• It turns out that Arm may be looking to make its own chips after all in a move that needs to be carefully balanced to ensure that it does not enrage its customers and accelerate the shift away from Arm to RISC-V.
• The Financial Times (see here) and Reuters (see here) are citing unnamed sources (not very reliable) that claim that Arm intends to launch its chip offering, is recruiting staff from its customers and may have already won business from Meta that otherwise could have gone to Qualcomm.
• This is not the first time I have heard this as Qualcomm made similar, but less specific, allegations as part of the court case that concluded at the end of last year.
• As this possibility is coming from multiple sources and given that the FT is generally reliable, I think it is likely that Arm will launch a chip this year as the FT claims.
• From Arm’s perspective, this strategy makes complete sense because the company has flown high on AI wings and now needs more revenues and profits to sustain this altitude.
• Making its own chips will greatly increase the revenue per chip but it will bring margins down.
• However, overall, I would expect to see a significant increase in long-term financial performance assuming that this strategy goes well.
• For Arm, chipmaking is a high-risk strategy as:
  • First, customers: where Arm will now be directly competing with its customers which will both anger them and compromise Arm’s independence in their eyes.
  • According to the FT, Arm has secured Meta as a customer for a data centre CPU in what I would guess is a fully customised implementation based on Meta’s requirements.
  • Qualcomm is likely to have offered Meta something similar but I suspect that the Arm offering could well have a greater level of customisation as it has no off-the-shelf designs to use and as the first customer, Meta probably got an excellent price.
  • I suspect that Meta will be dual sourcing as Reuters sources claim that the talks with Qualcomm are still ongoing which makes sense given that this is Arm’s first foray into chipmaking.
  • There is currently no love lost between Arm and Qualcomm at the moment but this will also concern all of Arm’s other customers with the exception perhaps of Apple who I don’t think will care very much one way or the other.
  • Competition with clients could intensify further if SoftBank acquires Ampere which could greatly accelerate Arms migration to becoming a chipmaker.
  • If Arm ends up offering only highly customised chipsets which are co-designed with customers, then the competitive issue will be significantly lessened but it is not clear at this stage which route Arm will be taking.
  • Second, RISC-V: which will receive another boost if Arm begins selling complete chipsets rather than just IP and processor designs.
  • This is because Arm’s customers will see a loss of independence and have concerns about whether they will be treated fairly given that there is an in-house competitor.
  • Samsung has proven for years that it can keep its memory business independent from its handset business but convincing chip customers of this will not be easy especially when its relationship with one of its largest customers is in such a bad state.
  • Hence, this is likely to push Qualcomm, Nvidia, Samsung, MediaTek and so on to look more closely at RISC-V which already has a lot of traction but only at the very low end of the market.
  • RISC-V is great for the low end because chipmakers don’t have to add very much to get a working product, but at the high end, Arm’s economies of scale make it not cost-effective to do RISC-V.
  • However, this is slowly changing because just as Arm is eating into the high-end market, RISC-V is eating into the bottom end of Arm’s addressable market.
  • Google is already migrating wearables that use Android to RISC-V and a move like this will encourage chipmakers to accelerate the migration to RISC-V meaning that smartphones may migrate sooner than expected.
  • This is not a big problem for Arm for as long as it can take share from x86 and proprietary processors in the vehicle, data centre and so on but at some point, it will run out of road.
  • I am also pretty sure that Qualcomm is already working out what it would need to do to build an Oryon CPU on RISC-V and this move will only increase this incentive for all of Arm’s customers.
• The net result is that if Arm is going to build its own chips (which seems likely given the number of sources) it needs to go on a charm offensive and make the case to its customers that its independence will be maintained.
• Failure to succeed will see customers accelerate their RISC-V programs and give the overall RISC-V ecosystem far more air to breathe than it currently has.
• If RISC-V hits critical mass and standards for higher chip functions begin to form and an ecosystem is created, this will greatly increase RISC-V’s ability to compete with Arm.
• Arm currently has complete dominance in many verticals and is growing share but for this to continue with Arm as a chipmaker, it needs to strike a delicate balance between maximising its revenue opportunity, keeping its customers happy and ensuring that RISC-V stays in its box.
• Making its own chips is a high-reward but high-risk proposition.

Prototype to product

• The halls are busy and the queues are long but what is different in 2025 is the change in maturity of the products that are on display.
• Most of the time one sees prototypes stuck together with tape and chewing gum which work some of the time and have a tendency to feel like they are going to fall to bits when you pick them up.
• 2025 is different as many prototypes have given way to products that look well-built, work all of the time and are either already on sale or about to reach general availability.
• Most impressive is that the sprinkling of AI pixie dust that I predicted yesterday has not materialised with most companies only using AI for very practical purposes.
• A good example would be a series of pool-cleaning robots that use AI to map the layout of the pool to decide the best way to clean it or a blood pressure monitor that customises a standard dataset to give specific indicators of heart health beyond simple measurement.
• This is the kind of usage of AI that will make money now as opposed to massive inference to do PhD mathematics at very high cost.
• What this indicates is that generative AI services are not really ready for mass-market consumer adoption which is why they are not featuring as prominently as I had expected.
• This concurs with RFM Research’s conclusion that at the moment, the current use case for generative AI lies almost exclusively in the enterprise where the database and automotive are the ones that I think will feature first.
• This does not mean that generative AI won’t go to the consumer at scale eventually, but I think it will take time to penetrate leaving enterprise to make all the running in the meantime.

Robotics

• This plays directly into robotics which is a theme that is still in its infancy but with every CES that passes grows its presence and its relevance.
• This year there are more robots than ever on the stands albeit almost all of them are single-purpose products mostly in the household and garden cleaning category.
• Robotics faces two main challenges the first of which is locomotion which is only partly solved and the second is intelligence which I think is also, only partly solved.
• It is possible to teach robots to walk on legs without too much difficulty, but the problem is that every robot that is not absolutely identical has to be reprogrammed from scratch.
• This makes it very expensive to create a fleet of robots that use legs which I think is essential if robots are going to participate in the human world in a meaningful way.
• Some form of general framework is needed to generalise locomotion, which is what Nvidia Cosmos is all about.
• By creating realistic video feeds with data from a digital twin in Omniverse or other sources, the hope is that it becomes much cheaper to train robots and even make progress on generalising robotic locomotion.
• Nvidia believes that robotics is going to be a massive opportunity and in the very long run, I agree.
• However, there remain substantial hurdles to get there and by being one of the first to try and solve these problems, Nvidia is setting itself up to be the dominant supplier of silicon and software platforms for the robotic industry.
• The other issue is intelligence which I don’t think LLMs are going to solve on their own although they provide an excellent solution for a voice-based man-machine interface (MMI) through which robots can communicate with humans.
• RFM research indicates that the MMI problem has largely been solved (see here) but in terms of intelligence and behaviour, I am far from being willing to let one loose in my house.

• It looks like growth is becoming a real problem at Apple as it is considering entering segments where its competitors have seen very little success in a sign that Apple is pretty much out of ideas.
• The correct response in this scenario would be to return all of the excess cash to shareholders via buybacks and dividends although this would almost certainly cost Apple its high PER multiple.
• Two new products are under consideration for launch both of which would be targeting the smart home segment.
  • First, Apple iHub: which is a tablet-like device similar to Alexa Echo Show or Google Nest Hub Max that can be attached to a wall or sat on a counter and is mostly controlled by voice.
  • This makes sense as the kitchen is one of the few use cases (like the car) where voice is currently often used as the man-machine interface.
  • Apple will add all sorts of tweaks like proximity and Apple Intelligence to the device, but I fail to see how this is suddenly going to breathe life into the home automation segment.
  • The biggest problem with smart home is fragmentation where there are hundreds of manufacturers making thousands of different products none of which seem to work very well together.
  • Even Amazon which is the king of the smart home has largely failed to get it to take off and so I struggle to see how Apple will succeed.
  • Second, Security Camera: which is a sub-segment of the smart home and would undoubtedly be part of the iHub package.
  • This is a segment that is dominated by Amazon and Apple’s Apple Home platform currently does not support some of the leaders in this space such as Ring and Blink who have chosen to go their own way.
  • This is precisely the kind of fragmentation that keeps the smart home segment as a niche rather than something that every household is rushing to implement.
  • Apple is very unlikely to take a conciliatory view here and encourage interoperability instead is likely to stick with its usual “my way or the highway” approach.
• The net result is that these devices look like an attempt to restart flagging revenue growth and do not really represent a new and original digital use case for users.
• This seems to imply to me that Apple is really struggling to grow and is also pretty much out of ideas in terms of how to do that.
• The Metaverse remains years away as the weak sales of the Vision Pro and Oculus Quest indicate, meaning that Apple needs to find something else or face stagnation.
• I don’t think that a foray into the smart home is going to fix the growth problem and so low growth looks to be the outlook from here.
• A 2025 PER of 30.4x is expensive for a company in this position even if it is very profitable giving me yet another reason to look elsewhere.

• Ouster reported good results and strongly signalled that it has turned the corner, but the uninhabited conference call gave a strong impression that no one cares.
• Q3 revenues / net income were $22m / LOSS$35m which were ahead of both the company’s guidance and my own expectations.
• Given how little this stock is now covered by the street, it is difficult to rely on the consensus estimate.
• Key to this set of results were some milestone achievements as well as long-term expectations that return Ouster to the kind of expectations that were set when the company originally listed via its SPAC.
• These were firm orders of $38m during the quarter, $120m of cost savings since Q3 2022, successful integration of the Velodyne and Ouster software platforms and a return to 30%-50% growth with 35% – 40% gross margins in the long term.
• The company expects to make meaningful progress on those long-term goals over the next 18 months meaning that the next two years should see an acceleration from the virtual standstill suffered in 2023.
• The $120m cost savings claim also looks a little odd as the OPEX of Ouster in Q3 2023 looks pretty much the same as it did in Q3 2022.
• What one has to remember is that Q3 2022 did not contain Velodyne and it is pretty clear what has happened.
• Velodyne was not really an acquisition but a rights issue as its technology was becoming obsolete, but it had some customers and a large cash balance,
• Essentially what Ouster has eliminated is the cost base of Velodyne, leaving it with pretty much what it had before the acquisition took place but also $200m in cash ($160 net cash).
• Ouster is not and has never really been about automotive Lidar (although it will hit automotive grade with its next-generation) but is much more about the automation of everything else.
• Ouster is selling lidars for industrial robots, forklifts, toll booths, logistics mapping and so on and this is the real story of the company as opposed to the more headline-grabbing autonomous driving and ADAS story.
• Here, there are hundreds of customers already signed up but so far very few have purchased Lidars for commercial deployment but instead have been tinkering and experimenting.
• The rampant inflation and weakness in the global economy caused them to pause the migration from tinkering to commercial deployment which in turn forced Ouster to acquire Velodyne to ensure it had enough money to ride out the bad macro.
• Given the company’s commentary, this now looks to be in the rearview mirror and the company can get on with fulfilling the opportunity ahead of it.
• Factoring in the medium-term expectations that Ouster is putting into the market, I can get to $20 a share without trying very hard.
• This is mainly because, at $5, the company is trading at a market capitalization of $195m or an enterprise value of $55m.
• Even on 2023’s tough year, this represents an EV/Sales of 0.7x.
• The problem is that no one appears to be listening as the conference call was almost uninhabited and so it is going to take some time and a series of excellent quarterly results before anyone cares enough to look beyond the awful share price chart.
• I have a position in Ouster which I substantially increased about 6 months ago at $3.7 per share but there is still a long way to go before I break even.
• However, I think that the outlook for the company to return to $20 a share looks pretty good on a DCF basis.
• I am happy with my position and am sitting tight although it has been very bumpy.

• SoftBank has made public the F-1 for the IPO or Arm which is a fair appraisal of the company, but it does not read like the filing of an AI company which may affect SoftBank’s ability to convince the market to pay $64bn for the shares.
• Highlights of the filing include:
  • First, Financials where Arm has largely returned to the form it enjoyed prior to its acquisition by SoftBank, but it is suffering from the downturn in the smartphone market.
  • This, combined with the difficulties in the Chinese market, caused FY 2024 (March 2023) revenues to decline by 0.8% which has continued into FY 2024 where revenues declined by 3.4% in FQ1 2024 (June 2024).
  • This is not as bad as SoftBank’s FQ1 24 results had led us to believe, but it is still going to be an issue when investors are being asked to pay a 2023 and 2024 EV/Sales multiple of 23x on declining revenues even if the declines are temporary.
  • Second, AI: where the F-1 mentions AI 47 times compared to Nvidia’s 2022 10-K which mentions it 79 times and Qualcomm’s latest earnings transcript which mentions it 28 times.
  • As it stands today, it is difficult to make the case that Arm is an AI company in the same way that Nvidia is an AI company.
  • There is certainly a long-term case to be made as Arm is in an excellent position to capitalise on the opportunity of running AI models on smartphones and other devices.
  • The fact that Nvidia is using Arm IP in some of its AI training products for the cloud is also a plus, but these opportunities are not meaningfully impacting revenues now like they are at Nvidia.
  • Furthermore, the debate over which processor architecture (CPU, GPU, or other) will be best for executing inference on edge devices is far from over.
  • Arm states in its risk warnings in the F-1 (bottom page 35) that if CPUs are not used, then its revenues could suffer if it fails to develop new technologies for its products.
  • This document does not scream AI-company and as such, everything will depend on the meetings that Arm and SoftBank conduct with investors to convince them that an “AI-like” valuation is warranted.
  • Third, Business model & litigation: where substantial question marks remain.
  • These questions spring from the tit-far-tat filings that Arm and Qualcomm have made in their ongoing dispute over the license under which Qualcomm’s Nuvia subsidiary operates.
  • This is the business that Qualcomm acquired in order to return to designing its own processors rather than using Arm’s off-the-shelf designs.
  • Eventually, I suspect that all of Qualcomm’s products will migrate to these new processor designs but the first iterations will be for Windows-on-Arm where Qualcomm intends to match the performance of Apple’s M-series and compete against Intel and AMD.
  • This has no real financial implications in the short-term as there are no products in the market, but seeing as Qualcomm is one of Arm’s largest customers, this has substantial ramifications in the 5-to-10-year time horizon.
  • Hence, while the uncertainty of litigation is never a good idea when conducting an IPO, the immediate-term financial impact looks to be limited.
  • However, Qualcomm has also asserted that Arm intends to completely change its business model from licensing chipset makers to licensing end-device manufacturers in the same way that Qualcomm does.
  • This would completely upend Arm’s business model and greatly increase its revenues and profits, but Arm would have to cancel all of its agreements with chipset makers and move them to device makers instead.
  • Arm has emphatically denied all of these allegations in its response to Qualcomm’s filing, but it does not rule out a business model change in its F-1 (page 39).
  • However, these are risk warnings rather than strategic statements and the example that Arm gives in this warning is a small change in the way that current customers are licensed and is not a change from one customer type to another.
  • Hence, I think it is pretty safe to say that this is not an admission of an impending change to its business model.
  • As a result, I suspect that Arm will stick to its emphatic denial of these allegations during the marketing for this IPO meaning that this uncertainty will remain unresolved.
  • Fourth, China where, like Qualcomm, its exposure is substantial and where revenue growth looks likely to be negatively impacted for at least a few more quarters.
  • Furthermore, the debacle around Arm China still highlights some of the risks to revenues from China as Arm has no control over how Arm China operates.
  • Consequently, I think that Arm’s risk profile in China is as great if not greater than Qualcomm’s especially when it comes to geopolitical sensitivities around the transfer of intellectual property into China.
• The net result is that this F-1 describes the profile of a company that looks more like Qualcomm than Nvidia, which is going to be a problem when it comes to valuation at IPO.
• This is because to achieve a valuation of $64bn, the market needs to put multiples on Arm’s earnings that are more than double those of Nvidia.
• Nvidia is currently trading on a January 2024 PER multiple of 59x but at $64bn the market would be paying 122x March 2023 PER which given FQ1 24 and current market dynamics may be similar for March 2024.
• This is a stretch by any measure that I can conceive of meaning that SoftBank really needs the current AI FOMO frenzy to achieve this valuation.
• Consequently, this is the line that I expect that SoftBank will take when it comes to marketing this investment to investors.
• If this strategy works, then I expect that this IPO will get away quite easily which will be helped by the fact that most of the street is included in the deal and will not be asking too many hard questions.
• Failure will mean a much more modest valuation which I think for the long-term performance of Arm and its reputation in the market, is probably a better outcome.

• The latest transaction between SoftBank and Vision Fund I is an attempt to put a market value down for a valuation of $64bn but no one has explained why Arm is more valuable now than it was in June when SoftBank itself valued it at $45bn.
• SoftBank has purchased the 25% of Arm that it does not own from Vision Fund I for $16bn which nominally values Arm at $64bn and it is now clear to me that this is the number that SoftBank will run with for the IPO.
• This transaction has a number of effects:
  • First and foremost, valuation where this transaction attempts to set a market value for Arm which can then be used to support an IPO coming at $64bn.
  • The problem here is that this strategy contains a substantial conflict of interest.
  • The valuation of $64bn is being set by SoftBank which has the most to gain from a high valuation of Arm at IPO.
  • Furthermore, the $16bn paid will be more than recovered by SoftBank if this allows the valuation to be $64bn rather than a more reasonable $32bn.
  • Consequently, despite the recusal of Mr Son from the negotiations, I struggle to believe that this is a transaction that is purely based on objective valuation.
  • This is particularly the case as earlier this month, SoftBank booked a $45bn fair value for Arm when it reported its FQ1 2024 results.
  • Arm’s is suffering from the downturn in smartphone shipments which is by far its biggest end market and as such, its growth has turned negative on a YoY basis (see here).
  • Typically, the valuation of a highly rated company does not increase by 42% when its revenues start declining even if the decline is temporary.
  • It will be interesting to hear how SoftBank justifies this valuation increase when the question is inevitably asked.
  • I suspect the answer will include AI (see below)
  • Second, long-suffering investors: who will now receive a good payday on the 25% of Arm that is held in Vision Fund I.
  • After the very public and messy meltdowns of WeWork and FTX, SoftBank badly needs to deliver some good news to the fund’s biggest backers the most prominent two of whom are PIF from Saudia Arabia and Mubadala from UAE.
  • This transaction will serve to reduce these investors’ risks from an unsuccessful IPO and relieve some of the pressure on Vision Fund I created by its less successful investments.
  • Third, neat and tidy: This transaction will simplify the ownership structure of Arm at IPO which will make its governance easier to understand.
  • A simple governance structure where control and ownership are both clear and well-aligned is always a bonus for any company coming to market.
• SoftBank also appears to have recruited 28 banks to execute the IPO which includes all of the usual names.
• This will ensure that only the small independents who can never make enough noise to cause any problems, will be asking hard questions about the valuation being asked by SoftBank.
• Neither the listing documents nor the marketing material from SoftBank for this IPO have been made available and so it is impossible to say with any certainty where the real fair value is at the moment.
• The current state of the smartphone market does not bode well for Arm returning to growth this side of 2024 which is going put pressure on a 23x FY 2022 revenues valuation.
• This is why the AI story is so important to getting this IPO away at the desired valuation and explains why SoftBank has been looking for anchor investors from the technology industry.
• The valuation issue will not become really clear until the public market itself has said what it is willing to bear.
• This is why Arm needs to be seen to be like Nvidia and as an AI company which I think is crucial to the success of this transaction.
• If the AI story sticks, then this will probably get away comfortably given the ludicrously high valuations that the market will afford to those seen to be leaders in the generative AI race.
• If not, then SoftBank has a very difficult task on its hands and may end up having to settle for much less.

• GMs decision to end support for Apple CarPlay and Android Auto has sparked a negative reaction from the Apple-loving technology press that seems to have put finger to keyboard to generate clicks rather than to inform.
• GM has announced that its EVs from mid-2024 will no longer support Apple CarPlay or Android Auto which, on the surface, looks like a very risky position to take.
• However, given how the EV rollout is slowing down, this means that GM will support Android Auto and Apple CarPlay in the vast majority of its vehicles for many years to come.
• Consequently, to me, this looks like an experiment and I suspect that should it fail, GM will be capable of restoring Apple CarPlay functionality to its vehicles with an over-the-air (OTA) software update.
• Apple CarPlay and Android Auto are small pieces of software that are installed in the IVI unit that allow apps running on the device to be projected onto the screen of the vehicle as well as access speakers, microphones and other functions as appropriate.
• For example, the smartphone often uses the positioning system of the vehicle which often works better given the size of the vehicle’s antenna as well as its direct line of sight to the sky.
• The problem for the OEM that both of these systems represent is that they encourage the user to use his or her smartphone when in the vehicle rather than the onboard digital experience of the OEM.
• In the long term, this is extremely dangerous as RFM has long identified that OEMs must have a stake in the digital experience of the vehicle or face earning no revenues at all from the potentially very large market for in-vehicle digital services.
• This is why GM is experimenting with removing them from the vehicle and, in contrast to the pearl-clutching of the tech press, there is a possibility that GM might pull this off.
  • First, Android Auto: In the vehicles where Android Auto and Apple CarPlay have been removed, GM will be using Android Automotive with Google Automotive Services (GAS).
  • This means that Android smartphone users will have a better in-vehicle experience than they did when they were using Android Auto.
  • This is because the Google Ecosystem will be installed on the IVI unit meaning that all the services that these users ran on their devices in the car will now run natively on the IVI unit.
  • This will create a faster, more stable and more reliable instance of the same services that they enjoyed before and they will also be better integrated with the other systems of the vehicle.
  • Consequently, for Android users, this represents an improvement over what they had before.
  • Second, Apple CarPlay: This is where the real question mark lies as there is no obvious way that iPhone users will be able to replicate the experience that they are used to in these vehicles.
  • With 65%+ of car buyers in the USA owning iPhones, this would seem to be a very dangerous or even suicidal move on GMs part.
  • This is especially the case as Apple claims that 79% of iPhone users in the USA will only consider purchasing vehicles that are capable of supporting CarPlay.
  • This implies that GM has alienated 50% of all potential buyers of its vehicles and there are already plenty of stories of grumpy car buyers saying that they will no longer consider GM.
  • However, there is a workaround.
  • This is supported by the fact that Google is very popular on iOS devices and the fact that while vehicle occupants are predominantly driving the vehicle, their digital lives in the vehicle are extremely constrained.
  • This is because when one is driving the vehicle, the only digital services that see real usage are navigation and audio media consumption.
  • This means that, as long as GM can come up with good options for iPhone users in these use categories, then it will have a shot at keeping these users happy.
  • Many iOS users (me included) use Google Maps rather than Apple Maps for navigation, as outside of the US coastal cities, it is a much better experience.
  • Even Apple has admitted this and allowed Google Maps to be used with other iOS apps far more freely than before.
  • Hence, for a lot of iPhone users, GM has navigation covered as long as it can enable a seamless transition from an app on the iPhone to the app on the car.
  • The big question is audio media consumption but with Spotify, Sirius XM, Apple Music and many others being available on Android, GM’s coverage of this space for iPhone users is also reasonably well covered.
  • Consequently, I think that GM has the biggest use cases for digital services in the vehicle pretty much covered with the use of Android Automotive with GAS.
  • The caveat is that GM needs to execute a seamless transition for iOS users, and I am pretty sure that Google will be on hand to help out.
• The biggest risk here is the technology media which for much of the time, functions as a second marketing department for Apple.
• So far, the media is assuming that iOS users will be completely left out in the cold which given the size of iOS’s market share in the USA and how important digital is becoming in the vehicle purchase decision, would be suicidal on GM’s part.
• This has the knock-on effect of immediately turning car buyers off to this proposition without asking any questions at all.
• Hence, what GM needs to do now, is to demonstrate how iOS users will be taken care of in a fun-to-use and simple-to-set-up manner even when CarPlay is not present in the vehicle.
• This is a similar conundrum that faced Microsoft when it was trying to develop the Windows mobile ecosystem which was actually quite good once one had started using it.
• Microsoft failed to get this message across and, as a result, the ecosystem never hit critical mass and withered and died.
• This is what GM must overcome to make this a success and given the digital assets it has with Google, there is a chance it could pull it off.
• GM also has to ensure that its deal with Google provides it with enough revenue share that it earns a good return on the sale of its digital soul to Google.
• The alternative is to become a commodity maker of smartphones on wheels eking out a meagre existence on the scraps that the digital ecosystems let fall from their table.

• Falling long-term estimates and substantial dilution have materially damaged the long-term outlook for the share price but the shares have fallen so much that there is enough upside even at a greatly reduced share price forecast to consider rounding down.
• Ouster has had a rough 18 months and the combination of difficult end markets, terrible action in the stock market as well as some bad decisions by the management team have hammered the share price.
  • First, end markets: Optimism and sentiment towards lidar have taken a big hit as the general malaise that has settled over autonomous driving and technology has hurt everyone.
  • As I have said on multiple occasions, autonomous driving was greatly overhyped and is unlikely to come to market before 2028 at the earliest.
  • This has meant that many large buyers of lidars have delayed or cancelled orders which have caused estimates for lidar sales to fall hard.
  • I have long believed that Ouster is not very well suited to automotive, but critically it doesn’t have to be as the lidar market is far more than just cars.
  • Any type of industrial automation can benefit from lidar meaning that Ouster does not need automotive in order to be successful.
  • Automotive lidar seems to carry a certain cache in the industry but this makes little sense to me as a lidar out the door is the same whether it goes into a car or a forklift truck.
  • This is where we come to the first bad decision by management in my opinion as the company thinks that it does need automotive, and it made the dilutive acquisition of Sense Photonics in 2021 to help it address this market.
  • The general economic downturn thanks to higher interest rates to pay for the pandemic has meant that Ouster’s estimates for the next few years have been hit and hit hard.
  • At the time of the SPAC listing, the investment deck was forecasting $1.6bn in revenues in 2025 which given the company’s customer count and its execution on its near-term forecasts was not incredible.
  • However, looking at the merger document with Velodyne leads me to forecast just $200m in revenues in 2025, some 88% below the original expectation.
  • I don’t think that the company has lost customers just that its customers have substantially delayed industrial and automotive autonomy which in turn has had a substantial knock-on effect on Ouster.
  • The real answer is that Ouster has no more idea than anyone else when this market is going to really start to move, and it needs to survive until that time comes.
  • I suspect that the estimates that are now out there represent a pretty low hurdle and I am optimistic that they will be beaten in time.
  • Second, share dilution: When I first invested in this company, there were around 150m shares in issue but following the acquisition of Velodyne, Sense Photonics and the ATM mechanism, this number is now 350m.
  • To be fair to the company, the market situation in both its end markets and the stock market has deteriorated through no fault of the management which has resulted in the need to raise more money to make it to profitability.
  • The manner in which this was executed raises questions about judgment but I am comfortable that this is now in the past.
  • This is what I think lies behind the acquisition of Velodyne as everyone in the industry knows that its products have no real future but the company had a lot of cash.
  • Hence this should be seen as a share issue to get Velodyne’s cash as well as access to its customers.
  • I expect that its products will be quickly terminated and replaced with Ouster’s.
  • This strategy has legs, but it will take time to pull off.
  • The net result is that dilution was inevitable, but it could probably have been moderately less if the management had made better decisions at the time.
  • Third, market sentiment: which is now at rock bottom.
  • The horrible share price action has forced the company into an ignominious reverse share price split (like many other SPACs) in order to keep the share price above $1.
  • NYSE regulations require that the share price can only be below $1 for a certain period of time before the shares are subject to delisting which is why many companies have taken this route.
  • Although this action changes absolutely nothing about the company, it has been taken as a sign that the company has no idea when or if the shares will recover above $1 implying great pessimism about its own outlook.
  • I think that this is why the news has hammered the shares yet again with the stock now below $0.50.
• The sum of all of these woes is that my valuation on a DCF basis (10% WACC) of Ouster has fallen from around $8 a year ago to just $1.85 now.
• A week ago, this implied that the shares could double to reach my valuation which would leave me selling the shares at a loss with an average entry price of $2.77.
• This left me pretty uninterested in increasing my stake with better options elsewhere.
• A week is a long time and now with the same target of $1.85, the shares could triple offering me a much more attractive opportunity to round down.
• Furthermore, with around $300m in the bank, the company currently has a negative enterprise value of $111m.
• This means if I buy the shares at $0.49, I get the company for free and $0.31 of cash into the bargain.
• Obviously, that cash is all going to be burned to keep the company going until it can break even but it is a measure of the deep value that is now on offer.
• I think that the management is pretty good at executing on the opportunities that it has despite the errors in judgement that it has made.
• In these sorts of situations, this is a really big deal as execution is what is needed to get the company out of its current predicament.
• This is why I am now inclined to increase my stake materially at this price as I think the company will survive and will be a going concern in the long term.
• I am also optimistic that the horrendous 18 months that the management has endured has made it less green and less prone to repeating the mistakes that it has made.

• The new Matter standard has the potential to end the fragmentation and incompatibility of the smart home but even with all of the big digital ecosystems supporting it, there are limitations and scope for substantial complexity to damage the user experience.
• Matter is an application layer protocol which was created to address the issue of interoperability between different smart home systems and devices.
• It was created by the Connectivity Standards Alliance led by Silicon Labs and version 1.0 was made available earlier this month.
• Matter is of most interest because all of the big digital ecosystems that are active in the smart home have decided to adopt it.
• Samsung with its SmartThings ecosystem is the latest to move ahead with Matter and will be using it to ensure that its products work well with Google Home and vice-versa.
• Although Samsung says nothing about Apple and Amazon, the fact that it is adopting the standard will mean that its devices should also work with Siri, Alexa and their respective apps for controlling the smart home.
• However, this is where things get complicated because Matter 1.0 is a specification and not a piece of code.
• Specifications tend to be written in English while code is written in a language that a computer understands meaning that there is scope for interpretation during coding which often leads to fragmentation.
• Furthermore, the digital ecosystems all compete with each other for the user’s attention in order to drive loyalty or revenue, and so there is an inbuilt incentive to ensure that some things work better in one’s own app as opposed to the app of a rival.
• This is already emerging in the Matter 1.0 specification where its creators admit that while Matter will cover the basic functionality of devices, it is unlikely to cover all of the features on offer.
• A simple example would be a light bulb where Matter supports turning it on and off from anywhere but to get it to cycle through the colours of the rainbow, one would have to use the app of its native ecosystem.
• Hence, even in the best instance, Matter is not going to mean that users will be able to control all the features of their devices from one place, but it will simplify the current mess and make it much easier to add devices and access their basic functions.
• It is also not going to be backwards compatible with existing devices but there are solutions whereby older devices and systems that don’t support Matter can access it through software bridges.
• The practical upshot of this is that Matter is going to help reduce the fragmentation in the smart home and make it easier for devices to be accessed by all of the digital ecosystems, but it is not going to solve many of the issues that plague the smart home.
• Furthermore, the digital ecosystems will still want to ensure that users stick with their apps rather than the apps of others meaning that they will have an incentive to ensure that the interoperability is not perfect.
• When this is combined with the real possibility that fragmentation occurs as a result of how the specification is expressed in code it is not hard to see fragmentation occurring.
• The net result is that users are likely to still be making a choice between one ecosystem or another in the smart home and here. Amazon has the advantage.
• This is because it has more users and more devices than anyone else and attempts to dislodge it even with superior products have been unsuccessful.
• Hence, I still think that Amazon is ahead in the smart home, but Matter should help level the playing field a little bit.
• It will also make the smart home more accessible for consumers meaning that uptake of products and services generally may improve meaningfully from where it is today.
• This is good for all of the ecosystems which I suspect is why all of them have signed up for it as uptake to date has not fulfilled anything like its promise.
• Matter should get this issue a little further down the road.

• It looks as if Apple is delaying its plans to include blood pressure monitoring in the Apple Watch for two or three years, once again indicating how difficult this is to get right and how important it could be once it is finally ready for the market.
• When it comes to wellness, blood pressure and blood glucose are the Holy Grail of wearables as these conditions affect over 2bn people worldwide and are badly monitored at best.
• Measurement is still conducted either with a cuff that crushes the arm or a needle in the skin and is both invasive and does not always give a clear picture of what is happening inside the user’s body.
• This means that anyone who can measure these reasonably accurately and un-invasively stands to make a lot of money as well as upend an entire industry.
• It also offers the possibility of moving from single points of data to continuous monitoring which could greatly improve insight although a lot of very careful data management and analysis will be required to make it work well.
• It is not for want of trying and I am aware of several companies who all violently disagree with each other, but who are all trying to measure one or both of these biometrics using some form of light.
• Some are using lasers, others are using LEDs. Some make their own sensors while others use off the shelf sensors and rely on their software to interpret the signal.
• However, all of them are trying to measure blood pressure and/or blood glucose through the absorption of a green light that is integrated into a wearable of some kind.
• The one exception is Leman Micro Devices which relies on squeezing the finger into a groove and then measuring when the capillary collapses to estimate blood pressure.
• This sounds easy but there is clearly much more to it as I have been aware of this approach for many years, but it is only very slowly inching towards being ready for market.
• Apple was hoping to include blood pressure in the 8^th version of the Apple Watch (see here) which should be launched this year but it looks as if Apple has been struggling with accuracy and that the feature will be delayed for some time.
• Blood pressure is the least controversial of the two biometrics and there is one company that has FDA approval for a device called BioBeat that it intends to sell for inpatients that are not constantly monitored and are outside of the ICU.
• The goal is to be able to replicate a cuff reading to within 8mm of mercury but this is very difficult to verify.
• This is because whenever one moves one’s arm, the pressure of the blood in the arm changes and it also changes depending on activity, diet and time of day.
• This complicates the issue so much that a proper measure of blood pressure is measured medically by a reading in the morning and a reading in the afternoon taken in a specific way and averaged over four days.
• The other problem that one faces is what I refer to as the “too much data problem” which is that constant monitoring could spike anxiety as normal changes during the day are misinterpreted by the user.
• Apple’s delay gives the other offerings time to get their products into the market and if they are able to succeed where Apple has failed, then they are likely to become the subject of a bidding war.
• Blood glucose takes this one step further where a constant measurement within a 15% margin of error is required but where most players think that this accuracy will never be achieved from a wrist-mounted device.
• Two that disagree are Rockley Photonics which has been working with Apple on research in this area and LifePlus which is about to come to market with a device that will measure both metrics.
• I continue to think that this is an area with a lot of promise and one where when / if someone cracks it, a lot of money will be made but it may still be a long wait.