What is Tesla really worth?
Throughout my analysis, I have compared Tesla Model 3 to iPhone, Tesla to Apple, and Elon Musk to Steve Jobs. I am interested in the question: can Tesla become as successful as Apple, and can Tesla cars turn into a franchise like the iPhone, taking the share of the electric vehicle (EV) market from 0% to 10% and up to 30% of the ICE car market (engine internal combustion)?
Tesla has many advantages. Tesla is not burdened with assets from a previous technological reality (gasoline cars). Tesla is incredibly focused. Going back to our analogy with the Cortes, he has no “boats waiting for him” (no escape route). If this electrical thing doesn’t work, what has already been done; there is no plan – B. Tesla’s vertical integration can work in the company’s favor as it competes with companies that have to rely on their suppliers and their dirty alliances.
Tesla’s approach to innovation will keep it ahead of the competition. Despite zero advertising budget – its advertising department is a one-man army – Elon Musk, with 27 million Twitter followers – Tesla has one of the world’s most iconic brands. It is run by a tireless founder who is willing to work a hundred hours a week and stay overnight in the factory when needed. Tesla is several years ahead of the competition in battery development (I’m not 100% sure of its exclusivity) and software. And then there is a car autopilot (with data from 1 billion miles of testing) that can give Tesla a leadership, it will be difficult to replicate its brothers with an internal combustion engine and even Google.
The company’s competitors, despite their strengths, also have weaknesses in that they are profitable dividend-paying companies and therefore have lower resistance to sustained losses (see discussion of Walmart and Nokia in Part 7).
But Is Tesla Another Apple?
During the first few years of its existence, the iPhone vastly outperformed any other phone on the market. Today, Android smartphones are often cheaper and may have better features than iPhones. However, through software differentiation (the iPhone runs its own operating system) and the creation of an ecosystem (iMessage, Facetime, and Apple Music, which only work on iPhones and other Apple devices and work incredibly well with each other), Apple was able to create for users, the cost of a brand change that forces iPhone users to update every two or three years to new iPhones.
Like other automakers, Tesla does not have a brand or ecosystem change cost system for customers that ties users to Tesla. Yes, there is brand loyalty for some customers, but most car buyers only need one commercial or one test drive to switch to a competitor’s product. Will this behavior change in the new technological reality of electric vehicles (EV)? The awesome feel you get when driving an electric car, the thrust you get from instant torque won’t be a unique advantage for Tesla.
The answer to the question we’re asking depends largely not on Tesla, but on the ability of ICE carmakers to switch to new EV technology.
Tesla bears claim that ICE carmakers will jump in the dozen into electric vehicle (EV) production over the next few years. So far, the reviews I’ve read about electric vehicles (EVs) made by traditional carmakers have been favorable, but the software interface still looks and feels just like Nokia trying to fix its Symbian operating system on a smartphone.
Just as the iPhone initially did not compete with other smartphones, but was really against obsolete phones, Tesla does not compete with new electric cars, but competes with the 86 million ICE cars sold worldwide today. If Tesla survives in the short term and becomes profitable, then I can see the way the company could start producing several million cars a year.
I can tell you one thing: just like you cannot go back to a regular phone, once you get used to using a smartphone, I will never buy an ICE car again. I drove my wife’s petrol car (my pre-Tesla car) a few days ago and I was shocked at how slow and unresponsive it was. But will my next electric car be Tesla? Today I think so, but will it be so tomorrow? Not sure.
Now let’s find out how much Tesla costs
Will Tesla semi-autonomous trucks or fully self-driving cars see the light of day within the next five years? I don’t know, but at that moment it won’t matter. Let’s say Tesla sells its average car for $ 40,000. Today the average car in the US sells for $ 38,000, but with Tesla there is fuel economy and less (or no) maintenance, so I give Tesla a $ 2,000 advantage. In fact, Tesla sells for $ 50,000 on average today.
Let’s say Tesla sells 2 million vehicles a year (half in the US and half in the rest of the world). GM and Toyota each sell just under 10 million vehicles, so Tesla will capture 5% of the US market and just over 1% of the rest of the global market.
If Tesla makes $ 8,000 per car, that’s 20% of the gross margin. Today it stands at 18%, although this figure is subsidized through environmental tax incentives. Toyota and GM are at 18% or so. Elon Musk’s goal is 25% of gross profit. (He is counting on Tesla’s ability to sell a fully self-driving electric vehicle that has 100% gross margins and is generating costs with little revenue today.)
Now let’s assume that all of Tesla’s other spending – research, general costs, interest, and everything else – is $ 8 billion a year (less than $ 7 billion today). Based on the above assumptions, Tesla will generate $ 8 billion in pre-tax profit.At 10x pre-tax profit, its market capitalization will be $ 80 billion, double the current $ 40 billion.
Neither bears nor bulls will like the previous math excursion. The Bears are probably arguing that Tesla won’t be able to get up to 2 million cars a year (because it will be sunk by debt and losses from SolarCity), and if it does, it won’t be able to reach 20% profit. The bulls will argue that the above assumptions are too conservative – if Tesla can make 2 million cars, it could make 5 million.
And while the bulls and bears argue, I’m fascinated by how my thoughts about Tesla and the ICE carmakers have changed since I spent several hundred hours analyzing the industry. I don’t know how likely to bet on this, but I see how Tesla can succeed if it reaches its “space speed” and starts generating cash flows.
This article is part 11 of a review of the 11-part series Tesla, Elon Musk and the Electric Vehicle (EV) Revolution.
All parts: part 1, part 2, part 3, part 4, part 5, part 6, part 7, part 8, part 9, part 10, part 11.
CEO of IMA, is the author of Active Value Investing and The Little Book of Sideways Markets. The books have been translated into eight languages. Forbes magazine called him “the new Benjamin Graham.”
(Translation: Vitaly Merkulov, “Shareholder of the XXI century” – myinvestpro.ru)
Read other interesting articles:
The Electric Vehicle (EV) Revolution: Part 10 – Tesla Bears and Elon Musk’s Broken Promises
The electric vehicle (EV) revolution: part 9 – Elon Musk’s bold promises and the future of Tesla
The Electric Vehicle (EV) Revolution: Part 9 – Elon Musk’s Bold Promises and Tesla’s Future
The Electric Vehicle (EV) Revolution: Part 7 – A Key Point in Developing and Selling Electric Vehicles
The Electric Vehicle Revolution (EV): Part 6 – ICE Car Survival Is Not An Obvious Fact
The Electric Vehicle (EV) Revolution: Part 5 – Electric Vehicles, the Environment and the Future of Oil
Tesla’s risky battery shouldn’t bother you [Tesla — часть 4]
How electric vehicle range alarm turns into a gold rush for EV charging stations [Tesla — часть 3]
Why a regular car versus an electric car (EV) is like a horse versus an internal combustion engine [Tesla — часть 2]
Tesla, Elon Musk and the electric vehicle (EV) revolution [Tesla — часть 1]
Why I Don’t Believe in Uber: An Analysis of the Economy of Driver Revenue