Just a couple of years ago, short-sellers like Jim Chanos were announcing that it was the end of Tesla. There hadn’t been a new, successful car company in the US for nearly one hundred years. And there certainly wasn’t going to be one based on the laughable concept of electric vehicles.
Now though, it is Tesla founder Elon Musk who is rubbing his hands together with glee, with the short-sellers running from their positions with their tails between their legs. The enigmatic entrepreneur seems to have pulled off the impossible: create a profitable car company that people love.
The story of Tesla, however, doesn’t end with the company’s current $500-plus share price. Many analysts, including those who focus on disruptive change, think it could go to $5000 by the end of the 2020s, maybe more.
Why is this? How can a “car company” increase in value so much over a decade?
Elon Musk Holds All The Cards
The critical thing to understand about Tesla is that the company holds all the cards that it needs to create the most compelling automotive product that the world has ever seen.
Consider first, the fact that Tesla makes all its own batteries. It’s not going to some third-party vendor who also sells cells to the rest of the automotive world. Instead, it makes them all itself, using proprietary technology that nobody else can access. It’s why the California-based firm can build cars that will drive more than 350 miles on a single charge while its competitors are struggling to get about 150. When it comes to batteries, it’s miles ahead of the game.
Now consider the company’s over-the-air updates. Teslas are the only cars in the world that get BETTER the longer you own them. All Tesla needs to do is create a new software package that adds features and drivers can immediately feel the benefits.
These updates can be practically anything. Most of the time, they’re improved driving assist features, but nothing is stopping Tesla from adding entertainment options, voice control, and other stuff that adds to drivers’ quality of life.
Tesla is also a monopoly. It sounds strange to say given how many car companies that there are in the world, but bear with me. The company is the only firm in the world, producing luxury electric vehicles for the western market at scale. Traditional automakers aren’t there yet. More importantly, Tesla is a transportation solutions firm, not a car company in the old-fashioned sense. It’s more akin to Uber or Lyft, but with manufacturing facilities to make its own vehicles.
If you find that hard to swallow, your perceptions will change over the coming decades. The best Tesla trip planner app won’t be the traditional rideshare companies; it’ll be for the company’s electric vehicles. And these won’t have human pilots. Tesla will create software that allows its cars to drive themselves, collect passengers, and form part of a massive fleet of vehicles, providing low-cost rides across the world.
This feature of Tesla’s business model is the real genius of their entire operation. If they can perfect autonomous taxi technology, they don’t need customers willing to put $60,000 down on a vehicle. Instead, they just need people willing to pay $5 for a ride across town. Tesla will then be in a race to get cars on the road. If customers want to rent out their Teslas to the public and to share an income with Tesla, they can do that. If they’re not willing to use their cars while they’re idle, then Tesla will sell cars to itself and create an in-house fleet. This group of vehicles will then serve the general public, just as Uber and Lyft do today, but at a much lower cost.
Autonomy Is The Real Game-Changer
Autonomous technology is the real game-changer for Tesla. Forget the engineering, battery tech, and electric drivetrain – the thing that is really going to make the difference to the company’s business model over the next ten years is the rise of cars that drive themselves. Tesla will be able to use this technology to produce vehicles that have intrinsic value before it even sells them to customers. Each car, the company estimates, will be able to generate a lifetime revenue of $300,000 in today’s terms. For the first time in history, a company will sell a vehicle that adds to its customers’ wealth.
Think for a second, too, about how this will change the lending side of the equation. In typical situations, a person has to work to recoup the money that they borrow when they purchase a vehicle. Firms providing loans take on substantial risk. They need to ensure that the borrower pays back the loan faster than their car is depreciating to make sure that they don’t lose money if they have to repossess.
The same is not true of a Tesla of the future. A lender knows that the car will continue to generate money as it goes forward. Even if the borrower can’t pay, the lender can take back ownership of the vehicle and use it to make money.
When you think about this fact, the economics of buying a Tesla starts to look a bit crazy. We could see a situation where people who hold capital buy as many Teslas as they can so they can benefit from the returns. Lenders could pay people to own Teslas, so long as they rent them out to the public. The possibilities are truly bizarre!
The Space Factor
The final part of the equation is Elon Musk’s other pet project: Spacex. SpaceX is going to become the biggest private company in the world over the next couple of decades, thanks to its Starlink effort. Global internet satellites will change communications across the globe.
Tesla, however, will benefit from Spacex because vehicles will be able to get internet wherever they go on the planet, including rural locations.
The electric car maker, therefore, is positioned to become the most valuable firm in the world — what a turnaround from a couple of years ago.
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Nice article, Alan. Tesla is an amazing company!