Tesla Stock, Short Sellers, EVs and Autonomous Cars


If you follow Tesla’s stock closely, you fall into one of 2 camps:

  1. Tesla is going bankrupt. Its cars are crap. It never delivers on its promises, the whole company is mismanaged, run by a con artist who has built a house of cards waiting to collapse. Elon Musk has no idea what he’s doing and his continued mismanagement is about to cause Tesla to crash and burn and its stock is on its way to $0.
  2. Tesla is an amazing company. It makes the world’s best cars. It continues to defy the odds, making cars deemed impossible by others, a reality. On its way to deliver a sustainable future, Tesla will own the transportation industry and become a Trillion-Dollar company. Elon Musk is a visionary, and key to Tesla’s success.

The two camps are polar opposites and each camp gets more convinced of its position with every passing Tesla announcement. But of course, only one of these narratives can be correct.

This article will answer the question: is Tesla destined for greatness or doomed to fail?

Before we can answer that, lets review some fundamentals…

The Stock Market

The stock market is a complicated beast and understanding it is beyond the scope of this article. However, it would be good to review 2 fundamental rules of the stock market:

  • Rule #1: In the short term, a company’s stock price is a reflection of supply & demand. More buyers than sellers equates to a higher price for the stock. More sellers than buyers equates to a lower price for the stock.
  • Rule #2: In the long term, a stock’s price will largely represent the fundamental value of the company. Revenues, profits and growth are the 3 key contributors to the long-term price of a stock.

Easy enough, but because of the significant fluctuations of the stock market on a day-to-day basis due to rule #1, many believe investing in stocks is the equivalent of gambling. That’s probably an accurate description for investors who have a short term horizon of days, weeks or even months. Without insider knowledge, its nearly impossible to predict a stock’s performance on a short-term basis and with insider’s knowledge, it’s illegal to trade a stock. So short term investing is a lot like gambling.

But unlike gambling in the casino where the odds are always in the house’s favor, short term investing in stocks can be manipulated by simply changing investor opinions. To understand how this is done, watch this video by one of CNBCs biggest anchors and a daily stock manipulator, Jim Cramer:

Crazy as it seems, its perfectly legal to sell a stock you don’t own (this is called “shorting a stock”), then spread crazy, unsubstantiated rumors about the company being on the verge of bankruptcy. Then when investors panic and sell the stock, you “cover” your short position by purchasing the stock again at a lower price than what you had sold it for. In summary:

  • You sell a stock you don’t own (“shorting”)
  • You spread misinformation about the stock to lower its price
  • You purchase back the stock at a lower price

Tesla’s stock is currently one of the most shorted stocks in the stock market. More than 32 million shares of Tesla stock (about $8 Billion worth) are sold, for which the seller doesn’t own the stock. If you think this seems like some sort of crazy loophole scheme that some day we’ll look back at and wonder how this was ever legal, you’d be right. Short sellers have every incentive to spread Fear, Uncertainty and Doubt (known as FUD) about a stock in the hope that the stock goes down, ideally to $0 where they can purchase their shorted shares for a fraction of what they sold it for.

Not all investors gamble and bet on miserable outcomes.

The most successful investors generally have a long-term horizon of years, and they don’t generally gamble on anything. They evaluate companies based on fundamentals and future potential, then they invest in opportunities that have the highest potential return and hold on to the stock long-term.

This strategy is summed up in 1 sentence by the most successful investor of all time, Warren Buffett: “Our favorite holding period is forever.”

If you are a short-term investor, this article will have no value for you. I have zero knowledge of what Tesla’s stock will do in the coming days, weeks or even months.

But if you are (or considering to be) a long-term investor in Tesla, we should be able to answer the question of whether or not Tesla has a bright future…

Disruptive Technology and the Innovator’s Dilemma

In the late 90s, I read a book called The Innovator’s Dilemma. In it, Clayton Christensen describes why market leaders are often set up to fail as technologies and industries change. His brilliant book was later named “one of the six most important books about business ever written” by The Economist. Christensen argues that market leaders tend to maintain their leadership positions because of their market reach and power, until that is, there is a disruptive technology that comes along and over time unseats them from their leadership position.

An easy way to understand this concept is to look backwards at industries that had dominant players that changed. Examples would include companies like IBM who maintained their leadership in the computing world (despite heavy competition), until the PC disruption occurred. Kodak maintained their leadership in Photography until the digital disruption occurred. Microsoft maintained its massive leadership in software, until the Internet disruption occurred.

Leading companies maintain their leadership because they have name recognition, a distribution network, lots of financial resources to fight new competition, not to mention the experience to build great products that helped them become a leader in the first place. IBM knew how to make mainframes. Kodak knew film. Microsoft knew desktop software, and so on.

However, when a disruptive technology comes along, there is no established market for the new technology. Even when there is a market, it’s relatively small compared to the revenues of a market leader. Incumbent leaders see the new market as a distraction to their already established $20, $50, $100 Billion or larger businesses. Nobody has time to invest in and chase after a market that’s 1/100th their core business.

Therefore, disruptive technologies are often developed and improved by newcomers who see the potential. To a newcomer with $0 in revenues, $1 Billion is a great market opportunity to chase. To Ford, that’s 0.75% of their revenues. But once a new startup hits $1 Billion in revenues from a disruptive technology, they have major competitive advantage as they have been accumulating name recognition, a distribution network, the experience and talent to continue to be a leader in the disruptive category.

By the time Microsoft was a Billion-Dollar company, it was too late for IBM to dominate the new PC world. By the time Google became a Billion-Dollar company, it was too late for Microsoft to dominate the Internet world.

You get the idea. Lets move on to cars and Tesla…

The EV Disruption in the Car Industry

For nearly a hundred years, the US car industry has been lead by 3 automakers: Ford, Chrysler and GM. Internationally, they are joined by Toyota, VW, Hyundai, Nissan and small handful of others. For decades, these companies have fine tuned the art of designing, manufacturing, distributing and selling impressive cars that all rely on a fundamental marvel of engineering:

Harnessing the combustion of fossil fuels to power a transportation device.

For better or for worse, this pinnacle of human technology has helped humanity achieve unimaginable advancements that would not have been possible without the Internal Combustion Engine (ICE). But we also now know that ICE-based engines are responsible for huge amounts of greenhouse gasses that are rapidly warming earth and causing catastrophes around the globe.

For the past few decades, car companies had provided no real alternative to gas-powered vehicles, citing that electric cars are impractical, cost too much, and they are a niche market that nobody wants. They argued that electric cars end up being just as bad for the environment because they simply move the burning of fossil fuels from the vehicle to the power plant.

These excuses not to invest in electric vehicles, is the classic “incumbent leader vs. disruptive technology” syndrome.

It turns out that with the proper research and investment, electric cars are practical, they can be competitively priced, and they are far more efficient than gas-powered vehicles, even if the local power plant is burning coal! Most importantly, based on the success of Tesla’s Model S, X and 3, it turns out that they are not a niche market after all. Given a good choice, consumers would pick electric cars over their gas-powered counterparts by a wide margin. The way we know this is because all 3 of Tesla’s cars are leaders in their category and Tesla has shown that Electric cars can provide far superior performance, maintenance and joy of driving, than their gas-powered counterparts.

Tesla has Awakened the Giants

Great! Tesla has shown electric cars are in fact the future. All the major car companies now agree. Every major car company plans to completely revitalize their lineups with electric options. Finally! The giants have been awakened. With the enormous resources that these companies have (collectively near $1.5 Trillion in annual revenues), it’s game over for Tesla, right?

Well, not so fast. Disruptive technology is unkind to the incumbents. Turns out Kodak was a pioneer in digital photography in the 1990s and had the most advanced digital photography technology in the world before digital photography was even a thing. My first digital camera was a Kodak – it’s actually how I met my wife, but that’s a different story. Similarly, GM was light years ahead of its competition back in 1996 with the EV1. But when you have a $100 Billion+ business selling gas-powered engines, and all of your headaches are caused by the business unit that’s generating no revenues and is only costing your company hundreds of millions in investment, it’s easy to see why these companies would shut down their disruptive technology research!

The argument today is that the car companies finally see the potential, and this time around, they are throwing $10s of billions at electric car lines, so the results will be different.

Here is the problem: Imagine you are Ford. You build more than 1 million trucks per year and you want to offer an electric version of your truck. You can’t stop building the gas-powered trucks because that’s your current bread and butter. Without it, you will die. So you have to add a whole new lineup of trucks that are electric. After years of trying, Ford has learned the hard way, that virtually nothing about their gas-powered Truck-building knowledge translates to building an electric truck. Their designers have no experience designing trucks where the battery needs to be in the floor. Their engineers are Mechanical Engineers who build combustion engines and know virtually nothing about electric circuits and electrical components necessary to control electric flow into an electric motor. Even their manufacturing processes are not easily translatable to building battery packs. It turns out it’s so freakin hard, even for Ford, to build an electric truck, that it’s given up and instead invested $500 Million into an electric startup called Rivian.

And Ford is not alone. The Tesla Model S was released in 2012. Since then, it quickly became the top selling car in the luxury sedan category, destroying the sales of Mercedes’ S class, BMW’s 7 series and a handful of other luxury cars. Every one of those luxury brands has been promising an electric “Tesla Killer” that has yet to arrive.

The disruption of Electric Vehicles is here and real, but there are no guarantees that existing car companies can make, or even survive the transition to EVs.

If the EV disruption wasn’t enough to shake up the landscape, there are two other major disruptions affecting the car industry…

Car on Demand and Autonomous Vehicles

There is no question that ride sharing services like Uber and Lyft have completely changed and are disrupting consumer expectations for transportation. The convenience of having a car magically appear exactly where you happen to be, has even made many reconsider whether or not they need to own a car. If you can spend $500/month and have a Chauffeur drive you around everywhere, why would you buy a car that needs maintenance, pay for insurance, gas, and have the headache of driving when you could spend that time on a productive task?

Take away the driver, and you’ve eliminated the only negative in that equation. The risk of having a stranger drive you around, or to have to maintain an awkward conversation you don’t want to have is gone. The driver is also the highest portion of the cost for the trip. The holy grail of transportation is getting a car on demand using autonomous technology to get you to your destination. Safer. Cheaper. More convenient.

Every car company, as well as Uber, Lyft, even Google and Apple realize this is the future. The race is on – the only question is when and who will emerge as the winners.

While Uber and Lyft seem to have a technical advantage by already providing the exact same service, but using a driver, it’s counter-intuitive to realize that Uber and Lyft are actually at a major disadvantage to providing driverless vehicle services. Assuming they build the autonomous technology necessary to accomplish driverless trips, the cost of having to buy the vehicles, then upgrade them post-production to add autonomy, will mean their cost per vehicle will be significantly higher. But even worse is the fact that these companies employ hundreds of thousands of drivers who make a living on the Uber and Lyft network. There would be no ambiguity who the bad guys are if Uber or Lyft start to put these drivers out of a job. The same companies that were once hailed as Job Creators would become the villains that are now killing the very jobs they created. It’s unlikely that either Uber or Lyft will survive this transition, but fortunately for them, this transition will take years.

Then there is the car companies like GM, Ford, Daimler Benz and others who are investing billions in self-driving technologies. While car companies have a legitimate shot at building autonomous technologies, their expertise has never been in software development. Car companies are notoriously horrible at making software. Just look at how many taps, clicks and movements it takes to enter a destination address into any car navigation system. This is a problem that was solved by Google and Apple more than 10 years ago, yet for the past 10 years, none of the car companies have been able to figure out how to simply copy existing patterns for entering in an address into a navigation system. For these car companies to miraculously figure out computer vision, neural networks and all the other software technologies necessary for autonomous driving seems like an unlikely event.

The real competition for autonomous driving and car-on-demand is a 3-way race between Tesla, Google and maybe Apple.

Google seems to have the advantage here. It has had an autonomous research unit since 2004 and its Waymo car service is actually giving rides in production (with a backup driver). This advantage can’t be underestimated. Google also has the resources to buy 100,000 cars, equip them with autonomy, and put them on the road. Such an investment would cost Google, a company with nearly $100 Billion in cash, just $10 Billion to do. Although to get to 1 Million autonomous cars, it would require all of Google’s cash, nearly a $100 Billion investment. Doable for a company like Google, but certainly not cheap. Google is in an awesome shape in this race.

Then there is Apple. With the secrecy that Apple operates with, it’s unclear what Apple is planning, but we might be able to make some speculations. First, Apple definitely lags behind Google because they don’t have nearly as many cars on the road. Second, it’s highly unlikely Apple will choose to build its own cars. Manufacturing cars would take years, at least 3-5 years, to iron out. If they wanted to make cars, they would have had to start building plants a while ago. Apple’s best bet is to follow Google’s strategy, use its massive cash reserves to buy cars, outfit them with autonomous technology, and put them on the road. Under the leadership of Tim Cook, it’s unlikely this “me too” strategy of copying Google will work, especially if Apple’s other businesses ever have hiccups. If Apple sales ever decrease, the pressure on Apple would be to stay focused on its core business of iPhones.

And finally, there is Tesla. Tesla is probably far behind Google in Autonomous technology, but what’s impressive about Tesla is the rate of improvement. This rate of improvement is also accelerating because of the number of vehicles Tesla has on the market that are equipped with its self-driving hardware sensors. Lets do a little math…

For every car that is equipped with self-driving hardware:

  • Google, Apple and others spend somewhere between $100,000 – $150,000 plus pay for a backup driver (for now)
  • Tesla makes a gross profit of $10,000 – $20,000 (Model 3 or Model S/X) and gets a free backup driver (the owner)

This advantage for Tesla is absolutely insane. While others have to buy their cars, equip them with self-driving technology, then hire a backup driver to drive the car around, Tesla gets to sell its self-driving technology to its customers allowing its customers to finance the deployment of these cars all over the world, while it makes a profit on selling each one.

Think about that for a moment. In order for Google to put 1 Million self-driving cars on the road (after the technology is perfected), it will cost Google $100 Billion. Tesla on the other hand will make $10 to $20 Billion in profits by deploying a million self-driving vehicles. In fact, it’s already done exactly that by deploying around 400,000 cars that have the hardware sensors needed for self-driving. It’s already gathering data from 400,000 cars, and its doing so while making money from each of those cars!

More than the cost of the cars, Tesla has another major advantage. The AI and Machine Learning needed to perfect self-driving is heavily data dependent. The more cars you have on the road with the hardware sensors, the bigger variety of road conditions you encounter, and therefore, the faster the AI algorithms learn. Tesla has the largest fleet of cars, deployed in the widest array of geographical locations, giving it a major advantage for data collection to teach its algorithms how to drive. And it’s doing this without having to employ backup drivers or paying for the cars. Tesla’s backup drivers are the vehicle owners who paid full-price for the privilege of being a backup driver for Tesla’s autonomous AI going to school!

The Tesla advantage is incredible. Nothing like this has ever existed! This is a major disruptive advantage that no other car company in the world has. It’s also something that’s beyond the understanding of most Wall Street analysts. They have nothing to compare it to.

Tesla’s Autonomy Day

If Tesla’s future is so bright, why is it that so many Wall Street analysts have a “Sell” or “Underperform” rating on the stock?

Great question! Let’s dig into that.

Last week I had the fortunate experience of attending Tesla’s autonomy day.  At the event, I had a chance to talk to several wall street analysts that cover Tesla. In my conversations, I realized a critical factor: Tesla is covered by “automotive analysts.” When I would ask about their thoughts on Uber or Lyft, they mentioned those stocks are covered by their “Internet analysts.” This is a huge discrepancy in viewpoints. The automotive industry hasn’t had major new players in many decades. Existing players go bankrupt regularly (GM, Chrysler, etc.). Their margins are extremely low and investing in disruptive technologies usually means making an SUV that can give 20 miles per gallon – not exactly a revolutionary disruption. It’s not that these analysts hate Tesla, it’s that they are comparing Tesla to Ford or GM and they have no idea why Tesla would be worth more. In their world, a car company doesn’t ever have a 10x increase in sales. Tesla is an anomaly that they don’t understand. Car companies are often valued at just 0.5x revenues because of their low profit margins. Tesla is valued at 2x revenues, so it appears way over-valued.

On the other hand, you have companies like Uber and Lyft being evaluated by "Internet Analysts.” As a result, despite the extremely low margins of Uber and Lyft, these companies are getting valuations that are 10x their revenues! In comparison, Tesla has a faster growth rate, higher margins, and a larger market potential, but is being valued (on a revenue basis) at about 1/5th the price!

Tesla’s self-driving technology is not yet perfect, but it’s pretty damn good:

Even if it takes Tesla several years to iron out the AI software, every year, it just keeps accumulating vehicles that all have self-driving hardware. Then with 1 Over The Air (OTA) update, all of them can become Robo Taxis overnight. Imagine a company that goes from having 0 Robo Taxis to all of a sudden having 1 million or 2 million Robo Taxis all over the world! Each one has the potential to add thousands of dollars to Tesla’s profits.

Elon Musk and Tesla Mistakes

Tesla and by extension, Elon Musk, have made their share of mistakes. Turns out great companies make mistakes all the time on the road to success. Some pay for them with punishments on the stock price…

In 2011, Netflix announced they were splitting their DVD business and separately charging for streaming and DVD. The results were pandemonium. Wall Street analysts turned on Netflix. Short sellers cashed in on the panic and cited competition from HULU and Verizon – announcing the death of Netflix. They spend too much, have too much debt and not enough cash to live long. Sound familiar? As the stock price nose-dived from $40/share (split adjusted) to just $9 per share, it seemed like the panic was real and Netflix’s days were numbered. Just look at their stock chart during that period:

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But of course, the panic was not real. The rumors of Netflix’s demise was just pure fabrication and despite so many people losing money for selling on the panic that was falsely generated, nobody ever went to jail! That’s what’s wrong with short sellers. They create a false narrative on purpose specifically with the intention of causing a stock to go down.

In the years that followed, Netflix continued to deliver quarter after quarter and eventually the false narrative of Netflix getting destroyed could no longer be supported. As a result, Netflix’s stock shot back up and has gone up more than 42x (that’s 4,200%!!!) since 2011 lows.

The arrow in this chart points to the right-most part of the chart above!

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If you had invested $2,500 in Netflix when the Wall Street experts had turned on them with “Sell” ratings and journalists were predicting the end of Netflix, your investment would be worth $100,000 today!

Similar stories exist for Apple in 2000 under Steve Jobs, and Facebook in their first year of going public. Who remembers the headlines “Twitter is Dead” just a few years ago? The stock is up more than 200% since Twitter was declared dead. The examples are endless. When the foundation of a company is solid, irrational fears create opportunities to buy. 

In fact, Warren Buffett has another great quote that applies here: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

Evaluating Tesla Rationally

So how can you tell if Tesla is truly over-valued and about to go bankrupt, or if it’s legitimately a great buy because of all the panic and fear that has been created? Great question. While we wait for all the Tesla Killer EVs to come out, let’s look at the facts around Tesla:

#1: Tesla Revenues have increased by 400% in 4 years!

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No other public company in the world has had this kind of growth with similar numbers. In fact, Tesla’s awful, horrible, couldn’t get worse, Q1 2019 results generated more revenues than Tesla did in all of 2015! Tesla’s stock price is roughly about the same as it was in 2015. The stock has a ton of stored energy.

#2: Tesla has 3 cars, each of which are the #1 selling car in their category. Not by a small margin, but by a large margin! The Model S, X and Model 3 are all the best-selling cars in their respective categories, which is pretty incredible when you consider how few variations they have.

#3: Tesla Q1 2019, supposedly their worst quarter ever, had a year-over-year revenue increase of more than 33% and they made 110% more cars than the same quarter in Q1 2018.

#4: Tesla car owners are amongst the happiest, most satisfied and most likely to buy another Tesla, than any other car company! Have you ever spoken to a Tesla owner that said “oh man, I wish I never bought a Tesla?”

#5: The fastest super cars in the world have a hard time keeping up with Tesla’s 7 passenger SUV, but if that wasn’t bad enough for the future of gas-powered vehicles, the new Tesla Roadster 2 goes from 0 – 60 MPH in just 1.9 seconds!

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In the meantime, for the past 4 years that I have been following Tesla, these have been the headlines:

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These headlines are just Friday’s top stories about Tesla on Yahoo Finance. Day after day, the stories on Tesla’s stock in the finance news pages are negative. Meanwhile, Tesla continues to defy the odds and makes products everyone else thinks it was impossible. The very same people who thought the Model S was not possible, then the Model X, then the Model 3, then producing 5,000 of them per week, are amongst the loudest critics still! Not a single one ever goes on CNBC and says “you know what, I was wrong – turns out, Tesla can make 5,000 Model 3s per week. I was wrong!” Yet, there they are, day-after-day, making their next bogus prediction of doom. You would think I made this stuff up. It’s crazy! Just watch this exchange between CNBC anchors and Cathy Woods (start at around 3:48 into it for the Tesla portion):

If Tesla continues to deliver with the Model Y, the Tesla Truck, Roadster 2, the Semi and other future cars, and there is little reason to think they wouldn’t considering their track record, Tesla will likely exceed $200 Billion in revenues within 10 years. 

And that’s not even taking the potential upside of autonomous driving. If their dream of creating a Robo Taxis becomes a reality, their margins will easily double or triple during that same timeframe. When you combine these factors, Tesla has a shot to be a Trillion-Dollar company in 10 years. That would put their stock price at over $5,000/share!

I’m going to end with 1 more Warren Buffet quote: “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”


P.S. I’m not affiliated with Tesla in any way. I’m just a tech investor (been doing it for 25 years) who has never seen a more crystal clear opportunity with a public company. In hindsight, it’s obvious that companies like Apple, Netflix, Facebook, etc. were going to be huge successes, but sometimes the FUD factor (Fear, Uncertainty and Doubt) that is created around companies by their competitors, journalists and “shorts” (those who bet against the stock then go out and make up lies and false rumors), causes stocks to have a mismatch between their value and their actual price. 

And there’s this:

A Deep Analysis of Tesla and its Stock Potential (the case for Tesla shares hitting $3,000!)

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:

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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:

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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. 

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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

Here is what it looks like:

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LINK to Above Spreadsheet
(feel free to comment with more accurate market size numbers)

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:

  1. 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.
  2. 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.
  3. The shift to car as a service. Services like Uber and Lyft are making car ownership less important.
  4. 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!

Yes, I own Tesla stock. I’m not stupid!

Review of my Model X, Tesla and the Car Industry

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…

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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:

  1. Electric Cars
  2. Software as the Foundation of Cars
  3. Uber-like Car as a Service
  4. Autonomous Vehicles

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…

Model X

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!

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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.

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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:

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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!

Range Anxiety

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.

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