The Tesla debate

This was originally a Tweet, which I’ve adapted to fit a blog post

Lots of discussion in my network about Tesla these days due to their recent meteoric stock rise. Is it a bubble? Or is there inherent long term value here?

I won’t go into the bear case. Many have argued it eloquently and well. Check out $TSLAQ on Twitter for some of the most in depth and wacky of it. Main bear theses have been cash flows and fear of bankruptcy, liability and possible lack of demand.

Here’s the bull case. It’s centered around 3 things: Tesla as a premium car (As in Tesla will be Apple for cars), the future AV applications and fleet, new businesses.

1. Premium car

Tesla will one day be to cars as Apple is to smartphones. Or that’s the thesis at least — They won’t be a commodity and will command premium margins. What are premium cars built on? Software. Not electric batteries. Tesla, more than any other OEM has built a computer on wheels. Not wheels with a computer on board. There is a fundamental difference.

One is built around Moore’s law- shorter product cycles, OTA updates — HW is subservient. Software is the main differentiation. The other (wheels with a computer) is built on industrial time frames, robustness, safety. All of which are important, but not premium.

This, software defined vehicle, more than the EV is what makes Tesla’s model S, 3, better experiences, now and in the future. The ability to upgrade the car overnight can’t be understated. EVs will be a commodity soon, but a car built around software, well that’s harder to do and requires structural, organizational changes in OEMs.

Just look at new cars coming into the market now — they STILL DON’T KNOW WHERE TO PUT YOUR PHONE. The dashboard and entire cockpit is still built around an ICE paradigm.

So the bulls say: like Apple, an integrated UX can’t be commoditized. Tesla will win on this, charge premium prices and dominate the high end. The high end will get bigger over time, much as the smartphone market has.

Personal take: yes, Software is key for a premium car. But, cars aren’t the platform a smartphone is. So the premium experience is just less important. Which means less people will want to pay up = less elastic demand curve. Cars just won’t be an as dominant part of our life as our phones.

Smaller market means less 3rd party apps => smaller market. Think if iPhone had stayed niche without many apps — the value of the entire platform drops. There are already multiple OS for vehicles, and without the winner take all effect that is shared by PCs & smartphones, there’s no reason for it to converge around Tesla.

So yes, Tesla has a premium experience. I just don’t see how they ever sell enough cars to justify the valuation their stock is currently trading at. Unless, the cost for EV plummets. Which brings us to #2.

2. New businesses

Main new business are Solar roofs but mainly becoming an electric battery provider. The first is through the M&A of Solarcity. The second, through R&D/supply chain improvements. Somehow they achieve a breakthrough in technology and/or cost.

This could be very meaningful as a new business as a Tier 1 (supplying to other OEMs), but more importantly, would set them up as leaders in electric vehicles for years. Imagine a similar dynamic to what Intel did in the world of semis.

More, if that made their cars affordable, that would be very meaningful for market share/TAM. It might even be a game changer.

I don’t know the division between Tesla and Panasonic in their JV. My sense is that batteries doesn’t equate to semi, and the dynamic that Intel succeeded in achieving for 40 years doesn’t occur here.

3. AV

Autonomous driving technology is a game changer for Tesla. But only if they switch from selling cars to selling miles. Otherwise, it’s just another premium feature. Maybe it’s a super important feature, one that commands an even more premium price, but still same target market and business model.

If there’s one thing the AV industry has learned over the past few years, it’s that selling miles is very different from selling cars. Just look at other OEMs trying to do it. Different customer, different value prop. Different markets. Just Different. One turns your car into a premium vehicle, the other makes it a commodity.

What’s their edge over Cruise, Waymo, or the other leaders on AV, with deeper pockets? It’s very unclear. I can easily see Elon launching this for headlines or showing traction, but don’t see it scaling to a real business while he’s still selling premium cars.

So to bring it all together — there’s definitely lots of innovation going on at Tesla. It is very impressive, but do they grow into their current market value? Only if they become $AAPL… small chance in my book 📖 🤷🏻‍♂