Tesla Motors Inc is a powerful force in the auto world right now, and the firm’s incredible business is the talk of Wall Street. On Tuesday morning, Morgan Stanley’s Adam Jonas said the firm may be forced to charge $60,000 for the Model 3. In his report he questioned how Tesla is going to get out of the car business in order to make real money. The answer, contrary to Musk’s general countenance, may be to look backward before looking forward.
Tesla Motors may simply be copying the business model that Elon Musk and Peter Thiel followed to make Paypal Holdings Inc. what it is today. That point was raised in an insightful SeekingAlpha piece on the firm’s future written by Faloh Investment. It’s an interesting thread to follow, and it may contain insights for Adam Jonas, and anybody else following Tesla Motors.
Tesla Motors takes targets seriously
Faloh starts off with a simple truth contained in a quote from Forbes. Luxury cars “form nearly half of the auto industry’s profits, despite making up just 10% of its unit sales.” Paypal holding Inc. , as one of the world’s first online payment processors, also tried to target elite groups. It began with Palm Pilot users, and migrated to sellers on eBay.
eBay Powersellers were just a small group of people but, back when PayPal became a thing, they were one of the most significant groups in terms of online sales.
Faloh reckons that Elon Musk and Tesla Motors are putting a target on the entire auto market but, just like when he was in charge at Paypal the firm is focused on a small, influential, group with a high yield. After targeting that market, the second step is owning it. We’re already seeing sales of the Tesla Motors Model S rival sales of similar luxury vehicles in Europe and the United States.
Once that’s done the high profit margins from the elite segment can be used to build an entire mass market business. That’s exactly what Elon Musk and Peter Thiel did at Paypal. The firm now stands alone as a $45B payments giant. It’s larger than a lot of banks, and it’s still growing.
In the view of Faloh, “Tesla Motors’ success in the luxury electric vehicle market is just its first step as it executes its business plan to grow into a mainstream brand of vehicle driven the world over. Elon Musk and his teammates have set their goals very high, and he’s not afraid to talk about it.”
The link between the model used by Musk at Paypal and the one being used right now at Tesla Motors is an interesting one, and it bears thinking about. That’s especially true as some, like Mr. Jonas from Morgan Stanley, think about how Elon Musk is going to gain even higher margins in the years ahead.
Tesla Motors goes beyond the car market
Mr. Jonas has an obsession when it comes to Tesla Motors . He thinks that the firm is working on a competitor to Uber, and he reckons we’ll see it some time in the next year or so. He asked Elon Musk about Tesla Motors’ plans for distributed mobility on the firm’s most recent conference call.
He didn’t get anything like a concrete answer from Elon Musk. The CEO told him “I think there’s a right time to make announcements. This is not that time. And nor is our strategy fully baked here. So for us to state that it would be – it’s not fully baked. So there’s no – we would prefer to announce something when it’s–when we think we’ve got the full story understood.”
Adam Jonas is looking for Tesla Motors to change the world, but he’s not exactly happy with the answers that Elon Musk has for the planet’s issues just yet. He doesn’t think that the firm can do all that well by turning itself into a mass market car maker. There’s a better future, in his mind, from keeping margins high and keeping Tesla Motors on the edge of mobility tech.
Jonas has a $450 price target on shares in Tesla Motors, more than 100 percent above where the firm’s stock is selling on Tuesday. His idea of the firm’s future is very different from that currently espoused by Elon Musk, but it may follow the Paypal line even more closely than the story told by Faloh Investment.
Keeping margins high at Tesla Motors
The biggest flaw in the car industry is, according to Mr. Jonas, the fact that each vehicle, including the Tesla Motors Model S, sits unused for so many hours a day. If the cars, which cost so much money to begin with, were used more frequently, they’d be able to keep their margins up. He sees Tesla Motors launching Tesla Mobility sometime next year to solve that problem.
He sees the app coming sometime in the next twelve to eighteen months though he does admit that there is a “a degree of uncertainty” around the whole idea.
In Mr. Jonas’ view Tesla Motors shouldn’t sell the Model 3 at $35,000. That would keep Tesla margins low. Each car may cost $60,000, according to Jonas but the sticker price won’t be all that important. Users will pay for miles rather than for a car, and that’s how Tesla Motors is going to keep its margins high.
That’s the boldest prediction that Mr. Jonas made in today’s report, and it could be a PR disaster for Tesla Motors. Elon Musk has said over and over again that the Model 3 will cost $35,000. That’s been his pitch for changing the world, and it’s one of the reasons why so many have backed his plans.
Taking that away could derail Tesla Motors in a way that it may never recover from. If Elon Musk sees the high-margin market that Mr. Jonas is pointing to, however, his instincts from Paypal may kick in. Perhaps Faloh was right about the firm’s strategy, but wrong about the point it was at.
Mr. Jonas did say that $60,000 represented the ASP of the Model 3 rather than the sticker price. Though the car might cost $35,000 for a base model, that version isn’t likely to contain the sort of features that make a Tesla a Tesla.
Paypal did, after all, jump from one high margin market, the Palm Pilot, to another, eBay Powersellers, before settling. It did so because the profits in the first just weren’t enough to keep its growth blooming.
If Tesla Motors runs into the same sort of wall in the luxury car market, and its cash burn indicates that it might, the firm may be forced to find another high margin market to put focus on. Mr. Jonas may just have pointed the way. Luxury car buyers may, in Faloh’s analogy, be the Palm Pilot ownesr rather than the eBay Powersellers in Elon Musk’s burgeoning enterprise.