There's been no shortage of comparisons between Tesla (TSLA 7.36%) and Apple (AAPL 3.71%) over the years, and it's easy to see why.
Both companies are cutting-edge consumer brands that have historically had cult-like followings. Both have succeeded in toeing the line between luxury and mass-market brands, and they've leveraged that positioning to become two of the most valuable companies in the world.
There was even a time when there were rumors that Apple could acquire Tesla, and Elon Musk seems to be the visionary heir in the public eye to Apple's co-founder and longtime CEO Steve Jobs.
Of course, the two companies compete in much different industries, but Tesla now seems ready to borrow a cornerstone of Apple's strategy.
In the electric vehicle (EV) maker's first-quarter earnings report, the company reflected on its recent price cuts, saying: "Our near-term pricing strategy considers a long-term view on per vehicle profitability given the potential lifetime value of a Tesla vehicle through autonomy, supercharging, connectivity and service. We expect that our product pricing will continue to evolve, upwards or downwards, depending on a number of factors."
If that strategy reminds you of another tech titan, there's a good reason for that. The iPhone maker has also pivoted from a product-first company to leaning more on services over the years, which is a major reason for its success.
Image source: Tesla.
All about services
Apple regularly touts its installed base of devices on its earnings calls, which has now passed 2 billion. That turn of phrase shows the company doesn't just think of products it sells as one-time transactions, but as instruments to entrench customer relationships through services. In Apple's case, this includes its App Store, Apple Pay, Apple Care, Apple Music, and even the Apple Card, which now offers a 4.15% interest rate.
Companies like Apple emphasize services because they tend to offer higher margins than products, and they also strengthen their economic moat. In the case of Apple, once a customer buys one Apple device, say an iPhone, it's in their interest to buy others since they're more compatible when used together, and they allow the customer to use Apple's services on all of their devices. If you've paid for Apple Music, for example, you can enjoy it on an iPhone and iPad and a Mac if you own those devices.
Can Tesla pull it off?
In the statement above, Tesla is essentially saying it expects margins from car sales to narrow, but it plans to replace those profits through services like autonomy, supercharging, connectivity, and service.
The recent numbers show why Tesla may be looking to pivot. As you can see from the chart below, margins are down significantly year over year in all key categories with gross profit, operating income, and net income all falling by double digits.
According to classical economic theory, this is what's supposed to happen as an industry matures and the first-mover faces competition. Margins come down, and the leader naturally looks for another way to build its competitive advantage.
However, Tesla doesn't have the same product diversification that Apple has, and as a carmaker, it doesn't have the same group of complementary devices that a company like Apple does. That makes it more difficult for it to implement the services strategy, but Tesla is trying to do that around electrification.
You can see from the chart above that the company is building revenue streams with services like energy generation and storage and vehicle services like maintenance and repair, posting strong growth in both categories. Investors should be aware that the energy generation and storage segment is separate from vehicles, made up of products like its Powerwall, MegaPack, and Solar Roofs, but the company's long-term goal is to use its solar products to power its superchargers and residential homes, including those of Tesla drivers.
Based on the numbers above and the stock market reaction, investors seem skeptical of the strategic pivot, but EVs are still a fast-growing market and it makes sense for the company to pursue market share for long-term gain rather than short-term profits.
Matching Apple's success won't be easy, however, and the price drops mean that Tesla investors will likely have to stomach lower profits for the next couple of years while they wait for services and new products to pick up the slack.
That should put the brakes on Tesla stock for now.
