profile

Long-Term Mindset

🧠 Tesla's Unfair Advantage

Published 4 months agoΒ β€’Β 3 min read

View Online | Sign Up | Advertise​

Friends,

Last week, Tesla's stock fell 10% after reporting earnings. All three of us are shareholders, so we took no pleasure in watching the price plunge. However, the report was underwhelming, and the stock is richly valued. Wall Street's reaction makes sense.

That said, we've noticed a lot of misunderstanding about changes in Tesla's strategy over the past year -- namely, its price reductions. Some investors think it's a bullish sign ("Tesla is playing offense!"). Others think it's a bearish signal ("Tesla's demand is weak!")

The key for investors to understand what's going on is this visual: the Business Growth Cycle.

By the end of 2022, Tesla was firmly in Stage 5: Capital Return. Its operating margins neared 17% -- far better than any other major automaker. The company was fully optimized for profitability at its current margin profile.

But then, Musk & Co. started to drop prices substantially. The cheapest Model Y you could buy on January 1, 2023, was $66,000. Today, it's just $44,000. That $22,000 price drop has obliterated its margins and caused the company to intentionally move backward to Stage 4: Operating Leverage.

Why would Musk make this move? We can think of a few reasons:

  • Tesla's scale makes it the low-cost EV producer. By lowering prices, Musk believes he'll capture more market share and put the hurt on rival EV makers.
  • Lower prices align with the company's mission of "Accelerating the World's Transition to Sustainable Energy"
  • With $23 billion in net cash, Tesla can easily afford to accept lower profits today while still investing aggressively in future growth -- via the Cybertruck, Semi, Optimus bot....etc.

Mind you, this doesn't mean this is how it'll play out. But there is a daring logic to it.

With interest rates rising, buyers are pinched. If Tesla offers a car for $44,000 that costs $37,500 to make, it's still generating a positive gross profit. But other automakers -- who have yet to achieve operating scale to produce EVs at a similar internal cost -- don't have that luxury. This is Musk using Tesla's unfair advantage (low-cost production) in a Machiavellian way.

This aggressive pricing strategy does not automatically mean that Tesla will be a good long-term investment. Trading near-term profits for market share might be a good business decision, but it could be a terrible shareholder decision. Moreover, Tesla's valuation is still pricing in substantial market share gains from here, not to mention successful future product launches and huge self-driving profits. None of those things are guaranteed to happen.

Instead, we view what's happening as a wonderful real-time display of what can happen when a company uses a strong moat (in this case, low-cost production) to put the hurt on competitors.

The move is a huge win for consumers and EV adoption in general. Will that translate into a win for Tesla's shareholders? Only time will tell.

Wishing you investing success,

- Brian Feroldi, Brian Stoffel, & Brian Withers

P.S. Enrollment in our newest cohort-based course, Advanced Financial Statement Analysis, is officially open! Click here to enroll using the coupon code LASTCALL200 (expires on Sunday, Oct 29th at 11:59 PM EDT).


Together With Sidebar​

​
​Sidebar is a leadership program that accelerates your career. It’s where people at the top of their field grow through a small peer group, virtual platform, and curriculum matched to them. Nothing will get you further in your career than learning from your peers. Sidebar finds your people. They have built a platform that matches people to the right group for them and offers goal tracking, social accountability, messaging, and sessions laser-focused on increasing your impact. Small group coaching unlocks career growth in a way nothing else can. It’s an untapped competitive advantage for many.

β€œYou’re the average of the people you keep closest; Sidebar helps you raise that bar.” - Global Director, Reddit

You could go your whole career never finding the right group to help you grow. Sidebar gets you there faster. Join the growing waitlist of senior leaders, and apply to become a founding member.

​

One Simple Graphic:


One Piece of Timeless Content:

We love investing in mission-driven companies. Find out why in Brian Stoffel's classic article, Mission Statement: Window to a Company's Soul.


One Thread:

Having a set of metrics to examine a company's performance is a critical part of the investing process. Venture Capital Investor Niv Thanabalan shares his list of favorite KPIs in this wonderful thread.


One Resource:

How much risk are you willing to take on as an investor? This is an incredibly important question to answer. Need help? This timeless article can help you determine your personal risk tolerance.


One Quote:


More From Us:

πŸ‘¨β€πŸŽ“ NEW! Our new course is now OPEN for enrollment -- Advanced Financial Statement Analysis -- starts on October 30th! Click here to enroll using a $200 discount.

πŸ“— If you've read Brian Feroldi's book, he'd love a review.

πŸ‘¨β€πŸŽ“ Need help getting your personal finances in order? Click here to start​ our 5-day Financial Wellness email course. It's completely free.


Long-Term Mindset

by Brian Feroldi

I teach you how to invest with a long-term mindset. Each Wednesday, I share six pieces of timeless content that can be read in less than 2 minutes. Read by 100,000+ investors from a16z, Amazon, Google, Microsoft, and more.

Read more from Long-Term Mindset

View Online | Sign Up | Advertise Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better. Today's Issue Read Time: <3 minutes Lesson: The future matters the most Timeless Content: Difference between bold and reckless Thread: 15 timeless investing visuals Resource: Dividend ETFs And more! Together With Sidebar Sidebar is a leadership program that accelerates your career. It’s where people at the top of their field grow through a small peer group, virtual platform,...

4 days agoΒ β€’Β 3 min read

View Online | Sign Up | Advertise Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better. Today's Issue Read Time: <3 minutes Lesson: A tale of Shopify's losses that weren't Timeless Content: Advice for young investors (or young at heart) Thread: Net income versus free cash flow Resource: Farnam Street blog And more! Together with 10 East 10 East is a membership-based investment firm focused on private market exposures for a select community of institutional and...

11 days agoΒ β€’Β 3 min read

View Online | Sign Up | Advertise Welcome to Long-Term Mindset, the Wednesday newsletter that helps you invest better. Today's Issue Read Time: <3 minutes Lesson: Understand the base rates of stocks losing to the market. Timeless Content: How to get rich. Thread: Stoffel's Antifragile Portfolio reviewed Resource: Warren Buffett archives And more! Together with Finchat Brian Feroldi analyzing a stock with Finchat I (Feroldi here) am a huge fan of visuals. A good chart can relay information 10x...

18 days agoΒ β€’Β 3 min read
Share this post