Things don’t look good for Tesla. With rising costs, Musk’s ongoing Twitter acquisition debacle, and the overall gloomy economic outlook, its value has almost halved since the beginning of the year. This morning Tesla shares plummeted an extra 6% upon news of its price increases across the range.
However, if you zoom out, Tesla is still doing extremely well. It’s still significantly larger than its major rivals, while only having 2.5% of the automotive market share (in the US/Canada). It even had its stock upgraded last week by analysts at RBC and UBS.
So why the enduring appeal? Why still a high valuation?
Surely the Volkwagons, Fords and BMWs of the world are going to eat it up now that they’re taking electric vehicles more seriously.
I believe that this is for good reason: because Tesla has a few very powerful Unfair Advantages up its sleeves.
An unfair advantage is a powerful competitive advantage, one that can’t easily be copied or bought by competitors. And Tesla has so many powerful ones stacked on top of each other that their target price keeps being set higher by analysts, and is why I continue to be bullish on the stock.
What Musk has done is apply the best of the Silicon Valley startup success principles to the old-fashioned and set-in-its-ways world of automakers.
Here’s how Elon has disrupted this multi-trillion-dollar industry, and why I believe it will continue its prodigious rise in the coming years:
Unfair Advantage #1: Tesla’s Supercharger Network
The biggest issue still holding people back from getting an EV is range anxiety. Where will I charge it? Unlike the ubiquity and ease of filling up at gas stations, charging is slow and there’s fewer charging points around.
Tesla decided to proactively tackle this problem by developing their supercharger network, back in 2012, while other automakers were still figuring out whether they should even develop electric vehicles. They invested heavily into a large proprietary supercharger network, and even offered free charging to all Tesla owners to sweeten the deal and encourage early adopters.
It’s now a decade later and other automakers still haven’t built their own charging networks, and in fact recently Tesla has been opening up its network to other vehicles which Goldman Sachs predicts will net $25 billion a year in the future.
By developing this infrastructure, they’ve not only forced fast-charging to be the standard, Tesla now has these superchargers everywhere and with the speed allowing you to charge up on a road trip in only around 20 minutes.
Try using the slower other charging points and you’ll see the difference. Compare the availability on a map, and also see the difference. The Unfair Advantage of Location is key: being dotted virtually everywhere in the developed world allowing long-distance road trips to be taken with ease..
This creates a huge barrier to entry that affects not only the upstarts, but also the incumbent automakers as they compete with Tesla for market share of EVs.
Unfair Advantage #2: Battery Technology
Speaking of range anxiety, Tesla is the only car manufacturer working on designing and producing their own battery cells, with the exception of China’s BYD.
Tesla started off by using off-the-shelf laptop battery cells to start production of their first car back in the 2000s. However, they’ve quickly switched to producing their own cells and battery chemistry. Their own battery, the 4680 cell, which they announced last year, is expected to increase range by 54% and reduce the price by 56%.
It’s an ambitious project, but if any company has shown it can achieve the impossible, it’s Tesla. If they succeed, just like with the superchargers, they’ll be able to license that technology to their rivals and have yet another revenue stream.
Unfair Advantage #3: AI
If you’ve ever driven a Tesla on the Autopilot mode, you’ll know it’s a game changer. Drive hundreds of miles in a day and you won’t be frazzled at the end of your drive. You can also drive in bumper to bumper traffic and still arrive at your destination with some energy left over.
And while Autopilot isn’t the continually promised “Full Self Driving”, Tesla are getting closer and closer. They make the hardware for it, they have the machine learning capabilities for it with “Dojo”, and a huge data advantage compared to their rivals, with a fleet of over 100,000 cars signed up to the beta program sharing their data with Tesla. This level of vertical integration of hardware and software is why it works so well.
Unfair Advantage #4: Software
And speaking of vertical integration, Tesla vehicles are essentially computers on wheels. For example, they’re ahead of the game when it comes to over-the-air updates, which allows new features to be released like: Dog mode, Dashcam and even the beta Full Self Driving function. It also allows them to fix any safety or security concerns very quickly, without customers having to bring their car into a dealership. Plus, Tesla software allows for entertainment apps, with games and integrations like Spotify and Netflix coming as standard.
Unfair Advantage #5: Lower Costs and First Mover Advantage
Being the cutting-edge pioneering startup that’s first in an industry is certainly not always an advantage. However, once you’ve reached a large enough adoption, you can become entrenched in people’s minds as the go-to company for that new product category: for most consumers, when they think of electric vehicles, they think of Tesla.
Tesla’s mission has always been to accelerate the advent of sustainable transport. And now that Tesla has succeeded in creating the consumer demand and market incentive for incumbent automakers to start moving away from gas-guzzling internal combustion cars, Tesla still remains the brand that people think of.
Now with gas prices reaching unprecedented and eye-watering levels, people are thinking more and more about fully electric vehicles, and therefore more about Tesla.
Not only do you save on gas, electric vehicles have the upper hand in having lower maintenance costs as well. The fact that electric vehicles have very few parts means that there is much less that can go wrong. There’s no engine, only an electric motor, so no need for any oil changes, and no issues with things like alternators, catalytic convertors, and carburetors.
In-line with their first-principles thinking and Silicon Valley ways, you buy a Tesla with just a few clicks on their website. So the other side to the cost savings comes from the fact that there’s no middle-men when buying a Tesla. You buy it directly from Tesla themselves. They do not have a car dealership model, with the need to haggle and spend hours thinking about extras.
Unfair Advantage #6: Profit Margins
To add to the idea of Tesla not having a dealership model to sell cars, they also don’t have a business model based on making the real money in aftersales, servicing and parts. For legacy automakers, their gross margins are only 5-10% and they rely on servicing and parts to make the real profit. For Tesla, their gross margin is a whopping 30.5%. Tesla also has pricing power, so despite soaring commodity prices, Tesla have been able to successfully raise prices to protect their margin, and they’ve just done it again today!
Unfair Advantage #7: Vertical Integration
I’ve referred to this a few times already. And the reason they’ve been able to keep better control of their costs is their vertical integration, and this integration is the reason they’ve been able to make their software and hardware work so well together for a seamless experience. There are even plenty of hints and rumours that Tesla wants to get into the mining game, to vertically integrate even further.
Unfair Advantage #8: Product Demand!
There’s a reason their model range spells: S3XY. They’ve designed their cars to be as sexy as possible. From the eye-popping ludicrous speed, to the award-winning design, to the fact that they deliberately developed and released their more premium models first: the Model S and Model X, which allowed the brand to have a badge that owners are proud of. Tesla has never encountered a demand problem, and the only existential threats to it have been supply. This is why raising their prices is going to be a non-issue.
Unfair Advantage #9: Manufacturing Innovation
Tesla is the only new car company in America to reach mass production since Chrysler was founded a century ago. As Musk says, and has been proved right time and again with other electric vehicle startups, “prototypes are easy, production is hard and being cash flow positive is excruciating”.
Tesla went through ‘production hell’ in 2018, as they were ramping up production of the more affordable Tesla Model 3, and struggling to hit their ambitious production targets. Billionaire Musk was famously sleeping on the factory floor during this time to make it happen.
Thanks to the monumental effort from the team and with Elon leading by example, Tesla was able to ramp up to mass-production profitably.
They have also decided to go to unprecedented levels of economy of scale. Their factories are the largest buildings in the world, and they are the first to use the incredible Giga Press to stamp out enormous sheets of aluminum to reduce the number of pieces to make the car body, and reduce the amount of welding required.
Unfair Advantage #10: Elon Musk
His proponents and critics can both agree on one thing, he’s a force to be reckoned with. Many investors simply look at his track-record and decide that they don’t want to bet against him. He has clinched victory from the jaws of failure more times than people care to count.
Plus, he gets attention. He is one of the most-followed people on Twitter, so Tesla is able to get plenty of attention with zero advertising. This means they are able to spend more on R&D. In fact, Tesla spends three times more on R&D per car compared to their closest competitors (Ford, Toyota, GM, Chrysler).
Also, Elon’s star power and ambitious plans attract talent. The number one most attractive employers for engineering students are SpaceX and Tesla
With Tesla hoovering up most of the top talent, and with such a heavy spend on R&D, and the willingness to take risks and bet big on innovation, Tesla has so much potential to dominate in years to come.
All this and more is the reason that Tesla is an innovation powerhouse. Plus, we’ve been talking about Tesla so far as a car company, when it is so much more than that, something that analysts have had a hard time evaluating using their existing models.
Yes it is outselling all its competition in electric vehicles, but we haven’t even yet spoken about the step into robotics, energy storage, insurance, solar roofs, and much more. It is in fact more like 6 businesses rolled into one.
With the bid to buy Twitter stalling, and some analysts asserting that no matter what happens with Twitter being bad for Tesla, as it’s a distraction for Musk, they are underestimating all the Unfair Advantages Tesla already has. The jumpy stock price is a reflection of the fear in this economic climate, but the fundamentals of Tesla as a growth stock are still very much there.
Unfair advantages aren’t just for companies, but for early stage startups and for each individual person too. Discover and leverage your Unfair Advantages in my award winning new book, out now.