Data Creation and Storage Is the New Oil
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
