Morgan Stanley analyst Adam Jonas published a research note on Tuesday that highlights a growing realization about Tesla: This is a car company, and car companies have to spend a lot of money to stay in business.
“Over the past year, the market has seen how expensive it is to launch a car company from the ground up and how much cash can be consumed when launching all-new vehicles to the market,” Jonas wrote.
Of course, the market should have seen this coming. Established automakers routinely burn through billions per quarter to sustain operations. And Tesla CEO Elon Musk did announce earlier this year that the company could spend a staggering amount of cash to expand production and bring the massive Gigafactory battery plant online on Nevada.
Jonas also recalled an amusing exchange between him and Musk from Tesla’s third-quarter earnings call:
We asked Elon Musk directly for his thoughts on a potential business case for selling on-demand shared autonomous electric mobility services to consumers directly from the company’s own platform. While recognizing that it was an interesting question, Mr. Musk declined to answer directly and stated “I think there’s a right time to make announcements. This is not that time. And nor is our strategy fully baked here. So for us to state that it would be — it’s not fully baked. So there’s no — we would prefer to announce something when it’s — when we think we’ve got the full story understood.”
Jonas then explained why he asked the question, which on the call elicited some chuckles from Musk, who by now is accustomed to Jonas’ out-there inquires:
We completely understand Tesla not wanting to make significant new business announcements during Q&A sessions of quarterly conference calls. We believe broader industry developments in the areas of shared autonomous electric mobility will proceed in a way that takes this topic to a level of investor consideration in the year …
So what is Jonas on about here?
For starters, though he’s a major Tesla bull, with a target price of $450 on the stock (it has been trading around $220 of late), Jonas has been early to the game of assessing Tesla’s prospects as a carmaker. Musk might aspire to be selling 500,000 cars a year by 2020, but Jonas thinks a niche, luxury, high-performance, high-sticker-price future is more realistic.
But he hasn’t limited his analysis of Tesla to the company’s future as a builder of automobiles. Rather, he sees Tesla as being one of several companies on the leading edge of a revolution in mobility (others include Google, Uber, and maybe even Apple, with its secretive Apple Car project).
In support of that thesis, he is making a bold prediction: that the Model 3 mass-market vehicle slated for 2017 will be much more expensive than anticipated, costing $60,000 versus the promised $35,000.
Over time, however, the Model 3, along with Tesla’s current vehicles — the Model S sedan and the Model X crossover — will cease to be cars sold predominantly to individual owners and become nodes in a fleet of technologically enabled smart vehicles, managed by software.
Customers won’t buy a car. They’ll buy miles, according to Jonas.
Tesla might not ultimately be all that enthusiastic about this disruptive idea. After all, if Musk wants to get money in the door, selling very expensive cars and aiming for a juicy profit margin is a good way to do it. Then again, Musk is no stranger to disruption, having helped create PayPal, which has redefined banking and financial transactions.
So as much as he’s now trying to manage a car company, he also needs to practice that distinctive Silicon Valley skill of imagining what the world will be like in 10 or 20 years.