Month: December 2020

I like Tesla. I like their product, I like their service model, I like their story. They produce and sell a game-changing innovation, are the face of a market that is poised for rapid expansion, and Elon Musk is an effective showman that knows how to keep his brand in the news cycle¹. Tesla is here to stay.

But it’s unlikely that Tesla will ever become the iPhone of the EV market², though it’s being valued as such. If anything, it’s far more likely that Tesla ends up being the new Prius³, and the Prius has continually lost market share to new competition⁴. With more than 90 new EVs hitting the market in 2021, Tesla’s real fight for market dominance is only just beginning.

A big part of their success to this point has been that lack of serious competition in the EV market, which has allowed their brand to become ubiquitous with the category. But in the U.S., that veteran status presents an obstacle as their vehicles are no longer eligible for a $7,500 federal tax credit⁵, though much of their new competition will be. Will Tesla still carry the same pedigree in an emergent market when there’s a federal subsidy in place that favors new producers⁶?

They might. With both the Cybertruck⁷ and Roadster expected to make their first deliveries next year, Tesla has not slowed on innovation. Plus, they’ve shown an ability to raise cash at whim, so they should be able to scale with their market. They’re a successful company with a commanding share in a for-sure growth industry who’s shown a profit for over a year running, and now they’ve been included in the S&P 500⁸. What’s not to like?

What’s a Tesla?

Tesla is a car company. Their primary function is to produce and sell cars. Normally, a car company would produce profits to fund R&D so they can continue to produce improved models of successful vehicles on an annual basis⁹. They’d cover their costs, pay down their debts, and kick back a dividend to shareholders. But Tesla isn’t a normal car company and they aren’t being valued by those traditional metrics.

The demand for Tesla stock treats them as if they were a tech company operating in a sector that is impervious to real competition. Facebook¹⁰ had no entrenched competition they needed to displace, and neither did Apple when the iPhone became a transcendental innovation. None among Microsoft, Google, or Amazon were first to their respective markets, but they were the most aggressive players and that paid off for them in the long run. Those are the only five companies worth more than Tesla in the U.S., all offering products that have reshaped the way that we exist in our world. Tesla makes cars, which have been around for over a century¹¹.

The biggest problem of Tesla’s model is that they struggle to produce a steady profit on those cars. You can gloss over profitability and focus on their cash flow today, but Tesla won’t be able to issue billion-dollar equity sales indefinitely. At some point their investors will expect a dividend, which means they’ll need to turn a profit. After all, Volkswagen already pays a dividend, and they’re about to take a massive bite out of the EV market¹². What happens if Tesla cedes significant market share to these new entries and finds themselves with a burdensome production surplus down the line? Discounting isn’t a real option if you’re already running razor-thin margins.

Another factor that’s difficult to forecast today is how depressed gas prices and an uptick in remote work will hurt the nascent EV market. If fewer people are commuting and gas is cheap, why pay the premium to switch to electric now¹³? If people can afford to wait to make the inevitable conversion to electric, will that take some of the luster off Tesla when consumers eventually come ready to buy in on EVs and find a wider array of options to select from?

Sure, But What Else is a Tesla?

Tesla’s revenues are not simply from car sales, though. They also handle their own servicing business, subscription services, sell their accrued regulatory credits to other automakers, pimp a solar and charging installation hustle, and offer insurance. The sum of these efforts is a meager profit that will soon disappear when demand for credits from other automakers decreases as they produce more EVs of their own¹⁴.

There’s a belief that Tesla can benefit from the economy of scale as they continue to grow with demand, but they’re still in the process of optimizing their production needs for their four existing models¹⁵ with more soon on the way. How will they handle the competition, continue to scale, and expand their line all without a profitable revenue stream from their core business¹⁶?

But Tesla is more than just a car company with a few side-hustles, and the true believers know that their real future is in autonomous driving¹⁷. They realize that Tesla already has nearly a million vehicles on the road gathering data, and that has value. Apple, Microsoft, Amazon, Google, and Facebook all have valuations tied to their proprietary data streams¹⁸, so why not apply the same logic to Tesla?

The problem there lies in competition. The companies at the top of the major data streams (mobile and desktop OS, search engines, social media, online shopping) all have one dominant company that commands well over half their respective markets. In the car industry, no one has topped 50% market share in the U.S. since General Motors did in 1962. Now, as far as EVs are concerned, Tesla maintains an imposing share, but in the broader vehicle market they’re still in the low single-digits¹⁹. And for all the promise of autonomous driving, even a self-driving EV will still just be a car.

Tesla Foil

Of course, a lot can happen going forward. Maybe Tesla shifts from expensive manufacturing and focuses more on developing technology to license to other automakers, creating a universally adopted operating system that becomes ubiquitous with the driving (or driverless) experience²⁰. Or maybe they develop a fleet of self-driving vehicles that revolutionizes how we get around and then becomes the first three-trillion-dollar company²¹. But they’re most likely to just remain a large player in a highly competitive industry, as boring as that might be²².

In any scenario, their recent inclusion in the S&P 500 bakes that uncertainty deeper in our financial institutions at a time that they can ill-afford more uncertainty. Now if Tesla takes a tumble it’ll affect retirement accounts, and passive investors shouldn’t have to take that hit²³. So, we root for Tesla to succeed, an American company making American cars in America²⁴, even if their present focus seems to be centered on China.

But what happens if they do cede a significant chunk of the market in 2021 and lose their tenuous grasp on profitability²⁵? No one knows and generally it doesn’t even matter how one company performs, but it’s different for Tesla, for whom the rules have never seemed to apply²⁶. To many, whether they’d admit it or not, Tesla represents a hope for the future, and hope can be a dangerous thing to cling to in a time of uncertainty.

So, to reiterate, I like Tesla²⁷. But I don’t like Tesla at $705.67²⁸. There’s about to be a serious logjam in the EV market and I fear that the glut of new offerings will likely overestimate demand in the near-term²⁹, which will put a drag on everyone’s projections, including Tesla’s³⁰. I only hope that it hurts just enough to send a message and not to trigger a full-blown panic³¹.

Note: The author, who formerly worked paycheck-to-paycheck but recently found himself abruptly unemployed, has no business criticizing a successful billionaire and his ascendant company, and will undoubtedly look foolish in retrospect.

1. ^{Like Trump, Elon Musk shoots from the hip and draws his fair share of detractors because of it, but it’s that brash cowboy nonsense that his fans find endearing}
2. ^{I don’t think anyone will be, even Apple}
3. ^{The Prius was revolutionary when it came out and drew a similar crowd of early adopters. It hit its sales peak in 2010 when Toyota sold over 500,000 vehicles that year, with more than 315,000 in Japan alone. It’s since become a historical footnote. Also, this footnote.}
4. ^{It’s not even Toyota’s top-selling hybrid these days}
5. ^{Fades after 200,000 vehicles sold, then precipitously disappears. It ended for Tesla in 2019}
6. ^{Buyers loved Tesla because they were new and different. Now, there are newer producers making different vehicles and the federal government is offering a tax credit for you to chase them.}
7. ^{Never forget the time that Elon Musk watched as the Cybertruck’s unbustable side window got busted at its unveiling}
8. ^{This is where I really want to turn this into a defense of Apartment Investment and Management, Co., who Tesla replaced in the S&P 500.}
9. ^{They might also find additional profits in licensing their patents, but Tesla has opted to open-source theirs, vowing not to take legal action against anyone utilizing their technology in good faith, which feels like a trap.}
10. ^{Also overvalued, though for different reasons}
11. ^{Even electric ones}
12. ^{The Volkswagen ID.4 comes out in 2021 and will be eligible for that $7,500 tax credit. It’s the most aggressive play against Tesla’s best-selling Model 3, and a sales comparison will be interesting to review this time next year.}
13. ^{Vehicle lives are extended as people are averaging fewer miles, and the electric fueling grids are still expanding.}
14. ^{If you eliminate the $1.2B in revenue from regulatory credits in the first three quarters of 2020, Tesla remains unprofitable.}
15. ^{Over the last few years their profits-per-vehicle are below market for luxury vehicles and even underperform against the economy leader, Toyota. Though their margins have shown improvement over the last several quarters, Tesla has only recently climbed out of operating at a loss.}
16. ^{On short notice, Tesla just shut down the production lines at their flagship facility on their two luxury models for three weeks. It’s a weird time for austerity as everyone is publishing articles about how massive their year was. Speculation is that it might be related to a suspension issue with the Model X that prompted recalls in China and an investigation to open in the U.S., but I’d guess it’s related to demand for those vehicles that lags internal projections.}
17. ^{Or battery technology, but evidence has shown that Tesla’s advantage there has narrowed dramatically in a short period as automakers are dumping untold billions into R&D}
18. ^{Presumably because of their abilities to then innovate with that data, for better or worse}
19. ^{More than 80% share of the EV market, but about 2% of U.S. auto sales}
20. ^{Then again, if Apple introduces their own game-changing car technology in the next few years, they’d have an obvious advantage in iOS integration}
21. ^{Maybe they go all-in on Bitcoin and it prompts a messy decade-long battle with the federal government about dodging taxes, and Elon Musk takes his company to die on that hill in an act of Ayn Randian corporate martyrdom.}
22. ^{Imagine a boring Elon Musk on a predictably boring quarterly earnings call talking up a boring 30% share of the EV market. Lame.}
23. ^{Especially not when there’s so much inflationary uncertainty in the future.}
24. ^{Unless you take exception to Elon Musk being South African, I guess}
25. ^{If we’re still playing by 2020’s rules, probably nothing}
26. ^{Except that time Elon Musk had to settle that fraud case with the SEC, but we’ve clearly all moved on}
27. ^{Though not quite sold on Elon Musk, founder of X.com}
28. ^{A record close for Tesla to finish up 2020}
29. ^{Tesla’s own record deliveries in Q3 2020 (140,000) was still outpaced by their production (145,000), and Musk has even taken to offering last-minute incentives via Twitter to clear out some inventory before the end of the year.}
30. ^{Not a suggestion to short Tesla, obviously. That’s what crazy people do.}
31. ^{And I made it through the whole thing without once railing on Elon Musk’s recent Tweet about converting a chunk of Tesla’s balance sheet to Bitcoin!}