982.9 million in revenue for the year 2019, a (-5.6%) decrease over the $1,040 million earned in 2018. More recently the company earned $458 million in six months ended 06/30/20 resulting in a (-6.5%) YOY from $491 million. The decrease in revenue was due to Covid-19 because of the reduced volume of claims from restrictions on elective and non-essential medical procedures in 2020. The annual decline from 2018 to 2019 was driven by customers changing their claim practices regarding the analytical service and two payors losing their government contract.

As of 12/31/2019, and 2018, the company’s net incomes were $9.7 million and $36.2 million. Gross Margins for the business as of 12/31/2019 were around ~81.8%. The drastic decline is due to revenue loss from the analytics services and network services.

The company has also generated AEBITDA of $750 million in 2019, a (-8.9%) decrease from 2018. More recently they have also maintained a 75.3% AEBITDA reflecting a proxy for a healthy cash flow business as of 06/30/20.

The company provides the following forecasts:

Revenue - 2025E: $1.3 - $1.9B (11-15% growth rate)

Adj EBITDA – 2025E: $1.1 - 1.4B (72-77% margin)

Current Debt – 2020E: $5.4B (6.7x AEBITDA)

Firm Value / Adj EBITDA – 2021E: 12.9x / 2025E: 24.3x

Multiplan plans to continue growth through the following strategies:

Enhance existing platform: Further, deploy artificial intelligence and machine learning

Extending platform: Build for new customer segments in government, property & casualty, and dental

Expand platform: New business models that automate administrative services, transparency of patient medical bills, patient interfaces with payor and provider

-Igli

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Hi Everyone,

This year SPACs have been the center of attention in the public markets. So far there have been 151 U.S. IPOs consisting of 61 SPAC IPOs. A renewed evolution of companies skipping the traditional IPO process and partnering with high profile investors or entities is transforming rapidly. Today we will breakdown SPACs, special purpose acquisition companies with the goal aimed to capture the greatest wealth opportunities in the market.

Business Summary:

A SPAC (Special Purpose Acquisition Company) is a “corporate shell” company, also more commonly known as a blank check company, sponsored by an experienced investor, or investing entity. The SPAC company goes public by issuing shares to raise money from investors with the plan to acquire or merge with a private company. The merger or acquisition allows the private company to go public without going through the traditional IPO process.

Originally SPACs have been around since the late 1980s focusing on small-cap companies that could not go public through the traditional process. Initially, this attracted penny-stock promoters creating fraudulent activities. But since then with regulation, SPACs have experienced an evolution and gained a lot of coverage with influential investors such as Chamath Palihapitiya, regarding Virgin Galactic and Opendoor, and Bill Ackman’s recent $4 billion behemoth raise.

For investors, SPACs offer a low-risk entry to a large public offering and the target company goes public relatively quickly avoiding the IPO window and preserving the management team.

Market Landscape:

The number of public companies in the U.S. has been on a steady decline. In 1996 sources have highlighted that there were around ~7,300 domestic companies listed on the U.S. stock exchange. Today that number is hovering around ~4,000 representing a ~45% drop. As of 2020 YTD, we have had 151 companies enter the public market. The traditional IPO process can be an expensive drawn-out process consumed with high fees before shares are sold. With private capital readily available through a robust VC industry, companies are holding off longer to access the public market. As a result, it is important to note that companies have increased in size through years of acquisitions and business maturity. With companies that are larger in value and revenue, the high potential returns are usually reaped by the private investors that are taking on the risk. More recently, SPACs have re-emerged in the spotlight as an opportunity to take private companies public at an earlier stage without the overdrawn process of an IPO. This trend reveals that public investors need to have the opportunity to participate earlier in the growth stage of the company to have access to higher potential returns. Of course, with high potential returns comes high risk as well.

SPAC Landscape:

This year SPACs have stolen the spotlight. According to Pitchbook Data, as of May, SPACs represented 38% of IPO filings. In 2019, there were 59 SPAC IPOs amounting to $13.6 billion, and in 2020 127 SPAC IPOs amounting to $48.5 billion. This is an increase of 256% YoY.

Advantages:

For investors and the target companies there are advantages when it comes to the SPAC process:

Quick to Market: SPACs typically take three to four months to clear registration with the SEC, which tends to be shorter than the average length of time it takes to during the traditional IPO process that can range between six to nine months

Liquidity: Shareholders of acquisition targets can achieve instant liquidity by merging with a SPAC because they become shareholders of a public company

One Targeted Deal: The SPAC is limited to one acquisition deal. But after they complete that acquisition, they can act, acquire, or operate as any other public company

SPAC Sponsor: The success of the SPAC also relies on the reputation and brand of the sponsored investor. A strong reputable sponsor will create a lot of confidence to investors willing to participate. Usually, the investor is very experienced with a strong track record. The target company will benefit from a knowledgeable member of the SPAC team

Time Limitations: There is a time limit that forces the SPAC team to find a target (18-24 months). This gives investors assurance that a deal will be finalized in a specific time

Disadvantages:

Due Diligence: There is less scrutiny in the process involving a SPAC compared to a traditional IPO Process. This usually depends on how effective a SPAC sponsor is in their respective fields: (Example: Nikola)

Dilution: SPACs provide investors warrants, which means if the stock increases in price then the target company must provide more shares to the SPAC investor resulting in a dilution for the target companies’ original shareholders

SEC Regulation: Once the target company merges with the SPAC company, they are liable to satisfy SEC requirements immediately. The one-year grace period usually afforded to companies during a traditional IPO process does not apply to SPACs

Investment Banking Fees: Banks rack in fees (~10%) for their role in structuring the SPAC pre/IPO and during the merger/acquisition process. While the overall costs of an IPO are still higher during a traditional process, fees are still high for underwriters in the process compared to a direct listing process.

Target Company: Investors do not have an idea of what private company is being targeted in a SPAC IPO. As a result, the opportunity cost of investing in an asset that provides a vague direction of the potential private company to be acquired is present. Investors can certainly pull out before the merger if they don’t like the target company but would have missed additional opportunities during that time frame.

SPACs Structure:

SPAC will undergo the typical IPO process to file with the SEC and then begin raising the funds.

Founders invest initial capital to form the SPAC

Sponsor will purchase founders shares to ensure that they maintain 20% of the equity post-IPO

Bill Ackman made a change to his SPAC removing founders share and creating a similar private equity structure with carried interest and hitting a hurdle rate of return

IPO is made of units which are common shares and warrants

Public investors purchase units, which are made up of one share of common stock and a fraction of a warrant to purchase common stock in the future. The price is usually $10.00 per unit.

Only whole warrants are exercisable at $11.50 per share. They become exercisable 12 months after the SPAC IPO

IPO proceeds and initial capital contributed to the SPAC are placed in a trust account until the acquisition or merger occurs

The sponsor of the SPAC will also seek additional investment vehicle known as a PIPE (private investment in public equity) to fund the acquisition of the merger of the company. The investors experience lower fees for the opportunity to participate in the process

SPACs are also subject to time restrictions for the target company and operations.

The company must buy a business in less than 24 months

Market value of the business must be 80% or more of the SPACs trust assets

A couple of key notable SPAC transactions are:

Pershing Square Tontine Holdings: (PSTH)

Price: $22

$4 billion capital raised

Churchill Capital Corp. III: (CCXX)

Price: $10.29

$1.1 billion capital raised

Social Capital Hedosophia Holdings Corp. II: (IPOB)

Price: $12.39

Current Funds in Trust: $414 million

-Igli

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Hi Everyone,

It’s obvious today that we all live in the “intelligence economy”. Companies need to have the ability to understand their data quickly and generate real-time insights. Data is generated from multiple sources in any organization and can be very difficult to consume. However, today we will breakdown Sumo Logic (SUMO), the company with the goal to “close the intelligence gap” in the digital world.

Business Summary:

Sumo Logic is a cloud-based machine data analytics tool that aggregates and unifies all the company’s machine data in one place to generate actionable insights in real-time. The company leverages artificial intelligence and machine learning capabilities to automate the collection, consumption, and analysis of data. Customers can monitor their application, cloud, and on-premises infrastructure. They can rapidly detect and resolve security threats. Additionally, they can also analyze key performance indicators from various types of machine data to gain insights about their customers’ behaviors, engagements, and actions. The end-to-end enterprise software intends to utilize its continuous intelligence platform and to deliver four main solutions that close the intelligence gap for customers.

Operational Intelligence

Security Intelligence

Business Intelligence

Global Intelligence

Technology Features: The platform is a multi-tenant, cloud-native that provides log management and analytics delivering the following benefits:

Data Collection and Management: Platform scans 873 petabytes of data per day and an average of 18.6 billion events per second.

Visualization and Exploration: Offers powerful data exploration, filtering, and visualization to empower users with insights and intelligence.

Search and Analytics: Proprietary analytics enables monitoring, troubleshooting, and identifying operational, security, and compliance incidents.

Architecture and Security: The platform is hosted on AWS and runs across multiple regions with multiple AWS data centers. Data is encrypted in transit and in rest.

The company’s visions as stated in the S-1, is: “to democratize machine data, making insights from this rich source available to all.”

Industry:

Software is eating up the business ecosystem. Businesses must be able to evolve into the digital world with the ability to aggregate, digest, and analyze large data that delivers insights. With rising complexity, the industry faces challenges ranging from manual processes, unscalable on-premises software, and outdated licensing models. To tap into the benefits of differentiated digital services, organizations must adopt new approaches to their software architecture, tools, and development process. As a result, the following trends have emerged in the enterprise solutions ecosystem relating to data optimization and analytics.

Modern Application Architectures

Multi-Cloud Adoption

Continuous Security

Continuous Real-Time Sharing of Data

Data-Driven Intelligence

Market Opportunity:

The total addressable market in the intelligence economy is estimated to be $55.1 billion. This market involves activities related to predictive analytics software, AI software, and analysis software.

Business Model Landscape:

The company generates revenue through a sale of subscriptions. Subscriptions are usually annual but can be three years or longer. The company provides also a tiered-subscription model based on volume of data collected, duration of data retention, and platform functionalities and features. Sumo Logic ensures customers have flexibility in to consume and analyze data with the appropriate functionalities of the platform. To execute the subscription model, the company deploys a go-to-market strategy that includes self-service on the website, inside and field sales team, and partner channels. The company has had high success with its land-and-expand approach to transform customers using the free platform to use the premium subscription tiers.

The following customer landscape is created based on the revenue model Sumo Logic has created:

2,100 customers as of 07/31/20 with over 125,000 users

330 customers with >$100,000 in ARR and 29 customers with >$1 million in ARR

No customer represented more than 10% of revenue and they range from cloud-native companies to companies undergoing digital transformations

Examples of customers include Netflix, Major League Baseball, Pokémon USA, JFrog, JetBlue, Qualtrics, Salesforce.com, 23andMe, Ticketmaster

On average the annual recurring revenue of the customer base grew at a compound growth rate of over 35%

Competitive Strengths (Moats):

The company aims to close the intelligence gap for customers. According to the S-1 filing, Sumo Logic has identified a series of advantages.

Network Effects: Users can share insights and collaborate with each other. More users, more insights, greater amounts of data consumed in the platform which in return results in greater insights to new users. A flywheel effect is created with customer adoption. Additionally, the company can harness insights from customer’s application architecture, and processes and benchmark them across new customers. This allows the company to offer greater value as the customer base grows.

Continuous Intelligence Platform: The platform is designed to collect and centralize data from a multitude of sources with seamless integration and often used for operational intelligence. The data-to-everything platform can be applied to almost any use case in an organization.

Accessibility to the entire organization: The platform offers enterprise-class access control and 175 out of the box applications to users. Teams can easily perform and share analysis across functions, set alerts to identify teams of events and deliver information to the correct groups.

Service and support broad customer base: The platform is designed with an easy to use and intuitive interface which includes visualizations, dashboards, and alerting capabilities. Customization for heavy technical users is also available. Any skill level can be easily on-boarded.

Flexible subscription model: Relative to its competitors, the company offers cheaper pricing for the services. The subscription packages are simple and designed to provide customers with the ability to expand their use.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: There are established businesses in the cloud-data analytics world. Key competitors include Splunk and Elastic. These companies have more capital and resources at play and can mitigate growth opportunities.

Packaging and Licensing Model: The industry is relatively new but with large players when it comes to their respective business models. The company could face downward pressure from customers regarding pricing or direct pressure from competitors. Also, multi-tiered packaging and licensing is highly vulnerable to economic conditions. Customers can cancel due to short-term contracts.

Long and unpredictable Sales Cycle: Long-term sales cycle is a risk when expanding to new customers. With unexpected events like Covid-19 and economic downturn, customers are operating at limited budgets. This can put the sales process at risk.

Security Risk: The platform collects, stores, processes, and transmits customers’ data. The brand heavily relies on strong security measures to protect the data. Any breach can lead to lack of trust and a drastic loss of customers.

Amazon Web Service Reliance: To deliver the platform the company relies on AWS for the cloud infrastructure services. Any changes to the structure of the agreement can result in outages of the platform and negative financial impact.

Team:

The company was founded in 2010 by big data and security experts. The current team is composed of the following:

Ramin Sayar, President and CEO: Mr. Sayar served as SVP and GM for the cloud management business unit at VMware.

Christian Beedgen, Co-Founder and CTO: Prior, Mr. Beedgen served as Chief Architect, Director of Engineering at ArcSight and Co-Founded Gigaton, a cloud file management company.

Sandeep Khanna, Chief Development Officer: Prior Mr. Khanna served as Partner Director of Engineering at Microsoft and various roles at Yahoo, Inc.

Financial Performance:

The company has 98.7 million outstanding shares at a price of $21.80 resulting in a market cap of $2.15 billion.

The company has achieved $155.1 million in revenue for year 2019, a 50% increase over the $103.6 million earned in 2018. More recently the company earned $96.6million in six months ended 07/31/2020 resulting in a 38% YOY.

The company has yet to make profits. As of 2019 and 2018 net losses were $92.1 million and $35.9 million. Gross Margins for the business for 2019 were around ~71%.

Additionally, the net dollar retention rate for Sumo Logic has fluctuated between 120% - 130%. The company has experienced an ARR of 46% in 2019 and 11% as of 07/31/2020.

Sumo Logic plans to continue growth through the following strategies:

Grow customer base: 16% of revenue came from international customers. Sales and marketing efforts in EMEA are a key focus.

Expand services within the customer base: Make it easy and cost-effective to increase data consumption for customers. This will expand the existing base with locked subscriptions.

Enhancing innovation: New cloud-native SIEM and comprehensive solution to offer real-time visibility and security intelligence.

Strengthen technology partnerships: Utilize AWS marketplace to enhance reseller partnerships

-Igli

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Hi Everyone,

Healthcare costs are out of control in the US. Consumers are bearing the majority of the cost of care and are experiencing restrictions from a fragmented industry. This rising challenge has created an opportunity for a company to revolutionize the industry with a consumer focused digital healthcare platform. Today we will breakdown GoodRx (GDRX), the company with the goal to “make healthcare services affordable”.

Business Summary:

GoodRx is a healthcare tech company that aims to offer affordable healthcare service to American consumers. Their software platform offers pricing discounts for medications, telehealth services (HeyDoctor), and health education services. The company has created a healthcare ecosystem that connects consumers, healthcare providers, pharmacies, pharmaceutical manufactures, and pharmacy benefit managers. GoodRx wants to reduce healthcare costs for the American consumer, drive faster treatment, better patient care and outcomes, and provide healthcare consumer education. Medical adherence, accessibility, low costs, and consumer satisfaction are the desirable outcomes that GoodRx seeks from using its platform.

The company breaks down its value proposition across three targets:

Consumers: Allow people to fill prescriptions and access treatments through telehealth. The price comparisons and negotiated prices have contributed to $20 billion of savings to date.

Healthcare Professionals: Engagement between physicians and consumers through telehealth services have improved interaction.

Healthcare Companies: Empower Pharmacy Benefit Manages to offer discounted prices to consumers and grow their cash network. The company has created a direct to consumer channel to reduce costs drastically.

Technology Features: The platform is offered through a website and application that can be accessed across many devices. The foundation is built on the following features:

Propriety Pricing Engine: Price technology that links with multiple sources across the industry and patent technology that offers collection and normalization of prices to PBMs as a single consumer interface. 150 billion prescription prices are aggregated every day.

Living Database: The platform has processed $8 billion gross merchandise value and offers valuable insights to improve the consumer experience.

Proprietary Telehealth HER: HeyDoctor is supported by unique electronic health record to allow physicians to conduct online patient visits with build-in messaging and video capabilities. This also sends electronic prescriptions and pricing and is easily accessible to healthcare workers.

The company’s mission as stated in the S-1, is: “Help Americans get the healthcare they need at a price they can afford”

Industry:

Healthcare consumers are facing an enormous amount of challenges in the U.S. due to rising costs and restrictions imposed on their care. The total estimated spending in the U.S. healthcare market is $4 trillion and expected to grow to $6.2 trillion by 2028. Despite the having best health-care technology and services in the world, the market is fragmented leading to a difficult experience for American consumers. The industry currently experiences the following challenges:

Consumer-Facing Solutions: Technology driven platforms that create ease for consumers and consolidate information in one source

High Costs: Healthcare costs contribute to 66% of all personal bankruptcies in the US. 30% of prescriptions are not being filled and 64% of Americans risked their health due high costs

Transparency: Complexity, fragmentation, and limited ability to compare healthcare prices are common. 70% of Americans do not know that prices of prescriptions can vary widely between pharmacies

Access to Care: The average wait time for a new patient visit in the 15 large cities was 24 days in 2017. Basic needs are not addressed quickly leading to higher costs

Market Opportunity:

The total addressable market across the healthcare services identified by GoodRx is around $800 billion.

Business Model Landscape:

Revenue is generated by the prescription offerings, subscription offerings, pharmaceutical offerings, and telehealth offerings that GoodRx offers to allow consumers to save money. The company deploys a direct-to-consumer business model.

Prescription offering: The company allows consumers to compare prescription pricing and show negotiated prices that are available. GoodRx is then paid a fee from pharmacy benefit managers when the code is used. The fee can be fixed, or a percentage of fees earned by the partners. This made up 94% of the revenue in 2019 and 91% in 2020

Subscription offering: Company launched Gold and Kroger Savings for a monthly subscription to access deeper discounts. The company receives the fee from subscribers with Kroger share the fee

Pharmaceutical offering: 20% of consumers search for branded medication and as a result partnering with the manufacturers opens consumer savings. Manufacturers pay a fee to advertise, integrate and communicate solutions on the platform

Telehealth offering: The company offers their own telehealth provider (HeyDoctor) and a telehealth marketplace. Revenue is derived from visit fees on HeyDoctor and fees for directing consumers to third-party telehealth providers in the marketplace

The following customer landscape is created based on the revenue models GoodRx has created:

15 million monthly visitors in Q2 2020 visited the app and websites.

Monthly average consumers 4.4 million from 0.7 million in 2016.

A monthly average consumer is a unique consumer who has used GoodRx code to purchase a prescription at a discount from the list price in a month.

80% of transactions for the prescription offering have come from repeat activity

GoodRx codes are accepted in over 70,000 pharmacies (79% of total pharmacies)

1,000 consumers per day completed online visits on HeyDoctor in Q2 2020.

Healthcare net promoter score that identifies customer satisfaction was 90 out of 100.

The GoodRx app has 700,000 rating reviews with a 4.8/5.0 score.

The company has entered a partnership with Kroger to provide discounts and allow retailers to increase store traffic.

Competitive Strengths (Moats):

The company aims to make healthcare affordable. According to the S-1 filing, GoodRx has identified a series of advantages.

Platform: 150 billion prices are aggregated daily resulting in an aggregate discount of 71% for consumers on medication costs

Brand: 68% of healthcare providers recommended the platform to patients and the platform received a high NPS score highlighting strong consumer satisfaction. The brand is associated with transparency and trust

Scalable Network: The companies gross merchandise value was $2.5 billion in 2019. This result is due to an extended network of PBMs, pharmacies, and pharmaceutical manufactures

Consumer-Facing: The platform represents a one-stop-shop for consumers to interact with their healthcare services. It is designed to deliver a consumer-first experience that is easy to use. Inherently consumer information is saved across the network, so the codes apply instantly for all future refills

Extension Services: High engaged consumers provide room for the platform to offer additional services such as telehealth. The additional services will increase customer lifetime value and reduce additional customer acquisition costs

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: Primary barrier to adoption is awareness. Consumers are not aware prices vary widely between pharmacies. They are also not aware of direct-to-consumer telehealth options. In prescriptions the competition is fragmented and are smaller. In telehealth the largest competitors are Teladoc, Amwell, MDLive, and Doctor on Demand.

Revenue Risk: A significant portion of revenue is driven by prescription offerings. Majority of this revenue was driven at brick and mortar pharmacies. Diversification is key as any changes to the behavior of consumers can impact.

Pricing is dependent on Industry Participants: The company does not impact price negotiations. As a result, changes in pricing structures from manufacturers, healthcare insurance companies, and PBMs will impact available discounts.

Lack of control for categories and prescriptions: PBMs determine discounts on certain medications based on negotiations with manufacturers and insurance companies. Changes in types of medications and categories can impact consumer satisfaction.

Limited Number of Industry Participants: The industry is concentrated in terms of national pharmacy chains, and PBMs. Favorable contract agreements are necessary because revenue is dependent on PBMs participation. Three of the largest PBMs accounted for 48% of the revenue in the first half of 2020.

Government Regulation: Heavy regulation such as the Patient Protection and Affordable Care Act will come under revision with additional regulation as the government focuses on the prices of medications. This can impact the partners involved in the current value chain.

Team:

The company’s founders and executive team are veterans in the healthcare tech space:

Douglas Hirsch, Co-CEO and Founder: Hirsch served as CEO at DailyStrength, a social network focused on health and wellness. He was also an early employee at Yahoo!.

Trevor Bezdek, Co-CEO and Founder: Bezdek served as managing partner at a technology firm and co-founded Biowire, building information tools for researchers.

Bansi Nagji, President, Healthcare: Served five years as Executive Vice President and Chief Strategy at Mckesson Corporation, leader in healthcare supply chain management.

Financial Performance:

The company has 384 million outstanding shares at a price of $52.04 resulting in a market cap of $19.9 billion.

The company has achieved $388 million in revenue for year 2019, a 56% increase over the $250 million earned in 2018. More recently the company earned $257million in six months ended 06/30/20 resulting in a 48% YOY.

Since 2016 the company has experienced CAGR of 57%, and it has profitability. As of 12/31/2019, and 2018, the company’s net incomes were $66 million and $55 million. Gross Margins for the business as of 12/31/2019 were around ~96.4%.

The company has also generated operating earnings of $160 million in 2019, a 41.1% increase from 2018. More recently they have also maintained a 39.4% AEBITDA representing strong earnings and translating to a $76 million free cash flow business as of 06/30/2020.

GoodRx plans to continue growth through the following strategies:

Expand of HeyDoctor Telehealth and the Telehealth Marketplace

Expand Subscription services: Partner with pharmacy chains and retailers like Kroger to introduce savings

Healthcare Education content creation: Expand brand trust by being a leader in healthcare information, education, and updates.

Expansion of Platform services: Clinical trials, prescription delivery and in-house doctor visits.

Igli

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Hi Everyone,

The creation of content has come a long way from the 2D static features. The industry has evolved to where consumers are demanding dynamic real-time 3D content. Gaming has embraced the revolution with many industries to follow. Today we will breakdown Unity Software (U), the company with the goal to “enable more people to become creators”.

Business Summary:

Unity provides a platform to create and operate interactive, real-time 3D content. The creators utilize a set of software solutions to build, run, and monetize 2D and 3D content across phones, tablets, PCs, consoles, and augmented/virtual reality devices. The platform is widely used in developing very popular games and shifting to other industries. As one of the world’s most popular gaming engines, Unity has focused on ensuring its platform focuses on the following pillars:

Engaging and Immersive Experience

Real-Time interaction with developed content

An interactive experience to connect with content and developers

Technology Features: Unity’s platform includes Create Solutions and Operate Solutions to offer an ecosystem for developers.

Create Solutions: This feature is powered by a software development engine that provides all the tools for creators to create, edit, run, and deploy real-time 2D and 3D content across 20 platforms. The platform offers custom scripting tools, graphics, animation, audio tools, networking, user interface tools and many more.

Operate Solutions: This feature allows customers to engage and grow their end-user base. The engine offers personal advertising, contextual advertising, end-user engagement, and many other features to acquire end-users for customers, retain them and ultimately monetize the product.

The company’s vision as stated in the S-1, is: “We believe the world is a better place with more creators in it.”

Industry:

For many years, content creation regarding photos and videos involved capturing three dimensional images through a 2D lens and projected into a 2D surface. Technology now is evolving and shifting the industry to interactive, real-time 3D content. This change has fueled gaming and now influencing other industries such as architecture, automotive, and film. The proliferation of real-time 3D content has been fueled by compute power, platforms and devices, distribution, and connectivity through the internet. As a result, the following trends have emerged that Unity has implemented in its platform.

Fast, High-Quality Production with Real-Time Technology

Create Once and Deploy Anywhere

Set of Solutions for Creators of All Types

Technology to keep pace with new hardware platforms

Market Opportunity:

The total addressable market across gaming and other industries is around $29 billion.

Gaming: The market opportunity is estimated around $12 billion with over 15 million potential creators and expected to grow to $16 billion by 2025.

Industries Beyond Gaming: The market opportunity is estimated around $17 billion, based on software developers, artists, architects, and other developers.

The company highlights that there is significant opportunity in augmented reality and virtual reality applications which will represent a significant portion of the business in the future. This will lead to industries beyond gaming where there are over 37 million engineers and technicians as potential customers.

Business Model Landscape:

Unity has a series of business models to generate revenue.

Create Solutions is used to generate subscription and associated professional services

Pricing models are designed to support creators at many stages. Customers with $100,000 in annual revenue/funding purchase the following plans, Unity Plus, Unity Pro or Unity Enterprise.

Operate Solutions is used to generate a revenue share and usage-based revenue

Majority of the revenue is generated under a revenue-share model and the remainder is usage-based revenue.

Strategic Partnerships involves contracts with hardware, operating system, device, game console, and other technology providers

Asset Store provides revenue from sales of tools, content, and softwares for real-time interactive games and applications

The distribution of revenue is based on the following breakouts:

Create Solutions: 28%

Operate Solutions: 61%

Strategic Partnerships and Other: 11%

The following customer landscape is created based on the revenue model Unity has created:

Global customers distribution is as follows:

EMEA (38%), Asia-Pacific (32%) and Americas (30%)

Unity operates with a strong partnership in China

Customer is defined as an entity that generated revenue. (Example: All of Zynga’s Unity subscriptions and services purchased as considered as one single customer)

716 customers generated >$100K in trailing twelve months composing 74% of the subscription revenue

Gaming Customers: Electronic Arts, Nintendo, Take-Two Interactive, and Zynga

Popular Games: Arena of Valor, Honor of Kings, Pokémon GO

Customers beyond Gaming: Skanska (large construction company), Volvo Cars, Moving Picture Company (Disney’s 2019 recreation of Lion King)

Strategic Relationships: Apple, AutoDesk, ARM, Google and DeepMind, Intel, Microsoft, Tencent.

93 of the top 100 game dev studios were Unity customers

53% of the top 1,000 mobile games on the Apple App Store and Google Play were made with Unity

50% of mobile, PC and Console games combined were made with Unity

Competitive Strengths (Moats):

The company aims to become the 3D operating system of the world. According to the S-1 filing, Unity has identified a series of advantages.

Platform: The software engine provides a strong ecosystem for developer to create and monetize. As a result, 2 billion monthly active end-users consume the content created and an average of 15,000 new project are created each day.

Market Leader in Game Development and Strong Brand Awareness: Unity is aiming to be a monopoly with their platform and the brand is synonymous with real-time 3D development.

Innovation, Talent, and R&D: $450 million in R&D and 56% of the headcount in the company is focused on R&D. To date a dozen acquisitions have been conducted to acquire talent and technology.

Data Footprint and Sophisticated Analytics: Analyze and capture end-user behavior and application performance data from over 50 billion in-app events per day across 20 unique platform devices.

Unity Creator Community: 1.5 million active creators are developing 8k games and application per month. 5.1 hours a day are spent by active creators. Additionally, partnerships with Unity make it easy for creators to interact and deploy their product.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competition: From the creation feature, the main competitors are Unreal Engine (Epic Games), and Cocos2d (Chukong Tech). From the monetization/advertising features the main competitors are Amazon, Google, Microsoft and Tencent (mainly partners).

Substantial Revenue concentrated in one service: Customers depend on Unity as a primary source of their revenue due to platform. Growth will be challenged based on demand for new features, and functionality to deliver value to customers. Unity is on the hook to derive a large base of advertisers to the platform

Operating System Platform and Application Store regulations: The company (Apple, Google) policies govern the promotion, distribution, content and operation of applications and content. A change in fee structure or technical requirements can incur costs.

Strategic Relationships: Separate multi-year agreements are created and currently impact 11% of revenue. Acquisitions of strategic partners, or the fact that certain partners compete with certain features of Unity’s platform can also impact performance

Expansions into other industries: Growth is dependent on penetrating non-gaming industries (construction, automotive, film, etc.) Cost, performance, and perceived value are important factors to create adoption in these markets. Substantial investments to allow the platform to adapt to these diverse industries is key

Team:

The company’s founders and executive team are veterans in the software gaming space:

John Riccitiello, CEO: Riccitiello served as the CEO and COO for Electronic Arts.

Joachim Ante, Co-Founder and CTO: Ante co-founded the company and developed the core of the Unity Platform as a teenager.

Luc Barthelet, SVP of Technology: Barthelet founded TirNua, a game company, and served as CEO for a company that built a computational knowledge engine

Danny Lange, SVP of AI, and ML: Served as Head of ML at Uber Technologies.

Sylvio Drouin, SVP of Unity Labs: Served as CTO at Xtranormal Technology that developed a 3D storytelling tool. He authored 15 patents.

Financial Performance:

The company has 263 million outstanding shares at a price of $89.40 resulting in a market cap of $23.5 billion.

The company has achieved $541.8 million in revenue for year 2019, a 42% increase over the $380.8 million earned in 2018. More recently the company earned $351.3million in six months ended 06/30/20 resulting in a 39% YOY. Majority of the revenue is international.

While the company is expecting steady growth, it has not achieved profitability. As of 12/31/2019, and 2018, the company’s net losses were $163.2 million and $131.6 million. Gross Margins for the business as of 12/31/2019 were around ~79%.

Additionally, as of June 30, 2020, the net dollar retention rate for Unity was 142%. During the year majority of the increase in the rate was due to increase use in Operate Solutions by existing customers.

Unity plans to continue growth through the following strategies:

Investing in Innovation: MARS focuses on augmented and virtual reality

Growth with Existing Gaming Customers: expand subscription services

Growth among Developers: Investing in free platform and education will convert creators to become future Unity users

Growth across Industries beyond Gaming: 3D content in business, construction, and other industries

Global Market expansion: The gaming market in Asia is estimated at $70 billion

Igli

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Hi Everyone,

The way we work has been a prime focus for many software companies. Automation, transparency, and integration are key trends that are emerging in the space. Today we will breakdown Slack (WORK), the company with the goal to “make people’s working lives simpler, more pleasant, and more productive.”

Business Summary:

Slack is a messaging software platform that allows people to connect and work together more effectively. The enterprise software is intended to initially replace e-mail and aimed at supporting any activity related to work. These activities can range from hiring, coordinating executive plans, planning budgets, organizing political campaigns, and many other forms. The company is a new layer of the business technology stack that brings together people, applications, and data.

The company creates a hub of shareable business information inside and across organizations. The information is streamlined, transformed, and directed to the correct people to leverage productive decision making.

Technology Features: Slack was designed from the ground up to create a platform with scalable integration capabilities. It can achieve this scale with the following features:

Messaging and team-based channels: Brings the right people to collaborate and share information. More than 15% of Paid Customers have adopted shared channels and on average a customer has four channels

Advanced Search: Users can tap any information stored in the software and use it as needed. Machine learning is also used to help in accessing a rich archive of stored information.

Software Application Integration using Workflow Builder: Design custom applications or access third party applications (Salesforce, Shopify, Zoom, etc.) to interact with information from the channel. 620k applications have been used or created as of 01/31/2019.

App Directory: Access and list of applications that address anything related to knowledge work.

The company’s vision as stated in the S-1, is: “Our vision is a world where organizational agility is easy to achieve, regardless of an organization’s size.”

Industry:

As software is expanding, customer’s needs, competitor’s behavior, and overall macro conditions are also rapidly evolving. The change creates new opportunities in the way information created by software at work is shared across organizations. E-mail has been the bridge of communication for enterprise software and has proven to be an ineffective method when it comes to sharing and managing information. Current forms of communication create endless threads of communication and often operate in silos. Information becomes inaccessible and overall organizational transparency deteriorates. Due to the fast-demanding landscape, the following industry trends have appeared based on market needs:

Simple and intuitive communication platforms

Accessibility through channel-based communication

Integration of existing software applications with the communication platform

Organizational agility

Market Opportunity:

The total addressable market for workplace software platforms for communication and collaboration is around $28 billion. The company ultimately believes and aims to shift any customer’s working life who is consumed by e-mail.

Business Model Landscape:

Slack offers a self-service approach, for both free and paid subscriptions. Slack generates revenue through a subscription model consisting of four stages: Free, Standard, Plus, and Enterprise Grid

The first three subscription plans apply to small or medium-sized teams

Enterprise Grid plan is designed for larger organizations that require multiple workspaces, centralized secure data controls, integration of software applications, and unlimited communication channels.

The go-to-market strategy relies on word-of-mouth and brand-awareness initially penetrating small teams in organizations. The initial phase creates user awareness and organic growth. Conclusively, the direct sales team is then used to expand to enterprise features. Slack also utilizes partnerships from top enterprise companies to integrate into organizations.

The subscription model and go-to-market strategy have resulted in the following customer landscape.

As of January 31, 2020, Slack has 660,000 organizations

An organization is a company, institution, or distinct business unit on a free or paid subscription

550,000 organizations are on free subscriptions

110,000 organizations are classified as Paid Customers

Paid Customer is an organization with three or more users on paid subscriptions

During the years ended in 2019 and 2020, no Paid Customer accounted for more than 3% of revenue

1.4 billion messages were sent on Slack during a week and a user connected on average 9 hours a day and active 87 minutes

985 paid customers were >$100,000 ARR which accounted for 49% of revenue.

All Amazon employees have access to Slack.

Competitive Strengths (Moats):

The company aims to workplace communication software industry. According to the S-1 filing, Slack has identified a series of advantages.

Organic User Growth: Self-service strategy allows users to understand the benefits of Slack. This customer engagement plants the seed for continuous growth.

Network Effects: The slack network allows communication and collaboration through shared channels. This ecosystem fosters value creation for each additional and existing user or organization. In addition, the platform also allows developers to build or integrate more apps to create incremental value. Slack Connect which allows external secured connections to other organizations is a leap forward in the industry.

Customer-Centric Design: Software and user interface are key elements. Slack has revamped the user interface to allow for clean messaging, access to apps, and organizational features that make information transfer simple and productive

Scale and market leader: Slack has a high user engagement, and which opens natural opportunities for scale. The platform is easy to use and intuitive with little required workforce training at an organization.

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance. In order to mitigate these risks, the company has to ensure product innovation and scalability.

Competitor: Slack principally competes against collaboration and communication platforms. Microsoft, Google, Cisco, Facebook, and more recently Zoom. The majority of these competitors are already integrated in the Slack’s customer base in some limited fashion.

Regulation to the Privacy of Data: Compliance with certain regulatory acts such as HIPAA is important. The company has to ensure the security of private data for users in organizations to prevent government oversight and potential customer churn.

Growth Management: Slack must continue to add new users and organizations. The premium subscriptions are key to additional growth and due to the one-year contract commitment, consistent upgrades are necessary to satisfy customer’s changing needs.

Platform integration and features: To maintain a competitive edge, innovation is key to offering features, integration, and enhancements. Capital constraints can severely limit the progress of the company opening it up to larger brands. Product differentiation and customer service are critical. The company granted $8.2 million in credits due to disruption in infrastructure during the quarter ended on 07/31/2019.

Team:

The company’s founders and executive team are veterans in their respective fields.

Stewart Butterfield, Co-Founder, CEO: Prior to Slack, Stewart served as General Manager of photo-sharing website Flickr at Yahoo! Inc.

Robert Frati, SVP of Sales and Customer Success: Prior to Slack, Robert was SVP of Commercial Sales at Salesforce.

Cal Henderson, Co-Founder, CTO: Cal served as Director of Engineering at Yahoo Inc. and served as Director of Web Development at Ludicorp Research and Development LTD.

Chamath Palihapitiya, Investor and Board Member: Chamath’s reputation as an acclaimed Billionaire and investor brought additional experience to the table. He owned 10% of the company and has claimed Slack to be the only investment he would make in the enterprise software realm.

Financial Performance:

The company has 570.5 million outstanding shares at a price of $26.69 resulting in a market cap of $15 billion. In a span of 52 weeks, the stock ranged from $15.10 - $40.07.

The company to date has generated steady growth and revenue from monthly and annual subscriptions. 62% of the revenue is generated in the U.S. It achieved $630.4 million in revenue for the fiscal year ending 01/31/2020, a 57% increase over the $400.6 million earned in 2019. More recently the company earned $417.5million in six months ended July 31, 2020, resulting in a 49% YOY. The pandemic sparked an initial influx of customer demand and then leveled out during the year due to economic conditions related to Covid-19.

While the company is expecting steady growth it has not achieved profitability. As of 01/31/2020, and 2019, the company’s net loss was $571.1 million and $140.7 million. Gross Margins for the business as of 01/31/2020 were around ~85%.

Slack has achieved an ARR of 19% in 2020 and 49% ending 01/31/2020. While there is a slowdown due to the pandemic the company still maintains stable growth resulting in ARR of $863M as of July 31, 2020, and ARR of $8K per customer.

Additionally as of July 31, 2020, the net dollar retention rate for Slack was 125%. Revenue continues to grow and the penetration into existing, long-term Paid customers is also increasing.

On April 9, 2020, the Company also issued an $862.5 million in convertible senior notes at a rate of 0.50% per year. The company is focusing on increasing its cash to continue growth and achieve break-even profitability.

Slack plans to continue growth through the following strategies:

Enable slack usage across existing and new business networks

Grow application platform and developer ecosystem

Expand Network Effects through slack connect to ensure secure connections across external organizations.

International expansion is key to expand beyond the existing 38% of revenue

Leverage AI, machine learning, and advance search to streamline and automate workflows

Igli

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Listen now (13 min) | Through the decades there have been only 576 humans to have traveled beyond Earth’s atmosphere. In particular, Dennis Tito, an American Entrepreneur, paid $20 million to become the first space tourist to the International Space Station. Space Travel has resurrected and now is the new frontier for human expansion. Today, we will breakdown the first public company aimed at pioneering human spaceflight. Virgin Galactic (SPCE), will aim to transform commercial spaceflights.

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Hi Everyone,

We continue the software trend and decided to breakdown the one and only Asana (ASAN). This company aims to revolutionize working together effortlessly. Its valuation can range somewhere between $1.7 - $4.2 billion.

Business Summary:

Asana is a software-as-a-service platform that is designed to improve and manage team collaboration and work management. The goal behind the work management platform is to allow teams to manage any task/project/portfolio and understand exactly who is doing what. Teams can create projects, assign work to colleagues, set deadlines, share tasks, and assign goals measuring key performance indicators.

While at Facebook, the co-founders saw that coordination challenges persisted as the company scaled. A significant amount of time was being spent in inefficient meetings and long communication threads. This frustration was universal creating an opportunity for the founders to solve problems.

The platform is built on three pillars:

Clarity: structure to what needs to be done

Transparency: all stages of work are visible to understand progress and completion

Accountability: Ambiguity over responsibilities and goals is removed

Technology Features: The platform is built on top of Amazon Web Service and the proprietary data model is called the work graph. The work graph offers users an experience that is customized and easy to navigate. It encompasses the following features:

Units of Work – (Tasks, Projects, Portfolios, goals)

Identifies people responsible for the units of work

Outlines the process of completing the work through templates and rules

Allows access to information (files, attachments) to be associated with the work

Ability to map a web of relationships in the data

The model is intended to provide all layers of an organization’s team dynamic views into the work all based on the same data in the work graph.

The company’s vision as stated in the S-1, is: “Our mission is to help humanity thrive by enabling the world’s teams to work together effortlessly.”

Industry:

The modern working environment demands faster responding to the ever-changing market demands. People are facing an overwhelming volume of communications from email, a messaging application, and status meetings. 60% of knowledge workers’ time is spent on work about work.

The founders of Asana realized that employee engagement is crucial to delivering better customer engagement, higher productivity, better retention, and higher profitability. The founders understood the evolution of the following trends brewing in the industry:

New purpose build solutions for work management that provide transparency, clarity, and accountability

Spreadsheet and email lack the capability to plan, manage, and orchestrate at scale

Legacy project management tools are difficult to adopt across all skill levels of the workforce

Vertical software platforms focus on certain functions of work creating information silos and fragmented sharing of data

Market Opportunity:

The total addressable market for collaborative, project, and portfolio management is $23B. It is expected to grow to $32B with a potential 39% growth by 2023.

The company believes they are <3% penetrated among the addressable employees in their existing customer base within significant room for growth. In totality, the company believes they can address the 1.25 billion global information workers.

Business Model Landscape:

Asana implements a hybrid self-service and direct sales model to efficiently reach teams and then expand the platform within the organization (similar strategy to Slack). Asana can penetrate the market by providing a free version and a feature where customers can invite guests. This allows then the company to transition the customers to a paid subscription composed of three levels.

Premium, Business, and Enterprise

Business and Enterprise level customers subscribe mainly to the annual plans

Subscriptions have grown to represent 46% of revenue for the six months ended July 31, 2019

The simple subscription model has resulted in the following customer landscape and performance.

Dollar-based net retention rate for organization spending >$5K was 125% consisting of 7,933 customers

Dollar-based net retention rate for organization spending >$50K was 140% consisting of 283 customers

Since inception the company has had 27M registered users

As of July 31, 2020, they had 1.3M paid users

Free-to-paid conversion rate (paid users/total number of registered users) increased from 3.6% to 4.7% as of July 31, 2020

Serve 82,000 paying customers

It is important to note a customer is defined as a distinct account (team/company/education/government institution). A single organization can account for multiple customers

No single customer was greater than 1% of revenue and top 100 customers represented 10% of revenue

Examples of customers: Autodesk, Whale and Dolphin Conservation, SiteMinder, G2, Fireclay Tile

Competitive Strengths (Moats):

The company aims to dominate the work management space. According to the S-1 filing, Asana has identified a series of advantages.

Team Culture: The company has seen an industry-leading retention rate of 90% due to the commitment of transparency, distributed responsibility, and employee growth. The company created high employee engagement, living up to the platform they are providing

Multi-Dimensional Data Model: Users across the organization realize different benefits based on their role and can work the way they want

Adaptability to virtually any use case: Customers need to evolve for single specific use and extend the platform to additional cases and departments to increase collaboration on cross-functional projects. Strong adoption is used in the employee onboarding, goal setting, and meeting agendas processes for an organization

Customer Experience: Through Asana Together programs, online forums, Asana Certified Pros, the company creates a vibrant ecosystem that provides efficient customer feedback and solutions. The sense of community has resulted in great feedback

Hybrid Go-To-Market Model: The majority of the customers use self-service and free trials to interact with the platform. This builds repertoire resulting in the direct sales team to effectively convert free customers into paying customers

High-Performance model: User data is maintained in the cloud-native platform and changes are immediate with real-time collaboration. Architecture has propriety intellectual property that enables flexible and fast queries

Easy to adopt for the team: The platform has an intuitive interface that allows users with any skill level to easily set up and navigate personal projects

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Competitive Market: There is a low barrier of entry in the market. Competition falls into three categories:

Work Management Solutions (Smartsheet Inc)

Productivity Suites (Microsoft, Google)

Vertical Solutions (Atlassian Corporation)

Key Organization Leaders: CEO and Chair, Dustin Moskovitz is an essential ingredient in the organization and needs to be retained

Free Trial Conversion Rate and expansion of usage within an organization: The company believes that besides its hybrid go-to-market strategy, word of mouth and non-paid customer referrals have increased a strong majority of the brand recognition. The subscription-based model is dependent on customers’ financial constraints and their personal experience. Expansion and service need to remain consistent across all levels of economic conditions

Revenue is driven by a single solution: The company intends to drive the solution from a single platform and depends on the demand for work management solutions in the market

Technical Operations Infrastructure: The company offers fast, reliable, and dynamic services with the platform and experiences in service outage, and delays in deployment can harm customer experience and operations. The company is heavily dependent on Amazon Web Services which provides the cloud computing infrastructure

Team:

The company’s founders and executive team are veterans in the Tech realm

Dustin Moskovitz, Co-Founder, CEO: Prior to Asana, Mr. Moskovitz co-founded Facebook, Inc serving as CTO and VP of Engineering

Chris Farinacci, COO: Prior to joining Asana, Mr. Farinacci served as Senior Director of Marketing for Google for Work and Google for Education, Alphabet. He also served as Chief Marketing Officer at Hara Software, Inc., an environmental and energy management software company

Eleanor Lacy, GC and Corporate Strategy: Prior to joining Asana, from November 2016 to July 2019, Ms. Lacey was with Sophos, Inc., a security software, and hardware company, most recently serving as Executive Vice President and Chief Legal Officer

The company has a dual-class structure of the common stock which has the effect of concentrating voting control. The team will hold an aggregate 67.8% voting power of the capital stock. The company has 16.8M Class A common stock and 134M Class B stock outstanding

Financial Performance:

The company achieved $143 million in revenue for fiscal year ending 01/31/2020, an 86% increase over the $77 million earned in 2019. More recently the company earned $100 million in six months ended July 31, 2020, resulting in a 63% YOY.

While the company is showing strong momentum in growth, they have yet to become profitable. January 31, 2019 and 2020, net loss was $51 million and $119 million. In contrast, Gross Margins of ~86% show promising outlook of future profitability as sales continue to accelerate.

In addition to the performance highlighted above, Asana has shown excellent levels of customer retention. The overall dollar-based net retention rate as of July 31, 2020 was over 115%. Customers are finding incremental value in ease of use of the platform.

Similarly, Asana has been able to increase its ARR steadily by 78% in 2019 and more recently 20% YOY. This results in about $0.003M ARR per customer.

The company plans to go public through a direct listing and based on the private transactions the price ranged from $13 – $28 per share. This gives the company a valuation ranging from $1.7B to $4.2B.

Asana plans to continue growth through the following strategies:

Expand within the existing customer base by growing the direct sales team.

Continue to build a high-value brand through customer experience

Add more customers ~currently at 82,000 paying customers

Develop functional workflows with premium functionality

Innovation expansion by growing the engineering team over 89% to expand product offerings

Productize and monetize organization-specific use cases on the platform

Igli

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Hi Everyone,

In anticipation of the IPO tomorrow, we decided to breakdown the one and only Snowflake (SNOW). This company is causing a snowstorm, as it is estimated to be valued between $27 - $30 Billion.

Business Summary:

Snowflake offers a cloud-based data warehouse platform optimized to act as a central database where customers can generate real time analytics to deliver insights. The company was founded in 2012 by data warehouse experts (two of which came from Oracle) to create an ecosystem that allows customers to break down data silos and derive value quickly from rapidly growing data.

The company built the data cloud platform on a cloud-native architecture that supports data engineering, data lake, data warehousing, data science, data applications and more importantly data sharing. The architecture is built in three major public clouds across 22 regional deployments around the world. The company has interconnected all the pieces to create a single Cloud Platform that offers consistent user experience around the world.

Technology Features:

Storage layer: integrates massive amounts of diverse data sources into a unified data record. This is dynamic and can grow.

Compute layer: provides dedicated resources to allow users to access common data sets simultaneously and seamlessly

Cloud services layer: intelligently optimizes the customers performance in the cloud with no maintenance.

The company’s vision as stated in the S-1, is: “We believe in a data connected world where organizations have seamless access to explore, share, and unlock the value of data.”

Industry:

Companies understand the explosion of data and the ability to utilize their large data sets to deliver value in the market. In the past, organizations have leveraged their data through silos preventing them from realizing the full value of their data. As a result, organizations end up investing significant capital in infrastructure clouds, application clouds, and on-site systems that are disconnected. Legacy database architectures lack scalability and capacity constraints and are not designed for the adoption of cloud-based workloads. Realizing this, Snowflake has tapped into the following industry trends to ensure product market fit.

Data is at the heart of business innovation and performance

The center of gravity is the public cloud to migrate data in a global, dynamic, and multi-cloud ecosystem

The digital economy has created data consumers

Technology consumption has evolved to embrace a utility business model where consumers pay only for what resources they use

Market Opportunity:

The total addressable market for the cloud data platform is $81B. According to IDC, the markets for Analytics Data Management and Integration Platforms and Business Intelligence and Analytics Tools, is estimated at $56B with a potential 50% growth by 2023.

Additionally, data sharing is a feature that is relatively new, and the company believes this opportunity is largely untapped.

Business Model Landscape:

Snowflake delivers its platform through a customer-centric, consumption-based business model, only charging customers for the consumption resources they use. The customers usually engage in a one-year contract term with the commitment to a certain amount of consumption at specified prices.

Majority of the revenue resides in the compute layer that houses the virtual warehouse allowing customers to access the common data sets.

Initially, many customers begin the process through a self-service trial on the company’s website. This transitions then into the direct sales team which is focused on new customer acquisitions and driving increased usage of the platform for existing customers.

This pricing and sales model highlighted above delivers strong growth for Snowflake resulting in the following customer landscape and performance.

YTD Snowflake has 3,117 customers, increasing from 1,547 customers as of July 31, 2019

7 of the Fortune 10 (4% of revenue for six months Jul 2020)

146 of the Fortune 500 (26% of revenue for six months Jul 2020)

Examples of customers (Adobe, Logitech, DocuSign, Square, Doordash, Capital One and Sony)

International customers generated 12% of the total revenue

Accumulated cash value of 56 customers is > $1M (+156% YOY).

Net revenue retention rate for customers is 158%

Competitive Strengths (Moats):

The company aims to dominate the cloud-data warehouse space. According to the S-1 filing Snowflake has identified a series of advantages.

Strong Network Effects: The Data cloud will expand as more customers/organizations move their data from siloed data repositories into the cloud. This will create the ability to exchange data between customers. The secure data exchange fosters an ecosystem of increasing the value of shared insights.

Example: “Starschema Inc., a data provider to leading organizations, made its COVID-19 epidemiological data available on our Data Marketplace on March 18, 2020. As of July 31, 2020, hundreds of Snowflake customers have consumed this data directly from their accounts to analyze the impact of the outbreak.”

Strong Management Team: The company has retained strong data architect teams, and data engineers led by CEO Frank Slootman who took two prominent software companies public, specifically ServiceNow – highly cloud software company at $65B. Retaining this talent is crucial to success.

Usage-based pricing model that distinguishes it from adapted-to-cloud service providers.

Optimize and integrate diverse data sources into one source

Supports large amounts of data through the cloud creating ability to elastically scale-up or down per the demands of the customer

Dynamic use of data simultaneously across the organization and delivering consistent, global user experience

Easy to use and access data allowing customers to utilize familiar business model languages like (SQL)

Seamless interaction resulting in reduce time spent managing infrastructure

Competition/Risks:

The company has highlighted certain competitive and operational risks that may affect its performance.

Snowflakes current competitors entail large, well-established, public cloud providers that generally compete in all the markets, including AWS, Azure, GCP, Cloudera.

A key point to highlight is that the company understand a large portion of the business is run on the AWS public cloud.

Disruptions in the with the public cloud infrastructure can impact costs and gross margins drastically. It is crucial to understand the space is dominated by Amazon Web Services (AWS), Microsoft Azure (Azure), and Google Cloud Platform (GCP)

Expansion of the company’s sales and marketing organization to increase new and existing customers is crucial. Capital One - accounted for approximately 17% and 11% of the revenue in 2019 and 2020.

Large Customers require significant investment in the sales processes exposing the company to risk.

Data regulation is evolving quickly regarding privacy concerns. Legislation can impact operating costs leading to lower performance. It can force the company to make changes to the invaluable sharing service and the quality of data in the cloud. Examples of legislation that have passed in Europe and locally in the U.S. reveal a strong push from legislative bodies.

General Data Protection Regulation (GDPR) - established requirements applicable to the handling of personal information of residents of the European Union (EU).

In January 2020, the California Consumer Privacy Act (CCPA) took effect, providing California residents increased privacy rights and protections

Team:

The company’s founders and executive team are veterans in the cloud-data warehouse sphere.

Frank Slootman, CEO; before joining the company, Mr. Slootman served as Chairman of the board of directors of ServiceNow, Inc., an enterprise IT cloud company that he successfully took public.

Michael P. Scarpelli, CFO; before joining the company served as Chief Financial Officer of ServiceNow, Inc. for eight years.

Benoit Dageville, Co-Founder and President of Products; before founding the company, Dr. Dageville served in various engineering roles at Oracle Corporation, a software and technology company

All three leaders total a compensation package of $83M (mainly concentrated in the company’s stock)

The company will issue Class A, B shares. Class B shares represent 86% of shares outstanding and 98.6% of voting power. Total Outstanding shares are 277,290,066

Salesforce Ventures LLC and Berkshire Hathaway Inc. will purchase $250 million of Class A common stock (initial public offering price of $105.00 per share) representing 2,380,952 shares of Class A

Financial Performance:

The company achieved $264.7 million in revenue for fiscal year ending 01/31/2020, a 174% increase over the $96.7 million earned in 2019. More recently the company earned 242 million in six months ended 2020 resulting in a 133% YOY.

While the company is showing strong momentum in growth, they have yet to become profitable. January 31, 2019 and 2020, net loss was $178.0 million and $348.5 million. In contrast, Gross Margins of ~60% show promising outlook of eventually breaking even as sales continue to accelerate.

In addition to the performance highlighted above, Snowflake has shown excellent levels of customer retention. This is a strong indicator of overall health and growth of the platform. It signifies that customers find recurring value in the cloud data warehouse platform.

Similarly, Snowflake has been able to increase its ARR steadily by 52% YOY. This results in about $0.17M ARR per customer.

The company plans to go public at a price range of $100 – $110 per share (S-1 highlights $105). This gives the company an epic market IPO value between $27 - $30B.

Snowflake plans to continue growth through the following strategies:

Advance the Data Cloud through the adoption of the platform

Expand and innovate the data exchange providing industry leading sharing capabilities.

Drive growth by acquiring new customers. Added ~725 customers fiscal year to date

Drive increased usage within the existing customer base; net revenue retention rate was 158% as of July 31, 2020.

Expand data sharing across the global ecosystem through the Snowflake Partner Network.

Igli

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Listen now (12 min) | Company breakdown of the most secretive company in Silicon Valley - Palantir, which is rumored to be valued between $10 - $20 Billion.

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