Tesla’s purple patch
Tesla’s massive ambitions hinged on the success of Model-3, a mass affordable electric car that could revolutionize the whole of the auto industry.
As Elon Musk outlined in his master-plan memo back in 2006 —
The strategy of Tesla is to enter at the high end of the market, where customers are prepared to pay a premium, and then drive down market as fast as possible to higher unit volume and lower prices with each successive model.
Elon Musk did bet the future of his company on this simple plan -
- Enter the high end of the market by building a luxury electric sports car where the customers can pay the premium.
- Use the profits from the previous version to deliver a semi-luxury sedan.
- Use the profits from the proceeds, to deliver an affordable mass customer electric vehicle that can be purchased by thousands.
So, the manufacturing capacities were upgraded. Automation was utilized across the company to bring down the costs. It soon transformed itself from a boutique electric manufacturing car company into a mass market company that had dreams of changing the way we think about vehicles.
The expectations went into overdrive. When Tesla announced the opening for Model-3 in March 2016, the implied future sales sky-rocketed with almost 325,000 bookings — almost $14 Billion in value. It was the single biggest one week product launch ever.
So all Tesla had to do is deliver the Luxury cars in time. Sounds all merry? Well, it never turns out to be this easy.
The unit economics laid out by Musk, required the company to churn out 5000 units to even start making profits per unit sold. But the company was getting no where near to the target. It was a nightmare. The production line was breaking. There were problems with the robots. There were issues with battery manufacturing. It was taking forever to deal with these niggling issues. Company’s automation dreams was falling apart and in an infamous interview with CBS, Elon Musk called it a “Production Hell”.
In meantime when the company was facing these challenges, on the Wall Street the company’s stocks were on a rally. The market cap sky-rocketed from $30 Billion to $60 Billion from March 2016(when the company started taking bookings) to July 2017(when the first batch was delivered). So people were still positive about the lofty promises the company had promised and were willing to gamble on the stocks.
But all of them didn’t believe in this story. They were conscious about the companies spending that could drive it into a rabbit hole. They were even at a point expecting the company to go bankrupt under Elon Musk and according to them the judgement day was not far away. They concocted a compelling story around why Tesla’s share are worthless and started short selling.
Unlike betting on the growth of the company, short selling involves betting on the onus of the company. It involves an assumption that the company would go down in future. So what you do, go to your neighborhood broker and buy a share of Tesla and sell it at the market price. As you anticipated, the market should go down and then you can repurchase the share at less value, thereby making a cut out of every transaction and returning the share back to broker. This is quite a risky way to trade and most new comer traders refrain from doing that as it involves huge risk.
This negative sentiment was not completely baseless as the industry in which Tesla was operating had seen a lot of bankruptcies and in fact Tesla hadn’t actually returned any sort of Profit. The streak it was showing probably because of it’s founder, Elon Musk’s way of showing the people the possible advent of electric and smart cars. But markets at some moment need to see some tangible results to believe in the objectives of the company. Also at moments, the only card of ace that was driving the streak wasn’t working because of alleged temper tantrums.
But despite all the troubles, Tesla managed to script an incredible turnaround. Twelve months after launching the Model-3 (in April 2018), the company announced that it had managed to produce 5000 Model 3’s in a week — the coveted break-even target. 3 months later Tesla reported quarterly profits of $312 million. Overall, Tesla sold 146,000 units of the Model 3 in 2018 — a rather spectacular number.
And the short-sellers were running for cover. Also, there is another concept called as Short Squeeze where in the short sellers try their best to gain more and more profit from falling prices. But sometimes because of competition in Traders for shorting the price drives high and this is called Short Squeeze and Tesla was squeezing life of many investors.
2019 was a breakout year for Tesla.
They delivered 367,500 electric vehicles — 50% more than the previous year. They debuted two new vehicles including the uber-cool Cybertruck. They started production in a new facility in Shanghai and finished the year with back-to-back profitable quarters.
The year 2020 also turned out to be glorious for Tesla as it had a continuous profitable first quarter. It launched Tesla model-Y crossover six month ahead of the schedule. Even Corona virus was not able to impact it, as it sold over 91,000 units — just 5% less than the same time last year.
And all of this culminated in a rather spectacular fashion when the company’s market cap soared to $150 billion in early March.
Steve Eisman, one of the few short sellers that made money during the 2008 crisis had this to say about the incredible rally —
“When a stock becomes unmoored from valuation because it has certain dynamic growth aspects to it, and has cult-like aspects to it, you have to just walk away.”
Company today has a market cap of somewhat about $ 300 Billion which is even greater than Toyota which was the previous market leader with a market cap of $ 204 Billion.
Also the recent questions about Tesla entering the lower range of the market by making an electric car with a price label of $ 25,000 at a show teasing the design of a new Tesla car which looks somewhat similar to a hatchback. This attributes to improvements in the battery technology which could make it more affordable family car.
Tesla also announced couple of days back about entry into Indian markets in 2021 and this would be huge market which does require new players to bring in some new technology, have a healthy price war and a new impetus to the overall Auto industry as a whole.
So the biggest takeaway from all this would be that a company cannot turn out to be a success just by showing good returns for few years but it requires a dreamer like Elon Musk, who paved the way and touched people’s heart with his dream of making an electric car for everyone. For what it is worth, Tesla is still in its early days and can turn out to be the next Google or Amazon. Also we don’t know yet but, Elon Musk can shock the whole world again with his plans and justify company’s valuation.
So until then, may it live long and prosper.
