Tesla is the Next Apple

This note was originally published on Business Insider.

Apple is the world’s largest company with a market cap of nearly $770 billion as of this writing. Tesla is one of the world’s largest automakers with a market cap of close to $55 billion, although we think the Tesla story is just getting started.

There are many parallels between Apple about a decade ago and Tesla today, market cap being one of them.  In Q4 2005, Apple’s market cap was close to where Tesla’s is today ($54 billion). A decade from now, we think we’ll look back at Tesla and realize it was the next Apple.

There are five major similarities to Tesla today and Apple in the mid-2000s:

  1. Brand
  2. Visionary leadership
  3. Integrated hardware and software
  4. Halo effect
  5. Reshaping a market

Brand

Tesla’s brand is to the car industry what Apple’s brand is to consumer electronics. Tesla owners love their Teslas.

According to a Consumer Reports survey, 91% of Tesla owners state they would “definitely” buy their cars again, the highest rating of any automaker. The next two closest automakers were Porsche at 84% and Audi at 77%. By comparison, Tim Cook stated on Apple’s Dec-16 earnings call that iPhone had a 97% satisfaction rate.

Beyond tangible customer satisfaction metrics, we believe there is a less tangible cool factor to the Tesla brand, much like Apple in the late 1990s and early 2000s. In many ways, Tesla has the same “think different” attitude that Apple popularized.

Tesla has built a brand around being a different kind of automaker. Not only because its vehicles are powered entirely by electric, but also because they don’t use model year numbers and treat software updates more similar to updating an iPhone app than a car. The company has done this all while squarely placing itself in the conversation with BMW as one of the best-engineered cars in the world. Tesla has established itself as an aspirational brand by taking a new approach to the car market.

Visionary Leader

Elon Musk and Steve Jobs share similarities in that they are visionary entrepreneurs that simultaneously operated multiple groundbreaking companies.  Musk with Tesla and SpaceX and Jobs with Apple and Pixar.  However, both seem to have different guiding lights.

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Apple Working With Tesla Is A Fairy Tale

There’s been a lot of talk about Apple buying Tesla, but what if Apple simply made a $10 billion equity investment in the company instead? It sounds so good — Apple working with Tesla. In theory, it would make our lives so much better. Imagine all of the things you love about your iPhone, perfectly integrated with all the things Tesla owners rave about. The two tech giants could take over the auto industry over the next 20 years as consumers embrace electric vehicles and automation. Unfortunately, an investment from Apple, nonetheless an acquisition, would be hard to pull off. At the end of the day, that might be better for consumers if not investors.

Before we discuss why it won’t happen, let’s go over why it sounds so good.

For Tesla. A $10 billion cash infusion would all but eliminate any current or future cash problems for the company. While $10 billion equity investment would cause about 20% dilution today, it’s likely it would have a long-term benefit on Tesla stock given the removal of the cash question. Aside from the cash, we believe Apple could and would want to provide resources from their world class hardware, software, and AI teams to make Tesla’s the entertainment system and autopilot better. The investment would likely remove Apple as a potential direct or indirect competitor. Additionally, Tesla’s Model 3 could be showcased in Apple’s 490 retail stores in 20 countries.

For Apple. Investors would feel like they are actually doing something with their cash, which should be a positive for AAPL’s multiple. Apple would be investing in a company that has the potential to be multiple times bigger over the next decade. They would not be spending on the impossible, which would be building its own car to try to catch Tesla, but rather investing in making the leader even better. The impact of AI and robotics on the automotive sector is one of the next mega tech trends, and Apple would have a pole position within that theme.

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Tesla’s Bedrock In AI & Robotics Will Transform The Industry & Our Lives

I always wanted to cover Tesla, but as an internet analyst, the stock fell outside of my coverage space. Despite this, I continued to study the company and ultimately invested because I believe that Tesla is not a car company, but a consumer electronics company that thinks like an internet company. With a bedrock in AI and robotics, Tesla is one of the best positioned companies to transform our lives over the next 20 years.  We think Tesla is on par with Amazon when it comes to a reckless pursuit to shape the future, which we believe will reward investors over the long run.

The Street Is Understandably Focused On The Wrong Metric

Tesla reports December quarter results on Wednesday (Feb. 22). Given the 48% rise in TSLA shares over the past 3 months, now trading near an all-time high, it’s understandable why investors are nervous going into the print. After all, good news is priced in as information of the earlier-than-expected Fremont production retooling has stoked Model 3 production expectations. As of our last check, buy side investors expect 17k to 25k Model 3 shipments in 2017.  That’s a big number when you consider that in 2016 Tesla delivered 76k vehicles (all models) to customers. Investors will be zeroed in on Elon Musk’s comments on the earnings call about production of the Model 3 in 2017.  His comments may cause volatility in the stock short term, but they are irrelevant in the long run.

It’s Not About How Many Model 3’s Tesla Sell In 2017

As venture capitalists, we have the luxury of thinking about themes over a very long horizon. With that perspective, Wednesday’s Tesla earnings report is a non-event.  What’s more important is that Tesla makes the best car in the world, amplified by AI and robotics. That focus will keep competitors in check, allowing the company to reach scale and ride the next tech mega wave as our lives are quickly transformed (over the next 20 years) into an electric, automated existence.

Artificial Intelligence

Tesla’s obvious AI play is autopilot for autonomous vehicles, with a less well known AI push in manufacturing. We know that the company is pushing boundaries to gain data to improve its driving AI with a goal of being first to market with an L4 compatible vehicle (the automated system can control the vehicle in all but a few environments).

The first to market will have a measurable advantage because road data equates to smarter AI and safer cars.  Google’s Waymo has driven over 2 million autonomous miles, but comparisons with other automotive companies are difficult given some companies include simulation miles.  Last October, Elon Musk reported Tesla had driven 222 million cumulative autopilot miles, but those miles are not comparable to the fully autonomous number that Waymo reports.  It’s unlikely that Waymo will have a commercially available vehicle in 2019, but likely that Tesla models solid in 2019 will be L4 compatible. Traditional automotive is even further behind, with BMW, Audi, Mercedes, Ford and GM likely shipping L3 autos in 2019. Note that L5 is the highest level of autonomy, for vehicles capable of all aspects of the dynamic driving under all roadway and environmental conditions that can be managed by a human driver, followed by L4, L3 and so on.  This begs the question, why would anyone interested in an autonomous car buy an L3 compatible vehicle if it was priced similar to an L4 vehicle? We don’t know how Tesla’s autopilot AI stacks up against the market, but based on comments from our industry contacts, Tesla sees AI as one of its two core competencies and is structuring its future around it.

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