The Tesla Thesis

I’m not a car guy. When I got the Tesla Model S (with the wife’s permission), it was out of my love for tech, and my genuine belief in the environmental ethos of zero-emission electric cars. The love affair started the moment Elon Musk unveiled the Model X. I fell for the car hook, line and sinker when Elon (yes, we’re on first name basis in a parallel simulated universe) promised autonomous driving capabilities.

The Model X was love at first sight. Alas, a car is a financial liability and the Model X, with the then base price of around £95,000, was the epitome of financial folly. So I settled for a modest Model S with a 75 kWh battery pack.

The product

Two years and eight months of union later, the Model S still gets my heart a-fluttering. It’s sleek, it’s cool, and its curves are wet dreams-inducing. To illustrate my point, here are some bokeh-licious photos I took of my sexy beast:

Like any relationship, there are ups and downs. This is my honest opinion of a specific model (a late 2017 Model S 75D). Production processes, hardware, and features have changed in the newer models. Without further ado, the good, the bad, and the ugly of the Tesla Model S for your perusal:

The good

  • Have I mentioned that this car is sexy and is the pinnacle of car design (a non-car-guy’s humble opinion)? Case in point: the door handle presents itself as you approach, and retracts to be one with the door as you drive away. I will say no more.
  • It’s sheer utter fun to drive. Instant torque sparks maximum joy. More importantly, each instantaneous acceleration does not spew noxious gas.
  • Fully charged, the 75 kWh battery pack provides a range of circa 210 miles, eliminating any range anxiety. On longer trips, the car plans the route to include stops at Tesla Superchargers. The very first road trip I made was from (just outside of) London to Scotland. I was impressed by the coverage of the supercharging network; there was even one in the Scottish Highlands! Even more astounding was that I paid zilch for “fuel” (supercharging is free-for-life for Model S and X bought before a certain date). At home, I charge using the Tesla wall connector, courtesy of Tesla as a referral reward. I set the car to charge in the wee hours to benefit from a special tariff of 5 pence (£0.05) per kWh (this works out to be less than 2 pence per mile). Better yet, my energy provider provides electricity from 100% renewable sources.
  • The semi-autonomous driving capability aka “Autopilot” is not perfect but works wonderfully on motorways. Autopilot keeps the car in lane, changes lane if the car in front is too slow, and exits the motorway automagically. It’s not fully autonomous as the driver’s confirmation is required to change lanes. Nevertheless, the assistance makes for a relaxing drive. On such drives, I listen to my favourite podcasts (Pivot, which inspires the rebirth of this blog, being the main one), and a vast universe of songs on the free Spotify account.
  • There is ample storage space in the trunk and in the frunk (front trunk) for road trips, or visits to the recycling centre.
  • The car is a piece of tech. I can program the car to open my remote-controlled house gate automatically when the car approaches the gate. I can control the car (unlock the car, open the trunk/frunk, open said gate, set temperature, set and monitor charging, summon etc.) via a mobile phone app.
  • Regular over-the-air (OTA) updates to the car’s software provides incremental improvements and/or new functionalities. Every OTA was like opening a present; less so today (see next section). These updates also come with Easter eggs, which most will find gratuitous (think farting noises with a click of a button which Tesla calls the “emission test mode”). These Easter eggs reflect Elon Musk’s inner geek and sense of humour. His love for the TV show Rick and Morty, for example, spawned an Easter egg which allows you to say “keep Summer safe” to engage sentry mode (a mode which protects the car from theft and other malicious intent). Voice commands in a Tesla are notoriously unreliable but “keep Summer safe” works every single time. Don’t look to Elon for guidance on how to set priorities in life.

The bad

  • The build quality is bad relative to cars from established automakers. I’ve had to visit the service centre to sort out minor annoying issues like rattling noises, misaligned wipers, and an inexplicable yellow border (fixed 1.5 years ago but the problem has resurfaced as you could just about see it in one of the photos above) on the otherwise unblemished and functional 17-inch touchscreen. Some basic components are known to have a short lifespan, making these a ticking time bomb for expensive out-of-warranty repairs.
  • Autopilot is not perfect. It is a massive leap from the current state to full autonomous driving despite Elon Musk’s various promises of the imminent arrival of full self-driving (FSD). Tesla has also been selling FSD as a premium add-on for years even though it’s still largely vapourware. I’m glad I paid for “Enhanced” Autopilot (which has largely been delivered) and drew the line at FSD. Confused by the gimmicky terminologies? This chart provides a good summary.
  • Over-the-air (OTA) updates to the car’s software does not fully benefit older cars. Recent updates such as video streaming (e.g. Netflix), new games or the ability to use my PlayStation 4 controller to play said games (#firstworldproblems) do not work on my car as it does not have the latest Media Control Unit (MCU). Like any tech products, an ageing hardware means inevitable obsolescence.

The ugly

  • The battery degrades and loses capacity over time. While I have not experienced any noticeable degradation, one direct impact of this natural wear-and-tear of batteries is that Tesla has throttled down the supercharging rate (normal charging at home is unaffected) for my car, allegedly to reduce battery degradation. When the car was brand new, the supercharging rate was 120 kW; the supercharging rate now averages 60 kW, doubling the charging time required. This is beyond annoying, especially on road trips. These issues are known as #batterygate and #chargegate among Tesla owners.

Despite the bad and the ugly, the Model S has been stellar. This is a car to be enjoyed and be grateful for. When the time comes to replace the car, I will most likely choose another Tesla. Battery degradation is inevitable but Tesla is expected to announce a 1 million mile battery on the “Battery Day” event tentatively scheduled for September 2020.

The company

The recent surge in Tesla stock price has put the spotlight on the company yet again. Tesla’s valuation, which reached an all-time-high market capitalisation of more than US$300 billion on 20 July 2020, is eye-watering considering its minuscule sales volume (compared to the established automakers). The high priest said so himself in May 2020 when the market cap was less than half of the all-time-high:

The valuation is in part buoyed by the broad asset price inflation caused by Central Banks’ stimulus programme. Market participants are also pricing in the company’s future potential. This potential is far from certain and it’s anyone’s guess what Tesla’s real value is, hence the volatility in the stock price. What exactly is the company’s potential?

Before I delve in, I stress that this is my personal view on Tesla and its potential. It is not an investment advice/recommendation. For full disclosure, I’m financially (I own Tesla shares) and emotionally (I’m a long-time fan) invested in Tesla’s success.

The mission and the master plan

Tesla has a lofty mission statement:

Tesla’s mission is to accelerate the world’s transition to sustainable energy.

The mission is being executed by revolutionising two economic activities enablers – transportation and energy, the erstwhile strongholds of the fossil fuel industry. The master plan is devilishly simple:

Build sports car

Use that money to build an affordable car

Use that money to build an even more affordable car

While doing above, also provide zero emission electric power generation options

Create stunning solar roofs with seamlessly integrated battery storage

Expand the electric vehicle product line to address all major segments

Develop a self-driving capability that is 10X safer than manual via massive fleet learning

Enable your car to make money for you when you aren’t using it

Elon Musk; The Secret Tesla Motors Master Plan, Master Plan Part Deux

The execution (so far)

Tesla’s range of cars which are in production (Model S, 3, X, Y) have made electric cars appealing. Not too long ago, electric vehicles are synonymous with golf carts. Now, they are aspirational products to yearn for and to attain. The affordable (and sexy) Model 3 and Model Y, in particular, are going to accelerate the adoption of electric cars. Tesla has forced the hands of the stodgy incumbent automakers; they too are transitioning away from internal combustion engines.

Some competitors have decent offerings; Volvo and Geely’s Polestar and the Honda E come to mind. The competition, however, is at a disadvantaged position. Tesla has had years to build its Tesla-only charging infrastructure. A Tesla owner could simply drive up to a Supercharger and plug in to start charging. In contrast, a non-Tesla owner has to contend with a disjointed array of charging stations operated by third parties, each with its own payment system and membership requirement.

Tesla’s slew of consumer energy solutions are elegant in form and function just like the cars. The solar roof (solar panels embedded into roof tiles) is beautiful and can withstand hailstones. The Powerwall, a battery pack which stores electricity, is so sleek that it’s a crime to hide one away in the garage.

Tesla has also been making in-roads into grid-scale battery packs. The most famous deployment is in South Australia, which started as a bet Elon Musk made on Twitter.

The product pipeline

Tesla has three more core products in the pipeline:

  1. The Cybertruck is a pick-up truck like no other. Within a week of its launch, 250,000 units had been pre-ordered despite the “failed” demo, and without any marketing expenses.
  2. The Tesla Semi promises significant cost savings to truck owners and operators through lower energy cost. A fully autonomous version will further reduce operational cost.
  3. The Tesla Roadster is a supercar with specifications that put the £2,750,000 Buggatti Chiron to shame. Enough said.

Tesla has also taken a leaf out of Apple’s book by offering services that are built on top of its core range of products:

  1. Subscription services – Tesla’s first subscription service is a £9.99 per month “Premium Connectivity” subscription. The recurring revenue business model makes sense and has revived the fortune of many a software companies.
  2. Insurance – Teslas are notoriously expensive to insure. I was quoted a ridiculous £4,000 for 1 year of coverage (some motor insurers deliberately price themselves out of insuring certain risks). Fundamentally, insurance is about utilising data to provide a competitive price (including profit margin), and to set aside sufficient reserves to pay out claims. There is no one better to provide insurance coverage for Teslas than Tesla itself. Elon Musk has called for “revolutionary actuaries” (see tweet below) to further develop the insurance proposition.
  3. Tesla robotaxis – When full self-driving is no longer vapourware, Tesla aims to launch an autonomous ride-hailing service in direct competition with the likes of Uber. The dream is that this will reduce the cost of ownership by allowing owners to put their cars to work at will.
  4. Electricity trading platform – Autobidder is Tesla’s best kept secret. This cloud-based software helps battery owners maximise their revenue. It’s a key step in Tesla’s foray into becoming a virtual utility. Watch this space.

The conclusion

Tesla’s business is super capital intensive. If free cash flow cannot be sustained, it will need to issue debt or sell more equity.

Its success relies on 1) scaling production as cheaply as possible, and 2) achieving full self-driving. These require engineering, technical, and regulatory breakthroughs that are not guaranteed. In short, it is a difficult business to be in, and a risky one to invest in, especially at an outsized valuation.

If anyone can make a success of it, it is Elon Musk (and his team). Do not bet against Elon Musk; he is highly motivated (he needs the moolah for his spacefaring ambitions), and he is more than capable of delivering Tesla’s potential. It is just a matter of when (likely to be later than promised).

The bottom line: Tesla makes innovative transportation and energy products that are beautiful and functional. More importantly, they wean us off fossil fuel.

Disclaimer: This is my personal view as a long-time Tesla fan. It is NOT investment advice/recommendation. I write on this blog in my personal capacity; my opinions are NOT endorsed by my employer or the actuarial profession.

Disclosure: I am financially and emotionally invested in Tesla’s success. I own shares in Tesla and I have a vested interest in an increased valuation.

Tesla referral link: If you regularly drive from A to B, please consider getting an electric car to stop polluting your neighbourhood. That electric car should ideally be a Tesla. Get 1,000 miles free Supercharging by using my referral link:

Octopus Energy referral link: Please consider switching to an energy supplier that provides electricity from 100% renewable sources. On the Octopus Go tariff, you could charge your electric cars (or do anything you fancy with cheap electricity) at 5p per kWh. Get £50 by using my referral link: