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TESLA: The Next Trillion-Dollar Company …

Business

… or an investment trap?

To a few long-time bulls like Catherine Wood from Ark Investment, Tesla will be the Amazon of this era. CNBC has shown Tesla no love for years and the bears have predicted bankruptcy from the day the stock went public. It’s a real dilemma for investors.

I'm a big believer in Disruptive Investing. I have no doubt in my mind the value of the company will someday grow to a trillion dollars and more. However, if you don’t already own Tesla stock, I think there are a few important ideas you should carefully consider before putting your hard-earned money at risk. In this article, I will discuss;

  • Why Tesla’s electronic vehicle (EV) business is years ahead of the competition.
  • What’s going on with Tesla’s power generation business.
  • Why Tesla appears to have such a large (and growing lead) in autonomous driving (and why this is such disruptive technology in its own right)
  • The reasons I would think twice about buying Tesla right now.
Tesla’s EV Business

Contrary to all the nonsense you might have heard over the last few years about ‘Tesla killers’ coming to take away Tesla’s market share, about how the quality of Tesla production is terrible, the fact is — Tesla is alone in the EV market right now and is likely many years ahead of all competition.

7 years ago, Tesla introduced the Model S. Currently, this car has over 600 km of range on a full charge and the range is constantly increasing. The other established automakers are bringing new cars to market that have either less range, less power, or both. If you take a moment to review this EV comparison compiled last year, you will see Tesla’s cars are faster and have a longer range than all other competitors.

You will note the Porsche Taycan is not on this list. Although arguably as fast or perhaps even slightly faster than a Tesla Model S according to independent testing, it’s priced between $150,000 and $240,000. The Tesla Model S starts at under $90,000 including the hardware for autonomous driving and around $116,000 if you want all the bells and whistles.

After years of research and development, Porsche engineers were able to produce a car equivalent in acceleration and top speed to the Tesla Model S for nearly double the sticker price. If I still haven’t convinced you of Tesla’s complete dominance of the EV market, consider the maximum range for a Porsche Taycan is 323 km — only half the range of a Tesla Model S.

Tesla is also making its own onboard computer and AI chipsets for its entire fleet of cars. According to Japanese automotive engineers after a recent teardown of a Tesla, it’s feared Tesla’s AI technology lead may be as much as 6 years.

According to the Nikkei Asian Review;

One stunned engineer from a major Japanese automaker examined the computer and declared, “We cannot do it.”

Teslas are also the only cars that actually get better after you buy them. All Teslas receive regular over-the-air software updates designed to improve performance, increase range, and add features like Dog and Sentry mode.

Almost no other competitor is thinking about offering this kind of feature.

Teslas are incredibly safe vehicles and regularly receive top honors. Although Tesla’s autopilot is not fully autonomous yet, data shows using Tesla’s autopilot feature is considerably safer than operating the vehicle yourself.

Years ago, the market leaders had a chance to squeeze Tesla out before they could get any foothold, but they didn’t. There are probably a lot of reasons why legacy car makers refused to enter the EV market earlier, but I think there were mainly two;

  1. The entire infrastructure of legacy carmakers revolves around expensive factories that are designed to make internal combustion engines. The idea of throwing out all of this investment in favor of making electric cars, that at least initially, would be a money-losing endeavor, was likely dismissed as impossible in the board room, even before being presented to shareholders. Shareholders would have likely voted down the idea due to the extreme losses a legacy car maker would experience trying to convert their entire ICE car-making process over to EVs. It will take shareholders prepared for significant pain, for legacy carmakers to convert fully to EVs. If you’ve supported Ford for the last 5 years, you know the pain I’m talking about.
  2. Never underestimate the stubbornness of someone with a vested interest in something. I have a good friend who thinks EVs are a fad and Tesla will go broke soon. Before you laugh, you have to understand, he has a vested interest in legacy energy companies surviving. He works for a pipeline maintenance company. He’s a trained petroleum engineer. His University instructors had a vested interest to indoctrinate him. I promise you, legacy carmakers are also filled with executives and engineers that to this day, insist electric is a dead end and internal combustion engines (ICE) will continue to rule the day forevermore. It will take very strong leadership to clean out the established, old-guard that cannot and will not accept the eventual death of the internal combustion engine.
Trucks

Some of the all-electric car makers are showing some promise. Rivian and Bollinger Motors are two all-electric companies producing electric trucks in the near future for the mass market. Unfortunately, although superior to ICE trucks in many ways, it appears neither new market entrant will produce a vehicle as fast, as far-ranging, as cheap, or as powerful as Tesla’s Cybertruck.

Hypercars

A number of all-electric hypercars are also coming to the market, likely in 2021. Most of these cars are extremely expensive and generally will be manufactured in very small numbers. Tesla will be releasing the new Roadster in 2021 as well. For $250,000 or less (a small fraction of the price of all other hyper-cars in this category) the Roadster’s top speed is virtually as fast as the fastest competitor, has the absolute fastest acceleration, and has by far the longest range on a single charge.

I could go on about Tesla’s world-wide network of charging stations, their dominant lead in battery technology (which appears to get bigger every year)… but I won’t. I will simply end this section by saying, Tesla has created a considerable lead against all automotive competitors and I would not be surprised in the slightest if Tesla ultimately begins supplying other automobile manufacturers with drivetrains and battery technology after the competitors realize there is no reasonable way they will ever catch up.

Tesla’s power generation business

Tesla’s acquisition of Solar City in 2016 was met with considerable criticism. Musk defended the acquisition, calling it ‘blindingly obvious’ and ‘a no brainer’. However, Tesla’s power generation business has actually gone virtually nowhere since the acquisition 4 years ago. True, there have been some successes — the world’s largest lithium battery installation in Australia (see more below), a backup power battery installation in Osaka Japan to provide power for commuter trains in the case of a power failure, and advances to the new solar roof technology appear to finally be starting to pay dividends.

According to Musk, focus on the Model 3 ramp-up robbed all of the resources the Solar City acquisition needed to grow. Model 3 is now well established and Elon says 2020 will be a year for massive growth in solar and energy storage. Late in 2019, Musk was quoted as saying he thought the energy side of the business could easily grow to be as large as the automotive side, however, he thinks growth on the energy side of the business will actually be a lot faster.

As usual, there are a lot of mixed opinions from commentators and analysts about Tesla’s ability to rapidly grow in a business that currently sees between 10–20% growth from more established businesses like Sunrun and Vivint. However, defenders of Tesla point to the integration of panels, storage, and EV, all under the same roof. Many company advocates feel the combination of top-quality product matched with seamless integration — all controlled by your smartphone — may be the key to success in this new, but rapidly growing market segment.

Allied Market Research agrees solar should see at least a 20% compounded growth rate through 2026. The question is, will Tesla also be able to take market share from larger, more established competitors as they have in the automotive industry? I think there are two main points to consider;

  1. First is the name brand. Everyone on the planet knows Tesla sells solar products and storage products. I had to google the names of Sunrun and Vivint for this article. Even though far behind the sales of competitors, Tesla has demonstrated a real ability to promote their products without any marketing budget. It’s clear Tesla’s solar and energy storage business will benefit greatly from the media’s fascination with Musk and the army of dedicated social media fans that follow every move of the company.
  2. Tesla’s Solar Roof already has a multi-year waiting list. True, this backlist is due to Tesla’s inability to install all of the orders, but like all Tesla products, there is a long list of dedicated Tesla customers who will accept no other brand. This is a powerful argument for Tesla bulls. Like all Tesla products, Tesla Solar Roof is designed to exceed the specifications of all competitors. In fact, the company claims the solar tiles are 3x as strong as regular roofing tiles and they are expected to last longer than traditional tiles. Currently, Tesla Solar Roof and all of its components, including power storage, are guaranteed for 25 years. Like Tesla’s automotive products, the solar roof is completely integrated into a Tesla ap. Owners can monitor and track power generation and consumption from their smartphones.

Tesla’s Megapack

Although not nearly as well known as Tesla’s automotive and solar lines of business, Megapack looks to be a big contributor to Tesla’s bottom line in the near future.

Currently, in peak hours, utilities are forced to bring on more expensive power generation to satisfy peak demand from the power grid. This kind of solution is extremely costly for utilities but necessary to avoid brown-outs or black-outs experienced by less robust power grids (for example Cebu City, where locals claim brown-outs are so common, they are considered normal).

Megapack could solve this problem by providing exactly the right amount of power exactly when it is needed. How much this technology will be implemented around the world isn’t completely clear yet and will probably take different forms in different areas. Yet, it’s easy to imagine long lists of orders in the near future by cities around the world looking to improve their power grid services in a cost-effective, environmentally friendly way.

According to the South Australia Government, the Tesla Megapack that was installed in 2017 has saved taxpayers $40 million per year. South Australia has found the project so valuable, they are now expanding the project by 50%. Australia believes the expansion (with some additional services) will result in an additional $47 million in savings annually for South Australia electricity consumers.

Autonomous Driving

We are quickly approaching a day when cars will not need a human to operate them. This is a big deal because Tesla plans to offer a Tesla autonomous network in the future where Tesla car owners can (if they want to join the service) allow their cars to autonomously drive passengers around, kind of like a driverless Uber service. This means in theory, someday soon, you could drive autonomously to work in your Tesla, then let your car drive other passengers around all day while you work, then call your Tesla to pick you up at the end of the day to drive you home. Effectively, the autonomous driving network would allow people to earn two incomes simultaneously.

It’s also easy to imagine entrepreneurs buying small fleets of Teslas to autonomously drive passengers around, all day and night. This new kind of passenger service business would essentially consist of cleaning the cars regularly and watching your bank account grow.

It’s also easy to imagine towns or even small cities purchasing fleets of Teslas instead of purchasing and operating a more expensive bus or train service. Rather than having public transportation drive around empty for long stretches of the day, a fleet of autonomous Teslas could simply park themselves in strategic areas around a community, patiently waiting to be ordered by a passenger — day and night. Communities that have never been able to afford a public transit system, one day soon may be able to provide a cheap, convenient, comfortable way for citizens to more easily travel around their community.

You may have heard Tesla has a lot of competition from Google (Waymo) and legacy automakers in the autonomous driving area. This opinion is simply untrue. In fact, there are only two true competitors in this field of study; Tesla and Waymo. No one else is anywhere close to developing autonomous driving.

Most competitors have decided to use lidar in order for the car to detect objects around it. Lidar is very accurate but it suffers from one serious problem — Waymo must ‘geofence’ an area before a car can navigate by itself.

This is a massive and expensive job (if the plan is to geofence the entire planet).

Additionally, the cost of the Waymo equipment is considerably more expensive than the self-driving hardware addon currently available on all Tesla vehicles. Waymo has driven 10 million miles autonomously since 2009. and is at level 4 autonomous driving in geofenced areas only.

Musk is betting that a camera-based system is superior because it allows the AI system to ‘see’ as a human does. Therefore the AI system can easily identify traffic signs, signal lights, and vehicles much in the same way humans do with their own eyes.

The downside to using a camera-based system is there is a lot more work to do when training the AI. However, Tesla has already driven over 2 billion miles autonomously. Every time a real-world driver takes over control of the car, the data is sent back to Tesla for the new information to be incorporated into updates of the driving system. Tesla is currently at level 2 autonomous driving, anywhere in the world. However, with the massive amount of data being poured into the neural net every day, it looks like Tesla will almost certainly be first to fully autonomous driving.

Why you need to still think twice before buying Tesla at these prices

Clearly, the future of Tesla looks bright. As of the writing of this article, Tesla has completed an additional $2 billion stock offering. This leaves the company with a massive pile of cash on the balance sheet. What they will do with the cash is just conjecture at this point. In the last conference call, Elon suggested Tesla would not raise any more money because he felt the company was already responsibly spending money as quickly as possible.

My guess is Tesla executives have decided to increase the pace of Gigafactory building. Tesla is already building a new Gigafactory in Germany, and there have already been rumors of a new factory being built in Texas. I think they will also use some of the new cash to build a second factory in China in the near future.

However, as good as Tesla looks in theory, there are some sobering things to think about that could make an investment in Tesla today a real nightmare.

  1. The next recession. If an investor were to buy Tesla today and next week we start a long 2-year bear market, it could be 4 or 5 years before an investment today would become profitable. Our last recession was in 2008. You may recall it was a very bad recession. Many investors had to wait for years to make back the money they lost in that bear market.
  2. Coronavirus. There’s a lot of conflicting information concerning how dangerous this virus is. Conflicting information causes confusion and misinformation to spread. Hotels in Osaka are very empty. I assume flights are being hit equally hard. Companies I consult with are canceling travel and conferences. This pandemic could get a lot worse and the economy could go with it. A hard hit to the world-wide economy would also be a hard hit to Tesla stock prices.
  3. A presidential election in November. If Trump wins, maybe everything continues — the stock market keeps getting pumped by the Fed, tax cuts, and various other programs suggested by the Trump administration. If the Democrats unseat Trump, how will that affect Tesla? Would a President Sanders help Tesla by following through on a ‘Green New Deal’, or would he go after Tesla and other corporations to ‘pay their fair share’ of taxes?
  4. Ron Barron argues Tesla’s stock is not overvalued. In fact, Ron thinks Tesla could go a lot higher because Tesla has multiplied its revenue generation many times since 2014, yet the stock price has remained within a relatively tight trading range until going parabolic late last year. Never-the-less, Tesla’s stock price is extremely high and it would take some amazing execution on the part of Tesla to justify such a high stock price. Should Tesla have a poor first quarter or some other short-term disaster, shareholders could turn on the company and start dumping the stock.

FOMO — Fear of missing out

I’ve been holding Tesla shares for nearly 3 years. I am sitting on a lot of profit, so I have the luxury of being able to do nothing. Even if Tesla were to drop 50%, I would still be way in the money. And as I said in the opener, I have no doubt Tesla will be the Amazon of this era. So, should you buy Tesla stock? Yeah, you should, but maybe not today.

If I were giving advice to a friend today, I would recommend at least waiting for Tesla to stumble on execution. Wait for a bad announcement from the company — Tesla stock is notoriously volatile. Better yet, hold your cash on the sidelines and wait for the inevitable next bear market.

I know it takes incredible patience when a stock you really want to own keeps going higher and higher. However, in the case of a serious bear market, I would not be surprised to see Tesla shares temporarily drop back down perhaps hundreds of dollars, before going to new highs.

Disclosure — I am currently long Tesla. Please seek professional advice before making any investment decisions.

I’m Edward Iftody — If you’d like to learn more about disruptive investing, I encourage you to read more at www.blockchainin.asia

 

This article was originally published by Edward Iftody, Medium.com

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