Profitability and the Value of Tesla

"Wobbles the Mind" (wobblesthemind) 04/10/2016 at 21:29 • Filed to: Cash Rules Everything Around Me (C.R.E.A.M.)

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Photo Credit: Tesla Motors...duh!

Tesla revealed a concept for the Ghostgrilled Killah better known as the Model 3. Im going to ELI5 profitability (that’s Explain Like I’m Five-ish, to all you ol’ fogeys) and hopefully make sense of why a technology company building a car is worth more than a car company building a car.

Let’s cap Tesla at 400,000 pre-orders at $1,000 each for a $35,000 car. That equates to about 11,428 cars paid for at that retail price. The Nissan LEAF had over 17,000 sales in the US in 2015. Now you may be thinking, “Wow, Im surprised so many LEAFs were sold!” Me too!! But let’s focus on something interesting instead.

With 400,000 pre-orders, Tesla would accumulate 11,428 cars paid for at retail without building a DAMN THING! That’s as impressive as it is frightening! That’s even worse than selling nothing at all because you’re at least guaranteed to be getting what you paid for when you buy nothing! With that 400,000 pre-order limit, Tesla could potentially make $400,000,000 for showing a concept car.

For. Showing . A. CONCEPT. CAR!

That’s not even its final form!! It’s just Part 1!! Part 2 will have an interior!!! DAFAQ??!!!!

Dafaq indeed...

Let me see if I can *bicky bicky* break this down for you, Old Skool! There is a heirarchy of premium for goods: Appliance, Toy/Craft, Technology, and Art.

Here’s the deal, the higher up your brand or product is on that perception scale, the larger the gap can be between the cost to make and the price to sale.

!!! UNKNOWN HEADER TYPE (MULTI-LINE BREAK?) !!!

When something is as essential or practical as an Appliance, the maker is lucky to make a 50% profit. If you buy laundry detergent for $7.99 and it cost the store $3.99 to buy it, the store just made a 50.1% gross profit (because 49.9% of that $7.99 you paid is used to make back what the store spent to stock it). Now the manufacturer probably spends $1.99 for the entire process of making that one item, then sells it to the store at $3.99. Again, that’s a 50.1% gross profit because 49.9% of that $3.99 goes to recouping the cost of making the product. The Manufacturer makes 50%, the Retailer makes 50%, and you have to buy it, and thus shop for the cheapest way to get that item. This creates a hugely competitive market and kills potential profitability.

Consider 50% to be the minimum for gross profits because once you add in operating costs (salaries, taxes, sourcing materials, marketing, items going on sale, etc.) many large businesses run on a 1% total profit margin. Now remember that 1% of $1 billion is $10 million in money that has no where it needs to go. So don’t feel bad for any large company. That’s business!

Level 2: Toy/Craft, aka “Something Special”

The problem with that appliance level is that you need to be huge as a business! So when you aren’t big but need to make the same cash, you charge more! Let’s say you skip selling your $1.99 cost item to the store at $3.99 and start selling that $1.99 item to the consumer directly for the $7.99 retail. Your gross profit just became 75.1% (because 24.9% of that $7.99 goes to the cost of making the item). This is when your company or product has moved to Toy/Craft level, which is a simple way of saying it’s “something special.” You are the same item others are selling, but people want you because there is just something about you that is better to them. I always consider clothing around this point because how the hell can something always be found at 50% off and still be double the retail price?!

Level 3: Technology, aka “Cutting Edge”

Now let’s say that last level is working for you, but you find a way to make the same product for just $0.99. You convince consumers to still spend $7.99, meaning you are now making an 87.6% gross profit (because only 12.4% of that consumer cash in your pocket is needed to make back that reduced cost). How do you spend less money while getting people to pay the same for something they thought was special when it was costing you twice as much to make? Get them to believe that your product is “leading the way.” It’s the “cutting edge.” Take the term literally as a knife. There is no part of the knife in front of the edge. It is the first to penetrate whatever the future places in front of it. Technology is renown for being the knife that cuts into the future, and makes a path for whatever may come behind it. When something is at the cutting edge of technology, it is literally the edge of the knife that is opening the way for all other things to exist in the future.

This is what Tesla has as a brand, and they are held back by making cars, which cannot exceed a Toy/Craft! This Level is how a 5 year old tech company (I’m refering to App Devolopers especially) can have a higher value than century old, tangible product makers. In fact, the making of tangible items automatically kills profit because you can’t make something out of nothing. If you reduce the cost to make that item down to $0.01 and continue to sell it for $7.99 on the grounds of it being the only way for humanity to progress forward into the future, you’re still at a 99.9% gross profit. Simply put, making things kills your profit, always!

This is why software is more profitable than hardware, and why it seems like everything that is worth the most can’t be experienced through any of the senses. We can’t touch a Facebook, but so many other companies have created the ability to “experience” it by using their tangible items. Facebook doesnt have to supply anything tangible to the consumer. That said, for Facebook or any App, the cost is minimum and therefore the profit is maximized leading to outrageous values. Yet, there is still an operating cost because time is always paid for! Even when volunteered, time costs something.

Level ?: Art, aka “You Wouldn’t Understand”

Now you’re probably wondering about that implied 4th level I called Art. Here’s the deal, Art is like Technology, except backwards! Instead of requiring constant motion and progress, Art stays stationary in the time it was made. A painting today, found 40 years from now is still a painting from today. A phone from today, found 40 years from now, is a paper weight (if we even have paper to be weighted by then!)

Art doesn’t become obsolete like technology, it’s timeless. Now, some Art is better at being timeless than others and that is where the pricing/value comes from. Art still requires a medium and that is a tangible cost. Art is also directly linked to time, and as we discovered, time is never free even when Art is done in your “free time.”

What Art can do is increase or hold the value of any product from Appliance, to Toy/Craft, to even Technology! Have you looked at the prices for an original video game console? *shudder* If the item losses value over time, it’s simply NOT Art! Apparently Ferrari and Porsche only made Art prior to the 90s...

What’s Next?

So the next step after Technology...well there is no step. However, we can take that edge under a microscope and truly figure out where the absolute edge is. We have established that making anything costs you money. Spending time on anything costs you money. So what can you NOT make and spend NO time creating? Easy, the answer is obviously existing ! Or rather, being paid to exist but not being the creator of said existence. That’s right, we are talking Existential Profitability!

Now, if you are religious, you already know your existence is paid for even though you’re down nothing for it. If you aren’t religious, then I’ll simplify: Rich kid gets money from parents. Boom! Either way, you’re undeserving of what you’re getting, and people hate you for it. Of course I’m talking from a business perspective. If you’re thinking of anything Religious or Sociological...perhaps even Political then that’s on you, not me!

I hope this gets your brain juices a churnin’! As always, tip your waiter even though it’s just a scheme to not pay people a living wage. Oh, and don’t forget to pre-order your Model 3, the interior is supposed to be like a Spaceship! This is why they waited for SpaceX to be successful before showing off the interior.

The more you know....

Supreme Chancellor and Glorious Leader SaveTheIntegras > Wobbles the Mind 04/10/2016 at 21:34

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Tesla won’t make a buck in profit till that battery factory is up and churning out bateries as fast as it can. As soon as that factory is up Tesla’s stocks probably won’t be so unstable as well

jimz > Wobbles the Mind 04/10/2016 at 21:45

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the “pre-order” thing was just a way to get a sizable cash injection. Tesla lives hand-to-mouth because they have no profitable product line to support them. If GM loses money on every Bolt they sell, they can afford to do that for a long while thanks to the fat profits from trucks and SUVs.

Tesla exists because Elon Musk wants to change the world. He’s already done that, and I give him full credit for doing so. GM would never have been able to sell the idea of the Bolt to their board of directors without Tesla.

Wobbles the Mind > jimz 04/10/2016 at 21:53

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I must have used the wrong word. I took profitability as “the ability (potential) to create profit.” Then I’m using value as “the amount of profit.” My fault, I’ll have to rewrite this.

Wobbles the Mind > Supreme Chancellor and Glorious Leader SaveTheIntegras 04/10/2016 at 21:55

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I think I mess up on this post. I used the term profitability literally rather than the way it’s actually used. I’ll rewrite this another time in the future and hopefully avoid this misunderstanding.

-this space for rent- > Wobbles the Mind 04/10/2016 at 21:57

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The preordered deposit is refundable, so it’s more like an interest free loan than ‘potentially make $400,000,000 for showing a concept car."

Wobbles the Mind > -this space for rent- 04/10/2016 at 22:03

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True! However, companies predict a refund rate and set aside that amount and spend the incoming proceeds. Worst thing that can happen is that everyone asks for the refund at the same time in the next few months. In that case, Tesla would have to take out a loan to cover that. Either way, they aren’t stashing any of those deposits for a rainy day. But we all consider loans to be money. How many people say they bought a car when they don’t even see the title for 3-7 years?! How many say they bought a house?!! Just perceptions.

-this space for rent- > Wobbles the Mind 04/10/2016 at 22:24

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I don’t disagree with any of that, just the implication* that Tesla can pocket the deposits and never produce a product when that isn’t the case.

*I may be reading too much into this because I read too many articles from short sellers explaining what a scam Tesla is.

Justin T. Westbrook > Wobbles the Mind 04/10/2016 at 23:58

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This is a very interesting, very intelligent article.

But...

The argument that Tesla is selling a product that doesn’t exist is false. They did exactly what they (and others) have been doing, except even better this time.

When Ferrari makes a new top-tier supercar, nowadays they bring in a few hundred Ferrari owners, get them drunk, show them a computer model, and then sell huge deposits on a car that doesn’t exist.

And then they deliver. <- This is the important part. This is what you’re buying. The promise of a Ferrari. At least until the car shows up.

Tesla is interesting because it does the same thing, just without the convenience of a dealer network. But, they also don’t have to worry about dealing with a dealer network.

I’d say that if you were one of the first 100,000 people to reserve a Tesla Model 3, you made a decent decision with your $1,000 deposit.

Why?

I’d argue that Tesla probably didn’t expect more than 200,000 deposits as quickly as they got them. We, as consumers, know what Tesla makes by now. We know they have infrastructure. We know they have some manufacturing capacity. We know they have plans of growth. We knew the path they started with the Roadster was where we’ve landed today — one of the *least expensive* and *liveable* electric cars, at least in theory and concept car form at the moment.

But Tesla isn’t selling you nothing with the Model 3. They’re selling you the same promise that Ferrari does. You know they’ve taken orders for cars in the past, and (eventually) delivered them. They did this with the Roadster, S, and X. Why should I think they can’t do it again with the Model 3?

It’s an investment with an extremely high chance of the eventual receiving of what you’re investing in.

So why did I say it was a good move for the first 100,000 deposits? Because I’d say that’s a very safe figure concerning Tesla’s manufacturing capability.

If you were one of these first 100k depositors and put a deposit down thinking you could get a car by 2018 at the latest, there’s a good shot that you will be driving a Model 3 by the end of 2018. Now the 235,000+ people who have put down a deposit after the first 100,000 are investing in something slightly different.

If those later “investors” bought into the idea that they were going to get a 35k car in roundabout two years, there’s a smaller chance of that happening than for the first 100k “investors” due to Tesla practically saying “Oh shit” when the ticker clicked past 130k on opening night.

But I still think all 400,000 people of the deposit max capacity will get their cars, if they stick it out. Will they cost 35k? The average majority of them wont by the time you get the packaging you want. Tesla predicts 42k average at the moment, and I’d wager that’s accurate for shit like autopilot etc. Will the car come end of 2017, or hell, end of 2018? For about a third or a fourth of people, yes. The rest of them? Who knows when.

But you will get a car, or you will get your $1,000 deposit back. You haven’t bought anything until you’ve financed or paid the full amount in exchange for an actual Model 3 at your door.

There’s very little risk (in the ordering process. Early delivery quality issues is a whole other ordeal to get into.)

But this was a good, interesting read Wobbles.

Edited to add: that Tesla likely *budgeted* for 200k deposits. Meaning they could afford the cost gap to start manufacturing cars until full payments started rolling in. Now they’ve near doubled that. The result is longer wait times (that would have existed anyway) but more initial cash to match increased demand.

They didn’t just say they were going to do it and hope for the best. They counted on earning a sizable amount up front. Now it’s even more sizable. The only factor that is negatively effected is the time-to-delivery.

The Dummy Gummy > Wobbles the Mind 04/11/2016 at 07:51

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1. None of that revenue can be recognized.

2. Tesla S PGM hovers around 25%, meaning this will be even less than that due its nature of affordability.