• Electric Vehicles: Is the Model 3 the new iPhone?
  • Electric Trucking: The Ace Up Tesla’s Sleeve?
  • Tesla’s sustainable batteries: Creating renewable energy for the planet.

February 2018

Last year, my team and I at Nightview Capital posited an idea: Tesla, the teenage upstart, had essentially already won the electric vehicle war against General Motors, the 110-year-old behemoth. In an age marked by technological disruption, our argument was—and still is—that startups led by capable management are better positioned to lead us into the future than the incumbents. In almost every vertical we cover, from cloud to retail to transportation, we have observed how upstarts, unencumbered by legacy business models, can out-innovate their competition, grab market share, and defy expectations.

(Full disclosure: Nightview Capital is long Tesla.)

In the case of GM and Tesla specifically, it’s my belief that GM has squandered billions of dollars of shareholder cash on stock buybacks in order to inflate their earnings per share—while Tesla has potentially created billions of dollars in long-term value through their gigafactories, trucking initiatives, supercharger networks, and renewable energy initiatives. It’s a classic case of “innovator’s dilemma:” it is our belief that GM and other legacy businesses are so rooted in old ways of doing business (i.e. internal combustion engines, etc.), their leadership just can’t pivot quickly enough to capture the full emergence of an entirely new future (i.e. electric, automated cars).

This year, I’d like to make a bigger, if not bolder two-part prediction: Tesla’s stock could rise to $1,000—and, if successful in their three core end markets, I believe the company could be worth $150 billion. Below, I’ll explain our rationale, but it’s important to stress up front that this prediction is predicated on several “if it happens” type of factors. Most importantly, the core of our assumption relies on management’s success in three separate and distinct verticals: Consumer electric vehicles, long-haul and short-haul trucking, and the company’s renewable energy initiatives.


Electric Vehicles: Is the Model 3 the new iPhone?

Let’s start with the obvious: Electric cars. In January 2018, Tesla’s Model 3 went on public display in showrooms in California. The event itself reminded me of the iPhone launch back in 2007: Hordes of eager fans swarming the showroom, lining up around the corner, eager to take a glance at the new Model 3, priced at $35,000.

Despite production delays, the Model 3 has over half a million pre-orders, and Elon Musk has recently said he could see demand for the Model 3 reaching an annual rate of “more than 700,000 units.” In January, Automobile magazine awarded the Tesla Model 3 with the prestigious “2018 Design of the Year Award.” “It’s just a really nice-looking, clean design that is instantly acceptable,” the magazine wrote.

Electric vehicles are no longer a fad. They are a reality. And with good reason: They are more than 2.3x cheaper to own than gas vehicles, cleaner, and more energy efficient than ICE vehicles. According to a 2017 report by the Union of Concerned Scientists, “battery electric vehicles produce far less global warming pollution than their gasoline counterparts—and they’re getting cleaner.” I believe the transition to electric vehicles is at a tipping point: Pretty much every electric vehicle forecast assumes the market is growing—but it’s the specific rate at which it is growing is the open question.

Some spectators have offered conservative estimates, like 20% annual growth rate for EVs, but it’s our perspective that the growth rate might be significantly higher. We look to countries like Norway, where electric vehicles represented nearly 42% of all new car sales in 2017—as a template for future growth around the world. Meanwhile, several cities and countries have adopted zero-emission policies by 2025. This is a great development, and we expect to see more cities sign on to initiatives like these.

GM, Ford, and Nissan are all creating respectable EV products—but they haven’t built the charging infrastructure quickly enough to scale out effectively over the next several years. While both Ford and GM have laid out plans to begin moving more heavily into electric vehicles, I believe they were too late to the party. As I have written in previous articles, I can’t underestimate the power of having Musk’s prescient decision to build the Gigafactories. Tesla has the first-mover advantage, and despite 2017 production challenges, we take Musk at face value when he says they’re in the S-curve phase of development.

Tesla shorts love to point out that the $35,000 Model 3 will face anemic profits, but they aren’t accounting for lower battery costs, high-margin add-ons (like full self-driving capacities) and increased production efficiencies.


Electric Trucking: The Ace Up Tesla’s Sleeve?

While most of the Tesla media attention has focused on its consumer-oriented EVs, we continue to be bullish on Tesla’s trucking prospects. And the exciting question that Tesla investors should be asking is this: Can Tesla disrupt the entire trucking industry?

Let’s pause for a moment and consider the opportunity. According to the American Trucking Association, trucks move about 70% of the nation’s freight by weight—every day. The ATA also says that there were 33.8 million trucks registered for business purposes, of which 3.68 million were Class 8 vehicles. Those trucks burned 38.8 billion gallons of diesel fuel, 15.5 billion gallons of gasoline, and traveled 450.4 billion miles. Meanwhile, annual revenues in the trucking industry totaled about $670 billion last year. “Simply -without trucks, America stops,” the association notes.

Tesla says the 300-mile-range and 500-mile-range models of the Semi, its new electric, autonomous truck, will cost $150,000 and $180,000, respectively, and will essentially be a grab at the $30 billion Class 8 market. Already, the company has commitments from Anheuser-Busch, Walmart, JB Hunt Transport Services, Ryder, DHL, the Canadian supermarket chain Loblow, PepsiCo, Sysco, Meijer, Fercam, and others.

Is it possible that Tesla’s trucking vertical could one day become a $50 billion business on its own? I’d say yes. Analysts at Bernstein wrote recently that the Tesla Semi represents a shot at the $30 billion Class 8 market, but given the fact that Tesla will be integrating Enhanced Autopilot features into every new truck, Tesla essentially will own the automation network on which these trucks run.

Overall, though, the market for electric and automating trucking is massive. Navigant Research, which tracks the trucking industry, recently upgraded its forecast of hybrid and electric truck powertrains from 125,500 to 1.66 million from 2017 to 2027. “We could see a breakthrough in the adoption of electrified trucks once total cost of ownership benefits can be clearly demonstrated for fleet operators,” Lisa Jerram, principal research analyst with Navigant Research, said in a statement.

In our view, the reason for the shift in trucks is obvious: Truckers need an electric solution, and so far, Tesla has essentially presented the only meaningful option. “If a trucker travels 90,000 miles a year — let’s say the cost of fuel for a diesel truck is $2.70 a gallon,” Verge reporter Tamara Warren recently noted on a Re/Code’s podcast. “And let’s say that’s 35 cents per mile. If you think about that, for fuel alone, that’s $31,000 to $32,000 that that trucker is spending.”

She added, “If you’re using battery-charging to power your truck, you’re saving thousands of dollars a year and that definitely is lucrative for a lot of truckers when it comes down to it, or their companies.”

The trucking industry is going through a massive sea change, and incumbents like Paccar, Cummins, Daimler, and Volvo have moved slowly to respond to the shift to electrification. As with consumer EVs, Tesla also enjoys the advantage of a steady flow of Lithium-ion batteries, manufactured by its Gigafactories. “This will blow your mind clear out of your skull and into an alternate dimension,” Musk tweeted recently about the truck. We hope he’s right. If the move to trucking plays out—we foresee a massive boom to Tesla’s core business.

“To be honest, we think the truck is a little bit of a game changer, not so much for Tesla but for the trucking industry itself,” Morgan Stanley analyst Ravi Shanker said recently on CNBC. Fair enough—and we agree.


Tesla’s sustainable batteries: Creating renewable energy for the planet

To understand Tesla’s ambitions with renewable energy, let’s take a look at its recent South Australia project. Last year, Tesla installed what is essentially the world’s largest lithium-ion battery, paired to a nearby wind farm. The idea is rather simple: Solar and wind farms can harness renewable energy sources, but actually retaining that energy—especially at night or when there’s no wind—is the difficult part. Enter Tesla’s Powerpack, a lithium-ion battery that can help transform the energy systems around the world by integrating of low-cost solar and wind power into national and local electrical grids.

“The world’s largest lithium ion battery will be an important part of our energy mix, and it sends the clearest message that South Australia will be a leader in renewable energy with battery storage,” Jay Weatherill, the Premier of South Australia, said recently. The Guardian had an even more blunt assessment of Tesla’s project: They recently wrote is would “usher in a revolution in how electricity is produced and stored.”

At Nightview Capital, we have been writing about this clean energy revolution for quite some time, so it’s exciting to see it start playing out in the wild. In addition to South Australia, Tesla has projects on Kauai and American Samoa, where lithium ion batteries are reducing energy costs for locals. “Tesla Is Turning Kauai Into a Renewable Energy Paradise,” Wired recently crowed in a headline.

On Kauai, Tesla has installed 50,000 solar panels and 272 batteries, providing enough energy to power 4,500 homes for four hours. “If Tesla can help keep Kauai solar-powered around the clock with its batteries, then it can apply what it has learned elsewhere in the country, and around the world,” Wired notes.

The opportunity—and market—is enormous. China alone has indicated that it plans to invest more than $300 billion in renewable power by 2020. The green energy market isn’t just good for the planet—it will become incredibly lucrative, too. James Wilde, the managing director, innovation, policy and markets at the Carbon Trust recently told The Guardian that the market for renewables will increase exponentially because of “the falling costs of renewables, the fact that corporates want secure energy, and also some of the market opportunities associated with distributed grids and generation.”

Tesla’s success in this vertical is dependent on a range of factors, from government cooperation to its ability to scale out its battery production farms. But the end markets are huge. The obvious conclusion to Musk’s quest here is the elimination of fossil fuels, replaced forms of renewable energy that are cheaper and better for the planet.

In the case of disruption, the old guard never leads the way to the future. And in these three verticals—cars, trucking, and renewable energies—Tesla is very much the “new guard” in our opinion. For Tesla to grow to a $150 billion company, we believe they need to succeed in these three transformative industries. It will be a challenging, exciting road ahead. In the words of Clayton Christensen, “The breakthrough innovations come when the tension is greatest and the resources are most limited. That’s when people are actually a lot more open to rethinking the fundamental way they do business.”

Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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