Tesla’s most lucrative business segment? Spoiler: It’s not the cars

Tesla makes an annual profit for the first time in its history. The stock market is going well anyway. Company boss Musk now sees big profits in the software – and in a subscription model for autonomous driving.

Elon Musk’s mood couldn’t have been better when the quarterly figures were presented on Wednesday afternoon, Californian time: “2020 was a very important year for us,” the Tesla boss looked back. And promptly added: “2021 will be even more exciting.” Gone are the days when Musk was still cursing analysts. He is certainly relaxed. Tesla meanwhile has almost 20 billion dollars on the high edge to finance further expansion. And is by far the most valuable automaker in the world. The highlight of the day, however, was not the boss’ mood, but Musk’s announcement that his group’s driver assistance software would be licensed to other automakers if interested. Negotiations have already taken place on licensing the autopilot. Musk also affirmed that he will remain Tesla’s head for the foreseeable future, “even if I wish I had more free time, some days are crazy.” But he is not the type who “leaves tasks half done.”

Tesla made history in 2020. For the first time in its 17-year company history, it not only achieved a quarterly profit, but also the first profitable year. With $10.7 billion in revenue in the fourth quarter of 2020, Tesla exceeded analysts’ expectations. Even so, the stock fell after hours by up to four percent, because Wall Street had promised higher profits for the year-end quarter. At $270 million, it was around $61 million below that of the third quarter of 2020. This is mainly due to the fact that now mainly the cheaper models Model 3 and Model Y are sold, which depressed the average sales price by 11 percent.

The Silicon Valley group earned 721 million dollars in 2020 – with sales of 31.5 billion dollars. Despite this size, there was still a double-digit jump in sales of 28 percent. In 2019, Tesla had lost $862 million.

After all, just under 1.6 billion dollars contributed revenue from emissions trading in 2020, with which certificate buyers such as Ford or Fiat-Chrysler pay for their pollutant emissions. It is currently Tesla’s most lucrative business segment.

27.2 billion of the annual sales in 2020 are due to the sale of vehicles, where the cheaper Model 3 and Model Y are now the bestsellers with 75 percent. This is not only due to the low prices, but also to the fact that many interested parties from Model S and Model X are waiting for new versions. They are currently being built and will be delivered in February. According to Musk, they are on average 10,000 dollars more expensive than their predecessors, but offer more range and convenience.

In the revised Model S, the steering wheel, which is similar to that of a flight simulator, catches the eye. The more highly motorized Model S are now called “Plaid” instead of “Performance” and reach top speeds of 320 kilometers per hour. Most interesting, however, is the acceleration from zero to 100: it was 2.3 seconds for the performance model. The successor should now only need less than two seconds. According to Musk, the first mass-produced vehicle that can do this. For comparison: the Bugatti Veyron from the Volkswagen Group takes 2.5 seconds. With this in mind, it is particularly exciting that the plaid model is available from $113,000. The Veyron costs around two million dollars.

2021 Model S interior

As difficult as 2020 was for the global economy, Tesla mastered it despite temporary corona production stops at its plants in Fremont and Shanghai. Even the goal of delivering half a million vehicles was almost achieved. In terms of capacity, Tesla is now able to manufacture over a million cars a year. The parent plant in Fremont accounts for 600,000 of these, the rest in Shanghai.

The capacity will jump again this year. New plants are being built in Grünheide near Berlin and Austin – the groundbreaking ceremony in Grünheide took place in June 2020, and in Texas a month later. Both plants are currently in a head-to-head race, which will open first. Tesla announced on Wednesday that they were already in Grünheide setting up the first machines in the factory hall. In Berlin, in addition to their own batteries, Model 3 and Model Y will be primarily manufactured. Austin is designed for the Cybertruck, which is expected in 2022. The semi-trailer truck will also be manufactured there, which is promised after delays for the end of the year.

Tesla Gigafactory Berlin-Brandenburg under construction, as seen on 2021-01-30 – (photo by the_wolfpack_berlin)

How fast Tesla is growing, Musk emphasized on Wednesday, “depends on the number of batteries available”. The fact that Tesla is now also manufacturing its own batteries is not aimed at competing with other battery manufacturers such as Panasonic or LG. Much more, own batteries are supposed to increase the worldwide availability. “We buy as much from other battery manufacturers as they can produce,” says Musk.

Investors in particular are likely to be concerned with the question of how much potential there is still in Tesla shares. It could even surpass the $1,000 mark, despite the fact that it was only split 1:5 last year. Especially when money continues to flow unchecked into the stock market.

US President Joe Biden also has a tailwind. He wants to upgrade the entire US government fleet with electric vehicles. In addition to Tesla, that would also benefit competitors such as Rivian, Lucid, Ford and General Motors . It is still unclear in what period Biden will electrify the fleet. It already comprises 645,000 vehicles.

Tesla would exceed a market value of $950 billion with a price jump to $1,000 – and rise into the spheres of Amazon, Alphabet, Microsoft and Apple. The valuation for the vehicle group cannot be justified using normal standards. Sure, growth is still ahead for Tesla. Musk is targeting 20 million vehicles sold by 2030. That is almost twice as much as global car market leader Volkswagen sold worldwide last year. Volkswagen is currently valued at $104 billion.

Tesla’s valuation can only be justified if the company is understood as a tech group that is doing more and more of its business by selling software functions. In fact, the entire automotive industry is changing in this direction.

Musk makes it clear that a large part of the growth will come from this segment going forward. For this reason, on Wednesday he rejected a frequently expressed customer request to be able to transfer the self-driving function that had already been purchased to new vehicles. Musk considers self-driving vehicles to be “undervalued” at the moment, especially if they can be used as robotaxis, which Tesla is working on. “We will soon be offering a subscription function for autonomous driving,” he announced. Tesla will not keep the driver assistance software for itself either, but will license it to other vehicle manufacturers if interested. “We have already negotiated this with other automakers,” he revealed.

Author: Nabeel K
Email: nabeel@wheelsjoint.com

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