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Is Tesla the iPhone of cars?

Assif Shameen
Assif Shameen11/3/2021 02:06 PM GMT+08  • 10 min read
Is Tesla the iPhone of cars?
Last week, Tesla became the latest listed company to have traded with a market cap of over US$1 trillion.
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Last week, electric vehicle (EV) pioneer Tesla joined companies such as Google’s parent Alphabet, software behemoth Microsoft, iPhone maker Apple, e-commerce powerhouse Amazon.com and social media giant Facebook as one of the handful of listed company to have traded with a market capitalisation of over US$1 trillion ($1.35 trillion).

A key catalyst for the whopping rally that sent Tesla’s market value to an electrifying US$1 trillion was the news that car rental giant Hertz Global would buy 100,000 Teslas, at list prices, by the end of next year to rent out to clients. Tesla shares largely maintained the gains even though on Nov 2, Tesla boss Elon Musk tweeted that the contract had not been signed while Hertz maintained that delivery had commenced.

Hertz’s huge order is seen as a sign that EVs are finally going mainstream. Analysts expect Tesla to deliver up to a million cars this year, more than double the 499,000 units it shipped last year. Tesla deliveries rose 73%, while the top five global automakers’ were down 27% in the last quarter due to a shortage of chips and other components. As its gigafactories in Berlin, Germany, and Austin, Texas, ramp up, its Shanghai plant reaches optimal capacity, and supply chain concerns ease, Tesla is forecast to deliver nearly 1.35 million EVs next year and 2.8 million EVs by 2025.

Tesla’s surge has been powered by the ongoing transition from internal combustion engine to battery EVs. Rising oil prices this year due to a global energy crunch are a bonus tailwind. EV sales worldwide soared 160% in the first half of this year to 2.6 million despite severe shortage of semiconductors, a key component, as well as production and distribution issues due to the Covid-19 pandemic. EVs will make up just over 3% of all cars sold in the US this year and about 12% of cars sold in China, the two biggest markets. EVs will make up 20% of all cars sold by 2025 and 40% by 2030, according to investment bank UBS.

The EV pioneer’s gradual climb from a start-up just 11 years ago to its current trilliondollar giant status has not been smooth. Indeed, Tesla has had several brushes with bankruptcy along the way. In 2016, the company’s finances were so precarious that maverick founder Elon Musk reportedly approached Apple CEO Tim Cook to explore the possibility of the iPhone maker acquiring Tesla, but Cook refused to take his call. As recently as August 2018, with Tesla’s stock in a funk, Musk was having trouble raising capital to tide the firm over until increased car sales brought more revenues. In what was seen as a sign of desperation, Musk tweeted that he was “considering taking Tesla private at US$420 [or a split-adjusted price of US$84]. Funding secured”.

Unfortunately, Tesla CEO had not given serious thought to privatising the firm, nor had he negotiated any deal with Saudi Arabia’s sovereign wealth fund or secured any funding. The Securities and Exchange Commission fined him and Tesla US$20 million each, asked him to step down as chairman while allowing him to keep his CEO position, and forced him to stay off Twitter. Musk hunkered down, raised US$13 billion in capital in four separate tranches, and started delivering on his promises. Its stock is up 1,780% since that controversial tweet three years ago.

Misunderstood on Wall Street

Regular readers of this column may recall my pieces on EVs and Tesla over the years. “Tesla is one of the most misunderstood companies on Wall Street,” Cathie Wood, chief investment officer of ARK Invest and one of the biggest bulls on the iconic EV maker, told me when I last wrote about it. “Tesla is not just a technology company or one that just makes cars,” she said. “It is also a battery company, a utility company, and designs its own artificial intelligence chips.” Tesla’s stock was hovering around a split-adjusted US$50 at the time. Back then, Wood had an US$800 split-adjusted price target on the EV pioneer. After the stock exceeded her overly ambitious target in March, she made an even more audacious prediction: Tesla’s stock will rise to US$3,000 by end-2025.

Tesla’s stock has been on a tear since May 2019 when it was hovering around a splitadjusted US$36. It is now up over 31-fold. An investment of US$32,500 in the company 2½ years ago would have grown to over US$1 million today. A maverick’s grand vision for EVs, the availability of cheap capital, an auto industry ripe for disruption in the aftermath of the 2008 global financial crisis and a growing legion of loyal fans all helped Tesla get to where it is today. When it needed cash to develop popular Model 3, it asked fans to pay up US$1,000 advance to join the queue. Four hundred and fifty thousand of them did, boosting its cash pile by US$450 million. Tesla has been in the right place at the right time. Investors’ interest in sustainable investing themes like climate change has touched new peaks in the aftermath of the Covid-19 pandemic.

How does Tesla’s US$1.11 trillion valuation compare with its peers? General Motors (GM) is currently valued at just US$79.7 billion, Volkswagen US$145 billion, Japan’s Toyota Motor US$287.4 billion and China’s Geely Automobile US$33.4 billion. Indeed, the rest of the world’s listed automakers combined are currently worth US$980 billion, even as traditional internal-combustion engine carmakers accelerate their own EV rollouts. Tesla sees itself as more of a clean energy play and tech platform rather than an automaker. It has been dubbed “iPhone on Wheels” because it is doing for cars what Apple’s smartphone did for consumer technology. Amazon’s market value was once compared to the combined value of all booksellers and publishers around the world. Yet books were a mere stepping stone for Amazon to become the “Everything Store”. From toilet paper to a US$100,000 Rolex watch, Amazon sells whatever you want to buy, and if it does not have it, a third-party seller will be willing to sell it on its platform. When iPhone was introduced 14 years ago, it was compared to Nokia or Blackberry even though the distinguishing feature was its software.

iPhone-like margins

Tesla’s ability to command iPhone-like gross margins and build an Apple-like ecosystem has been the secret sauce in its recipe for success. Tesla’s gross margins in the last quarter were a record 28.8%, up from 25.8% in the June quarter. Traditional auto firms have 10% gross margin, though Toyota enjoys an average 17% margin while Mercedes Benz maker Daimler has 20% margin. Gene Munster, a partner at Loup Ventures in Minneapolis, believes in three to five years, Tesla will likely command Apple-like 40% gross margins on cars.

Unlike other automakers which sell through franchised dealerships, Tesla sells cars directly through a network of its company-owned showrooms. That helps keep overall costs low and margins high. Tesla also forgoes all spending on traditional advertising budgets, relying purely on word of mouth. That helps improve margins and boost cash to reinvest in research and development, or R&D. Last year, it invested US$2,984 on R&D per car sold and spent almost nothing on advertising. In comparison, GM splashed out US$394 per car on ads and forked out US$878 per car on R&D, while Toyota splurged US$454 on ads and US$1,063 on R&D.

Proprietary autonomous driving technology software will further propel Tesla ahead of traditional automakers, whose forte is hardware. The EV pioneer has had some form of a “driver-assist” function powered by cameras and sensors in its higher-end models for four years now. But the adaptive cruise control Autopilot system, which can steer, brake and accelerate a car on its own, has been controversial, to say the least. Tesla’s cars driven on Autopilot, for some reason or other, just keep crashing into other vehicles when this technology is on. For its part, Tesla insists that its cars are far safer with the technology switched on than they are when it is not.

Two years ago, George Brian McGee, a Florida executive, was driving home in a Tesla Model S operating on Autopilot when he dropped his smartphone during a call and bent down to look for it. Neither McGee nor the Autopilot noticed that the road was ending and the car just drove past a “stop” sign and a red light, smashing into a parked car and killing a 22-year-old university student. The Autopilot software gave McGee a false sense of security. He would not have used his phone while driving or bent down to pick it up if the car was not on Autopilot.

Detractors say Autopilot and Tesla’s more advanced driverless Full Self-Driving (FSD) system package are just not ready for prime- time and only lure drivers into a false sense of security that can lead to fatal accidents. But Musk insists he will start delivering cars without any steering within three years, which will also help make Tesla’s Robotaxis ubiquitous. The FSD, which is currently on trial, would cost owners an extra US$10,000 on top of what they pay for the car. As the steering disappears, prices of FSD-powered Teslas are likely to drop.

Much to Tesla’s chagrin, competition is coming. Over US$75 billion will be spent just on new EV battery plants globally over the next five years. Volkswagen now has a slew of EV models on sale. GM, Nissan, Ford and Daimler are doubling down on their EV strategies and introducing new models, while others like Toyota, which until now focused on hybrids, have gotten the message and are pivoting to battery electric models. Start-ups such as Lucid Group, which raised money through a merger with blank-cheque SPACs, or special purpose acquisition companies, are also ramping up. Last weekend, Lucid delivered its first Air Dream Edition, which features 520 miles (837 km) of per-charge range and costs nearly US$170,000, or 50% more than the top-of-therange Mercedes-Benz S-Class model.

For over a decade, Musk has successfully sold a dream of affordable EVs. He has taken a page from the success story of Apple’s co-founder Steve Jobs, the Pied Piper of consumer electronics, who was laser-focused on delivering the best customer experience. Having pushed nearly a million cars this past year, Musk must now focus on the long-term goal of selling 20 million cars a year and getting over 25% of revenues from segments other than EVs, like energy storage and solar roof panels. A cheaper mass-market EV costing US$25,000 with the option of the more sophisticated Autopilot software is likely to be on the streets by early 2024. A truly autonomous Tesla using sophisticated FSD will not be too far behind. And a cybertruck should be on roads within two years as well. While Musk might be slightly behind schedule on some of his promises, he now has a track record of delivering products years ahead of rivals.

It promises to be quite a ride for Tesla investors.

Assif Shameen is a technology and business writer based in North America

Photo: Bloomberg

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