Tesla Reorg: Aligning Profit and Vision

  • Today, Tesla gave details on its previously announced company reorganization. The 9% workforce cut was more than the 5% reduction we were expecting.
  • We believe this reorg brings Tesla a measurable step closer to long-term sustainability.
  • Reading between the lines, there is now a higher probability that they will be profitable in the Sep-18 quarter.
  • We remain positive on the Tesla story given our belief that Model 3 will scale, and the company will achieve its mission of accelerating the world’s transition to sustainable energy.

Source: (Screenshot) Bloomberg

Critical production metric likely unchanged. Elon Musk addressed the elephant in the room in his letter to employees, clarifying that the cuts will not impact Model 3 production. This, of course, is the most important near-term metric to the story, even more so than cash.

Framing up the cost savings. Tesla currently employs about 37,000 people, which will be reduced to about 33,500. For starters, we expect a one-time charge of $130-$150M split between cash and stock, detailed on the Jun-18 earnings call. More importantly, the quarterly op-ex savings going forward should be about $80M ($320M annually). This is estimated using a $100,000 average salary and a 6-quarter average tenure. In the context of the company’s high cash burn rate, $80M  per quarter may not sound like enough to have an impact, but as the next several months may decide the fate of the company, every dollar counts.

The Road to Profitability. Tesla previously said that they will be GAAP profitable in the second half of this year. Conventional wisdom suggests we should discount any of Musk’s predictions on timing, but given the magnitude of the reorg, it’s clear he is serious about reaching profitability. The Street is generally looking for GAAP profitability in early 2019. In rare form, Musk directly aligns the company’s mission with its ability to make money, saying, “we will never achieve [our] mission unless we eventually demonstrate that we can be sustainably profitable. That is a valid and fair criticism of Tesla’s history to date.” We believe this reorg will bring Tesla one step closer to profitability – and to achieving their mission.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make. 

Posted in Tesla  • 

Secret Weapon: Tesla’s Over-The-Air Updates

  • Tesla has several underappreciated, unique advantages including their tech brand, battery production, charging network, autopilot data, and over-the-air updates.
  • Tesla is the only automaker that is able to perform over-the-air (OTA) updates. Every other car manufacturer requires the car to come in for service to receive an update.
  • The power of OTA updates was demonstrated this week after the Model 3 failed to receive Consumer Reports’ recommendation due to long braking distances. Tesla pushed an OTA software update that was able to recalibrate the ABS system and reduce braking distance by 13%. The Model 3 was then retested and earned CR’s recommendation.
  • Updating vehicle performance without having to service the vehicle in person shows the real power of OTA updates, which we believe will be a continued advantage for Tesla as vehicles become more reliant on software.
  • Because of the heavily entrenched relationships between automakers and dealers, few other vehicles are able to receive OTA updates. This compounds with the fact that Teslas are manufactured with more heavily-integrated software that is able to control more functions of the car.

On May 25th, Fiat Chrysler issued a recall of 4.8M vehicles due to a cruise control issue. Each one of those vehicles will need to be brought in for inspection, costing the company an enormous amount of money and causing damage to the brand. OTA updates not only save money and delight the consumer, but they also allow Tesla to have a more direct relationship with customers. Automakers are not allowed to compete with their dealer network on sales or service. That means they can’t service things like ABS calibration without dealers receiving their cut. Tesla, unencumbered by this relationship, is able to control more of the customer experience and open the potential for future revenue like upgrades for “full self-driving” and longer range.

Aside from being largely prohibited to perform OTA updates, other automakers are far behind in manufacturing vehicles that are well equipped to benefit from them. Tesla’s integrated hardware and software approach means that a software or firmware update is able to fix issues like braking distance or faulty windshield wipers. Jake Fisher, the director of auto testing at Consumer Reports said, “I’ve been at CR for 19 years and tested more than 1,000 cars, and I’ve never seen a car that could improve its track performance with an over-the-air update.” Meanwhile, a typical vehicle has several kilometers of wiring harness and multiple electronic black boxes from different companies, not a unified system. Similar to the iPhone’s control over hardware and software vs. Android’s fragmented system, Tesla’s integrated approach gives them a leg up as cars become computers on wheels.

OTA updates will soon be a crucial tool for every car on the road, and we believe Tesla’s head start is an under-appreciated competitive advantage.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Posted in Tesla  • 

There’s a Method to Musk’s Goal Setting Madness

  • According to Bloomberg, of the 54 projects they have tracked since Tesla’s inception, Musk has been late on 21 (or 40%).
  • These continual misses fuel an inaccurate narrative that the company can’t execute and may not survive.
  • In our view, Musk misses expectations because he publicly sets the same targets for all four of the company’s stakeholders: customers, investors, employees, and suppliers.
  • Most public companies have the luxury of sending different messages to each of their stakeholders.
  • Our rule of thumb to translate Musk’s targets into reality is to add 3-9 months.
  • We continue to expect the Model 3 to mark a pivotal moment in the world’s adoption of EVs.

Why does Elon Musk have to give the same target to all of Tesla’s stakeholders? Tesla is in a unique stage of its growth. A typical company thinks of each stakeholder as a group, Tesla has to think of each one as a cog. To survive, the company has to advance each cog in unison with a consistent message to each of its stakeholders.

To illustrate, let’s look at Tesla’s target of producing 5,000 Model 3s per week by the end of June 2018. That target is eventually publicly communicated to investors, but only after it has been communicated to suppliers and employees.

The first cog to move is the supplier. Tesla needs to pressure suppliers to promptly deliver parts. If the company tells those suppliers that they need to have parts to produce 5,000 Model 3’s per week by the end of June, and tells investors that they expect 5,000 by the end of September, that may cause some of its many suppliers to believe they have wiggle room in what Tesla has asked them to deliver. If one supplier misses its target, the entire production line misses its target. As Musk wrote in an internal letter, “actual production will move as fast as the least lucky and least well-executed part of the entire Tesla production/supply chain system.”

The next step is assembly. Employees need to be held to the same goal as the suppliers to assemble the Model 3 on target. Like the supplier, if the employees think there’s wiggle room in the target, they will likely fall short.

Customers are notified via email when to expect delivery of their vehicle. Those communications to customers are also picked up by suppliers, investors, and employees.

If any one of the stakeholder groups senses wiggle room, they’ll slow down; it’s human nature. And speed of production is a critical element to Tesla’s success. The company needs to ramp Model 3 to generate cash to stay in business.

Most public companies have the luxury of sending different messages to each of their stakeholders. By comparison, most other public companies don’t have to carefully balance these groups for 3 reasons: 1. they can source parts from multiple suppliers; 2. they have a broader product line; 3. they have a more favorable cash position.

Take Apple for example. The company can set a supplier goal of 70m iPhones in a quarter and suggest to investors through its earnings guidance to expect 60m phones in that same quarter. If a group of suppliers senses wiggle room and misses its target, Apple typically can source the part from a backup supplier, a luxury Tesla does not have. Sometimes, both the primary and secondary suppliers fail to meet Apple’s goal, and, for example, iPhone X production was slow out of the gate. The downside is that consumers get frustrated with longer iPhone X lead times (~ 30% of revenue). But that negative is more than offset by the positive that Apple is still generating revenue from sales of previous generation iPhones. Even if suppliers never ramped production of the latest iPhone, the company has the cash to sustain itself until the next iPhone. Tesla can’t afford to wait for the Model Y.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Perspective on Consumer Reports’ Model 3 Review

  • Consumer Reports reviewed Tesla’s Model 3 for the first time and the car did not earn its recommendation.
  • The review was critical of the Model 3’s inconsistent braking, complex user controls, unsupportive rear seats, and highway noise.
  • Elon Musk tweeted that the braking issues can largely be solved with firmware, software, or hardware updates (we think in the next year), at which point CR will retest the vehicle.
  • While the CR review feeds into the “Tesla’s in trouble” narrative, the fact remains that Tesla has more demand than it can supply for the Model 3.
  • Some perspective on the review’s tone is helpful, given Consumer Reports was also critical of the original iPhone.
  • We continue to believe the Model 3 will represent the turning point in the world’s adoption of EVs.

Consumer Reports Model 3 review. The Model 3 failed to earn Consumer Reports recommendation based on concerns of inconsistent braking distances and complex user controls. In Consumer Reports’ test, the Model 3 took 152 feet to stop from 60 mph, almost 7 feet longer than it takes the Ford F-150 to stop. Car and Driver also noticed similar variability while testing Model 3 brake times. In Tesla’s own tests, stopping distances from 60 to 0 mph were an average of 133 feet. Musk also expects to be able to fix the problem via an over-the-air software update to the brake calibration algorithm, and added that Tesla, “will make sure all Model 3’s have amazing braking ability at no expense to customers.” Consumer Reports was also critical of the complex user controls, unsupportive rear seats, and excessive wind noise at high speeds. The report’s negative comments overshadowed an otherwise positive review, highlighted by the fact that the Model 3’s 350-mile range was the longest ever recorded in a CR test.

Consumer Reports on iPhone. Consumer Reports has been skeptical of other groundbreaking, mass market products before. When reviewing the original iPhone, for example, they mentioned characteristics that went on to be trivial. CR logged complaints about the inability to remove the battery, a headphone jack that required an adapter for non-Apple headphones, and said entering calendar appointments was not as easy as it was on a Blackberry. Complaints about the Model 3’s complex controls and the lack of buttons remind us of Steve Ballmer’s infamous take on the iPhone’s prospects because it did not have a keyboard.

The variation in braking distances is a serious issue that needs to be swiftly addressed. Consumer Reports’ director of automotive testing, Jake Fisher, said that an over-the-air improvement in braking performance would be an industry first, and if it was successful, CR would retest the Model 3. If Tesla is able to improve this metric, it may earn CR’s recommendation and demonstrate the power of over-the-air updates.

If Tesla accomplishes an over-the-air improvement in braking performance, it may earn CR’s recommendation and demonstrate the power of over-the-air updates.

If a hardware upgrade is necessary, it will add to the list of challenges Musk is facing, and feed into the “Tesla’s in trouble” narrative. We see this review as another speed bump on the Model 3’s path to transforming the industry and we remain optimistic about its ability to do so.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.

Posted in Tesla  • 

Feedback Loup: Model 3 Test Drive

It has been a tough day for Tesla. Shares opened down 5% and drifted lower throughout the day after Wednesday night’s circus disguised as an earnings call. On the call, Tesla provided incrementally negative commentary regarding Model 3 profitability. As believers in the Tesla story, spirits at Loup Ventures HQ were a bit low.

Then the day took a turn. At about 10 o’clock in the morning, we had an unexpected visitor, Bo Hu, the proud new owner of a Tesla Model 3. Bo picked up his Model 3 earlier this week and stopped by our office because he wanted us to see the car. We had been on a staged test ride in a Model 3 at the hand-off event last summer, but this time was different for two reasons: 1. we got to drive the car for the first time, and 2. we witnessed firsthand how Model 3 owners become Tesla evangelists. We felt like it was 2007 and we were listening to an early iPhone user sing the praises of his new device.

The driving experience. There’s not much that we can add that hasn’t been well-documented regarding the experience of driving a Tesla. The overall experience, including ease of use, acceleration, smoothness, comfort, and attention to detail, exceeded our high expectations. The one issue was an error message on the display reporting an open charger port which was in fact closed. We view this as a small but important data point that suggests the Model 3 is not airtight today. That said, it’s easy to see how Tesla will work those bugs out of the system over the next 6 to 12 months. We left the test drive a little jealous of Bo, and with the feeling that purchasing another vehicle in this price range is simply foolish – a feeling that Bo shares, as he mentioned that any new car purchase for his family going forward would undoubtedly be a Tesla.

The bigger story. As Model 3s hit the road, everyday drivers will become Tesla evangelists. Bo is an engineer by trade, more the technical type than a salesman, but the way he talks about the car and his experience with Tesla is a compelling pitch. This is common among Tesla owners, and we anticipate that Model 3 sales ramp, word of mouth will be a powerful demand driver. Bo mentioned several of his friends that own Mercedes or BMWs that have recently put in Model 3 reservations since seeing the car.

Bo’s visit couldn’t have come at a better time. Just as we were disappointed with Tesla’s latest turn of events, driving a Model 3 refocused us on what matters most, a product that delights consumers backed by an inspiring mission.

Disclaimer: We actively write about the themes in which we invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.