"The $60 billion bullet train they're proposing in California would be the slowest bullet train in the world at the highest cost per mile. They're going for records in all the wrong ways." -- Elon Musk
Elon Musk is no fan of the government's plan to sink billions of taxpayer dollars into building a new high-speed rail system. Instead, the inventor, entrepreneur, and CEO of Tesla Motors (NASDAQ:TSLA) proposes an alternate solution:
- Invest fewer billions of private dollars into building a single prototype "Hyperloop" line from San Francisco to Los Angeles.
- Find out if it can be done for as little as $6 billion.
- Confirm that it can carry millions of passengers a year at speeds of 760 miles an hour, cutting commuting times down to just 35 minutes.
- And if it works: Build more Hyperloops.
Part 1 of that plan is already under way.
What is Hyperloop?
When Musk introduced the concept of Hyperloop in August 2013, the idea took the world by storm. Everybody had an opinion -- some in favor, some against. CNET describes Hyperloop as a solar-powered, overland, underwater, and through-mountain subway in which "passengers would travel in pressurized pods -- similar to airplane cabins -- through tubes elevated off the ground with pylons." Hyperloop pods would travel through their tubes "similar to an air hockey table. But instead of floating on a small cushion of air, the pods are propelled along that cushion using solar-powered electromagnetic pulses."
That all sounds very hi-tech (and so, right up CNET's alley). But what does it mean to you and me? Is this project even feasible, and if it is, how should investors position their portfolios in case Hyperloop works?
The economics of Hyperloop
Musk sees Hyperloop as a potential fifth mode of transportation, supplementing and eventually surpassing "planes, boats, trains" and perhaps even the cars that his own Tesla builds, in passenger volume. Utilizing linear electric motor know-how developed at Tesla, Musk's original plan called for the construction of a pair of 380-mile long Hyperloop tubes stretching from L.A. to San Francisco.
With tubes departing once every 30 seconds, carrying 28 passengers apiece, a single Hyperloop tube could potentially move roughly 29.4 million passengers a year. A round-trip system of two tubes could boast 58.9 million passengers annually. Multiply that by Musk's hypothesized "$20 for a one-way trip," and that's a potential $1.18 billion in annual revenue for whomever builds Hyperloop. At Musk's estimated $6 billion cost to build a San Francisco-to-L.A. line, therefore, the project looks economically feasible.
Problem was, a lot of critics say Hyperloop is not feasible -- at least not at that $6 billion price tag. Stanford professor Richard White, for example, has denounced Hyperloop's pricetag as "drastically underestimated." The Atlantic's Alexis Madrigal pointed out that a single, 100-mile stretch of Californian high-speed rail could cost $7 billion -- so how could Musk hope to build a high-tech transportation system, four times as long, for $1 billion less? UCal Berkeley professor Michael L. Anderson declared that Hyperloop's 380-mile trek would cost closer to $100 billion.
Turns out, they were all wrong.
The economics of Hyperloop... work
Last month, Hyperloop Transportation Technologies -- a venture-backed company that took up Musk's offer to try to implement his Hyperloop plans -- announced it has signed a deal to begin construction of a prototype, five-mile-long Hyperloop next year. HTT estimates the cost will be $100 million.
$100 million -- that's about $20 million per mile, or only about 26% more than the per-mile cost embedded in Musk's original estimate of $6 billion for 380 miles. It's nowhere near the $263 million per mile cost embedded in Prof. Anderson's estimate. What's more, while critics were taking essentially cost-free potshots at Musk's Hyperloop, HTT is prepared to put money where its mouth is -- and prove that its math (and Musk's math) is right.
To fund the prototype Hyperloop, HTT plans to launch an IPO later this year, hoping to raise at least the $100 million needed to create the world's first Hyperloop.
What it means to investors
Fans of the concept may worry that excitement over the first commercial Hyperloop could eclipse enthusiasm for Tesla stock. After all, at a current enterprise value of 543 times EBITDA, according to S&P Capital IQ data, Tesla stock appears to be valued more on hype than on profits. If fickle investors get distracted by Hyperloop dreams, that could certainly affect Tesla shares.
As far as Tesla the business goes, though, I don't think investors have much to worry about in the short term. For one thing, even HTT doesn't expect to have its prototype running before 2019, and widescale rollout of the technology could take decades longer than that -- by which time, Tesla will either be an established automaker, or a high-profile flameout. For another, since HTT will by definition be a point-to-point system, there will still be a need for localized travel around those major points -- in a word: Cars.
As for the idea of investing in HTT itself... it's hard to say much about that at the present. If HTT's math is right, this is a company that could one day become wildly profitable, but we'll need to take a look at the S-1 filing with the SEC to figure out exactly how wild that profitability will be.
For now, just rest assured: As soon as the S-1 comes out, we'll let you know.