Here’s Why Tesla Is Venturing Into The Semi-Truck Business

As it gears up to increase its production capacity to meet the overwhelming demand for Model 3, Tesla Motors (NYSE:TSLA) recently announced via Twitter that it will be unveiling its semi-truck in September this year.  Further, Elon Musk, the company’s CEO, also announced that a battery powered pick-up truck is likely to debut in the next 18-24 months. Expert opinions are mixed on whether Tesla’s latest venture can be successful and drive growth for the company. Several experts believe that the long distance truck industry is not ready for electrification yet. Given the distances covered and load carried by trucks, some experts believe that battery powered semi-trucks will be best for low-speed and short haul duties. We believe diversification into another segment of electric vehicles which will be zero emission and use cheaper fuel (in the long term) can benefit Tesla and drive growth for the company. However, the company’s ability to address the challenges and production capacity will be the key factors which could define the success of this segment.

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Better Safety, Reduced Costs Can Attract Users

According to Tesla’s CEO, the company’s new truck would reduce shipping costs, improve safety, and will be “fun to operate.”  Given the focus of several regulators on low emission, safer vehicles, if Tesla is able to deliver on its promise, the semi-truck can see significant traction. However, there are several concerns around the cost of these vehicles, the availability of charging infrastructure, battery range, and service requirements. While there is skepticism around the viability and performance of battery powered trucks and details around Tesla’s new launch are sparse, some analysts feel that this could be an opportunity in excess of $100 billion in revenue per year for Tesla. The revenue estimates for this new venture vary and Morgan Stanley believes that autonomous heavy duty trucks could add up to $2.5 billion in a year to Tesla’s revenues.

According to our estimates, Tesla will witness a significant growth in revenues in the next few years, as the company begins deliveries of its mass market electric car Model 3. We expect a fourfold increase in the company’s revenues in the next five years and Model 3 will account for nearly 80% of these revenues.

However, this increase in revenues depends on Tesla’s ability to ramp up its production significantly and deliver a significantly higher number of vehicles compared to its current deliveries. This ability is not yet proven and requires significant capital expenditure which can increase the risk of bankruptcy. Electric trucks can boost these revenues (although with a conservative estimate of $2.5 billion per year, this increase might not be significant), however their success and Tesla’s ability to manufacture these vehicles at a decent scale are significant factors determining this increase in revenue. We believe while the electric truck market might be lucrative for Tesla, the success of this segment will depend on whether the vehicles are able to address the challenges of a battery powered truck for a long haul and the company’s production capability.

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