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Market Pulse
Friday, June 21, 2024

A Battery Breakthrough, Revolut’s $40bn Valuation and Missing AI Revenues

Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

Our three stories this week:

  1. Forget 10x. A 100x battery breakthrough. 
  2. Revolut and a $40bn valuation 
  3. AI: The case of the missing revenues

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) Forget 10x. A 100x battery breakthrough

On the Apple website it says “Even with so many advanced new features, iPhone 15 Pro still gives you amazing all-day battery life”. So, once a day, you need to plug it in somewhere or you won’t be reading an insightful Sidekick Market Pulse on our app come tomorrow morning. This could all change if a Japanese company, TDK, has its way. 

TDK is a major supplier of batteries for consumer electronics like the iPhone, and holds a 50%-60% global market share in small-capacity batteries[1]. They recently announced a breakthrough that they say can significantly improve the energy density (the amount of power stored in a given space) of their solid state batteries. 

By using a new ceramic material they developed, they claim they can increase the energy density of their current batteries by up to 100 times[2]. As humans we often fall into the trap of thinking technological progress is linear, that we move forward in small incremental steps. An example might be your previous car getting 400 miles on a tank of fuel and your new one getting 450. But every now and then we get disruptive, exponential change that has the potential to reshape society. 

Unfortunately we don’t expect these batteries will be available anytime soon. There are still some significant technical hurdles to overcome in order to mass produce them. The new ceramic material used is fragile and this means that, at least initially, they might not be suitable for smartphones or cars without additional technical breakthroughs.

We believe that AI inference will increasingly be done on-device and this means consumer devices would likely need much faster AI-enabled chips. These chips might require more power. This suggests two potential interesting future investment themes: 1) a shift towards more power efficient AI chips and 2) batteries with higher energy density. We’re keeping a close eye on both areas to see who the future winners might be. 

Note: We hold Apple in Flagship.

2) Revolut and a $40bn valuation

UK fintech Revolut is targeting a valuation exceeding $40bn in an upcoming share sale. This is 20% higher than the $33bn valuation they achieved in their 2021 funding round and, if they pull it off, it would make them Europe’s most valuable startup[3]

This is notable because European fintechs have had a difficult time over the last few years, most famously perhaps, Klarna’s valuation, which dropped from $46bn to below $7bn. Even Revolut investors, like Schroders and Molten Ventures, have been writing down, not up, the value of their Revolut investment since the $33bn raise in 2021[4]

Valuing companies is part art, part science. This is especially true when valuing young unlisted tech companies during their initial high growth years. 

One of the first things to look at is what a sensible required return might be for a company like Revolut. You can currently get more than 4% per year by simply investing in very low risk UK Gilts[5]. Historically the equity risk premium (the additional return you get from taking equity risk) has been around 4%[6]. This means that at the moment, the annual risk-adjusted required return for global listed stocks is around 8% per year. 

However, Revolut is a financial services provider which historically has been a riskier sector.  Importantly, it’s also a private company. These two reasons alone should push the expected return higher than 8%. We calculate a risk-adjusted required return for Revolut around 12.5% based on historical risk premia. They don’t have their UK banking licence yet after all. 

This means that, for Revolut to be worth $40bn today, it should have a realistic chance of building a business worth around $130bn by 2034. Only if they achieve this, would an investor get the 12.5% required return. Some very basic back-of-the-envelope calculations suggest Revolut might need revenues of $30bn - $40bn and net profits of perhaps $5bn - $7bn to be worth $130bn by 2034. 

This brings us back to today. Revolut’s annual 2023 revenues were likely around $2bn with net profits somewhere between $300mn and $400mn[7]. They have around 40mn customers which puts average revenue per customer at around $50. For Revolut to get from $2bn in revenues to the $35bn in revenues we think they need to justify a $40bn valuation, a lot of things need to go right. Let's see.

3) AI: The case of the missing revenues

AI startups are raising money at breakneck speed. And a lot of that money is being spent on, yes you guessed it, Nvidia GPUs. But a question is being asked, a little louder with every passing month it seems: “When will the AI revenues come to justify all the infrastructure spending?”

Sequoia recently did some very interesting analysis. They calculated the annual AI industry revenues required to pay back the money currently being splurged on AI infrastructure i.e. Nvidia GPUs, electricity, buildings etc. Their findings? There is a massive $500bn gap between the revenue needed to pay back the massive spending on AI infrastructure and their estimates of AI revenues[8]

Think of it this way: Nvidia is currently selling their H100 chip and have already announced two new generations - one slated for 2025 (Blackwell) and one for 2026 (Rubin). Once you’ve built your brand new high-end AI datacenter and filled it with the latest Nvidia chips, it will be at least 2 or even 3 tech generations out of date in as little as 3 years. And having the latest chips matters as they are not just faster, but also more power efficient. 

Some people might argue all this spending on AI infrastructure is like building railroads. Build them and the trains (and passengers) will eventually come. Yes, and no. The AI railroads are a bit different because they have to be replaced every 3 or so years at great cost. And if the ‘passengers’ don’t come fast enough, or aren’t willing to pay exorbitant fares necessary to maintain the AI railroads, the railroads risk not being replaced at all. 

We don’t believe hype cycles in tech should be feared. It’s all part of tech / growth investing. Our experience tells us that disruptive new technologies can create great opportunities and there will be both winners and losers. But our experience also tells us that there is a very high risk of capital being misallocated, like it was back in 1999. We think the AI / momentum trade is crowded and getting long in the tooth and as a result we believe it's increasingly important to remain vigilant and level headed. 

Note: We hold Nvidia in Flagship.

References

[1] https://www.ft.com/content/e33cb565-6d44-4f9a-9105-f3afc03aa732 

[2] https://www.ft.com/content/e33cb565-6d44-4f9a-9105-f3afc03aa732 

[3] https://www.ft.com/content/9e613f65-cdf5-4b3d-9ac7-cfb39cde3159 

[4] https://www.ft.com/content/5adbb200-02bf-40d6-815c-c13a4a30b5c4 

[5] https://www.bloomberg.com/markets/rates-bonds/government-bonds/uk 

[6] https://www.schroders.com/en/global/individual/insights/what-can-we-learn-from-the-equity-risk-premium-about-the-prospects-for-equities-vs-bonds/ 

[7] https://www.irishtimes.com/business/2023/12/22/revolut-expects-to-hit-2bn-revenue-mark-this-year-despite-setbacks/ 

[8] https://www.sequoiacap.com/article/ais-600b-question/

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