Tesla’s competitive moats (plural)

Tesla’s stock has sold sharply over the last few weeks. There were key people leaving, decisions were made and reversed in a matter of days and on top of that Elon is fighting SEC (Is he that bored???) None of these inspires confidence. There are also questions about demand and execution.
Will Model 3 continue to sell well? When will Model Y be released (“between sometimes and never” was one obviously very biased comment I heard on CNBC) and how well will it sell? All valid questions, but I think it is pretty obvious, a) EV market share will continue to increase, b) Tesla cars are great and loved almost universally and finally c) Tesla has multiple competitive advantages.

It’s funny how people are talking about the lack of demand and yet they acknowledge that every single car manufacturer is making a massive commitment to the EV market. Are all these car companies misjudging the demand? I don’t think so. Let’s address the demand, close to 100 million cars and light trucks are sold worldwide each year. There were about 1.2 million EVs and plug-ins sold in the world in 2017 and 2 million in 2018, how many of these cars will be sold in 2019 and beyond? I think it’s pretty safe to say that electric vehicles will continue gaining market share. Conservatively, I think EV sales will grow at least 50% YoY for a foreseeable future. Given the virtually unanimous high marks Tesla owners give to their cars, even with all the competitors entering the market again it is safe to say, Tesla will continue selling more and more units.

Now let’s talk about Tesla’s competitive advantages

1. The leader in battery technology — Tesla has been at it for over 10 years, they are making roughly half of all Lithium-Ion batteries produced in the world. They control the production, they have the lowest battery cost, highest energy density, the lowest level of cobalt and soon no cobalt whatsoever.
2. The leader in EV driving efficiency — there is a youtube video were people test Model X vs Jaguar I Pace, even though X is about 500 lbs heavier it was using about 17.5 kWh per 100 km vs 22.5 for Jaguar. These are real numbers, provided by an independent company. This type of efficiency is hard to beat.
3. The leader in self-driving technology — every Tesla in every trim level is equipped with sensors and cameras, there are about 500k Tesla cars on the road, if we estimate conservatively that every car drives about 10 miles a day, that’s 5 million miles a day of information collected by Tesla, it is estimated that all other companies in the self-driving space have total data collected that represents less than 5% of Tesla’s data. Plus over the air updates (see below) allow for all the cars to get the latest software every time there is a new release. And new release means new software with more driving situations being addressed, allowing sensors to interpret more complex problems. No other company can compete with this kind of set up.
4. Supercharger Network — this one is pretty simple, it’s a big and obvious advantage. Other car companies recognize it and are looking for ways to rectify the situation but it won’t be easy.
5. Over-the-air-updates — the ability to update software over the air is huge. No other car company is doing it. This made possible for Tesla to give all mid-range Tesla owners access to the full battery during the Hurricane Florence evacuation last year. When the full autonomous driving capabilities are released all Tesla owners, even people that opted out of it when they bought their cars will be able to upgrade. With every over-the-air-update cars get more features and owners love the company for it. Here’s the latest update: “Tesla remotely increases power output of all Model 3 vehicles through a software update” How cool would it be to wake up to something like that?
6. No Dealer Network — and finally the dealers, oh boy, Elon Musk was saying this from the beginning — deals have an inherent conflict of interest. They don’t want to sell electric cars, they don’t make as much money. There is no oil change, there is no transmission or muffler, even brake pads don’t need to be changed as often. Study after study has shown that deals steer potential buyers away from EVs to traditional ICE cars. Dealers add cost and make the experience of buying cars frustrating and nerve-racking. Tesla is doing a lot of selling online already. Nobody argues that online sale adds efficiency. Which again, gives Tesla a competitive edge.
7. Price point—with all the criticism about Tesla slashing its prices, people think its a sign of disappearing demand. I think it's a good thing, a sign of strength and a long term competitive advantage. That means Tesla is getting more efficient every day. Every drop in a price makes it that much harder for would-be competitors to enter and compete in this market. We already established that Tesla has the lowest battery cost, best energy efficiency and with over-the-air updates, they are the most efficient car company in that respect as well. Add the dealer network overhead that every legacy car company is stuck with, all of these factors will make it very difficult for others to compete with Tesla in the price department as well. We’ve seen how well Model S and X have been competing with BMW, Mercedes and the likes in the upper end of the luxury market. Model 3 and soon Model Y will do the same.

Let’s talk about $TSLA stock for a second, the company needs 4 profitable quarters to be eligible for S&P 500 and other indices. There are mutual funds and ETFs that will start adding Tesla when that happens. In my mind, it is just a matter of time. Don’t know if Q1 2019 is going to be profitable, but Q2 almost certainly will be, and then Q3 and Q4, does everybody see the pattern?

Tesla sold 245,000 cars in 2018, I think in 2019 it can sell between 350,000 to 450,000, in 2020 with additional Gigafactory in China it will punch through the 10 thousand average cars per week mark and should sell about 600,000 cars. In 2021 with the help from Model Y it can approach 1 million cars with a conservative estimate of 800,000 and in 2022 a million vehicles is an easy prediction.

Tesla YoY Growth Estimates

I also think Tesla needs a smaller car, smaller and cheaper than Model 3, to compete in the 25k category. Let’s call it Model 2 or Model i, but this is a whole other story.

For now, I am long Tesla, holding August 2019 250 calls, and considering adding to my positions. At least right now I am planning to hold this position until that magical 1 million cars per year moment.

09/19/2019

A lot has happened since I published this story first. My August calls expired worthless. I could have sold them but I was greedy and I though the company will have a profitable second quarter. But I used the price drop as an opportunity to buy more. I bought some stock around 215 and I also bought 250 calls for January 2021. I know it’s a long way out but I believe in the company and the EV revolution in general.

As a bonus, here are some things that I think we’ll see from Tesla in the next 12 -18 months:

1. Model 3 production at GF3
2. Reveal of a pickup truck
3. Selection of European Gigafactory location
4. FSD release
5. Battery Investor day
6. Start Model Y production
7. Start Tesla Semi production
8. Expend insurance offering to other states
9. Start Tesla Roadster production
10. Start producing solid-state batteries
11. Getting to 1500 cars per day production
12. Breaking 10b revenue mark per quarter
13. Updating Model S and X power trains, adding “Plaid” mode.