Data Creation and Storage Is the New Oil

Data Creation and Storage Is the New Oil

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RAOUL PAL: Tim, fantastic to  see on Real Vision. TIM DAVIES:   Absolutely. Thanks for the opportunity. RAOUL PAL: I mean, we've known each other for   24 years or something. I was trying to  figure it out. A long time, like '97-- 

TIM DAVIES: --Half a lifetime ago. RAOUL PAL: Yeah, back from Goldman Sachs   days. Give people a bit of your background, just so everyone knows what you do and who you are.  TIM DAVIES: Thanks, very much appreciate  it. So I met you in 1998. I was a young   guy backpacking around Europe and I got a  job at a place called Goldman Sachs that I   had never even heard of, to be honest-- RAOUL PAL: --I don't know how they let   either of us in. I don't know why they  let either of us in, but they did. 

TIM DAVIES: So, yeah, look, an incredible  experience. I worked on the European sales   trading desk, I had a great opportunity  to understand how markets worked,   particularly that bid offer spread. We were  around during the tech run. I remember one of   my favorite things was probably that we raised $5  billion for Vodafone in the space of an afternoon   when they bought management for $180 billion, so a  really long time ago. In 2001 I really struggled,   I always wanted to know why people  bought the companies that they bought. So  

I was much more interested in becoming a portfolio  manager than a sales trader. So I left London in   2001 and went to work with the Packer family in  Australia for nine years, which was brilliant.   Most of my career was spent in China. So I was  a China hedge fund manager from 2003 until 2012.   I got to go there 10 days every month for 10  years. So I got to go there about 100 times.   We also built a business on the ground in  Shanghai. We hired 20 local analysts in  

2006, and then repeated it again in 2010 with  another firm. So it's an amazing place to watch   markets grow. We invested in companies that added  thousands of stores every year. We invested in   a lot of the tech names from  today. I invested in Tencent's IPO.  RAOUL PAL: You had perfect timing for that  whole China bull market. You got the tech  

bull market and then you've got the China  bull market, and you got it spot on, right?  TIM DAVIES: Yeah, I think it was. At the same  time, I think they probably spent much of their   time staring at Bloomberg and trading and stuff,  rather than 20 years later, we're a little bit   wiser and we spend that time really digging  apart companies. Holon on spends six or 12   months looking at businesses before we'd include  them in our portfolio. So a different skill set,   but it's been an incredible experience  just in terms of understanding the scale,   like when we look at really big numbers  coming out of working in an economy that was   1.3, 1.4 billion people really helps a lot. RAOUL PAL: So tell me a bit about Holon.   What are you what are you doing now? TIM DAVIES: Yeah, so Holon was set up by twin   brothers, Heath and Luke Behncke, in Australia.  Luke had spent a lot of time in government in  

Australia, knowing policy really well. Heath has  been a traditional value manager in Australia,   predominantly on Australian shares. Heath worked  out, in probably 2015, 2016, that the world   was changing. All the best Australian  companies were being acquired,   and we were starting to see the beginning of  what you talk about, this exponential age,   really starting to come through. So Holon on was  established in 2019. Effectively, we run a loan  

only, concentrated in equities fund that's really  focused on investing into that exponential age.   So it's made up of the traditional,  really large technology companies today.   It's made up of companies that we see,  things like Afterpay, things like Tesla,   that are really benefiting from this acceleration  that we're seeing in growth coming through,   and also some exposure to digital assets through  MicroStrategy and Coinbase. So that's our base   fund. It's going really well, we're coming up  to about 2 and 1/2 years, averaging just under   30% performance per year. The really interesting  part of our business though, is we're building  

infrastructure for Web 3.0. So at the moment,  we have put on about 27 petabytes of storage in   a data center in Sydney that fits into that file  coin protocol. So we think that's really exciting,   and our plans are really to look to grow that out  to the exabyte size. So we see an opportunity here   to grow that business at least 100-fold in terms   of the size of data storage. RAOUL PAL: Wow. One of the key  

things you're working on is these three white  papers and kind of framing your thought around   money, energy, and data. I'd love to hear your  thoughts on this, because this is very much in   line with how I'm thinking of the world, and I  just want to see how you're looking at things. So   let's start off with the money component. TIM DAVIES: So at the moment, we're trying   to build a framework over the next 12 months of  really trying to communicate to the market what   we think are the necessary building blocks that  will take us from our web to environment today   into web 3.0. Those three core  things are near 0 cost transactions,  

which, as we know, whether it's smart  contracts or digital assets that enable that,   near 0 cost energy. So we're really starting to  expand out our renewables footprints. I think it's   interesting today that building an industrial  sized solar plant is about one fifth the cost   of a new coal plant, so we're starting to see  those real benefits of scale coming through. Near   0 cost data storage, which we think is probably  one of the most interesting things that's come   out of our Tesla report, is really understanding  where is data storage today and where do we need   to get it to. And then I think the last piece,  what we call the capstone to those three things,   is doing that in a smart contract, trustless  environment. So enabling us to take that fixed  

cost of human beings in that system, that cost  layer, bringing it out and letting software solve   a lot of those challenges. So we think the four  combination of those four things together really   enable this acceleration into the exponential age.  A lot of the Web 3.0 things we talk about today,   that's where we see these four things coming  together. And really, like I said, accelerating  

that Renaissance, accelerating that opportunity  that we're going to see in growth coming through   from these really exciting Web 3.0 businesses. RAOUL PAL: The energy side interests me, because   I've been looking at this and my conclusion  to it all is the cost of energy is going to 0.   As you digitize everything, it goes to zero  cost, unless it has a scarce supply. So an NFT   won't, but everything else as  unlimited supply, it goes to zero.  

How are you looking at the energy market? TIM DAVIES: So it's really interesting. So for   us have to get to renewables, the cost of energy  has to be brought down. So it's really a function   of just continuing to grow scale and driving down  the cost of production. I think some other things   that are really interesting are the ability to  be able to turn isolated assets into income by   putting a miner, and then that capital can then be  used to build renewable energy across cities, for   instance. So we'd be taking out that fixed cost of  pipelines, all those extra things that are added,   and instead, actually converting it on site. So  we think there's some really interesting things   that will come through. China's providing-- I had  the opportunity 10, 15 years ago to go and look  

through the entire energy manufacturing,  particularly for solar out in Nanjing,   and it's just extraordinary, the process they go  through and the sheer scale. So just bringing that   lower and lower and lower, that cost of energy,  there obviously is a limiting factor, but I think   it's potentially 50% well from here at least. RAOUL PAL: Yeah, and I looked at the exponential   of the declining cost of energy. Who knows,  because the sun is free, the technology to convert   it gets cheaper and cheaper by the day, and we've  seen the cost of computing power massively reduce.  

It just feels that we're going to enter into a new  world where the cost of energy is inconsequential.  TIM DAVIES: I agree, yeah, it's exciting. RAOUL PAL: What does that do for productivity?   What does it do for other opportunities?  Obviously, it makes data scalable, because it   costs less, which is part of your thesis.  The data itself, the computing power goes   down with the cost of electricity, because  it's probably the largest input these days.  TIM DAVIES: I agree, I think  it's a really interesting part.   There's still so much to go. I think it's  interesting, if you look at where renewables  

are coming through, it's really solar as the one  that jumps out. if you look at some of the charts   over the last 15 or 20 years, it's really  starting to take that exponential shape on.   So our rights, laws coming through, and our cost  of production for increasing volume is really   going to continue to lower that price. So it's a  really interesting space. We brought an external  

analyst in to do the work for us on energy, a  guy called Richard Cornman who has about 20,   30 year of experience in Australia in the  space. We're actually going to zero in next   year and really start to pull apart this thesis  around how we get to near 0 cost energy. So,   yeah, a lot more work to do on the space, but  I think your thesis will stand up quite well.  RAOUL PAL: And how do you invest in the energy  side of this equation? People have struggled   to find ways of capturing it. Yeah, you've got  lithium and you've got battery technologies and  

stuff like that, but how are you thinking about,  OK, what is the opportunity set as investors?  TIM DAVIES: I think, partly, it's  actually thinking about who has   the cost base of high energy costs. So what  does lowering energy costs do to our business   and things we invest in? For instance, what does  it do to Bitcoin mining? It's really interesting,   if we keep driving down that cost of energy, does  it open up our profit margin, does it bring more   volume or miners into the market and make it more  difficult in terms of solving? So it's really   interesting trying to work through these areas.  Standalone energy, I think Tesla's energy business   will end up being about 20% to 25% of their  revenue through that back end of the 2040s. So   bringing storage capacity is really critical in being able to take our renewable energy   and have storage so it can start to take some of  that slack of peak load or bad weather and stuff.   So I think Tesla's incredibly well positioned.  It's really hard to do a stand alone, someone  

like Cheniere, for instance, in China is probably  one to have a look at. But for us, we think we   get really good bang for the buck with the growth  that will come through in Tesla's energy business.  RAOUL PAL: So for you,  Tesla's still not overpriced. 

TIM DAVIES: No, I think it's a long way off  actually. We took a really different approach   to this. We looked at it, sat back, and said, look  what's going on here? 30 year handover, probably,   of leaving our combustion engine vehicles for  electric vehicles. So it was quite unique to   actually look to build a 30 year model of what  that looks like. I think in most modeling,   we probably look at it and say anything more  than ten is isn't it realistic. This is quite   unique and that there's two main drivers. One  is obviously the environment we know about. ICE,  

internal combustion cars, they produce about 30%  of greenhouse gases. So it's a pretty easy target,   I think it's one of the bigger targets to attack  in terms of reducing our greenhouse gas emissions.   When we looked at the data, what we did in our  model is we captured about 62 countries in the   world and about 92% of the world's population.  What really jumped out is its rising incomes   in developing markets that are going to  drive the EV story. 70% to 75% of cars sold  

are going to be in developing markets. And  between 40% and 50% of every year it will be   India and China. So EVs is much more of a story  around rising wealth in India and China than it   is, really, in any other major factor outside  of what I touched on, the environmental push.  RAOUL PAL: I also thought through when you were  talking about who is the net beneficiary of the   cost of electricity going towards zero, India  is one of them, because they entirely rely on   oil imports right now. Reliance is starting to  build this massive solar complex, and I think the   biggest solar complex in the world is in India, in  Kerala, but that's a step change for that country.  TIM DAVIES: Absolutely, but to me it jumps out  a bit like Africa when they got mobile phones.  

It's like an assumption, oh, they'll have to  go through the fixed line cycle into mobile.   India does it with the best technology.  They'll manufacture at home,   real scale, domestically to drive down the  cost of CapEx to build that energy supply. So   it's one of those great things around emerging  markets and developing markets today, is they can   get the best technology available and skip through  a lot of those things that we have gone through in   the developed world over the last 20 or 30 years-- RAOUL PAL: --Yeah, I've been following the story   of Reliance for this. So Reliance, we're an  oil refining business that happens to have   the world's biggest oil refinery, it's state  of the art. But then he takes over the entire   4G market because he realized he  doesn't need any legacy infrastructure,   taking the step change, drives everybody  into bankruptcy, takes over the entire space,   and then starts building businesses on  the back of it. And then he borrowed,  

I don't know how much he borrowed, $18 billion,  and paid it all off in 3 months over the pandemic.   And now Reliance have the opportunity to  own that entire network effect around India,   and then the next announcement is  green energy. I'm like, holy shit,   that's a really interesting company. TIM DAVIES: I agree. I think it's that  

integration again. Tesla's got that integration  of energy and a product. And I think Reliance is   looking at the same thing. You want to bring green  energy, if we're going to actually own a national   technology platform, we want to feed green energy  into that for that stamp, particularly today. We   ESG is so important today, so yeah, I think  it's a really, really interesting business.   The challenge is how do I look at it with the  petrochemicals part, and everybody's waiting for   the technology part of the business to be spun  out sometime in the next year or so I think.  RAOUL PAL: Is that the idea? You  think that they'll spin that out--  TIM DAVIES: --I believe so. It's been spoken about  for quite a while around spinning out. it's JIO, 

J-I-O, isn't it? The business they're spinning-- RAOUL PAL: --JIO is the mobile phone business and   all of that stuff, yeah. TIM DAVIES: Spot on. RAOUL PAL: So the money side of the equation.   So how are you guys looking at crypto, what are  your plays in this space? You're mainly in the   equities, I guess. How are you seeing this  evolve within the thesis that you're looking at?  TIM DAVIES: Yeah, we think it's central. So that  ability to move money for near 0 cost opens up   an enormous number of things. You start to think  about what a near 0 cost micropayment could do.   For instance, bonds can go from one payment  every six months to micropayments per day,   which radically changes the risk profile and  potentially lowers the cost of capital, because my   cash flow streams come in every day. So we think  the ability for micropayments is incredible.   When we think about where data will be stored,  one of our theses around our data is that   we don't believe the biggest data providers today  want to offer that business into the future.  

If you work through the numbers today, we only  have two zettabytes of total storage in data   centers today. Now, we think that's got a growth  500x by 2035. The numbers are just astounding   in order to be able to genuinely save a fraction  of what we produce in data today. If you look at   the kind of key target here, it's the IDC,  International Data Corp, and almost uniformly   across the industry, it's they're correct,  they're saying 2,200 zettabytes in 2035.   Our work on Tesla alone tells us that EVs will  produce 15,000 zettabytes of data by 2035. 

RAOUL PAL: How come EVs produce so much data? TIM DAVIES: It's the autonomous nature of an EV.   So an autonomous car driven for an hour is the  same as 5,000 adults working in a professional   job. It's an enormous swing factor, and  it's one area that we want to spend some   time talking to Tesla and really zeroing  in. But the assumption today comes out of  

the former Intel CEO, Andy Grove, who made a  comment that it was about 40 gigabyte per second   of how much data is created.  Now when you extrapolate that,   our assumptions for Tesla is that they'll probably  have about 110 million autonomous EVs on the road   by about 2035. When you extrapolate that across  the industry, 40 gigs, one hour a day, per year,   and then you end up with about 15,000  to 16,000 zettabytes just for those EVs.   We think IOT is probably wrong by a factor of 10,  the assumptions as well. So we're heading into a  world where we might be looking at 20,000 to  25,000 zettabytes of data created. Today, we could   store two of that and we'd have to throw away all  the other data that's stored as well to fit it in. 

RAOUL PAL: This is quite shocking.   How the hell are we going to solve this? TIM DAVIES: Yes, so it's really interesting.   I'm writing a big white paper at the moment  on this, I'm 110 pages into it at the moment,   where we're breaking down what is data storage  like, what are the devices, who makes them,   who's got the market share, and what does  growth look like. And then we're pulling   apart the internet as well and going well, what  are all the problems with the internet today.   In terms to date, like I said, we think data is  probably short by about 10x, the assumptions, as   early as 2035. It probably costs us $2 trillion to  get to two. What does it cost us to get to 1,000?   So in our view, these are areas where it's almost  like they haven't really been pulled apart and   studied yet. So we think a 500x increase, that'll  get us to 1,000 zettabytes, which means that we've  

got to keep everything we've saved. It means that  if we just want to add size 1% of data relative   to today's story, so in 2035 1% of that 20,000  zettabytes means just today we'd have to grow 100x   just to add that 1% in 2035. So the numbers-- RAOUL PAL: --And that can't be server farms,   so what is the solution to this? Is it distributed  data, edge computing, I mean, how is this done?  TIM DAVIES: So we sit back in  this we ask ourselves. Let's say   I'm the CEO of Google and I sit down with  my board and I announce my 10 year plan,   and I start off by saying we have to increase  our CapEx from roughly $50 billion into the   trillions per year to fund the CapEx to build  sufficient capacity. The pricing of the data will   exponentially fall, and it will trigger  exponentially increasing demand for storage.  

So if I don't grow exponentially and my  price is falling exponentially, I've got   to grow just to have flat revenue. If you look  at those businesses today you say to yourself,   CapEx is going to explode to just store  this data, my ROE is going to collapse, and   my price per unit of data is going to collapse.  Why would I do it? Effectively, they're   walking into a trap of being this low ROE-- RAOUL PAL: --Well unless you can leverage   the data like Google to create AI, which is the  logical next layer that you're talking about.   The layer above is, OK, once you've got cheap  electricity, cheap data, and the system of money,   AI now is essentially unleashed. And if they  can do that, they can add value back into the   equation. If they don't, like Amazon, I don't  think use that data, what are they going to do? 

TIM DAVIES: So if you think about it, there's  a pot that we protect, and we all go fishing in   that pot to build those layers, those high margin  layers, and AI programs. Facebook's Oculus, for   instance, the data they're going to pull is really  valuable today. And so we think that actually,   it becomes a bit like a utility where it's a fee  for service basis. If I want to go into that pot   and pull information out, I'm going to pay  to access that. What's unique about it,  

one of the beauties about tokenomics,  if we turn it into something we can put   rules around it. So in our view, data kind of  becomes the same, valuable data becomes a thing,   we put a smart contract around it that  says, for instance, if it was Chinese data,   the government says no one outside China  can access it. So that wouldn't allow that   data to be accessed. So you start to  think about that evolution of a smart  contract directing money, while a smart  contract can actually direct data as well.   It can have a micropayment every time that data  is accessed. So it changes the nature and the  

value of that data. Having that isolated, if  you think about it, it doesn't make sense to   have it all in different pots that these big  global guys just keep funding themselves as   opposed to having it in a centralized, safe pot.  But like I said, the data can have real value,   we can access that data, and it changes the nature  of the business. They avoid this trap of becoming  

low ROEs and heavy CapEx. I think the other thing  would be the government, if you think about it,   the cloud guys today effectively control  our brain and nervous system of the world.   Now if data goes up 500x, could you imagine the  pressure on those businesses? So we think the   regulations go through the roof. We think they  start to restrict their ability to move, because   effectively, they're holding our brains,  so why would we let them do anything else?  RAOUL PAL: So thinking through what you're  saying, we've all said data is the new oil,   and you're saying essentially the same thing.  There will be a shortage of supply because  

of storage, so therefore, there's going to be  a premium, eventually, to data, which we have   not seen, because data has been going to zero.  But you're saying if you're going to want to   access it, because there's no way we can get  to the scale of what you are talking about,   that the only way is to charge more for it. TIM DAVIES: I'm not really convinced that we don't   get to the scale we're talking about. So it's  really a function of aerial density. So we know   that Moore's law says we can effectively put twice  as much capacity every two years into a chip.   The question is, does that continue?  Can we continue to increase the size of   storage per square inch? Can we move from  HDD, to SSD, to flash, or some of these new   technologies that we're going to see in this  shift. I think we can get the capacity there.  

It's a function of cost, and it's a function  of how do we manage that. When we think about   data today, HTTP is location based. So  if 500 people, at any place in the world,   access Real Vision, everybody goes back  to the same server in the same location.   A guy called Juan Benet developed a  project about 10 years ago called IPFS.  

And basically, it's a beautiful,  neat filing system for how we   store information based upon its content as  opposed to its location. What this means is   we get a more structured and better organized  internet, and our cost of retrieval should fall,   Lion thinks by a magnitude of about 100x, it  will fall back to 1% of the cost today. So   there's a lot of moving parts in the data storage  area. The key levers are really around what do we  

need to keep. So an Autonomous EV driving  down the road, do we need to keep the data?   I heard from someone last week that BMW cars have  a little camera in the mirror, and they're taking   video as they go past and that information is  being sent back to where you can park your car.   So there is value for this data, and again, it's  a function of our ability to store it effectively   and earn income from it. I think  it'll be a deciding factor of   how much storage capacity we need.  It's an incredibly exciting space,  

where we're heading in sheer growth-- RAOUL PAL: --You've talked about File   Coin a bit. Talk to me a bit about that. TIM DAVIES: So File Coin, what it does is it   allows everybody around the world with storage  capacity to add it to a network. With the idea   being that one of the limiting factors on cost  of storage today is that everything is an OTC   transaction. So if you or I go into Amazon where  you are today and where I am today, we're probably  

going to get very different prices for the same  package we're looking for. What File Coin does is   it effectively says to the world, everybody bring your capacity to one protocol,   and the price of data is set by where someone  is willing to offer you storage. So we move to   a market based mechanism for pricing as opposed  to half a dozen big groups making that decision.   What we want to see, like I said, are those  exponentially falling prices that will drive   that exponential demand for storage, and that'll  bring people in. What's unique around File Coin,  

similar to Bitcoin the protocol was bigger up  front, so the rewards were much more. We can   go to File Coin today and plug our storage in,  save some data, and we have to put a single file   coin up to effectively protect that data. If the  storage isn't switched on we lose that collateral,   but we get one file coin back as a reward for  doing that. If we bring a validated client,  

like a big client with real data to the  platform, the rewards are 10 times that amount.   If you work through it, the question becomes what  price does file coin have to be that my reward   can fund my CapEx expansion for the next year. So  the idea here is can the file coin protocol itself   fund the cost of building that network  out, which we think is really, really   interesting protocol. So we estimate the cost  of storage to build out in the next 15 to 20   years is probably going to be over $100 trillion.  They're just enormous numbers, and we think that   they simply can't afford it, the big cloud guys  today, because they're big, but they're not that   big. So we've really got to ask ourselves, how can  we fund the cost of this development. So File Coin  

as a protocol is really interesting in what it's  laying out. It's got some of the biggest investors   in the world involved with it. US Ventures  is one of the early people behind it. So   we think it's probably the protocol that wins  in this space. There's a few other smaller ones,   but File Coin is definitely the largest play.  So it's a really interesting way for us to   grow our capacity, to have pricing set correctly,  and probably a solution to fill this hole that   we've got. If the big cloud guys aren't going  to fund it, who's going to fund it? And the   answer is you and I. If it's economical for  us to bring storage capacity to the network,  

that is a business decision  that we could make today.  RAOUL PAL: The other one that's a similar  kind of mechanism, though it's not a token,   that I stumbled across because a Real Vision  subscriber tapped me on the shoulder said you need   to look at this, and I don't know if you've looked  at it, but it's the carbon futures in Europe.   Super fascinating, so you basically said you're  going to have to pay for your carbon, and they   priced it. And so what's happening is it's forcing  everybody to replace all of their dirty energy,  

and they have to offset it with these carbon  credits. And the more it goes up, the more it   knocks out stuff from the pricing mechanism.  It's basically a token economic system. It's   genius because what it's doing is accelerating  the trend, this exponential trend towards green   energy. It's being forced by this  token economic system in Europe and   other countries. I think Australia has some but  I think it's regional. New Zealand's has one   in place, a bunch of countries are, but again,  it's all part of the same equation that you're   talking about. It's correctly pricing some  things that were priced for free, like carbon,  

and driving the cost of other things down to zero. TIM DAVIES: Yeah, I think it's probably something   to have a good look at next year. It  came up in some of our research on Tesla,   obviously the carbon credits, so we  wanted to sort of think through that area.   So it's definitely something we'll tear apart  next year. So I agree, I think we've got to   somehow find this mechanism to fund it. RAOUL PAL: Yeah, and this is not a   credit, is what's interesting, because  you can generate credits in a bunch of   not very good ways. This is saying this is the  cost of carbon, and if you're going to use carbon,  

you're going have to pay for it. And  it kind of changed the economics of the  whole space. It's knocked out most of the  coal power out of Western Europe already.   It's super clever, these behavioral incentives.  So what else are you looking at that's kind of   shocked you when you started doing  the research on some of this stuff?  TIM DAVIES: I think the big one that  jumps out to me is really trying to   understand hardware storage. I'd be wanting  to see companies with balance sheets like   the big global tech guys that are ready to  start to invest in CapEx and really expand   in that hardware we need. My concern is that  we're not going to get that response. So I know   that hardware storage costs went up close to 100%  for the infrastructure over the last 12 months--  RAOUL PAL: --When you talk about hardware storage,  what do you mean? I mean the actual storage   devices. So if we want to actually go out and  buy storage, whether it's HDDs, hard disk drives,  

whether it's SSD, solid state drives, or whether  it's flash and other technology. So Samsung's   very strong in this space. They provide about  a third of the global market in flash and SSD.  TIM DAVIES: If we look at HDD,  which is quite commonly used today,   it's pretty fragmented. Seagate is one of the  bigger players. We know brands like Microsoft   produced some of them but they're all third  parties, so I think that's a space that is   going to be really interesting. Seagate made  some comments in their results last week   that they're starting to see really strong demand  for storage hardware from decentralized storage   providers, i.e. File Coin. So people are really  looking to add that huge capacity, because the  

block rewards, like Bitcoin in its early years,  the block rewards are really strong in the first   two or three years. A lot of people are looking at  bringing real capacity to market around the world.   Australia is uniquely positioned. If we think  about redundancy data out of the US, we can go   right to Europe, we can go left to Asia, and the  pipe first goes to New Zealand then to Australia.   It's legally sound and it's geologically sound as  well, so we are seeing a lot of new data storage   capacity being built in Australia at the moment.  So I think those areas are really interesting. 

RAOUL PAL: So I just want to go back on that  for a second. Samsung is a third of the market?  TIM DAVIES: A third of the market  is SSD and flash drives, so   they are the dominant manufacturer in those  two. HDDs are very fragmented. If you look at   the balance sheets, they're not great. A lot of  them have been taking on debt to buy back shares,   dressing up their accounts, and you look at it  and say, in an ideal world, they wish they had   really strong balance sheets. So they could react  and then go out and build significant capacity,   but I'm not sure that's going to happen.  It's a real challenge. Does it mean that   a new player enters the market? They're fairly  complicated. Does it mean that, for instance,  

you might start to see, I noticed that Bain  Capital, for $18 billion, took Toshiba's memory   business out of the business last year. So you may  start to see some of these bigger funds actually   really start to understand the tightness that's  likely to come in this market, and either look to   take significant stakes or take our divisions out  of some of those Japanese storage manufacturers   that are not that big in the market anymore. RAOUL PAL: Is there a chance that Samsung   becomes the new Taiwan Semi, or do you  think they're so balance sheet constrained   that they're not going to be able to do it? TIM DAVIES: I think that their scale and the   technology around them, if you think about the  network in Taiwan there, it's such a condensed--  RAOUL PAL: --What I mean, Taiwan Semi, meaning  they basically own the epicenter of the global   chip market. Can Samsung do the same?  I'm just trying to think. Is there a  

probability of that, or you don't think so? TIM DAVIES: I think they're the best positioned.   The difference with HDD and SSDs is basically  HDD uses magnetism, so metal fibers, and SSD   uses tiny little charges. So the charge there  or not is that binary data zeros and ones.   They're really well positioned, great balance  sheet, great, strong brand, I think they're   probably the best positioned out of everybody in  that space. The HDD one, we're starting to bang   up, potentially against our ability to continue  to grow our storage capacity through technology.  

That's slowing down in that space. Like I said,  SSD is probably where we're going to shift to.   Our ability to grow our areal density is better  in that space, in terms of the potential. So yeah,   I think they are really well positioned. We  don't own the stock, mainly because it's a   mix of a whole lot of different things. It's  really hard to target just on the storage side.  RAOUL PAL: So outside of storage,  hardware storage, what else is   interesting on your radar screen? TIM DAVIES: If we touch on Tesla,   Tesla, to me, is probably one of the most  misunderstood companies in the market.  

And I think something that you've touched on  it, and in fact, Peter Diamandis last weekend   put out a quote saying, what do you think is the  greatest mindset challenge for entrepreneurs.   I believe it's shifting from thinking literally  to thinking exponentially. And that's the thing   that jumps out with Tesla. People look at the  numbers and go oh, that can't possibly happen.   When we look at Tesla today, they'll  be close to 900,000 units this year.  

We think comfortably they're at 5 and a half  by 2025. We think 15 to 20 as early as 2030,   and we see them stretching out into the 40 million  units per year in the 2040s through our model,   as as I said, India and China really starts to  accelerate new car ownership. I think Tesla is   a business in terms of its free cash flow, so  they're at the point where the free cash flow,   it is insane how much money they are going to be  producing on a free cash flow basis. We've got   them hitting $50 billion free cash flow in 2025,  and we've got them going through a trillion a year   of free cash flow in the early 2040s. We've  just never seen a business like that, that  

is so dominant. When I think about market share-- RAOUL PAL: --It's not just about EV. They're not   just an EV story. It's a bigger story than that. TIM DAVIES: Absolutely, if you look at the   driver in the short term, the next 10  years, is definitely going to be EVs.   Then it's software, software is clearly  going to be a really big business for them.   Those regular updates for your car, that ability  to service your car through software updates   rather than our traditional route of going to  a mechanic, that will really come through in   the business. And as I touched on before, that  Tesla's solar business comes through as well,   where it starts to really generate significant  growth. One of the things we love about Tesla  

is the integration of the business. So our  ability to put a solar panel or roof tiles   and our ability to put storage capacity.  In Australia today, if I was to put   those two things, about a six kilowatt system, it would run a house family of four and it would   charge my car. The NPV of that saving over  25 years is $70,000. That will fund the   purchase of the model 2 when they come out  in 2023, and a second one 12 years later,   and so effectively, I'm going to get a two free  cars for doing it. It's that level of planning,  

that level of integration that we don't see  anyone else being able to match in the auto space.   We look at their margins, their ability to build  these enormous factories that are all linked,   our ability to learn in one factory and  transfer that across to another factory,   and we look at we look at their competitors. One  of the big things that people throw at us is,   of course VW is going to be great, and of course  Toyota is going to win, why would Tesla win. When   you start to look at these businesses, the top six  automakers today have $900 billion of net debt.   Tesla is sitting on $10 billion of net cash, and  it's going to get bigger and bigger and really   start to accelerate, because of that level  of free cash flow growth that comes through.   How do you pivot? VW has 670,000  workers, it has 160 factories,   and it has over 100 models in 12 brands, and  it sells through dealers. And if you comp that  

against Tesla, six cars, three of five factories,  maybe one or two cars added, that real focus,   and then we get 100 cents on the dollar when  we sell a car, because we sell it through the   internet rather than through a dealership network. RAOUL PAL: I've just bought two Teslas, and   it was a total shock to me. It was a total shock,  because we've all been in a test before and it's   like, yeah, fine, electric car, blah, blah, blah.  Mine hasn't arrived yet, I have the Model X plaid  

coming and it still being built, but my wife's  Model Y arrived, performance, than the new one.   And I got in it and went, oh my God, it's as big  a change to the world as when the iPhone came out.   There is no knobs, no dials, no vents, nothing,  just a screen. It's kind of stripped back to this   minimalist, relaxing interior. The car has all  the technology but it doesn't get in your way.   It's just an utter game changer. And then, as  you and I would do, flicking through other cars,   and a Porsche Taycan, should I buy that?  And then you look at it, and there's knobs,   dials, switches, chrome, blah, blah, blah.  And you're like, you are so far behind,  

because Tesla realizes you don't need any of  that when you get to autonomous vehicles. You   just want a tranquil interior where the technology  works for you, but you don't want to see it all.   And half these car companies  haven't figured any of this   out yet. They're still replicating the old car. TIM DAVIES: Yeah, absolutely, it's a really tough   place to be. I mean, look at Toyota. Toyota is  producing 10 or 11 million cars a year. They were   the EV maker when they first came out with the  Prius. Their target for 2030 is one million cars  

per year. We think the market is 55 to 60 million  EVs a year at that time, so Toyota's going to   shift from perhaps 10% to 12% global market share  to less than two. So not only have they had the   benefit of scale in terms of growing margins  and doing it well, now that's about to reverse.   They're going to shrink, lower their margin, and  invest heavily in a loss making business for quite   a period of time until they can get to scale. So  there's so many moving parts in the competitors.   If you're a betting man, you'd say, they're  not going to make it. Very rarely do we ever   see a company, very rarely ever do we see a  company go from major technological change   that isn't a brand new company. RAOUL PAL: Yeah, we had the  

head of innovation for VW on. I interviewed  him as part of this exponential series.   And he said, listen, Tesla has the ability  to raise capital and start from scratch.   We've got to phase out an existing,  very successful, massive business   and build a new business, and we've had  to fund it out of cash flow. So yes,  

of course we're behind. But his assumption was that they're probably ahead of their peers,   and they probably are, but he said the pain to do  that was truly extraordinary. And we're seeing all   these old legacy businesses, whether it's General  Electric or even AT&T and all these things,   just never able to disrupt themselves. VW might  do it. There's not many who are going to do it.   Maybe one of the French ones will, I don't know,  but it's bloody hard to catch Tesla. Because   you've got this gap that you were  talking about, that investment gap,   there's time as well as money, and what's  Tesla going to be in another five years' time?   It's really hard to catch up. TIM DAVIES: Yeah,   it's really interesting if you look at exponential  growth. We all hear the word. When you do the  

beauty of the math in it is incredible. So  if we grow at 50% compound for 30 years,   we are less than 1% for 18 of those 30 years of  that final value. So it all comes at the end,   and the hard part for investing is we're starting  to see these incrementally large increases in VW,   often low base. Well, Tesla's going to be adding  off 900,000 50% plus per year for 10 years,   which is what Elon's target is. They're at  the knee bend and really start to accelerate.  

Some of them are just getting started. I think  VW is probably halfway along that route. But   I think what's unique about Elon is such strong  margins. So he has the highest operating margins   in the industry for roughly 1/10 of the production  of what VW and Toyota do. So that real scale of   margin expansion we expect to come through. This  effectively allows Elon to sit in Europe and go,  

I know where your cost of production is. I'm  going to sell these cars for below that price.   So not only are you going to get squeezed for  cash flow on the business you're shrinking,   but the cash flow you desperately need  from the one you're trying to grow,   I'm going to sit there and make sure for  a period of time that you're not going   to get that cash flow coming through. It is  such a strong position, the ability to take   your factory and drop yourselves right  in the middle of that German heartland.  

Now, in a way, he's forcing BMW, Mercedes and VW  to say you can service your domestic customers   or your global. You can't do both, choose one.  If you put your attention on the Chinese market,   I'm going to take the German market. It's really  interesting the psychology of this product switch   and this delaying in catching up. It gives him  so much flexibility. We're hearing in Australia,   for instance, this dealership network here  that's suing BMW, I think it's for $650 million,   because they're not letting them sell the EV.  So suddenly, not only do I have to keep sales   going through and continue to sell petrol  driven cars for another 10 or 15 years,   but there's a chance that my dealer network may  fold and walk away, saying no, this is ridiculous,   we're just going to lose more money. So it's an  incredible predicament they find themselves in.   I think if you look across the other EVs as  well, they're great businesses, but again,   that exponential curve. Most of them are  just at the start of the curve. Rivian has  

sold less than 200 cars and it's valued at $150  billion US or so. So it's really interesting,   I think, the opportunity that's ahead of them.  In terms of valuation look, we've got a DCF--  RAOUL PAL: --Let's go back to Rivian.  Elon Musk is like yeah, great car.   They need to build a factory that can make it  scale, and we've all witnessed, the whole world   witnessed Tesla going through that pain and almost  failing. And everyone is going to have to go   through that pain barrier of scaling a brand new  factory for a brand new product in a way that's   meaningful, and that takes time and learning. TIM DAVIES: Yeah, it's interesting. So when I  

started doing this work, 12 months work it was,  I actually was pretty negative on Tesla. I wasn't   sure that they'd make it. I'd read about the  challenges with this model 3 and how hard it was--  RAOUL PAL: --And everybody hates them, it's weird. TIM DAVIES: Yeah, it's incredible, but he's   achieved that. He crossed that boundary and  now you can just really see that acceleration.   Like I said, on a DCF basis, we think the stock's  actually incredibly cheap. And people go ---. 

RAOUL PAL: Some people are going to be watching  this hating you, because for some reason they   get emotional about Tesla. I don't understand.  It's the fear of change of technology, I don't   know what it is. Sure, people hate Elon Musk,  he's a bit of a showman, but people really hate   this company. So go on, tell me what you think  it's worth. I just want people to absorb this.  TIM DAVIES: So we did a DCF on it, about  an 8 and 1/2 discount over 30 years,   and we get 1,400 valuation. RAOUL PAL: I'm just looking where the stock is. 

TIM DAVIES: That's today, it's 1,000. RAOUL PAL: 1,000, so it's trading at a third   of its today's value, is what you're saying. TIM DAVIES: Today's DCF value. I think what's   interesting, as well, is we've got it at about  close to 6 and 1/2 thousand for 2030. So we've   done sort of a stage every 10 years, like if it  plays out, what's the value of that DCF. Towards  

the back end of our model it's close to $10,000  per share. What's interesting, actually, is what   does it do with the cash? So we are basically-- RAOUL PAL: I think it's a $10 trillion company   is what you're talking about, right? TIM DAVIES: Well, I think it's 20,   because we're forecasting it'll  have $10 trillion of net cash by  2050. RAOUL PAL: And let's assume   that Tim is an idiot, and you're wrong  by 50% or 75%. You're wrong by 75%,   it's still an extraordinary number. TIM DAVIES: Absolutely, the largest   company in the world if we're wrong. We've spoken  to a few other investors that have done a lot of  

work and hold their positions, and almost to  a T, they've gone oh, your numbers are light.   So I think once people do the work on the company,  I mean, in the end, like I said, we basically   did a 30 year model and looked across  each country, and said, look what does   the journey for this country look like on its  switch to EVs? So most countries with 2035,   2040 we're not allowed to sell them anymore.  2050 we're not using them anymore. India and   China are a little slower, given the scale and  the impact on the model, so we've capped them.   But yeah, once you do that, you start to see, hey,  the biggest market ever was 93 million in 2018 of   car sales. We think it hits to 206 million. RAOUL PAL: And the bulk of your model,   if I understand it, is on the car sales. Let  alone whatever they manage to do with the  

battery technology or any of  the other spin off technologies,   you're kind of throwing them in and saying  they're going to be free coal options in this.   Is that right, or you've made some assumptions? TIM DAVIES: Look, we've made assumptions on   software, so we basically said about $1,000 a  year. That means I get updates for my autonomous   software, I get some servicing done, some software  updates to improving the car. You think about the   car that you and your wife have just bought, that  car, in 10 years' time, possibly is going to look   really different, i.e you've ripped the seats  out and you've put couches in, who knows? At that   point, our car, why would we have a steering wheel  all facing that direction? It radically changes   our life. I think the other companies will  catch up as well, but it's, again, just a   function of time and capital and the advantage  that Tesla has. I touched on before, the cash,  

the free cash flow. We basically looked at it and  said, we'll just create this thing called long   term investment account of excess cash, and we're  going to assume they get about 5% return on it.   What we're effectively saying with that cash, is  as he starts to acquire, as he starts to spend   that in other opportunities, we can then adjust  what that return is. We ask ourselves what would   he want to buy. The one that jumps out that's  going to need cash is obviously SpaceX. Is there   an opportunity to use this incredible cash flow  where we've got cash sitting at cash hands and   sitting at about $650 billion at 2025. It's just  incredible what comes through in this business.  RAOUL PAL: He's going to tokenize as well, you  know that. It's clear he's sending the message,  

whether he uses Doge for streaming payments, or  for the software, and all of that kind of stuff.   When you start talking about a company with  that much cash of that size, much like we could   probably talk about Facebook, Apple, Google,  once they tokenize, their sovereign states.   Because then you have a system of money around  all of this too. And the gigantic sums, I mean,  

don't forget with the numbers you're  talking about, $650 billion of cash,   you start looking like a sovereign wealth fund. TIM DAVIES: With $10 trillion in cash, I mean,   what do you do? That's probably our biggest  question mark is what's he going to develop?   Where are the opportunities that he's going  to look to answer? Effectively, the sky's   the limit for him. I think it's worthwhile  adding in your analogy there, is 460 million   of the best computers in the world that he has  at his disposal. So you think about a network of  

460 million Tesla's, integrated. There's never  been anything like it before. I don't know of a   single thing that's a network of that level-- RAOUL PAL: --Is that part of your data   storage? Could you use your Tesla for   data storage and get paid for it? TIM DAVIES: Yeah, I think so. I mean   I'm hearing there's a group in Canada that's  now looking at putting an asset miner into it,   and excess power can be used to mine Bitcoin. RAOUL PAL: It's just like you ask this   stuff-- TIM DAVIES: It's incredible, isn't it? RAOUL PAL: It is. It's just a bit mind boggling.  

It's mind boggling. Tim, listen, fantastic  conversation. Really, really interesting stuff.   I look forward to reading your stuff when  it comes out, and good luck with it all,   the exponential age. As you say, people cannot  get their heads around exponentially. Everything   always looks ridiculous, and everything looks like  a bubble until you put it on a log chart. Once you   put it on a log chart, everything makes sense. TIM DAVIES: Yeah, absolutely. 

RAOUL PAL: All right, my friend, great to see  you. TIM DAVIES: Appreciate it. Thanks so much h  RAOUL PAL: When change comes, opportunity  abounds. We're about to enter a period   of the fastest pace of technological change in  all human history, something we refer to as the   exponential age, and Real Vision is going  to be your guide to this incredible future.

2022-03-30 13:46

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