When a company’s share price has been going through a price rally for days and has doubled since the beginning of the year – in little more than 35 days – it moves the mind and stimulates the imagination. Some find it exciting and strengthen their belief in the company and its products, while others think that the world has finally gone crazy.
Of course we are talking about Tesla, which has seen daily price jumps of 10 percent and more in the past few days. It was not until the end of January that the share price broke through the 100 billion dollar barrier, and was thus higher than that of Volkswagen. In the meantime, the share price has reached 170 billion dollars, and if things continue like this, Tesla is only a few days away from overtaking Toyota as the most valuable automobile company.
The reasons for this price rally and valuations are manifold and often just as speculative as the price itself appears to be, and many analysts are racking their brains over it. One of the reasons seems to be the so-called short squeeze, where many speculators who had bet on a falling share price are now trying to limit their losses in the face of soaring stocks and panic-strickenly buy stocks – which in turn drives up the share price.
But I am not the equity analyst and I am not really interested in speculation. In my opinion all this is all rather unproductive and doesn’t help humanity. In my opinion, this mental energy could be used much better.
What interests me more is how Tesla seems to be taking all the right steps in its strategy to generate future revenues. And in a way that traditional automakers and automotive analysts have little understanding of. I would like to illustrate this with the following video:
What looks like the left player is about to lose because he has to sacrifice one checker after the other, the strategy goes completely up with the last move and remaining checkers. The left player takes all the stones from the right player and wins.
It seems to be similar with Tesla. For years, the company has mainly been making losses. At the same time, however, it is growing much faster in terms of sales and production figures than the traditional companies, even though both seem ridiculously small compared to the established companies. But here too, the exponential effect of disruptive technology is overlooked. What seems ridiculously small today quickly takes over from all the others thanks to the exponential growth curve.
Everything that is earned and much more is reinvested: in research, charging stations, new model series, new factories, strategic acquisitions of robotics companies. And it’s starting to pay off. No competitor manages to launch a comparable product 8 years after the launch of the Model S.
The sale of an (electric) car is by far not everything. It becomes exciting when you look beyond the physical product and take a closer look at the digital services. This is where the revenue potential is hidden that has not yet been fully exploited and for which Tesla is now setting the course. For analysts familiar with Internet companies, this is by no means surprising. But automotive analysts only see the car and tend to overlook these new digital values. Even employees of traditional automotive companies easily overlook this, they are not even aware of what they are overlooking. Like this Mercedes employee who test-drove a Tesla Model 3 for a few days, describing the physical characteristics of the car, but leaving out many of the digital ones, and not even realizing that he had missed out on them.
What digital values are we talking about at Tesla? And how can they lead to revenues?
Tesla already offers certain software functions only at extra cost. Autopilot, Full Self-Driving, or recently even the Acceleration Boost for the Model 3 Long Range are only available for several thousand dollars/Euro. These functions can either be purchased with the purchase of the car, or at a slightly higher price later. The Acceleration Boost has only been available for a short time, and who knows which functions will be unlocked in the future.
While loading on Tesla Superchargers was still free for the first Tesla buyers, today it is only the first thousand miles/kilometers. Everything above that must be paid for. But at much lower prices than with suppliers such as IONITY, who have recently come into the limelight because of their drastic price increases.
Although: with Tesla billing is not always easy, as this tweet from a Tesla owner shows.
A few days ago I also switched to the Tesla Insurance, which has been offered for half a year. And this mainly because I now pay 30 percent less in insurance. With this, Tesla removes an obstacle, because the previous insurers were more expensive in the event of damage due to the engine power and the many sensors installed in the car. At least that’s what the insurance companies say, who presumably also had too little reliable data from the still little-used vehicle.
With the possibility that Tesla can also make an accurate assessment of a driver’s risk based on the data produced by the vehicles, and how often the (safer) autopilot is used, the sum insured can be optimized for the driver, not the risk group.
Elon Musk has already mentioned it in connection with robotics, but now it is to be used ahead of time: a ridesharing app. The specialist blog Electrek reports about it. This feature in the Tesla app allows you to use your own car as a ridesharing vehicle without any problems. Tesla records every ride that is arranged. Tesla earns money with every ride that is mediated, and that even before the own cars can be used as robotic taxis.
Elon Musk has also already teased it, but once there, he could significantly increase the proceeds for Tesla. Apps for cars are not just about 2 or 3 or 10 euros, which such an app can cost on a smartphone, but also about completely different price dimensions. A model where Tesla 30 and the programmer of the app receive 70 percent of the price, and that from the app price and the in-app purchases, can bring Tesla hundreds of millions or even billions of revenue every year. And this for years, long after the money for the initial purchase of the car has been realized.
Whereas the Internet connection in Tesla vehicles was previously free of charge, the so-called Premium Connectivity Package has been offered since the end of 2019. If you buy it for 10 dollars a month, you will then also have current traffic conditions available on the navigation map, streaming services and other things.
Alternative Usage Models
Experiences from Japan show where the journey under this headline can lead. Car rental companies were faced with the mystery that their cars were rented but had the same mileage when they were returned as when they were picked up. Solution to the mystery? The tenants had never used and driven the cars. They had simply looked for a room for a couple of hours in Japan, where they could stay undisturbed, eat, read, do other stuff. Cheaper, in any case, than renting a hotel room or co-working space.
With autonomous and electric cars, new uses for cars could be devised that went far beyond a mobility solution. With its Byton Stage display, for example, the electric carmaker Byton shows how the entire cockpit front can be used for videoconferencing and meditation – naturally in park mode.
Disappearing Revenue Models
With an electric car like the Tesla, you can not only expect additional revenue models, there are some that existed with burners, but no longer with electric cars.
Maintenance is such an issue. What began as a necessity for combustion engines has developed into an important revenue model for dealers and workshops. Up to 10 percent of the purchase price of a car is added as revenue over the years for maintenance. Income that a dealer does not want to do without so easily. But with electric cars that is over. Tesla, for example, does not even have a maintenance plan. How could it? Apart from changing tires and refilling windscreen wiper water, there is nothing to maintain. Not even the brakes need to be replaced, because thanks to the recuperative function of the electric motor when slowing down, the brakes are simply used less.
The Tesla customer view is noteworthy here. The company could propose a maintenance cycle and thus pass on sales to workshops. And the customers would probably even find it normal, because they were already used to it with combustion engines. But Tesla is not taking the side of the repair shops here. It clearly has the customers in mind when it designs the car to be as maintenance-free as possible, even if this means that maintenance revenues are lost in the short term. In the long term, however, the company will gain additional customers as a result.
The revenue potential of Tesla is only now becoming really visible and beating. Tesla has taken the necessary steps to achieve this, and this is what sets the company apart from traditional car manufacturers who are stuck in a business model that is more than a hundred years old: they sell a car and the maintenance to go with it. Tesla still sells cars today, but not maintenance, but many new digital services that have never existed before. This makes it clear that Tesla is not so much a car company as a digital company. And here, as known from Apple, Google, Amazon and Co, the revenue possibilities are unlimited.
It is even conceivable that similarly, already in the smartphone market, the car will cost little or nothing, since the actual revenues are generated by the use of the car. But this is where things get hairy, as this can lead to the undesired effect of higher mileage for all cars.
However, traditional manufacturers today must deliver more than just an “electric car”. When I was asked by employees of a German manufacturer what their electric car had to be able to do in order for me to switch from my Model 3 to theirs, I once gave this longer answer in which I listed eight points, with electric car itself being only one of the points. The share price reflects these seven points and they mainly include digital values.
This article was also published in German.