Why Tesla is not a write-off

It was a giant middle finger to the auto-makers. When they shipped it, the dashboard was missing, there were no knobs or climate control vents. Instead there was a giant touch screen in the middle of the car. Then on 29 May 2018, one of these Tesla cars ploughed into a stationary police car while on auto-pilot near Laguna Beach, California. The force of the impact was so great that the police car was pushed up onto the pavement and both cars were declared write-offs.

The problem with Tesla is that it has little to no economic moat and it burns through cash like a Californian bush fire. Investors feel nervous. Weed-smoking Elon Musk and his random and very sue-able PR blunders, haven’t helped either.

But Tesla’s not a write-off. It could still take off.

Its technology is a decade ahead of the competition. Despite what’s reported in the popular press, Tesla has some of the best safety ratings in automobile history. That’s why when a Tesla crashes, the event is so rare that it makes the news headlines.

The auto-pilot function, which caused the accident in this story is still better than having a human behind the wheel. If you’re an experienced investor, then you should understand this. The market makes human errors all the time when pricing in corporate fundamentals, but these get fixed over time. 

Perhaps Tesla’s current stock market valuation is an error – it’s trading with a market cap of $50 billion but only produces 76,000 cars a year. The stock’s recent 20% decline might make sense, yet nothing about Tesla to date makes sense. There has never been a company like it – it trades more like a tech stock than a traditional auto-maker.

Let’s get back the car, which is far more tangible than Tesla’s stock price.

Tesla’s auto-pilot will strip out human error in the future. Not appreciating a vehicle dimensions, the stopping distances on a freeway and the age-old random habit that some drivers have of cruising past speed limits and red lights without realising, will all be eliminated. I’m not proud to admit this, but my wife will tell you I’ve done these naughty little things myself.

This is why so many people die on the roads.

Take the US – the country that invented really long road trips – there’s a 1 in 114 chance of dying on its roads according to the US National Safety Council. The odds of dying by flying in comparison are only 1 in 9,821. An American is actually three times more likely to die from choking on food than dying in a plane crash. Even though Americans love to eat, they rarely die this way.

There’s another way Tesla’s could save lives. According to the World Health Organisation, seven million people die from respiratory diseases linked to pollution every year. Electrifying the world’s global road network could see drastic improvements in the air quality in our most polluted cities. This is a really big deal for countries like China, with some of the world’s worst urban air pollution levels.

It might have the world’s largest car market in the world, yet two million people a year are dying in China from pollution-related causes.

It has a lot to lose, which is why it has pledge to electrify its road network, independent of what other nations do. It already has the largest number of charging poles and stations in the world with 190,000. Yet this is just the beginning. It plans to install 4.8 million charge stations by 2020, which will require $19 billion – roughly the GDP of Cyprus.

The logic here is simple. If you make electric cars a viable form of transport, people will buy them while the government can focus on cleaning up the factories. The problem is that what’s bought in China, probably won’t be a Tesla.

Out of the three million electric cars worldwide, two-thirds are made and used in China. Chinese electric car company BYD, which is backed by Warren Buffet, is the biggest electric car company you’ve probably never heard off. They already produce more electric vehicles than Tesla.

But look! This doesn’t really matter.

This is neither Tesla’s market, nor its goal. Tesla has been as much about changing lives as saving them.

What Tesla has achieved in the last decade is remarkable. It has turned the electric car from a wishful concept into a firm reality. Then it went further and made the thing really cool: the Tesla S P100D can accelerate from 0- 60 mph in 2.5 seconds. That’s quicker than a McLaren P1, a Lamborghini Aventador and a Ferrari 488. The upcoming Tesla roadster is even quicker. It can do 0-60 in 1.9 seconds, which is faster than any street legal car available.

What you need to appreciate is that Tesla is a disruptive technology. It’s part of a much broader structural trend that is yet to come. By 2030 the number of pure gasoline and diesel vehicles manufactured will fall dramatically from 95% globally in 2017, to just 52% by 2030. We’re in 2018 now, so 2030 is only 12 years away.

Since the company went public in June 2010, it delivered a return north of 1,000%. This is despite persistent double-digit negative operating margins and missed production targets. PR blunders by Elon Mush and high exec-management turnover hasn’t been too much of a deterrent either. It could have fallen a lot more than 20%.

I would look at Tesla more as the market’s barometer for how it feels about mankind’s future. So far it’s saying that we’re all going to drive electric. Plus, some of us might drive a Tesla.

The auto industry is littered the wreckage of promising prospects. The big auto-makers who have survived a century of carnage through acquisitions, mergers and bankruptcy have a lot of experience and will close in on Tesla quite rapidly.

Tesla has, however, shown the market that to make it work, it’s more than just going all-electric. It’s about looking cool as you do it. It’s about being inspiring and throwing the rule book out the window, even if it’s your own, like smoking a joint on live radio (against Tesla’s corporate policy apparently).

Tesla didn’t just give us all-electric. It made us feel sexy in 2.5 seconds. It showed us how auto pilot could take us home in California, even if high on recreational weed, although that’s still illegal.

The stock price doesn’t need to crash further. Tesla still has the potential to save and change our lives. Tesla’s not a write-off. I think. Well not yet.