The question might sound ridiculous, but wouldn't you like to have bought AAPL when it was $7 or $10, or even $30? Did you consider buying AAPL then? What were the pros and cons?
That time has passed and there is nothing we can do about it. Is there another Apple out there today? The short answer is that nobody knows. Otherwise there would be a sure way to beat the market to a pulp, which is impossible. What is the next best thing? A potential Apple. If we find a stock that will grow 50x with at least a 5% chance, that's a great deal. Or 10x with a 15% chance. Unless you have loss phobia.
We have to recognize that investing, especially when one is aiming for high growth, has a significant amount of gambling involved. That’s why large investors and venture capitalists put money on many small companies with potential, hoping that 10% of them will grow tenfold and some of the others will do reasonably well. Even with extensive knowledge and due diligence, there is no way to know.
Why compare Tesla to Apple? One is a tiny car manufacturer who still has to prove itself and the other is a tech behemoth that has taken several industries by storm during the last decade.
Remember that, about ten years ago, Apple was a company hit by a tremendous tech industry collapse, a few short years after a near-death experience. It managed to leverage its design principles and software to create the iPod, iPhone and iPad. The Mac advanced nicely in the background. Apple has shown the world that beautiful design and simple user interfaces matter and that consumers are willing to pay a premium for that. Oh, not to forget, Apple has a genius for a CEO - a detail-obsessed perfectionist, involved in every aspect of the company’s business.
Most of these traits also characterize Tesla.
To explore the parallel with Tesla in greater depth, we need to ask several questions:
What does Tesla have that is so special? With its Roadster, Tesla managed to change the consumer’s view of electric cars: From golf carts embraced by tree-huggers to glamorous high-performance beasts you could lust after.
OK, but where’s the money? Tesla's moat is the power-train. It includes a battery pack, a power electronics module (PEM), AC induction motor and one-speed gearbox. The critical element is the battery pack. Most electric car manufacturers try to develop or co-develop new types of batteries for their vehicles (most of them using Li-ion chemistry). As one can learn from an expert in the battery business, John Petersen, this is an incredibly steep uphill road, fraught with danger: initial investment requirements, delays, safety and production cost issues for the new batteries and so on.
How did Tesla solve the deadlock? For its basic battery cells, Tesla uses the so-called 18650 Li-ion cells employed in laptop batteries. This is how it is riding the high horse of the electronics’ industry battery needs. The intense competition in this huge market pushes price and energy density improvements at an annual rate of 8% each.
How can one power a full-size car with laptop batteries? This is the secret sauce of Tesla’s power train. Tesla assembles thousands of them in a liquid cooled (or heated, if needed) pack that globally improves on the characteristics of individual cells: controls thermal runaways, balances charging and electric load, seamlessly isolates failed cells and keeps all of them at an ideal temperature to improve their life cycle. This is no easy engineering feat.
What’s the result? A much cheaper and more reliable battery whose building blocks are already available on the market in very large quantities.
What are the main advantages and drawbacks of electric vehicles? One should be aware that in an electric vehicle (EV), price ratios are completely different from those of an internal combustion engine car (ICE). In an EV, the “gas tank” (battery) is very expensive but “fuel” (electricity) and the “engine” (motor) are comparatively dirt cheap. An EV has less than 10% moving parts compared to an ICE car and except for breaks and tires, there is basically no maintenance. Breaks will last much longer on an EV, as the motor will be used to slow down most of the time and replenish the “tank” while doing so. With so few moving parts, the chance of failures decreases drastically.
From the consumer’s cost point of view, there are two very big unknowns that have to be addressed: How long the battery will last and how much it will cost to replace.
From an environmental point of view (I will not get into the political and security issues of oil dependence), electricity can be generated using a variety of sources. The mix of those sources can be altered several times during the life on an EV fleet as needed. One should be aware that an EV powered exclusively by coal-generated electricity (quite an unlikely situation) is considerably worse than a modern ICE car.
First, let’s recall that the critical number here is $ / kWh of stored energy. This should not be confused with the price of the electricity you need to travel. This is about the capacity of the “gas tank”. A light car such as the Roadster can travel about four miles on 1 kWh of energy. Tesla’s sedan, the Model S, can travel about three miles with that energy. Both figures are real world numbers with A/C and other accessories taken into account.
From the DOE document we get a price of $200-$250 / kWh of 18650 cells. This means $10,600-$13,250 in a 2009 Roadster (which has a battery that holds about 53 kWh). A liquid-cooled box with sensors and connectors (excluding the PEM) could amount to $3000-$6000 (one has to guess without reliable information). This gives us a best guess of $16,500 as the cost of the 53 kWh pack or $311 / kWh. From Tesla’s document, we infer that for the Model S, the cost would be reduced to 61% of that (42% / 69%, since the Roadster sport was a 2009 model), or $190 / kWh.
This is insanely low, considering that A123 Systems’ production cost is about $1000 / kWh, according to John Petersen. Even if the Roadster’s battery pack was $10,000 to produce, the worst case of DOE estimates and the previous calculations yield a cost of $268 / kWh for the Model S. Again, this is very low compared to the estimated $750 / kWh for the Nissan Leaf’s battery.
What about the product strategy? Here again, I see similarities between Tesla and Apple. Both offer few but exquisite products. Their attention to detail is quite remarkable. Complexity is hidden behind an elegant and functional design. They expect customers to pay a premium for their products and plan to maintain healthy gross margins (Tesla estimates a 25% gross margin on the Model S; Apple has maintained a GM around 40% during the last several years). These practices are not standard in any industry, so both need their own chains of stores to be able to communicate directly to consumers and to offer a different experience. There is a reason why we do not like the usual PC or car salesman.
Both Apple and Tesla have strategies for the next five to ten years and are ready to sacrifice the current or the next quarter if needed to preserve them. Many companies’ good plans get stifled under Wall Street’s pressure to meet quarterly estimates.
How should the small investor approach TSLA? One does not have the resources to adopt the venture capital strategy of buying a few dozens stocks in a nascent industry. At the same time, a large slice of the portfolio should not be allocated to a potential ten-bagger as there is no safety net. In fact, some argue that TSLA is highly overvalued already. But the company is staying quiet and relentlessly advancing on its plans to deliver the Model S in about one year. There are no signs of the predicted delays or cost overruns for the Model S. Orders for the sedan (with a $5000 refundable deposit) are growing nicely, even without any marketing effort (which should change on October 1 when Tesla presents the beta version of the car to customers and to the media). Tesla's next car, an SUV called the Model X, will be presented by the end of the year and should enter production by the end of 2013.
Stock price forecast. While it’s too early to do explicit earnings estimates, I think TSLA has a reasonable chance of growing 3-5x during the next three years (Tesla announced that it plans to introduce a new car every year). If Tesla follows through on its long-term plan to produce 400,000 cars per year at its factory (ex-NUMMI), including a mass-market model priced around $30,000, the stock could easily become a 10-20x in five to eight years.
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