Will the Hyperloop Cannibalize Tesla's Business?

Tesla (NASDAQ: TSLA  ) CEO Elon Musk has long hinted about his Hyperloop pet project, and now he has revealed its inner workings. The Hyperloop is Musk's retort to California's proposed $70 billion high-speed rail system, and will use a series of advanced-engineered tubes to allow people to travel extended distances.

The design is expected to allow someone to travel from San Francisco to Los Angeles in 35 minutes. Yet perhaps the most interesting element of what Musk is doing is that he is changing the dynamic of the transportation industry for consumers. Those consumers are the same ones that would likely buy a Tesla. So what gives?

Tesla as a technology company...
The reality is that Tesla is more of a technology company as opposed to a car company the way that it operates. Technology moves a lot faster than the old school style of automotive engineering. Tesla, in effect, is akin to the Apple (NASDAQ: AAPL  ) of automobiles.

Apple is not afraid to introduce a product that is going to eat into its existing business. It's done that with the iPhone taking business from the iPod, where sales continue to decrease, down 25% just in 2012. They will soon do it again with iTunes Radio taking business away from the widely used iTunes download market, which grew 38% from 2011 to 2012. 

Apple has executed this to great financial success. In their fiscal year of 2012, the company had $121 billion of cash on hand. That same year, it notched sales of $156 billion! Last year, the company had 77% of the cash on hand that it made selling its products and services!

Apple knows that in a highly competitive market, it needs to cannibalize itself. Tesla knows that too. Will we someday see a Tesla-branded Hyperloop? That's up to Musk, but if we know anything about the guy, it would not come as any surprise, and it actually might be good for Tesla's overall business to continue to diversify in that manner. 

Self-driving cars
The only other company that can be described as taking car concepts and melding them with technology's breakneck pace would be Google (NASDAQ: GOOGL  ) . Regulation is a challenge in terms of car safety, but Google has been able to get regulators to approve its self-driving cars in California, Nevada, and Florida. 

Will Google actually get in the car business? It's tough to say. No one ever thought that the company would offer broadband to consumers, but they are going to in a few U.S. cities. They've been in talks with Tesla about licensing its driverless technology, although Elon Musk says that Google's system is not yet a priority.

Google's going to expand its business beyond just search and web services, there is no doubt. Since 2010, the company has boosted its research and development spending 78%, to $6.8 billion. Expect to see that number continue to increase as Google tries to expand its proportion of revenue outside of what it calls "Advertising Revenue" which totaled $43 billion for 2012. Outside of ad revenue? The company only made $2.3 billion in 2012, which is a scant 5% of revenue . Diversification is important.

Tesla's feeling good
Perhaps Musk isn't at all bristled by the idea of the Hyperloop taking anything away from Tesla. The plan appears to sweep car buyers from existing manufacturers. In fact, Tesla's revenue from car sales in 2012 was $385 million, a 160% increase from 2011.

In fact, Tesla's automotive sales have been impressive as of late, with the company beating the likes of Chrysler, Volvo and Cadillac, among others in California for a 12% market share. While the company will need to do better in markets other than California to be successful, it would not be surprising to see good revenue increases for 2013 as well. 

Tesla saw a $30 million profit last year, and it's looking likely that they will do better this year. Operational costs need to drop, as total costs of revenue at $383 million is almost as much as their $385 million in car sales. What helped them was their development services revenue at $27 million to bring some profit numbers instead of a loss for once. Could the Hyperloop affect Tesla? Maybe someday, but right now it appears to be on a trajectory to take market share from incumbent higher-end carmakers, and not the market for mass transportation. 

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 27, 2013, at 1:06 PM, jimillo wrote:

    " Could the Hyperloop affect Tesla? Maybe someday."

    I respectfully disagree. If anything, the Hyperloop will complement Tesla. How? Because the Model S is best used as an 'area car', i.e. to be driven around your home area. When people look at their typical driving pattern, most days are spent within a 100 mile radius of their home - even on weekends. This is what I call 'area driving'. Real road trips (300+ miles) are a once-every-few-month event, if at all if you fly (or take a Hyperloop!) on such trips.

    If you had a choice between spending 6+ hours driving from SF to LA, or spending 30 minutes in an inexpensive Hyperloop, I think a lot people would pick the Hyperloop for SF to LA trips.

    The existense of a fast, inexpensive Hyperloop alternative would actually reduce demand at Tesla Supercharger stations. As you know, Supercharger stations are being built at Tesla's expense (there is no expense to a Tesla owner for using one - other than what the owner paid for their car). If there was a Hyperloop from SF to LA, Tesla would likely save money by not having to expand their Supercharger stations. A win-win situation for Tesla.

  • Report this Comment On August 27, 2013, at 1:15 PM, CluckChicken wrote:

    "Yet perhaps the most interesting element of what Musk is doing is that he is changing the dynamic of the transportation industry for consumers."

    So he has taken an idea that was first brought up in 1812 and as an added bonus there is already a company working on it.

    History: http://www.columbia.edu/~brennan/beach/chapter2.html

    Et3: http://www.et3.com/

  • Report this Comment On August 27, 2013, at 1:52 PM, xinspect wrote:

    Hyperloop is wonderful in the far (30 years+) future but a fools errand to eliminate the pressing need for high speed rail.

    I'd love to get a Model S and have no agenda against Musk but his back of the envelope cost estimates are sure to be pitifully low and he hasn't even considered the NIMBI's for an elevated structure, even if the majority of the route is in an X-way median. Underground construction will drive up costs exponentially.

    Besides, I might want to go to Paso Robles or maybe Salinas or Santa Barbara, but guess what- I'll need high speed rail to get to those places! Because THE HYPERLOOP CAN't STOP ALONG THE WAY!!

  • Report this Comment On August 27, 2013, at 2:01 PM, Johnny04 wrote:

    That is an uncessary concern since you have to drive to the Hyperloop station. It's two different types of transport addressing two different needs.

  • Report this Comment On August 27, 2013, at 9:30 PM, Marshgre wrote:

    The Hyperloop is designed to transport both people and their cars. So if you need to go to a city that's 800 miles from your hometown you simply drive your Tesla car to the Hyperloop station, load it into a tube, shoot it to your destination, and drive out of the tube. I think it's yet another enhancement to Tesla's cars as it will allow drivers to take an 800 mile trip in an electric car in an hour without having to stop to charge along the way.

  • Report this Comment On August 28, 2013, at 2:03 AM, john2000young wrote:

    you may be able to put your model s in the hyper loop pod and shot it from east coast to the west in one hour.

  • Report this Comment On August 28, 2013, at 4:58 AM, SuntanIronMan wrote:

    @ john2000young

    I am guessing you were kidding about that, because from west coast to east coast in one hour (say LA to NYC) would be about a 3,000 MPH hyperloop ride!

    Hyperloop, if it were build with current plans, would zip pods around at around 700-800 MPH maximum.

    Also, Muck has said that the hyperloop would not be economical at the distances you are talking about. I believe he said 1,000 miles would be the limit before a plane ride would make more sense.

  • Report this Comment On August 28, 2013, at 10:55 AM, BrainInVat wrote:
  • Report this Comment On August 28, 2013, at 6:00 PM, RussellL wrote:

    Will the Hyperloop Cannibalize Tesla's Business?

    Did trains cannibalize the stagecoach?

    Did cars cannibalize trains?

    Did buses cannibalize cars?

    Did airplanes cannibalize buses?

    I think there is a need for both Hyperloop and cars.

  • Report this Comment On August 30, 2013, at 11:11 AM, demonye wrote:

    New location and design for the Hyper Loop. We would love your feed back and input. Its called the Hyperloop Hydro or “Hydro Loop”. Check it out and give us some feedback. www.jumpstartfund.com/index.php/hyperloophydro.html

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