Once upon a time Steve Jobs was ridiculed by the pundits, and even Michael Dell himself (the king of the PC world at the time), for having such a naively simple plan to put Apple back on the map.
His plan was simple. He broke down all computers into 4 types: Consumer Desktops, Consumer Laptops, Pro Desktops and Pro Laptops. His goal for Apple was to have one fantastic offering in each of these 4 categories. It took Apple a few years from 1997 to fill each of the 4 boxes, but eventually Apple had its four boxes filled with the following:
The plan’s genius was not obvious to everyone. At the time Steve unveiled this plan, Dell, the king of the PC world, had over 100 different computer offerings. The pundits, analysts and competitors made fun of Jobs’ plans, saying it would be impossible to meet the needs of every type of PC user with just 4 different computers.
Fast-forward 20 years, and Elon Musk is deploying this exact plan on the car industry. Those who get it, have catapulted Tesla’s market cap past Ford and GM. The pundits, analysts and competitors, continue to be baffled by how this is possible, calling Elon Musk a con-man who stops at nothing to build a house of cards. They point to the delays in the original Model S or the Model X as validation for their arguments. They argue that the competitors are going to crush Tesla, when their fans wake up and realize the plethora of better options.
The words and phrases used to describe Elon Musk and Tesla are eerily similar to those used to describe Steve Jobs and Apple fans in the early 2000s. Apple fans were the illogical fanboys who acted like members of a cult, blindly following their beloved leader.
But to those who understand what is happening here, Tesla’s strategy is genius in its simplicity. While Toyota has become the king of the car industry with more than 80 different car models and has the rest of the car industry following in their footsteps, Tesla is taking a different approach: Make one fantastic car in each product category:
The Apple iMac launch in 1997 was a success, but it was nowhere near the success of the Model S. Tesla, in its first shot at the luxury sedan market, catapulted to the #1 auto-maker in the category, unseating the Mercedes-Benz S-Class.
While Mercedes had a 100-year head-start on Tesla, within 3 years of the Model S release, Tesla already owns a 25% market share, at the expense of all the other car-makers. The pie has not gotten any bigger. Tesla is just eating other car maker’s slices. All indications are that Tesla’s Model X is doing the same to the Luxury SUV market. With over 400,000 pre-orders for the Model 3, Tesla appears to be destroying it yet again in another product category. That’s 3 for 3!
What does this mean for Tesla’s Stock?
Even if you have great success in the marketplace, that doesn’t mean the stock price will follow. Sometimes, the price of a stock can get way ahead of its performance. And it’s true that Tesla’s stock is definitely ahead of its current revenue performance. But the stock market is all about future speculation of a company’s potential profits. If you had speculated that Apple would one day sell 200 million $700 iPhones per year when they first introduced the iPhone in 2007, you could have 10x your investment despite the fact that Apple’s stock was already ahead of its 2007 revenue performance. Likewise, if you had speculated that Netflix would one day have more than 100 million streaming subscribers (and maybe 500 million some day in the future), you would have 10x your investment in the past 5 years!
So lets speculate what Tesla’s future revenues could look like, say in 7-10 years. For that, I built an intentionally simplified spreadsheet, where I took a stab at approximate market size of each of 6 categories of car types. I then estimated the international market size to be approximately double that of the US market size. Finally, I took a stab at the approximate market penetration of Tesla’s vehicles in each category. It’s important to note that the US Luxury Sedan market share in particular is pretty close to accurate. All the other estimates are smaller than Tesla’s performance in the luxury class, so in my opinion, these numbers are actually quite conservative
The next question is whether or not $135 Billion in revenues is possible? Is the market large enough to support a single company having $135 Billion in revenues? Well, it turns out the auto industry is larger than $1.5 Trillion per year! And companies like Toyota, GM and Ford have approximately $250 Billion, $166 Billion and $150 Billion in revenues individually! So $135 Billion in revenues would be less than a 10% market share and would still be below some of the largest automakers. I think Tesla has a shot at being larger than Toyota in 10 years, but lets stick to the conservative numbers.
I also happen to think that 4 disruptions in the auto industry will largely shift the advantage to newer car companies. These auto market disruptions include:
The shift to Electric cars. This is clearly the unstoppable future and most car companies have already recognized that this is happening by planning their own electric models.
The shift to software being the foundation of cars. This shift is hard to see for those who are not in the software industry. Yes, Toyotas and Fords also have lots of software in them, but they are mostly car companies with software slapped on top of the car. Tesla is a software company with a car wrapped around its software. Subtle, but important difference.
The shift to car as a service. Services like Uber and Lyft are making car ownership less important.
The shift to autonomous cars. When cars drive themselves, the same car can be owned by multiple people. Fractional car ownership will be a thing, making $50,000 cars affordable even in third world countries!
For those of us in tech, the way the car industry is playing out resembles a lot like the cell phone industry, where smartphone leaders like Blackberry and Microsoft, were rapidly replaced by iPhones and Androids. Remember when the hard-core Blackberry fans complained that “oh I can’t type on glass…I need to feel the keys being pressed!” Those same people now complain that “I need to hear the engine roar when I press the gas.”
The advantages that Tesla has over its competitors are enormous. It already owns the electric car market (with ~60% US market share of all-electric vehicles); it has the largest battery manufacturing facility; and the largest worldwide network of fast chargers. Imagine the advantage that Ford would have if it owned the majority of gas stations and no other vehicle could get gas from a Ford gas station. That’s the type of advantage that Tesla currently enjoys for electric vehicles! Not to mention Tesla is a software company and all of its current and future cars now have the hardware for autonomy. Its technical advantages are only going to get stronger.
And that’s just their vehicle potential!
Remember that other company Tesla bought, Solar City, that all the analysts were in an uproar about? The potential of doing another $30-$50 Billion in rooftop solar (~1 Million homes per year) is there. Plus augmenting power plants with battery power to even out power distribution (and lower brownouts and blackouts) has another $20 Billion+ potential. Tesla could see $200+ Billion in revenues in less than 10 years!
Unfortunately, like Amazon, Tesla will also not have much profits during that enormous rise. Building massive manufacturing facilities has its costs. As such, the nay-sayers will focus on the lack of profitability as the reason why the company will always be over-valued. But as a shareholder, I want Elon and company to be focused on future potential of profits, rather than optimizing profits for the short term. I would much rather Tesla optimize for 10 or 15% profit margins when it has $200 Billion in annual sales, and therefore $20-$30 Billion in profits, than when it has a mere $10 Billion annual in sales.
So what does a $200 Billion revenue company, that’s still rapidly growing, and profitable go for? About 2-3 times revenues or about 20-30 times profits. That puts Tesla at $400 Billion to $900 Billion market cap or about $2,400 to $5,400 per share!
Last week, I became a first-time Tesla owner of a Model X. The experience of buying and driving this car is so far from ordinary, I wanted to capture some of my thoughts about the Model X and the entire car industry as a whole…
After nearly a hundred years, the car industry is about to be radically transformed because of four major disruptions that are all happening in the span of about a decade:
Software as the Foundation of Cars
Uber-like Car as a Service
Any one of these disruptions would be enough to shake up an industry and change the leading manufacturers, but when you take all of these disruptions together, the implications are global, vast and deep. These are the kinds of disruptions that displace millions of jobs, change world powers and can even trigger wars.
But first, lets talk about the car…
From the moment that I saw, walked up to and sat in my Model X, I was in love. Not because of the surprisingly useful falcon-wing doors, which I had previously dismissed as a marketing gimmick, but because immediately I was customizing the car’s settings for my preferences.
You see, Tesla’s cars are built on a software foundation. That means everything, from the motors to the suspension to the seats, is controlled and configured via software. Do I want my door to open as I approach the car and close when I get inside? Hell ya! Do I want Ludicrous mode that makes the car take off as if it’s an F-18 catapulting off of a Navy aircraft carrier? Ummm, yes please! Do I want my garage door to open and close when I approach and leave my house? Who doesn’t!
Configuring the car to my taste was much like the experience of customizing my iPad, and it’s just as easy! The brilliant 17” touch-screen display in the middle of the car makes you wonder, “why has nobody else done this before?” Even more importantly, with the incredible success of the Tesla Model S for the past 4 years, why hasn’t any other car company done this still?
Where’s the Start Button?
When I was finally ready to drive the car, instinctively, I was looking for the start button. There isn’t one! You simply put the car into Drive and press the gas (or is it the electricity now?). The incredibly smooth and quiet ride is a different experience. It’s so quiet that it’s almost as if the car is always coasting, but punch the pedal, and the car explodes, in eerily silence, from 0 to 60 MPH in about 3.2 seconds. Passengers get pinned to their seats with about one G-force of acceleration, which usually comes with a gasp of “oh wow!“ It’s easy to hit 100 MPH in the blink of an eye (not that I would ever go that fast – I’ve just heard it’s easy to do :).
The amazing part of all this explosive power is that no professional driving experience is necessary. There is no need to shift gears (there are none!), there is no careful balance of clutch and gas to make sure the wheels are not spinning in place and there is absolutely never any fishtailing in this car. The onboard computer and software that controls everything makes sure power is appropriately distributed so that the car stays in perfect alignment and control at all times.
The performance, traction and handling are so mind-blowingly good, it’s hard to believe it’s a 6-passenger SUV.
Enter Auto Pilot
Then, there’s the auto-pilot features…put the car in Cruise control, and it will maintain your speed and automatically slow down as it sees cars in front of you. I’ve had a similar feature on Mercedes (Distrionic) and Toyota (laser-guided cruise) for years, but the Model X has perfected it. If you pull the cruise control bar twice, the car will also take over the steering, keeping you centered in your lane. It’s incredible to see the car turn the wheel on its own, slow down and speed up again as it navigates the road. While this feature works on city streets, I’ve found it to be most impressive, and most useful, on the freeways where it’s virtually fool-proof. The Autopilot feature puts the Tesla very close to autonomous driving. It’s not perfect, but it works surprisingly well and when it doesn’t work, it tells you to take over.
Some interesting features of auto-pilot include the ability to have the car change lanes on its own if you turn on the blinker, and it reads the speed limit signs, which also limits your auto-pilot speed to a max of 5 MPH over the limit. A surprising gap in auto-pilot is the lack of ability to read stop signs or see red lights. The car will blow through a stop sign if there are no cars in front of you. You actually have to resort to using the breaks. So arcane!
The Fit and Finish
About 7 years ago, I considered buying a Tesla Roadster, but after sitting in one at a Tesla showroom in Santa Monica, I decided against it. The fit and finish just wasn’t there for a $100,000 vehicle. Of course, it was understandable, considering Tesla was a new car company, all the roadsters were hand-made, and they only made about 400 of them per year. They were still fine tuning their skills.
That experience is now completely flipped on its head. The fit and finish of the Model X is above and beyond what I expected. The interior is simply gorgeous. The seats are sporty and comfortable with beautiful stitching. But perhaps the most impressive part of the fit and finish is Tesla’s attention to details.
As you put the car into park, the controls on the screen change to operate the doors. You have full control over all 4 doors of the car. Without hesitation, you can push all the door buttons to open everyone’s door. The doors have sensors that detect objects around them and avoid opening the door into an object. There are tiny unnoticeable lights on the doors that illuminate the exterior. The backs of seats are made of a beautiful glossy material rather than the typical fabric, giving it a futuristic and sleek feel that’s very unique.
The car industry doesn’t know what is about to hit it, but frankly, even if they did, there’s little they could do about it.
Disruption #1: Electric Cars
One of the most impressive stats I have seen on luxury car sales is this chart that compares 2014 luxury sedan sales in the US to 2015:
This chart shows that the Tesla Model S has become the #1 car in its category. There are two things that are worth noting about this incredible accomplishment for a new car company: The first is that Tesla has beaten every luxury car-maker, including prestigious names like Mercedes and BMW, by spending nothing on advertisement. The second is that Tesla’s incredible growth has happened not because of the growth of the entire industry, but rather at the expense of every other car-maker in the category. That is the power of disruptive changes in play. It’s easier to grow a company when the entire industry is growing. It requires a disruptive change when the market size has already peaked.
There’s also little question that the Tesla Model X will be the #1 car in the luxury SUV market within a couple of years. You might think that’s a bold statement considering the category has BMW X5, Audi Q7, Mercedes GL series and Porsche Cayenne, but in fact it’s a foregone conclusion. Tesla Model X already has over 20,000 pre-orders and that was before anybody had ever seen or driven the cars.
So how is this happening?
With so many other electric car options, why is Tesla kicking so much ass while other car companies are struggling to sell electric vehicles? The answer is that Tesla is the only car company that its survival depends only on electric cars. While other car companies with $100 Billion+ in revenues from gas-powered vehicles can dabble in a hobby-like electric car project, Tesla has to solve all the problems that come with owning an electric car, the biggest of which starts with range!
From the moment I stepped foot into my Tesla, that battery meter that looks just like the iPhone battery meter, grabbed my attention. I was annoyed that it wasn’t full. I was worried about the 180 mile range estimate it was giving me (at full, it would have been 250 miles). I got doubly worried that my, shall we say aggressive driving, lowered my expected range to about 60% of the estimate. In the first day, the range went from 180 miles to less than 100 and I had barely driven 40 miles. Woh! I had been over-doing the ludicrous launches of the vehicle.
Range anxiety is real, but the way that Tesla has solved it is brilliant. First, Tesla doesn’t make cars with less than 200 mile range, which generally means you can drive anywhere in town, even aggressively, and still be fine. By the second day of driving, I realized I had nothing to worry about. Even with the standard cable connected to my home 240-volt outlet (40 amps) I get about 25 miles of charge per hour. That meant that my car is fully charged every single day, usually in less than 4 hours. With a full charge, it would be virtually impossible to run out of juice, even if I was driving around all over Phoenix.
For longer road trips, Tesla has created a network of Super Charging stations only for Tesla vehicles. With the lack of infrastructure for adequate and fast charging stations for electric cars, Tesla decided to solve this problem on its own. So they’ve created the equivalent of gas stations that are just for Tesla cars – for free! These superchargers can top off a close-to-empty Tesla in little more than 30 minutes – did I mention it’s free!? And they are strategically placed throughout the country so that I can take a trip from Phoenix to Flagstaff, Las Vegas, Los Angeles or basically anywhere in the country, without any problems.
No other electric car can do that!
With the enormous resources available to Ford, GM, Toyota, Honda or Nissan, despite the fact that all of these car companies have electric cars, none of them have invested a dime in infrastructure. It wouldn’t even cost that much. To open 1,000 fast charging stations all around the US would cost about $250 Million. Even if it cost a Billion Dollars, it’s a rounding error for car companies that have $100 Billion+ in revenues. Instead, to add insult to injury, all the major car companies have invested $0 in infrastructure and pump out electric cars with max ranges that are well below 100 miles and then take 8 hours or longer to fully charge. What a joke! By the time they wake up and create longer range electric vehicles, Tesla’s super-charger advantage will be impossible to overtake.
That’s Disruption #1.
Disruption #2: Software as the Foundation of Cars
Marc Andreessen famously wrote an article that Why Software is Eating the World, and even if I wasn’t a biased software guy, just looking around what has happened in the world in the past 20 years, it’s obvious he’s right. It’s also no surprise that software has been increasingly creeping up into cars over the past couple of decades. But while other car companies rely on vendors to help them incorporate software into their cars on an as-needed basis to control the breaks, or to provide Internet Radio and other features, Tesla has built the entire car with software as the foundation.
This provides a significant advantage to Tesla in ways we can’t even imagine yet today. When the iPhone first put together a phone, a music player, a camera and GPS all into a single device, nobody imagined how the world would change in less than a decade. We are on the verge of that kind of a shift from cars that have software in their core. Take the Tesla mobile app, even in its current basic form, the app can display the current location, speed and power consumption of the car and update it in real-time. You can even put the car in Valet mode if you forgot to do so when you leave the car. Having software at its core means that when you put the car in valet mode, the car will also limit its max speed, lock the glove compartment, the front trunk and limit the use of the nav system so it can never reveal your home address!
As anyone who has ever built software can confirm, building great software is hard! Tesla is a software company to its core. Founder Elon Musk, previously founded PayPal and other software companies and made his mark initially through the creation of software companies. Understanding what it takes to build software gives Tesla a significant advantage over traditional car companies.
What about Apple and Google Cars?
If having software as the foundation of a car gives a car a significant and disruptive advantage, then it would be reasonable to assume that Apple and Google could have a disruptive advantage to get into the car business. Yes and no. Yes, the software part of these companies would give them an advantage, but the fact that neither Apple nor Google has ever built anything that contains a single movable part, not to mention two tons worth of parts that need to be machined, welded, fit together and painted to perfection, gives them a significant disadvantage. Those are not the kind of skills a software company can pickup in less than a decade. That’s why Google has partnered with Ford to try and bring their self-driving cars to market. And while partnering will allow Google and Ford to benefit from each other’s skills, they will not be able to integrate the experience of the car in the same way that a single-vendor company could.
Disruption #3: Uber-like Car as a Service
One could ask the question “who even needs a car anymore!?” There is a growing percentage of the population, especially in highly urban cities, for whom owning a car is no longer a necessity. A car is available to drive you anywhere you go, anytime you want. So why pay for a car, then spend countless hours per year to drive it, park it and service it? Its a lot of hassle.
This disruption to the car industry is real and happening right now. The fewer people who buy cars, the smaller the car industry becomes. A smaller number of cars can service a growing number of people when they are being driven all day long.
This disruption is exponentially more potent when combined with self-driving autonomous cars, so lets get right into disruption #4…
Disruption #4: Autonomous Vehicles
We are now less than 10 years away (possibly as few as 5) before we have completely autonomous cars with no backup driver. Companies like Uber even have stated goals of putting autonomous driver-less vehicles into their fleet of cars. But what Uber might not realize is that this disruption in the car industry could put them out of business faster than any other threat. Because the transition to autonomous vehicles would have to be phased in for Uber, it will likely be faced with drivers who will go on strike the moment the first autonomous car enters Uber’s fleet. As the hundreds of thousands of drivers will not simply stand by idle as Uber tries to replace them with robots, Uber’s revenues could be hammered to near zero overnight, forcing its hand to cave into the will of its drivers. No large company can survive losing 100% of their revenues as they transition to new technology. As a result, Uber is destined to be a human-centric service for the remainder of its life and that’s probably a good thing.
On the other hand, car companies like Tesla, who will also have autonomous cars, could create new ways of car ownership: no up-front costs, no maintenance, no parking necessary. Just summon a car, anytime, anywhere, for a small monthly fee. With no drivers to pay (or go on strike) and with multiple people being able to share the same fleet of cars (probably on a 5:1 ratio of car buyers to cars, perhaps a bit conservative), it could radically reduce the cost of having access to a car while at the same time radically reduce the number of cars needed in the world. Imagine being able to summon a Model X, anytime you wanted, for 1/5th of the current cost. When multiple people are sharing the same car, the cost of near-ownership will be dramatically reduced.
What All This Means
Last Thursday, Elon Musk revealed the Tesla Model 3. Prior to the reveal, in less than 24 hours, Tesla had already taken more than 100,000 pre-orders for the car before anyone had laid eyes on it. In the history of the car industry, that has never happened before. It’s quite possible that Tesla will have more than 1 Million pre-orders for the Model 3 before the first delivery of the car in 2017. Tesla is well on its way of achieving its mission of ridding the world of carbon-generating cars and it’s going to happen fast. Seeing Tesla’s success has finally woken up other car companies. While they won’t be able to do as good of a job, there’s little question that the entire industry will be moving towards all-electric vehicles. In less than 20 years, the entire transportation business, which includes car companies, oil companies, gas stations, trucking companies, drivers, and even countries who’s main export is oil, will be radically disrupted.
What will happen when the price of oil doesn’t matter? What will happen when trillions of dollars of company and country revenues shift from 100-year-old companies and countries in the middle east, to brand new ventures? Hopefully only good things, but wars have been fought over a lot less at stake!
I’m eager to see what will happen next. In the meantime, I love driving my Tesla and I love the fact that Tesla and Elon Musk are the catalyst behind all of this change. My prediction is that Tesla is going to be the world’s largest car company in about 10 years.