Is the Tesla of today comparable to Apple 20 years ago? That looks like a hypothetical question. I have seen multiple articles trying to identify the next trillion-dollar opportunity. However, the trigger for this analysis was a recent Morgan Stanley report that compared Tesla to Apple 20 years ago. So, is the comparison fair? Let’s drill down.
My first instinct was to compared Tesla’s market capitalization to Apple in 2000. The results were more surprising than I had envisioned. Apple’s market capitalization was a mere $5 billion in 2000. Yes, that’s correct and I did not miss any “zeros” there. In fiscal 2019, Apple brought back $69 billion worth of its shares! So, from a market capitalization perspective I did not find any similarity between Tesla and Apple. Let us now look from a product standpoint.
From a product perspective, IBM launched its first smartphone in 1992. Then came the Blackberry and finally Apple’s iPhone in 2007. Looking at 2000, only a few people had access to mobile phones let alone a smartphone. However, after 2007, sales of smartphones imploded. Smartphones were a lot better than feature phones and soon came up with newer features. More importantly, with time, prices of smartphones became more affordable for the masses. We now have a wide range of price options in smartphones. From the most basic version, you can opt for the most advanced version.
Tesla started with the Roadster that was priced above $100,000. Then came the Model S followed by the Model X in 2015. However, Tesla reached a scale with its Model 3. This year, the company started delivering the Model Y. From selling a few thousand cars a few years back, Tesla expected to sell half a million cars in 2020 before the pandemic. It may revise down its guidance as the Freemont plant was shut due to the pandemic.
Now, from a product perspective again there is not much similarity between Apple in 2000 and Tesla of today. Electric vehicles are gaining a lot of traction now which was not the case with smartphones in 2000. That said, while almost every automaker is betting on vehicle electrification, Tesla has a lead.
In my view, Tesla’s brand, its battery capability, and its software are its key competitive strengths. Sprinkle Elon Musk’s aura and you get an iconic electric vehicle brand. But then, can Tesla or for that matter electric vehicles make a Blackberry out of gasoline cars?
Electric vehicles would need price parity with gasoline cars to move from a niche to a mainstream product. While the lifecycle cost of owning gasoline and an electric vehicle car can be debated, gasoline cars are way too cheaper to purchase initially. Crude oil prices have also fallen and even after the pandemic we might not see them moving above $60 per barrel. Lower gasoline prices mean that governments globally have a lower incentive to promote electric vehicles.
To be sure, electric car prices have gradually come down with falling costs for batteries. The next big wave for electric vehicles might come with battery advancements. We’re already talking of a million-mile battery.
Meanwhile, from a product perspective, both Tesla and Apple produce innovative, differentiated, and customer-friendly products. Most owners of Apple and Tesla products admire and cherish them. New Tesla models get the same attention as a new Apple product. That said, unlike Apple, Tesla’s capital expenditure is relatively higher. The automotive industry is asset-heavy and Tesla has to regularly invest in new plants to ramp up its capacity.
However, in the future, Tesla would also ramp up its service offering. It plans to commercialize the autopilot later this year as discussed in its Q1 2020 earnings call. Then we have the Robotaxi and Network App that would enhance Tesla’s service business.
But then, can Tesla’s market capitalization reach a trillion dollars in the next 20 years? Statistically, it would mean a CAGR of around 10% for 20 years. The growth rates look quite reasonable for a company that is growing as fast as Tesla.
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