Tesla Motors was founded in 2003 by Martin Eberhard and Marc Tarpenning. Fast forwarding 5 years later to 2008; Elon Musk took over as a CEO from his previous position as a Chairman after a series of dramatic events. The company went public 2 years later and raised $226 M in an impressive IPO priced initially at 17 USD a share in 2010.
Tesla’s premise was embodied in Musk’s first master plan for the company which was to build a more affordable electric car using money from selling less affordable electric cars. Back in 2006 this didn’t seem achievable to most people, however, a lot has changed since then, the company defied logic and was able to sell many Teslas , build an electric charging network, start building a big battery factory, and acquire a solar energy company to create a system that charges its Teslas and store electricity at home.
The company was valued at almost $ 60 Billion and its share price in 2019 is $255 up from its IPO price of $ 17 in 2010 (1,474% increase). This extraordinary growth is without doubt countered by skeptics and this is evident in the fact that TSLA is the biggest shorted stock on the stock market.
Now, let’s examine the underlying value of Tesla in order to have a better understanding of the valuation and try to make sense of the explosive growth of the company and its future. At this point of time (Spring 2019) the premise of Tesla the is not about its ability to sell cars, batteries, and solar roofs to turn profits and deliver value to the world. The premise is actually hidden in its big bet on Autonomy. Lets dig deeper into what is at stake here.
The fundamental message that consumers should be taking today, it is financially insane to buy anything other than a Tesla. It will be like owning a horse in three years. I mean, fine if you want to own a horse. But you should go into it with that expectation”
Elon Musk at Tesla Autonomy Investor Day
It started a little bit before Musk’s 2016 sequel to his first master plan. The Artificial Intelligence (AI) hype was on in 2015 with IBM, Google, and Facebook all talking about the bright future that Machine Learning (ML) will bring to humanity. The true breakthrough in technology was earlier with the use of back propagation for deep learning using neural networks by Geoffrey Hinton of Google and others. The Machine Learning competition was, and is still somehow, on between Google and Facebook. Thousands of people around the world were already using open source tools like Tensorflow that was developed by Google to use ML to develop software that takes advantage of this new algorithm. These new algorithms worked fairly well solving object recognition, classification, and translation problems when vast amounts of labeled data is readily available. Google embarked into a journey that had some early drama to take these ML algorithms to the next level by developing its ML capabilities to be used commercially for Autonomous Driving. This was not a new problem for Google to solve; the US Defense Advanced Research Projects Agency (DARPA) ran a competition for self driving for several years. Google’s efforts eventually resulted in the creation of Google’s self driving transportation subsidiary Waymo. However, Google’s Waymo transformed to offer people a transportation service. Waymo uses a mini van made by Chrysler equipped with a very expensive sensor suite that utilizes Lidar to complete the task.
Now back to Tesla, the company is betting on winning the self-driving race with it’s current production cars because Tesla believes that it is much better positioned than others. It was worth to mention that George Hotz of Comma AI, the guy who hacked PlayStation, explained long time ago that if a human can drive just using their eyes (vision), then a self driving computer equipped with cameras (and the right ML software) can, in theory, do the job if given enough data. This was long before Elon Musk and his head of AI spit it out to everyone that Tesla vehicles can achieve full self driving using relatively cheap cameras.Once this concept became public knowledge and understood by most people, the self driving challenge became a data collection race. Tesla believes it is well positioned because manufacturers is own cars, unlike Google and Uber who use other’s cars, and collects data from its 500,000 Tesla’s 24/7. Elon Musk can show up confident that the company is ahead of everyone to win this race. Uber’s self driving project and MobileEye’s technologies now face huge uncertainty against Tesla’s position. Once Tesla achieves a system that is 10 times safer than humans it can easily compete with Uber’s Taxi business model. Furthermore, Tesla can also license some of it’s technology to Uber, Google and other car makers even though Tesla doesn’t need to. This is why Tesla’s bet is on becoming a $ 500 Billion company may make sense to many of its investors.
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Mike Hassaballa 