For those of you that have been following my blog or will continue to follow in the future, one of the things you’ll learn about me is that I am very risk averse when it comes to investing. When I was in my teenage years and early 20’s, I used to invest in individual stocks, and let’s just say that I’ve been burned way too many times and thus I’ve been investing in Index and ETF funds for the last 8-10 years and have had pretty good returns because of it. I always like to keep a pulse on the market with some individual stocks in case I find something really compelling to invest in to generate more than a conservative 5-7% return, but thus far, I still don’t invest in individual stocks. Except for Tesla. As you may have read in some of my previous posts, I am a huge computer geek, and as such, I am very passionate about what Tesla is doing from a technology perspective. However, I have started following them very closely for the last 8 months and become very passionate about what they are doing from a financial and business perspective as well and I have been evangelizing them with everyone that I meet. This post is designed to dive into the business model behind Tesla and why I believe they will be a very lucrative investment over the long run and why I, personally, am starting to invest money into them. Just keep in mind that this is my own personal opinion and you should consult a financial advisor before deciding to invest as well. I will add that the greater Wall St. opinion of Tesla is very bearish and thinks that they are greatly over-valued. As such, I am investing in Tesla only with my “play money” and not my long-term retirement funds.
Who is Tesla?
This is quite a loaded question with a lot of complex intricacies, but I’ll try to answer it as succinctly as I can. Tesla today is a very different company than it was 2-3 years ago. They are a car company, a technology company, a power storage company, utility provider company, power production company, a manufacturing company, an insurance company, soon a trucking, metropolitan transport, and ride sharing company as well. This is why I am so bullish about Tesla. I am not aware of any company that touches more industries, has a more wide-reaching strategy, and as deep of an innovation pipeline as Tesla – mind you they are still largely regarded as a startup. I am going to try and hit on each of these points, but first, it would be good to understand where Tesla and it’s CEO and primary shareholder, Elon Musk, came from.
Who is Elon Musk?
Without completely boring those that aren’t as passionate as I am about Elon Musk, I’ll try to keep this short. After emigrating from Africa to Canada to the U.S., Elon moved to Silicon Valley and started his first company, Zip2, with his brother Kimbal. In a nutshell, Zip2 was a form of internet yellow pages before hardly anyone knew what the internet was. They eventually were bought by Compaq Computers where Elon took the proceeds to eventually start a new company X.com. Elon had set out to bring something boring and old-school like banking into the internet age just like he did with advertising with Zip2. After a lot of turmoil and power struggles, X.com, an online bank, eventually merged with PayPal, an online money transfer service, and became the PayPal we all know and love today (after it went public of course). Elon took the proceeds from the IPO of PayPal (after he was ousted as CEO) and started SpaceX. The goal of SpaceX was to make space flight more affordable and to one day make humans an inter-planetary species by colonizing Mars. Elon’s goal was to take something as complex and capital intensive as launching rockets and lower the cost of entry by driving cost efficiencies through current technology and rocket re-use. Today, SpaceX is the only private company sending regular launches into space, albeit at just a fraction of the cost that Boeing and Lockheed Martin, who have traditionally owned the NASA contracts for space flight. As if starting a rocket company wasn’t complicated enough, Elon also caught wind of this company called Tesla that was in the early stages of being formed and became Tesla’s biggest investor, earning himself a spot on the board and eventually becoming CEO. Additionally, Elon is involved in several other ventures such as the Boring Company, OpenAI, and others. One thing to notice about all the companies that Elon Musk has been involved with is his goal isn’t to create something new from scratch. Elon focuses more on bringing his work ethic and engineering capabilities to find something hard and figure out a better and cheaper way to do it all while focusing on the customer experience and inciting a passion and brand loyalty to anything that Elon touches. This is a very quick and dirty synopsis of Elon, however the goal of this post isn’t to tell Elon’s life story, it’s to talk specifically about Tesla. Regarding Elon’s biography, I would highly recommend Ashlee Vance’s book, Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, for a much more holistic and well-rounded view of Elon Musk as a person as well as an entrepreneur.
Tesla – The Electric Car (and Technology) Company
Tesla was founded by Martin Eberhard and Marc Tarpenning. They got their start by founding a company called NuvoMedia, which created an eBook reader that garnered the attention of and eventually sold the company to Gemstar International Group (who owned TV Guide). Their time spent with NuvoMedia also gave them lots of experience with electronics and the lithium ion batteries used to power them. The proceeds from the sale gave them some working capital for their next project, which eventually became Tesla Motors. Elon Musk had been looking for an electric car project to invest in when he eventually crossed paths with these two and ended up in funding the majority of their Series A funding round, which made him the majority stock holder and earned him a seat on the board. Ever since then, Elon Musk began to have more and more influence on the direction of Tesla until he eventually wound up as CEO. There are several important factors here that I believe ultimately shaped Tesla into what it is today. First and foremost, Tesla has always been about pollution, global warming, and social responsibility. Direct from the Tesla website:
“Tesla’s mission is to accelerate the world’s transition to sustainable energy.”
Additionally, Elon had always been enamored with cars that go fast, such as his first McLaren F1 for a cool $1 Million that he wrecked without insurance. As such, the first car that Tesla produced was the Tesla Roadster.
But even Musk admitted it was a complete disaster. However, one of his key tenets has been to always improve. Make mistakes, make failures, but learn from those failures and move on.
It’s these core tenets that explain why Tesla is succeeding at becoming a start-up automaker in America. The last successful auto-startup in the U.S. was Chrysler in 1925. That’s a long time. This further re-enforces how powerful Tesla is to the U.S. and global economy. Tesla started with the Roadster and kept improving with the Model S, then the Model X, and now is about to release the Model 3 to the world later this month. The Model 3 is Tesla’s entrance into the mainstream auto market with an electric car. Over the last 10 quarters, Tesla has averaged about 17,400 cars per quarter or 70,000 cars per year. Granted, those deliveries have been ramping up over recent quarters, but pale in comparison to the 3 Million cars sold by GM in 2015. However, with the Model 3, Elon is projecting to reach annual shipments of 500,000 cars per year by the end of 2018. This is a very ambitious goal, but one that will definitely put Tesla on the map, even against the big guys, and really start to steal some substantial market share.
More than an Electric Car
Tesla’s are more than just your average electric car though. Tesla has completely changed every aspect of the car ownership experience from the sales and maintenance model to the “fuel” aspect, and even the car itself. Let’s talk about the car. Electric and hybrid cars have been known to be traditionally boxy or ugly. Take at look at the Toyota Prius, Ford Focus Electric, Nissan Leaf, and the new Chevrolet Bolt.
They all seem to have that same boxy, unattractive look. Now let’s look at the current Tesla family, the Model S, X and 3. See the difference? Tesla made electric look even sexier on the road than it is on your operating costs and social conscience of assisting with Tesla’s mission.
But, sexy-looking cars isn’t all they did. The Model S and X have performance models that can go from 0-60 in 2.5 seconds and 2.9 seconds respectively. That makes them the fastest production cars on the planet, mind you they are keeping pace with the likes of Audi and McLaren that are producing these speeds in upwards of the $300-500K price range. Now, the Tesla models aren’t cheap either, but comparatively, they are roughly half the cost or less for similar performance.
Tesla Car Technology
Let’s talk about the technology. Oh man, the technology! (And remember, I’m as big a computer geek as you’ll find!) First of all, Tesla is one of only a few cars on the road with active driver assistance technology for lane keeping, changing, breaking, etc. But as far as how it performs, no one else is even close! By the end of this year, Tesla plans to do a fully autonomous, coast to coast trip with no controls being touched, and that includes charging! The day of being able to punch in an address and go to sleep while the car drives itself is sooner than everyone thinks. Realistically, Elon Musk still thinks this is about 2 years out for what we would call level 5 autonomous driving, but again, light years ahead of what all other car manufacturers are doing. Then there are lots of little things when it comes to technology that, individually, wouldn’t make you buy a Tesla, but altogether, form a pretty powerful package. Things like the Summon feature that will pull your car out of the garage for you, automatic parallel and perpendicular parking, the ability to automatically cool the car when it’s parked just in case the unimaginable happens and you leave you child or pet in a hot parked car, or being able to monitor your car’s charging and basically control every other aspect from your smartphone, or even an Amazon Alexa! How about being able to electronically adjust all the seats or even open all of the doors from a single console? All of this technology is tied together with a 17 inch touchscreen for all controls. Most auto manufacturers sub-contract certain parts of the vehicle to other companies and just leave the final assembly to the manufacturer, however, that makes it nearly impossible to tie all the internal and user interface systems together for a single cohesive customer experience (let alone manage quality control). Because of this, Tesla keeps all of its development and manufacturing in-house (a trick Elon learned at SpaceX) so they can truly tie all the systems together. The touchscreen can control everything from the cabin lights, air flow and filters, car suspension, you name it. In the IT field, it’s what we like to call software-defined as everything can be defined and controlled via software (no more mechanical buttons needing to be pressed), which brings us to the next really innovative offering. Tesla provides free over-the-air updates. Now, we’re not talking just GPS and maps updates, but actually adding features to the car in real time. With most car manufacturers, the car is as good as it’s going to get the day you drive it off the lot. It is the opposite with Tesla. It just keeps getting better over time. For example, Tesla just recently released updates over the air to add perpendicular parking as well as the over-temperature control I mentioned above. Being that Elon grew up in Silicon Valley in his professional career, he treats the car just like a smartphone where you have frequent updates to fix issues and provide new features on a regular basis. On the same note, you’ll find Tesla showrooms eerily familiar to the Apple Store, but more on that later. The concept of a car model year doesn’t exist with Tesla. All updates, both hardware and software, are provided incrementally.
Tesla Car Safety
Car safety is one that often gets overlooked due to government regulations making sure cars are safe before they are sold, so it becomes a mere checkbox in a myriad of features. But with Tesla, it’s actually a very important feature. Being that the cars are electric, Tesla has positioned the battery cells along the base of the car. It gives the car excellent handling as well as a solid center of gravity. When the Model S was tested by the NHTSA in 2013, it was so solid it actually broke the test equipment. During internal testing of the Model X, Tesla was unable to cause the SUV to have a rollover. Then, when the NHTSA finished their Model X testing earlier this year, it became the first SUV, EVER, to receive the highest mark in every single category making it the safest SUV ever built according to the NHTSA. All of this doesn’t even take into account the inherent safety features from the Autopilot technology, automatic emergency braking, and collision avoidance systems. Just think, when full autonomy is here, and even partially here today with the current Autopilot technology, the car is always watching out for when you might unavoidedly get distracted by a cell phone, child, or wreck about to happen. Think about the reductions in reckless driving, drowsy driving, drunk driving, and the like. Every car currently being manufactured is outfitted with 8 cameras and an array of sensors so the car is always watching out, even when you’re not. During an accident review last year by the NHTSA, they determined that a Tesla is 40% less likely to get in an accident where air bags would deploy when Autosteer (part of the Autopilot system) is enabled. Over time, as all of these features become available, the cars will only continue to get safer.
One of the main reasons that electric vehicles (EV’s) haven’t taken off faster still comes down to one thing. Range Anxiety. This is the fear that you will end up stranded as your car runs out of power. And secondly, electric charging isn’t as convenient as putting gasoline into a car, and Tesla realizes that both of these issues would have to be overcome to increase mainstream customer adoption and drive sales. The first thing Tesla did to combat this was to roll out it’s own network of superchargers. This is equivalent to a car manufacturer rolling out it’s own gas stations, which speaks to Tesla’s dedication. A massive undertaking, but Tesla did it to accelerate the transition to sustainable energy. Now, these chargers aren’t just any kind of electric vehicle chargers. These are super high speed chargers that are designed to give you up to 170 miles of range in as little as 30 minutes. In North America, there are nearly 6,000 superchargers deployed and Tesla continues to bolster the network. These superchargers are located along major access corridors like interstates and are frequently located around places with wifi, restaurants, and shopping to make the charging stops as inconvenient as possible. Additionally, Tesla is also building out a network of what they’re calling destination charging. These are the more standard 220V type of charging like you’d get at home, but these are located at hotels and restaurants and generally offered free of charge to customers. Back to the main topic of range anxiety though, Tesla has built a surprising amount of technology into the vehicle as well to mitigate the concern of driving distance. Not only does Tesla make some of the longest distance EV’s around (up to 335 miles on Model S), but they’ve also built intelligence into the navigation system to estimate your charge level at certain points in the trip and automatically route you to nearby supercharger’s to ensure you’ll never run out of charge. Additionally, during the course of your trip, if you happen to be driving in an area that results in a greater than expected battery discharge (cold temperatures, hilly roads, wind, etc.) the vehicle is keeping tabs on the charge level in real time and will either re-calculate your route to a closer supercharger and/or advise you what speed you need to drive to reach your destination or next supercharger (I have actually experienced all of these firsthand, so if you have questions, fire away). All this to say that Tesla has gone to extraordinary lengths to remove every possible doubt and fear with driving an electric vehicle.
That brings us to a topic that just about everyone hates equally, no matter what type of car you have, Auto Maintenance. With traditional ICE cars (Internal Combustible Engine), maintenance could mean anything from oil changes, to checking a series of hoses and belts, inspecting/replacing brake & transmission fluid, fuel induction & injection services, and the list goes on. In fact, a lot of these services aren’t necessarily required but “recommended”, or worse, the dealer strongarms you into doing unnecessary maintenance because they make you think your warranty will be voided if you don’t take their recommendations (Tesla clearly states on their website that this DOES NOT void your warranty). In fact, regular vehicle maintenance has become a huge profit center for car manufacturers and dealers. You then end up paying for services you don’t need, you pay their ridiculous markup, and you end up waiting for hours on end because each service is done by a “different mechanic” and they can’t give you a realistic time of completion. And no, I’m not bitter about my ICE maintenance at all! 😉 This is yet another aspect of car buying and car ownership that Tesla aims to solve and keep the customer’s total experience and satisfaction as top of mind. To start with, electric cars, plain and simple, have a lot less moving parts and thus less things to check and/or charge you to replace. Now, per Tesla’s published Maintenance Plans, one would argue that these are much more expensive on a per service basis than with ICE cars, however, recommended maintenance is only once every 12,500 miles versus the 3,000 – 5,000 miles that is common with ICE cars, depending on the make, model and age. In my TCO analysis, I find that maintenance is about the same, but I have not owned a Tesla firsthand….yet. On multiple occasions, Elon has said: “Our philosophy with respect to service is not to make a profit on service. I think it’s terrible to make a profit on service.” So, going in less for maintenance is a huge time saver (and stress reliever), but what’s even more unique and innovative is that with all of the technology that’s built into Tesla vehicles, 90% of issues can be remotely diagnosed by Tesla via the on-board computer. If the issue can’t be fixed remotely, they can send a mobile service van to you for repair, or if you need to take it into a service center, you can schedule your visit right from the touchscreen in your car (not calling a dealer and waiting on hold). Now that’s convenience! But, don’t take it from me. Watch this short video Tesla released earlier this week.
Tesla Warranty & Resell
As if all of these benefits weren’t enough, let’s take a minute to discuss new car vehicle warranties. It used to be commonplace to have a new vehicle “bumper to bumper” warranty of 3 years/36,000 miles and a powertrain warranty of 100,000 miles. The last US automaker I recall doing that was GM in the pre-2008 crisis. Since then, I’m only personally aware of one other mainstream automaker, Kia, who still provides such a warranty. It’s amazing that with how far we’ve come as a society, with technological and mechanical advances, that “our word is our bond” has literally no meaning today. We have more and more manufacturers stating that their cars are more reliable than the next guy’s and lasting longer, yet fewer and fewer of them are willing to stand behind their product with something as legally binding as a warranty. With that said, I think, in this day and age, it speaks great volumes that Tesla (again, first successful auto startup since 1925) is not only bringing back the promise and peace of mind of a warranty, but they are one-upping it. Any new vehicle bought from Tesla includes a “bumper to bumper” warranty of 4 year/50,000 mile warranty and an 8 year/unlimited mile warranty on the drivetrain and battery. Now, let that sink in, an 8 year UNLIMITED MILE warranty on the drivetrain! Who does that? This is just another thing that Tesla is doing to put the consumer experience first and providing peace of mind to it’s customers. As if that wasn’t enough, keep in mind that Telsa has a goal of ultimately creating a drivetrain of accomplishing 1 MILLION MILES before failure. (To execute that statement properly, you need to hold your pinky up to your mouth while you say it as a great testament to the late Dr. Evil.)
Even used Tesla’s bought from Tesla can include up to a 4 year/50,000 mile warranty with the battery/drivetrain warranty left in tact until that 8 year mark. And one little tidbit that I’ll add as icing on top is the resell value. I talk about this in my TCO post, but Tesla vehicles have the highest resell value of nearly any car on the market with a Model S still being worth 52% of it’s value after 100,000 miles!
Tesla Sales Model
If you’re sensing a theme here, and you should, Tesla is all about the consumer experience. Buying and owning a car should be exciting and breathtaking, like buying an iPhone, and not dreadful and stressful. The traditional dealer sales model is how virtually all cars are sold today. A manufacturer produces a car and sells it to a dealer at an invoice cost. That dealer then marks it up and requires you to haggle for your price with a car salesman and his manager where they often use all kinds of tactics to grow their margin (even if they sell the car at “invoice” they have all sorts of rebates and uplifts that you’re still getting ripped off, regardless of whether you know it or not). Things like dealer prep fees, clear coat paint protection, extended warranties, fuzzy lease math to lower monthly payments but add the number of payments so you end of paying more in the end. It’s to the point where EVERYONE hates the car buying experience and ends up wondering at the end if they got the best price or if they got taken by some pushy, slimy sales guy. This even makes browsing for cars, before you’re ready to buy, a dreadful experience as well. Tesla made a series of profound changes to flip this model on it’s head. First of all, there are no “dealerships”, but rather showrooms. These showrooms frequently show up in shopping centers and malls. The whole purpose of these centers is not to sell you a car, but to educate you and get you feeling good about Tesla as a brand. There are no commission-driven car salesmen, but salaried consultants who’s only job is to educate, not to sell. (I’ve been to a Tesla showroom 3 different times and can attest to this no-pressure model.) When you’re ready to buy, you buy it via the Tesla website, your car is custom built for you, and delivered when ready. There is barely any ready-made inventory to buy from. And what you see is what you pay. There is no haggling. Every car is sold at list price. Again, the whole experience is geared towards the best consumer experience possible, not how to nickel and dime every customer to drive the most profit possible.
Tesla Vehicle Family & Futures
As you can tell, there is a lot here to Tesla as it pertains to their vehicles more than just being an electric car. I’ve read lots of articles and talked to several folks that like to compare Tesla electric vehicles to the likes of those being produced by the major automakers, and frankly, it isn’t even a contest. Sure, Big Auto can out-produce Tesla in terms of quantity, with probably larger margins and less expense. But trying to compare them as just an EV to EV comparison would be irresponsible as there is so much more that goes into Tesla’s vehicles that Big Auto doesn’t even attempt to tackle as they are complacent with the status quo. Quite frankly, Tesla produces a better, more well-rounded product in almost every way. Now, they may not have quite as many options as Big Auto as it pertains to model types, but that also lends to Tesla’s attention to detail and desire to control every aspect of the Tesla experience from their consistent design, fully integrated end-to-end product, and an overall superior consumer experience, which is probably why Tesla has the strongest brand loyalty from it’s customers by a WIDE margin. With the Model 3 alone, there is a long line of 400,000+ reservations that paid a deposit and have waited 2 years for that vision to come to life. Name any other manufacturer, either Big Auto or startup, that has been able to do that and secure the next 2-3 years of orders. That being said, I’ve mentioned the Tesla family, which started with the Roadster, but the current production family consists on the Model S, Model X, and now the Model 3.
But, Tesla also has a rather deep innovation pipeline of vehicles on the way. The next Tesla vehicle to be unveiled is the Tesla Semi in September. That’s right, an all electric Semi-Truck with Autopilot and soon fully autonomous capabilities.
That will be followed up by the Tesla Model Y, which will be a more affordable crossover SUV between the Model 3 and Model X in size (image below is an artistic rendering of what it might look like).
The Model Y will complete the initial lineup of vehicles that Elon Musk had envisioned to spell the word “S3XY” (it was “SEXY” until they got sued for the Model E naming).
However, Elon also has a vision to build a Tesla pickup (below image is an artist rendering).
And even then, Elon has also mentioned building a high-density passenger transport as well.
Then, lest we not forget that Elon has also made reference to a revival of the Roadster in the next couple years. Here’s an artistic rendering to tease you with. Can you say Bad A$$?
Needless to say, in just the EV business at Tesla, there is a very big and deep innovation pipeline at Tesla that will only continue to strengthen their market position and relevancy in this new world we’re living in.
Tesla – The Power Storage Company
Now, while Tesla originally started out as an EV company that then morphed into a technology company, they started to see a unique way to pivot their company again to focus on power storage products. Since the early days of Tesla, there had been considerable research and development in battery technology to see how big and how safely they could string a bunch of batteries together to power an EV such as the earliest prototypes and leading up to the Tesla Roadster. Fast forward to 2009 as Tesla was starting to ramp up development of the Model S and Tesla actually created a formal partnership with Panasonic to produce battery cells for it’s Model S and eventually the Model X. But not only was Panasonic to become the sole provider of battery cells to Tesla, but they actually co-engineered the 18650 battery cells for the Model S/X vehicles as well as the 2170 batter cell that will power the upcoming Model 3. Needless to say, between Tesla and Panasonic, there had been considerable investment into battery R&D and there was no reason why this technology had to be limited to EV’s. In 2012, Tesla started development to adapt their battery technology into stationary power storage products (think an alternative to whole house generators and/or storage of solar energy to bed used at night). In 2015, Tesla released the first generations of the Powerwall and Powerpack designed specifically for consumer and industrial use cases respectively. By 2016, nearly 300 MWh of Tesla’s power storage products had been deployed and they released the second generation of the Powerwall. So, while adoption continues to ramp up for these power storage products in the consumer space, the largest untapped market is starting to grab headlines around the world.
Tesla – The Utility Provider Company
One of the the most important factors in our transition to sustainable energy is the ability to harness that energy. On a small scale, this is easily accomplished within a household with solar panels and grid-tie systems and/or energy storage such as with the Powerwall, but in order to make an impact on a large scale, it needs to be done at the utility levels. It’s not uncommon today to see wind or solar farms run by the electric utilities to supplement the grid power that’s provided by traditional coal plants, but to move to a truly sustainable future with 100% renewable energy, it wholeheartedly relies on the ability to harness excess power to distribute when the sun isn’t shining or the wind isn’t blowing. That’s where Tesla’s Powerpack comes in. But don’t take it from me. Here’s an example of how Kauai, Hawaii could only run on 100% renewable energy under the best of conditions, however, by leveraging a 52 MWh Powerpack installation, they are able to increase the ability to run more often on 100% renewable energy and, even with such a small island, expect to reduce annual fossil fuel use by 1.6 million gallons per year. Or, we could talk about the recent announcement for Australia where Tesla just won the bid to build the biggest battery in the world with a 129 MWh Powerpack system. When coupled with renewable energy like solar or wind power, it’s projects like these that can really move the needle in terms of reducing our dependence on fossil fuels, decreasing or carbon footprint, and making the world a safer, healthier place to live. But, that as well brings us to the next, incredibly strategic position Tesla took, and that is in the business of actually producing the power themselves.
Tesla – The Power Production Company
Given Tesla’s mission is to “accelerate the worlds transition to sustainable energy” and they’re now producing electric cars people actually want to buy, and they’ve now produced a product to actually store that sustainable energy, there was only one thing left to do, and it is genius! Last year, Tesla reached an agreement to merge with Solar City, the largest full-service solar provider in America. Tesla shareholders approved the merger with an astounding 85% approval in November of 2016. This move is so incredibly strategic for Tesla as they now own an entire pipeline of clean energy from solar sales, service, and install, to power production, to power storage, and power consumption, either via consumption in the home and/or consumption via Tesla vehicles. Interestingly enough, Solar City was created by Elon’s cousins, Peter and Lyndon Rive, after Elon mentioned the solar company concept.
However, just merging a solar company with a power storage company wasn’t enough for Elon. They had to produce something that would revolutionize the industry. And with that, in October of 2016, Tesla announced it’s upcoming solar roof.
Tesla Solar Roof
If you think about existing solar technologies in the consumer space, there’s 3 major problems. First of all, traditional solar panels are bulky and ugly when placed on the roof of a house, requires bulky roof rails to be installed and thus deters investment by many.
Secondly, there are solar shingles on the market which can be mounted nearly flush with the roof, and they aren’t quite as ugly, but they are still definitely noticeable as they are usually stark black and only cover a portion of the roof.
Thirdly, even if the first 2 obstacles are overcome, there is the issue of a large upfront investment. Solar City began to tackle this third issue several years ago by leasing solar installations at less than the cost of energy from the utility, but it caused several financial problems, and thus Solar City is starting to exit the leasing game. Enter Tesla’s new solar roof, which addresses all of these issues. In partnership with Solar City pre-merger, Tesla developed a solar roof product that looks like traditional roof shingles or tiles when viewed at an angle (such as from the driveway or street), however when viewed from the sky (such as where the sun is) the shingles become transparent and allow light to pass through to the embedded solar cells.
This solves the first two issues, but how does it solve the third? Unlike traditional solar installations that are designed to be installed on top of a traditional roof, the Tesla Solar Roof is designed to replace the roof itself. By taking this approach, it does still have a high cost of entry, however, the total cost of ownership of the solar roof is designed to be the same or less than that of a traditional roof. As such, it only makes sense to install the solar roof when your traditional roof needs to be replaced (every 30 years on average) or on new constructions (in 2016, there were in excess of 1M homes completed alone). Being that the TCO of the roof is the same or less than a traditional roof, there’s no reason why it wouldn’t be feasible to include this product on EVERY new house construction. There is also the added benefit that due to the materials being used for the shingles, they are, by nature, more durable than a traditional roof and thus Tesla is offering a 30 year warranty on power production of the cells and a durability warranty of “the lifetime of your house, or infinity, whichever comes first” per the Tesla website, which also shows a video of a 2″ hailstone traveling at 100 MPH and the results on a traditional roof versus a Tesla roof. Since the release, the Tesla roof is already sold out well into 2018. A legal warranty for “infinity”. That has to be a first, though not all that unexpected when compared to Tesla’s “unlimited mile” warranty on Tesla drivetrains.
Tesla – The Manufacturing Company
This is probably the most overlooked and under-appreciated angle of Tesla’s business model. With Tesla’s move to a true mass-market car like the Model 3, there has been significant focus on manufacturing capabilities to drive their output from the current ~94K cars per year across both Model S and Model X to reach 500K cars per year with the Model 3 alone. Regarding Model 3 production, Tesla is investing in Kuka Robotics to drive the automation in the majority of the production line.
Elon likes to refer to this automation as the ‘alien dreadnought’. Elon thinks that with the advanced automation being put into the Model 3 production line that they can increase the output of the Model 3 line by 20x over the Model S/X. But, he also sees this Model 3 output line as a stepping stone to a much more automated factory which will likely debut with the Model Y production line where they remove people from the picture entirely except for running diagnostics and investigating anomalies. In reference to the robots, he says “They should be moving so fast you can’t see them.” At the end of the day, Elon thinks that the factory itself should be a product, “the machine that makes the machine”. With regards to the output of battery cells at their Gigafactory One, Elon has even said “In fact, the exit rate of cells will be faster than bullets from a machine gun.” So, in an interesting turn, Tesla has gone from making some of the most advanced and complicated cars in the world to simplifying them as a trade-off to production speed such that he envisions a fully automated factory that can produce a 20 to 30 percent improvement over factories producing a car every 25 seconds. With all of the product lines Elon envisions Tesla to produce, manufacturing technology and efficiencies could be the single most important thing to Tesla’s success, however, instead of just being the means to an end, if manufacturing could be a product itself, the opportunities will be endless for Tesla.
Tesla – The Insurance Company
An interesting avenue of revenue that most people are not aware of is Tesla’s entrance into the insurance market. As anyone in the U.S. is keenly aware, most insurance companies do not know how to price auto insurance when driver assistance features are in use that make the car safer. This is probably due to a lack of presence in the market and thus statistics to use which actuarial work is based on, but, if you try to go an insure a Tesla today with a major insurance carrier (I have looked at both USAA and Allstate), they generally price premiums for a Tesla just like any other super-premium ICE vehicle. According to the NHTSA report that came out earlier this year, Tesla vehicles are actually 40% less likely to get into a crash when Autosteer is in use, and one of the key tenets of auto insurance is managing risk, so by extension, the insurance “should” be cheaper due to the decreased risk, but it’s not. I know of only one insurance startup that is taking this approach seriously in the U.S., Root Insurance. However, Tesla has recognized this gap in the market and what they are currently piloting in Australia and Hong Kong is Insure My Tesla. Tesla is keenly aware of the reduced risk profile that Autopilot and things like regular maintenance have on a car. Musk’s statement on this issue rings very true and relevant to Tesla owners today and in the future: “Not to the exclusion of insurance providers but if we find that insurance providers are not matching the insurance proportionate to the risk of the car, then if we need to, we will in-source it. I think we will find that insurance providers do adjust the insurance cost proportionate to the risk of a Tesla.” So, yet again we have another industry that Tesla may be looking to enter on a large scale and yet another source of revenue for Tesla.
Tesla – The Ridesharing Company
All of these different avenues of business for Tesla may seem quite haphazard, but they are actually all a part of a larger strategic plan that Elon has put together with part 1 being published in 2006 and part 2 in 2016. These are both very interesting reads, directly from Elon himself, if you don’t believe what I’ve been evangelizing in this blog post. Specifically in part 2 though, Elon details the plan for Tesla to become a ridesharing company (dubbed The Tesla Network in later Tweets) with the likes of Uber and Lyft. The idea is that, once full autonomy technology is complete and legally allowed to drive the roads completely hands off (punch in an address, go to sleep, and wake up when you get there), which he still thinks is realistically about 2 years out, you will eventually be able to tap a button on the Tesla app for your car to go out and make money for you while you’re at work or on vacation by providing rides for other users. The idea is to turn driving into a utility model and to someday be as transparent as plugging into an electrical grid and paying for only what you use. This type of model, obviously, will completely change the concept of car ownership in the long run, but that’s a completely different debate we won’t get into here. The important thing for now is that this a completely self-sustaining business model for a company like Uber and will now just be another “option” and source of revenue in Tesla’s ever-expanding line of business.
Tesla – The Data, Analytics, and Artificial Intelligence Company
An aspect that I feel will be overlooked for sometime with Tesla is one of the most valuable commodities today. The Data. Now, obviously, I’ve talked ad nauseam about the value of Tesla’s technology when it comes to it’s Autopilot and fully autonomous driving technologies, but a lot of the input that goes into building that technology and perfecting the algorithm’s is the data the car is collecting. Until recently, Tesla only collected minimal amounts of data from vehicles as needed for diagnostic or anomaly investigations, however, Tesla has recently started sending imaging from the 8 on-board cameras, radar, and ultra-sonic sensors back to Tesla and feeding them into Tesla’s neural network for further analysis and algorithmic tweaking. Andrej Karpathy, Tesla’s newest head of AI and Autopilot Vision division, recently pegged Tesla’s fleet as a mobile, distributed data center. But, this type of data being collected is what the average person would/should expect. The thing about data though, and specifically “Big Data” (in this case) as we term it in the IT field, is that you don’t know what you don’t know yet. The biggest problem to solve for data is knowing the right questions to ask of the data. Until you know what those questions are, it’s better to collect as much data as you can so you then have a large dataset to ask these questions to when you think of them. If you think about the large swath of businesses Tesla is and is starting to become, there’s an unprecedented amount of data to be analyzed, both for prescriptive analytics (computers telling you what you “should” do to drive more revenue) with the current business strategies as well as discovering new ways to monetize this data. Just thinking out loud here, I’m wondering what happens when we take the data from the vehicle and merge it with insurance risk. There are several companies, such as Progressive, that takes a small sample of your driving data, either via a dongle or phone app, to determine your driving habits and potentially provide you lower rates as a result of safer driving, but what about a system that collects significantly more data, is “always on“, and does it in real time. They would be able to manage risk infinitely more than one just based off of sample periods. I can see this as being an integral part into Tesla’s “Insure My Tesla” pursuits when autopilot is not in use. How about taking that data to learn infinitely more about how Tesla’s are getting into accidents and building a more robust car that incurs less costly damage in a wreck or increases the safety of its occupants. Something Tesla is already starting to do is leverage vehicle data for more real-time maintenance notification versus arbitrary mileage marks. Perhaps the cost of maintenance starts to fluctuate based on how hard or easy that you drive your car (flooring it all the time and braking hard or relying more on conservative driving and regenerative braking to maintain brake pad life)? How about the data that can be collected from Tesla’s traditional solar cell’s and their new solar roof to learn more data about how power is being collected and consumed. Once Tesla releases it’s Semi-Truck, there will also be a whole new level of data available to analyze freight trucking as well and optimize efficiency with real-time drag coefficients based on freight loading. As Tesla continues to expand their business into so many different industries, the data they produce and can correlate with one another will become infinitely more valuable than it is today, whether it’s used to lower costs, raise revenues, or create completely new lines of business. The possibilities are endless.
Tesla – Financial Strength
Despite my vision for what I think Tesla is worth now or might be in the near future, I feel compelled to comment on this. Being that Tesla is still largely regarded as a startup and is going after one of the biggest, longest established industries is paramount. Tesla has long been considered in the auto industry as an “ankle biter” and not relevant. Yet time and time again, Tesla continues to show up their “more mature” brethren in Detroit. Big Auto has consistently been caught disparaging Tesla for one thing or another. But, I personally feel that Tesla has reached the critical mass at which point Detroit is (secretly) actually worried about Tesla. Tesla currently has a Net Promoter Score (NPS) of 97. The next closest brand is Honda at 49. The approval ratings by consumers is such a stark contrast that Big Auto has no other choice than to lash out in the media, either publicly or through their network of lobbyists. There are so many naysayers out there about Tesla, that it truly makes them the underdog, not just of the auto industry, but frankly the entire industrial and entrepreneurial market itself. To call out a few examples, we obviously need to focus on the most recent “downgrade” as David Tamberrino of Goldman Sachs downgraded their “sell” price. The market responded fiercely to this, however, Tamberrino stated the reason for his downgrade as “we see potential for downside as the Model 3 launch curve undershoots the company’s production targets” without any supporting evidence other than his “gut” feel. This clearly seems like an emotional response or one that has other interests at play here. But, this is just at the surface. Google search after Google search will reveal lots of articles where there are so called “analysts” who can reach such a bold statement of Tesla burns through $620 Million, Loses $13,000 per car Made. An assessment such as this is looking at pure revenue versus cars sold and makes no allowances or considerations for profits being re-invested back into the business (such as the many new business lines I’ve covered above). This is a very haphazard and elementary way to look at returns. Unfortunately, this is not an isolated issue to one analyst or company. You can find examples here and here as well. Tesla, in fact, has a gross margin on each car of 24% versus a behemoth like GM. So, when looking at the financial stability and outlook of a company like Tesla, it’s important to look not only at the current product offerings, but to consider investments (specifically R&D) into future product offerings as well. It doesn’t take much research to find that there is much more beneath the covers of Tesla than what shows up in the headlines.
So, with this slew of evangelism (a.k.a. rambling), I suppose it’s time to wrap this up into a bow and send it on its way (three-hole punch if you will, lock it up tight!). The reason why I see Tesla as a such strong buy and long-term investment, and why I believe they deserve “all your money” really comes down to diversification (I’ve identified 10+ different business lines/industries above), the depth of their publicly identified innovation pipeline (I identified 5 new vehicle models above), the untapped potential of their vehicle market (largely U.S. and Europe today with untapped China and India potentials), the unfulfilled U.S. market with 2-3 years worth of pre-orders in the queue, the just starting market for the solar roof (1M+ new homes built per year in the U.S. alone), and their future in insurance ($186 Billion Market) and ridesharing ($5.5B market via Uber alone). While many of you can be fed up with the length of this post and my obvious LOVE (OBSESSION) for Tesla and Elon Musk, I think the data stands on it’s own. Looking at current revenues, yeah, the company may be over-valued in the stock market, but look how much upside potential there is! I can see Tesla being one of the core holdings to “rule the world” alongside Google, Amazon, and Dell (in which case I really think they’re undervalued)! Anyone else that thinks they should be in that group as a large scale, multi-dimensional, multi-national company servicing consumer, commercial, and government spaces, well, if you’re not in that list, you’ve lost the contest before you even began (in my opinion). Sorry folks! BUY TESLA! (But don’t blame me if you lose money, it’s the stock market folks! It’s volatile!)
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