7 Ways Tesla Has Built a Wide Economic Moat

Tesla (NASDAQ:TSLA) stock confounds a lot of old-school investors who make comparisons with other automotive manufacturers. A common argument among skeptics compares vehicle production at legacy auto manufacturers like Volkswagen, for example, with Tesla, and follows with a claim of how preposterous the valuation of Tesla is. 

The problem with that comparison is that Tesla does offer much more under the hood than car production. For one, it is fundamentally a software company that happens to be overlaid on top of hardware in the form of a car. That is a significant differentiator from most other cars, which are primarily hardware with a sprinkling of software.

The firm’s software focus is precisely what allows Tesla to upgrade the performance of its vehicles regularly, whereas most traditional car manufacturers rely on new models to improve drivers’ experiences. 

Beyond differences in hardware and software focus, Tesla has a whole slew of assets under its hood that make it a compelling long-term investment opportunity, and many of them are largely unknown to the majority of investors. We lift up the hood to uncover them. 

Tesla Has Enormous Brand Value

Branding is often overlooked as an intangible asset that is hard to truly value, but what it really boils down to is trust among consumers and willingness to buy from a company repeatedly.

To understand brand equity better, look no further than Coke. There’s a reason Coca Cola (NYSE:KO) has successfully fought off all competition in the cola wars, and it’s because customers know, like, and trust that each can of coke will deliver the refreshing taste to which they have become accustomed.

Similarly, Tesla has earned a place in consumers’ minds as a company that manufactures high quality, performance vehicles that connote luxury and value.

The Tesla brand has grown so large that it eclipses that of all other manufacturers. According to Statista, Tesla’s brand value is now worth $67.7 billion versus, which is more than double that of its closest competitor on the list, Toyota, which sits at $28.5 billion.

Such a high brand value means consumers, particularly those considering electric vehicles, will en masse be more likely to select a Tesla than they will a competitor’s offering. The high brand equity is more likely to translate to repeat purchases and premium pricing, which in turn can boost Tesla’s margins.

Technology Advantage

Another asset Tesla enjoys is its technology advantage over competitors. A rival CEO famously expressed the challenges legacy auto makers face as follows.

He stated that when attempting to compete with Tesla, controllers were sourced from dozens of suppliers, none of which were compatible with each other. So, to make changes, the manufacturer would need to petition suppliers to make changes to code in order to avoid IP infringements.

Soon, the lesson was learned that the entire production of the car must be brought in-house, which in turn meant entire factories had to be re-tooled to support EV production.

In sharp contrast, Tesla was built from the ground-up intentionally without over-reliance on suppliers. Musk led the company to build factories exclusively to create electric cars that were heavily software-oriented. And each hardware component was carefully scrutinized to ensure it was necessary.

In legacy autos, by contrast, parts would often migrate from one model to the next whereas Tesla didn’t have the anchor of past models to hold back operational efficiency.

Battery Technology

Tesla’s technology prowess extends beyond manufacturing to include battery technology, a software ecosystem, battery technology, and energy storage.

To give a sense of how cost-effective Tesla has become, a battery that today costs $12,000 would have been priced at $1,000,000 three decades ago.

Lower battery costs allows Tesla to realize its ambition to go mainstream and enjoy mass adoption while simultaneously boosting margins.

Software Subscriptions

The traditional approach to selling a car involved paying close to MSRP and driving it off the lot. Dealers would attempt to add services to further increase the price paid through warranties or services, and perhaps even financing.

Tesla took an entirely different approach. Rather than selling a skeptical customer on services that they may later discover were overpriced, Tesla sells subscriptions to software services that consumers actually want. 

By 2030, some analysts forecast that Tesla’s software subscription business alone could generate as much as $20 billion annually.

In that sense, Tesla can be more accurately compared to an iPhone as a hardware device that monetizes software well than a traditional car that can generate limited, if any, further revenue once its driven off the lot.

Tesla FSD

Full Self-Driving vehicles were once thought of as futuristic visions but Tesla is bringing the idea mainstream.

Elon Musk, CEO of Tesla, has claimed that one day Tesla will have what he called its ChatGPT moment. He explained that just as artificial intelligence hit the mainstream all at once with over 100 million people flocking to offerings from Alphabet and OpenAI, so too one day will Tesla be able to “flip a switch” where all Tesla vehicles can drive autonomously.

The innovation is highly disruptive and, remarkably, could be achieved through one of its many over-the-air (OTA) updates.

So far, Tesla claims over 9 billion miles have been driven using real-world data. With each incremental mile, Tesla gathers ever more data to train its machine learnings algorithms.

On a related note, Musk has claimed Tesla’s artificial intelligence is as good as any in the world.

Energy Storage

The renewable energy market size is forecast to grow at 16.9% through 2030 according to GrandView Research from a base of $1.1 trillion.

Here, too, Tesla plays a key role with energy storage offerings, such as Powerwall and Powerpack, as well as solar products.

Powerwall

Powerwall is not yet a household name but it may soon be, so what is it? In a nutshell, it’s a residential battery pack that has the ability to store energy from solar panels and can lower electricity costs.

It’s also a viable solution for homeowners who are afflicted by power outages, such as those in hurricane corridors.

With increasing focus on renewable energy systems by governments and credits offered broadly to nudge consumers to buy them, Tesla has the potential to ride a long-term trend that is already showing rapid growth. For example, Tesla’s energy business grew to $3.91 billion in 2022, representing year-over-year growth of approximately 40%.

Powerpack

Where Powerwall addresses residential needs, Powerpack targets commercial and industrial ones.

Again Tesla shines bright here and stands out with solutions that are both scalable and flexible to the needs of purchasers of energy storage solutions.

According to Tesla, energy storage deployments tripled in the last quarter on an annualized basis to 3.7GWh.

Combined with Powerpack, these divisions have the potential to significantly add to Tesla’s bottom line over the next decade.

Does Tesla Have an Economic Moat?

Tesla is much more than an ordinary car company that can be analyzed by comparing unit volumes of vehicles produced with those of other manufacturers. 

To the question of does Tesla have an economic moat? Yes, Tesla has a wide moat from its enormous brand equity, technology advantage in the form of mass car production, software subscriptions and FSD, as well as its energy storage divisions.

With such a broad revenue base from so many products and services, Tesla enjoys a moat that makes it less susceptible to competitive threats than traditional car manufacturers. 

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