Tesla's business model could be in trouble

Over the past few years, as its sales and stock have risen, Tesla’s core business model has been shifting.

The carmaker was founded in 2003 with the basic goal of bringing an exciting all-electric vehicle to market. It succeeded, and under CEO Elon Musk (who started out as just an investor) the company has grown to sell nearly 100,000 vehicles a year, the newest of which are equipped with semi-self-driving technology.

To drive this growth, Tesla also invested in a far-flung network of fast-charging stations.

About a year after the launch of the Model S sedan in 2013, Tesla’s business plan began to undergo modifications. An energy-storage business was launched, and in 2016, Tesla merged with SolarCity. The first Tesla solar product, the Solar Roof, officially went on sale last week. Meanwhile, Tesla continued to build a massive battery factory in Nevada.

There are useful connections and synergies among these various businesses, and they both fit with and enable Musk’s master vision for a fossil-fuel-free world.

Unfortunately for Tesla, though, the company could be playing a transitional role in the broad disruption of traditional mobility than many analysts and experts now think is underway.

Tesla is the bridge

Tesla Detroit sales vs market capAndy Kiersz/Business InsiderTesla’s surging market cap.

In this story, Tesla is an innovator that proved it was possible to start a new car company after the globe hadn’t really seen one for decades; Tesla also revived the electric car, which had languished for a century after losing out to the internal-combustion engine.

Tesla is a bridge between the old ways and the news ways, with a foot in each camp — and potentially the inability to prosper in the new world that it made possible. Remember that once you’ve crossed a bridge, you don’t need it anymore. It’s in the past.

In a research note published Monday downgrading Tesla to “equal-weight” from “overweight,” Morgan Stanley analyst Adam Jonas argued that competition will soon arrive for Tesla, but that the competition might not look like what everyone thinks it would be:

Internet of Cars (IOC) is an addressable market we estimate to exceed $US10 trillion today plus the value of more than 600 billion human hours spent inside cars annually (10 trillion miles/25mph x 1.55 occupancy). IOC is too big and too complementary to harvesting and analysing data for the world’s most valuable firms to ignore. As such, we expect the next few months and years to reveal a number of catalysts that show with little ambiguity that there are some very big technological and commercial bets being made right in Tesla’s backyard. If investors are prepared to give Tesla credit for some meaningful degree of success (however small) in these markets, they must also be prepared to share the road with others.

What Jonas leaves unspoken is the emerging idea that replacing the traditional automobile with something better is rapidly being supplanted by the notion than physical transportation is far less lucrative than the activity of passengers inside the vehicles.

Silicon Valley getting out of cars

“Big tech companies have gone cold on being assemblers,” Ewen Cameron Watt, a Senior Adviser at Blackrock, said in an interview.

“They want to be data managers. It’s all about the data and connectivity,” Cameron, who is also the co-author of a study from the Blackrock Investment Institute titled “Future of the vehicle – Winners and losers: from cars and cameras to chips.”

Tesla isn’t ignoring this opportunity — machine learning from its fleet of Autopilot-enabled vehicles is serving up a massive amount of real-world information about self-driving technology. But Tesla is also trying to do several things at once, just when it comes to the auto side of its business.

It’s trying to produce and sell big-ticket luxury cars, service them, launch a cheaper vehicle, and provide widespread fast-charging. Forget adding semis and pickup trucks to the mix, as Musk has said Tesla will — executing on just one of its existing challenges would be impressive.

However, Tesla’s traditional competitors are already good at all those things, while Tesla’s tech rivals now appear uninterested in replicating Tesla’s experience.

Narrative vulnerability

In response, Tesla is trying to exploit the elasticity of its business model, which may or may not be there to exploit. Thus far, developing new lines of business hasn’t hurt Tesla, but the company’s historic financial underperformance has been masked by a surging stock price and the company’s ability to access the capital markets for billions in ongoing funding, despite the carmaker being 13 years old, with an IPO staged in 2010.

Tesla’s vulnerability is unique: I call it “narrative vulnerability.” Electric cars are yesterday’s story. The new story is about self-driving systems and Big Data.

The problem with narrative vulnerability is that once it takes hold, Tesla’s only way to deal with is to adjust its story. Tesla has been able to do that, up to a point. But at some point, the features of its new story won’t fit with a very different narrative.

The critical issue is that Tesla will always be tied to cars: designing them, building them, selling them. In that respect, it could wind up a victim of its spectacular success.

This column does not necessarily reflect the opinion of Business Insider.

More from Matthew DeBord:

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