Tesla – Model breakdown

Tesla has further to fall.

• Tesla looks to be in real difficulty as a chronic inability to make money combined with a business transition that is going to take many more years than it expects, is likely to end in it being absorbed by one of the big OEMs.
• Since raising $2bn earlier this month, the shares have fallen by 16% as there are real concerns about both demand for Tesla vehicles this year and the company’s ability to make money from those it does sell.
• This, combined with the OEMs finally getting to grips with making nice looking, competitive electric vehicles puts Tesla in a very difficult position.
• If one listens to where Elon Musk wants to take the company, it sounds very much like a service company that only makes hardware in order to allow its service to come to market.
• This is classic Silicon Valley start-up strategy 101.
• The service referred to is robotaxis which sound great when we are informed that each vehicle will soon deliver $30,000 in gross profits but this does not stand up to numerical scrutiny.
• This is for two reasons:
  • First, Time: Tesla has stated that its autonomous driving solution will be feature complete by the end of 2019 and that occupants can safely fall asleep at the wheel by the middle of 2020.
  • Tesla states that this is possible because it has solved the machine vision problem.
  • What it means by this is that its vehicles can understand the road so well by interpreting the feeds from 8 cameras and radar, that it can drive better than humans.
  • Unfortunately, RFM research has concluded that, in reality, that this is very far from the case and that Tesla is very miles away from solving the machine vision problem.
  • RFM, therefore, ranks Tesla 20^th out 30 when it comes to autonomous driving solutions.
  • Consequently, I think that Tesla will badly miss its forecasts for autonomous driving and do not expect it to have a commercial robotaxi before 2028.
  • Consequently, Tesla needs to stay afloat selling metal boxes on wheels for at least another 9 years.
  • Second, business model: I find Tesla’s business model for its robotaxis to be fundamentally flawed.
  • Tesla thinks that because ride-sharing costs $2-3 per mile today that it will be able to sustainably charge $1 per mile for a robotaxi that costs $0.18 per mile to deliver.
  • This is the source of the $30,000 of gross profit per vehicle that it hopes will underpin the company’s valuation.
  • Tesla’s cost estimate is in-line with RFM, but I think that there is no way that Tesla will be able to sustainably charge $1 per mile for a robotaxi.
  • This is because RFM estimates that the cost to buy an autonomous vehicle and have it chauffeur the owner around would cost $0.32 per mile.
  • In this scenario, it makes no sense to use a robotaxi when it is more than three times more expensive than owning the vehicle oneself.
  • A self-owned autonomous vehicle will still have all the advantages of a robotaxi (drives itself, parking etc.)
  • Furthermore, there is going to be huge competition in this space, and I see the price very rapidly declining to less than $0.30 per mile.
• The weakness in the long-term business model assumptions, its time of arrival, Tesla’s inability to make money on the vehicles it sells today and decent alternative vehicles from OEMs paints a very bleak short and long-term picture.
• Hence, I think that there is no way that Tesla should trade at a premium to the OEMs and consequently, there is still a very long way to fall.
• It is not too late to sell.