I’ve Got Beef with Tesla

Last week, I drove with a couple friends down to Philadelphia for Easter Break. While we were driving, we discussed how crazy it is to think that our parents grew up without cell phones or computers. My parents went to college with typewriters, not laptops. They conducted research by combing through the stacks at libraries. They couldn’t just type search terms into Google and instantly find the results they were looking for.

My friend asked me what I believe will be the Google of the next generation. The thing that will make our kids pause and ask, “Wait, you did what back in the day?”

There are countless possibilities, some of which are in development and many of which are based on discoveries and inventions that haven’t even been made yet. One, however, stands out among the rest: self-driving cars. I think the next generation will pause and ask, “Wait, you used to have drive your cars? With a steering wheel?”

Eventually, this devolved into a conversation about Tesla and Elon Musk, two names that seem to be inextricably linked to autonomous vehicles. Based on discussions with my friends over the years, there seems to be a general public perception that Tesla is some sort of “pioneer” in the fields of self-driving and electrical vehicle manufacturing. Don’t get me wrong, Tesla is certainly a player in both, but I don’t believe they’re a pioneer in either. Tesla’s marketing—the hype train—has done a great job getting people to believe that, though. And it drives me absolutely nuts.

Allow me to elaborate on what I believe to be some of the popular misconceptions about Tesla.

Myth #1: It’s a well-run business

Tesla’s a hot mess. The only certain about Tesla is uncertainty. It’s relatively normal for younger companies to fluctuate more in terms of output, cash flows, etc., but at this point, Tesla has shown it can’t provide any reliable guidance. Elon Musk has been promising that it’ll be one more quarter until Tesla achieves sustained profitability for what seems like years.

Furthermore, their financial situation has been deteriorating. Elon Musk has said that Tesla is done looking to Wall Street for capital, but unless Tesla does a 180 and really turns things around in terms of profitability, they’ll have to raise cash, and they’ll have to do it soon. A quick look at Tesla’s most recent quarterly earnings shows a decrease in their cash balance from $3.7 billion on December 31st to $2.2 billion on March 31st. This represents a cash burn of $496 million per month for the trailing three months. With $2.2 billion in cash as of March 31st, Tesla will be out of cash in a little over four months. They need to raise capital unless drastic operational changes occur that will make them profitable.

tesla frown

Yikes.

Considering the fact that they’ve never gotten a whiff of profit in any fiscal year since they became public, this seems unlikely. In fact, Tesla has only had three quarters in which they reported positive net income: Q3 2016, Q3 2018, and Q4 2018. The latter two quarters of 2018 were the only two consecutive quarters of positive net income for the car manufacturer, at a modest $312 million and $139 million, respectively. This trend couldn’t stick, however, as they reported a loss of $702 million in Q1 2019.

 

Myth #2: Tesla is way ahead of the pack in the self-driving race

There is a lot about the field of self-driving that is conjecture, but it’s pretty clear that Waymo is in the lead here. Alphabet-owned Waymo “has run self-driving cars over 5 million road miles in 25 cities and done billions of miles in computer simulation, which it uses to update its self-driving software on a weekly basis” (source). Waymo also boasts the lowest rate of instances in which an engineer needs to take over because of a glitch, called disengagement. Furthermore, it had only three collisions over 350,000 miles.

In fairness to Tesla, they’re using a different technology that Musk argues will result in less heavy, awkward, expensive equipment atop the vehicle. Waymo and many other self-driving companies use LIDAR, which is essentially radar with millions of lasers and laser light signals used to detect obstructions. It’s a trade-off, though: this will take longer and set them back a good deal relative to their competitors. Additionally, industry leaders believe LIDAR is necessary, especially for night driving. Tesla’s choice to forgo LIDAR, opting for cameras instead, is a risky bet, and many experts have voiced skepticism.

Myth #3: Tesla pioneered electric vehicle manufacturing

The first mass-produced electric vehicle to market was the Nissan Leaf in 2010, followed by the Model S two years later. Since then, Renault-Nissan quietly outperformed the competition until Tesla grabbed a whopping 60% of the US market following its Model 3 launch. However, whether Tesla’s Model 3 is profitable remains to be seen, given that Tesla is burning through cash. And if it’s not sustainable, production won’t—and can’t—continue.

model 3

The Model 3 is sleek, but is it profitable?

Other manufacturers like Nissan-Renault and BAIC have found ways to make electric vehicles profitable. While the Model 3 is arguably the best value among EVs from a consumer standpoint ($35,000 MSRP), Tesla has had a really, really tough time making money on it. Though Tesla was the first car manufacturer to focus solely on electric vehicles, other companies that manufacture cars did it sooner, and profitably. Electric vehicle manufacturing is still relatively new and Tesla may still have an opportunity to be a pioneer if they can turn things around by increasing Model 3 margins, but frankly, I don’t see that happening.

In closing, I don’t buy the Tesla hype. I believe the company is poorly run (and I didn’t even get into Elon’s antics) and financially unhealthy, and not a leader in either self-driving technology or electric vehicle manufacturing. Frankly, I wouldn’t be surprised to see Tesla implode in the next couple of years.

Sources:

https://ir.tesla.com/index.php/static-files/5cb2477b-8dca-479f-9dda-eb3f59fa67e3

https://ir.tesla.com/index.php/static-files/15df7636-8cd8-4b18-989b-4badeeda806c

https://www.theverge.com/transportation/2018/4/19/17204044/tesla-waymo-self-driving-car-data-simulation

 

 

One comment

  1. Great overview. It’s pretty funny to see the Tesla evangelist crowd praise everything Elon Musk says or does (looking at you redditors). But you’re right, customers need to be able to trust a company and Tesla’s reliability just isn’t there. These financial figures are definitely worrying. Now I understand that the company is building up capital for infrastructure to support their business model ultimately they need to be able to perform. And when the Model 3 is STILL delayed and Elon has gone back and forth on closing all store fronts to afford constructing this base model… well the company seems erratic at best.

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