Is Tesla Motors Inc. Really a Car Company?

Tesla Motors  (NASDAQ: TSLA  )  can't really be expected to disrupt global auto sales as just a carmaker. In order to make sense of how much disruption the electric-car maker might cause we've got to look at Tesla as technology innovator. 

The emperor's real clothes
At its heart, Tesla is a software developer dressed in a carmaker's robes. The Silicon Valley company has focused on developing its software to be the primary component behind its fleet's sophisticated safety and battery systems, not to mention its infotainment console. The majority of Tesla's software is developed internally by a highly skilled group of electrical, power electronics, software, and automobile engineers. This software focus affords Tesla a flexible and dynamic approach to updating its fleet, something that few, if any, other carmakers have been able to accomplish.

Source: Tesla Website

Wireless recalls
Tesla's software is the first of its kind in the auto market, as it presents a noninvasive and dynamic approach to upgrading the user experience and vehicle safety. For example, in order to fix an overheating problem with its cars' in-home charging units, all Tesla had to do was send out an over-the-air software update to the affected vehicles. The company also went above and beyond this service by also providing

Model S' Infotainment System. Source: Tesla

charger replacements, but Tesla was certain the update alone was an adequate fix. Compare that to almost every other carmaker, which would likely have to do a physical recall of the affected models, and it's easy to see why we have to broaden our classification of Tesla to being more than just a carmaker.

The car of the future
It's also important to consider what Tesla has in mind for the years ahead. Musk has hinted at moving toward an open-source format, allowing people to develop their own apps in order to customize their driving experience. Vehicle autonomy is on the company's mind, too, but that won't be substantially developed any time soon. If Tesla's software isn't a disruptive new technology, then I must be missing something.

Riding the wave
In order to get a better idea of Tesla's potential to disrupt, investors would be wise to consider the technology adoption curve. Right now, the folks that own a Roadster or Model S would be considered innovators, those people we all know that are always in front of the latest gadget trend. Once Tesla jumps into the early and late-majority adoption segments, all bets are off.

Source: Wikipedia, used under creative commons.

This adoption life cycle coincides with Tesla's historical timeline -- at the end of 2013 the company had about 2%-3% of the U.S. premium auto market share. Considering that people are becoming more exposed to and educated about electric vehicles, and taking into account Tesla's unique approach to software, shareholders can expect the company's fleet to claim a larger market share in the premium auto segment in future years.

Not just the 1%
Along with the potential for an increase in share of the luxury segment, the introduction of Tesla's third-generation model will likely expose the automaker to strong growth potential in the midrange auto segment. Gaining relevance within that market may prove vital to the long-term adoption of Tesla, something that shareholders should consider a risk because Tesla yet has no experience in scaling its technology and quality standards down to a more affordable level.

Market share visualized. Source: Tesla

Betting on disruption
Even with all the inherent risks in embracing an investment in Tesla as a technology company, the car company will likely find stability and security in the luxury car market. It will be interesting to see how Tesla's story will change as it moves into more affordable segments. If the electric-car maker can  win over the early majority with its mass market product, shareholders might find Tesla's next chapter to be much less risky.

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Read/Post Comments (16) | Recommend This Article (5)

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 April 11, 2014, at 4:34 PM, dimestop wrote:

    NEWS ARTICLE INDICATES TESLA IS PLANNING TO BUILD A "SUPERCHARGER" NETWORK IN CHINA...

    ALSO...NOTICE TESLA LARGELY DEFIED ANOTHER BIG MKT DOWNTURN and recovered to within .32 cents (up about 5 dollars off it's lows...)

    it did the "best of the high-flyers" to weather a couple big days of DOW AND NAZ DOWNTURN...etc.

    here's A BIG REASON WHY... LOOK AT THIS....

    GET WITH "REALITY SHORTS" HERE IT IS AGAIN:

    JUST GOOGLE THIS:

    images of china expressway between major cities

    then click on the URL with the images... AND YOU'LL GET AN IDEA OF "CHINESE EXPRESSWAYS"...between major cities... and WHY ELON WILL BE BUILDING "SUPERCHARGER STATIONS" THERE...

    AND LOADS OF "RICH CHINESE WILL BE BUYING TESLA S... as fast as Elon can MAKE 'EM....

  • Report this Comment On April 11, 2014, at 5:12 PM, phakr wrote:

    I think you have a broken link. In the "Is Tesla really a car company" article, there is a Jeremy Philipps link to find out what company he has invested $117,000 in, etc. That link does not bring anything up.

  • Report this Comment On April 11, 2014, at 5:35 PM, speculawyer wrote:

    Yes, they are a car company. The batteries are needed to make the cars. Buy building massive battery factory they can push down the price of battery-powered cars such that the become mainstream and sell big to everyone.

    Once you've gone electric, you don't want to go back. It is clean, quiet, CHEAP TO FUEL, no oil imports, no drips, no exhaust, no transmission, no oil changes, no fill-ups, you can 'grow your own' fuel on your roof with solar PV . . . EVs are GREAT. Love mine.

  • Report this Comment On April 11, 2014, at 6:05 PM, devoish wrote:

    Wireless recalls

    Tesla's software is the first of its kind in the auto market, as it presents a noninvasive and dynamic approach to upgrading the user experience and vehicle safety. For example, in order to fix an overheating problem with its cars' in-home charging units, all Tesla had to do was send out an over-the-air software update to the affected vehicles. - Lia Niu, September 11, 2014

    "According to Automotive News, GM will upgrade OnStar software on its vehicles remotely using a wireless connection, without requiring the owners to visit the dealership service department. This may be yet another technology evolution that challenges traditional dealership business will reshape the future of automotive service". - September 2, 2010

    https://idc-community.com/manufacturing/manufacturing-value-...

    If Tesla is not a car company, then it is a retirement plan that sells shares to investors better than it sells cars to drivers. The tech is just not that special or unique.

    Best wishes,

    Steven

  • Report this Comment On April 11, 2014, at 10:28 PM, EFRROS wrote:

    If the tech is not that special or unique, then why hasn't anyone else done this? Things that make you go hmmm!

  • Report this Comment On April 12, 2014, at 12:03 AM, Ustauber wrote:

    ThxTsla

  • Report this Comment On April 12, 2014, at 8:30 AM, drax7 wrote:

    Like the innovation cycle described. What market cap can we expect once we reach the early adopters phase? $50 billion, $100 billion?

    Given production expectations of 35,000 cars this year, at what number of cars should do we cross the chasm?

    Certainly once both model s and x are in production, later this year, we should be in the early adoption phase. By the third quarter of 2014 could the mkt cap exceed 35 billion?

    35,000 cars sales in 2014 equates to 35 billion mkt cap, assuming third generation vehicle trajectory is in place. .

    75,000 car sales in 2015 should equate to 75 billion mkt cap. Those are my targets subject to revisions.

    Tesla embodies the integration of hardware and software, and the end result has synergy beyond anything around today.

  • Report this Comment On April 12, 2014, at 8:55 AM, Pietrocco wrote:

    Leah,

    Do me a favour: buy the shares, hold them for the long-term, and lose a fortune!!

    Just punishment for someone as asinine as you are.

  • Report this Comment On April 13, 2014, at 2:35 AM, DrDauger wrote:

    @Pietrocco: Have links? Reasoning?

    I'm long TSLA starting at $35/sh; I expected it would double by the end of 2013. Today my only regret is not buying more at the time. I thank financing by the shorts who had and have your attitude.

    This worked when I bought AAPL back when it was (split-adjusted) $6/sh. That was 1998, when Dell said Apple should be liquidated. I still have a piece of that position. What is Dell up to lately?

    Like Apple, Tesla has a market-disrupting forward-thinking product (I know because I immensely enjoy my Model S) and business plan, and this capital-intensive business means other makers will take years to catch up, longer because they still haven't "woken up" to the challenge instead taking at best timid steps, longer still because the Gigafactory will give Tesla monopoly access to low $/kWh Li-Ion batteries, the #1 industry-wide supply constraint to mass-market pure-EVs. Therefore the game is wide open to Tesla, so I continue my long position.

  • Report this Comment On April 13, 2014, at 3:35 AM, timlonely wrote:

    How many of us have heard of http://www.rimac-automobili.com/ ? Probably not many. The same is true for Tesla. However Tesla brand will stand out as more Model S roam on US, European and Asian roads. The Model X will increase brand awareness and that's what Model S and X are doing: build awareness and prepare the customers for Model E. With social media and the Internet, things go faster than in the past. You visit a store, take a picture of the car or its dashboard and in no time it's on Facebook.

    The gigafactory is needed otherwise Tesla will be heavily dependent on Panasonic or another supplier for the batteries, the only thing that is holding back sales. Go visit a store, test drive one and you will feel the difference. It's not just about power or acceleration. I used to drive a BMW 320 turbo D then a 325i. They were great cars, especially the turbo D because it's a diesel. But the Tesla S is really something different. I'm long Tesla.

  • Report this Comment On April 13, 2014, at 10:04 AM, Pietrocco wrote:

    Dauger,

    Promise me: you shall not sell any shares for the next 5 years.

    Then you shall need no links, and no further reasoning. Reality will have shown you everything that you still need to learn on this matter.

  • Report this Comment On April 14, 2014, at 3:50 AM, Batteryprof wrote:

    ALL THAT ARTICLE IS A MISTAKE.

    HOW CAN YOU DO ELECTRICAL SAFETY WITH SOFTWARE ???

    WHEN IT IS MADE WITH FUSES CABLE SIZE, RELAYS THAT WILL NEED TO BE REPLACED SOMETIMES ... LIKE IN YOUR HOME ...

    IT IS LIKE TO SAY MICROSOFT IS A GOOD SOFTWARE COMPANY, WHEN IT IS A MONOPOLY BECAUSE OF INTEL HARDWARE PROTECTION ...

    HARDWARE IS THE KEY, SOFTWARE IS LIKE SIMULATION, IT DOES NOT MAKE A REAL PRODUCT ...

    IT IS AN ENORMOUS MISTAKE TO BELIEVE THAT SOFTWARE CAN FIX A HARDWARE PROBLEM.

    SOFTWARE IS LIKE COMMUNICATION/ IT IS ONLY WIND ... AND IT IS REALLY EASY TO CHANGE, BUT IF THE PRODUCT BEHIND IS NOT GOOD ...

  • Report this Comment On April 14, 2014, at 4:15 AM, Batteryprof wrote:

    I REACT ON MY PREVIOUS POST, AND WOULD SAY THAT MICROSOFT SUCCEDED JUST BECAUSE OF INTEL ALLIANCE AND ITS OS MONOPOLY...

    THEN IF YOU SEE THE PARALLEL WITH TESLA, YOU WOULD SEE THAT PANASONIC IS NOT A MONOPOLY IN LI-ION AND THEN CANNOT MAKE TESLA ONE ...

  • Report this Comment On April 14, 2014, at 4:29 AM, Batteryprof wrote:

    AGAIN, THAT ARTICLE PISSED ME OFF IT IS A NON SENSE!

    --> HOW MANY TIMES YOU NEED TO REPAIR YOUR CAR OR GO TO THE MAINTENANCE SHOP?

    --> ENOUGH FOR OTHER OEMS TO CHANGE SOFTWARE IF THEY NEED ...

    --> IT IS REALLY RARE AN OEM DOES A RECALL FOR SOFTWARE ONLY ...

    THAT ARTICLE COULD MAKE INVESTOR BELIEVE TESLA WILL DO LIKE MICROSOFT WHEN THEY CANNOT, IT IS MANIPULATING AND FALSE STATEMENTS ...

  • Report this Comment On April 14, 2014, at 10:01 AM, gjsuhr wrote:

    One quibble, the article says... "at the end of 2013 the company had about 2%-3% of the U.S. premium auto market share."

    That may be true if you define "premium market" as everything over $35,000, but the Tesla Model S is averaging a typical sales price in the $80-100K range. The market in that price range isn't nearly as big so the growth potential isn't as large either....until / unless Tesla can produce a $35,000 car.

  • Report this Comment On April 15, 2014, at 1:48 AM, Lazerator wrote:

    Here's the way I see it. Clearly TSLA makes a pretty awesome technologically advanced car, and is indeed an innovator. They have been taking bold (and risky) steps to expand their market and their ability to serve it.

    However, the car has some severe limitations as far as range. In the best case, it might get 200 miles per charge at today's highway speeds. On long cross-country trips, the car is just not practical. It's great for commuting except for the price which few can afford.

    TSLA sold 22,000 or so cars in 2013 and has a market cap of $24 billion, down from a high of $32 billion. GM sold over 9 MILLION cars in 203, and has a market cap of $52 billion. To me, this is just one metric showing how out of whack the stock price is.

    TSLA's forward p/e ratio is extremely high. It will take years of solid and rapid growth for TSLA's fundamentals to catch up with the stock price. I just don't see the upside short term except for speculation. In fact, I considered it a great short candidate at $250.

    Personally I don't see a EV as the solution to most personal transportation needs. I think a plug-in hybrid is the perfect solution for short and long-range driving, requiring fewer of the expensive batteries and utilizing small diesel or more advanced engines for backup. Perhaps TSLA will recognize that and build one some day.

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