We Believe The Market Has Not Digested The SpaceX Quarter

0:06 Welcome to the call after the calls. Excited for everyone to join us. We've got amazing guests talking about SpaceX and Tesla. Of course, we've got the entire ARC team here. We've got Tasha, we've got Daniel, we've got Kathy, we've got Brett, and we've got some amazing guests as well externally. Don't forget Daniel there as well. We've got Pierre Farrago of New Street Research, Sean Magcguire joining later from Sequoia, Aaron Bernett of course of Mach 33 and Alex Potter from Piper Sandler. So, a amazing combination sellside, research, buy side. we'll be able to get all perspectives here on all things SpaceX and Tesla. We're live across X, LinkedIn, YouTube, Tik Tok. I think you can find us anywhere. So definitely drop comments and questions. We've got people monitoring all of those lines.

1:02 We'd love to be able to answer some insightful questions. and of course before we get started, as is customary, we'll read a little bit of a disclaimer here. So the information provided in today's conversation is forformational purposes only and does not constitute an offer, solicitation, or recommendation regarding any investment, product, or service. Any reference to a particular company or security is not an endorsement by ARC nor a recommendation by ARC to buy, sell or hold any security. ARK and its clients as well as its related persons may but do not necessarily have financial interest in securities or issuers that are discussed. Historical results that may be discussed are not indications of future results. We cannot discuss any private or non-public material information of any kind. Certain statements made during today's conversation may be statements of future expectations or other forward-looking statements based on the current views and assumptions of ARC and its guests and involve both known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied. ARC does not assume any obligation to upward to update forward-looking information and all information discussed today is subject to change without notice. In addition, certain information was obtained from sources that ARC believes to be reliable. However, ARC does not guarantee the accuracy or completeness of information obtained from any third party. All right, we're going to kick this off with the number that mattered.

2:27 So, let's pull in Alex Potter from Piper, Brett from ARC, and Aaron Bernett from Mach 33. Alex, let's start with you. the number the number that you called out $1 trillion in revenue. Why is that the number that matters to you? >> geez, I don't I mean because it made me dizzy and almost faint when I heard it. I don't know. I I've never I've never covered a company where certainly not a company that's this liquid and high-profile where Yeah. I don't know how many sellside firms cover SpaceX. It's 50 or something, 60 different firms that cover it. And I think consensus in 2028 was like 200 billion, 220 billion, something like that. So roughly 5x wrong relative to what Elon said 2028 revenue could be. That's absurd. and like I said, I like it's you after the call is done as a as an analyst. You sit there staring at your model, not really knowing what to do. I've never It's not like other calls. It's not like other companies where you're like, "Oh, you know, guidance needs to be we need to tweak our numbers a little bit. This is like, no, we need to take our model down to the studs." it's it's a fun company to cover in that sense, but it's also it's just it's unreal. So, so is that what you've been doing this past week? How big of a rewrite has the underwriting team done?

4:13 >> Yeah, I mean, it's ongoing. and I know that Aaron does a much better job of of, you know, modeling Tesla than than I do. you know, I've cover or Tesla SpaceX. I I always do that. so I've covered I've covered Tesla for a really long time. So like that the it just always slips out. and our Tesla model is extremely detailed, right? It took us a long long time to build it and I like talking about companies with that level of granularity and we haven't with SpaceX. And so and my SpaceX model is still more detailed than the average model of of the companies that I have under coverage. But when Elon comes out and says things like that and it sort of illuminates how wrong the model really is, it it makes you sit there and stare at your screen. And I and that's basically I've either literally or figuratively been doing that basically ever since the call last week.

5:10 >> All right. >> Just thinking through. >> Brett, the number that you said directly ties to this 20 gigawatts. Why? Yeah. >> Why is that the number for you? Well, I think 20 gigawatts is both what they Elon said they had lined up for basically cooling and power capacity to for their terrestrial compute buildout and that was the biggest change for us in terms of how we thought about the trajectory of the company in that they had previously guided to by the end of the year, you know, maybe doing five to 10 gigawatts by the end of 27, 5 to 10 gigawatts installed and I was mentally prepared for them to say, you know what, building this stuff is really hard and we're going as fast as we can and it's going to come in around the five gigawatt range. And instead they said, well, we're going to come in around 13 and there's a probability that we get to 20. and so relative to the entire kind of like narrative around data centers being hard to build and there being permitting and power issues, Elon really is able to drive his companies at a maniacal pace. And that 20 gawatt number or even the 13 gigawatt number you can use to get to some of the Gotti revenue figures that he put out there. So 500 billion, you know, run rate revenue by the end of 27, leading to that trillion dollar number, is kind of what falls out of the model as you kind of drive forward the terrestrial business in that way.

6:46 >> I I think he was a little bit more more forceful when he said that. He said, not only did he say it's not just five gigawatts, he said we have rocket engineers and they're playing in the little leagues. So >> that quote. >> Yeah. Yeah. It's a little bit >> Yankees against the >> Exactly. >> Erin Erin, your number here is one to two Starship launches per week. I like this. This is this is different from just focused on the immediate term data center opportunity for you. Why is that the key number here?

7:20 >> Well, I I should mention right off the bat that Alex, get used to looking dumb with SpaceX. no matter what we put out there. gotten used to it by now even in >> it is just a yeah they're move they move fast for a rocket company and now you add in the AI of it all and it's now just yeah just everything is moving much faster I guess this is the feeling of being in the singularity now so yeah so one to two weekly cadence is the number and I we're focused on that because I think it points to a much bigger Starlink kind of bandwidth than people are expecting And what I found is even some of the most bullish and sharpest people I know have a visceral gut reaction that that one to two equals something like 50 to 100 launches next year of Starship. And the the smartest people I know are just like yeah, that doesn't feel right. It's way too high. And so, you know, I've just recently put out something today that was on this like if you look at what they're doing and where they're headed, it's it's actually not too crazy.

8:26 it's not like what people tend to think about for maybe Elon numbers where maybe it's a few years early or something like that. I think we're looking at a realistic upmass of you know somewhere in that 40 to 60 range of number of launches we can see next year which is very big. It's something like doubling or tripling the total bandwidth on orbit that Starlink can provide. And so that really that really starts to throw a wrench into people's numbers.

8:53 and then it also is the is the foundation for Star Mind. which I think just continues is really beyond this 20 gigawatts it's going to be you know of terrestrial in theory that would be the the low percent probability but if that's you know on land in the next few years or the next year to two they need to what's the next 100 gigawatts or whatever that they're aiming for internally and that's going to come from Star Mine. So you really need to see this ramp up of of Starship.

9:21 >> All right. All right. So, what we're going to do now is we're going to tackle SpaceX from kind of each of their segments here. We're going to dive into super intelligence. We'll talk about Starlink and connectivity and Starship. but maybe as we dive into super intelligence, we'll bring Pierre on screen. We booked Pierre from New Street Research via his Crockpot and Elon on the call saying Grockpot the fastest growing product that he has ever seen.

9:49 How important do you think that is to the future of SpaceX? >> Well, it's definitely well, I would say it's SpaceX is in a very unique position in the Frontier League. they are in the front league is really qualified as model even if it's if it's still mostly mostly running behind and it's very important for the long-term future of SpaceX to in that league and over the last six months we went from having a model that could do well as a chat box that could qualify for the for the frontier to having like the most talked eight and then the curse of acquisition is is like a mastermind move from the perspective of SpaceX and I guess it played a lot in the development of the of the of the boat as well cursor I think captures about 25 of AI tokens working on software development it's put puts a SpaceX in the deep into the league with a very significant the market. and so you combine together grog the computer and and cursor and all the ingredients are there for for SpaceX to to be a leader and and maybe the last elements I would want to say on that front is how well the company well understand the fact that you you don't have to worry too much about articulating your lineage model your harness your agent with your comput at the end of the day you have to be relevant all elements and as long as you grow compute faster than everybody else you you win one way or another and that's exactly what's what's happening at the moment.

11:54 >> So Brett, one of the big assertions that was made on the call is that the price for compute that people are willing to pay is going to keep going up. Is that true? Do you believe it to be true? and and then we'll we'll go to the sell side and see see what they think. >> Well, it's certainly true in the immediate term and I think of all companies, SpaceX is going to test the limits of how much compute the market can absorb in a very short time. And because they have they're uniquely positioned because they have Grockbot and the cursor business where if they are overserving the market as in if demand for u immediate term compute begins to soften they can take it internally and then train to compete with that frontier. I think if you look at Enthropics S1, it's really clear why they're willing to spend a lot for compute because their financial metrics are just ginormously outstanding. And so that they are willing to, you know, rent compute at the margin for 50 plus billion per gigawatt or that the market is is because that this is mana from heaven in terms of cash flow that's sitting out there addressing an enterprise market that we think is a $40 trillion market. at full penetration.

13:15 so we think that actually there's plenty of revenue to absorb the compute that SpaceX pushes pushes into the market. And specific to SpaceX, maybe unique of all companies, they they will want to and should want to test the limits of how much compute the market can absorb because then they will begin to absorb the compute internally to power Grock to kind of drive their revenue. And this chart shows what we think is going to be their recognized monetization over time. As you can see in our model, we're under where they're saying they're at, as in this is 40 30 to 40 billion per gigawatt that SpaceX will begin to monetize at.

13:57 Whereas Neoclouds that are signing longer term contracts really don't get above 20 billion per gigawatt until the early 2030s. And so by charging out the margin for the scarce supply, SpaceX is able to recognize a lot more revenue just on an infrastructure as a service side and potentially power a software business that's even more margin accretive. >> Alex, are you thinking about this in a similar way and you know he also is asserting that there's going to be a number of stranded assets and so you know you really should double down on the players who can execute. So from your perspective, you know, you're you're not just covering SpaceX, you're looking at other players as well. How does the compute game shake out here?

14:44 >> Yeah, I mean, that is you know, vertical integration and and having control over your own destiny is, you know, their special sauce has been for all of Elon's companies for as long as I've covered them. And you know, anytime when you're competing as part of a consortium, and you're relying on somebody else, vendors, suppliers, whoever it is in the value chain to, you know, get you over the finish line.

15:19 you're unable to deploy, in this case, compute or it could be cyber cabs or whatever it is at your own pace. you're always being limited by whoever the slowest person in the supply chain is. And that's something that Elon cannot and will not abide and never has. So you know it it's incredibly empowering I'm sure for the team there when they look across the industry and they survey how many people are struggling for oxygen because there is such insatiable demand for compute to be the one who has unilateral control over bringing compute online at your own pace has got to be an incredibly empowering feeling and that is the competitive position that they and they alone are in at this point. So, you know, that's what gets them to these ridiculous pricing numbers that Brett was referencing.

16:22 >> Erin, we're all here stuck on the ground. There were a lot of juicy nuggets about orbital compute and that's some somewhere where you've certainly pushed the frontier in terms of research. So, what did you take away from the call with respect to orbital super intelligence? you know, a couple things. One thing I would do is go back to Earth for what that that came away as like a big shock that I'm surprised more people aren't talking about is the 440,000 Vera Rubins optimized for training.

16:56 That's a really interesting. That's a lot of training. I'm trying to figure out how big that is. like you know are we talking tens of trillions of parameter models that are that they're going to try and leaprog on a you know state-of-the-art or something. Anyway, when it comes to orbital data centers, I think the big thing is just seeing that they're tracking towards these you know larger clusters, they've said this in the past and this wasn't on the call, but they talked about coherent clusters now flying them in formation, which is kind of a new thing that allows them to get much bigger than we originally had modeled.

17:33 as far as the number of kind of big models that they can serve together or the number of you know tokens per second, token density they can hit. And so that means more inference, better better models. So anyway, that's kind of been what we've been thinking about when it comes to orbital data centers. Really, it's about the utmass though when it comes down to orbital data centers. Are they are they there for the foundation going into 27 with their early test maybe 28 or 29 moving into the future?

18:00 >> All right. And then I think a big question here and Pierre we'll go to you with this one is following the money. Okay, if they are going to bring 20 gigawatts online and then that each gigawatt is going to require $50 billion plus of payment. What companies out there are making enough money to keep spending this? It's like what? Yeah, talk me through talk me through where where it's all coming from. How how are you funding it? who's the customer and then yeah where is the money magically appearing from?

18:37 Well, if you ask that question at an industry level, you take a step back, you look at the next five years, like between now and the end of the decade, we need to like plans when you all the players at every step of the value chain. It looks like about 300 gawatts of active like name plate power being rolled out of capex. and and if you look at the top four hyperscalers they're going to generate according to sales side consention dollars over the period. The reality is that u internet and I tend to very impact of this investment on the gener data centers the following 30 of operating cash flow so so I think the sell side is that it's actually going to be$8 trillion dollars the hyperscalers are going to just the hyperscal like half the bill. Then you have a few enterprises rolling out their own things, they're going to cover about 10.

19:59 And then when you range like the very long and the likes of a Biden, but also like a core weave and others Pierre, your your audio is dropping in and out. I'm not sure if it's >> Oh, I'm sorry to hear that. >> Hold on one sec. We'll have we'll see if we can get the producers to re reync you in. All right. While he's while he's getting reconnected, who who here wants to Brett, do you want to take a swing at where you think the money is coming from?

20:35 >> Yeah, I think you can. And this is why I said that it's like SpaceX is going to test the limits of potentially overserving the market. If you if you take their 500 billion annualized number by the end of 27, a hundred of that could come from Starlink actually. So then there's 400 billion in revenue you need to generate from infrastructure as a service or AI revenue or AI software revenue. if you look at the industry frontier labwide, we expect there to maybe be 800 billion in run rate frontier model revenue that's acrewing. and so like that could if if SpaceX were supplying the entire market that would all work out where they would have a 50% compute margin call it paying it to SpaceX to then generate 800 billion in revenue. So that roughly tracks but SpaceX is really servicing kind of the anthropic side of the market. So you know there's a whole other open AI supply chain and and there's Gemini and Grockbot. So, I I suspect that the market will be able to absorb the supply, but it's possible SpaceX kind of pushes back pushes past and so kind of the near-term revenue per gigawatt gets compressed a little and and then they use it for an internal use.

21:58 But over a two-year time frame, you know, we need this much compute and more on kind of like the tracking through of what this is doing to enterprise productivity and the consequent spend that enterprises will provide to do so. >> The other thing I' I one more thing though because >> Okay, go ahead. >> Oh yeah. Yeah. People like I interpreted this question not as where does in demand come from but how does SpaceX pay for all this capacity? If you look at SpaceX relative to every other player, you know, Alex mentioned their ability to control their own destiny that includes kind of like their capital deployment to assets in field cycle is much shorter than other players. And so it's kind of like the old Amazon used to have this positive, you know, working capital margin where basically like they would generate revenue something before they had to pay the supplier for getting it. SpaceX isn't quite there, but they are really close to that where it's kind of like the capex can self-fund as they build. So, particularly if you accommodate a reasonable debt load that they're going to place against the data centers. So, they have to go against the debt capital markets to pay for this infrastructure, but it's not even clear that they'll have to raise equity in order to build up this really big kind of balance sheet of strategic compute assets. and so that's unique for them relative to others.

23:22 >> All right. And I think we do have Pierre back and maybe we'll use this as a a transition from the AI world to the connectivity and Starlink side of things. and I think we'll also bring Tasha on as well. And so Pierre, how or can Starlink successfully fund this or are they we just going to keep seeing dilution in debt raises here to make it all possible? yeah, I think like Brett really brings the answer to your question, which is I like to compare SpaceX in the data center build out as a surfer at the foot of the wave, being pushed by the wave and having actually a lot of flexibility and maneuverability. So today, SpaceX can sell for about $50 billion a year a data center that, as you said, cost $50 billion to deploy. So when you have that kind of return, you don't have to worry about financing. The financing comes u by itself and when the reason why SpaceX today can achieve these prices is because you have a lot of projects that are in the work and that are being delayed. And why they are delayed the likes of an anthropic and open AAI of course are missing out on their growth potential potentially on their market share on defending their market share. So it's critical for them to have access to compute as fast as possible. At some point things may normalize and and we don't know at what pace over how many months or how many years. When things normalize of course SpaceX is going to adapt the pace of its rollouts and of the $50 billion you mentioned $10 billion maximum are really very long lead capex.

25:06 everything else can actually be rolled out in in a much more measured way. The same way you see semiconductor manufacturers investing over three years programs in very large new buildings and then they invest in clean rooms and then in equipment much more nimly. All right, Tasha. One of the things that we have gotten wrong in the past was in our initial Mach 33 and ARC SpaceX model, we really just focused on the consumer side of Starlink. And now Elon's repeatedly saying enterprise and business is going to be as big if not bigger than the consumer side.

25:52 What do we make of that? How does that impact our forwardlooking models? >> Sure. yes. Well, I think you know they they've said that they're kind of in the early innings here in terms of both enterprise and and and government roll out. we know that we we see deals every day about you know them getting more access to different airlines and you know plans that'll sort of be carried out over the next few years. but you know o overall I'd say that they have said their plan is to own connectivity broadly. they seem to you know they're executing on that plan. They're sort of they're going piece by piece and sort of knocking out the naysayers here. some of the more recent news around this is around spectrum acquisition. they acquired the lowband spectrum necessary for mobile. and overall they're saying that the you know the connectivity market is around a trillion dollars.

26:57 so that would include broadband, mobile, everything. so really big opportunity and I think you know the upcoming Starship launches are are of course critical to to increasing that capacity because they've said that you know as ARC has modeled that the revenue is really should be sort of measured as a function of bandwidth that they put up. Aaron, you are I would say again on the cutting edge when it came to the direct to sell and cellular business model that SpaceX now appears to be going after quite aggressively. What do you think the end state looks like there? Are they just going to be competing head-to-head with T-Mobile, Verizon, AT&T, or are they going after something more orthogonal here?

27:48 I think from a customer ownership perspective it's it's head-to-head and I think it's looks a little maybe maybe it looks a little different as far as the way that they accomplish it. I think there's your industry expert in the telco world wants to and the existing seuite wants everyone to believe that you need the 200 or 300 or whatever the you know spectrum approval licenses meghertz that they have and SpaceX has something like 80. they can accomplish things. There's more than one way to skin a cat. Not that I'm anti-at but I do like dogs. and the thought process is like whether it's femto cell whether it's you know a variety of different angles for them to attack when you do the math you you start to realize that the the vast majority of the US as the example there's the rest of the world's similar to this as well but the vast majority of the US like 60% of the US is inside of a population density that works well for satellites V3 satellites that are coming another reason why we're so fixated on what Starship can do in 2027. and so when you start to realize that, then you have a different sort of way to get to the end customer that you can leverage that allows you, it opens up other angles for you to go after. So the idea of towers, Sam, we've talked about this in the past, I think, publicly. where you're talking about things like going after towers, buying carriers, buying whatever. There's there's a lot of different ways to go after this like high urban population density. 40% of the US market that does have a lot of, you know, kind of the disposable income to be able to go after these high bandwidth packages and things like that. But I think where it gets really exciting is when you start to then bundle in productivity, bundle it maybe entertainment. I don't know, there's some rumors that Elon may be investing in Sky Dance. I don't know if those are still rumors or been validated. But when you start to bundle in these things on top of just you know dumb old bandwidth gigabit per second sort of speeds it becomes a very attractive high churn or low churn kind of market with a long with a big LTV and that's I believe part of the reason you want to really want to be looking at what Starlink can do in 27 and 28 because if you're you you know these data centers become expensive the these are the things that allow them to borrow debt. These are the things allow them to finance with just cash flows coming in that are not just based on, you know, the things they're building that are supposed to be driving long-term revenue or even quick, you know, one-year revenues on the data center side. I don't know if I answered your question now. I feel like I I rambled.

30:28 >> Brett, what do you think with respect? You're you're sitting in the CFO's seat now of SpaceX and you've got ROI on terrestrial data centers. You've got direct to cell satellites. You've got Starlink satellites. You've got orbital compute satellites. How do you think about where to allocate capital and the different type of return profiles of these opportunities? I think the answer would have been different a year ago from what it is now clearly. which is why like the the terrestrial data center business offers such compelling return on capital so quickly that it's soaking up incremental additional capital. and you know over time they are going to allocate to Star Mind as is shown in this car chart because their infrastructure costs of delivering basically a gigawatt of compute in orbit is going to be structurally lower than doing so on the ground in our view. you know, on the order of a third the cost of what other players are able to offer. in between here and there, and I think Erin kind of categorized it well, the the bandwidth they throw into space can power this, you know, broadband business that they have today, moving into a mobile business that the broadband will provide the infrastructure to support.

31:54 and you know you can see as they increase bandwidth this is some historical and some forecast they are able to capture more and more of the kind of overall revenue in the space. And so we think that in the early 2030s, Starlink could be, you know, clearing around 500 billion in revenue with extraordinarily attractive margins, producing a lot of cash flow that allows them to reinvest in that AI business. And I think it's in a near certainty that they will bundle intelligence and connectivity as a package as in you will subscribe to Starlink and Grock as a package. So you get your intelligence delivered to you for one low price, you know, and so kind of intelligence and the delivery of intelligence is going to be one product and service and distributed through their cars, distributed through whatever their cellular hardware strategy looks like.

32:54 you know, including your broadband. And there's a lot of even having vertical integration through that connectivity and hardware piece can also allow you to mask somebody's Grockbot so it looks like them. So the Grockbot can do all of the access all the goods and services that are that are being denied access to regular bots. So there's also kind of strategic things they should be able to do with owning connectivity. and so net it makes sense that they're spreading their bets and as it happens all of these bets that they're making have extraordinarily apparently return on capital characteristics right now. So it makes sense they're accelerating as well. All right, Tasha, we're gonna jump back to you in a moment, but we're gonna bring Daniel in to see what he thinks about Starship test flight 15. Are they going to do it? Are they going to catch it, Daniel?

33:45 >> Yes or no? >> My bet my Yeah, my bet is yes. so for those viewers who don't know, what am I what am I saying yes to? Starship Flight Test 15 is SpaceX's next test flight. this is the most notable milestone that they're aiming for of the whole Starship program. They're aiming to use chopsticks and catch the upper stage of the rocket. and why that's really notable is everything we've spoken about for the last 30, 40 minutes, it's not possible without a fully and rapidly reusable rocket. So, SpaceX is successful in that. It really demonstrates the underpinning of how enormous DA opportunity is and can get to from Aaron mentioned 50 to 100 flights next year. At scale, they want to get to 10,000 a year. And that's not really possible when you're losing half of the rocket. So, we're very excited to to look at the next test flight, which is happening next month. and like I said, really the most notable milestone of the whole program.

34:41 >> All right, Erin. Earlier, Alex said he stared at his screen when, you know, Elon jumps out and says, you know, a crazy big number like one trillion, 5x expectations. Now, one to two launches per week. How different is that than what you were expecting? >> so like we were actually modeling this pretty close to that number. A little bit lower. I think we were modeling around 40ish between 40 and 45 depending on how you slice and dice the data. and so they're saying 50 plus basically. I mean they're saying one a week and it ramps to two a week and maybe more which you know they're not saying a number for the year. they're saying, you know, that kind of cadence, which but it roughly rounds to somewhere like 50 plus between 50 and 100. and and still like you go into industry discords or whatever with people that know quite a bit and pay quite close attention, they don't believe it. It's like 25 would be you'd be lucky to get 25. And maybe it's just the movement from one a month like that we're kind of at maybe one every six weeks we're kind of at this current cadence to one a week feels like too much. And I think there's this kind of inherent human it feels fast. but the way these things happen, the way they're building these things, the the they're building something like one a month rockets right now that they could launch one a month. So you really just when you when you combine these things, you realize it's really not too hard to get to this number. but it it plays a big role when you start to add in the bandwidth.

36:14 when you think oh 100 tons times 30 40 50 whatever they end up getting to times roughly you know 50 terab per second per launch and all of a sudden you're like wow okay that's doubling tripling potentially quadrupling the amount of bandwidth on orbit today I mean those are big numbers that's that's big and so it's kind of like wow what does that mean does it crash the market all of a sudden people are paying you know pennies or whatever for their for their connection or they doing other things. They're they're offering higher higher reliability to to enterprises or something like that.

36:54 yeah, but I think that's 2027 should be should be pretty exciting one way the other. >> Brett, how does this tie into overall rocket rocket cost declines and how you think about the industry? Well, I don't know about for the industry, but for SpaceX, it definitely suggests you know, even even if they weren't able to land the top stage, which it seems increasingly likely they'll be able to, we think that would pull them to the you know, low hundreds of dollars per kilogram to launch, you know, whereas prior to SpaceX being in the market, what were we at, Daniel?

37:28 Like 20,000 or 10,000 to 20,000. >> Yeah. Yeah. Around 20k. and and I think on on cost too, like the most notable thing is to say that SpaceX is 10 years ahead. Like everyone is talking about going to partially reusable. There's only two really bodies that have done that. Blue Origin 10 years later, China's done it twice. SpaceX is just completely disregarding that and now going to full reusability. And Brett, that really ties into your launch cost going from that 20k to to I'm guessing you're going to say $100 per kilogram. not not this.

38:01 >> Yeah. and actually down to to $10 per kilogram as they really really really scale. I think that's Elon had previously said he needed a mass driver on the moon for that. But I think given their ability to manufacture and cost scale, as Starship becomes truly rapidly reusable, they could get down to $10 per kilogram for launch. over but $100 is is definitely as soon as you turn on reusability, that begins to be in play depending on your judgment on how costly it is to refurbish the rocket or inspect the rocket. so it unlocks a lot of different interesting stuff.

38:39 All right, I want to bring Alex and Pierre back in. This is the Ross and Rachel of our day. The will they won't they? The SpaceX Tesla merger. Maybe we just go around the horn and say what odds you think. and yeah, if everyone abide by their own compliance guidelines here, but Brett, let's let's kick it off with you first. Will they? Won't they? What timeline? And how confident are you?

39:11 >> I mean, I can say from a forecast perspective, we think there's a 90 plus percent chance that they merge within the next 18 months. and with the remaining 10%, just who knows, you know, subject to can the Tesla shareholders be convinced they're being paid a fair price and will kind of the regulatory bodies approve it? I think that there are clear I think it's a win-win for both sets of shareholders if they merge given all of the crosswork the companies are doing and the fact that SpaceX has amazing good uses of the cyber cab money that's going to start flowing onto space or Tesla's balance sheet. And so that's why it makes sense for both of them to get together and that there there are clear you know Grock is distributed through the cars now Starlink is appearing on the cyber cabs they're building the terra fab together you know Optimus really depends upon super intelligence in order to actually work and operate and so they are so closely tied there's a lot of benefits to them tying together.

40:19 >> All right Pierre over to you. Will they, won't they, when >> Yeah, I think it's a very complicated situation. So, it might be painful. you know, getting an offer that satisfies enough a large enough a wide enough group of Tesla shareholders is really the only thing that stands between us and the merger. So if if the question is will they eventually merge I think the probably the polity is like 90 90% or 90 plus percent then the question is how long does it take and how much does at how much does Tesla Tesla go are are the key questions and as Brett articulated very well I think I've rarely seen two company with as many operational reasons to to get combined it's as simple as that it's a long list it's a long list Alex, are you in consensus here with the these two potential outliers?

41:18 >> I mean, I don't know if I would say 90%, but I I certainly hope that that's true. I I think definitely better than 50/50. Elon clearly wants it to happen, and generally speaking, you don't bet against things that Elon wants to happen. I do think that there is a lot of complexity. The the China regulatory angle is difficult for me to handicap. and and you know what what price is being paid and can the Tesla shareholder base be convinced? I mean, I think that's the issue is, you know, I mean, Elon's compensation package more or less says that he thinks Tesla in a vacuum is $8.5 trillion, right? and so a lot of the Tesla shareholder base, that's a lived experience for them. They they remember when the stock was 50 billion market cap and then it went to 650 and everybody got rich. So if you can get Tesla for a 20% premium or 30% premium, it doesn't sound quite lucrative enough.

42:18 so that I think is maybe a hurdle, but I I think some way and I certainly as an analyst I I definitely hope it happens sooner rather than later because I am sick of people asking me this question like it comes up in every like you can't get to the model anymore. Like you can't get because everybody sales people talk about it, clients talk about it. It's it's but it's unavoidable until until we have some resolution. It's not going away. So, >> you did some Brett, you did some modeling.

42:51 >> Yeah. >> Suggesting that, you know, how far out people want to look, it it wildly swings what people should be willing to pay for it. Can you talk us through that and we'll we'll clip this so that down the line everyone can just repeat this clip instead of having to answer the question. Just send it out to all all clients and you're covered. There you go. >> Yeah. I I mean I think a a very very simple crude way to think about it is the Starlink opportunity is very big.

43:20 The cyber cab opportunity is even bigger but then the AI supercomputee opportunity is much much bigger than that. And if you're focused on the five-year time horizon then paying a premium to Tesla shareholders shares the upside return that both of them get. like we calculate like a 30% premium to Tesla shareholders would mean that incremental additional return that comes from the merger is equally shared across the two shareholder bases and that's really subject to the price of the two stocks at any given time but but on 2031 we think you know almost twothirds of the revenue and more than twothirds of the profitability of the business will be SpaceX line items SpaceX having used the robo taxi cash flow to fund its growth So, and over a longer time horizon, super intelligence is such a compelling opportunity that actually, you know, Tesla shareholders should count themselves lucky to be being dealt in to the combined entity. Actually, SpaceX could be somewhat indifferent to Tesla over a longer time horizon just because of the the ginormous opportunity that SpaceX is going after with its Star Mine constellation and Grock. And so depending like you could argue that SpaceX should be able to acquire Tesla at a discount over a longer time horizon because of how much of a better competitive position they have against the whole world, you know. but I think a fair, you know, premium that deals everybody in and helps both sets of shareholders is where the the market clearing price should reside and where the board should agree. And I think we're Tesla shareholders and we, you know, full disclosure, you know, we're longtime supporters of Tesla. I think, it's clearly in Tesla's best interest to be a part of this combined entity, not to be something that is you know, a cybercap producer that is relying on SpaceX to produce the intelligence it needs for an Optimus robot that is, you know, if I only had a brain straw man without SpaceX. And so I think that there's a lot of really compelling reasons to do it and to do it with some elacrity given how quickly SpaceX itself is scaling.

45:33 >> All right, let's bring in Kathy as well because who better who better to weigh in on this than someone who has to actually make the allocation. Kathy, we're discussing the potential merger between SpaceX and Tesla. And how do you think about that from your seat as a portfolio manager? I'm looking forward to it. and of course we've done all of this modeling and we've done it for such a long time and we see the the super exponential I said to to Brett during our last big ideas prep was saying okay we have to start talking about super exponential growth here. and I said well you know it's hard to help people understand what exponential growth is. Now we're talking about super exponential growth and in a year's time you know we're talking about I just listened to the beginning of this call so vertical integration convergence there was another yeah vertical and singularity singularity it's happening now what's so so fascinating about it SpaceX Tesla leading the charge and Brett this gets us to, you know, these GDP growth numbers. And I think what's what's Oops, I'm sorry, this thing fell. I think what's confusing to a lot of people is we've been in a 3D 3% GDP growth world for so long. Here, Tesla and SpaceX are leading us into this 7 to 9% real GDP growth world, and we can't get our heads around it. as you know, as Alex said at the very beginning, he's just staring at his model like, okay, we've never been here before. And that's true. We've been at 3% for 125 years. And so, there's a discontinuity happening here that the inventor and genius of our time is leading us towards. So, I I can't wait for it to happen.

47:40 >> That's right. I think I I think I overheard that call and the technical term was super duper exponential. Yes, that's what I said who somebody said. Yes. And I said, "Okay, so now we have to call it super duper exponential." Yeah. In this big ideas planning session. Yes. We might very well have to do that. >> There you go. I guess a key question after all of this exciting talk and everything that is going right, I'd like to go around the horn here. Kathy, we'll start with you. It's like when you're looking at companies that are firing on all cylinders here, what do you see as the biggest risk, the biggest downside possibility that you're using to check the thesis that we've all laid out?

48:26 >> I think we have an issue here with the debt markets and you know I had been saying for quite some time that you know e equity analysts first of all they're the I guess after 089 especially the risk aversion the short-term time horizon you know took us away from you know five-year investment time horizons which have been ours and so when equity analysts and even more so debt analysts see growth like this they think oh my gosh we're we're back in 1999 this is going to end badly and they go on strike. and you know, we have to we're out there pounding pounding the the drum saying, look, you know, what was the big capital spending variable in the late 90s. It was fiber and it stayed dark in the ground for years. Maybe we've used it up by now.

49:32 right now there's a shortage of so many things. You cannot make that comparison. but the people who who are elder statesmen in states women in our industry today, they were young in the late 90s and they just, you know, that's a lot of muscle memory or scarred tissue that they're they're maybe still dealing with and even more so on the debt side. I remember level three and something crossing, you know, these killed debt holders. So I think I think that's that's one thing.

50:09 >> Pierre, what about for you? What are you looking at as the downside risk or you know fault proof point in the counter thesis here? >> I don't have any any specific like pinpoint worries. I think it's we're talking you know about things that play out and fully fully bear fruits over decades. so decade is a long long time to misexecute to to lose focus to to get it wrong to to to to see things playing out differently. So the way I think about the downside risk here is is more about like a compounding you know probability of misexecution over a very long period of time.

51:01 >> Alex, what do what about in your modeling here? >> Yeah, I mean I would say the two Kathy mentioned just screwy things happening in the debt markets if everything seizes up from a financing standpoint. I I know that you know that you've got a sub one-year payback on on the capex and you know projects like that really ought to finance themselves and that's true assuming you have healthy functioning capital markets and if you don't for whatever reason then that's bad. I think I'm maybe less I that that could be a systemwide problem. I think a lot of companies are going to have problems with financing. one of the things that Elon I still remember in the early on days he I mean he went through periods where the capital markets had seized up and everybody you know thought maybe capitalism wasn't the way to go there for for a short period of time and somehow someway he was always able to get the money and I think to a certain extent And it's because people, regardless of the state of the world, I it's people just didn't want to live in a world where because of something so mundane as money availability, Elon wasn't able to take these visions through to their natural conclusion.

52:29 That would have been a major bummer if in 2008 nobody gave him money and, you know, they they went out of business on Christmas Day or whatever that story is. and and Tesla just ceased to exist. People didn't want to live in a world like that. They wanted to see what happens. So, there was always somebody at the 11th hour who could who would give him money to keep the lights on. And I think that I mean that that won't help if the debt market sees up and you know everything seems like it's going to hell in a hand basket here in the near to medium term. But I think it's a bigger problem for other people than it is for Elon.

53:03 Brett, you are hyper optimistic. You help us be aggressive in in our modeling. Where do you see it falling apart if if at all? >> Yeah. Well, I mean, you can look at the first number that Alex said in this podcast, which was a trillion dollars, which they guided to for, you know, basically could be a trill trillion dollar run rate by the end of 27 or 28. And then you can look at the market current market cap of the company and you can say well gosh a lot of misexecution is already priced in here.

53:38 You know it's pretty clear that people don't think they're going to hit these numbers given like how the company is valued right now. And so I I you know I think just structurally what's going on in capital markets right now is the the billion dollar bills that are sitting on the sidewalk related to super intelligence aren't being picked up because the market doesn't believe they exist and because of like structural things that happened in the allocation game of the guy who could pick them up is having his hands tied behind his back because all of his compatriots are like you idiot that billion dollar bill doesn't exist. But it does. It exists right there on the sidewalk. And that's why the assets are priced where they are because people really don't think that Anthropic is going to pay for this compute. And they really don't think that OpenAI is going to IPO and continue to invest in training despite all of the real-time evidence that compute is short and that kind of like delivering amazing productivity tools to enterprises is something they'll pay lots and lots of money for, trillions of dollars, we think. and so I, you know, in some ways the the peroxisms in in markets right now are very reassuring to me since it means there's so much kind of like this is not a real billion dollar bill priced in. and so it as an investor, you know, I feel very comfortable with that. And you could have, I don't know, like crazy regulatory stuff happen. you could have certainly I was surprised that they that SpaceX seems to be able to build the on the ground infrastructure at the pace that they can given all of the noise we'd heard about the difficulty of building data centers. So there is true execution that has to occur and it would not surprise me if relative to his aggressive schedule their revenue capture did slip to some degree. but I I just think that like Kathy said, people have such scar tissue and they don't understand the market. They don't like Anthropic has just had the most remarkable 12 months in business history. and at a huge gross profit number like people just they almost haven't internalized it because they can't believe it. so I think I think the market has not yet really digested the SpaceX quarter the anthropic S1 the the real like we are crossing this threshold into a new growth domain and and I don't think it's really being accepted yet and the cash flow will force people to accept it over time and so that could put breaks on but I don't think it breaks the cycle.

56:15 >> Great. If I could just go to you >> yeah I was just gonna add one more thing there. you know this is because this company embodies the convergence of you know so many technologies. So robotics, energy storage, AI of course you know all of our you know major innovation platforms or three of the five major innovation platforms. I I think that one of the reasons it's not that the good news is not being discounted mean even though it's right in front of our face the anthropic news is the way the traditional world is set up is in silos. So the space the space analyst or the neocloud analyst and the AI analyst they're all different and you know they need to collaborate but that's not how the traditional world has been set up. We haven't had the the this kind of well the massive kinds of convergences that we're seeing today. So I think there's a real you know I think that that there's undervaluation severe undervaluation that will clear up as they start comparing notes. I've noticed different companies are putting teams of analysts on SpaceX now but it takes a while for this collaborative effort you know to play out.

57:51 >> Yeah. And I think I I think you have to have like a it's an unprecedented capital market cycle and so it there is a lot of actual friction in Wall Street to like adjusting to that. and and so I think there will have to be some time for people to digest and understand kind of this and in between like the financials have to deliver to to really shove it in people's faces. Yeah, >> thank you so much for Sorry, I don't want to cut you off, but I >> No, no, I just wanna Alex was nodding his head, so I wanted to recognize that nod. So, thank you.

58:27 >> And thank you so much for taking the time to join us. You know, >> my pleasure as well. All right, we're we're transitioning from the SpaceX side of things over to Tesla and we're going to dive in with the same first segment here, the number that mattered. We've got Tasha Keany from Arc Invest and then Alex and Pierre back with us. Tasha, we're gonna start with you. You've been championing Tesla from the very beginning. the very first open source model which was in reaction to Tesla potentially going private and now the number that matters $4,400.

59:08 >> you I was gonna say it. You said it. >> Sorry. Sorry. Yeah, there was a along with the earnings call breaking breaking news that happened last week was we published our latest Tesla valuation model. our base phase our base case forecast is $4,400 a share. and what's expected there is, you know, similar to our model from a couple years ago. we think that the majority of the enterprise value will be based off of the robo taxi business. that's roughly 80% of the enterprise value.

59:38 We're assuming roughly 8 million cars in the fleet u by 2031. And then the update is is also we expect Optimus to ramp more more than our previous model as well. So that's roughly 14% of that enterprise value about 1 million robots. >> All right, Alex, not robo taxi specific, but your number was FSD related 1.74 million. Why is that the most important number to you? Oh, there are a lot of important numbers. I don't know if it's the most important. It's it it's an important one.

60:12 I just really like this idea now that it's getting to the point I think it actually might have been Pier on the Q&A who put numbers to it, right? That this is now getting to the point where it's real revenue. I think that's one of the nice things about SpaceX is that you know, the revenue numbers are so in your face. You cannot ignore them. Whereas with Tesla, up until recently, you know, a lot of the revenue was sort of plain vanilla stuff, right? You sell a certain number of cars, you multiply that by the price, and that gives you revenue. But people are accustomed to seeing revenue like that.

60:52 you know, you sell batteries, you sell service. but this is a real proof point of, you know, more or less pure margin revenue. And at this point, it's more or less fully replaced the 100% margin credit revenue that people always used to complain about, right? People would always back that out and say, "That's not real money. You know, it's it's real money, but you know, Tesla didn't earn it." And as soon as that disappears, you know, Tesla's, you know, the it's all going to go come crashing down. Well, that money disappeared and it's been fully replaced and then some, right? I mean, you're on this upward trajectory of extremely lucrative revenue coming from FSD subscriptions and I agree, you know, roboaxi and all of these other things will be huge drivers of the terminal value, but today this matters for the P&L in an exciting way. So, I I really like to see those numbers.

61:46 and the implied take rates. It's exciting. >> Pier, two million was your number. driverless. Driverless. Going back from FSD to driverless. Why are you so impressed with this number? Why is it so important for the story? >> Well, the transition from FSD to to unsupervised is is a challenging one. It's really where I think we a year ago we still had like a dark a dark spot in terms of you know when when that could inflict and so two million driverless miles today for Tesla achieved in eight months that means Tesla is deploying its driverless experience six times faster than Whimo and that means a lot the first thing it means that when you run six fast faster you you take over the competitor very rapidly So Tesla is going to be larger than Whimo very rapidly. If you actually think about it like in Austin, you see it might be imminent. and and so that's that's of course very very significant.

62:55 And and the other thing is that if you think about like you know proof of concept and like making sure that something is working if Tesla today purely driverless is deploying a fleet and like accumulated miles six times faster than than Whimo, it proves two things. The first one is that like the vision only approach that have long but which has been for many many years very very skeptical and and cautious is actually working. It's very difficult to to challenge that now given the statistics between two million and 20 millions you improve like your your stats but you you're past the proof of concept I would say and the second one is actually the transfer of experience between FSD and driverless that is also proven by these two millions you Tesla doesn't spend $50,000 per car in sensors Tesla didn't you know staff driverless like I mean grew this two to this two million miles driverless six times faster out of a much simpler stack because they could transfer experience from FSD and and that's major so that means robotex is on basically that's very important >> Tasha how do you see the market I'd say in the medium term with respect to Tesla and Whimo here.

64:29 >> Well, I think you know, Pierre has a really good point here on the sort of speed of rollout. I would say, you know, what what we would focus on when comparing the two is of course you know, Whimo was first to start their service. but we believe that Tesla could be the first to scale. and it's it's because they're verticalized. It's because you know, we'd agree with Pierre that their cost structure is is ultimately better. We estimate on a incremental cost per mile basis they're about 40% cheaper than the Whimo nextg vehicle with cyber cab. So you know I I I think those are and I think they they have the Whimo playbook to go off of. So that's another really big benefit. so you know we we think that the market for robo taxes is really in the early innings here. I think they've they've taken a certainly more cautious roll out than I think they expected perhaps than we expected initially. but the question is really who who will scale and and we believe that could be Tesla.

65:26 >> Great. So then let's let's swap sections here and bring in Daniel as well. And I think this is relevant just hearing all three of you discuss different elements here which is with SpaceX again very clear kind of how people are measuring the company with Tesla. I think it's a bit more nuanced and so it' be great to understand you know how each of you are valuing the company. is it driven by FSD near-term robo taxi, you know, scaling of these other businesses?

65:57 Daniel, welcome back. how are you valuing Tesla? >> Yeah, so as Tasha mentioned, our open source model, the the 4,400. a couple of key components to that. The primary one is robo taxi. So that is roughly 80% of the enterprise value, but the 14% that Tasha mentioned on Optimus is worth double clicking into a bit. So in the out year 2031 we think Tesla can deploy roughly 1 million Optimus cumulatively. for context people often say you know 4,400 it's a crazy number. Our our optimist forecasts are very conservative. So Elon in the same year has said 100 million if not 1 billion Optimus deployed whereas we're thinking on average around 1 million. H so an element of conservatism there. and then the other part that we introduced to the model this year which is really notable is compute and AI infrastructure. since we last published our our older model roughly two years ago, AI has become really topical for all of these companies. So by 2031, we're estimating Tesla can spend roughly $225 billion cumulatively on AI compute. And the more they spend on the compute, the more capable Optimus gets. so really Optimus is is one of the most notable changes. And then energy is really in the balance that remaining 6% near-term it's very important for rolling out data centers.

67:21 I think this week or or last week Elon tweeted that they're trying to accelerate the mega pack production as fast as they can to help with load balancing for the AI data centers. And and then lastly maybe another area of conservatism but really we think in terms of opportunity is full self-driving. So, we heard a lot of positive tidbits on the call that roughly 75% of consumers in North America are paying for full self-driving before they even get the car, which is notable because you get one month free.

67:48 So, it just goes to show how compelling the service is. But from a a long-term opportunity standpoint, we we don't model full self-driving subscription service. We really think robo taxi h is such an enormous opportunity on the order of 10 plus trillion at scale of a market size. So, and that's kind of maybe just double clicking on some of the key areas that we focused on this year with our updated model. >> Alex, let's go over to you. How how are you guys modeling it especially through this transition here? Are you seeing that robo taxi is going to scale and and that's the opportunity or is it still a scale up of FSD as you transition into a different business model?

68:28 Yeah. So, first of all, I'm too chicken to model Optimus. So, the the contribution to my price target in our model is $0 from Optimus. It's not that I think the value is $0. I'm just not creative enough to think it outside the box. I what happens to me generally speaking with with our Tesla model is as long as there's sufficient upside to our price target I basically say there's a call option and it's free.

69:00 but I agree like Optimus could be a gigantic driver is likely a gigantic driver of the terminal value. If we have a one-year price target, probably doesn't factor in that much, but we do an extremely detailed forecast for FSD, for robo taxi. it's a, you know, 20-year DCF where we make, you know, explicit projections. there's actually we have a lot of other projections. There's 17 different revenue line items in our model. So we model supercharging sessions by region and price. We model insurance. We model a lot of different things. But in the end it really comes down to FSD and robo taxi. And FSD maybe the one of the areas that I differ from you guys is I agree FSD itself like the actual subscriptions maybe they drive near-term P&L contribution and that's great but over the long term they're not a big contributor but I assume FSD licensing will be and this is not something you have evidence for yet.

70:10 but I think that eventually other automakers hands will be forced and just like what happened with supercharging right eventually it's not as though people you know want your let's say you're Jim Farley at Ford or something you don't necessarily want people to pull up in a Ford pickup to a supercharger and charge with Tesla signage everywhere but in the end you're sort of forcing just to capitulate, right? Because why would you not? The supercharger network is ubiquitous. It works. It's reasonably priced. It's everywhere. It's reliable. Why would you go with some third party that's none of those things and is more expensive? So, in the end, as and then one company capitulates. They say, "Okay, we're going to use North America charging standard." And then it's just like falls like dominoes and everybody else falls into line.

71:07 >> I think that there is a day three or five or whatever years down the line where people are going to say, you know, I I want to buy for whatever reason a BMW or something, but I won't buy it if it doesn't have full self-driving functionality. And the way that Tesla's solving this problem is fundamentally different than the way everybody else is trying to do it, right? So you can either build your car, build your BMW or whatever it is around Tesla's electrical architecture and license FSD and sell your BMW to a willing customer or you can lose market share. I think that that's going to happen. So in my model that ends up being not as big a driver of robo taxi but as robo taxi but in the same ballpark.

71:55 >> And Alex don't don't sell yourself short. The reason we're so excited to have you and Pierre on is because you you both do incredible research and push the frontier. So, everyone everyone should >> you guys do too. >> Pierre, what are your thoughts here? You've explored various robo taxi rollouts. I know we've had discussions in the past about different ways it could look. How are you modeling Tesla in this period of transition? >> Yes. And if you recall five years ago, we had like five different scenarios to see how the core FSD technology would evolve.

72:35 the the most the most favorable scenario was Tesla actually developing unsupervised FAZ being able to deploy a fleet to go over the hurdle of mission delivery and execution on the on the actual passenger pickup and drop off. and the second best scenario was Tesla would do all of the above but would face some some competition. And so I think today we we're basically sitting in the second best scenario with a good level of conviction on Tesla probably dominating the market. We we kind of see Tesla as being the dominant standalone robo taxi player because they benefit from this ability of viabilizing their fleets with with Tesla owners that nobody else can replicate. Whatever the scenario you look at in terms of technology and capabilities and then when it comes to valuation I admire your courage Alex to do 20 DCF and things like that. I've long given up and given up and sometimes my peers and my colleagues like complain about it but I don't. So I I have a hard stop at 2030 guys. I'm sorry I have to go. And and so I kind of look at a scenario which is to be honest not not excessively aggressive like which is very reasonably optimistic on the road out of robot and I look at my a bit the eit number I can get to in 2030 it's like 60 billion dollars and I'm just thinking you know where will the market be in in 2030 on Tesla and you would be just opening up the the robot opportunity so still very very high growth and then Optimus that I don't model either. I think that's the right approach. Alex, you you model what you can foresee and I think it's a bit early to to model Optimus and Optimus would be an upside the way robot taxes and upside today and look look at the multiple on earnings of Tesla today is like very clearly you know taken into account in some sort of shape in some shape shape or form. So, so you know, 60 60 billions of earnings in 20 in 2030, 50 times 50 times at least 50 times earnings because it's still like a very high growth, very high potential stock.

74:53 And that's kind of the way we very simply think about it today. >> Great. And so then let's let's bring Tasha back on as we do a little bit of a deep dive into robo taxi. And you know, I think all of us here, we've been with this story for long enough. it's been promised every single year, but are we finally crossing the finish line? It is commercial. what is the scaling look like, Tasha? Is this is this the year?

75:27 >> Well, you know, I feel like the most monumental step was taking the driver out out of the vehicle. so in some sense we're already there but but now it is just just a matter of scale. you know one thing I did want to talk about speaking about FSD and yeah we we haven't put it in our model because we as as you look at how they get FSD revenue today it seems like longterm the robo taxi opportunity will dwarf it. I I like the idea of an automaker capitulating. I we've we've thought about that too. I feel like we've been we've held out hope for the traditional automakers in the past and it so far it hasn't hasn't quite quite got gone according to plan in terms of what we thought they would do with with autonomy. but but I think that would be a smart move. I agree. but yeah on the FSD attach rate on the call which was mentioned you know this 75% of of owners if you look at other subscription services and free trials for things like Sirius XM or G GM super cruise which are actually over longer periods and both cheaper products that 75% you know if you take the most recent estimate right that's pretty amazing compared to past services it's like more than double what what competitors have gotten so so I think that that really goes to show that consumers want this product. They're certainly touting it as you know a reason that people are buying the cars in a way that they haven't done in the past. so so I think that you know we want we know that customers like autonomy. we think that robo taxis will make autonomy cheap and that will proliferate ride hail. and Tesla's already proven that they can price below at least they they have chosen to price below Uber and and other services here on as they rolled out the cyber cap. So so we know that it's already possible. It's just a question of like when will it be widely available. so we think that'll happen within the next five years. It'll be very meaningful within the next five years. Let's say >> Alex, you've got a lot of experience with China and the Chinese automakers.

77:28 It seems pretty clear at least from from where we're sitting, right? It's like China's doing autonomous in China with Chinese companies. the US is doing autonomous with US companies. Europe is the the potential battleground here where China is flooding the market with all of their EV exports. Tesla getting FSD approvals in some countries. How do you think the autonomy play shakes out in Europe?

78:00 >> Yeah. Yeah. This is a fascinating topic. I I agree. This is going to be the the place where you see Tesla actually have an opportunity to go head-to-head with Chinese autonomy. I think I I just got back from China and I I spoke to a bunch of companies over there. people don't necessarily say this outright but my my belief is that like I said earlier Tesla's approach to solving autonomy is is different right it's not a consortium approach where you get you know a sensor supplier and an automaker and a ride hailing company and you know an algorithm developer and then everybody gets together and makes this sort of franken monster are you have a lot of companies like that is basically Chinese mirror images of Whimo.

78:54 you have a lot of those companies and they're going to Europe and deploying their their cars and trying to deliver u you know autonomy. You also have a bunch of companies that are basically Chinese mirror images of mobile eye right where you know you're sort of walking up the level two level two plus level two plus maybe we leaprog level three whatever that means. so there are a bunch of companies doing that >> and there are a bunch of companies replicating Whimo.

79:22 It's pretty small list of companies that are trying or who even could theoretically replicate the way that Tesla solving this problem. So, if you believe, as I believe, that Tesla's approach is better, right? It's more scalable, you have you're vertically integrated automaker, you do everything soup to nuts, you have your own in-house fleet that's purpose-built for gathering this data, you're training the data in your own data centers, maybe you're using your own chips, your own electrical architecture. The only companies that can do that by definition are vertically integrated automakers.

79:54 And if you're going to walk the path that Tesla walked, it's going to take you a long time, right? Many years. And the Chinese aren't dogmatic. They will do that if it seems like that's what will work. And there are companies that are in the process of doing that now. But they're behind. And I think that the Chinese government is probably not so keen to allow Tesla to just run rough shot over the entire industry. if they think maybe there is a different model that they ought to get their Chinese companies up the learning curve before they compete in the in Europe they will have no such luxury right it will be just like in the states where Tesla's going up against Whimo and in Europe they could be going up against Whimo or they could be going up against you know Chinese companies with Whimo characteristics and I think Tesla will win right I mean because there's for all the reasons we were talking about earlier, right? It said it's more scalable and the cost is going to always be lower. That doesn't mean that the Chinese companies will I think or Whimo for that matter will be out competed or you know sort of driven into extinction. I I think that Uber could kill Lyft if it wanted to, right?

81:16 You could just undercut them on price until Lyft runs out of money. But they don't, right? because it's beneficial to have lift around sort of setting the price and you can out earn right so you could have whimo or te you know Chinese companies that are like whimo being sort of like the lift you know the analogy and then that allows Tesla to overearn relative to that competitor while pricing at par or maybe below that is a super interesting dynamic we often talk about what will happen to Uber andyft But Brett, do you have any any comments on Robo Taxi before we go to the next?

81:56 We'll go rapid fire in our next section of overhyped or underhyped on Optimus. So, everyone gear up your answer while Brett takes us. >> Yeah, I just adding to the kind of European battleground. One, Europe is a battleground. It's an ironic battle to fight since Europe probably won't let a robo taxi service really scale until like 2040. So who cares beyond my investment horizon. But then two, there was just this report out by cohhere that was using an openweight Chinese model and witnessed this strange behavior where they asked it to take a local cyber security inventory to protect their system and instead it tried to like take the data and output it without permission to an Alibaba server. and so it's just I think that there are geostrategic things that are going on here that should make any regulatory or sovereign somewhat nervous about kind of like having physical assets that are run by kind of like Chinese AI, you know, operating and becoming critical infrastructure for their policy. and so I would expect that will also put some commercialization friction onto the Chinese players as they try to export their autonomy elsewhere and their robots, which is a good segue to Optimus.

83:22 >> Sounds great. All right, let's bring Pierre on and Daniel as well. We'll go rapid fire here. Pierre, thank you for for joining us. I know we've significantly run over time and we appreciate everyone staying to continue to talk about it. Pierre, overhyped, underhyped, optimist. >> Well, Alex is okay. He's not overhyping it. Neither am I in my model. and I think it's it's job, you know, to make us dream. I think it's very important. We we live in a time of acceleration. So we we need people to to carry that flag and carry that that perspective. I don't know that there is like a a very specific expectation and optimist. So the the only thing you can you can see that is tangible is the scale of the manufacturing floor. and is it overhyped? I mean given the level of competition around the world on humanoid robots I don't think Tesla can get into that game at a total scale. So, so, so, so it doesn't feel like what's delivered operationally is is not overhyped and and for the rest, you know, as long as you stand between Alex and and Elon, you're fine.

84:37 >> All right, Alex, over over to you. >> Yeah, I don't think that it's I don't think that it's overhyped. I I I actually don't think that it is taken very seriously by the at least my client base. I don't think people really put it in numbers. I think I'm similar to them in that regard. I and I would love nothing more to them than to be proven wrong. Like I mentioned, I don't think that that that you need to believe very much about it to believe that Tesla's attractively valued at this valuation, which is sort of a copout thing on my part. Like it can be like I don't really care how much it's worth.

85:18 It's worth something more than zero. which is what I think the stock currently implies it's worth. but yeah, I if anything, I don't think that it's overhyped. >> All right, Tasha. >> Yeah, I mean, I feel like who who who is hyping it, I guess, is this is a good question to ask. But, I mean, I think if you look at headlines, it's it's overhyped. And and even on the earnings call, if you listen to Elon, he's like, well, you know, I think people don't understand how difficult this is. Like, even the manufacturing up front is going to be extremely hard.

85:49 so I even even you know one of the world's most optimistic people is is sort of trying to temper temper expectations there. but but I'd say you know we're really excited about the opportunity. It's just a question of when. in the next five years you know as I've said we we expect it to be maybe less than 20% of Tesla's value but longer term could be much more than that. >> Daniel >> I will say appropriately hyped but on the timeline overhyped. I think given the hardware difficulties Tash has just described, but more importantly actually the data front and how there's no real inherent data advantage that any player has given how nonuseful a manually controlled Optimus is whereas as Tash often says a manually controlled vehicle is very useful. H so I think it's appropriately hyped in terms of the opportunity but just people are maybe too aggressive in terms of timeline and we're in the very early innings.

86:46 >> Wow. Everyone loves to be hedged. Brett, take us take us away. >> We're giving compliant answers. >> Yeah. Yeah. >> Take take us here. >> Yeah. >> It it it it is just such a huge challenging problem. I think they are mechanically constrained and software constrained and you can't just throw money at it and solve it. There's lots of learnings that have to happen between here and there to make humanoid robots that are generally useful a practical reality that you can sell into the market and so you know Elon always sets hyper ambitious targets and in this case you know designing towards kind of such a big build of optimism is I don't know if it's best use of capital for Tesla specifically just because of how hard it will be to get these products into working order and market.

87:40 You can look at I think Sam, you've said it. It's kind of like robo taxis a decade ago or Whimos a decade ago were probably roughly where humanoid robots are now where it's like, oh, these look like these totally work. Why don't these just commercialize at scale now? And the corner cases of robo taxis is like figuring out how to drive up next to a curve safely. the corner cases for humanoid robots is basically like the entire universe of reality. And so it's just so much harder a problem. and I do think it's crackable with super intelligence, but you need a lot of super intelligence crossed with a lot of manufacturing learning in order to get there.

88:20 >> All right, let's round it out now. The biggest downside risk that we're looking at with respect to Tesla. Alex, we'll start with you here and maybe I'll I'll lob in as part of this. Is is the is the potential merger here just weighing over everything and so you know it can operate without really being valued for what it should be because people are holding out on that. >> Yes, I think that the answer to that question is yes. in terms of downside, I I actually I wish I would have asked Kathy about this because I I feel like I remember seeing her post about China risk and you know, potentially torpedoing a merger. that's something that's difficult for me to to handicap. And you know there are only a couple things that I think could really because the one of the liberating things about being vertically integrated and in control of your own destiny in this way is that you know they can more or less grab this company by the scruff of the neck and pull it into the future and it's on them to do it. which is amazing because this is the team that you can trust to actually execute. but if regulators or geopolitical issues you know sino US relations throw a wrench in the gears then that's something that Tesla can't unilaterally unilaterally control. so I asked Travis about this in my in my post IR call. I was like hey you know people talk about carving Tesla China out in order to try to ring fence that in order to make a merger palatable. and he was just no comment, no comment, no comment. So that's that'd be my biggest issue.

90:12 >> All right, Tasha, what about from your perspective, biggest risk to ARCs forecast? >> Yeah. So I I I think you know, Alex made some great points. I I I'd add that for from our perspective definitely if robo taxi scaled a lot more slowly than than we expect and and then Tesla expects that that that's the biggest risk. >> again it's you know given the number of car he said 5 million cars annually by 2030. So that's certainly not what they're aiming for. you know they've also said they expect a statewide roll out to eventually happen.

90:48 so I think I think regulation could certainly slow it down. They're still working on technical issues as well that could certainly slow it down. you know, we we strongly believe that again they'll be the first to scale, but that is the biggest risk. >> Daniel, what about from your seat? I >> I I think to add to Tash's point on roll out potential accidents with Tesla FSD and robo taxi, it'll likely get a lot more headlines than than any other accident. and then more of a top down kind of out there answer really is if if Starship blows up and they can't get reusable rockets because a lot of that compute will be needed to train Optimus and and tap into that multi-t trillion dollar opportunity. So in the topic of ARCs convergence, that's my answer.

91:31 >> Brett, are you gonna flip this on its head like last one and say the downside is people not being optimistic enough here? No, I I think I think that the the the the risk for Tesla is that the merger doesn't go through because I you know you can Elon is already spending four days a week in Memphis to make sure that super intelligence gets built out for SpaceX. So I think you should interpret if there's a failure to merge the entities. I think his attention probably increasingly focuses on driving velocity in the SpaceX side of his set of enterprises. And so then what does Tesla become? Tesla, I'm sure, would execute on building out, not sure, but they would probably execute on building out cyber cabin, robo taxi, and really moving into exploitation mode on the strategic platform they've built. But it, you know, not having him to like keep pushing that company forward, it would probably lose its exploration edge. And that probably means Optimus continues to drift on timeline and probably means that opportunity is not really, it might be available for them to build, but not to really take the full kind of potential cash flow and market credit for. And so I think that people, the Tesla shareholders in particular, have been on a long journey and so feel like, oh, we've been on this long journey and we're not going to get the rewards of this journey if we don't get paid a very high premium for this merger. The reality is there's another train leaving the station right now and kind of it's in the best interest of both the SpaceX and the Tesla shareholders to have a combined entity that can be driven forward at a ve very aggressive velocity. And I think if if the merger didn't happen, then you probably realize kind of the vision laid out in in you know the model that Tasha and Daniel you know worked really hard on like you get Cyber Cab and who knows what happens to Optimus and suddenly you know your key supplier is a company that's much much larger than you in SpaceX at least as we understand it could develop. and so then it's less of a kind of vital source of the real like driving forward of technological growth. and I'll just add one more since I have the floor. they did change their language on we're going after all of transportation now. So not just robo taxi. And so what could that mean? I mean who knows? Maybe they do something crazy and buy an airline because it's has Starlink on it. Or, you know, they could there could be some really aggressive interesting orthogonal moves that happen here that might catch people off guard.

94:11 >> All right, thank you, Alex. Thank you, Tasha. Thank you, Daniel. Thank you, Brett. Thank you, Kathy. Thank you, Pierre. we've managed to condense two hours of earnings call into an hour and 40 minutes. So, no, I think this was a great conversation, super enlightening, and hope to do it again. Thank you all so much for your time. >> Thanks everyone. Thanks a lot, Sam.