- Tesla CEO Elon Musk has dismissed the notion that Apple has been poaching some of its best engineers.
- The CEO also shed some light into when Tesla might be able to turn a profit.
- Falling EV battery prices might help Tesla to lower its cost of production and allow it to sell high volumes necessary for the company to become profitable.
There has always been some bad blood brewing between Tesla (NASDAQ:TSLA) and Apple (NASDAQ:AAPL) ever since it emerged that Apple has been poaching Tesla engineers to work on its self-driving car project, Project Titan. Now Tesla’s CEO has finally come out in the open about the issue in a long-ranging interview with Handelsblatt. Regarding Apple poaching Telsa’s ‘‘most important engineers’’, CEO Elon Musk had this to say:
"Important engineers? They have hired people we’ve fired. We always jokingly call Apple the “Tesla Graveyard.” If you don’t make it at Tesla, you go work at Apple. I’m not kidding."
Musk then went ahead to compare Tesla’s products to Apple’s saying:
Video: Self-driving electric cars will accelerate Apple stock
And on weak European sales:
"I’ve only been saying it for nine years: step one: expensive car, low volume. Step two: medium price, medium volume. Step three: low price, high volume."
But perhaps the most important part of the interview was regarding what he thinks regarding when Tesla might be able to turn a profit:
"I hope to be profitable next year. I agree, we cannot be making losses forever. This year we’ll be investing a lot into the manufacturing ramp-up of the Model X, and in the long term, the Model 3 as well. So our goal from next year onwards is to be cash-flow positive. But we wouldn’t slow down our growth for the sake of profitability."
Dissecting Elon’s profitability comments
Since going public in 2010, Tesla shares have been an investor’s dream, easily becoming a ten-bagger.
But investors have started becoming wary of Tesla’s lack of profits. Consequently, the shares have been depressed over the past 12 months.
And, going by Musk’s comments, Tesla might not be able to turn a profit soon. The CEO talked about the company becoming cash-flow positive in the current year, but hinted that profits might be further away due to the company’s heavy investments in Model X and Model 3 in the future. Musk also drove a very important point that many Tesla investors tend to ignore, that Tesla won’t be able to sell in high volumes until prices of its models come down significantly. And that is actually the crux of the profitability talk. Tesla has been languishing in the red despite impressive top line growth due to high development costs continuing to outweigh sales. For Tesla to become profitable, it has to grow its sales volumes to a certain level. Musk had talked about a possible timeline when Tesla might become profitable when he said that for the company to turn a profit, it will have to sell at least 500,000 units a year, something that the company hopes to achieve in 2020.
Tesla will sell about 50,000-55,000 units in the current year. During the last quarter, sales grew by 40% Y/Y. Going by current growth rates, Tesla will sell about 300,000 units in 2020. It therefore appears as if the company is counting on newer models such as Model X and Model 3 to make up the shortfall.
Declining Battery Cost To Improve Profitability
Now, just as Musk said, Tesla won’t be able to sell in high volumes until the prices of its models come down. Model S goes for $80,000 while the $144,000 price tag for Model X places it above BMW i8, considered to be the priciest EV in the market today at a retail price of $137,450. So Tesla’s models are among the costliest EVs in the market. How can the company bring down prices for its models?
Earlier comments by Musk that the company won’t become profitable till 2020 appear to point to one thing: that Tesla is banking on falling battery costs to lower its cost of production and allow the company to price its vehicles more competitively. Battery costs are the biggest cost component for EV manufacturers. But luckily for Tesla and other EV manufacturers, battery costs have been steadily falling. EV battery costs averaged $1,000/ kWh in 2010. Analysts, however, estimate that battery costs now average $410/kWh, with some manufacturers going as low as $300/kWh. Analysts also estimate that Model S’ P90d’s 90 kWh battery would have cost Tesla $90,000 about five years ago, but now costs around $36,000. With battery prices falling at 14% per annum, Model S battery cost could fall below $20,000 in the next three years.
Industry experts estimate that for EVs to truly take off, battery costs would have to fall to around $100/kWh. At current rates, that would take about seven years. But Tesla has its Gigafactory in Reno, Nevada, that might help it achieve the milestone earlier. Low production costs will allow Tesla and other EV manufacturers to finally achieve profitability. So that qualifies Musk’s earlier comments about Tesla finally becoming profitable by 2020.