Welcome to the free weekly edition of The Diff! This newsletter goes out to 42,584 readers, up 687 since last week. In this issue:

• The Porsche IPO and Mass Luxury

• Growing Out of an Energy Deficit?

• Subscription Travel

• An ETF For Everything

• He Is More Machine Now Than Man

• Talent

• Diff Jobs

The Porsche IPO and Mass Luxury

Some deals are opportunistic—a big M&A transaction after a crash, or a burst of IPOs when the market is strong. And some deals, particularly bigger ones, have their own internal logic, which can't afford to slow down regardless of what the global economy or the stock market is doing.

If you were trying to time the IPO of a big German sports car company, you’d want to do it any time but now, in the midst of:

• Covid lockdowns in their biggest, fastest-growing market

• A looming energy shortage in Germany, where they make most of their cars

• A weak stock market flowing through to lower luxury demand

• An EV transition Germany under-indexes to

• Rising prices for the raw materials that are essential to that EV transition

And yet, here we are. In a few days, Porsche will be a publicly-traded company, with 911 million shares outstanding, and a market value at the midpoint of its price range of €72bn. Investors in the deal aren't getting voting rights, which will reside with Porsche's parent company, Volkswagen, whose largest shareholder Porsche-Piëch family.¹ It is, at least by US standards, not a very clean governance situation and not a clean spinoff: in addition to the controlling shareholder, Volkswagen also has two board members representing the government of the State of Lower Saxony, which owns about 12% of the business. And Porsche and Volkswagen will retain some shared projects, including R&D and production.

So what's being sold isn't quite a complete company, and it isn't exactly being sold. But it's still a unique asset. Porsche sells cars for an average of €100k apiece, at a time when the global median price of a car is $28k. They're a luxury brand, and they're selling to an affluent audience. Their European customers earn around $376k, their Chinese customers make $484k, and their US customers $600k. (It's a testament to globalization that a) there are so many people in China earning mid-six figures USD, and b) that at 32% of sales, they're the largest end market for a German brand.)

Their premium price point hasn't forced them to be stingy with production. They sold 302k vehicles last year. To put this in perspective it's more than four times the combined sales of Maserati, Aston Martin, Lamborghini, Bentley, Ferrari, McLaren, Rolls Royce, and Bugatti. Within the luxury segment, they're the mass-market brand. Like other high-end brands, though, they have some pricing power. They produced EBITDA of ~$25k/vehicle, compared to ~$135k per car for Ferrari. Earning 18% of the unit profit on 27x the volume has been a good way to approach the business. Stacking them up against the rest of the automotive industry (excluding Tesla, the Universal Outlier in all comp tables), they actually end up quite close to Ferrari in terms of margins—their EBITDA margin excluding financing was 24.5% last year, compared to Ferrari's 30.8%, and compared to most of the rest of the industry in the low teens.

(People who care more than I do about cars and luxury goods may debate whether the company counts as a luxury brand given that, if it does, it's most of the luxury auto market. It is worth noting that they do a "limited edition" release most years. This is a tiny share of their unit volume, 0.2% to 0.4% of sales. But it's evidence that they can engineer some scarcity value for the brand, even if they have sold over a million units of the 911 since 1964.)

The prospectus highlights growth of 8% compounded since 2019. Looking back at their 2011 annual report, from before they merged with Volkswagen, their growth over the subsequent ten years was actually a bit faster: revenue grew 12% annualized, while deliveries grew 10% annualized over the same period. So they've been able to push prices up a little while nearly tripling their sales. Their operating margin deteriorated slightly, from 18.8% a decade ago to 16.0% last year, but it remains healthy.

When a company goes public while it's in the middle of a transition, it always raises the question of why they're not going to wait until there's a clear path forward. Porsche is targeting a 50% EV mix by 2025 and 80% battery EVs by 2030. The Taycan is their flagship electric vehicle, and it was 72% of their unit growth in 2021. And there's an increasing EV mix to the rest of their fleet; the Cayenne, their bestselling vehicle year-to-date, has nine ICE versions and four hybrid ones. Looking at where they're spending as a leading indicator of what they're selling, and the picture is even more electric: 73% of their R&D spending this year was for electric vehicles, up from 40% in 2019.

There are some things that won't translate easily from an internal combustion world to a battery-based one, but brand names certainly do, as does most of the design that's directly experienced by the owner (rather than indirectly viewed when the vehicle does or doesn't fall apart, or that affects what kind of profit margin it produces). In one sense, the cheaper brands have to earn their EV credentials with every new release, while more expensive brands, selling to a more affluent and carbon-obsessed audience, have a bit of leeway. And in a competitive industry, relative position can matter more than absolute position, so if the automotive industry is shifting to a new model, the fact that some competitors won't survive is good news for the ones who probably will.

Which also makes the macro timing of a Porsche IPO more sensible. High-end brands may die during recessions, but they usually don't die because of recessions. The fatal illnesses that they contract have a long incubation period. Brand recognition has momentum over time, and one thing that can keep a brand alive for a while is that going downmarket tends to increase sales first and hurt gross margins later on.

This is something the company is quite aware of. At Volkswagen's investor day earlier this year promoting the deal, they didn't kick off with a discussion of batteries, drivetrains, or new models. They started by talking about brands. Their head of design described it like this: "You buy an entrance ticket, a membership card to a specific community, you become part of a family, you become a tribe member." That can be good or bad; the Groucho Marx principle—“I don't want to belong to any club that would accept me as one of its members.”—can apply. But the product decisions they make actually give them some leeway to admit a few new members. (Which they are in fact doing: 60% of Taycan buyers are first-time Porsche customers.)

The luxury business seems to have a formula: make it exclusive enough and it doesn't need to be all that nice; make it nice enough and it doesn’t have to be all that exclusive. And it’s more satisfying and more sustainable to make it nice than to make it exclusive.

Further reading: The Diff previously covered the auto industry's transition towards EVs and autonomous vehicles ($), and Ferrari got a writeup last month ($).

Share

A Word From Our Sponsors

Tegus is the first port of call for M&A professionals and institutional investors ramping up on an industry or company.

Get access to a database of 35,000+ expert call transcripts, spanning 5+ years, or schedule expert calls through the platform for a fraction of the usual cost.

When thousands of research analysts are pooling their expert calls into an on-demand database, using Tegus is table stakes. It's the leading platform for due diligence and primary research.

See the power of a Tegus subscription, and get up to data parity with your competitors, with a two week free trial through the Diff.

Try Tegus

Elsewhere

Growing Out of an Energy Deficit?

The British Pound reached an all-time low against the dollar last night, before recovering most of its losses. As with plenty of other extreme financial moves, there's a gradually-then-suddenly aspect to it: Britain's competitiveness has been eroding for years, with GDP per hour worked growing more slowly than every G7 country except for Japan ($, Economist). Over the last few months, higher energy prices have further weakened them—energy demand is fairly inelastic, and energy demand from consumers, as opposed to manufacturers, is politically sensitive. The immediate catalyst is the new government's commitment to cutting taxes in the face of high inflation.

One way to look at income taxes is that they're a handbrake on the economy reallocating resources; the lower taxes are, the faster wealth compounds in productive industries relative to the rest, and the faster those industries dominate the economy. This is obviously not costless, but it is at least a low-effort way to achieve economic reforms without ever having to think carefully about what those reforms ought to be. But in an environment where just about every currency is depreciating against the dollar, and the dollar is depreciating against real assets, it's an incredibly risky move to widen a deficit.

Subscription Travel

The NYT has a look at the growth of subscription-based travel services, with pricing ranging from $49/year for Scott's Cheap Flights to $2,500/month for Inspirato. This is part of the general shift towards subscription models profiled in The Diff a few weeks ago: it's a way to capture consumer surplus upfront, make consumption more predictable, and use this combination to offer the same product at a lower marginal cost. The breadth of the price points demonstrates just how effective this can be. It's a decent way to improve the economics of discounted airfare, especially since for those price-sensitive customers any cheap booking they skip feels like a waste of money. And it's also a good way to capture the biggest spenders and ensure that their first choice for a high-end vacation is the one they've already partly paid for.

An ETF For Everything

A cynical but fairly accurate way to think about trading strategies is that some of them sound good, some of them are good, and there isn't necessarily a strong correlation between the two. After all, any strategy that sounds good and is good will soon be exploited, at which point it will sound better than it really is. Whereas things like day-of-the-week anomalies were pretty embarrassing to pitch, but worked for a while. A more elaborate form of that theory will hold that strategies will naturally gravitate into two buckets:

1. The ones that work, whether or not they sound like they should, will be done by people who are getting paid a piece of the upside they generate, either at hedge funds or at proprietary trading firms.²

2. The ones that sound good will become thematic ETFs, and will monetize entirely based on the assets they gather.

This seems to be the case with tracking politicians' trades ($, Economist). There are two upcoming ETFs that follow them, one for Republicans and one for Democrats ("politics" is a lot less marketable than particular flavors of partisanship). But academic research indicates that politicians underperform the market. A good example of this: there was a famous case where a member of Congress made some trades after a dire Covid briefly in February 2020, but one of the trades was buying Citrix, rather than Zoom. Knowing what's going to happen and knowing what trades to make in order to profit from it are two different skills, and someone with the busy day jobs of political fundraising and actual legislating probably doesn't have time to perfect both of them.

He Is More Machine Now Than Man

The Obi-Wan Kenobi series will use an AI-produced version of James Earl Jones' voice to recreate the voice of Darth Vader. Media fragmentation has already created a shortage of globally-recognized celebrities, as more people watch hyper-targeted shows. This will only get more extreme as AI gets better at bringing actors back at the peak of their talents. Maybe the next version of the boom in musicians' back catalogs will be a similar one in the rights to reproduce actors in AI form—meaning that eventually there will be at least a few celebrities who earn the bulk of their box office results after they're dead.

Talent

Fewer than 200 of the 10,000 IIT graduates took jobs outside of India last year, compared to an apparent 80% two decades ago. This is partly a story of new industry clusters and partly a story of location agnosticism: India's local tech industry has grown, and has moved up the value chain from outsourced work to building globally competitive companies. At the same time, it's increasingly possible to do the same work around the world. And organizational techniques that started out as an attempt to manage a business across multiple time zones by moving the most commoditized work to the cheapest labor markets still operate at a time when those labor markets are more expensive and the work is more complex.

Diff Jobs

Companies in the Diff network are looking for talent. If you're interested, please reach out. Some current roles:

• A company giving individual investors access to private equity and other asset classes is looking for multiple positions, including several engineering roles—experience scaling distributed systems is important here, specific languages/platforms less so. (US, remote.)

• A firm that helps crypto businesses stay compliant and helps non-crypto institutions work with emerging financial technologies is looking for data scientists with blockchain experience. (US, remote.)

• A startup systematic hedge fund seeks excellent quantitative developers. (NYC)

• A security company that analyzes crypto projects for software vulnerabilities is looking for someone in DevOps. Pulumi experience a plus. (NYC)

• A company that helps promising early companies find executive talent needs a new researcher. (US, multiple locations)

Find a Role With Diff Jobs

Hire With Diff Jobs