Author: Michelin

“Tesla’s market value will exceed Apple’s.”

This is not the first time that Musk has made Apple a “target”: the first time was in 2017, when Apple’s market value was only $700 billion; the most recent one was at the just-concluded Q3 2022 earnings conference, where Musk added, “Tesla’s market value will reach the total of Apple and Saudi Aramco, not including the robotics business.”

Keep in mind that these two are currently the world’s most valuable companies, with market values of $23 trillion and $2 trillion respectively. Tesla, with a market value of less than $700 billion, still needs to quadruple to catch up with Apple, and nearly septuple to surpass the two of them combined.

An ordinary and steady Q3 earnings conference became different in the “Apple dream” created by Musk. What will Tesla use to achieve the dream of surpassing Apple?

Why always compare with Apple?

From innovative products that change the industry to simple design style, direct sales model, the comparison between Tesla and Apple is an age-old topic. But for Musk, the reason he sets his sights on Apple is still market value.

At the beginning of this year, Apple’s market value once exceeded $3 trillion, becoming the first company on the planet with a market value exceeding $3 trillion. It can be said that no technology company doesn’t want to surpass Apple if they dare to dream.

Not to mention that Tesla and Apple are similar, both having stable revenue growth, higher-than-industry-average profitability, and strict control over the supply chain.In the last quarter’s financial report, Apple’s hardware gross margin reached 34.5%. Apple, which accounts for about 40% of the revenue in the consumer electronics sector, reaps nearly 75% of the profit. In the automotive industry, the company with such capability is Tesla.

In the just-concluded third quarter, Tesla’s single-quarter revenue was $21.5 billion, net profit was $3.7 billion, operating profit was 17.2%, and vehicle gross margin was 27.9%. Compared with the 30.5% gross margin in the same period last year, the investment in new factories and batteries, and the increase in raw material prices slowed it down.

Although the gross profit margin has been below 30% for two consecutive quarters, the nearly 28% vehicle gross margin is still an astonishing achievement. Recently, this “cost-cutting fanatic” has begun to target logistics. We can see such a scene in almost every quarter: the delivery volume in the last month of each quarter surged. A large number of deliveries are concentrated in the last few weeks of each quarter, which increases transportation and logistics instability and costs.

Therefore, Tesla will transition to a more stable delivery pace and reduce the transportation costs of vehicles. Recently, Chinese customers who have ordered Model 3/Y reported that the waiting time for delivery has been reduced. We don’t know if it’s because of this reason.

In addition to profitability, another important factor that supports Apple is the sustainable growth of its business. In the current situation of the global smartphone market cooling down, the sustained growth of the iPhone market is crucial.Compared to the mature smartphone market, the growing electric vehicle field, which has not yet reached halfway, is more critical for Tesla. For Tesla, there is an invisible benchmark: 50%. The 50% average growth rate set by Tesla has become a benchmark for measuring its performance.

In the third quarter, Tesla produced over 365,000 vehicles worldwide, a year-on-year increase of 54%; delivered over 343,000 vehicles, a year-on-year increase of 42%; and total revenue was $21.5 billion, a year-on-year increase of 56%.

The 42% delivery growth did not reach the 50% benchmark, for which Tesla gave the explanation that there were too many vehicles in transit. No wonder Tesla has come up with the idea of optimizing delivery rhythm.

As the delivery volume in the third quarter did not meet expectations, if Tesla wants to achieve 50% growth and deliver 1.4 million vehicles for the whole year, it means delivering nearly 500,000 vehicles in the last three months. Looking at the production capacity of Tesla’s four super factories, the pressure to achieve this goal is not small.

The magical weapon to catch up with Apple is not the half-priced Model 3, but FSD. Since Model 3 and Model Y’s sales put Musk in the top spot of the richest people, the question of when Tesla will release a more affordable model to harvest a bigger market and higher stock prices has become a topic of concern at every earnings call.During the recent earnings call, Musk answered questions about the next generation of Tesla vehicles: they will be smaller, cost 50% less, have a total production volume greater than all current products combined, but crucially, won’t be revealed in the short term.

“Half-price Model 3” can it become Tesla’s trump card to surpass Apple? In my opinion, it won’t, or at least it cannot rely solely on it.

Since Musk has made Apple an example in his statements, let’s review how Apple ascended to the “throne.”

There are significant differences between Tesla and Apple in terms of products and brand kernel, but if we compare the two from a macro perspective, Tesla today is more like Apple from 2011 to 2016.

The global smartphone market was rapidly developing at that time, just like today’s electric vehicle market. Apple also doubled its revenue and market capitalization by leveraging its smart hardware products such as the iPhone, iPad, and Mac. Back then, Apple’s market capitalization of nearly 60 million relied almost entirely on hardware “real swords and guns” fighting.

It seems like an excellent achievement. However, if they continued along this path, we would never have seen Apple’s current position as the “most valuable company.” In the following years, the penetration rate of smartphones had approached saturation, and the growth of smart hardware couldn’t replicate the previous years’ rapid growth. Meanwhile, Apple’s software services business, which was almost zero in 2011, has increased to more than 23% in the last quarter. The user stickiness brought by the software business and the kingdom built by hardware helped Apple’s value increase four to five times. (The peak of the smartphone industry in 2016)

Greater hardware sales volume can leverage higher stock prices, but the effect is limited. No matter how powerful the cost reduction and efficiency improvement measures are, it cannot infinitely reduce the material costs of a car, but the boundary cost of software and services can approach zero.

Therefore, for Tesla, the current hot-selling Model 3, Model Y, the Semi that will start delivery at the end of the year, the Cybertruck that is expected to be put into production next year, and even the “half-price Model 3” in the future plan, are the fundamental basis for Tesla as an electric vehicle manufacturer, but pursuing Apple’s dream also requires the help of software business, such as FSD.

At the recent 2022 AI Day, Musk announced that the number of FSD Beta test users has increased from 2,000 to 160,000 in one year, an increase of 80 times.

By the end of November, FSD will be pushed on a large scale in the North American market. This means that users who have purchased the FSD software package in North America will be able to use the pure visual system FSD function that has eliminated the ultrasonic radar and only retained the camera from the end of November (users in China, don’t get too excited first).

Meanwhile, the revenue brought by software services represented by FSD in the future is the key card that Tesla needs to catch up with Apple.

Finally

There was an impressive point in September that newly-delivered Model Y in Germany won the sales crown with a monthly delivery of 9,846 cars, surpassing a series of classic fuel models such as Volkswagen Golf.

We are accustomed to the “reporting” of new energy vehicle sales every month in China, and we always feel that new energy vehicles are a solo performance in the domestic market, but this is a worldwide trend that cannot be ignored.

Looking at Musk’s “surpassing Apple” statement today, many people may find it unbelievable and exaggerated.

However, if we go back ten years ago, I might not have thought that Apple, which had a market value of only 300 billion dollars at that time, would increase tenfold. Benefiting from the trend of mobile internet, Apple has surpassed Microsoft and countless competitors and sat on the throne. Who knows whether the trend of intelligent electric cars can also blow Tesla up?

Certainly, Tesla still has many problems to solve before that, such as production capacity and delivery, slow-moving FSD, and half-priced vehicle models…

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