Ground Control to Major Musk

Romain/ juin 12, 2020/ Finance, Tech/ 1 comments

While there have been passionate debates about Tesla’s valuation during the past quarters, an unlikely company named Nikola has recently caught the attention of the financial industry. Especially because of Robinhood traders who seem to compete everyday for the craziest trade ever. Nikola’s goal is clearly to become the Tesla of the hydrogen cars, which is an ambitious and interesting focus. However, its market cap is already close to Ford’s, while it has not produced any single car and it only discloses 4 employees on Bloomberg.

Since the Nikola frenzy is likely to be temporary, it is worth highlighting the fact that at the same time Tesla stock has been trading around $1,000, some analysts even betting on a $10,000 stock in a few years. Thus, whatever happens tomorrow with the US equity market, Elon Musk’s company will remain one of the major icons of the super bull market that we have experienced since the Great Financial Crisis.

Musk is a controversial CEO. Either you love him, or you hate him. A Wall Street analyst told me that he thought Musk was “a genius inventor, but also a terrible executive”. In fact, Musk’s relationships with investors have been tough since he launched his first startup in 1995. Nevertheless, despite such a mixed track record in terms of investor relations, Musk managed to take advantage of high valuations with Zip2 first, and then PayPal, to be able to seed new projects and pursue his dreams of developing solutions that will contribute to save humankind.

Indeed, Musk has always been fascinated by energy issues, and how homo sapiens could save themselves setting up colonies on other planets like Mars. Such a huge ambition led to several spectacular firms: SpaceX, SolarCity, Hyperloop, The Boring Company, and of course Tesla Motors. The interesting thing about Tesla is the fact that the company was founded in 2003 by two other persons, Martin Eberhard and Marc Tarpenning. Elon Musk decided to inject equity in the firm in 2004, before taking the executive control of operations.

Don’t get me wrong. Tesla has been a great and brilliant entrepreneurial project. Like with SpaceX, what Musk and his teams have achieved since 2004 is fantastic. Whatever the future of Tesla as a brand, its contribution to the car industry and the EV segment is already significant.

However, it might be still too early to claim that Tesla has fully disrupted the auto industry.

Don’t Panic but the EV market remains challenging

First, the number of vehicles sold by Tesla in 2019 only accounts for less than 2% of total car sales worldwide. In other words, the Fremont company is still addressing a niche market after 16 years of existence. Therefore, the comparison with the iPhone looks a bit misleading and incorrect.

The second reason lies in the fact that the total ownership cost of EVs is still above the cost of traditional cars. What is more, EV sales still depend on public subsidies or quotas, meaning that the organic demand remains weak. Electric or hydrogen vehicles need to be as affordable as diesel or gasoline cars to capture significant market shares.

 The third reason is the problem of battery autonomy. Tesla recently stated that it is working on a 1000 miles range technology. But other players like Panasonic are more cautious and only guide on progressive upgrades.

The fourth and last limit is the critical lack of infrastructures that constrains the effective use of Tesla vehicles. Indeed, people need chargers almost everywhere to adopt EV, and nationwide maintenance networks need to be quickly operational.

While it remains unclear whether Tesla will dominate the car market in 2030, the company has contributed to develop very innovative products and services, and has significantly improved research in self-driving technology. Moreover, Musk has become a king of marketing, making the best car commercial ever dreamt thanks to SpaceX, and becoming the first carmaker to be able to sell directly to customers without any promotional campaign.

To summarize this fantastic adventure, the best thing is to cite Musk himself: “I think it is possible for ordinary people to choose to be extraordinary”.

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  1. Pingback: Homework – Tesla, Trade Desk, Peloton, Twilio, and the LPPLS Model – The swarm blog

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