The Secret Business Model of Tesla | How Tesla earns Money? | Elon Musk
Salutations, companions!
At present, Tesla stands as the world's preeminent automotive empire.
With a market capitalization surpassing a trillion dollars, it's a valuation that dwarfs its competitors. In a captivating scenario, if we were to juxtapose Tesla against the aggregate worth of the ten most esteemed automobile companies, including Ford, Honda, Volkswagen, Toyota, and BMW, it becomes evident that Tesla's worth eclipses them all. What mystique shrouds Tesla, one might wonder? What enchantment does Elon Musk employ that propels his enterprise to such astronomical heights?
In the article to follow, we'll embark on a journey to demystify Tesla's Business Model. "Tesla, renowned for crafting high-end electric vehicles, has outpaced even industry giants like Ford and General Motors in terms of market value," as the company's stock gains monumental momentum. Musk, the trailblazing visionary, sees his fortune soar in the wake of Tesla's meteoric rise, outshining even the esteemed Warren Buffet.
This summer, Tesla emerged as the paramount automobile manufacturer globally, rapidly garnering both awe and controversy. A presentation brought to you by Vested Finance.
At first glance, one might deduce that Tesla's prodigious value reflects its volume of car sales. Yet, this is a fallacy, dear friends. While it is undeniable that Tesla's car sales have experienced substantial growth this year, a closer look reveals that the cumulative number of Tesla vehicles sold in 2021, or projected by year's end, will amount to less than a million. To provide context, the worldwide total of vehicles sold by all manufacturers stands at a staggering 75 million. It is approximated that approximately 900,000 Tesla units will have been sold by the year's end, culminating in a mere 1.2% market share. A modest percentage, but a valuation of grandeur.
Let us delve into the core products underpinning Tesla's revenue stream. In the realm of automobiles, four predominant models reign supreme: Models S, 3, X, and Y. The Model X, the priciest of the quartet, commands a substantial $99,900. Following suit, the Model S boasts a price tag of $90,000, while the Model Y enters the fray at $55,000. Lastly, the Model 3, not only the most popular but also the most affordable Tesla offering, is accessible at $42,000. An interesting side note is the impending release of the Model 3 in India, projected to bear a price tag of approximately ₹7 million. This will stand as Tesla's most budget-friendly model, catering to a broader consumer base.
Tesla's array of vehicles occupies the upper echelons of the luxury segment. An illustrative chart visually elucidates the volume of each model sold, with Models X and S typically hovering around 10,000 units each, while the Model 3 eclipses the competition with a remarkable 90,000 units. This data pertains to quarterly deliveries.
So, what profit margin does Tesla amass from the sale of a single car? A fair estimation can be gleaned from the Automotive Gross Margin, which encapsulates the sales revenue minus the manufacturing expenses. At present, Tesla commands an impressive 30.5% margin, a substantial leap from its historical 27%. This margin supersedes the majority of its counterparts, including stalwart brands like BMW and Mercedes, who struggle to attain such elevated levels. For most automotive enterprises, margins tend to hover between 15% to 20%. A profit margin in excess of 30% is typically reserved for the crème de la crème of luxury brands, such as Porsche and Ferrari.
The bedrock of Tesla's revenue emanates from vehicle sales, contributing the lion's share. However, Tesla's financial ecosystem is not monolithic; rather, it spans three principal domains. The first of these is automotive, encompassing car sales as well as the Sale of Regulatory Credits, a concept to be elaborated upon later. Servicing forms the second domain, presenting yet another revenue avenue for the enterprise. The third and final component is Tesla's foray into the realm of energy, encompassing products like the Tesla Solar Roof and Power Wall.
Tesla's product portfolio extends beyond cars; it encompasses Solar Roof and Power Wall offerings. The Solar Roof proposition is elegant in its simplicity. For those seeking to incorporate solar panels into their homes, Tesla provides a seamless solution. The Power Wall, designed with renewable energy in mind, serves as an energy reservoir, ensuring a continuous power supply during periods of low sunlight. This innovative device exemplifies Tesla's commitment to sustainable energy solutions.
In addition to the existing product line, Tesla is diligently working on the Cybertruck, an electric truck designed to revolutionize the market. Furthermore, the company has undisclosed plans to unveil an economical car model, expected to retail for $25,000, rendering it accessible to the broader American populace.
The amalgamation of these revenue streams culminated in a 2020 revenue figure of approximately $32 billion. Forecasts for 2021 are even more optimistic, anticipating revenue to surpass $45 billion. An illustrative chart depicts the trajectory of this revenue growth, accompanied by future revenue projections. The visual breakdown indicates that red denotes revenue stemming from car sales, while orange represents revenue generated through energy products, including Tesla Solar Roof and Power Walls. The yellow segment signifies revenue derived from servicing. Astonishingly, nearly 80% of Tesla's total revenue is attributable to the sale of Tesla vehicles.
A comparative analysis against General Motors serves to underscore Tesla's nascent position in the revenue race. Despite significant strides, Tesla has yet to eclipse the established giants. Nevertheless, Tesla is nipping at their heels and is poised to ascend in the ranks.
Interestingly, Tesla's earnings fall short of its expenditures, an intriguing paradox. The company's profitability is buoyed by the robust profit margins garnered from vehicle sales, reaching a commendable 30%. The enigma lies in Tesla's substantial Research and Development investments, totaling billions of dollars. This intensive focus on technological advancement remained a financially burdensome endeavor for Tesla, resulting in unprofitable years until 2019 when the company finally achieved a net profit. A fascinating facet to this narrative is Tesla's astounding $0 allocation for advertising expenses, a marked departure from conventional automakers who invest extensively in marketing. Tesla's advertising absence is compensated for by Elon Musk's ubiquitous influence; his tweets alone can sway the value of cryptocurrencies. The intrigue surrounding Tesla, coupled with its myriad innovations, grants it free and extensive media coverage, a testament to the power of word-of-mouth marketing.
Tesla's uniqueness is further underscored by its distinct approach to car sales. While traditional car manufacturers rely on third-party dealerships, Tesla bypasses intermediaries entirely. Prospective buyers can place orders directly through Tesla's website or visit a showroom to make a purchase. This direct-to-consumer model eliminates the need for intermediaries, sparing consumers from haggling over prices. Tesla forgoes advertising expenses and does not forfeit profit margins to commissions. Although this approach raises operational costs for Tesla, it affords the company full control over the entire process, akin to Apple's strategy of overseeing every aspect of its products.
The veritable cornerstone of Tesla's production strategy lies in its Gigafactories, colossal manufacturing facilities established to harness the advantages of economies of scale. Economies of scale, a fundamental economic concept, dictates that increased production scale leads to a reduction in per-unit costs. Tesla, acknowledging the historically exorbitant expense of batteries, initiated the Gigafactory concept. These colossal installations focus on the mass production of batteries for Tesla vehicles, ultimately driving down their cost. Currently, six Gigafactories are distributed worldwide, with four fully operational and two under construction.
Yet, what truly sets Tesla apart are the pioneering technologies integrated into its vehicles. The self-driving technology featured in Tesla's automobiles is a marvel. In autopilot mode, the driver's role is minimized, as the vehicle can essentially navigate itself. The company has distinguished itself with an array of cutting-edge safety features, solidifying its status as an industry leader in this regard. Tesla's groundbreaking strides in popularizing electric vehicles have reverberated globally. Credit for the widespread adoption of electric cars can be primarily attributed to Tesla.
Hence, numerous investors place their trust in Tesla, perceiving it as an emblem of revolution. The company's stock is particularly favored, securing its status as one of the most sought-after in the United States. However, permit me to impart a vital investment guideline: diversify your portfolio. While Tesla offers enticing prospects, prudence dictates spreading your investments to mitigate risk and preserve capital in the event of market turbulence.
In the past two years, Tesla's stock has ascended to staggering heights, multiplying in value fifteenfold. An investment of ₹100,000 in Tesla's stock in December 2019 would have burgeoned to approximately ₹1.5 million today. The swarm of investors flocking to Tesla's banner has propelled it to the summit of automotive supremacy.
Nevertheless, an alternate perspective lingers, one that casts a shadow of doubt over Tesla's valuation. Some assert that Tesla is overvalued, arguing that its present valuation lacks substantive justification based on factual data. What substantiates these reservations? Let's delve into the critiques.
First and foremost, traditional automakers have ventured into the electric vehicle domain, eroding Tesla's market share. In the US, the birthplace of Tesla, the market share occupied by Tesla has dipped, plummeting from 79% in the initial half of 2020 to 66% in the same period of 2021. Competitors such as Audi, Ford, and Chevrolet have not only gained ground but also introduced electric models that often boast lower price points than their Tesla counterparts.
The second contention pivots on Regulatory Credits, an esoteric yet pivotal revenue source for Tesla. Regulatory Credits are akin to currency in a system of environmental responsibility. Companies manufacturing eco-friendly vehicles accrue credits, which can be sold to less eco-conscious counterparts. Tesla, by producing zero-emission electric vehicles, generates an abundance of these credits, which other automakers are compelled to purchase. These credits have become a significant revenue source for Tesla, with nearly $500 million in revenue attributed to their sale in 2020. Without this revenue stream, Tesla would have reported a net loss for the year. The looming specter is that, as other automakers pivot toward electric vehicles, the demand for these credits will diminish, potentially depriving Tesla of a crucial revenue source.
The narrative of Tesla's future is yet to unfold. It stands at a crossroads, poised between inexorable success and unforeseen challenges. Both sides of the argument have been articulated, but the verdict remains uncertain.