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This is a part of the EV Innovation Intelligence series

In 2019, Tesla sold about 350,000 cars and make revenues of about $30 billion. Toyota sold over 10 million cars (30 times that of Tesla) and made close to $300 billion (10 times that of Tesla).

While the final 2020 annual numbers aren’t out for these companies, expect the ratios to remain the same for both number of cars sold and revenues.

In 2019, Toyota made over $20 billion in profits. Tesla lost close to $1 billion.

Toyota’s current market cap hovers around $200 billion; Tesla’s has soared beyond $800 billion early Jan 2021, making it the fifth most valuable stock on Wall Street. (Its shares, valued less than $100 just a year back is hovering over $800 beginning of 2021)

Assuming 2021 to become a normal year yet again and assuming Toyota and Tesla perform similarly as they did in 2019, Tesla’s market cap per $ revenue earned is 40 times that of Toyota.

Something seems to amiss.

Well, I have been a part of the dot com boom (and bust) 20 years back, so I am acquainted with sky high valuations, but this is a different, and more sober era. Or is it?

Does Tesla’s valuation reflect something fundamentally strong about the company, or is it a transitional euphoria before the valuation comes down to a more earthly level as befitting a car company?

I analyse based on what I have learnt about Tesla and also based on what some of the experts had thought about Tesla’s strategy.

Fundamentals are in place

It has many bright engineers in place (the company itself was co-founded by JB Straubel, an EV expert).

Tesla has firstly got it right many of the fundamental things needed to sell a lot of electric cars. It has excellent partnerships. Thanks to some quick moves, it has a manufacturing base in China and in 2020, its China revenues grew almost 100% (first 9 months).

It also earned over $1.2 billion in emission credits in 2020.

And the company has been innovating incessantly. Here are some of them:

  • Tesla is working on a whole new wiring architecture for future vehicle platforms and they aim to bring it down to just 100 meters starting with the Model Y (according to a new patent application that recently became public).
  • The company has invented a technique for increasing its all-electric vehicles’ power and torque by simply adjusting the shape of some of its electric motor’s components.  Electric current flow becomes concentrated in different spots on the motor depending on the ‘geometry’ of these parts, thus an opportunity to limit any losses has presented itself by controlling where the concentrations happen.
  • Tesla’s new patent describes a “tabless electrode” that does away with the tabs that connect the positive and negative terminals of a jelly-roll battery. The goal is to reduce resistance and manufacturing costs. The tab-less electrode technology negates the use of a tab to make the positive-negative connection by instead using two substrates, one of which has a conductive edge.
  • Tesla’s software measures how well each of the tires are gripping the road and adjusts torque in the front and rear independently hundreds of times per second to ensure the tires are constantly achieving maximum grip and propelling the car forward. And, also, Tesla uses a tire with a tread pattern specifically developed to maximize contact with the ground.

So it is not as if the company is just building castles without a foundation.

Software and not transport

I think one of the reasons for Tesla’s high rating is its positioning. In many ways, Tesla positions itself as more of a software company than a car company. While part of this positioning is based on some fundamental software technologies that are propelling Tesla’s worldwide, I would surmise that at least part of the positioning is well, deliberate positioning.

A software company most times get higher valuations on unit revenues than a hardware company such as a car company.

Quixotic nature of the founder

Tesla is almost completely identified with Elon Musk, and this, without a doubt adds to its valuation.

Musk has proved his engineering mettle in many industries – solar energy, space transport and with Tesla, in automotive. Besides, he has a strong computer science/software background (he made his first pile of fortune selling a web applications, and then of course, through the sales of PayPal).

Such a unique set of capabilities in the founder does set the company apart in terms of future expectations from investors. Well, do the investors expect Musk to combine his interests to make flying cars in future? This is not a question for amusement, for all you know, he might.

Beyond his amazing engineering and software skills, Elon as a personality is difficult to understand, and it is equally difficult to understand what he would do next. Such uncertainties, in this case at least, adds that extra zing to the company. Musk’s ability to create “ripples” through surprising announcements, sometimes in unorthodox ways, only lends to the exoticism around the company.

Other business interests

Musk operates not just a car company, but also a battery business (its energy storage business sells PowerWall), a solar power business, and space travel business. The first three could form highly synergistic ecosystems that can provide strong, long-term competitive advantages to Tesla (and perhaps to other businesses as well).

Not to be left behind, Tesla is also making significant efforts in experimenting with autonomous vehicles, with many of its test vehicles reportedly having completed millions of miles of autonomous test driving.

Early mover advantage

Many may not know that Tesla has been around for quite a while – since 2005. I think the 2005-2010 period was the one that many car companies – that are now playing catch-up – missed. This was the time when Musk had enough time to think, put together a plan and a vision, get a strong team to develop strong IPs and perhaps even understand the market better by getting his earlier products out fast. None of these appears to be something other large car companies cannot do, but Tesla is also located in Silicon Valley, a place that knows how to quickly turn early mover advantages into invincible fortresses.

Do all the above still justify the valuation Tesla has?

Personally, I don’t think so. But, for his brilliance and daring, Musk perhaps deserves to enjoy the title of the world’s riches human – even if turns out to be only for a short while.


This is a part of the EV Innovation Intelligence series

Posts in the series

Tesla’s Valuation | EV’s in different countries | Purpose built EVs | Mainstream Fuel Cells | IT in Emobility | EVs versus ICEs | Advent of China in Emobility | Charging vs Swapping | Micromobility & EVs | Electric Aviation | Li-ion alternatives | Million Mile Battery | Battery Startups versus Giants | Sales & Financing Models | Ultrafast Charging a Norm | Heavy Electric Vehicles | Material Sciences in Emobility | Lithium Scarcity | Solar Power in EV Ecosystem | EV Manufacturing Paradigm | Innovations in Motors | EV Startups – a speciality Oil Companies’ Strategies | EV Adoption Paths | Covid-19 affect on the EV Industry |

 

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