Tesla and Amazon have always been on my “too hard” pile to figure out as an investment. I commend what they are doing to innovate their industries, but I could never quite figure out how to reconcile their low net profits with their sky-high revenues. When you’re selling billions of dollars worth of goods, I expect you to make profits. Even Ford, a deep cyclical, is able to earn 5% net returns on each car it sells. If you spend $45,825 on a 2017 Ford F-150, I can appreciate that $2,291 will work its way to Dearborn, Michigan in the form of net earnings that the Board of Directors and management team can allocate as they wish.
But the only thing I know is that Tesla will have to raise prices in order to earn profit rates that approach Ford.
As I mentioned last month:
“This means that economies of scale (lower input costs) are not contemplated as part of the business model. For Tesla and Amazon to earn profits consistent with their revenue base, and attempt to justify the stock price, it is necessary for both businesses to increase the costs of their goods and services even more.”
Two days ago, part of my anticipation was realized when Elon Musk put out a press release on the Tesla website announcing a $0.40 per minute idle fee for every minute that a Tesla vehicle is left at a charging station in excess of five minutes. They claim it is part of improving the user experience to free up available lot space, but the net effect is the same whether the action can be tied to a salutary goal or is just a pure profit grab.
In my own mental model files, I call this “Policing The Perks.” I first encountered it when I was a teenager and I saw a restaurant in Clayton, Missouri inspire ill will among its loyal patrons by charging $0.25 for soda refills and adding a nickel for each condiment or topping you added to your meal. When part of the experience of a purchase becomes independently processed for fees, the delight of the brand begins to diminish because you can feel the company’s grip on your wallet just by going through the terms of the transaction.
Even if you assumed that Tesla’s last quarterly profit of $0.14 represents its earnings power, this would still be a business only earning $84 million on $7 billion in sales. That is only a 1.2% net profit margin. That still demands further price hikes and taxes on the experience to get its profit margin up to the automotive industry’s 4.7% net profit margin average. And for what it is worth, the analyst consensus is that Tesla will lose $500 million next year so it probably has even further to go than I allude.
I am skeptical of Musk’s claim that this fee’s purpose is aimed at improving the user experience. Customers being put on a clock is likely a greater irritant than the occasional occurrence of encountering a full charging lot. Most likely, big shareholders and the Board are starting to take seriously the very large discrepancy between Tesla’s revenues (high) and profits (low to non-existent). The Tesla experience will continue to add frictional fees, the costs of the vehicles will go up, and/or the quality of vehicle components and labor costs will go down. Those are your menu of options when you approach $10 billion in annual sales without earning a sustainable profit.
Originally posted 2016-12-18 16:44:24.