Elon Musk makes bold promises, but can Tesla deliver on them?
Elon Musk is unlike any leader we’ve ever seen. For most people, creating PayPal would be an incredible accomplishment. Not for Elon Musk; he built Tesla, a vertically integrated automobile company and the first new American automobile company to remain active for such a long time, beginning in 1930. But Tesla isn’t just a car company that’s on track to produce several hundred thousand electric vehicles a year. This is a company that creates a network of charging stations that covers not only the United States, but also Western Europe and parts of Asia. This is the company that developed self-driving controls for their own electric vehicles. I can continue and I will continue. Elon Musk also built SpaceX, a company that can send rockets into space for 10 times less than NASA and land the rockets back on a barge drifting in the middle of the ocean.
It works with Neuralink, a company that connects your brain to your computer. Okay, I’ll stop. I would say that even if Tesla goes bankrupt tomorrow, Elon Musk has already succeeded – he has accelerated the progress of humanity for decades to come.
Elon Musk (along with Tesla shares) is causing controversy in the investment community. He sets impossible goals and reaches half of them with a delay of several years. He will either never reach the other half, or he simply has not yet reached – it is not known. There seem to be two reasons behind his seemingly unrealistic goals. On the one hand, like Steve Jobs, he created a reality distortion field and convinced people with his charisma and confidence that they could achieve seemingly unattainable goals.
But Elon Musk has another side.
Tesla has lost money every year of its existence. There is nothing wrong with that, considering that Elon Musk has created a vertically integrated company in an industry that did not exist 10 years ago. The problem is that these losses have to be financed and they can be financed by either debt or equity. A company that is losing money has restrictions on borrowing because it has a limited ability to even pay interest on that debt. Therefore, it must finance its losses by issuing its own shares.
Tesla does not trade on today’s or even tomorrow’s earnings multiples; she trades on Elon Musk’s dream multipliers. At times, Tesla, which produced 245,000 vehicles in 2018, had a larger market capitalization than General Motors, which produces nearly 10 million vehicles a year. The bigger the dream, the larger the company’s market capitalization and the easier it is for Tesla to finance its losses … and achieve Elon Musk’s dream. But distinguishing which dreams will turn into reality is incredibly difficult, not only because of the physical attainability of those dreams, but also because Tesla will need more capital to achieve them.
So, to predict whether Tesla will achieve Elon Musk’s big dreams, you need to have an opinion not only about their achievability, but also whether others will believe in Tesla and Elon Musk long enough to allow the company to issue cheap shares to finance these dreams. From time to time, to support his vision of the dream, Elon Musk makes a statement that seems to challenge what we believe is possible today.
In May 2019, Elon Musk announced that he expects the Tesla robo-taxi network to go live by 2020. Even if Elon Musk is wrong by two years, and this ambitious dream comes true in 2022, it will transform the auto industry and turn Tesla into a cash cow (and also take Uber and Lyft out of business if they don’t come up with their own robotic taxis by then) … Or is robo-taxi a sci-fi dream that may not even be realized by 2030?
Before you answer this question, let me give you two more examples.
In July 2017, Elon Musk announced that Tesla was ready to take orders for solar rooftops, implying that the technology was prime time ready. Two years later, after consumers paid a deposit, almost nothing is heard of solar roofs. Perhaps we should have taken Elon Musk literally, not figuratively – Tesla was ready to fill orders (but the roof was not ready).
Another example. In a letter to shareholders in 2016, Elon Musk wrote that he expects production of the Tesla Model 3 in the fourth quarter to reach 5,000 electric vehicles per week (260,000 vehicles per year). Now imagine you’re in Q4 2017 and Tesla is producing 186 EVs a week (about 9,700 a year). Elon Musk lied to you, or did he just dream big, but did not live up to this dream (until now)? Well, would you believe Elon Musk’s next promise, to produce 500,000 models in 2018 (that’s 50 times more) Tesla Model 3?
Let’s skip 2018 and fast forward to 2019, where in the second quarter we see Tesla producing 288,000 EVs on an annualized basis and is on track to reach 500,000 EVs per year by the end of 2019 approximately.
Given these facts, when Elon Musk makes a prediction that is plausible and when is the prediction an exaggeration? How do we know?
These examples illustrate several points:
1) some of Elon Musk’s promises are an exaggeration. (Is it really a lie if they are implemented with a delay of five or ten years?)
2) even the promises that Elon Musk will fulfill will appear a year or three later.
3) Studying reports from the last few quarters is of little value when analyzing Tesla. (We have a hard time in the process of increasing production 50x, even if it happens one year later than promised.) Just remind yourself that this is the same person who was able to accomplish what NASA failed.
To complicate matters, there are external factors such as interest rates, the economy, and trade wars, any of which can damage Tesla’s valuation, making it much more expensive or completely impossible to fund the company. In other words, Tesla is a path-dependent company: its success will depend in part on factors that are completely outside its control.
This article is part 9 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 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]
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