Dear Partners,
I will provide market commentary, information on current positions and potential positions.
Through November 2021, performance was strong. Since November, the stock market has been volatile through February of 2022 primarily driven by potential interest rate increases, inflation and a conflict in Russia/Ukraine. The growth sector has been especially weak. Many companies are down as much as 50–80%. Strong companies like TSM, ASML, ADBE and Zoom have also sold off during this downturn. This is very likely a good opportunity to buy strong franchises for the long term.
Tesla is actually growing and maturing as a company. In Q4 of 2021, the company did $5 billion of operating cash flow, growing 50–75% per year top and bottom line with runway for at least 5–25 years. The current market cap is around $800 billion with a $20 billion run rate of operating cash flow — roughly 40× — which is high but for a company at 1% market penetration, quite cheap. That EBITDA/cash flow could be as high as $30–$67.5 billion over the next few years based on my projections of unit growth, operating leverage and vertical integration.
Each car has a margin of roughly $10–$20K today. As battery prices come down, that margin will increase. We are long a massive call option on Tesla figuring out self-driving and AI and becoming a software company. At 1 million cars and $150K of software revenue per car, we get to $150 billion in cash flow. At 10 million cars we get to $1.5 trillion in annual cash flow. There are 3 billion cars in the world.
I also feel we are buying Tesla as a car company with free call options on: self-driving software, AI software, vertically integrated battery technology, solar and energy technology, electricity trading, Tesla Bot, HVAC technology, and many other incubated projects.
Columbia Heights Partners, LP made a small allocation to a SpaceX SPV via a side pocket investment. My bull case underwriting sees the market cap going from $100 billion today to as high as $30 trillion. SpaceX is the market leader with a 10-year technology lead.
Starlink is a global internet service providing 100–500 Mbps download internet service anywhere in the world. The company raised a primary round in Q4 2021 from Sequoia Capital and Fidelity. Starship is 100–1,000× cheaper per ton of payload than the competition — a genuinely game-changing innovation. SpaceX is projecting 1,000 Starships, each launching 3 times per day. We are truly at Day 1 for SpaceX.
Bitcoin acts as a unique store of value and hedge on inflation, and also as a base technology layer for money. I see similarities to TCP/IP for the internet, but also to FICO, MSCI, S&P, Moody’s and even Mastercard/Visa — which also act as “top of the capital stack” or “base layers” to human ingenuity.
One thought experiment I like: the ROE of Satoshi’s 8-page white paper resulted in an $800 billion asset and 2–3 trillion asset class. If that isn’t a moat, I don’t know what is. Anyone can copy the whitepaper and code, but somehow no one has been able to beat Bitcoin.
Bitcoin has very asymmetric upside: if it works, potential upside of 1,000–10,000×. I look for scarce assets and similar to natural monopolies like Moody’s and S&P, Bitcoin, SpaceX and Tesla all feel like “scarce assets.”
I remain invested in Moody’s and S&P Global and quite pleased with the performance of the companies in terms of cash flow, growth and capital allocation. In a world of low interest rates and potentially low growth, Moody’s and S&P act like bond-like equities with income, growth, pricing power and stability.
The General Partner has launched a new fund focused on buying credit rating agencies in India. These are primarily subsidiaries of S&P Global and Moody’s. Currently, per capita credit spend in India is as low as $0.02–$0.04 vs. $12–$18 in the US. I am quite optimistic about the long-term growth of these businesses, their capital-efficient business model and natural monopoly market structure.
Kind Regards,
Gorav Khanna
Managing Partner
Columbia Heights Partners, LP