A primer on Tesla and why they have a shot at becoming The Most Valuable Company in the World.
June 25, 2021
Hi, I'm Sean
20 years of finance experience and obsessed with high quality results.
Tesla recently released the Model S Plaid, which is a 4-door family sedan that goes 0-60 in less than 2 seconds, making it the fastest production car in the world. It's also one of the safest cars in the world and without a doubt the technologically most advanced car. Here’s a video of it effortlessly cruising by a Porsche and two McLarens at Laguna Seca Raceway.
“Between bouts of awe and car sickness—Sharp Curves Next 22 Miles—the Plaid sometimes had a melancholic effect on me. Man, nothing will ever feel fast again. Every piston-powered brag must now come with an asterisk; every Cars and Coffee, a sacrament of denial.” - Dan Niel test driver and writer for the WallStreetJournal.
At a price tag of close to $150,000, the Plaid is not going to be a top seller, like the Model Y, which Elon Musk expects to be the top selling car in the world within the next couple of years. The Plaid, however, is a symbol and metaphor of Tesla’s technological prowess and engineering dominance; their ability to imagine the future and deliver.
The company is led by a person who is credibly going to be responsible for putting humans on Mars in our lifetimes. Elon Musk’s leadership and vision is unique in that it’s simultaneously wild and proven to be credible. Elon is certainly in the company of Steve Jobs, Walt Disney and Jeff Bezos for building extraordinary companies propelled by inspirational vision. I’ll add Ford in there as well; particularly considering they are the only significant American car company, along with Tesla, to never declare bankruptcy. These companies have and should endure long after their founders.
Musk’s vision is establishing life on Mars and he believes it is absolutely essential to preserving human existence. But not only does he believe this, he takes massive measurable action.
In terms of “Vision” Tesla is too narrowly defined as a car company. In their own 10-K (annual report filed with the SEC) they state “We design, develop, manufacture, sell and lease high-performance fully electric vehicles and energy generation and storage systems, and offer services related to our sustainable energy products.” They further state “Our mission to accelerate the world’s transition to sustainable energy, engineering expertise, vertically integrated business model and focus on user experience differentiate us from other companies.”
This “mission” statement is not window dressing; it is reiterated and perpetually echoed in earnings calls and conversations with Elon. He is intently focused on user experience and environmental sustainability.
There exists undoubtedly a global desire to decrease pollution and carbon footprint from use of fossil fuels and this trend is only accelerating. Even China, often derided for egregiously polluting the environment, has demonstrated of late a position of leadership in driving sustainable and clean energy practices. (No doubt driven in part by their desire to participate in a lucrative likely trillion $ sustainable energy market opportunity).
Tesla has positioned itself since long ago as a company that will participate in the full clean energy ecosystem, from generation through solar, to storage with battery, to use thru transportation and residential and business needs.
So every product that Tesla builds, whether car, solar panel or battery pack, is designed with this holistic philosophy in mind.
Markets and analysts are catching on to this, but it's important to realize that Tesla is much more than a “car” company.
Elon has commented he believes Energy and Storage segment of Tesla will continue to grow faster than automobile for years into the future and could be as large. This segment was about $600m revenue in the quarter ended March 31, 2021 compared to about $300m a year ago; so it doubled. That’s already a 12-month run-rate of over $2 billion.
Solar generation and energy storage is a trillion $’s market and growing.
Battery is the primary cost component and primary driver of vehicle power and mileage range. Battery is therefore arguably the single most important component of the car simply because cost and vehicle range are the primary concerns of consumers.
Energy storage is a tough nut to crack. One of the biggest issues globally with electric power grids is the need to match electricity demand with production. Energy storage fixes that problem. Our current electrical grids don’t “store” energy, it just runs around inefficiently either being used or dissipating. Tesla appears to be at the forefront of solving this problem and building the capacity to address it.
Debate over who has the “best” battery technology seems ongoing, but consider the following:
Yes, GM, Ford, Volkswagen and others are announcing plans to ramp up battery capacity; but the point is Tesla already has and is ramping further. They are literally years ahead in the technology race and know-how. It's simply hard to imagine - not impossible - but hard to envision how these competitors will compete at scale with a company that has been at scale for so long and was built to be an electric car company from the ground up.
Consider this: Ford announces a joint venture to produce 60 GWh annually and expects to need 240 GWh globally in 2030. In November 2020 Elon made comments about battery capacity in Berlin alone: “It will be capable of over 100 GWh per year and possibly over time, it will be going over 200 to 250 GWh.” In summary, Tesla is saying it’s Berlin factory alone (i.e. not considering Giga Nevada, Texas or Shanghai) is likely in a few years going to produce more than Ford expects to need in 2030. Let that sink in!
Elon talks a lot about how manufacturing is complicated, under-rated and will be their key competitive advantage in the future. As he likes to say they build the machines that build the machines that build the parts.
It is important to note, as Elon has alluded to on investor calls, that most electric vehicle startups (Nikola comes to mind) are simply designing an original looking car “body” and then buying parts and assembling them. Tesla starts with what is the ideal end state; then asks “ok, how do we build that?”. And to most the answer is completely impractical, inefficient and cost-ineffective.
Logically speaking, why are virtually all cars today assembled from 1000’s of metal parts? Theoretically, with the exception of parts that move (wheels, shocks, steering, seats, etc…) the car should be one piece of metal. It would be safer (stronger) and easier to assemble. That’s where Tesla is moving. The picture below says 1000 words (or 70 words). The analogy management deploys is that of a match box car: just one piece of die-cast metal would be ideal.
Tesla has demonstrated the ability to move at lightning speed in their build and deployment of Gigafactory Shanghai built and producing Model 3’s in 10 months. They are building factories from the ground up that are first and foremost designed to build parts for electric cars and assemble electric cars. Most - if not all - other car manufacturers are retrofitting pre-existing lines that are simply not optimized for EV manufacturing.
In 2020 Tesla broke ground on Giga Berlin and Giga Texas; and both seem to be moving at light-speed and should be manufacturing by late 2021.
Tesla is a technology company that builds cars; like Apple building computers. Nobody marries hardware and software so beautifully as Tesla and Apple.
I’m just going to lift some script from one of the best recent articles on software in the car from Christopher Mims of the WallStreetJournal.
“Today’s most complicated automobiles have up to 200 computers in them, just smart enough to do their jobs controlling everything from the engine and automatic braking system to the air conditioner and in-dash entertainment, says Johannes Deichmann, a partner at McKinsey whose expertise is software and electronics in automobiles. These computers, made by an assortment of suppliers, tend to run proprietary software, making them largely inaccessible even to the auto maker”.
“Since the first Model S, Tesla pioneered replacing hundreds of small computers with a handful of bigger, more powerful ones, says Jan Becker, chief executive of Apex.ai, a Palo Alto-based automotive-software startup. Systems that used to require dedicated microchips now run in separate software modules instead.This is why Tesla can add new capabilities to its vehicles through over-the-air updates, he adds.”
The above concepts are paramount because unlike other auto manufacturers, Tesla does not have 200 separate computers or microchips running proprietary software: They have ONE software. Tesla Software. They control the entire system from car performance to user experience. They take complete ownership of the car’s electronics.
It is also for this reason that Tesla is arguably the least affected auto-manufacturer from the semiconductor chip shortage. They have a hand in the design of all the chips used in the car and they procure those chips directly from key suppliers. And finally, it is why they can simply push software and firmware updates seamlessly through the air to your car to fix bugs and improve performance.
This will resonate for gamers. Elon said during the Plaid unveil: “There’s never been a car that has state of the art computing technology, state of the art infotainment where this is literally at the level of a PlayStation 5...This is actual PlayStation 5-level performance… yes it can run Cyberpunk. It’s high frame rate, it will do 60fps with state of the art games.”
On a recent earnings call Elon stated that he believes Tesla may have the most advanced AI team on the planet. It is indisputable that they have the most data and growing with millions of cars providing real-time data and feeding their neural network AI machine.
Andrej Karpathy, Sr. Director of AI at Tesla recently gave a presentation about what they are working on; it's about 30 minutes but well worth it. Below is a picture of Tesla’s inhouse supercomputer, which Karpathy said “might be the 5th most powerful supercomputer in the world”.
I’d like to see GM or Ford’s supercomputer.
Tesla has ditched radar and lidar in favor of relying on high definition cameras to enable FSD. Many are skeptical about this approach and Elon responded:
It will prove very difficult for “car” companies to become technology companies. Traditional car manufacturers tout that they are hiring 1000’s of software engineers, but they will and are having trouble attracting top talent for a few reasons. (1) Top talent always wants to work with other top talent on the cutting edge and Tesla owns that space by a long-shot. (2) Traditional Tech companies - particularly in Silicon Valley - pay relatively high salaries that traditional car manufacturers will find difficult to match. (3) Software development requires a certain DNA built into company culture; hard for traditional auto to change DNA.
FSD with AI will be solved. Not IF, but WHEN. It is a complete game changer and it's very difficult to envision any other “car” company catching Tesla soon. Maybe a company like Alphabet’s Waymo will develop and license to traditional auto. FWIW, Elon has stated that he’s not opposed to licensing their AI either.
Assuming Tesla is sincere in their intention to introduce robo-taxis in the future, then the introduction of ride-hailing (i.e. Uber/Lyft like service) is a natural first progression to autonomous taxis that could be launched now. They would need to build an app for users and an interface for the driver in the car (think today an Uber driver uses their phone, but the driver’s-side tech would simply be part of the car’s interface). They would need to build algorithms to match drivers, riders and routes. Given the technology they already have in place this is not an overly difficult endeavor.
Finally and most importantly; launching “Tesla Ride-Hail” would likely create tremendous incremental value:
This is dependent on operationally effective FSD, but it has the potential to be an orders of magnitude material incremental revenue driver. The market or TAM is difficult to measure because it doesn’t exist yet, but without the human cost element of driving, a robo-taxi service would be much cheaper the Uber/Lyft offerings and would likely see mass adoption: Adoption from users and adoption from car owners as a means of incremental income (i.e. you would buy Tesla and lend it out to FSD when not in use).
This sounds too futuristic for many people to wrap their heads around; but it's arrival is inevitable. The “when” and “who” are debatable.
Addressing the “who” no company is gathering the troves of data Tesla is. They literally have millions of cars on the road gathering data. Waymo is a division of Alphabet and they’re clearly working on this endeavor as well, but it's hard to imagine how they can catch up to Tesla.
Tesla is the market leader here and the first to market will realize significant network advantages as more and more users adopt and their AI and neural network gets smarter and safer.
This is one of the biggest markets ripe for disruption and least talked about. When we talk about cars, myriad consumer tastes and preferences enter the equation. Commercial trucking? Cost per mile. If Tesla can deliver on their promises to deliver a solution that significantly reduces cost per mile transportation of commercial goods; Tesla will have another multi-billion dollar product line.
AND if they can do this with self-driving it will be near impossible for copy-cat EV Semi producers to match their cost per mile. Game changer.
Elon has mentioned in the past and brought up the idea/concept again during Tesla’s Q1 2021 earnings call that the energy needs of the entire United States could be satisfied with a 100x100 mile solar panel array.
Simply put, the point here is Solar Panel could be the sustainable energy panacea we’re looking for. It won’t be a 100x100 mile grid, but it will take the form of residential and commercial use, as well as commercial power production. One could argue Tesla has a lot of competition in this space and that is true, but they are also right in the middle of it and building it into their eco-system.
The Megapack and Powerpack are simply Tesla’s solution to energy storage at commercial scale.
Given Tesla’s technical prowess and troves of information on each car, geography and user driving behavior they will be able to price insurance more effectively than any insurer. Information really is power here. Tesla will offer lower rates and still be able to extract attractive profits.
Further insurance will/is simply sold with the car; will just be another box you check on your way to checking out. It’s estimated that US auto insurance is a $50 billion market.
Tesla has discussed on earnings calls that they made material technological advances to the automobile HVAC system when developing the Model 3; specifically they referenced being one of the only electric cars to utilize heat-pump technology. Heat pump technology, as opposed to pure AC or Heating, is significantly more efficient. So, this is a logical place for Tesla to invest R&D because air conditioning and heating are electrical power drains.
They also frequently high-light their advanced HEPA filtration systems (Covid provided a natural pathway to that conversation). Elon recently tweeted (June 15, 2021) that he believes the Tesla air purification system is literally 10X better than any other car. In the same series of tweets he specifically mentioned (a) firmware updates to the Tesla cars HVAC and (b) the concept they could/would scale up HVAC for home use.
Home HVAC is a logical and conceivable next step for Tesla. It makes sense because home HVAC suppliers don’t inherently seem like they’re innovating at a rate or urgency Tesla needs to. I’m pretty sure they aren’t providing “firmware” updates to home HVAC systems. So imagine, along with the solar panels and power pack, now Tesla offers an integrated HVAC; i.e. Tesla cooling, heating and air filtration systems for the home. The brand Halo alone would drive sales.
Tesla’s has over 25,000 Supercharger stations throughout the world and is aggressively expanding. Superchargers allow you to recharge up to 200 miles in 15 minutes. The reality is this is going to be more than enough for most people. Further, Tesla is rumored to be adding restaurants and entertainment to the supercharger experience. With range anxiety being a significant impediment for many to transition to EV this is obviously a huge first mover advantage for Tesla. On a related note Tesla recently announced its longest EV charging route in China of 5000 kilometers.
Have you heard of Ford, Chevrolet or Toyota supercharger stations? Ever seen one?
This is an area that simply feels intuitively advantageous.
A big drag on Tesla stock are bears or naysayers prognosticating storms of competition crowding the EV space.
Tesla was founded in 2003 and has largely been thought of as a niche EV manufacturer until the market and as a result the incumbents (Ford, GM, Toyota, Volkswagen, Etc.) took notice when Tesla’s stock price increased more than 10x from late 2019 into 2020; eventually assuming a market value worth more than all traditional car manufacturers combined. Using the terms of the Innovator's Dilemma (a great book by Harvard professor Clayton Christensen), Tesla is accelerating up the S-curve so quickly now that it will be difficult for others to catch them.
Incumbent auto manufacturers not only must overcome technological innovation issues, but to do so, among other things, must realign their corporate culture and strategy. Changing corporate culture is turning the Titanic (not even a strong enough analogy); they have employees, processes, physical infrastructure and culture that have been entrenched for decades. It’s not an impossible task, but of monumental difficulty.
The traditional “dealership” model is a financial drag on traditional auto-makers. From a simple profitability standpoint we can think of this as simply a transfer of profit margin to a middle-man.
From a consumer perspective; it's fair to say the experience of buying a car for most is terrible: the haggling, the negotiating, the upsells, the financing.
The Tesla purchasing experience is straight-forward. Order the car on line, and it is delivered to your house or a place near. Everything is straight-forward, transparent and practical. You can customize it. You can buy it or finance it.
The Dealership model is essentially a racket that traditional auto manufacturers will live with for years.
As mentioned earlier, Apple is the only other company - in my opinion - that has been so successful combining hardware and software in a consumer application. Apple may be the only company with DNA to compete with Tesla. Not only does Apple have hardware, software and aesthetic design expertise, but they are masters of managing supply chain. One could argue the future of cars is just a big phone on wheels with a seat. They also have the capital to make a push. It's interesting to talk about Apple, but they simply can’t be a threat for at least 5+ years.
No, Netflix won’t push into the automotive space (save from a content on screen standpoint). But some have analogized Tesla to Netflix and GM/Ford to legacy media, like NBC/Peacock or Disney, noting that Disney has seen early success. This is far from a perfect analogy. First I’d say the jury is still out on Disney’s streaming success, but they’ll likely be a long-term survivor. The analogy however is flawed. In entertainment, I’m sure you’ve heard “content is king”. Well Disney has the content. They need to catch Netflix on the tech side, but unfortunately for Netflix their technology is not a meaningful long-term differentiator (I’m sure some would debate me on this). On the other hand, for cars, I believe tech is the future and legacy auto-makers have never done tech well. A better analogy might involve digital still pictures to developing film.
Tesla is here for the very long term and will see double digit revenue growth for years to come. Nobody can stop this flywheel Elon created.