Does Tesla Really Have An Economic Moat?

+20.06%
Upside
174
Market
209
Trefis
TSLA: Tesla logo
TSLA
Tesla

Tesla (NYSE:TSLA) has benefited considerably from its early entry into the electric vehicle space. While Teslas offer superior performance, lower maintenance, and no tail pipe emissions compared to internal combustion engine (ICE) based cars, the company has also been able to benefit from various government incentives at both the federal and state levels (ZEV credits, federal tax credit for buyers). That said, the advantages of the shift to all-electric drivetrains are unlikely to remain exclusive to Tesla over the long term. Mass market manufacturers GM and Nissan have already proven that they can manufacture relatively compelling electric products such as the Bolt and Leaf, while other large players have also earmarked sizable investments to aid their shift to EVs. Ford, for instance, is expected to invest over $4.5 billion into its EV program by 2020. That brings us to a key question – does Tesla have a long-term competitive advantage that will allow it to differentiate itself as mainstream auto makers go all-in on electric? We do not believe that its advantages are particularly compelling. In this note, we take a look at some of Tesla’s current advantages – namely battery technology, charging infrastructure and autonomous driving systems – to explain why.

We have a $205 per share price estimate for Tesla, which is well below the current market price. Read our current stance on Tesla here.

Tesla’s Battery Cost Improvements 

Relevant Articles
  1. Down Almost 20% This Year, Is Tesla Stock Good Value?
  2. Down 9% Year-To Date, Will A Q4 Earnings Beat Drive Tesla Stock Higher?
  3. With Delivery Growth Cooling, Is Tesla Stock Still A Buy At $250?
  4. Following A Lackluster Cybertruck Debut, Is Tesla Stock Overvalued At $240?
  5. Will Weak Earnings Follow Tesla’s Mixed Delivery Report?
  6. With Deliveries Missing Estimates, What’s Next For Tesla Stock?

Tesla was able to change the perception surrounding electric cars by providing long-range vehicles at relatively accessible price points. In its initial years, the company was able to manage battery costs by using commodity lithium ion battery cells, while deploying a proprietary system for monitoring and cooling the battery packs. More recently, Tesla has been working on tweaking its battery design to offer better energy densities and performance. Tesla has also moved to simplify the battery supply chain, investing as much as $5 billion (through 2020) to build its Gigafactory in Nevada. The factory locates most battery manufacturing processes under one roof, cutting logistics costs and improving economies of scale (related: How Tesla’s Battery Strategy Is Driving Stronger Margins). That said, it doesn’t appear that the company has come up with any significant R&D breakthroughs relating to core battery tech, and its moves have been primarily driven by eliminating costs and building scale. We wouldn’t be surprised if large auto companies also decide to take a page out of Tesla’s playbook, building similarly large factories as they ramp up their electric ambitions.

Supercharger Network Buildout

As electric cars are not really competitive with gasoline-powered vehicles without quick charging, Tesla has invested significantly to build a network of superchargers that allow drivers to recharge their vehicles in about an hour. The auto maker guided that it would double the number of supercharging stations worldwide to around 10,000 by the end of this year, while increasing the number of destination charging points to over 15,000. While the large network charging infrastructure does provide Tesla with an advantage over its current EV competitors, we believe that this can be replicated fairly easily by larger auto companies as they ramp up their transition from ICEs to electric drivetrains. While building a large network does take time, it is not particularly expensive or complex to build out. This means that supercharging is unlikely to provide a long-term economic moat for Tesla.

Tesla’s Massive Self Driving Data Sets

Self-driving vehicles have emerged a hot trend, with technology and automotive companies increasing their R&D efforts in the space. While these companies have typically deployed test vehicles or provided limited functionality on their production cars, Tesla appears to be at the forefront of the self-driving technology that is already on the roads. The company has installed autopilot hardware in every vehicle produced since October 2014. As of December 2016, Tesla had logged a total of over 1.3 billion miles from autopilot equipped vehicles, compared to just about 2 million miles from Alphabet’s fleet. This massive volume of real-time data (and exposure to various driving conditions and events) could allow Tesla to improve its machine learning algorithms, which typically get better as more data is logged. Tesla could see its data log grow further as it ramps up production of its Model 3 sedan, which is expected to boost its delivery volumes by almost 5x.

That said, there’s no guarantee that this will result in a sustainable advantage for Tesla. Silicon Valley giants such as Alphabet (Google’s parent company) are likely to become platform players in the auto space, providing self-driving systems that car manufacturers can buy. If a platform concept catches on and is eventually deployed at scale by multiple manufacturers, it could diminish Tesla’s early lead in the space. Moreover, with the hardware cost of self-driving systems such as lidar falling fast, more mainstream manufacturers could opt to install them in their vehicles to garner data.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research