Elon Musk has finally announced details of his overall plan -- to combine the solar energy business he founded, SolarCity (SCTY +0.00%), with his revolutionary electric carmaker, Tesla Motors (TSLA +0.56%), to form a holistic energy conglomerate that will forever shift the way we power up.
In this episode of Industry Focus: Energy, Sean O'Reilly talks with Fool intern Ben Estep about just what Musk's plan entails, and what investors should focus on. Find out a few of the most pressing concerns about turning his ambitious blueprint into reality; how Tesla might start competing with Uber not too far in the future; and how the competitive landscape looks for the mega-company.
A full transcript follows the video.
This podcast was recorded on Jul. 21, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is Thursday, July 21, 2016, so we're talking about energy, materials and industrials. I'm joined in the studio today by Motley Fool investing intern and relentlessly hard worker, Mr. Ben Estep. Morning, Ben!
Ben Estep: Morning!
O'Reilly: How are you?
Estep: Doing great, thanks!
O'Reilly: Before we dive into the big industrial news of the day, which is Tesla's evil secret master plan to take over the world, I've got to ask you, how are you enjoying your time with The Motley Fool?
Estep: It's been phenomenal. Everybody that works here is ... just a group of very intelligent people. I feel like I've been challenged more here in six weeks more than any other experience I've had so far.
O'Reilly: Awesome. We've really enjoyed having you.
Estep: Thank you!
O'Reilly: Ben, you were slated to be on the show today to help us speculate about Elon Musk's master plan, this have been in the news for a month or two now, ever since shots were fired and he offered to buy SolarCity. Had a nice outline set up: We were going to speculate about what Musk wants to do, and then what time did I message you last night, 11 p.m.?
Estep: Yeah.
O'Reilly: Midnight? Something?
Estep: It was pretty late.
O'Reilly: I couldn't believe you were up. Anyway, I got a push notification from Bloomberg on my phone. Hit the wires, Musk's master plan hit, and we know what it is now.
Estep: Yeah.
O'Reilly: This is huge. Before we go into the details, can you walk us through what led us up to today, just for a little bit of background for our listeners that may or may not know?
Estep: Yeah, absolutely. We had been looking at ... Elon Musk had come out and proposed the acquisition of SolarCity, which initially people were pretty negative about. A lot of investors viewed it as just a bail out for SolarCity. But looking at it, and looking at the direction that Tesla's taking, they've been recently filing trademark applications, essentially transitioning the company away from, still focused on electric vehicles, but really moving into an energy conglomerate basically.
O'Reilly: Arguably, basically, with more of a holistic view of how energy's consumed in transportation and everything. Is that accurate?
Estep: Yeah, absolutely.
O'Reilly: Okay. Did you look at these trademarks?
Estep: Yeah, they're pretty fascinating.
O'Reilly: Can you give me an example?
Estep:Yeah, for example some of them they had put through was just changing the nature of the business to energy consulting, battery solutions.
O'Reilly: They're going to be anErnst & Young for energy consumption.
Estep: Yeah, pretty much. Then in addition to that, I don't know if anybody's noticed this, but now if you go to teslamotors.com, you're automatically redirected to tesla.com. Even though motor vehicles are still a huge focus for what they're doing, they're clearly looking beyond that and looking at renewable energy, pretty much trying to change the world and the way that we use fossil fuels.
O'Reilly: What kind of financial concerns were there with [this]? Because obviously, we've been getting hints of this master plan for a month or two now. What concerns have there been regarding Tesla, and possibly implementing any master plans that he may or may not have had?
Estep: I think there have been production issues as the company scales, but I think part of that's natural due to how quickly the company's grown. Going from producing a couple thousand cars to producing 500,000 cars in a very short time has required them to raise a lot of equity and also debt. I think some investors have been worried about dilution to earnings, and what that will look like over the long run. They haven't been profitable, and there were similar concerns with SolarCity. They both have a lot of debt on their balance sheets and haven't really made money yet.
O'Reilly: I'm glad you mentioned that. The equity raise they did at the end of, was it May? Correct me if I'm wrong.
Estep: Yeah, I think it was May, yeah.
O'Reilly: What did you think of the size of that?
Estep: It was definitely big. I think was a bit over $2 billion. But I think that looking at historically how much they've raised, I didn't think it was anything out of the normal.
O'Reilly: Yeah, I didn't think it was a lot of money. It was like $1.5 to $2 billion or something, but I got the impression they were trying to see if they could do what they needed to do with as little dilution as possible, so that was nice.
Estep: Yeah, it's not much to build 500,000 cars, completely reinvent your manufacturing process. $2 billion seems kind of reasonable.
O'Reilly: You'll totally appreciate this. I was in the District earlier this week, and I saw one of the original Tesla Roadsters. From, what would that have been? 2006, 2007?
Estep: Yeah, you don't see too many of them.
O'Reilly: Yeah, I stared at it for a second because I thought it was a Lotus or something. Then I was like, "Oh my gosh, that's the original Tesla Roadster!"
Anyway, what else has been going on? Because they had that announcement -- man, this is like cobwebs in my mind -- they had the Powerwall big announcement, and I remember Musk was like: "Surprise! My Powerwall's been powering this event." What else has been going on with that stuff?
Estep: Yeah, beyond that, Tesla or Elon Musk specifically finally feels like they've gotten to the point where the Powerwall is really scalable. Prior to this it's been a pretty expensive solution that was probably only really available to commercial companies, but now as they've been able to scale and the prices are coming down.
O'Reilly: What does one run you now?
Estep: I think last I was looking it was like $50,000 per unit basically. But I'm not exactly sure what they've gotten down to.
O'Reilly: At least you've got the Supercharger option, which for a house costs $2,500 I think.
Estep: No, the Supercharger option actually relates back to their cars. One of the concerns is ... Which actually that will probably be something they could transition into, household using solar panels, but with those, you pay $2,500 up front, and then it's basically free charging throughout the life of the vehicle. This, I think, was really because there are concerns for some people about if you're taking a long trip, or doing something like that: How are you going to charge your car? I think they have something like over 600 locations so far, with over 4,000 of these Superchargers. If you look at the map they're really spread out all over the U.S. You could feasibly take a road trip and stop anywhere.
O'Reilly: Yeah, and people have.
Estep: Yeah, exactly. Yeah.
O'Reilly: Those are all going to be converted to solar power quickly.
Estep: Yeah, that's the plan. Originally, Elon Musk had chosen to use utility power just so they could really scale rapidly, but using SolarCity and also their Powerwall solutions, I think that pretty rapidly they can convert that all into solar energy.
O'Reilly: Got it! Combining these companies: What are the ramifications?
Estep: I think investors are going to be worried about; again SolarCity has some similarities to Tesla in that they have a lot of debt, their gross margins are quite a bit lower than Tesla's. I think they'll be seeing what the future is like. Knowing that with plans to scale as rapidly as Elon Musk and Tesla and SolarCity want to do, that there's probably going to be the need for capital raises in the future to accomplish what they want.
O'Reilly: Got it. Before we dive into the details of the secret master plan, what does the competitive landscape look like? Who are the other people that can potentially, I don't want to say derail [Tesla], but will be competitors.
Estep: Yeah, I think one that first comes to mind is BYD, which Warren Buffett's made a really known investment for several years. I look at them almost as the Chinese Tesla. They're still focused on different things. BYD does a little bit more with lighting, LED and that kind of stuff. I still think there's differences, but beyond that, I don't think there's really many companies that are going to offer as holistic of a solution as Tesla will have. I think there's other companies like AES Corp. and alsoABB Ltd., which are pretty large companies, but they are both more focused in battery storage and energy solutions and things of that nature. There really isn't anybody doing what Tesla is in as big of a way.
O'Reilly: Got it. OK, without any further delay, I guess, walk us through step by step the basic tenets of this master plan.
Estep: Yeah, definitely. I think it's important to note that Musk has never been shy about his ambitions to get us off of fossil fuels and to basically move toward creating a sustainable energy conglomerate, [which] is kind of how I view what they're doing. A little background: In 2006, he had come out with his original master plan, which was phenomenally simple. It was really just build a low-volume car, which is going to be expensive just because they're doing a lot of it by hand and they haven't scaled the process yet.
O'Reilly: That was the Roadster I saw on the street the other day.
Estep: Yeah, exactly. Basically, then use that money to produce at a little bit more volume, produce cars like the Model S and then also the Model X. Then ultimately, transition into producing a low-cost electric vehicle that can be mass produced, which we're seeing with the Model 3. Then, all while doing this, focusing on solar energy. People have been waiting, as we talked about, speculating about what the new plan is, and he just came out with it last night. He's been working tirelessly on creating this, but there are similarities to his original plan. But the big thing is expanding the electric vehicle product line to address all major segments -- so, moving into public transportation, semi trucks, pickup trucks and really, basically, any kind of vehicle that you could want.
O'Reilly: That was what really got me, because when I got that notification last night from, I think it was Bloomberg, it said a bus and pickup truck. I had to pick up my jaw off the floor. You don't have to answer this like an analyst, what did you think?
Estep: I don't know. I think when I saw "Tesla semi," I was like, I had this image of some kind of crazy futuristic semi trucking down the highway, driving next to it.
O'Reilly: The other cool thing was ... I don't even know what this means: "Developing self-driving capability that is 10 times safer than manual via massive fleet learning."
Estep: Yeah.
O'Reilly: That's important in light of the crash that happened in Florida.
Estep: Yeah, absolutely. I think that's his goal. I think one thing that's been interesting with Tesla Auto Pilot is they still refer to it as "beta." Which beta usually we think of an unproven system that they're still working out a lot of the kinks. He refers to it as beta because it hasn't gotten to the point where he wants it to be yet. His plan is basically once the annual crashes that are occurring with electric vehicles and autonomous driving are 10 times safer than our traditional, gas-powered, human-controlled vehicles, that's when he said he'll take beta off.
O'Reilly: Got you.
Estep: At least as far as massive fleet learning, that's really just looking at, again these cars are pretty much computers and through this autonomous driving they're constantly gathering data. That's where that massive fleet learning comes in, it's just pulling in all that.
O'Reilly: Right, got you. There are a few wackier things that he actually came out with, and I don't know why. How is my car going to make me money, Ben?
Estep: Yeah, this was interesting. Essentially, Tesla will have their app, and once autonomous driving is enabled, let's say you go on a vacation for a week, you can essentially hit a button on your app and put your car available to be used in Tesla's ride-sharing fleet. Essentially, it's almost like they're going after Uber, where while you're on vacation your car is driving around without you, and picking up customers, and you get a little bit of that money back.
O'Reilly: While I'm sipping a margarita. I'm very anxious to see how that's going to play out because obviously Uber, they've made no secret of the fact that they want to cut their drivers out of the equation ASAP. Then I don't know, I guess they would own tons of cars that we be circling cities or something. I don't even know how that would work. I'm anxious to see how that works out. Bring it back around, this is the Motley Fool, we like the stock market investing. What do you think some key takeaways are for investors in Tesla, SolarCity, and possibly renewable energy future at large?
Estep: I think at least looking at Tesla and SolarCity, it's definitely a long-term time frame, which we're usually big fans of here at the Fool. I think it's hard to say what's going to happen in the short term, and I think a lot of his ambitions are going to be for five to 10 years down the road. I think holding those, if you're invested in those stocks, you're really putting your faith in Elon Musk and his ability to execute his master plan. But I think beyond that, there's a lot of interesting sectors and areas to look at for renewable energy, beyond the obvious companies like First Solar, and other companies like GE that are focused on wind power and solar power.
But I think battery storage and energy solutions are going to be just as important of a component to investing in these sectors. I think a lot of companies that are focused on creating photovoltaic cells and wind energy, they are not as focused on the battery part. I think there's going to be some companies if you look, you know probably take some digging and understanding of the business, but I think there's some of these companies that could also be a great investment for the long term.
O'Reilly: Cool. Before we wrap up here, a criticism that has been lobed at Musk and Tesla has been they're a little bit behind on some stuff. He's talking about building a bus, and he hasn't even ramped up the Model 3 to the production that it needs to be to meet the arguably awesome pre-orders, it was like 400,000 or something. You nervous about that at all?
Estep: It has worried me at the same time, but I think one of the things I've been reading more about recently is reflexivity, both in a social sense and also in the economic sense, like that was something that George Soros really talked about -- the ability of, as a stock price goes up it has the ability to influence the fundamentals and kind of create ...
O'Reilly: Because you can raise money with the higher stock price and do stuff with the money.
Estep: Yeah, exactly! It kind of to some extent this self-fulfilling prophecy but I think Elon Musk is clearly a very driven visionary who I think it's not like, "Oh, shoot, we screwed up" -- he's stating his intentions because this is what he wants to do. I think if he wasn't as vocal and direct, I think he couldn't get his employees on board. Maybe even though he's promising these early production deliveries and those things, who knows? Maybe if he hadn't been as driven and promising these things, maybe it would have been two years more of a delay.
O'Reilly: Yeah. Okay, let's put you on the spot, we're going to do something before we leave. SpaceX is private. We can't invest in it. (Sorry, Google can.) You have the option: You can have a decent chunk of your net worth in Tesla, SpaceX ... SolarCity's off the table now. Is that it?
Estep: Yeah, I guess it's pretty much.
O'Reilly: OK. All right, so I apologize. Tesla or SpaceX, which would you rather stock in?
Estep: I would say Tesla, just because I think SpaceX is really cool, I think they've done some phenomenal things, but I think the long term prospects that Tesla has, and not only that being ... If the acquisition of SolarCity goes through then they're going to be the largest solar panel producer in the world, also making the most efficient. I think for what they're doing, they're pretty ahead of their time. I think it's going to be really hard for other companies to catch up to that.
O'Reilly: Cool. All right. Ben it's been an absolute pleasure having you on the show.
Estep: Yeah, thanks for having me! It's been fun.
O'Reilly: That is it for us Fools, if you have any questions or comments we'd love to hear from you. Just email us at [email protected]. Once again, that is [email protected]. As always, people on this program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear in this program. For Ben Estep, I am Sean O'Reilly, thanks for listening and Fool on!
