Tesla is an auto business, but at the same time, it’s not. It has grown from that into something else and investors need to look at Tesla not from any single angle, but need to see it as the whole it is. The Spring recently published an article on the potential of Tesla services, and it challenges one to look at Tesla in a different light.
The article points out that Tesla has always been valued from the same perspectives that investors use to value auto businesses. This is great for any normal car company — they build factories, have high upfront expenses, and sell a new car to a customer every 10 years or so. Tesla looks like your typical auto company at a glance, and this is what investors seem to go by. Take a quick look, slap a value on it based on certain metrics, and move along.
I agree with the author of the article, Kevin Rooke, who believes it is “becoming increasingly wrong to value Tesla’s auto business like an auto business.” This is because Tesla is so much more than that. Tesla is also a tech business, an energy business, and is taking a few pages from Apple as it starts to become a services business, which is what the article focuses on.
Your Twitter comments are great btw!
— Elon Musk (@elonmusk) December 7, 2019
Another point the author makes is that most of the time, automakers don’t even know who exactly their customers are. Tesla CEO Elon Musk keeps a close eye on customer feedback on Twitter, often interacting with Tesla owners, investors, and supporters.
The article also highlights that Tesla has a different approach to selling its cars. It has a direct-to-consumer business model, which means there are no dealers. Unlike Ford or other automakers that sell to dealerships once the cars are off the line, Tesla sells to the customers directly.
Regarding services, the article points out that Tesla’s services look a lot like Apple’s. Some quick comparisons include trade-ins, insurance, service centers, Premium connectivity, and Supercharging. This is actually a smart way to bring in recurring revenue. Some may complain about having to pay for something that was once free, such as WiFi, but $10 a month for the internet is likely to cover costs plus a small premium and is not that expensive. Still, an important point is the option is there to make more money on this down the road.
Rooke illustrates how quickly the services could become a core part of Tesla’s business by providing an example: imagine 2 years from now that Tesla has a fleet of 2 million vehicles with $1,000 per vehicle in services revenue per quarter. If Tesla achieves a 10% gross margin on these services, then that is an additional $800 million of profit per year just from these services. Rooke shows other examples as well and also demonstrates just how Tesla can turn its services into those big businesses by comparing what Tesla does with other automakers. You can read more about his thoughts here.
By embracing the services potential with its technology, Tesla is positioning itself to become even more profitable despite what critics, who only see it as a basic auto company, have to say or argue.