Last week, Elon Musk finally unveiled his overall plan for Tesla Motors (NASDAQ:TSLA) -- namely, to combine SolarCity (NASDAQ:SCTY) and Tesla together and become a holistic energy conglomerate that will change the sector forever.
In this clip from the Industry Focus: Energy podcast, Sean O'Reilly and investing team intern Ben Estep explain the context that brought us to this point, what exactly Musk's plan entails, and how feasible it'll be to implement. Also, they discuss how Tesla might be looking to compete with Uber, a few concerns investors might have about the combination SolarCity and Tesla Motors, Tesla's updated plan for their autopilot software, and more.
A full transcript follows the video.
This podcast was recorded on July 21, 2016.
Sean O'Reilly: 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?
Ben 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 them viewed it as just a ... A lot of investors just viewed as a bailout 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 an Ernst & 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 ... 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 upfront 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, it's 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 US. 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 has 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. 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, but will be competitors.
Estep: Yeah, I think one that first comes to mind is BYD, which Warren Buffet's made a really known investment for several years in. 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 also ABB Limited, 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. Okay. 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 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, pick-up trucks and really basically have 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, it said a pick-up truck, I had to pick up my jaw off the floor.
O'Reilly: Yeah. 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" reading, I was like, I had this image of some kind of crazy futuristic semi trucking down the highway, driving next to it.
O'Reilly: Right. 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.
O'Reilly: That's important in light of the crash that happened in Florida, it's too bad.
Estep: Yeah, absolutely. I think that's his goal. I think one thing that's been interesting with Tesla Autopilot 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 at. 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 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.
Sean O'Reilly has no position in any stocks mentioned. Ben Estep has no position in any stocks mentioned. The Motley Fool owns shares of and recommends SolarCity and Tesla Motors. The Motley Fool owns shares of General Electric. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.