• Wayve’s deal with Nissan is a big shot in the arm for the “brute force” approach to autonomous driving, but Nissan has made no promises to use it beyond level 2 leading me to think that a somewhat reluctant Nissan has been coaxed into giving it a try by SoftBank.
• Wayve is a UK-based autonomous driving start-up that uses a single large end-to-end model to drive the vehicle.
• This means that sensor data goes in one end and driving instructions to the vehicle pop out the other.
• The advantage of this is that if one can get to work, then there is no need to limit where the vehicle can go which also means that no HD map will be needed.
• The dream of autonomous driving is to have software that can drive a vehicle more safely than humans under any conditions and be able to deal with situations for which it has not been explicitly trained.
• This is exactly how humans do it and as long as one is prepared to exchange a large neural network for a human brain, then all should be well.
• However, this is a bridge too far for me which brings us right back to RFM Research’s old chestnut of causality.
• Humans can drive a vehicle safely because they understand the cause and effect of the road, while the large model merely matches inputs to statistical characteristics and estimates what the output should be in the given situation.
• For example, any human would never mistake a large restaurant sign with red, yellow and green circles for a traffic light but unless the machine has been explicitly taught about that sign, it will.
• This means that for situations where the dataset is both stable and finite (i.e. all outcomes can be predicted and trained for), then a neural network can perform really well.
• However, the road is neither finite nor stable which makes a large neutral network a suboptimal choice to solve this problem.
• This is where opinion in artificial intelligence diverges.
• On the one hand, you have Elon Musk, OpenAI, SoftBank, Anthropic and so on who claim that with a big enough model, enough data and enough compute, magically, machine superintelligence will pop out at the other end.
• This is the argument that keeps the money pouring in and the valuations at very high levels.
• On the other hand, there are the sceptics and gadflies like Gary Marcus, RFM Research and many others who think that until a statistical-based system can truly reason, we will be as far away from superintelligent machines as we were 10 years ago.
• In my opinion, the “reasoning” models are not actually reasoning but simply offering up a very good simulation of it.
• This is because while the models can ace PhD level maths, they fail to reason that if A=B, then it follows that B=A.
• This is the classic paradox that has plagued AI for decades in that machines can be taught to do very difficult things but fall to bits when asked to do the simple stuff.
• It is not until this issue is beginning to be solved that I think the Wayve approach to autonomous driving has a chance of working in a truly commercial setting.
• One can see this in how Nissan will be using Wayve’s technology starting in 2027 where it will be used for level 2 only at the outset (see here).
• Level 2 is hands-on ADAS where the human is still piloting the vehicle and does not go much beyond staying in lane and adaptive cruise control.
• I take this to signal a “let’s see” approach and I suspect that as SoftBank is a major investor in Wayve and is championing a collaboration between OEMs to share data and resources to achieve full autonomy with an end-to-end system, it has had some influence on Nissan when it came to taking software from Wayve.
• Nissan has made no commitment that I can see to take this beyond level 2, and so I do not take this as a sign that the end-to-end large model approach is the right one.
• In fact, I think this approach will end up falling short and an approach that uses a combination of rules-based software and machine learning will be the one that wins out at the end of the day.
• This also means that autonomous driving components such as an HD map, lidar, radar and cameras will all be needed to help reduce the volatility of the dataset of the road as well as produce redundancy that can make the cars safer than humans.
• With all of the hype and excitement around LLMs, this approach is currently not in favour, and so I suspect that it will be later rather than sooner that we begin to see fully autonomous vehicles on the road.
• Hence, I think that Wayve and Deeproute.ai (which also uses this approach) will never become going concerns in their own right and will end up being acquired.

• WeRide thinks that it is mostly governments and regulations that will impact its path to profitability, but I suspect that it will be the market which decides who wins and who loses.
• The world of autonomous driving is chugging along with slow progress from the pure plays and where the vehicle makers have effectively given up and focused their efforts on advanced driver assistance systems.
• Some members of the automotive industry are referring to these advanced assistance systems as autonomous driving, but it is not until I can be fast asleep in the back seat and not worry for my life, will I consider the autonomous problem solved.
• This is what is referred to as level 4 and level 5 while the automotive industry is focused on level 3 which means that for certain roads and certain conditions, the vehicle can take over but must remain supervised.
• The automotive industry is right to focus on this as this is a product that it can sell now and is much cheaper to implement than a fully autonomous vehicle.
• Meanwhile, the pure plays are pushing ahead but it is very slow going.
• Waymo is the undisputed leader with Cruise having pulled out and most of the other offerings still using safety drivers, but it is a close race.
• This is because it is far more difficult to go from 95% to 96% than it is to go from 0% to 90% and this trend of increasing difficulty is continuing.
• This is why progress has slowed down considerably and allowed the laggards to catch up, meaning there is not much difference between the different offerings.
• Hence, when the different solutions are finally good enough, they are likely to come onto the market roughly at the same time and be pretty much equivalent to one another.
• This is what puts a large hole in Tesla’s business case for its robotaxi offering because it is not going to have the market to itself.
• The result will be a bloodbath of cutthroat competition resulting in the price being something like $0.4 per mile rather than the $1 per mile that Tesla is currently predicting.
• This is the difference between 80% gross margin and 25% gross margin on ¼ of the revenue base which makes a gigantic difference to both the profitability and fundamental value of the autonomous driving industry.
• Hence, I continue to think that it is economics as opposed to regulation that will determine the fate of this industry and both PonyAI and WeRide are in for a rough time in the harsh glare of being publicly listed.
• Both of these companies are experiencing very low growth and are very unprofitable as a result of not having enough revenues to cover their operating expenditure.
• I think the eventual winners will be the few companies that can achieve scale and are efficient enough to be able to generate a profit despite the inevitability of low gross margins.
• This will probably mean deep pockets and so the pure plays like WeRide and PonyAI are going to have to raise a lot more money or seek to be acquired.
• Neither of these businesses is mature enough to warrant being listed and so it is possible that the public market was the only option left to them to raise more money.
• I think that the winners from all of this are the OEMs who don’t need to spend billions developing their own solutions but instead can wait until the technology is mature and the robotaxi industry is beginning to emerge.
• By that time, I suspect that the brutal economics of the Robotaxi industry will mean that there are several perfectly good solutions available for acquisition or licensing at very reasonable prices.
• Timing remains very uncertain but if Nvidia is to be believed, it is just around the corner.
• I take a more conservative view and stick with my long-held target of 2028 for commercial autonomy.

• The next version of CarPlay is certainly not the apple of carmakers’ eyes as the promised launches have failed to materialise adding support to RFM’s view that CarPlay 2.0 and beyond represents a greater threat to OEMs than Google does.
• 2 ½ years ago, Apple announced that CarPlay was being extended to the instrument cluster to push Apple deeper into the vehicle user experience and we were promised that “automakers from around the world are excited to bring this new vision of CarPlay to customers”.
• Apple also led us to believe that 14 OEMs brands had signed up to support CarPlay 2.0 even though some of them did not even know that they were going to be mentioned on Apple’s slide at WWDC 2022.
• The reality was that this announcement was not met with excitement but horror as it is perfectly obvious that the extended CarPlay was designed to entice users to spend more time with Apple further diminishing the digital relevance that most OEMs have in their own vehicles.
• RFM Research has long concluded that if OEMs want to save their businesses in the long term, they need to replace revenues lost from falling vehicle shipments with revenues earned from digital services delivered to the vehicle.
• Executed correctly, digital services can allow OEMs to show steady profit growth given that digital services have far higher margins than vehicles and that RFM forecasts that the opportunity could be pretty large.
• However, to benefit from digital services, OEMs have to remain digitally relevant which means not ceding the digital cockpit to Apple, Google or anyone else.
• Following the announcement, 2 years went quietly by with barely a mention of CarPlay 2.0 which was then updated at WWDC 2024 with some technical details and vehicle models were promised by the end of 2024.
• However, 2024 has come and gone and still, there are no signs of any launches with CarPlay 2.0 and it appears that OEMs and particularly the high-end end are going the other way.
• Mercedes has stated that it will not support CarPlay beyond what it is today (despite being on Apple’s 2022 list) and BMW has launched a new user experience with added hardware complications that look to me like a way to move beyond CarPlay and Android Auto.
• With some of the best-known brands declining to support CarPlay 2.0 and beyond and the lack of launches from anyone else, throws the whole proposition into some doubt in my opinion.
• The technical analysis of CarPlay (see here) reveals that it is not particularly complicated which I think rules out technical difficulties as the cause for the delay leaving the blame firmly on demand.
• Hence, I suspect that almost all (if not all) of those who originally agreed to support CarPlay 2.0 have gotten cold feet as they have realised what ceding the digital cockpit to Apple would mean for their ability to monetise their vehicles in the long term.
• Furthermore, with all the excitement at the moment surrounding AI and voice agents, attention has once again turned to the possibility of using voice in the vehicle as the main man-machine interface.
• RFM Research has concluded that this is a great opportunity for OEMs to improve the vehicle’s digital experience and win back the digital relevance that they have lost to the digital ecosystems.
• Hence, I think that the Apple CarPlay story will remain quiet while the voice agent opportunity is being explored as the last thing OEMs need is to cede this opportunity to Siri.
• Google is more amenable to this and Mercedes is experimenting with using the Gemini LLM as the basis of its assistant which will be invoked by saying “Hey Mercedes!” not “Hey Google!”
• This is irrelevant to Apple’s financial; performance but it makes GM’s strategy to abandon Apple CarPlay in its entirety look less insane with every day that passes.

• Mercedes will be using Google’s Gemini LLM to power its in-vehicle digital assistant in the 2026 CLA in a move that is much less risky than it sounds.
• Mercedes has been working closely with Google for some time and this update is an extension of a wide-ranging agreement that involves the use of Google Maps as well as Google Cloud services to support sales, marketing and dealership functions.
• The digital assistant was demonstrated a year ago, but the difference is that the assistant is now powered by the Gemini LLM as opposed to the older Google Assistant.
• This should mean that the quality of the voice experience is much improved as RFM research has long concluded that one of the superpowers of LLMs is their ability to use natural language as the man-machine interface.
• This is not Mercedes ceding the digital cockpit to Google but using Google as one of the building blocks for its user experience (MBUX).
• This is similar to what it has done with Google Maps where it has licensed the map but implemented its own navigation and graphical user interface on top of it.
• This does not fill me with confidence as Mercedes has still not figured out that the 2^nd and 3^rd most used buttons on the steering wheel are track forward and track back.
• Instead, for at least 6 years Mercedes has implemented a favourites button that is difficult to use and tricky to program as well as other things that hardly anyone uses.
• Needless to say, I bought my Mercedes despite the digital user experience as Mercedes still makes some of the nicest vehicles available.
• Consequently, I am not confident that Mercedes will do a great job when it comes to the fine-tuning of Gemini for use in Mercedes vehicles which is going to be a problem.
• OEMs and Mercedes in particular, have lost a lot of the digital initiative to Google and Apple as most drivers prefer to use their smartphone for navigation and media consumption than the OEMs experience.
• RFM Research has concluded that a voice-based digital experience represents the best opportunity for OEMs to win back some of the digital initiative and by basing its experience on Google rather than just using Google services, Mercedes has made the right choice.
• However, its voice experience needs to be first-rate to ensure that drivers don’t go back to Android Auto or Apple CarPlay after giving the voice experience a quick try.
• This is how Mercedes can keep users within its own user experience which will mean that when digital services are delivered to the vehicle, they come via the Mercedes storefront rather than Google Play or the Apple App Store.
• This is crucial because RFM Research has concluded that being part of the digital service ecosystem in the vehicle will be essential to bolstering revenues and cash flows from the likely long-term structural weakness of the vehicle market caused by electrification.
• Allowing this to be delivered through Google Play or Apple Appstore will leave Mercedes and the other OEMs unable to earn a share of the revenue and fully exposed to falling vehicle sales.
• Hence, Mercedes appears to have made the right strategic choice, but I remain concerned with its ability to delight its users and prevent them from continuing to defect to the digital ecosystems.

China – Economic Necessity

• Once again at CES, China is everywhere and nowhere at the same time as the vast majority of its technology industry remained absent even though almost all the products on display are made there.
• This has been the status quo for a few years but it is clear that there have been a few changes in the last 12 months.
• The main change is that in segments where China has a strong export business or where it is a leader (and hence expected to have significant exports), then there is more of a presence than there was in 2024.
• The most meaningful of these is automotive and electric transportation which have no military application and where there are many Chinese products on display.
• Chinese companies that make e-bikes, scooters, vehicle chargers, Lidar makers and robots are all once again present in much greater numbers than last year.
• This is a sign of just how important exports have become to bringing about any sort of recovery in the Chinese economy as domestic consumption remains very depressed.
• Consequently, I suspect that these companies have been encouraged to attend unlike in 2024 when almost everyone was discouraged from going to Las Vegas.
• I suspect that we are going to see this continue in 2025 even though the situation in China in terms of technology remains very depressed outside of automotive.

BMW – Juicy Fruit

• BMW didn’t launch any cars this year but debuted a new user experience which is an attractive complication aimed at bringing back some of the digital relevance back to BMW and away from Google and especially, Apple.
• The new experience is called Panoramic iDrive and brings together elements of the digital cockpit that are all supposed to work together to provide an integrated and seamless experience.
• The highlight here is a new panoramic screen which is only a few inches tall but stretches the entire width of the windscreen and has space to display 6 customisable widgets such as map, weather, time, media and so on.
• The other elements are the main infotainment screen, the heads-up display and the steering wheel and BMW has integrated the experience so that they work together.
• BMW has also implemented an LLM-powered assistant in the vehicle for navigation and I suspect that as time passes the scope of this assistant will be widened or another assistant with a much wider mandate will be implemented on top.
• The user’s ability to customise the experience is very limited with colour options and the ability to have a user photo as the background on the infotainment screen and I think that BMW could have done much more here.
• Once again nothing is stopping BMW from making the experience more flexible through a software update in the future.
• BMW is very confident that the new user experience is going to appeal to its customers and this will be a feature on every new BMW model launched from the end of 2025.
• This is a response to both the threat that Apple poses in the vehicle and competition from the legion of new Chinese competitors.
• Users who want to take advantage of the new screen won’t be able to do so using CarPlay and so this will encourage them to keep their smartphones in their pockets rather than switch on CarPlay and banish BMW from the screens in the vehicle.
• This is precisely what BMW needs to do to start regaining its digital relevance in the vehicle, but the proof will be in the testing of how good this new experience is.
• BMW appears to be realising that the biggest threat it faces is not Mercedes or Audi but the smartphone, and if users like the new user experience, this will represent a step in bringing users back to its own user experience.

Floor report – Orderly business

• The floor was even busier on Day 2 than it was on Day 1 but the chaos that usually accompanies this has not materialised.
• Meetings and catch-ups are not getting moved or shuffled around and everyone is turning up pretty much on time for everything.
• This is an unusual turn of affairs but suggests that attendees have come to CES to conduct business as opposed to killing time in pointless meetings to justify an evening spent in the casino.
• I expect that Day 3 will be quieter with Day 4 being catatonic by comparison.
• This is setting the industry up for a pretty good year from a consumer electronics perspective outside of the automotive industry where volume shipments remain under pressure from both a weak consumer and real competition from China.

Autonomous driving – The Turn?

• After several years of despondency, the word on the floor is that autonomous driving has turned a corner and will soon be showing the kind of improvements that will allow autonomous driving to become a reality within a reasonable time frame.
• A key part of this is the idea of using generative AI to create synthetic sensor inputs for unusual situations on the road that can be used to train the machine algorithms and reduce the rate at which they make mistakes.
• I am generally cautious about the use of synthetic data because reality is always stranger than fiction meaning that a computer will never be able to think of or anticipate most of the odd events or situations that occur on the road.
• This leads me to think that synthetic data will not solve the autonomous driving problem and that humans are going to be driving vehicles for a while yet.
• I continue to think that it is not until the machines start to really understand the road for what it is rather than as a series of statistical connections that the problem will be solved but this will be easier said than done.
• This is particularly the case because investments in generative AI and compute infrastructure are sucking all of the investment dollars available meaning that there is not much left to go elsewhere
• My 2028 target for the true commercialisation of autonomy (level 4 and up) continues to look increasingly optimistic.

• GM’s withdrawal from the robotaxi market is a sign that the economics of this industry are not going to be what Elon promised but it will make it easier for Elon to prove me wrong.
• GM will restructure its autonomous driving unit to focus on equipping GM vehicles with autonomous features and away from becoming a provider of robotaxi services.
• This will involve GM acquiring almost all of the shares in Cruise that it does not own which is where Microsoft’s $800m write-down of its investment in Cruise is coming from.
• This implies that GM has already agreed with Microsoft to acquire its shares at 40% less than what Microsoft paid for them meaning that the new valuation of Cruise is $18bn down from the $30bn where it raised money in 2021.
• I suspect that this is still too high meaning that Microsoft is getting a pretty good deal on its exit from Cruise.
• GM is not giving up on autonomy entirely, but it is giving up on the business model of being a transportation services provider.
• The business will now be focused on offering differentiated autonomous features in GM vehicles for which GM will charge a fee at the point of sale as well as ongoing subscriptions.
• The annual expense rate of Cruise will be halved from $2bn to $1bn and it is in the development of a robotaxi vehicle and the infrastructure required to provide the service where the cuts are going to be made.
• GMs argument for this is almost entirely based on the $10bn that GM has already invested adding weight to what I have long suspected which is that the best option for OEMs is to wait until they need a solution and then buy one off the shelf.
• I have argued for years that the economics of the robotaxi industry are going to be far worse than Tesla has led the market to believe as the $1 per mile price for the service was just not realistic.
• This is because, at $1 per mile, a well-run service will have 70%+ gross margin, attracting many competitors and driving the price down to something closer to 20% gross margin.
• To earn 70%+ gross margin one would need to have the market to oneself which Tesla is never likely to achieve but now that Cruise has ignominiously exited from the market, the probability that I am wrong has risen.
• Tesla’s biggest problem is now Waymo which I think is closer to a working solution than Tesla and will be more than happy to sell its solution to anyone who wants to offer a robotaxi service.
• Hence, I don’t think that Cruise’s exit signals that Tesla will have the robotaxi market to itself, but it does remove one of the major competitors that was going to cause Tesla a lot of trouble.
• The geopolitical situation is also likely to make it more difficult for Chinese players like Pony AI, WeRide & Apollo to compete in US and Western markets, but others such as Mobileye, Nebius, Wayve and so on are still around and ready to compete.
• As a result, the market is still likely to be very competitive meaning that the economics will be very unfavourable meaning that the only way to make a good return will be to achieve large scale.
• Hence, Tesla’s recent rally makes little sense other than a meme trade on US politics and gives me more reason to avoid it.

• Pony AI has gone public on the back of revenues generated from engineering, but real growth will come from ride-sharing fares and when these will take off is much more uncertain making a valuation over 43x revenues look pretty risky.
• Pony AI is a company that I have known for quite some time and RFM Research has consistently listed it as one of the leaders in autonomous driving.
• Pony AI has pretty much the same business model as Waymo in that it has a solution for autonomous driving which it makes available to car and truck makers or fleet operators who want to offer a robotaxi or robotruck service of their own.
• Pony AI also offers the software, infrastructure and the app to match riders to drivers which customers can also take to have a fully integrated service should they so desire.
• The company has just gone public at $13 per share raising $260m from 20m new shares issued giving a total diluted share count of 348.96m and a market capitalisation of $4.5bn.
• This would not be unreasonable for a company that could promise very rapid growth for a number of years, but I do not think that this is the case here for two reasons.
  • First, Non-recurring engineering revenues (NRE): which make up almost all of the revenues the company is currently earning.
  • These are revenues paid to Pony AI by customers in return for integrating its technology into their vehicles and, as such, are one-time in nature.
  • Hence, when all the integrations are done, this revenue stream will trend towards zero with the idea being that revenues from autonomous ride-hailing and robotrucking will replace it.
  • NRE revenues are also very lumpy as can be seen in the prospectus where revenues for the first nine months of 2023 were $21.3m which is just 31% of the total revenues that the company recorded for the full year 2023 ($71.9m).
  • Furthermore, 2023 saw just 5% revenue growth YoY clearly demonstrating that, in this case, NRE is not a growth business.
  • For the first 9 months of 2024, the company has recorded revenues of $39.5m but given the lumpiness of NRE, it is impossible to know what Q4 24 will bring.
  • Hence, this company and this valuation do not stand on the business as it is today but rely in their entirety on the take-off of autonomous driving (see below)
  • Second, Autonomous driving: where mass market take-off is extremely uncertain.
  • The problem remains that machine vision is still not good enough to enable a computer to drive a car or a truck more safely than a human can.
  • Until that milestone has been passed, the autonomous driving market is going to remain small with revenues being generated from pilots, small-scale operations and NRE.
  • Once the milestone has been passed, Pony AI is in an excellent position to collect a small portion of every fare which will allow it to grow extremely fast with pretty healthy profitability as long as it refrains from owning the fleets themselves.
  • In 2017, I proposed a target of 2028 for when autonomous driving would become commercially viable which, at the time, was by far the most pessimistic forecast in the market.
  • Fast forward to today and my 2028 forecast is by far the most optimistic in the market and I may even be forced to push it back.
  • Hence, I don’t think that real commercial autonomous operations will commence at scale anytime soon, leaving me wondering where Pony AI will get the 2025, 2026, 2027 and at least 2028 high growth it needs to sustain the valuation.
• I continue to think that Pony AI has a leading autonomous driving solution and that when the market takes off both in China and overseas, it is in an excellent position to benefit.
• However, when this occurs is very uncertain and as a public company, any delays are going to be self-evident in its financial statements.
• Furthermore, any wobbles will be harshly punished given how high the multiple being applied to revenue already is.
• The company is also not without other risk as it is a Chinese company meaning that the foreign investors are investing through the VIE structure as well as being exposed to the now well-established risks of doing business in China.
• The company is also controlled by a single founder meaning that minority investors have no say in how the company is run nor can they remove management.
• I think this could easily go a lot lower as delays are priced in and so I am happy to wait on the sidelines until the market offers me an opportunity to take a serious look at it.

• Qualcomm used its 2024 investor day to focus on the areas outside of smartphones where the diversification strategy that was laid out in 2021 is starting to bear fruit.
• It also gave some targets for its businesses outside of smartphones which, in some cases, look pretty conservative to me and could be handsomely beaten.
• The strategy is simple in that the company identifies a market vertical which is going through a dislocation such that connectivity and processing are becoming important, and then adapts its silicon and builds software to help clients deal with the dislocation.
• Qualcomm also attacks markets where vertical players use the technology barrier they have constructed to keep competition at bay and brings those barriers down with its horizontal approach.
• This is exactly what it did in smartphones and, combined with MediaTek, it has enabled the Chinese smartphone makers to dominate the Android market.
• This is currently being repeated in ADAS and I suspect that in time we will see it in The Metaverse if the segment ever takes off.
• This has worked extremely well in automotive and The Metaverse and is now being applied to both PCs and Industry.
  • First, Automotive, where Snapdragon Digital Cockpit has become an industry standard, and Snapdragon Ride is rapidly taking share from Mobileye.
  • These chipsets directly address the migration of vehicles from being hardware-defined to software-defined as well as the slow progression towards being able to drive themselves.
  • Here, Qualcomm is targeting $8bn in revenues in 2029 up from $4bn in 2026 and its $45bn pipeline covers 80% of this target.
  • Second, PCs where Windows-on-Arm finally delivers on the promise of excellent performance and great battery life rather than having to make a compromise.
  • Qualcomm now has just over 50 design wins in this segment up from around 20 when it launched which is expected to grow to 100 design wins by 2026.
  • Qualcomm estimates that 90% of laptops will be AI PCs (i.e. have an NPU) by 2029 of which 30% to 50% will be non-x86 products.
  • This gives a $4bn revenue target in 2029 which at the mid-point of these numbers and 75% share of non-x86 PCs, gives an ASP of $60 per chip which looks pretty low to me.
  • Hence, I think that there is a lot of margin for error in this estimate which is not unexpected given how uncertain the speed of change can be.
  • I see space for a big outperformance of this forecast.
  • Third, Industrial which has had some difficulty recently, but where Qualcomm now intends to perform a rinse and repeat of Automotive.
  • This will not be easy, given how fragmented and different all of the verticals are, but having Saudi Aramco as a cornerstone client is a big vote of confidence.
  • Both Honeywell and Deloitte chimed in to support Qualcomm’s Industrial offering.
  • The target for 2029 revenues is $4bn which again leaves quite a lot of wiggle room as business very rarely progresses as one expects.
  • Fourth, The Metaverse which is where I think the real risk to the forecasts lies.
  • Qualcomm contends that the ability to use natural language as the man-machine interface greatly reduces the shortcomings of using a head-mounted display which will help The Metaverse to win adoption.
  • RFM Research generally agrees with this view, but there are a lot more barriers that need to be overcome for take-off of The Metaverse and a 30m annual unit shipment target in 2029 is a punchy estimate on that basis.
  • Apple’s struggles in this market and the heavy subsidisation that is required to sell units are indications of just how immature it is and that the technology is far from ready for the market.
  • However, if it does take off, then Qualcomm is in pole position as it is pretty much the only supplier to this market and it has 100% share at the leading supplier, Meta Platforms.
• When one adds all of this up one gets $22bn in revenues in 2029 up from $8.3bn in FY2024 which assuming mid-single digit growth in handsets gives 41% of revenues in 2029 coming from non-handset sources.
• This means that the 50% non-handset revenue in 2030 is unlikely to be met, but this is an aspiration rather than a hard target and it looks like the company will get there shortly after 2030.
• I continue to think that most of these numbers have not been incorporated into financial forecasts and so I think it likely that long-term FY2027 and beyond estimates will now start to rise.
• This means that growth of 10% or better for the next 5 years looks reasonably safe and with operating expenses stable as a percentage of revenues and cash being returned via buybacks, EPS should grow somewhat faster.
• Even without further multiple expansion and upside surprises, the shares should deliver a steady return over the next 5 years leaving me very happy to sit on my position.

• The US Department of Justice is recommending that Google be forced to sell Chrome as a remedy for its illegal monopolisation of the search market in a move that looks badly thought through and will probably fail on appeal.
• Google is a company that offers a diverse set of digital services to users and then monetises those services by selling targeted digital advertising based on usage patterns.
• Google is relatively unique in that it understands its users as a profile across all of the Digital Life services that it offers meaning that the key asset of the company is its knowledge graph of both the Internet and its users.
• Chrome is used for both data collection and service delivery meaning that if it were to be severed from Google, it would have very little value to its new owner.
• This is why I think this remedy has very little value meaning that forcing it to share its insights with competitors would be a much more effective solution to impose.
• Furthermore, it will be appealed meaning that there are years of wrangling ahead before any solution is reached.

Xiaomi Q3 24: A lone star in a dark sky

• The one bright spot in the deeply depressed Chinese technology industry is Xiaomi where its transition to making vehicles has gone well and where smartphone sales are also picking up.
• Q3 24 revenues / EPS were RMB92.5bn (up 30.5% YoY) / RMB0.21 just ahead of estimates of RMB90.3bn / RMB0.21.
• The high growth was driven by increasing penetration of the high-end smartphone segment which allowed a 10% increase in average price as well as 39,790 vehicle shipments which did not occur in 2023.
• The SU7 has been well received both as an EV and as part of Xiaomi’s IoT device ecosystem which has 686m active users almost all of whom are in China.
• The company remains on track to deliver 100,000 units this year and critically, this has not undermined financial performance.
• This is because Xiaomi has deliberately limited its profit on hardware, meaning that manufacturing vehicles fits very well into its business model.
• This is the exact opposite of Apple where I argued for years that making vehicles made no sense due to the negative impact that it would have on the company’s profitability.
• However, low profitability also means that the company remains quite expensive from a shareholder perspective.
• With the shares at HKD28.30, the company is on a 2025 PER of 27.0x which is very much at the higher end of the Chinese technology sector.
• This means that the company really needs to deliver on monetising the ecosystem which has been slow to materialise as almost all of the revenues still come from hardware.
• The addition of the vehicle has increased Xiaomi’s opportunity meaningfully as RFM thinks that digital services in the vehicle is a big opportunity, but there are plenty of others vying for this prize and at much lower valuations.
• Xiaomi remains one of the better-run Chinese technology companies, but I would like to see better visibility to profitability from the ecosystem before I pay a multiple of that size.