Why Investors Love Tesla?

For those who are unfamiliar with the works of Elon Musk, Tesla Inc. is an American automaker, energy storage company and solar panel manufacturer based in Palo Alto, California. The company specializes in electric cars, lithium-ion battery energy storage and residential photovoltaic panels, as well as Powerwall and Powerpack batteries.

CEO Elon Musk said that he envisions Tesla as a technology company and independent automaker, aimed at eventually offering electric cars at prices affordable to the average consumer.

Tesla has a unique strategy known as “complex coordination” that aims to disrupt the automotive industry by creating many innovative pieces that fit together. Their marketing, production, sales and technology strategies are all also notably different from the other competitors.

Tesla’s automotive strategy is to emulate typical technological-product life cycles and initially target affluent buyers. It would then move into larger markets at lower price points. The battery and electric drivetrain technology for each model would be developed and paid for through sales of the earlier models. The Roadster was low-volume and priced at $109,000, whilst Model S and Model X targeted the broader luxury market. Model 3 is aimed at a higher-volume segment. This business strategy is common in the technology industry.

Tesla’s production strategy includes a high degree of vertical integration, which is made up of component production and proprietary charging infrastructure. The company also operates enormous factories to capture economies of scale. Tesla builds electric powertrain components for vehicles from other automakers, including the Smart ED2, the Toyota RAV4 EV, and Freightliner’s Custom Chassis Electric Van. Vertical integration is rare in the automotive industry, where companies typically outsource 80% of components to suppliers, and focus on engine manufacturing and final assembly instead. Tesla’s sales strategy is to sell its vehicles in company-owned showrooms and online rather than to use a conventional dealer strategy.

Tesla’s technology strategy focuses on pure-electric propulsion technology, and transferring other approaches from the technology industry to transportation, such as online software updates. Tesla allows its technology patents to be used by anyone in good faith. Tesla however retained control of its other intellectual property, such as trademarks and trade secrets to prevent direct copying of its technology.

Its top selling car is the Model S, with global sales of over 197,600 units between June 2012 and September 2017, followed by the Model X with almost 59,000 units sold between September 2015 and September 2017. The Model 3 with 220 units sold during the third quarter of 2017. The now-retired Roadster sold about 2,450 units.

Musk bills Tesla as the pinnacle of “lean” manufacturing. Stating that the majority of production is being done by robots with a minimum number of employees completing the manufacturing.

So why does Tesla continue to burn through $600 million of cash every single quarter, or roughly $30,000 for every car that it sells? The figure below shows this genuine year-on-year trend.

Maybe this abnormality has nothing to do with the fact that Tesla’s real capacity problem has noting to do with the size of their manufacturing facility. Instead it is the huge amount of people they’re actually using to build their cars.

Tesla now occupies a ginormous 5.3 million square feet of manufacturing space, which was originally utilized as a joint operation between General Motors and Toyota since 1984. It was intended to help the Japanese automaker learn about doing business in America and teach GM the principles of lean manufacturing. Moreover 20 years ago, the plant manufactured over 350,000 new cars each year which is equivalent to 74 vehicles per worker.

Meanwhile, Tesla, the ‘pinnacle’ of lean manufacturing with a 20-year technology advantage, only manages to produce somewhere between 8–14 cars per employee. They were employing between 6,000 and 10,000 workers in 2016 and only manufactured 83,922 vehicles. As of late 2016, Tesla now employs over 30,000 after acquiring Grohmann and SolarCity. The number of people Musk’s got in there has a great deal to do with why he doesn’t make money building vehicles.

Musk also intends to go from manufacturing 100,000 cars a year to 500,000 with the launch of the Model 3. We have to however wonder whether or not that is actually possible, since that leap in numbers is huge for any company of any size.

In Tesla’s fourth-quarter earnings call in February, Musk stated that once the Model 3 launches, he plans to begin producing 5,000 vehicles per week in the fourth quarter. He plans to increase those numbers further to 10,000 vehicles per week by 2018. It can be pointed out that when Tesla’s market cap surpassed that of BMW, Ford and GM, the market doesn’t seem to care about all of Tesla’s manufacturing inefficiencies and faults, as seen by the graph below.

As long as the investors keep thinking that Tesla is worth somewhere around $800,000 per vehicle it produces. There is no reason to why the company shouldn’t be worth $400 billion within the next couple of years when they actually start manufacturing 500,000 annually.

Tesla has recently posted their 2017 second-quarter report and here is how the company did compare to what Wall Street expected:

Tesla’s reported a net loss of $336 million, or $2.04 per share, compared to a loss of $293 million, or $2.09 a share, a year ago. Excluding stock based compensation, Tesla lost $1.33 a share, which was narrower than expected, according to a consensus estimate from Thomson Reuters. Revenue climbed to $2.79 billion from $1.27 billion in the year-ago period, and outpacing Wall Street’s estimates of $2.51 billion. In essence Tesla’s second-quarter report outcome was much better than the Wall Street expectations. In the release Wednesday, Tesla reaffirmed that it remains on track to hit its previously announced targets.

For several years now, electric cars were considered to be too expensive to produce and extremely hard to make money within the market. There is also evidence of this there particularly looking back at GM’s Volt range as well as Nissan’s Leaf.

However, Tesla breaks away from the pattern and the bottom line shows that, at least in the first quarter, Tesla actually made money building and selling electric cars. That’s something none of the other big carmakers can claim right now. As of February 2017, Consumer Reports named Tesla as the top American car brand and ranked it 8th among global carmakers.

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