Companies

Over the past month, there has been a surprise twist in the battle between Big Auto and Tesla: Traditional carmakers are slowing investment in EVs and autonomy. While the move is good for traditional auto profits over the next 1-3 years, it will likely make the inevitable EV transition more costly. In the end, I believe Tesla will emerge in a better long-term competitive position.

The December outlook was better than it first appeared. Adjusting for the number of weeks in the quarter, growth in December should be 7% y/y compared to the Street that was at 5%. Additionally, the active installed base, Services, China, and gross margin showed surprising strength, evidence that the Apple revenue flywheel is rock solid.

Netflix reported its September quarter, highlighted by subscriber adds that exceeded expectations by 60% and sent shares of NFLX up about 17%. Over the past year the company has pulled three levers to restart growth: raising prices, introducing an ad model, and cracking down on password sharing. While these new initiatives are working, the company will soon face tough comps and the creator economy.

Tesla's September results and outlook commentary revealed a double whammy of pressures on the business, prolonged margin pressure, and dampened demand outlook. While this next year will be the most difficult period for the company since the ramp of Model 3 in 2019, I believe the long-term opportunity remains intact: The company has a pole position in what will be a massive market transition to electrification.

For Tesla earnings it's all about the margins. While I expect a miss in September, I believe margins will rebound in December. In this scenario, the case that Tesla should be viewed as a tech company will remain intact.

The collective investing community is skeptical that Vision Pro will become a measurable part of Apple's business, because the utility of spatial computing is still unknown. As developers build exciting apps, demand and sales will increase.

WSJ reported that Meta is considering offering paid versions of Facebook and Instagram to European users in an effort to navigate EU privacy regulations. We think there is 25% chance that this comes to fruition. If it does, we estimate it would add between 2-10% to overall revenue for European availability and 3-15% if available in US and Europe.

The Financial Times has reported that Jony Ive, Sam Altman, and SoftBank are in talks to build an AI consumer device, likely a wearable. My guess is this never sees the light of day, but given the players involved it's worth considering its impact. Apple is in a good spot given the strength of its ecosystem makes it difficult for a one-off product to sway Apple users. Samsung on the other hand would be more at risk.

Meta's annual developer conference, Connect, highlighted that it shares the same vision with Apple when it comes to the potential of a new headset-computing paradigm, even if its flagship headset is light years behind (though priced far lower). Separately, Meta announced new AI products that will capture meaningful user attention.

Apple's dependency on China keeps investors up at night. Today Deepwater estimates that 40-45% of Apple's overall revenue is manufactured in China, and expects that to decline to 25-30% in five years. We believe half of the decline will be the direct result of production moving to India.

Apple excels at making consumer tech easy to use. The most recent example is the streamlined iPhone setup experience. Doing the little things right is why consumers who own one Apple product purchase additional products, locking those users in as lifelong customers.

Big auto is in a tight place when it comes to transitioning its business to electric, and the current UAW discussions will eventually result in a steep increase in costs that will further push them into the red. Tesla, however, can afford the pay raise and will emerge as the winner from the labor talks.