There is a conventional way to look at auto company profits, and then there is the Tesla way.
The headline numbers from Tesla’s latest quarterly update are stunning enough: Record revenues of $US25 billion ($A37 billion) in a single quarter, the Model Y becoming the best selling car in the world, the imminent release of the Cybertruck which it hails as the most radical new car design in a generation.
But this is only part of the story – it’s what Elon Musk’s company is doing to the trillion dollar car and transport fuel industries now – and what it will do to them in the future – that is making analysts and investor rethink how they value this company, and the legacy car giants that now fear for their future.
Tesla’s second quarter results show adjusted net income of $US3.1 billion for the quarter, which is higher than market expectations. But it also reveals a contraction of margins to 9.6 per cent, from 14.6 per cent in the same quarter last year, and more than 17 per cent in the September quarter last year.
It’s the result of Tesla slashing the cost of its best-selling vehicles, the Model 3 and the Model Y, as it seeks to ramp up production – and demand – towards two million units for the year.
Normally, that would be a really big deal for the market, because it looks like Tesla is cannibalising its margins. But to focus on that would be missing the point.
Firstly, because Tesla is still producing cars at margins that are the envy of the rest of the car industry, thanks to its ground-breaking manufacturing efficiencies at its various giga-factories, including the “giga-press”. And it is improving those efficiencies in every new factory it opens.
But while the conventional car industry is focused on how much money it makes out of the hardware – selling the car themselves and the spare parts – that’s now now what Tesla is worried about or focused on.
The shareholder pack gives a hint: “While we continue to execute on innovations to reduce the cost of manufacturing and operations, over time, we expect our hardware-related profits to be accompanied by an acceleration of AI, software and fleet-based profits,” it says.
In short, Tesla can already make cars at a lower cost than any other legacy car company outside of China, but that’s not where the big money is to be made. It is going to come from the technologies where Tesla is basically untouchable by its auto peers – at least for now and the foreseeable future – and that is in the vehicle smarts.
Or, as Tesla CEO Elon Musk put it during the earnings call: “This is the biggest single step change in asset value in history.”
That sounds like, and is, a typical example of Musk hyperbole. But don’t write it off, even if you hate what he does and says on Twitter.
Tesla is already showing how that can be done – subscriptions for extra features on the car, particularly in entertainment, insurance, selling emissions credits to other car manufacturers, opening up its Supercharging network to other EVs.
Morgan Stanley analyst Adam Jonas has long rated Tesla stock not just on the margins it makes from selling cars, but the additional revenue it could make from subscriptions, insurance, supercharging, battery storage, selling mobility, and – lastly, but not yet priced – the promise of FSD and robs-taxis.
In a recent report Jonas noted that Tesla led other car makers on virtual every metric about the future: On vertical integration, on battery supplies, on margins, and on star power. And, of course, FSD.
Musk, of course, is very bullish about FSD. One of the reasons is that the stock market has suddenly taken notice of Artificial Intelligence, and revalued stocks accordingly. Tesla, because of its work on Full Self Driving, its dojo computer training system, the Optimus robot, is one of the world’s leaders, and streets ahead of any of its auto rivals.
Stanford University futurist Tony Seba predicted a few years ago that “robo-taxis”, autonomous electric cars, would dominate the global market by 2030.
See: Death spiral for cars: By 2030, you probably won’t own one. It sounded weird and outlandish at the time, and offensive to anyone protecting their “freedom” and their truck. But now more people are starting to think that Seba might not be so far off the mark.
Ark Invest, a research firm that specialises in disruptive technologies, has put out a new report suggesting that autonomous vehicles could be one of the most productive innovations of all time.
It supports Musk’s contention that – despite the headlines you see in mainstream media about individual Tesla accidents – , autonomous cars potentially will reduce accident rates and slash transportation costs. Musk says that can be by a factor of 10 or more.
Ark Invest’s latest analysis includes some stunning numbers of its own, which have enormous implications for the oil and the legacy car industry.
It estimates the lift in productivity from autonomous vehicles could be around $US17 trillion globally, per year. On the other side of the ledger, the loss in annual fuel and maintenance revenues to the oil and car industries will be $US1.2 trillion a year.
The loss of car sales to people (individuals won’t own them, fleets will – and they will last longer) will be $US1.8 trillion a year, according to Ark Invest, although autonomous car sales to fleet operators will be around $US1 trillion a year.
As analysts like Morgan Stanley’s Jonas and Ark Invest note, no car company comes close to Tesla on software development, a fact admitted recently by Ford CEO Jim Farley, who lamented the fact that his company’s software development had been outsourced to multiple companies over the years, and that basically, it doesn’t have a clue.
So it was intriguing to hear Musk reveal that one major OEM (car maker) had approached Tesla about licensing its Full Self Driving technology. Basically, they have no choice: They have no time to develop their own and will have to pay Tesla to learn how to do it.
Little wonder Musk is feeling bullish. “AI is entering a new era,” he says. “The short term variances in gross margin and profitability really are minor relative to the long term picture. Autonomy will make all of these numbers look silly.”
So silly, in fact, that Musk was saying that Tesla, already the world’s most valuable car company, could be worth 10 times more once FSD gets accepted – both by regulators and the public.
“It does make sense to sacrifice margins to make more vehicles because …. if it (FSD) is approved by regulators, it will be the single biggest step change in asset value maybe in history.”
The GigaPress machines used to make Model Y single-piece rear castings. Source: Tesla
Still, with all this, most in the industry simply don’t understand what’s happening around them. Take, for example, the GigaPress, the manufacturing revolution that allows Tesla to produce cars much cheaper than anyone else.
Critics say such cars are really hard and expensive to repair, because the casting are so big – the cars are not made of individual panels.
Tesla points out that that’s nonsense, and because it looks after its own manufacturing, and the repairs, and the insurance, it has every incentive to make it simpler and cheaper.
“We’ve closed the loop on this with insurance, and we design specific parts that will make it easier and faster to repair. We have an incentive to do that because we have our own insurance and body shops. We expect that we’ll continue to do this intelligent repair will continue to become cheaper and faster over time.”
See also: Tesla in talks to license full-self-driving with another major carmaker
And: Musk says Cybertruck orders”off the hook”, but still no word on pricing and launch
Keyword: “Biggest step change in asset value in history:” Tesla masterminds next revolution in EVs