Against the background of the unrealized aspects of the entrepreneur’s 17-year strategy, Tesla still manages to do one thing excellently – sell more and more electric cars
Elon Musk is about to unveil the third iteration of his “Secret Plan” regarding Tesla Inc., something he’s apparently been working on for nearly a year. But why is he doing this?
The original plan, published in 2006 — four years before Tesla went public — was considered a standard pitch for a Silicon Valley entrepreneur: Sell an expensive car, then use the proceeds to build cheaper cars for a larger market and such as. Tesla doesn’t exactly follow that path, mainly because in this case selling a dream on the stock market is more important than reinvesting earnings into it. But still, Tesla is close enough to the strategy, writes Liam Denning in a commentary for Bloomberg.
The second iteration was more of a manifesto than a plan, mixing in defenses about the then-progressive and dubious acquisition of SolarCity Corp. with scenarios that seemed more fantastical than realistic. Seven years later, apart from the successful launch of the Model Y crossover, almost nothing of this plan has been achieved. The solar rooftop business remains underdeveloped, with Tesla’s entire energy business generating less than 5% of its revenue. Sales of the Semi electric tractor are just beginning, delayed for years until an electric bus is no longer talked about.
When it comes to securing global regulatory approval for autonomous electric cars that can be used as cost-effective robotaxis, Tesla has diverged from its plans here, too.
What happened, however, can be seen in the graph:
When a company fails to deliver on virtually all of its stated plans, yet its valuation swells to over $600 billion, the plan may not matter much. Perhaps more specifically, the specifics don’t matter.
One of the more amusing aspects of the recent service action affecting 360,000 Tesla electric cars was Musk’s tweet in which the entrepreneur pointed out that the word “download” is “anachronistic” when referring to an over-the-air software update. Whatever you say, the guy who sells expensive driver-assistance technology marketed as Autopilot and “Fully Self-Driving” — the latter of which regulators say can get a little wrong at intersections — is a stickler for semantics.
The apparent dissonance doesn’t seem to matter. That’s why the point of Musk’s plan is simply to have one, not to serve as a business accountability tool. Given that the details of the secret plan, Part Deux, are more sci-fi-like, the new version, Plan-à-Trois, will likely focus on finer details to keep fans engaged. However, Musk tweeted that he would offer “a path to a fully sustainable energy future for Earth.” And as far as total addressable markets go, the Earth is pretty big.
Keeping that addressable market large and a little fuzzy is useful, because even if Tesla no longer needs the stock markets the way it once did, justifying its market cap requires a lot more than just selling cars. For example, suppose Tesla increases car sales by 50% annually through 2030, while maintaining an average selling price of $50,000 and a net margin of 15%. Even then, with Tesla somehow accounting for a third of the global passenger vehicle market by the end of the decade, a discount rate of 2% – half the 10-year government bond yield – would have to be applied in order to today’s rating to be calculated. Solar roofs, robotaxis and artificial intelligence are helping to do this.
On the financial front, regardless of the actual “Secret Plan” that will be unveiled at Investor Day, the immediate priority in maintaining Tesla’s valuation is pretty mundane.
Recall that when Tesla released its 2022 results, the company said it was aiming to produce 1.8 million vehicles that year. That would be just 31% more than last year’s volumes, but would still allow the company to meet the 50% compound annual growth target it set at the start of 2021.
The stock’s subsequent jump may have reflected Musk’s more upbeat comments on a call for expanding margins and the “potential” to produce 2 million cars this year. But it also reflects the New Year’s rally in tech stocks and bitcoin. Returning to a 160% premium to the market, Tesla will need to show it can deal with the auto industry’s most mundane problems — delays and price competition — if it wants to maintain that optimism.
It also means demonstrating progress on new products. This isn’t just about the long-delayed and possibly expensive Cybertruck, but the cheaper mass-market vehicle. The latter is critical to any higher energy transition goal at scale and was, after all, the primary goal of that original master plan 17 years ago. We’ll probably hear a lot about that on March 1st, along with the weirder stuff. To be able to support Tesla’s valuation this year, however, today’s product lineup will need to expand. The “secret plan” that matters is not rocket science or robotics. The idea is simply to sell more cars.
