Let’s start with Ankur Daga’s thoughts on Tesla Inc (NASDAQ:TSLA), including the joy of driving one, what kind of potential technological advantage it has over its rivals, and whether it’s destined to take a huge share of the global EV market (or whether that’s even the right question to be asking).
“As a Tesla Model S owner, I believe that the shorts are overestimating the ability of other car manufacturers to create a superior or even at par experience with their electric cars – the head start is simply too great and is comparable to the one Amazon had with AWS. The feeling of driving a Tesla is very similar to holding the iPhone for the first time – the technological leap is profound and one will find it hard to switch to competing products even if Tesla sells its cars at an iPhone-like premium. Further, with Tesla’s experience during manufacturing the Model S and Model X, they have more than the substantial expertise needed to create the much simpler Model 3. Given that the Tesla battery led setup has roughly two orders of magnitude less moving parts than the standard ICE engine setup, I believe that applying the traditional logic on car manufacturing ramp up time and capital investment to Tesla’s situation is a non-starter. I believe that on the automotive side, Tesla will be able to pick up the type of market share in EVs that the Model S has in the luxury car market (the more relevant question perhaps is what % of the total automotive market will EVs be in 10 years). I am, however, unconvinced that Tesla’s margins will be anywhere close to Apple’s iPhone margins given the price point,” Ankur said.
Like Chamath, Ankur also believes that in a worst-case scenario where Tesla is bleeding money and simply can’t stay afloat long enough to achieve its targets, that the company should easily be able to find a buyer to pay at least $15 billion for it so that the note owners don’t lose anything.
“In the event that Tesla has grossly underestimated its cash requirements and overestimated its production speed, I believe that there are plenty of buyers for the company at the right price – Apple, Google and others would easily pay upwards of $15 billion for the company, thus convertible bond holders will not lose money.”
Let’s now look at what Ankur believes are some of the things that investors must believe Tesla will achieve if it’s to dominate transportation (and possibly energy) in the same way that Apple Inc. (NASDAQ:AAPL) is dominating the mobile phone industry:
– Tesla can achieve iPhone-like penetration (30%+ of U.S sales) in the EV US auto industry
– Tesla can produce superior margins with economies of scale (current gross margins are ~20% and need to roughly double)
– Automobile sales will be driven by software rather than hardware in the future and Tesla has a substantial lead in software that will be hard to catch up with
– The ecosystem will create virtuous sales effects where one would buy Tesla cars, Tesla Powerwalls and Tesla Solar for Home
– Tesla can take on Uber through its self-driving technology
– Further option value is created through new businesses that Tesla will be entering into that are hard to predict today – e.g., Tesla Energy becomes a massive business
– Tesla battery technology knowhow and scale is a sustainable competitive advantage
On the other hand, let’s look at some of the factors that Ankur believes would have to arise for Tesla to lose 70% of its market cap and the bearers of the notes to lose money.
– Tesla will be substantially delayed in producing its Model 3 and will bleed cash in the interim
– Management is underestimating the capital investment requirements by at least a factor of 2 – adding an additional $10+ billion in investment required
– Other car manufacturers will catch up very quickly and will reduce Tesla’s ability to gain Apple-like marketshare and/or Apple-like margins
– Something goes wrong with Autopilot or other Tesla technologies that significantly hurt the brand and cause very substantial legal problems
– Projects such as the Solar City acquisition and Tesla’s Model 3 will yield very low or negative gross margins and thus will cause the company to bleed cash
– Tesla battery technology is a commodity and others will quickly be able to replicate it
– Electric cars are still only ~1% of the market and will not likely increase market share exponentially in the near future
We’ll check out Ankur’s final breakdown of the various Tesla probabilities and the Expected Value of the 2022 convertible notes on the final page of this article.
