Accelerating Smartcar Unit Sales Fuel Tesla's Stock Price

Once we are able to verify, with a high degree of confidence, the emergence of a unit sales X-pattern between new-game competitor Tesla and its top old-game competitor BMW, or top set of old-game competitors (such as BMW, Mercedes, and Audi), within the luxury market for premium sports sedans and sport utility vehicles, we are then in a strong position to take the next step in our detailed competitive analysis, which is to identify significant changes in the multidimensional strategic product roadmap of the new-game business that, with high likelihood, would result in an upside surprise in unit sales over several fiscal quarters.

The diagram above depicts a composite view of global quarterly unit sales, daily closing stock price, and strategic product roadmaps for Tesla over time. Specifically, it presents the following two numerical time series a plots and one graphical time series plot:

1. Tesla Global Quarterly Unit Sales of Model S and Model X 5 from 2012 - 2016 (Red Line)
2. Tesla Daily Closing Stock Prices from 2011 - 2016 (Blue Shaded Area)
3. Tesla Multidimensional Strategic Product Roadmaps for 2012 and 2015

We refer to this diagram as the Cyclefund Strategic Performance Framework for the Tesla AI-Assisted Smartcar Suite of Premium Luxury Sports Sedans and Utility Vehicles from 2012 to 2016. Quarterly unit sales for Tesla from 2012 - 2016 sourced from wikipedia.org. Daily closing stock prices for Tesla from 2011 - 2016 sourced from finance.yahoo.com.

Through our prior work examining the cyclical performance of post-PC smart media devices (Apple iPod 2003 - 2005) and post-PC smartphone devices (Apple iPhone 2009 - 2012) over time, Cyclefund Research was able to demonstrate a strong correlation between device unit sales and stock performance, assuming a relatively stable average selling price (ASP) and gross margin for a given class of device. Based on our fundamental belief that the AI-assisted smartcar phase of the electrification of things (EoT) era is a continuous and direct extension of the prior smartphone phase of the post-PC era, we strongly expect the correlation between smartcar unit sales and stock performance to hold, assuming relatively stable class-specific smartcar ASPs and gross margins.

In short, if Tesla is able to achieve its publicly stated goal to deliver 50,000 Model S and Model X smartcars over fiscal Q3 and Q4 of 2016, then the cumulative number of Tesla vehicles delivered for 2016 would approach 80,000 units, or more than 50% greater than the prior year. Under this highly aggressive and relatively unexpected scenario (due to Tesla's prior track record for missing publicly stated targets), the current price of Tesla stock would significantly undervalue the company's potentially dominant position in the emerging space of semi-autonomous, AI-assisted, cloud-connected, premium luxury all-electric smartcars.

Tesla Smartcar Results Expected to Parallel Apple iPhone Results

In the previous section, we presented a framework for predicting upside moves in the price of Tesla stock in the short term. In this section, we extend our time horizon and seek to establish a model for forecasting Tesla stock price trajectories over the medium term. This is a more complicated multi-step process, the first step of which is to forecast the financial performance of Tesla over the next several years. To do so, we must make two key assumptions based on our beliefs and convictions about the future:

1. The smartphone phase of the post-PC era will be supplanted by the smartcar phase of the AI era.
2. A new firm will emerge to initially dominate the global smartcar market just as Apple initially dominated the global smartphone market.

Under these fundamental assumptions, we can leverage the actual sales and profit trajectories of the dominant player in the early days of the smartphone phase of the post-PC era to forecast the expected financial trajectories of the player most likely to dominate the early days of the smartcar phase of the AI era. Or more simply stated, we can utilize Apple smartphone results to forecast Tesla smartcar results.

The key to getting this right is to identify the proper window in time to utilize as a basis for projecting financial results of Apple into normalized versions of financial results for Tesla. This is where a bit of art comes into play. The most influential product category cycle within the post-PC era was the premium mass-market smartphone category cycle. Similarly, we believe the most influential product category cycle within the AI era will be the premium mass-market smartcar category cycle. Given this, we see a strong parallel between the initial Apple iPhone smartphone launch of 2007 and 2008 and the initial Tesla Model 3 smartcar launch of 2017 and 2018. Accordingly, from these endpoints we work backwards by five years to define the appropriate corresponding windows in time as 2003 - 2008 for Apple and its legendary iPhone smartphone and 2013 - 2018 for Tesla and its new Model 3 smartcar.

The diagram above depicts a comparative view of annual revenue and net income performance for Apple vs. Tesla over time. Specifically, it presents the following four time series plots:

1. Apple Global Annual Revenue from 2003 - 2008 Actual (Green Line)
2. Apple Global Net Income from 2003 - 2008 Actual (Purple Line)
3. Tesla Global Annual Revenue from 2013 - 2018 Estimated (Blue Line)
4. Tesla Global Net Income from 2013 - 2018 Estimated (Red Line)

We refer to this diagram as the Comparative Financial Performance of Apple 2003 - 2008 Actual vs. Tesla 2013 - 2018 Estimated. Annual revenue and net income for Apple from 2003 - 2008 and Tesla from 2013 - 2015 actual, 2016 - 2018 estimated sourced from finance.yahoo.com.

The key takeaway from this diagram is that the actual and expected revenue trajectory and the actual and expected net income trajectory of Tesla in the 5-year window spanning two-years of expected sales of the Tesla Model 3 premium mass-market smartcar closely correlate with the actual revenue and net income trajectories of Apple in the 5-year window spanning two-years of actual sales of the Apple iPhone premium mass-market smartphone.

Model S Ramp Drives Tesla Stock, Model X Ramp and Model 3 Launch Hold it Back

The diagram above depicts a comparative view of stock price performance for Apple vs. Tesla over time. Specifically, it presents the following two time series plots:

1. Apple Closing Daily Stock Price from 2003 - 2008 Actual (Blue Line)
2. Tesla Closing Daily Stock Price from 2013 - 2016 Actual (Turquoise Line)

We refer to this diagram as the Comparative Equity Performance of Apple 2003 - 2008 Actual vs. Tesla 2013 - 2016 Actual. Closing daily stock prices for Apple from 2003 - 2008 and Tesla from 2013 - 2016 sourced from google.com/finance and finance.yahoo.com, respectively.

The key takeaway from this diagram is that the actual stock price trajectory of Tesla in the first two years of the 5-year window spanning two-years of expected sales of the Tesla Model 3 premium mass-market smartcar closely correlate with the actual stock price trajectory of Apple in the first two years of the 5-year window spanning two-years of actual sales of the Apple iPhone premium mass-market smartphone. However, for the past two and one-half years, Tesla stock has traded sideways as uncertainty over Model X and more recently Model 3 and the SolarCity acquisition have undermined the company's stock performance.

Tesla vs. Apple Dilution: On Track Unless Derailed by SolarCity, Gigafactory, Model 3

The diagram above depicts a comparative view of diluted shares outstanding for Apple vs. Tesla over time. Specifically, it presents the following two time series plots:

1. Apple Average Diluted Shares Outstanding from 2003 - 2008 Actual (Green Line)
2. Tesla Average Diluted Shares Outstanding from 2013 - 2018 Estimated (Blue Line)

We refer to this diagram as the Comparative Diluted Shares Outstanding for Apple 2003 - 2008 Actual vs. Tesla 2013 - 2018 Estimated. Average diluted shares outstanding for Apple from 2003 - 2008 and Tesla from 2013 - 2015 actual sourced from Apple annual reports and gurufocus.com, respectively. Average diluted shares outstanding for Tesla from 2016 - 2018 estimated based on the mean growth rate of the average diluted shares outstanding over 2013 - 2015.

The key takeaway from this diagram is that the trajectory of average dilutes shares outstanding for Tesla in the 5-year window spanning two-years of expected sales of the Tesla Model 3 premium mass-market smartcar correlates with that of Apple in the 5-year window spanning two-years of actual sales of the Apple iPhone premium mass-market smartphone. However, should the pending acquisition of SolarCity, the ongoing construction of the Tesla Gigafactory, or the facilities upgrade of the Tesla Factory in Fremont in preparation for volume production of the Model 3 require a substantial equity capital raise, the average diluted shares outstanding estimates provided above for 2016, 2017, and 2018 would need to be revised upward accordingly, perhaps significantly upward.

Tesla Valuation at Model 3 Ramp Expected to Converge to Apple Valuation at iPhone Ramp

The diagram above depicts a comparative view of the price-to-sales ratio for Apple vs. Tesla over time. Specifically, it presents the following two time series plots:

1. Apple Price-to-Sales Ratio Dot Plot from 2003 - 2008 Actual (Red Dots)
2. Tesla Price-to-Sales Ratio Dot Plot from 2013 - 2018 Estimated (Blue Dots)

We refer to this diagram as the Comparative Price-to-Sales Ratio Dot Plot for Apple 2003 - 2008 Actual vs. Tesla 2013 - 2018 Estimated. Price-to-sales ratios for Apple from 2003 - 2008 and Tesla from 2013 - 2015 actual sourced from google.com/finance and finance.yahoo.com, respectively. Price-to-sales ratios for Tesla for 2016, 2017, 2018 estimated based on the mean price-to-sales ratio of Apple over the ten days before and after the close of its fiscal year ending September 28, 2007, the year the original iPhone was released for purchase.

The key takeaway from this diagram is that the trajectory of the price-to-sales ratio for Tesla in the 5-year window spanning two-years of expected sales of the Tesla Model 3 premium mass-market smartcar is expected to converge with the price-to-sales ratio of Apple in first year of actual sales of the original Apple iPhone premium mass-market smartphone.

Tesla Stock May Surprise to the Upside by a Ludicrous Amount

The diagram above depicts a comparative view of stock price performance for Apple vs. Tesla over time. Specifically, it presents the following three time series plots:

1. Apple Closing Daily Stock Price from 2003 - 2008 Actual (Blue Line)
2. Tesla Closing Daily Stock Price from 2013 - 2016 Actual (Turquoise Line)
3. Tesla Closing Annual Stock Price for 2016, 2017, 2018 Estimated (Turquoise Line Continuation)

We refer to this diagram as the Comparative Equity Performance of Apple 2003 - 2008 Actual vs. Tesla 2013 - 2018 Estimated. Closing daily stock prices for Apple from 2003 - 2008 and Tesla from 2013 - 2016 actual sourced from google.com/finance and finance.yahoo.com, respectively. Estimated closing annual stock prices for Tesla in 2016, 2017, and 2018 based calculations from Cyclefund Research.

The key takeaway from this diagram is that the stock price trajectory of Tesla in the 5-year window spanning two-years of expected sales of the Tesla Model 3 premium mass-market smartcar is expected to correlate with the actual stock price trajectory of Apple in the 5-year window spanning two-years of actual sales of the Apple iPhone premium mass-market smartphone, assuming that the final year in the 5-year window for Apple represented an anomaly given the violent downturn in global equity markets due to the onset of the financial crisis and ensuing great recession of 2008 - 2009.

Tesla vs. Apple: Transition to AI Era from Post-PC Era

Apple became the most profitable company in the post-PC era because of its leading or, in many cases, dominant positions within a core set of post-PC product categories, including post-PC smart devices, intelligent assistants, mobile operating system platforms, Internet cloud services, charging and communication connectors, mobile software applications, and downloadable and streaming digital content. Over the next several years, as the current post-PC cycle reaches maturity and begins to decelerate or decline and a new AI cycle emerges and begins to accelerate, we believe that Apple will face unexpected and perhaps insurmountable competition from Tesla, an emerging leader in the field of narrow artificial intelligence (AI) applied to semi-autonomous and fully-autonomous battery-powered electric vehicles.

The reason that we believe that Apple needs to pay particularly close attention to Tesla it that the next big post-PC device is not a small cloud-connected wearable smart device that you put on your body, such as a smart watch or smart glasses, but a massive cloud-connected non-wearable smart device that you put your body into, namely a smartcar. While Apple has recently announced internal difficulties in developing its own smart car, Elon Musk has taken a page directly out of Steve Jobs' playbook and evolved the Apple post-PC smartphone and smart tablet stack into the Tesla smartcar stack, as shown in the smart device evolution diagram below.

We refer to the diagram above as Apple vs. Tesla: Smart Device Evolution from the Smartphone-Centric Post-PC Era to the Smartcar-Centric AI Era. The diagram is organized into three vertical columns and seven horizontal rows, with the first column labeled Apple and the third column labeled Tesla. The center second column contains the game changing product categories that define the post-PC era and are expected to continue to define the AI era. The first and third columns show current leading products from Apple and Tesla, respectively, for each of the corresponding categories in the center column.

Specifically, the Apple post-PC era stack comprises:

1. Smart Devices: Apple Watch, iPhone, and iPad
2. Intelligent Assistant: Siri
3. Operating System Platform: iOS 10
4. Cloud Synchronization: iCloud
5. Charging and Communication: Lightning Connector
6. Navigation Services: Apple Maps
7. Media Content: iTunes Music, Podcast, TV Shows, and Movies

The post-PC era stack can be segmented into hardware, software, and service categories. Apple hardware includes Apple Watch, iPhone, iPad, and lightning connector. Apple software includes Apple iOS 10. Apple services include Siri, iCloud, Apple Maps, and Apple iTunes.

Similarly, the Tesla AI era stack, which is continuous evolution of the post-PC stack, comprises:

1. Smart Devices: Model 3, Model S, and Model X
2. Intelligent Assistant: Autopilot
3. Operating System Platform: Tesla Version 8.0
4. Cloud Synchronization: Over the Air (OTA) Updates
5. Charging and Communication: Supercharging Network and Wall Connectors
6. Navigation Services: Tesla High-Precision Maps
7. Media Content: Music and Podcast at this time and TV Shows and Movies in the future

Tesla hardware includes Tesla Model 3, Model S, and Model X. Tesla software includes Tesla 8.0. Tesla services include Autopilot, OTA updates, supercharging network, Tesla Maps, and Tesla Media.

Comparing the lists above, it is clear that Tesla has leveraged Apple's vertically-integrated post-PC development and delivery model for smart watches, smartphones, and smart tablets and applied it to smartcars. Just as the vertical integration of hardware, software, and services enabled Apple to capture the lion's share of profits and dominate the smartphone phase of the post-PC era, we believe that vertical integration of hardware, software, and services will enable Tesla to achieve similar results during the smartcar phase of the emerging AI era.

Why Tesla and Not Apple, Google, or the Major Auto Makers?

The reason that the discussion in the previous section should be alarming and highly unsettling to executives at technology companies, such as Apple, Google, Microsoft, Baidu, and Uber, as well as leaders at automotive companies, such as BMW, Mercedes, Audi, GM, Ford, Volkswagen, Toyota, and others, is that the current Tesla smartcar stack is so well developed, far advanced, and vertically integrated that no individual tech companies, individual auto companies, or feasible combinations of tech and auto companies are anywhere near offering a competitive smartcar stack until the turn of the decade. Yes, until 2020!

The upshot of this is Tesla will be virtually alone in the AI-powered smartcar race for the next three years, much like Apple was essentially alone in the smartphone race during the early years of the post-PC era. Given this, we strongly believe that our view of Tesla relative to any other tech or automotive competitor is not currently reflected in the price of the stock. Specifically, we believe that the market incorrectly views Tesla as a niche electric car company with numerous well-healed competitors ready to take share in the short to mid term.

Our view is clearly different. We believe that Tesla is a smartcar company on the verge of delivering the next revolutionary cloud-connected post-PC smart mobile device at scale into a global market with limited competition from automotive and technology competitors who currently lack and will continue to lack well developed, advanced, vertically integrated smartcar solutions for the next several years.

In short, by the time leading automotive manufacturers realize that they do not have a competitive smartcar operating system, intelligent driving assistant, cloud synchronization, supercharging network, or high-precision navigation services and are forced to reluctantly turn to and rely on Apple, Google, Microsoft, or Baidu to provide many of these services, Tesla's smartcar fleet will have traveled across all corners of the globe producing billions of miles of supervised (semi-autonomous driving) and unsupervised (fully-autonomous driving) fleet learning to be ingested in near real-time into its big-data artificial-intelligence (AI) deep-learning algorithms to continuously improve its smartcar platform, assistant, cloud, charging, and navigation services.

Most importantly, because the accuracy and ultimate success of deep learning is dependent on massive data sets, expert training feedback, and exposure any and all corner cases, the firm that achieves overwhelming global fleet scale before any of its competitors will, by the exponential and singular nature of AI, be endowed with a durable position of competitive dominance. Put more simply, in the emerging AI era, coming in second, even a close second, is no longer a sustainable option. In an AI-first world, first place takes it all.