This article is the first part of a two-part series on Tesla and its vehicles. This piece involves a thorough examination of exactly what kind of business Tesla is, and how it fits into the broader market segments it serves. The second part, coming tomorrow, covers the author’s personal experience with Tesla vehicles and how those vehicles compare to others on the market today and tomorrow.
by L.W. Ruff
- Car Company?
- Solar Company?
- Battery Company?
- Software Company?
- Energy Storage Company?
When Tesla came into being as “Tesla Motors,” its founders understood that advances in battery energy storage (density) meant that electric cars didn’t have to remain silly gimmicks. They recognized that electric cars could not only achieve functional parity with internal combustion engine cars, but could handily surpass them because auto transportation could be provided without the expenses of engine maintenance and pollution, and with fantastic performance. Obviously, they were correct, but Tesla only reached automobile mass manufacturer status in 2018. But, is Tesla a car company?
Few people would identify Tesla as a solar company. There was initial excitement when Tesla acquired SolarCity, but at present, the solar part of Tesla’s business appears to be DOA. It is probable that Tesla will revive this part of the business with sound product offerings, possibly soon. But, is Tesla a solar company?
Some have made a strong argument that Tesla is in fact a battery company. This perspective has merit given Tesla’s lead in battery power density, longevity, and production capacity. Tesla makes more car and stationary storage batteries than all of the companies in the rest of the world combined. But, is Tesla really a battery company?
Given Tesla’s lead in its ability to issue software updates to cars over the air, the solid performance of its automotive software, its in-house hardware architecture, and its evolving self-driving technology, who could be faulted for citing Tesla as a software company? But, is Tesla a software company?
The performance success on the stationary storage battery system Tesla sold to Australia has many electric generating companies saying that market for new gas peaking plants is all but dead. The projected demand for stationary storage is astronomical. But, is Tesla an energy storage company?
Tesla is all of the above, none of the above, and much more at the same time. It defies conventional wisdom because it doesn’t fit traditional models. Taken individually in a capital market environment, Tesla is just one fish in a pond on five fronts. By now, other fish should have one-upped Tesla in one or more of their areas, but this has yet to happen.
Tesla is proving to be the most polarizing stock in history. The high value of Tesla stock compared to earnings appears irrational from a traditional model standpoint. In recent years, Tesla has been valued on its perceived potential, as opposed to fundamental valuation formulas. This fact makes conventional thinkers crazy to the point where many have sold the stock short at high volumes, and have been so frustrated by the stock’s resilience that they’ve committed malicious acts in an effort to hurt the company. Others see the potential for success and invest on the bet that Tesla is a different kind of company, one that will have almost unimaginable success. But back to the question — what is Tesla?
Tesla today is an engineering innovation company, with the lofty mission of transitioning the world to sustainable energy. Because of the genuine significance of its mission, it has generated excitement across multiple engineering and software fields, and beyond. This has served to attract the best and brightest people. Just because engineers tend to be introverted does not mean that they don’t want their work to mean something. In fact, every engineer worth their salt at Tesla exemplifies an attribute of human nature that is rarely tapped. These people, like their CEO, are absolutely driven, and relentless. These attributes are evident in their products, which when offered publicly are second to none when measured for aspects of safety, technology, and value. The company’s rate of progression, in all areas where they focus their talents, leaves their competitors bewildered. Few people understand that this “cult” at Tesla is a primer for the collaborative abilities of humankind. Imagine what humanity will accomplish when this methodology of business management replaces the stodgy and dated corporate cultures that currently dominate business. What manner of persons would actively seek to damage this methodology of business building that leverages the success of humanity in such a profound way? The answer is simple: ignorant bystanders, vandals, and the street punks of Wall Street.
Conventional wisdom pushes the idea that Tesla should be benchmarked against automotive companies. This activity is visible across the investment segment and has generated hotly divisive arguments. But because Tesla is not actually an automotive company, how should it be benchmarked?
Tesla is best benchmarked against other multi-billion-dollar innovation companies that have disrupted markets and risen into the lead of their respective industries by a wide margin. Benchmark Tesla with these types, but only those that are advancing at a much greater rate than their competition. Benchmark it against others that also attract top talent, people on a mission. Benchmark it with companies that have achieved what was said to be impossible. Benchmark it with companies that are iterating their technology so quickly that their decision-making presents as amateurish when viewed externally. Currently, the only company that can be benchmarked with Tesla is SpaceX. Go figure.
Success Extinction Committee? (SEC)
One problem that frequently surfaces with innovation is friction, not only with conventional thinkers, but also with bureaucracy. This is seldom a problem in communistic societies where progress is throttled, and individuals who seek to advance faster than the state are silenced, or worse. It is seldom a problem in capitalistic societies when progress is incremental and predictable. While the United States remains the best place on earth to innovate en masse, even here frictions are generated when innovators move faster than the regulatory organizations that are intended to protect the public et al.
Throughout U.S. history, individuals who have successfully, or nearly successfully, disrupted entrenched industries were more often than not treated as pariahs or villains at some point in their careers. While much of this is recognizable as human nature, it is greatly blown out of proportion when bureaucracies, whose basis was established in a bygone era, or with an irrational beneficent hand, attempt to assert control using outdated or wrongly applied methodologies. Regulators, when faced with innovation, need to gauge intent, and watch for aberration when innovative conditions do not fit traditional models. In the case of Elon Musk, regulators have it easy, given his lengthy track record of innovation and methods of communication. There is no irony in observing that Tesla has largely taken on the MO of its leader. Therefore, it should come as no surprise to regulators that Musk, as Tesla’s leader, is likely to communicate in a manner equal to the mind-boggling rate of change that his companies iterate.
What form of public protection is gained by bullying innovators who, as evidenced by the history of their track records, have introduced technologies that have served to promote the general welfare of the people of the United States, and the world in the case of Musk, by distinct and measurable proportions? If that person were to suddenly display aberrant behaviors, such as seeking personal gain at the expense of the public good, then certainly, regulatory oversight would be in order. In other words, if Musk had abruptly sold stock he owns, or had advised others to do so in the now infamous “420” case, then the SEC would be justified in applying sanctions or prosecution. This case is not unlike: “The Seen, and the Unseen.” Maybe the SEC is seeing only the obvious, maybe it is woefully out of balance and blind to the emerged destructive capacity of malicious actors on the other end of the spectrum (a.k.a. short sellers).
Where is the measured response and protection of the public interest when speculative and false stories are written that do damage to an entity whose mission serves the public interest? One could argue that the apparent incapacity of the SEC to evolve to meet the challenges of emergent agency threatens to cause net harm to the public interest. If the SEC has in one hand litigated tried and true methods for prosecuting group A, but has no established capacity to prosecute opposing group B, then it is enabling group B to harm group A.
How do we identify when a regulatory body becomes an accessory to criminal activity? Turning a blind eye to an emergent threat seldom ends well for the public. It’s not a stretch to see how someone like Musk, sleep deprived in part by the constant barrage of malicious actors (who currently enjoy the title of “short sellers”) can be driven to frustration when the SEC appears to lack the ability to balance the equation.
Tesla and SpaceX are the evolving basis for successful businesses of the future, so the SEC needs to shift to constantly reinventing itself before it does real destruction. It is in the in interest of the general welfare of the United States to maintain its innovative edge. Regulatory bodies must gear up to move in tandem with progress. The SEC should be mopping up street punks, not stifling innovation.
Is it any wonder that Musk sought to take Tesla private? SpaceX is private — just look at the pace of its innovation and lack of controversy around the firm. C’mon, SEC, make an effort to be part of the solution and lead — you have the talent!
The S Curve — Tesla Style
Tesla’s whipsaw changes to pricing, model availability, and programs give it the appearance of a moody teenager to even the staunchest supporters. Why would a company state “The $35,000 Model 3 will be available in 2–4 weeks if you order now” only to change that timeframe to 6 to 8 weeks just two weeks later, and then completely remove it from the website a month later? Perhaps Tesla did it because it is constantly adjusting to real-time data.
Every announcement that Tesla makes generates global headlines. For a company that doesn’t advertise, it’s the ultimate use of free advertising. Sometimes announcements coincide with external factors to generate increased or decreased demand. The S curve is a proven behavior trend for the adoption of new technologies. In the early stages, the S curve will move in fits and starts. Tesla is singlehandedly flipping conventional wisdom on automotive transportation, software, energy storage, battery production, and solar home energy generation and storage, in ways that few can presently conceive of.
It’s possible that the delivery delay for the $35,000 Model 3 had to do with shifting demand. Publication of the $35,000 Model 3, along with announcement of the Model Y, had the effect of a mass market advertising campaign. What is not well recognized is that Tesla is supply constrained — on battery production. It would be foolish to generate demand too far past its ability to supply. Its present task, from a corporate management perspective, is to match demand to its ability to produce. This is no easy problem. Given the scale and risk, I would challenge anyone who thinks that they’re a genius to jump in and perfectly and successfully manage this transition. Your challenge is: if you fail, you kill your company. In this light, it’s much easier to have respect for Tesla’s board. Elon Musk is a brand, and make no mistake, enigmatic or not, Elon Musk is also a tool of the board. Tweets move the brand, and precise movement of the brand is critical for success. Get it, SEC?
An innovation company like Tesla improves efficiency by wisely allocating capital to R&D, expansion, and production cost reduction. Every higher margin vehicle feeds this synergistic process. Flexibility is paramount to Tesla’s success. What appears to be inexperience or stupidity to outside observers is most likely fast flexing to maximize profitability while maintaining innovation agility and rapid expansion. Tesla does this because it is in the company’s DNA. This is not a car company, it’s a fast-moving, rapidly iterating, engineering innovation company that makes things. Just because its main focus is producing cars today doesn’t limit it from producing other products and services. In the spaces that it chooses to produce, its offers are generational improvements over existing technology.
Tesla is a generational intellectual dragon. Mythical as that sounds, this tends to explain its inexplicability.
Aftermarket – In the Pipeline
Take the example of the popular Ford Mustang and look at the aftermarket and customizations business for that car. It took Ford 54 years to produce 10 million Mustangs with multiple platform/body/engine design changes that make the range of aftermarket products quite complicated.
The Model 3 could hit the 10 million mark in about 10 years using a single platform. With that kind of volume, and observing its inherent structural integrity, it could become the most upgraded and customized car in history. Consider these three points:
- The Model 3 is so well built that it’s reasonable to conclude that it will still perform like new even with a half-million miles on it.
- Tesla might consider open sourcing cosmetic designs that could alter the look of the car. A sort of “Tesla Premium Customs” that would allow buyers to configure the style of their car based on popular templates.
- Cottage industries could spring up allowing DIY folks to utilize used Tesla batteries for home energy storage. Figure that a well used 75 kWh Model 3 battery retains 80% charge capacity. This results in 60 kW of storage capacity for home energy. Current commercial prices for this capacity for home storage are around $18,000. Even figuring a cost drop of 50% by 2025, a used Tesla battery could be worth $4,000 to $6,000. Note that Tesla sells the Powerwall 2, rated for 13.5 kWh, for $6,700.
Modeling Tesla’s Stock Price
Because Tesla is not a car company, a different model of valuation could be used to predict where Tesla’s valuation may go. A simple model, purely speculative, that looks at all areas of Tesla’s business using three metrics.
- Projected growth for each product/service
- Gross profit margin for each product/service
- Sentiment Earnings Multiple (SEM)
With these, Implied Valuations (IV) and Conventional Valuations (CV) can be forward and backward projected. Keep in mind that the numbers do not account for initial facility buildout, equipment costs, R&D, expansions, and one-time charges. The conventional value can be viewed as where Tesla would land if it was to suddenly stop being Tesla (stop innovating and expanding) and was run like a conventional (dead) company. Using static costs, the model produces the following end-of-year values:
What is mind-blowing about the model, is that Tesla could end up significantly undervalued. This is attributed to its speed of innovation, which may continue to catch everyone off guard. By 2025, Tesla may have revenue of $1.4 trillion, with profit of about $105 billion. At a 16× multiple for earnings, the conventional value would be $9,833 per share. In the latest round of funding in May of 2019, Elon Musk purchased another $25 million worth of Tesla stock. Why would he do that?
Again, this article is the first part of a two-part series on Tesla and its vehicles. The second part, coming tomorrow, covers the author’s personal experience with Tesla vehicles and how those vehicles compare to others on the market today and tomorrow.
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