Their 5+ year lead in market-proven designs of electric cars, and of the factories that make those cars is, by itself, a really exciting thing to bet on
They do have a lead, but I doubt that it’s a five year one. BMW for one has a good electric car initiative going on, and the rest of the car industry is going that way too. I assume that all the major manufacturers have electric cars for sale by 2025, and they’re much more able to ramp up production than Tesla is because of their existing factories. Just look at all Tesla’s problems over the last few years ramping up by a factor of 5 over four years. To overtake the whole US market, they’d have to ramp up to ~20 million cars and light trucks/year, a factor of 200 more, plus you’re imagining them selling to the rest of the world too. Frankly I think that’s impossible for them. Becoming a major manufacturer is definitely plausible. Owning the entire market is impossible though.
Their 5+ year lead in autonomous driving is, by itself, a really exciting thing to bet on
Waymo (ie. Google) has a significant lead on Tesla, and would probably sell to all the other car manufacturers. Plus the last few years have shown that autonomous driving is very difficult to get to the truly valuable level. I’d give Tesla a <5% chance of getting to valuable levels (ie. level five autonomous driving) by 2025, and the chance of them beating the rest of the market there by a significant lead as <1%. P(beating market | valuable levels) = 20%
Their 5+ year lead in battery technology and manufacturing is, by itself, a really exciting thing to bet on. Even if they were to exit the car industry, they could earn $100B+/yr revenue making batteries for countless applications
That’s their best bet I think, but the same difficulties with ramping up to that revenue remain. Plus they have the difficulties involved in running two largely separate businesses inside of one company.
Model 3 is the most popular electric vehicle in the world by far, and there’s still plenty of room for quality improvement and price lowering.
This is basically the same point as your first one. The vehicle is exciting, but getting those price and quality improvements while ramping up production to high levels is very very difficult.
Tesla is already profitable, yet are still many ways they can increase their gross margins, the most obvious of which is simply scaling up and optimizing everything further (they’re the youngest major car company and have done this the least)
Their margins are currently riding on not having significant competition, which is changing quickly and the rate of change is increasing. Electric cars are currently a luxury choice, thus having a high margin. But once you are trying to sell to the entire US market, prices are going to have to drop, and margins will drop with them.
As a final note, Tesla isn’t going to do well in the short term, just like the rest of the car industry, since we’re currently in a recession.
While I do think that Tesla can sell more than they currently are, the stock price already has that very factored in. Their market cap is $150B right now, which, assuming an insane $10k profit per car and a normal car manufacturer PE ratio of 10, shows sales of 1.5M cars/year, a 10x ramp up in car sales, again with an insane profit margin. Given that, clearly the market is already pricing in some significant gains.
I assume that all the major manufacturers have electric cars for sale by 2025, and they’re much more able to ramp up production than Tesla is because of their existing factories.
It’s not clear to me that it’s easy to retool a factory from making ICE cars to making electric (w/ 2000 vs 20 moving parts in their drivetrains, respectively). Perhaps it’s better than starting with nothing, but it’s still going to be a huge cost.
Waymo (ie. Google) has a significant lead on Tesla, and would probably sell to all the other car manufacturers. Plus the last few years have shown that autonomous driving is very difficult to get to the truly valuable level.
I agree that Tesla does not have a clear lead over Waymo (and others). My rough impression (having not looked into it in detail recently) is that Waymo and Cruise are able to achieve a higher level of autonomy in more narrowly scoped areas, whereas Tesla achieves lower levels of autonomy, but across its whole fleet worldwide, w/ no geographic limitations.
However, one advantage Tesla has is that it’s already booking revenue from selling its full self-driving package. When people choose the 7k full self-driving option [edit: announced today that it’ll be 8k starting July 1st], that’s cash that hits Tesla’s accounts right away. And then they recognize the revenue over time, as they ship more pieces of the package. One might also expect the take rate of the package to increase over time, as “full self-driving” becomes less of a promise and more of an actuality.
And every car they sell (even those w/o the paid full self-driving option) sends data home to train their neural nets.
So, in two ways, Tesla has a continuous path from here to full autonomy: 1) financially they’re able to incrementally profit more and more (w/ software-like margins) off of progress towards full autonomy, and 2) they’re able to ship incremental features to their fleet, and iterate w/ huge (and by far market-leading) amounts of real-world data.
So there don’t have to be any discontinuous leaps in progress for Tesla to get to full autonomy. They just have to keep hill climbing (or descending the gradient, if you prefer).
Their margins are currently riding on not having significant competition, which is changing quickly and the rate of change is increasing. Electric cars are currently a luxury choice, thus having a high margin. But once you are trying to sell to the entire US market, prices are going to have to drop, and margins will drop with them.
I’m skeptical that the competition will be too much of a challenge. It’s the classic Innovator’s Dilemma, as Liron mentioned. Tesla’s batteries have the lowest cost per kWh of any manufacturer, because it’s been one of their core competencies and they’ve focused on it obsessively. Other manufacturers will have to dump huge amounts of money into R&D and reworking their supply chains and factories to become competitive. All while losing money in the meantime because their costs are so much higher.
And other manufacturers (at least the US ones), are not in great financial positions to make that kind of investment right now.
It’s hard to imagine other manufacturers truly competing with Tesla in the near term, unless they go all in w/ a bet-the-company approach. Presumably some will, once it’s clear that that’s their only hope. But I wouldn’t be too surprised if many of those end up as the Blackberry or Nokia to Tesla’s iPhone.
(One additional Innovator’s Dilemma type factor preventing incumbents from switching to the new approach, is that, at least in the US, manufacturers have relationships w/ dealerships that legally require them to only sell through those dealerships. And dealerships have traditionally made most of their money through service. But electric cars need less service, due to having fewer moving parts. So dealers will be less inclined to sell the new EVs and will be a source of friction for manufacturers wanting to switch over from making ICE cars to making EVs.)
While I do think that Tesla can sell more than they currently are, the stock price already has that very factored in. Their market cap is $150B right now, which, assuming an insane $10k profit per car and a normal car manufacturer PE ratio of 10, shows sales of 1.5M cars/year, a 10x ramp up in car sales, again with an insane profit margin.
While I agree that big gains are priced in, do note that: 1) Tesla has consistently grown revenue at 50% per year since 2013 (first full year of Model S sales), and 2) The autonomy features they’re already selling are a big boost to margins and will become a bigger boost over time (as they recognize more of the sales as revenue, and as the take rate increases).
So, in the medium term, one might expect Tesla to have margins somewhere in between those of a traditional auto company and those of a software company. (In the long term, their margins will depend on whether they capture a large share of the transportation-as-a-service market, and if so, whether the winners of that market end up with commodity-like margins or monopoly-like margins. My guess is the latter, but I’m not super confident about how that will play out.)
I agree the market is pricing in a normal kind of expectation of “significant gains” but it’s not pricing in a major industry-changing “surprise” breakthrough announcement, which on the meta level should not be a surprise IMO, but rather the expectation. This company has ingredients in place for a massive upside. I admit I don’t know the facts here but I’m feeling pretty skeptical that BMW will have caught up to Tesla’s vehicles in 5 years or even shrunk the size of the lead, even given their currently much higher scale of car production capability.
Re autonomy, I heard on the Third Row Tesla podcast that driving a Tesla in the last couple months has noticeably better autonomy than ever and the fraction of time/situations when you can let the car drive smoothly for you without touching anything keeps increasing. They are also collecting a lot more data than Waymo, the highest quality kind of data you can get: real driving on real roads, and times when the driver disengaged autopilot.
Re BMW, I just don’t think that there’s that much of a lead on Tesla’s part. When I hear most consumers considering an electric car, BMW’s i3 is a very competitive alternative to the Model 3, and I’d bet that the gap is going to shrink, especially in the price realm. I also hear about others, so Tesla definitely doesn’t own the electric car space in consumer minds.
Re autonomy, the problem is that 95+% of the value comes from the switch to not having to pay attention to the road. Until you get there, the autonomy is just another feature, not something that is going to get everyone to buy a Tesla. Up to that point, more autonomy can actually be dangerous since consumers will pay less attention to the road even when the car can’t safely take over. I don’t think that Tesla is really getting closer to that point, since that will probably need to have a change in method rather than just marginal improvements.
It seems like all the competitor EVs today have two major downsides vs Tesla: Huge price increase for same battery range ($20k or more) which I guess supports your point that Tesla’s battery dominance is its main advantage, and the other EVs’ autonomy features are very lacking. I also suspect that their overall car OS / software platform is lacking the design and integration that Tesla has.
I think Tesla is pretty clearly making the best EVs right now but ya it’s hard to say how many years of lead they have and whether the lead is growing or shrinking.
Why are you convinced that Waymo is ahead of Tesla on autonomy?
From what I’ve heard online, Waymo has an approach to autonomy that seems more likely to lead to full autonomy than Tesla’s incremental improvement approach. Waymo is using a wider array of sensors than Tesla, and it seems likely that Tesla’s sensor array isn’t enough to handle full autonomy.
However, this is a weakly held belief since I only know things about it third hand, so on this specific issue I’m fairly neutral. That said, I think that everyone is far from the truly valuable autonomous car, so the value of the stock seems right (or too high) to me.
Specifically, Musk doesn’t think LiDAR will help, and Waymo and others use it heavily, and from what I know of how this stuff works, the more sensors the better, for now. (I wouldn’t be surprised if Musk turns out to be right in the long run, but also wouldn’t be surprised if Tesla starts quietly adding LiDAR.)
They do have a lead, but I doubt that it’s a five year one. BMW for one has a good electric car initiative going on, and the rest of the car industry is going that way too. I assume that all the major manufacturers have electric cars for sale by 2025, and they’re much more able to ramp up production than Tesla is because of their existing factories. Just look at all Tesla’s problems over the last few years ramping up by a factor of 5 over four years. To overtake the whole US market, they’d have to ramp up to ~20 million cars and light trucks/year, a factor of 200 more, plus you’re imagining them selling to the rest of the world too. Frankly I think that’s impossible for them. Becoming a major manufacturer is definitely plausible. Owning the entire market is impossible though.
Waymo (ie. Google) has a significant lead on Tesla, and would probably sell to all the other car manufacturers. Plus the last few years have shown that autonomous driving is very difficult to get to the truly valuable level. I’d give Tesla a <5% chance of getting to valuable levels (ie. level five autonomous driving) by 2025, and the chance of them beating the rest of the market there by a significant lead as <1%. P(beating market | valuable levels) = 20%
That’s their best bet I think, but the same difficulties with ramping up to that revenue remain. Plus they have the difficulties involved in running two largely separate businesses inside of one company.
This is basically the same point as your first one. The vehicle is exciting, but getting those price and quality improvements while ramping up production to high levels is very very difficult.
Their margins are currently riding on not having significant competition, which is changing quickly and the rate of change is increasing. Electric cars are currently a luxury choice, thus having a high margin. But once you are trying to sell to the entire US market, prices are going to have to drop, and margins will drop with them.
As a final note, Tesla isn’t going to do well in the short term, just like the rest of the car industry, since we’re currently in a recession.
While I do think that Tesla can sell more than they currently are, the stock price already has that very factored in. Their market cap is $150B right now, which, assuming an insane $10k profit per car and a normal car manufacturer PE ratio of 10, shows sales of 1.5M cars/year, a 10x ramp up in car sales, again with an insane profit margin. Given that, clearly the market is already pricing in some significant gains.
It’s not clear to me that it’s easy to retool a factory from making ICE cars to making electric (w/ 2000 vs 20 moving parts in their drivetrains, respectively). Perhaps it’s better than starting with nothing, but it’s still going to be a huge cost.
I agree that Tesla does not have a clear lead over Waymo (and others). My rough impression (having not looked into it in detail recently) is that Waymo and Cruise are able to achieve a higher level of autonomy in more narrowly scoped areas, whereas Tesla achieves lower levels of autonomy, but across its whole fleet worldwide, w/ no geographic limitations.
However, one advantage Tesla has is that it’s already booking revenue from selling its full self-driving package. When people choose the 7k full self-driving option [edit: announced today that it’ll be 8k starting July 1st], that’s cash that hits Tesla’s accounts right away. And then they recognize the revenue over time, as they ship more pieces of the package. One might also expect the take rate of the package to increase over time, as “full self-driving” becomes less of a promise and more of an actuality.
And every car they sell (even those w/o the paid full self-driving option) sends data home to train their neural nets.
So, in two ways, Tesla has a continuous path from here to full autonomy: 1) financially they’re able to incrementally profit more and more (w/ software-like margins) off of progress towards full autonomy, and 2) they’re able to ship incremental features to their fleet, and iterate w/ huge (and by far market-leading) amounts of real-world data.
So there don’t have to be any discontinuous leaps in progress for Tesla to get to full autonomy. They just have to keep hill climbing (or descending the gradient, if you prefer).
I’m skeptical that the competition will be too much of a challenge. It’s the classic Innovator’s Dilemma, as Liron mentioned. Tesla’s batteries have the lowest cost per kWh of any manufacturer, because it’s been one of their core competencies and they’ve focused on it obsessively. Other manufacturers will have to dump huge amounts of money into R&D and reworking their supply chains and factories to become competitive. All while losing money in the meantime because their costs are so much higher.
And other manufacturers (at least the US ones), are not in great financial positions to make that kind of investment right now.
It’s hard to imagine other manufacturers truly competing with Tesla in the near term, unless they go all in w/ a bet-the-company approach. Presumably some will, once it’s clear that that’s their only hope. But I wouldn’t be too surprised if many of those end up as the Blackberry or Nokia to Tesla’s iPhone.
(One additional Innovator’s Dilemma type factor preventing incumbents from switching to the new approach, is that, at least in the US, manufacturers have relationships w/ dealerships that legally require them to only sell through those dealerships. And dealerships have traditionally made most of their money through service. But electric cars need less service, due to having fewer moving parts. So dealers will be less inclined to sell the new EVs and will be a source of friction for manufacturers wanting to switch over from making ICE cars to making EVs.)
While I agree that big gains are priced in, do note that: 1) Tesla has consistently grown revenue at 50% per year since 2013 (first full year of Model S sales), and 2) The autonomy features they’re already selling are a big boost to margins and will become a bigger boost over time (as they recognize more of the sales as revenue, and as the take rate increases).
So, in the medium term, one might expect Tesla to have margins somewhere in between those of a traditional auto company and those of a software company. (In the long term, their margins will depend on whether they capture a large share of the transportation-as-a-service market, and if so, whether the winners of that market end up with commodity-like margins or monopoly-like margins. My guess is the latter, but I’m not super confident about how that will play out.)
I agree the market is pricing in a normal kind of expectation of “significant gains” but it’s not pricing in a major industry-changing “surprise” breakthrough announcement, which on the meta level should not be a surprise IMO, but rather the expectation. This company has ingredients in place for a massive upside. I admit I don’t know the facts here but I’m feeling pretty skeptical that BMW will have caught up to Tesla’s vehicles in 5 years or even shrunk the size of the lead, even given their currently much higher scale of car production capability.
Re autonomy, I heard on the Third Row Tesla podcast that driving a Tesla in the last couple months has noticeably better autonomy than ever and the fraction of time/situations when you can let the car drive smoothly for you without touching anything keeps increasing. They are also collecting a lot more data than Waymo, the highest quality kind of data you can get: real driving on real roads, and times when the driver disengaged autopilot.
Re BMW, I just don’t think that there’s that much of a lead on Tesla’s part. When I hear most consumers considering an electric car, BMW’s i3 is a very competitive alternative to the Model 3, and I’d bet that the gap is going to shrink, especially in the price realm. I also hear about others, so Tesla definitely doesn’t own the electric car space in consumer minds.
Re autonomy, the problem is that 95+% of the value comes from the switch to not having to pay attention to the road. Until you get there, the autonomy is just another feature, not something that is going to get everyone to buy a Tesla. Up to that point, more autonomy can actually be dangerous since consumers will pay less attention to the road even when the car can’t safely take over. I don’t think that Tesla is really getting closer to that point, since that will probably need to have a change in method rather than just marginal improvements.
It seems like all the competitor EVs today have two major downsides vs Tesla: Huge price increase for same battery range ($20k or more) which I guess supports your point that Tesla’s battery dominance is its main advantage, and the other EVs’ autonomy features are very lacking. I also suspect that their overall car OS / software platform is lacking the design and integration that Tesla has.
I think Tesla is pretty clearly making the best EVs right now but ya it’s hard to say how many years of lead they have and whether the lead is growing or shrinking.
Why are you convinced that Waymo is ahead of Tesla on autonomy?
Waymo has legal permits for driving fully driverless while Tesla doesn’t. Waymo also invested a lot more years into building the tech then Tesla.
From what I’ve heard online, Waymo has an approach to autonomy that seems more likely to lead to full autonomy than Tesla’s incremental improvement approach. Waymo is using a wider array of sensors than Tesla, and it seems likely that Tesla’s sensor array isn’t enough to handle full autonomy.
However, this is a weakly held belief since I only know things about it third hand, so on this specific issue I’m fairly neutral. That said, I think that everyone is far from the truly valuable autonomous car, so the value of the stock seems right (or too high) to me.
Specifically, Musk doesn’t think LiDAR will help, and Waymo and others use it heavily, and from what I know of how this stuff works, the more sensors the better, for now. (I wouldn’t be surprised if Musk turns out to be right in the long run, but also wouldn’t be surprised if Tesla starts quietly adding LiDAR.)