Is Tesla going the same way as Apple?
Updated: Jul 3, 2020
Its not uncommon to hear many people today lament that they should have bought Amazon or Apple when it was a relatively new company, and I was reflecting, what is a stock today that people will lament about in the future? So, as Tesla’s (TSLA) share price settles from its historic highs, that it could be a potential candidate to follow in Apple and Amazon's footsteps, as cliched as it might sound. I think there are several compelling reasons why Tesla could go the same way Apple did in the last decade and this post discusses a few of these reasons.
I would like to qualify that this post does not contain any technical calculations or even any research based evidence to prove that Tesla is indeed the next Apple, but rather I am attempting to reflect on some of the information that we know about Tesla as a company and discuss whether it is following Apple’s playbook.
It would be an understatement to say that the iPhone completely revolutionised the industry. Almost all phones today, resemble the first iPhone's DNA. From the physical aesthetics of a full screen display with a single button, to how the operating system of the phone relies on 3rd party applications; literally every phone is following the same model that was revealed in the first iPhone. In fact, no phones today resemble any other phone from that era. Its competitor, Nokia, who many thought were infallible and at its peak had almost 80% of market share has been wiped from existence just because the entire market had changed overnight.
Tesla is attempting to do the same with its cars. It was one of the first companies to talk about electric vehicles being a mainstream vehicle. And they are not only aiming to change the conventional fuel for an average car, but also to introduce features such as autonomous driving, concept of apps in your car, concept of your car doubling up as a taxi when not in use, fuelling your car from the comfort of your home and many more. Once they are able to implement all these features, the average car will look very different from the cars we see today.
Of course while we list out all the similarities in the way the 2 companies have designed their flagship product, we also need to acknowledge that there are key differences. What Apple could do literally overnight, Tesla can’t. Autonomous driving is still some years away. Tesla also need to further grow their supercharger network, despite having a network far wider than its competitors. A car also has to undergo regulatory safety approvals before any disruptive feature can be added. This makes Apple way more agile than Tesla purely due to the nature of the product that they sell.
Nonetheless, Tesla is still creating similar waves in the automotive industry, similar to how Apple took over the mobile phone industry.
Walled Garden Ecosystem
One of they things that make Apple unique, even today is its closed ecosystem. Basically, Apple controls its own Operating Systems very closely allowing it to develop proprietary products in areas where it wants to retain monopolistic control. Products such as Facetime, Airdrop, Apple TV have a significant market share in its own areas because they are protected by Apple’s walled garden. Its walled garden design gives Apple incredible control over its core product and also differentiates that product from its competitors. This strategy has been so successful and unique to Apple that its nearest competitors in the phone and PC market are unable to copy it without losing market share.
By taking the wall-garden approach in its design Tesla is attempting to do a similar thing with its cars. It controls the OS of its cars closely and is able to send software updates to the car without the customer having to bring it to a service centre. This OS opens up different markets beyond its core for Tesla. For example, Tesla can launch its own navigation app, to compete with GoogleMaps. It can develop competing products to Spotify for in-car music. It can have advertising within the car. Tesla can also charge licensing fees to other EV companies who want to share its supercharger networks or take a share of revenue if a Tesla car charges at a competitor charging station. I’m sure Tesla’s team has come up with ideas much better than these, but my point still stands. Tesla with its design, is able to go beyond just selling its car for revenue. It can monetise every aspect of the car. This wouldn’t be something new, it would just be copying from the Apple playbook.
Finally, brilliant product design or innovating monetizing ideas can only go so far without a core group of fiercely loyal customers. Apple as we all know, has grown its brand so well that there is an army of people who refuse to buy any other product except Apple. Some buy into it for the “cool” factor, some buy into it as a status symbol. Some, like my parents just continue using Apple for years because they have gotten so used to the interface that any other OS seems like learning a new language for them. Whatever the reason, Apple has its customers in a vicegrip, keeping customer retention at an insanely high level. Other than marketing, Apple has also created a cult-like mindset towards its companu which is centred around 1 charismatic figure, Steve Jobs. When Steve Jobs was alive, he was one of the key points of attraction to the brand.
Similarly, Tesla has attempted to do the same with its cars. It has ingrained in people’s minds that it is the first and only company to develop electric cars. Chances are, many have heard about electric cars for the first time in the context of Tesla or Elon Musk. The company’s marketing has been extremely strong and its also able to turn around its “failures” and give it a more positive spin (see the Cybertruck demo fiasco). It is already a car that many millennials desire ahead of a Ferrari or a Porsche. The fact that people even discuss Tesla in the same conversation as a Porsche is a testament to its marketing efforts. And like Steve Jobs, Tesla has created a cult of personality around its central figure Elon Musk. Musk is strategically somehow able to generate buzz for all its companies with just a tweet to his 32 million followers. Whenever SpaceX, Hyperloop, The Boring Company or Starlink is mentioned, it also creates buzz about Tesla. Similar to Apple, Tesla is well on its way to becoming more than just a brand.
If all these factors align for Tesla in the same way it aligned for Apple, the company would have no issues at blowing away its competition. It helps that Tesla already has a huge head start in EVs and if a competitor is able to come up with a better product, Tesla will still prevail. The best example of this is Android where it was and still is the superior product with better features, but Apple is still the market leader.
Can TSLA match AAPL in its stock performance?
The firm ARK Invest, that manages funds consisting primarily of disruptive technologies has given TSLA an average 2024 price target of $7,000 and in its optimistic case, a target of $15,000. The report can be found on ARK Invest’s website.
Now, I am not even going to try to argue for or against this number because I have no experience in valuing stocks to this degree. Thus, I will not go deep into the fundamentals of the workings of Tesla and all the possible scenarios that might play out in the future.
However, I just want to do a simple comparison to Apples stock and see how it has performed and whether Tesla can follow in that path.
Let’s take a look at how far Apple has come since its IPO. Since its IPO in 1980, Apple has had 4 stock splits over the years before landing on a price of about $300. Once we normalise the stock splits and take into account inflation, this gives us a multiplier of 247x increase in stock value ($309 / $1.25). As of writing, the price of Tesla is about $400. At its January 2020 price of $650 it would only be up 30x. This is already quite impressive considering that Tesla only recently started to have profitable quarters.
If we assume, that Tesla does have the capability to reach the same level as Apple did in the next few years, then its inflation adjusted IPO price of $21 could potentially reach $5,250 (at a multiplier of 250x). This is not too far off from what ARK Invest predicts. In fact, this is a more conservative estimate than their $7,000 prediction. Of course, we need to remember once again that the $5,250 price would only be reached IF Tesla can replicate the success of Apple.
Therefore, I believe that Tesla has a good chance of matching what Apple has done. So, I definitely do not want to be in a position in the future where I would wish I had invested in Tesla if it becomes successful. Like all investments, there is definitely risks involved and there are many factors out of Tesla’s control, but I strongly believe that Tesla is following Apple’s playbook and that should lead it in the same direction as where Apple is now.
Disclaimer: This post should not be interpreted as investment advice as I am not a professional financial consultant. The objective of this blog is to share my experiences with others and receive feedback. I will provide links to my information sources to the best of my abilities, but the reader is responsible for their own due diligence.