If you had asked Tesla’s founders 15 years ago how they would feel if they heard that their company would become the world’s largest battery electric vehicle (BEV) manufacturer with one of the largest market capitalizations in the automotive industry, they would no doubt be happy. The company sold nearly a quarter of a million vehicles in 2018, and the Model 3 finished the year by just barely missing out on cracking the top 10 of best-selling cars in the U.S. in 2018 while using a third of the Li-ion batteries that went into the automotive industry. Simply put, no other company in the world has had a greater impact on the automotive industry in the past decade than Tesla has. But, Despite Tesla's leadership in most metrics related to BEVs, they have failed to compete with other large automakers on one key metric: profitability. Although Musk's vision for Tesla may not have included profitability when it was founded 15 years ago, its existence is now threatened by its inability to make money.
Tesla's Model 3 vehicle
Tesla prioritized growth by investing in R&D and manufacturing expansion at the expense of profitability, but as the company reaches mass production of its Model 3, pressure to evolve into a profitable business is mounting. Two profitable quarters to end 2018 offered some hope, but a $702 million loss in Q1 2019 wiped out those gains and then some, despite the company selling $200 million in zero emission vehicle (ZEV) and non-ZEV credits to other automakers. For Tesla, some of the biggest roadblocks are still to come…the following are the three biggest remaining barriers to achieving profitability for Tesla.
- Maintaining demand for its BEVs. Tesla's Model 3 launch generated more than half a million fully refundable preorders, indicating substantial interest in the company's first "mass-market" BEV. The vehicle has been a success to date in the U.S. due to not only preorder customers but also those consumers looking to maximize their federal tax credit, which decreased for Tesla in 2019. The company also enjoys the position of having the most competitive product in the marketplace when considering price, range, charging access and speed, and features. In the coming two to three years, further expiring tax credits as well as expansion into international markets should provide adequate demand for Tesla's rapidly expanding manufacturing capacity.
However, these market conditions will change in the early 2020s due to three factors: Tesla will have worked through demand from early adopters, financial incentives will mostly be gone, and competition from incumbent automakers will increase substantially. Tesla's Model Y – a better product-market fit in the U.S. and China, which prefer SUVs to sedans like the Model 3 – will play a crucial role in Tesla maintaining its market-leading position. Tesla's pursuit of the premium mass-market segment puts it in direct competition with Audi, BMW, and other luxury automakers, which not only have a slew of BEVs of their owned planned, but also can manufacture vehicles with a much higher build and finish quality than today's Teslas. Lux views Tesla's ability to remain competitive enough against well-funded and more experienced competitors entering the market over the next three years as its biggest weakness, which could impact demand for its vehicles.
Tesla's Model Y -- 7 Passenger Vehicle
- Prioritizing growth outside the core over growing the core. Tesla has long stated that it doesn't want to be a car company, at times calling itself a software company and other times an energy company. Leveraging its supply of low-cost batteries, the first move away from the automotive business was deploying stationary storage units. Its Powerwall was reliant on residential solar deployments, and in response, Tesla acquired SolarCity for $2.8 billion in 2016. Lux agreed with Tesla's vision – a vertically integrated solar-plus-storage business could reduce soft costs by reducing system complexity, and Tesla could leverage its brick-and-mortar stores to reduce customer acquisition costs – but viewed the acquisition with skepticism due to its expected negative financial impacts.
Tesla's continued prioritization of its automotive business – the right move, given its core expertise – has resulted in delays and uncertainty in its other products. Powerwall 2 deliveries are delayed, as cell production lines were diverted to the Model 3; the solar roof tiles released in 2016 have yet to enter mass production nearly three years later; and Tesla Semi production was pushed back one year to 2020. If the company's vision is leveraging its leadership into other industries, reality is tipping precariously close to these endeavors being more financial sinkholes that never make it to market than opportunities for expansion. If Tesla can neither get these businesses on track nor recognize the strain it is placing on the core business, it may hold on to these loss-makers too long.
Tesla's Powerwall 2
- Inconsistent and distracting leadership. Elon Musk's vision for Tesla should be given substantial credit for pushing Tesla to be the industry leader it is today, but a steady hand to guide the automaker from startup to profitability has been noticeably absent. Employee surveys have not painted the nicest picture of the workplace; Tesla ranks higher than most competing tech companies in job stress and lower in median years with the company. Turnover has impacted not only the rank-and-file but also the executive level as dozens of high-level division leaders have left the company in the past two years – a rarity when a company's stock prices remain strong, suggesting a lack of faith in sustained stock prices.
Issues extend beyond just the culture of the company, as Musk's Twitter habits have caused headaches for the company, including his infamous "funding secured" tweet that cost at least $40 million. For all of Elon's mistakes, his role in the company plays a large part in supporting Tesla's stock price, which is crucial, as the company is likely to need further funding on top of the recent $2.8 billion raise. Lux considers Tesla's leadership team a weakness, as the company has already made several unforced errors in crucial times.
- Overpromising on autonomy. Tesla's aggressive timeline to release what it claims are Level 5 autonomous vehicles is simply unrealistic: The company claims not only that its lidarless autonomous vehicles will be capable of self-driving with humans in the car, but also that it will offer customers the ability to make their vehicles available to participate in autonomous ride-hailing plans in 2020. Lux continues to advise clients that Tesla's autonomy hardware is simply not advanced enough to offer these features and is certainly not proven enough for Tesla to promise a robotaxi fleet. Tesla's denunciation of lidar is out of step with the rest of the industry, which views lidar as one crucial data input into self-driving vehicle software. Lux remains concerned about Tesla's pursuit of relying only on machine vision, which can't perform comparably to lidar in limited visibility conditions, and we expect Level 4 and Level 5 autonomous vehicles to rely on lidar as one of several inputs. Even if this could technically be executed, claimed revenues of up to $30,000 per person are unrealistic. This would require a minimum average of six hours per day of sharing based on current rates, in which drivers can take home about $15/hour (not including taxes, gas, or maintenance costs on the vehicle).
Tesla has tackled many of the hurdles people thought it wouldn't overcome, but the company's lack of profitability remains the single defining trait for those looking to Tesla as a key part of their business. We remain confident that Tesla will maintain its position as one of the global leaders in electric vehicle sales for the next three years, but if Tesla fails to achieve and maintain profitability, it will be forced to cede this position.
How can Tesla fix these issues? The answer may be straightforward: Tesla could double down on its current niche of selling premium electric vehicles to the rich. Tesla could also dial back R&D on noncore areas (solar, stationary storage, trucking, pickup trucks, autonomy, robotaxis) to further add to its profitability. However, Tesla will likely do no such thing because its real priority is not to be a profitable automaker.
Tesla is fundamentally a cash-burning R&D and advanced engineering organization for Elon Musk's ambitious interests, which vary widely and evolve on a regular basis. As much as Musk and Tesla need to placate investors, analysts, and the financial markets, they will continue to publish ambitious roadmaps and project profits to keep the company afloat by any means necessary. But any money Tesla makes will likely continue to be funneled back into visionary R&D projects, in perpetuity, if the markets allow it.
For investors, this has not been great, at least not recently: Tesla's stock price has fallen by 37% since mid-2017; by contrast, the S&P 500 benchmark rose 21% during the same time frame. But for humanity overall, Tesla's strategy is immensely beneficial: The company has successfully shifted the automotive industry's roadmap toward electric vehicles, which will eventually help lower global emissions. Tesla will likely do the same for autonomy, prodding the automotive industry to work faster on self-driving cars, sparking the arms race that will eventually help lower road fatalities.
Until another company acquires Tesla or a frustrated board of directors ousts Elon, it will continue to be a loss-making, ambitious, world-changing R&D organization while not taking eventual profitability too seriously. That is rare, and in this case it's a good thing, unless you are an investor keeping the company afloat or unless Tesla misjudges its financial position (like cash flow or stock price, for example) and exposes itself to an unfavorable acquisition exit.
- Blog: "Tesla Staggers, Nio Pivots; No Easy Road to EV Mass Adoption"
- Report: "Li-ion Battery Innovation Roadmap" (Lux Members Only)
- Analyst Insight: "Tesla achieves performance improvements with AI chip, but exposes itself to new risks" (Lux Members Only)