If you can see the future, you can become very wealthy.
In 2007, I happened to stumble onto the video of Apple’s initial iphone introduction. I am not an early adopter, or even much of a tech guy, but I instantly understood the message. The Iphone was going to change the world and everything we did. I saw the future.
I made a ton of money off this prediction by aggressively trading call options in Apple in 2007. Then the financial crisis hit, and I lost a ton of money trading Apple call options in 2008.
However, the story didn’t change. This product was still going to change the world, and I knew that more than ever because I actually bought one and realized the potential of the platform.
However, I was too scarred by the massive losses I took in 2008 to reload and trade with the vigor I had in 2007. That was a shame, because as you can see in the chart below, it could have made me very wealthy.
Ever since, I have looked to invest in companies that are going to change the world. I knew the Apple story would repeat. I just had to be able to recognize it when it did.
While it may not reach the same scale as Apple, I believe Tesla will be a similar story. It will be my largest investment (I’m 100% in cash in March 2020)when I re-enter the market. I want to explain why…
Below is a video that has had a large impact on me. I think it is worth the five minute watch:
Sinek uses Apple as an example, and explains that customers don’t buy what you do, but they buy why you do it.
Tesla falls into this same category.
Tesla has that ‘it’ factory you can’t quantify. It changes what you think of the company and their products. When the Model 3 came out, I thought it looked like a souped-up Honda Civic. When I first saw the Model X, I thought it looked more like a minivan than SUV. The Model S always looked awesome.
My perception changed of these vehicles has radically changed because my view on the company has radically changed. I see how they are trying to change the world, and I get what they are trying to do.
Further, have you ever spoken to a Tesla owner? They are passionate about defending their purchase and become fantastic sales people for Tesla. This is very similar to how fiercely Apple owners defend Apple products.
Let’s dive further into the details…
The Market:
There is no doubt that self-driving cars are the future. There is little doubt that vehicles that aren’t powered by gas are the future. The question is not if, the question is when. The point is this market will grow substantially.
This report states that electric vehicles will be 1/3 of all car sales by 2025 and ½ by 2030. This is just one guys prediction – but let’s use it for our analysis.
In 2019, there were 77M cars sold worldwide. Only 2.2M of those cars were electric vehicles (or about 2.8%). Of those 2.2M – Tesla sold 367,500 or 16.7% of the EV market.
Let’s assume the car market stays flat and that Tesla’s market share is cut in half because of increased competition. Both are very conservative assumptions as I expect the total car market to grow and Tesla’s market share not to shrink that much.
Under this conservative assumption there will be 25M EVs sold in 2025. Tesla’s share should be 2.08M cars. That also means that 38.5M EVs will be sold in 2030, making Tesla’s share 3.21M cars.
For comparison, Ford sold 2.4M cars in 2019 and GM sold 2.8M.
The point is that a rising tide lifts all boats. This market is going to explode over the next decade, and Tesla is poised to benefit.
The Financials
All the financial analysis depends on the number of cars Tesla sells in the future. Every projection is a fancy way to say guess, and there are guesses all over the map.
What we do know is at 367k cars sold (2019), Tesla was able to clear $1B in free cash flow. We also know that they predicted to sell 500k cars in 2020; and outpaced the street’s projections in Q1 significantly.
We know the margin on their cars is around 22%, where their competitors are lower (GM is 12% and BMW is 20%). You would expect that as volume increases, they should be able to gain efficiencies and increase margin.
We also know that Tesla has become very astute financially. They had a stock offering in Q1 2020 when the stock was at $767 a share raising $2.67B. That is a significant premium on the current price, and will come in handy as they try to achieve their growth objectives.
The bottom line here is Tesla will be growing a healthy double-digits for the foreseeable future. They became profitable for the first time in 2019. The foundation for a great run has been established. Who knows what it looks like when they start selling 1M+ cars a year.
Innovation
Tesla is an innovator. They want to change the world. Let’s look at several ways they are or will disrupt how we live today.
Tech Advantage
This is the secret sauce to Tesla. Tesla isn’t a car company, they are a tech company. Their tech advantage with batteries and the data they collect from their 1M car fleet in operation are huge moats around their business.
Tesla’s can travel further than their EV competition. That is a huge advantage. Their competition will catch up to where they are now eventually, but the expectation is that Tesla will continue to get better as well. That will only make their cars more desirable.
As discussed earlier, the future is self-driving cars. Having a network of one million cars on the road, gathering data on every turn in the road and every stop sign and stop light only makes the self-driving algorithm better and better. It will take years for a competitor to get to where Tesla is now.
This tech advantage Tesla has cannot be understated. That is why they just aren’t another car company. They are different and in a class by themselves.
Vehicle Purchase Model
They are attempting to change the way people purchase vehicles. There are no showrooms with pushy people (which all come at a cost to margin). They sell their vehicles online. They are so popular, they don’t advertise. The direct to consumer model is an extremely cost-effective way to sell cars.
Tesla Trucking
The trucking offering is very interesting. They, and the competitors in the space, are all working on electric semis. This is obviously the future. However, Tesla takes that a step further by attempting to make them autonomous.
Trucking is such a major industry. Imagine the disruption that would take place if you no longer had to pay drivers? That will be an absolute game-changer.
It is estimated that they already have 2000 semis on order. Some notable companies that have acknowledged placing orders for the semi are: UPS, Pepsi, Sysco, Wal-Mart, Anheuser-Busch, DHL, Meijer, Ryder Systems and J.B. Hunt.
Tesla Truck
The opinions on the Tesla Truck are on either end of the spectrum. Regardless of what you think of it, Musk believes he will be able to sell “as many as he can make for years”. The pre-order demand for the truck has been that high.
My personal opinion is they are ugly and a little too space-age for me. However, the futuristic look will appeal to many people, as well as the attractive price point.
Tesla Network Ride Sharing
Tesla plans on taking over the ride-sharing space with its Tesla Network. Musk has aggressive plans to launch this competitor to Uber & Lyft, and if he can pull it off it will flip this industry on its head. Essentially, because the cars are self-driving you will be able to send them out to earn money for you while they drive autonomously.
Imagine this – you drive to work. You send your car out to earn money for you as a ride share all day. Then, the car comes back in time for you to drive home from work.
Tesla is rumored to take about 30% of the revenue from this service. This is a brilliant way to create a recurring revenue stream from a past sale.
The owner of the vehicle will get 70%, and the earnings potential from this are rumored to be from $10k annually to $30k annually for the owner. Further, Tesla plans on putting cars that they own in areas where there aren’t enough cars. This is a game-changing idea.
Tesla Powerwall
This is a great read on the exact details of Tesla’s offering: Tesla Powerwall.
I think this offering has world-changing potential – maybe more than the vehicles.
Think about it, the way power is delivered to your home has not really changed in 100 years. This industry will be extremely disrupted by a technology like Powerwall.
Why can’t your entire house be powered off a battery and solar? Why do you need to be reliant on a utility? This has to be the future…
The key here is the battery technology. You need to be able to use your solar energy at night. As the battery technology gets better, and as it gets cheaper, the potential for this reality becomes closer.
And even before we get to that scenario – it still is an interesting offering. I am sure the math is compelling for states the require solar on new homes, or states that charge extra during peak hours, or states that allow you to sell energy produced back to the utility.
Someone will completely disrupt the monopoly that the utility companies have on power delivery. It seems like Tesla is the only one who is thinking about trying.
Tesla Megapack
Similar to the story with the Powerwall, someone is going to figure out how to do battery storage with solar. The problem with solar is the power is produced during off peak hours (during the day). That power is needed during peak hours.
Large scale utility storage is needed for the solar industry to reach the scale that the sustainability folks desire. Tesla has a lead here due to their expertise in battery storage.
This video is a great explanation of the product: Tesla Megapack
HVAC
This is complete speculation, but there are rumors that Musk is interested in getting into the HVAC space. The theory is they built an HVAC system for their vehicles, why can’t they do that for homes? If they produce an innovative model that is more efficient than the standard offerings they may be on to something.
Gigaplants
It is extremely impressive how Tesla has been able to streamline the process of building manufacturing facilities. They had notable struggles building their plant in California. However, they were able to build a plant and start manufacturing cars in 10 months in China. That is insanely fast. The costs were also 65% less to build the China plant than the US plant.
In addition, it is very exciting that Tesla is innovating with their manufacturing processes. They have filed two patents recently for vehicle wiring. One patent enables faster and cheaper wiring by robots; and the other offers redundancy inside the internal car electrical network.
What is interesting about that is it shows that Tesla isn’t only innovating with its product, but also with how it makes its product. Being a world-class manufacturer is a key to increasing margin and profitability.
The expectation as demand increases, Telsa should be able to copy this process in other parts of the world. A Gigaplant for Germany is in the works, and a Gigaplant in Texas is rumored. Efficiently being able to bring these plants online is a significant competitive advantage.
Sustainability
A quick google search can give you vastly different opinions on the green impact of electric vehicles. Regardless of the science, there is no doubt that the perception is electric cars are more environmentally friendly than gas powered cars.
Further, governments believe this and are pushing agendas to support the industry. Regardless of whether you agree with the politics, these subsidies will help grow the industry.
Safety
Tesla’s are safer vehicles than their competition. Much of that is due to the battery. The battery creates extra weight in the bottom of the car lowering its center of gravity. This makes it less prone to roll-over. It also gives it additional structural capability.
Further, the autopilot has shown to be significant safety feature. It is reported that there is only one crash for every 2.87 million miles for cars on autopilot. This is compared to regular cars crashing once every 436 thousand miles.
Here is a great article on the safety aspects of Tesla: How Safe Are Telsa Cars?
Elon Musk
Elon Musk is an interesting case. He is starting to evolve from a petulant genius to a savvy innovator. There are two qualities that I find very important with Musk.
First, he has an uncommon vision of what the future of the world should look like. He is dreaming big and wants to shape tomorrow. Second, he has a tremendous ability to put his dreams into action. Most dreamers aren’t doers. He is transforming several industries at the same time. This takes tremendous ability.
There is also a notable drawback to having Musk leading the company. Will he be distracted by his other pursuits – namely SpaceX? Also, he hasn’t always been the most mature leader. These are things to keep an eye on.
Final Thoughts
I am writing this in March 2020. The world is suffering through the Coronavirus Pandemic. I am bearish on the market right now as I believe we are the cusp of a recession.
As such, 100% of my portfolio is in cash at the moment.
However, I think this will be a prime buying opportunity for all stocks, and especially Tesla, in the coming months.
Common sense tells you that Tesla will have challenges for the rest of 2020. With the world economy in shambles, and with the price of gas so cheap, I can see them missing their growth targets this year. People aren’t going to be purchasing expensive vehicles when their businesses and jobs are in jeopardy.
Like my Apple and 2008 Financial Crisis story above, the story won’t change. The world will get over the Coronavirus, and Tesla will thrive. The dip in the market is a gift, and one I will be looking to exploit…
Pat
Disclaimer – do your own research and make your own financial decisions. I may or may not know what I’m talking about, and I’m definitely not qualified to talk about investing. Time will tell if I’m right on Tesla.
Photo by Afif Kusuma on Unsplash
