While this letter was being prepared for publication, Elon Musk released the news that he decided not to follow through on his idea of taking Tesla private. That news made the goal of this letter obsolete. But the arguments in it are as valid today as they were yesterday, making it still worthy of publication.
Dear Mrs. Catherine Wood,
As a member of the CleanTechnica staff, an online publication about a better future, I write to you to express our opinion and the opinions of many of our readers.
Many of our readers and commenters, who are also retail investors in Tesla, have extensively discussed the pros and cons of Tesla going private. Aside from whether they could keep their investments or what liquidity would be, the most heard opinion was that they would support Elon in going private.
You distinguish yourself from other analysts by looking at a 5 year horizon, and not only the next 1, 2, or even 3 quarters, which is more common on Wall Street. We think that is the only legitimate way to value a company like Tesla. Looking at long-term development and profitability is the best way to invest in winners, as opposed to speculating who this week’s top performer will be. It is what my father taught me is the difference between investors and speculators. For me, it explains the success of the funds you manage.
For the benefit of our readers, we have developed a simple financial model of Tesla for the next 10 quarters. To enable them to validate for themselves the likelihood of the many, contradictory predictions that are thrown into the discussion on a daily basis.
To evaluate your 5 year view, a special “Long Range” version for that time period is developed. We found about the same automotive revenue in our model as you show in your overview at the bottom of your letter.
But there stops the similarity. We did not model Mobility as a Service (MaaS) because it looks like a very big question mark. MaaS can become a huge commercial success; it can also become a niche activity. Tony Seba predicts it with an irrefutable logic. As strong as the logic Carlos Ghosn used to predict the market penetration of the Nissan Leaf would be half a million per year in 2014. Similar to the revenue the internet would generate before and resulting in the dot com bubble. (The expected internet revenue was larger than the total budget of the consumers. And the consumers kept eating, paying their rent or mortgages, and visiting brick and mortar stores. There was just not enough money for the expected internet revenue.)
Predicting future behavior is difficult. The transition from gasoline to electricity is a relatively safe prediction. There are no fundamental changes in behavior and there are clear financial and usability advantages from electric vehicles. This transition will follow the classic S-curve, like Tony Seba so nicely illustrates with the demise of the horse and buggy a century ago.
Predicting the future for MaaS is different. It requires a large shift in behavior and preferences. I know my preferences will not shift to replacing my car with MaaS. Where I live, special taxi transport for the elderly is nearly free. Those who can still drive prefer to drive their own car, even if it is an order of magnitude more expensive than using a taxi. The (un)willingness to use such services creates a large uncertainty in the future volume of MaaS in my mind.
Another simple economic consideration is the margin on MaaS activities. NEVS (formerly SAAB) has large tentative orders in China for hundreds of thousands ridesharing/autonomous cars. Waymo intends to acquire 20,000 Jaguar I-PACE SUVs and 62,000 Chrysler Pacifica vans as a starter. GM’s Cruise is building its own fleet of driverless Bolts. A margin of 80% is only possible when you have a virtual monopoly, and when you can keep all the competitors that are attracted to that margin at bay. With these competitors gearing up even before Tesla enters the arena, that is an illusion. Even if MaaS gets the love of the public that many people expect, it will be a high-volume, low-profit business.
What is much less of a question mark is the energy storage systems (ESS) business unit, part of Tesla Energy. Elon and JB talk about it becoming as large as automotive. I modeled it as only half the size. That is still a very big profitable company.
Another thing our Long Range model makes clear is that, in five years, the growth of Tesla will likely become massive. With the Tesla Pickup and a $25,000 mass-market model arising, the S3XY line getting into high-volume production, and those energy products adding their revenue, Tesla is on its way to reaching the size that Toyota and Volkswagen AG are today in 2025.
For this to happen, Tesla has to preserve its brand of being the coolest kid on the block, and its reputation of engineering excellence and unsurpassed quality. The barrage of articles in the normal financial press — like CNBC, Reuters, Bloomberg, Forbes, and others — follow templates such as:
Tesla / Elon says the company is producing X cars, but we don’t believe it.
Tesla / Elon says the company has demand for more Model S and X, but we don’t believe that.
Tesla / Elon says the company has no cash problem, but we don’t believe it.
Tesla / Elon says the company’s cars are safe, but we don’t believe they are.
Elon says ……, but we don’t believe him.
Such storylines have been rapidly increasing the past few months.
Beside these, we have the “cash burn” and “can’t pay the bills” articles of financial analysts, questioning whether Tesla has enough cash on hand to reach the end of the current quarter.
It has reached a level that people who don’t know what electric cars are react to Tesla with: “Oh, that is the company with that CEO who is worse than Trump on twitter, and all those broken cars.” That was a random comment on Dutch TV.
And the thought that this will stop when Tesla becomes profitable is wrong. Every professional analyst should know that the current quarter is within spitting distance of break-even point (Deepak can show a profit) and all foreseeable quarters after this are profitable. The threat of Tesla becoming profitable has generated only a giant eruption of negative press.
The doubt whether Tesla will exist next year has become one of the main arguments not to buy a Tesla product.
There is the argument that the transparency and public scrutiny made possible by the mandatory quarterly reports helps the performance of the company. After the IPO, Tesla had to reduce its transparency. The financial analysts and press were not willing to judge Tesla’s results on its own merits. They did not want to take into account that Tesla did its own retail and used the “Build to Order” sales model while the rest of the industry was “Build to Stock.” The analysts had their templates for automotive companies, and it was up to Tesla to produce numbers that fit positively into those templates. Tesla tried hard to comply, but their numbers will never fit into a template designed for a different business model.
Sooner or later, this conflict must result in something like the famous incident of the Q1 conference call. How often is a CEO called a liar when explaining the expected financial development for the rest of the year? That is what happened right before Elon was “not polite.” Not willing to engage in a discussion about his supposed lies was called not answering legitimate questions. How many news outlets covered that simple yet absurd point?
That was also the conference call where Tesla invited an independent analyst on who uses YouTube to communicate with his public. The Wall Street elites were aghast that someone like him was invited into what they considered their exclusive gathering. But this was the analyst asking the most pertinent questions concerning the company’s mission and the progress Tesla is making on its various projects. For the long-term investors who are focused on the transition to renewable energy and the result we’ve forecasted for 2024, this is the scrutiny we expect the press and analysts apply to Tesla. These are the questions we want asked and answered.
In short, being a publicly traded company has become a liability for Tesla. The simple solution is going private.
The simple solution is complex, as we know too well, because Elon Musk feels honor bound to keep the investors onboard that led to the current success (reaching profitability with a mass-market car is a huge success). It would require all the creativity of investment experts to devise “Special Purpose Vehicles” that would make keeping them onboard possible, that would allow employees and small retail investors can keep their stakes in the company.
Please don’t only look at what a great stock Tesla is to have on the market. Look also at what is best for Tesla, its employees, its customers, its suppliers, and the many small shareholders for whom the mission is more important than their share value.
For the whole team at CleanTechnica,