It would be remiss not do discuss this interview with Elon and Ron Baron. It’s a great interview
I would recommend watching it, but I am sure you already have. I will just discuss the
elements that are relevant to Tesla.
COMPACT Ron mentions that Elon wants to make cars
for $20,000 a piece. Mainly referring to the new platform of vehicle that Elon mentioned
on the latest earnings call that would cost half the price of a model 3 to build. For
the record, my maths has this car closer to $15,000 cost rather than 20.
Elon says they have not formerly announced their next car program, so he cant go into
specifics. But he says they do expect to make cars that are more affordable than the current
Model 3 and Model Y. To give you some reference, currently the
Model 3 in Shanghai is for sale at around $38,000. Some analysts are saying this even
has a 32% margin. Implying it costs around $25,000 to build currently, and this is, for
lack of better word, at least relative to how fast Tesla moves, old technology. Not
only does it not have a front casting, but not even a rear casting, or in-house structural
packs. Which gives you some indication of why I think the next platform will cost less
than $20,000.
But if we are already at $38,000 for an antiquated Model 3, then a $30,000 price tag for this
new platform is probably reasonable. Bear in mind we were initially told $25,000.
I mean if we want to be specific he says we expect to make cars that are more affordable
than the current model 3 or Y, he doesn’t officially say for sale to consumers, so it
may just be a Robotaxi, but I would infer from the context that he is talking about
for sale to consumers. Remember the FSD profit will be significantly higher again than any
gross margin on the sale of the car.
And that is unlimited demand right there, a $30,000 car with 50% margin, and then probably
another 10% of that going to Tesla every year on FSD subscription. And like I have explained
in the past, that the demand for a Tesla, or any electric car, reducing in price, becomes
exponentially more elastic, due to fixed costs of the competition when it comes to gas and
servicing.
Just as rough example, a $50,000 Tesla may compare to a similar cost of ownership of
a $30,000 ICE car. But a $30,000 Tesla, compares to more like a $5000 ICE car. Now think how
many more people can afford a $5,000 ICE car, than a $30,000 ICE car, yet Tesla only dropped
their price by 40%, yet the cost of ownership has dropped 83%.
AUTONOMY Elon then goes on to talk about how big a
factory autonomy is, which he has mentioned many times before, because it’s such a big
deal. Elon says instead of a car driving about 10-12
hrs a week, they could instead drive for 50 to 60 hours. Again the 5 fold increase in
utility that he has said many times before. And that we need fewer parking lots and fewer
cars in general so it’s better for the environment.
MANUFACTURING Elon says that Tesla is probably the best
at auto manufacturing, which no one was expecting. Elon sounds like he is being modest here.
Ron interjects and says probably in the history of the world, presumably including all manufacturing,
and Elon again modestly agrees. His modesty seems sincere, as in he doesn’t want to
brag about it, but equally he’s not going to lie about it either, and admits that Tesla
are that good.
Then he talks about how you need to make the requirements and specifications of manufacturing
less dumb. And to try and delete parts and processes. He talks about how they have found
parts and steps that were in there just in case, or by accident even, and now they are
going through and removing them. He also gives some examples. And they have deleted so many
parts from the car.
I don’t think the competition are doing this. This is also one of the major advantages
of a Tesla car. Now I get a lot of comments about how Tesla need a new design, or their
design looks old or dated, but think what happens when you have the same design for
a decade, or even decades, and how you can refine the manufacturing process over that
time, especially when you are continually looking for ways to improve it, and reduce
steps and parts. Compared to other manufacturers who will make a new version of this car every
5 years or so, it’s not so feasible for them to continually refine the steps.
Oh and for the record, Tesla’s do not look dated, they are a timeless design.
Obviously the more parts and processes Tesla remove the costs reduce, the manufacturing
becomes simpler and the production speed increases.
FACTORY Elon talks about why he was sleeping on the
floor on the factory. A lot of it was to due to simply motivating employees, so the workers
could see that the CEO was so motivated and hard working they will sleep on the factory
floor, then they will simply work harder. And these were such tough times, getting to
volume production, then the workers would give it their all. It was good leadership.
Could you imagine Mary Bara sleeping on the factory foor?
PRODUCTION Alright lots of great conversation about Twitter
and SpaceX, and I might do a video on Twitter sometime too, but lets focus on Tesla.
Ron talks about logistics, but starts by saying Tesla is making 40,000 cars a week. Elon then
confirms that he thinks he has said publically that their aspiration is to reach 40,000 cars
a week, which I am not entirely sure he has literally said, but perhaps in other ways.
Either way, that is some easy math. It equates to 2.1 million a year run rate. Well guess
what people, if we hit 1.4 million this year, then 2.1 million is 50% more. In other words,
if Tesla do no expansion or ramping and remain at their current rate, then they will hit
50% production growth.
Yet there are analysts or fund managers, even some of which Tesla is their largest position
who are saying that Tesla will do 2 million next year. I don’t say this to point out
how bad these peeople’s math are, I just like to point out and reduce the credibility
from the authoritative people in the community. As they distort investors and the markets
valuation on Tesla from the true value and expectations.
Ron then says that 40,000 a week, is producing a car every 15 seconds. Elon nods his head
as if he is quickly working out if what Ron said was true, and then agrees. Possibly Elon
just worked out the equation of 7 days times 24 hours times 60 minutes times 60 seconds,
divided by 40,000 in his head. And yes the answer was 15 seconds. Elon is also very tired
and jet lagged in this interview. Which was potentially kind of cool.
So in case you didn’t already work it out, assuming no black swan events or any major
catasphrophes, Tesla will certainly beat 50% growth in 2023. The market has not even priced
in 50%, on top of that the market has not priced in Tesla’s operating leverage. The
stock still seems very under valued. But the next stage of growth is mainly dependent on
4680 cells, in case I haven’t said that lately.
LOGISTICS We talk about logistics next, and that Tesla
are simply getting too big, and there are not enough ships, or modes of transport available,
so instead they will smooth out deliveries through the quarter, which will actually reduce
cost.
Ron talks about autonomous trucks for deliveries, and is that the idea, and Elon agrees. Right,
remember those 50,000 semi trucks by 2024, well think how many of them will be used to
deliver Teslas around the country? Then Elon says if you’re in the are then the car will
just drive to you, something I have said in the past too.
VERTICAL INTEGRATION They talk about the fact that a US car company
has a very small chance of survival, and that Tesla struggled to get suppliers, and ended
up having to do a lot of these processes themselves, and were forced to vertically integrate as
a result. Suppliers wouldn’t take them seriously.
This has now become an asset, as Tesla had to understand the entire supply chain, and
a result Tesla could design a more integrated vehicle, that needed far fewer parts, costs
less, weighs less, has increased performance. Again going to be so tough for the competition.
Elon now says that Tesla may actually need to get into the mining business, and it is
looking more likely that this will be the case. In the past Elon has only said Tesla
will if they need to, well it’s starting to look like they need to. Perhaps this is
a good sign, and means that they are going to be bigger than they thought, and will thus
need more minerals. He also says refining too, of which we know they are already going
to start a lithium refinery in Texas.
VALUATION We then get some audience questions, and one
of the questions is why should people invest in Tesla with 70 times earnings, compared
to Mercedes at 6 times earnings, which also sells EVs. Elon says he is not telling people
to invest in Tesla, and has said that the price is too high in the past, or not to invest
in Tesla if you can’t handle the volatility. At this stage a higher share price is of little
consequence to Tesla, in fact lower is better if they are doing a buyback.
Elon thinks this is due to the fact that Tesla is so far ahead in autonomy, and no one is
even close, yup that’s what I’ve said, Telsa will have this monopoly for probably
at least a decade. But let’s be realistic here. Mercedes last 4 quarters likely have
similar earnings. Whereas Tesla, despite being 70 times earnings, is actually only about
25 earnings, when you compare it to the level they are today. Mercedes do not make profitable
EVs, Tesla make very profitable ones, and all the other advantages Tesla have over EVs
compared to anyone else. It seems people still don’t quite understand yet just how difficult
EVs are to make.
But the mind blowing part of Elon’s answer is when Elon talks about a self driving car
costing the same to build, but becoming 5 times more useful, then imagine the what would
happen if a company was doing 25 to 30% gross margins, and suddenly that same thing was
5 times more valuable. What would that do to the value of Tesla and the car?
There are a few ways to interpret this and do math around this, but let’s just use
a simple way, if a Tesla is worth $50,000 then it’s worth 5 times as much, i.e. $250,000,
but still only costs $35,000 to build in both scenarios. The profit or value, goes from
$15,000 gross profit, to essentially $215,000, or 14 times as much profit or value. I think
this is roughly the mind blowing aspect of what Elon talks about the value of autonomy.
Also remember all Teslas already have the necessary hardware for this. And then there
is Optimus too, which is also hard to comprehend.
i.e. a p/e ratio of 70 is justified due to the unbelievable potential.
CHARGING Elon is then told about street lights being
a potential source of charging due to the infrastructure. I was happy to hear that Elon
did already know about this, and I had seen articles of this being used in the UK, it’s
good to see the Elon is aware of everything going on in the industry. But basically the
supercharger stations will be self sustaining with solar and batteries, and will work in
a zombie acopocalypse. Elon has a great a sense of humor.
Anyway, is always great to hear Elon share some of his thoughts.