The company name evokes very different yet equally strong
responses from critics and fans. Critics argue Tesla loses money on each
car sold. Indeed, with losses of $290 million in 2014 and $888 million
in 2015, it’s unclear when the company will eventually hit
profitability. Critics also point to the fact that co-founder and
visionary CEO Elon Musk often oversells what the company can do in the
short run. The company has missed stated goals and new vehicle launch
deadlines. Moreover, the company has sometimes struggled with its
innovations, like getting the Model X doors to work just right. On the
other hand, proponents ignore the short term losses and point out that
Tesla produces highly desirable electric vehicles—cars that go faster,
go further (than other electric vehicles) and are safer than internal
combustion engine (ICE) vehicles. They point out the astonishing fact
that Tesla reeled in nearly 400,000 reservations for its Model 3 in a
single week – pre-orders that will rack up over $16 billion of vehicle
sales. A single tweet from Musk teasing a product announcement sent
Tesla shares surging yesterday. Investors continue to back Tesla with a
lofty market cap of over $30 billion, which translates into a
significant innovation premium.
It’s this innovation premium that helped Tesla race to the top of our
Forbes Most Innovative companies list in 2015 – and stay there. It
maintains its #1 position for the 2016 ranking. Tesla’s next challenge
is whether or not it can become profitable and deliver on its huge
market value. And will Tesla ultimately be the catalyst behind
transforming the auto industry from ICE vehicles to electric vehicles?
Our analysis signals it can and likely will.
Tesla deserves its high market cap only if it can reach profitability
– preferably in the next four years. Musk has long stated that the path
to success was to start at the high end of the market with cars like
the Model S and X and then move down market, producing more affordable
cars like the Model 3. But if Tesla can’t make money on expensive
vehicles as some analysts suggest, the obvious question is: can they
make money selling cars at half the price?
The answer? Absolutely. Our analysis (with professor David Kryscynski of
Brigham Young University) of Tesla’s improvement in cost per vehicle
shows Tesla is making money on the Model S and will likely make solid
profits on the Model 3. Let us explain. One of the tools of any
strategist is a scale (or experience) curve. A scale curve calculates
how rapidly the cost per unit (in this case, vehicle) decreases with
every doubling of unit volume.[1] This analysis is useful for projecting
how Tesla’s costs per unit will change going forward based upon its
history.