- Tesla is heading into 2019 in better shape than it ever has been in the past.
- But that doesn’t mean it’s time to let Tesla bullishness run free.
- Many of Tesla’s ambitious supporters are making big mistakes about the company.
Tesla turned an important corner a few weeks back when it reported its first quarterly profit since 2016. Coming after easily the most surreal and strange summer in the company’s 15-year history, this was good news – and a fulfillment of CEO Elon Musk’s prediction that the carmaker would swing from red to black by the end of 2018.
Don’t be fooled: Tesla’s balance sheet remains debt-laden, and its future cash needs are likely to be a drag on future profits.
But don’t overlook the most salient aspect of the company’s finances – its revenue. Tesla topline was almost $US7 billion for the Q3. Tack on another $US3 billion, not a stretch given Tesla’s growth in vehicle deliveries, and you have a quarter to one-third of what GM or Ford does every three months, with a global manufacturing footprint and dozens of cars and trucks sold.
All the money that Tesla has coming in the front door is an inconvenient truth for the company’s naysayers, who would rather fixate on quality control, Musk’s shenanigans, or on the competition that is set to arrive – even though the global electric-vehicle market is currently so small that nobody really wants to compete yet.
That doesn’t mean Tesla’s latest results should overly embolden its boosters. We’re not talking about Toyota here; Tesla is a small carmaker that captures an outsized share of media attention, and that can often mask its shortcomings.
The inconvenient truth for this group is that Tesla’s isn’t actually going to take over the world and become the Apple of cars – or match GM’s prodigious achievement, over 50 years ago, of capturing half the US auto market. As with most things when it come to Tesla’s biggest fans, that hasn’t stopped them from making huge mistakes. Here’s a rundown of the five worst.
The electric-vehicle market will see massive growth in the next decade, and Tesla will dominate.
Years ago, this unsupportable argument came largely from the more emotional regions of the pro-Tesla camp. Those who made it were justifiably disgusted with the traditional auto industry for its many sins of the past, hated the idea that they had to buy a car from it, and saw Tesla as a sort of saviour company.
As Tesla has grown and experienced all the pain that car companies deal with all the time, this view has retreated. People still love Teslas. But because a lot more of them own an actual vehicle, they understand that Tesla is making something that has four wheels and windows.
Impractical expectation have migrated out of the early adopter space and into the finance realms, where it’s always been important to promote investment stories about Tesla that are mega-bullish.
Loup Ventures’ Gene Munster, for example, argued last year that Tesla’s addressable US market could be 11-million vehicles annually (Munster offered this prior to Tesla’s summer of discontent in 2018, and even before the carmaker’s Model 3 sedan hit serious production delays, since resolved).
As I noted at the time, Munster’s number is borderline nonsense. If Tesla were to sell 11 million vehicles annually in the US, it would control 65% of the 2018-level market, which should come in at over 17 million. And bear in mind that at its peak in the 1950s – when it had only two major domestic competitors in Ford and Chrysler – General Motors captured just over 50% of the market; it now leads all US sales with less than 20%.
Equally egregious is Ark Invest, whose CEO, Cathie Wood, thinks Tesla will in five years will transform itself from being primarily a carmaker to being a mobility service-provider, minting a share price of as much as $US4,000. Tesla has nothing that even vaguely resembles even an incipient mobility business. Waymo, which has been testing self-driving vehicles for close to a decade, has just started to roll one out.
It doesn’t strain credibility to propose this as an investment thesis – it insults it. (Ark was among Tesla investors who argued against Musk’s failed effort to take the company private, and to Wood and her team’s credit, seems to have delivered admirable returns to investors through its stakes in “disruptive” technologies.)
It gets worse. Ark also thinks that 17 million EVs will be selling annually by 2022. Forgetting for a moment that there’s something of an unrealized contradiction between Tesla plugging EVs into a service, rather than the ownership model, the maths here is challenged by reality.
We would be much, much better off as residents of planet Earth if the EV were to grow rapidly over the next three years. Five-to-seven million in annual sales would be wonderful. If you go to 17 million, however, you have to figure out how the globe’s automakers are going to either convert existing factories now assembling gas-powered cars to build EVs; or locate the capacity expansion worldwide that would support manufacturing EVs at a level equal to the entire yearly US market for passenger vehicles, in a boom state.
Disagreeing with these Tesla ultra-bulls doesn’t mean that you’re anti-Tesla, by the way. It just means that you’d prefer for Tesla to be part of a reality-based scenario – one in which Tesla doesn’t dominate, but participates, in a robust market for EVs.
Teslas will be able to drive themselves.
Maybe someday. But not any day soon. The first highly automated vehicles are just beginning to appear, operated by Waymo and GM’s Cruise unit. This is an extremely high-cost undertaking that GM President Dan Ammann has called the biggest engineering challenge of our generation.
Tesla’s vehicles have the hardware and software to provide what experts call “Level 2” autonomy. The Autopilot system is extremely good. Cadillac Super Cruise – also a Level 2 system – is better at hands-free highway driving, but Tesla’s Autopilot can handle most other situations a bit better.
That’s not good enough for some Tesla boosters, who grasp that although Tesla has for over a decade been famous as an electric-car company, self-driving doesn’t require electric propulsion. There are good reasons to use electric batteries and motors for autonomous vehicles, but they aren’t dealbreakers.
Autonomy has captured the tech world’s imagination, and so a hard pivot has been made in that direction. If you don’t attach full autonomy to the Tesla story, well, then Tesla could become just another electric-car company among many manufacturers, slogging it out for market share while Waymo and Cruise capture all the new, rapid, lucrative self-driving growth.
Can’t have that. So Teslas must drive themselves. Even if it’s currently unlikely they will.
Tesla is the next Apple.
The analogy-or-bust crowd loves this one. Apple had a charismatic oddball as a leader – and so does Tesla! Apple almost went bankrupt before a gargantuan resurgence – and so did Tesla! Apple links hardware and software in a gorgeously designed and cultishly valued ecosystem – and so does Tesla!
I could go on, but you get the point.
The core concept here is that Tesla is making the automobile into a software platform, just as Apple made the iPhone into one. This implies the software-driven hypervalue creation that Silicon Valley prizes.
True, iPhones aren’t cheap. But even if you pay $US1,000 for one and don’t have it subsidized through your wireless carrier, you can own it more or less free an clear in a year or two. At which point it has depreciated a terrifying amount. Apple iPhones are worth essentially nothing in a very short period of time. They don’t even make attractive paperweights.
Luckily for Apple, iPhone owners tend to commit to lifetime participation in the device, upgrading to new ones at regular intervals.
This can be compared to what people do when they lease cars. But it gets tricky when you look at car ownership. Cars and houses are the two things that people are willing to go into pretty significant debt to buy. For houses, you usually wind up with an appreciating asset. For cars, you don’t.
Folks are willing to borrow quite large amounts of money to buy Teslas. Over time, if you’re shelling out $US1,000 a month for your vehicle, you expect it to do what it’s supposed to do. An iPhone, by contrast, can be a less-good hunk of hardware than an Android device and still win because it’s part of Apple’s ecosystem. It can be good enough.
Tesla has kind of gotten away with being incredibly good at some stuff and not very good at all at other stuff. And the most part, its vehicles have been superb. But they need to remain stupendous, especially at lower price point, if Tesla is to prosper.
Elon Musk can run Tesla like he’s a one-man army.
Musk has been able to move the needle through a huge investment of personal time and energy. I don’t think he enjoys what he’s termed “production hell,” but there’s no question he’s good at it!
This can’t hold up for much longer.
Tesla could be operating two large car factories 2021 or 2022, on different continents. Newer plants could be making vehicles and batteries. If demands increases, more factories will be needed.
Musk won’t be able to operate a company at that scale; he’ll barely be able to serve as its top strategist. The incredibly messy Model 3 rollout might have convinced Tesla enthusiasts that no matter what goes wrong, Elon can fix it, but those days days are coming to an end. Mercifully.
Tesla could still fail.
The company is in better shape going into 2019 than it ever has been. But that doesn’t mean it won’t fail.
The biggest challenge is in fact out of Tesla’s control. The US and Chinese auto markets have been booming for years, creating a margin in which expensive or experimental electric-vehicles could gain a foothold.
The auto markets are cyclical, however, and there are signs that both the US and China are entering a slowdown.
A minor erosion of demand probably won’t hit Tesla hard, because the company’s vehicles are priced relatively high. That doesn’t make them recession-proof, but it does insulate them from smaller economic shocks, as richer customers can brush off brief downturns.
A tougher recession – one that curtails credit, undermines Tesla’s access to capital markets, and prevents people from buying new and even used cars – would slow or halt Tesla growth. Established automakers can plan for such downturns, and they have ridden them out before. Tesla never has.
What been most troubling about the company’s struggles since around 2014 is that they have happened when all the factors that drive an auto-sales boom have been in high gear and the industry has been raking in money and larding balance sheets with cash. That hasn’t damaged Tesla yet – but it still could.
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