let’s understand Tesla’s Business Model. What is so special about Tesla? What is Elon Musk’s magic that has made this company so valuable? How Tesla profit?
Tesla is the most valuable car company in the world now. Its market capitalization has crossed $1 trillion. It is so valuable that if I keep Tesla on one side, and look at the next 10 most valuable car companies, Ford, Honda, Volkswagen, Toyota, BMW, the combined valuation of these 10 companies, would be equal to Tesla’s.
How Big is Tesla?
“The market value of Tesla, the manufacturer of high-end electric cars, has actually surpassed that of Ford and General Motors.” “The electric-vehicle maker’s stock speeding this year.” “Musk’s wealth skyrocketing thanks to the surge in Tesla shares. Making him wealthier than Warren Buffet.”
“This summer, Tesla became the most valuable auto company in the world.” “It’s just become one of the most controversial names, and one of the most-watched names.”
Profit Margin on Cars
At first glance, you’d think that if Tesla is such a valuable company, it must be selling a lot of cars. This isn’t true, friends. Although it is certainly true that the number of Tesla cars sold this year, is much more than last year. It has good growth. But if you compare overall, the number of Tesla cars sold in 2021, or rather the number of Tesla cars that will be sold by the end of 2021, it will be less than 1 million. Here we have all the cars sold by all the companies worldwide 75 million.
It is estimated that around 900,000 Tesla would be sold this year. The overall market share of Tesla is only 1.2%. A meagre market share, but an enormous valuation. Come, let’s look at the main Tesla products that are being sold that form the revenue of Tesla. Talking about cars, mainly, there are 4 very popular models of Tesla. Models S, 3, X, Y.
The most expensive of them is the Model X. Around $99,900 for this car. Then, Model S at $90,000. Model Y at $55,000. And Model 3, the most sold Tesla car, it’s also the cheapest Tesla car at $42,000. It’s being expected that Tesla would soon introduce the Model 3 in India. But in India, it will cost around ₹7 million. It will be the cheapest model of Tesla.
One thing is for sure, that Tesla cars come in the high-end luxury category. If you look at this chart you’d know the volume of sales of each model. Generally, the Tesla Model X and S are around 10,000. And Tesla Model 3 at 90,000. This chart is for the quarterly deliveries. What is Tesla’s profit margin in selling one car? To have a fair estimate, we can look at the Automotive Gross Margin. It is the overall sales minus the manufacturing cost. For Tesla, this is at 30.5%. It is believed to be a very high profit margin. In comparison, in the past, it used to be around 27%. And now it has crossed 30%. It has seen good growth too. And if you compare it to the other car companies, it is more than in most companies. Even BMW and Mercedes don’t get such a high profit margin. For most car companies, it is in the 15%-20% range.
In fact, this margin of more than 30%, is only for the high-end extreme luxury brands. Like Porsche or Ferrari. Selling cars is the main source of revenue for Tesla. Most of the revenue earned by Tesla, is from the car sales. But it is not the only source of revenue. So what other sources of revenue does Tesla have?
Source of Revenue
Its sources of revenue can be divided into 3 main categories. First is the automotive. that includes the car sales. Apart from it, the Sale of Regulatory Credits is also included in it. I’ll explain the Sale of Regulatory Credits later in the video. The second is Servicing. Servicing the cars is also a source of revenue for the company. And the third main source is the energy business of Tesla. You might already know that Tesla doesn’t sell cars only. It sells Solar Roof and Power Wall as well. The concept of the Solar Roof is quite simple. If you have to install solar panels in your home, you can get them from Tesla. The Power Wall has also been created with the perspective of renewable energy. If you have solar panels in your home, but if there isn’t much sunshine, where would you get electricity from? You need a place to store energy.
Their Power Wall is an energy-storing device. This Wall looks like this. Additionally, Tesla has plans to launch an electric truck, Cyber truck. They’re already working on it. There are also plans to launch a low-cost car model in the future. They haven’t disclosed its name yet. It will cost around $25,000. Even the middle-class people of America would be able to afford it. Combining all the revenue of Tesla, in 2020 it was around $32 billion.
It is being estimated that in 2021, it will be around $45 billion. In this chart, you can see their revenue growth. Revenue is the amount of money that a company earns. The earnings of the company. In the same chart, you can see the future projections of the estimated revenue of Tesla.
In the chart, you can also see the breakdown. Red shows the revenue from car sales and automotive. Orange is for the revenue from selling energy products. Products like Tesla Solar Roof and Power Walls. And Yellow shows the revenue from Servicing. Around 80% of the company’s revenue is from the sales of Tesla cars.
Profitability of Tesla
If we compare this with a company like General Motors. The revenue of General Motors, in this chart, you can see that Tesla is lagging. In terms of revenue generation, Tesla is yet to reach the levels at which it can compete with the other car companies. But you can see it grow on the chart. Tesla is catching up with them fast. In the future, it’s possible that Tesla would overtake companies like GM and Ford.
What makes Tesla Unique?
Interestingly, friends, the money earned by Tesla is less than the money spent by Tesla. You’d wonder how this could be possible. Tesla has a nice profit margin. The cost to manufacture one car, allows it to get profit on sale at a 30% profit margin. On what is the money spent? Friends, the simple answer to it is on Research and Development. Tesla is spending billions of dollars on researching and developing good technology.
For this exact reason, Tesla had been a loss-making company for many years, up till 2019. 2020 was the first year when Tesla made a net profit. And do you know what’s more interesting, friends? While the other car manufacturing companies spend a lot of money on advertising. On marketing and promoting the cars, Tesla’s advertising spending is $0.
$0! Tesla doesn’t spend any money advertising its cars. Look at this chart. It has shown a good comparison of different car companies the per car expenditure on R&D and the per car expenditure on Advertising. For Tesla, the advertising spending is 0. But R&D expenses is almost thrice than that of the other car companies.
You’d wonder how this could be possible. How could a company sell its products without using ads? The simple answer is Elon Musk’s popularity. Elon Musk is such a popular personality, with only one tweet, he can impact the price of Dodge coin.
So you can imagine, such a popular person doesn’t need to spend on advertising for the promotion of his company. There is so much hype built up for Tesla, that it gets automatic media coverage from all the companies. There are so many new exciting features in their car, they present so many new and unique things, that people get curious about it and write on social media, discuss them, the media companies publish articles about it, news channels talk about it on TV.
In marketing, this is known as Word of Mouth Marketing. If you like something so much that you tell your friends and family about it, and they like it immensely as well, and they tell their friends, this leads to the promotion of the thing. In a way, you can say that the promotion of any YouTube videos is also by Word of Mouth. When you like it, you tell your friends and family members, they watch these videos, and through them, more people watch these videos. And channel owner doesn’t need to spend on advertising either.
Other than this, there are so many unique things about Tesla, in comparison to the other car companies, that makes it unique in itself. That makes it special. Another example of this is, their car dealership model. Other car companies often sell their cars through car dealers. A third party is involved in between. You would’ve seen that when you go to buy a car, there is some dealership involved. Tesla doesn’t do so. If you want to buy a car from Tesla, you can order it from their website directly. Or you can go to their showroom and buy a car from Tesla directly. So there are no middlemen. No need for negotiations. And Tesla doesn’t lose money on commission either.
The disadvantage of this model is that for Tesla, this increases their costs. They need to have their delivery centers. Hire staff there, carry out maintenance. Train the staff. The other car companies do not have to bear these costs.
But the advantage is that Tesla has total control of the process from start to end. You can compare this with the Apple company. Apple does the same. Apple tries to control as many things as it can. Whether it is the Operating System, software of the phone, or the chip manufacturing.
Tesla’s direct sales method is banned in some US States. Like in Texas. That’s why Tesla can’t legally sell any cars directly in Texas. People living in Texas have to go to other states to buy Tesla cars.
Another special thing about Tesla is their Giga-factories. The gigantic factories they have established to establish the principle of Economies of Scale. In economics, there’s a concept Economies of Scale. The larger the scale of production of something, it reduces the cost per unit of it. In electric cars, over several years there was a problem that the cost of batteries was very high. So Tesla introduced the concept of Giga factories, wherein they set up gigantic factories for manufacturing the batteries for their cars in order to reduce their cost.
Presently, there are 6 Giga factories worldwide. 4 of them are functional. And 2 under-constructions. Apart from these, perhaps the most special thing about Tesla is the technologies that they use in their cars. The type of self-driving technology they’ve used has never been seen before in a car. In their autopilot mode, a driver could drive the car almost without doing anything.
The car can drive itself. The safety features in their car are one of the best in the world. The credit to popularize electric cars globally, goes to Tesla. For these reasons, many people have confidence in Tesla. And feel proud to invest in its stocks. They’re certain that in the future, this company would bring a revolution to the world.
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So many people have invested in Tesla’s stock, that it is the most popular stock in the US now. If you want to invest in Tesla’s stock too, or in the stocks of any major global company, from India. You can easily do so through the Vested App. Vested is a Zero Commission US Investing platform for Indian investors.
It was started in 2018, and if you had to invest in the US stocks then, there was a very lengthy process. Many paperwork had to be signed. But now, the process has shifted online. And has become very simple. It is registered with the Securities Exchange Commission and Registered Investment Advisor. It is a credible platform. The link to the app is in the description below. Do check it out.
And for the sake of transparency, I’d like to tell you that I have also invested in Tesla’s stock. But I have one tip for you, whenever you invest in the stock market, don’t invest a lot of money in one stock. Diversify your portfolio. It reduces the risk in case one company goes under, all your money wouldn’t disappear. Obviously, investing in global companies as well as Indian companies is a good way to diversity your investment portfolio.
Is Tesla Overvalued?
Anyway, let’s get back to our topic. In the last 2 years, Tesla’s share price has increased to 15 times. If you had invested ₹100,000 in Tesla’s stock in December 2019, today, that ₹100,000 would have been around ₹1.5 million. So many people investing in Tesla’s stock, is the reason why Tesla has become the most valuable car company in the world.
But there is another aspect of it. Many people believe that Tesla’s stock is currently overvalued. They think that it doesn’t have any reason to be so valuable if the data and statistics are looked into realistically. What are the reasons why some people believe Tesla to be overvalued?
Let’s look at them. First, other car companies have entered the electric vehicle market too. And the market share of Tesla is starting to fall. The total electric vehicle registrations in the first 6 months of 2020, in the US, in it, Tesla’s market share was 79%. But in the first 6 months of 2021, this market share fell to 66%. The other car companies’ market share has started increasing. Audi’s market share has increased to 3.3%. Ford’s to 5.2% Chevrolet’s has also increased.
And almost all of the companies have introduced models of their electric cars. And in many cases, they are much cheaper than Tesla’s model. The second important reason here is the Regulatory Credits. I mentioned them earlier in the video. Regulatory Credits are a very important source because of which Tesla can now be profitable. For Tesla, it is a revenue source.
What are Regulatory Credits?
In America, there is a Point or Credit System. The companies that do not cause pollution, or those that meet the maximum pollution emissions standards, the US government would give them credits or points. These are known as Regulatory Credits. Companies have 2 options now. They can either manufacture such vehicles that doesn’t cause pollution. Or if they are producing vehicles causing pollution, those companies need to purchase Regulatory Credits from either the government or other companies. And Tesla has earned many such Regulatory credits because they manufacture electric vehicles that do not cause any pollution, So the other car companies, have to buy these Regulatory Credits from Tesla.
They pay Tesla in exchange. And thus it is a major revenue source for Tesla. According to the 2020 annual report, almost $500 million of Tesla’s revenue were from the Sale of Regulatory Credits. In fact, if Tesla had no revenue from the Sale of Regulatory Credits, in 2020, Tesla wouldn’t have been a profitable company. It would’ve been in a net loss that year.
In this chart, you can see the impact on Tesla’s net profit if Tesla did not have any revenue from the Sale of Regulatory Credits. Many experts believe that in the next few years, Tesla wouldn’t have this revenue source any longer. Because the other car companies would ramp up the production of electric cars, or they would switch almost completely to electric vehicles.
So they would no longer need to buy Regulatory Credits from Tesla. And so Tesla would lose this revenue source. Will Tesla continue to remain a successful company in the upcoming years? Or will it fail? Time will tell.
But I’ve told you both sides of the argument.
What’s your opinion?
I would like to tell you one thing when you invest in Tesla’s stock or in the stock of any company, through the Vested app or any other apps, remember one thing, you need to have a basic knowledge of these companies. How are these companies performing? What are its revenue sources? How profitable is it? What are the future predictions? Listen to both sides of the argument. And only after you’ve understood the risks, invest in the company.
That’s all for today.