It seems like that’s the only topic on the minds of Apple investors these days. In fact, it’s nothing new. Since the launch of the iPod twenty years ago, navigating the theme of product availability has been an essential part of investing in Apple. It’s a well-traveled road: Apple releases a new product and it takes 2-4 months for supply to catch up with demand. We’ve all learned to extrapolate underlying demand from the reported numbers. Then, the supply chain tightened not only for newly announced Apple products but for others as well.
It started last April
On April 29th, 2021, Luca Maestri warned that broader supply challenges would have a negative impact on the forthcoming June quarter by $3-4B. That headwind was expected to dampen sales by 4%. It was the only mention of supply constraints in Apple’s prepared remarks for that quarter. In hindsight, it highlighted a theme that has dominated the Apple conversation for the past year.
Supply chain is a distraction vortex for investors
The conversation of supply chain is important because it masks the pace of intrinsic growth, making it difficult to discern the health of the business. I believe the topic has been blown out of proportion, now somewhat of an investor distraction vortex, as is evidenced by the number of times Apple has mentioned ‘supply chain’ on earnings calls.
What stands out is that the supply chain headwind has a pendulum effect. It improves, only to worsen in a subsequent quarter. Over the past year, the supply chain has delayed about $27B in revenue, or about 6% of total sales.
The forest for the trees
It’s hard for me to step back and look at the big picture when the topic is dominating not only Apple but many parts of my comfortable life that require me to wait longer to get things. The big picture is as clear as it’s been for the past 15 years: Apple makes the best consumer tech products in the world, and consumers are willing to wait to get them. Loyal Apple customers are not jumping ship for competing products. They’re committed to upgrading, to expanding the number of Apple products they own, and they’re willing to be patient to that end. This is why Apple reports 9% revenue growth in March, higher than the Street’s 4% expectation, against a monster 53% revenue growth comp and global economic uncertainty.
As long as Apple continues with its mission to create the world’s best consumer tech products, the supply chain topic isn’t going away anytime soon. I might as well get comfortable with that fact.
It’s no surprise that my attention has been focused on the potential downfall of traditional auto as I’ve studied Tesla’s ascent. Why? Because the company has grown 4-5x faster than the traditional car makers. But that’s just the beginning.
The sub-theme orbiting the conversation around Tesla is that it’s more than a car company and it’s more than a tech company. It’s an energy company in hiding. In reviewing the details of Tesla’s March quarter, it has become increasingly clear that Tesla has the potential to be even more than an energy company.
When I apply what I’ve learned from studying Apple’s evolution over the last 20 years, I realize that it’s not just traditional auto that’s in trouble.
Traditional auto is in trouble
In the summer of 2020, I wrote The Rest of the Auto Industry Is In Trouble. As demand for Teslas continues to outpace the broader industry, it is becoming increasingly difficult for traditional automakers to catch up. As Tesla scales to meet demand, Tesla’s price-performance gap versus other carmakers will widen because other carmakers are producing EVs sub-scale.
Here’s the dilemma:
- If traditional auto releases a car with features and range at parity and sells the car at cost, it will be priced 10-25% higher than a comparable Tesla. This will soften demand and lead to further market share loss.
- Or, if traditional auto subsidizes vehicles to gain market share, they will lose money with limited margin cushion. The more they sell, the more money they lose. To that end, we believe that legacy car companies will eventually be forced to restructure or go out of business within the next decade.
Those with a different view from mine would say, Look at the facts. Traditional auto is doing fine as evidenced by Tesla’s global EV market share decline. It’s hard to put solid numbers on the magnitude of decline, but that view misses the point. It’s true, that over time, Tesla’s share of the auto market will shrink to 15-25% of sales as all cars go electric. That market share target aligns with Musk’s long-term goal of selling 20m cars per year (a goal that is distant, given the company will deliver around 1.4m cars in 2022). I believe they’ll get there eventually, in 10-15 years. If that happens, Tesla will likely become the largest car maker in the world, displacing the incumbents. Just like the iPhone displaced Nokia and BlackBerry.
Lyft and Uber are in trouble
Given its safety benefits, autonomy will eventually be a mandated feature in every car. While Musk’s push to put FSD on roads before it’s ready is a flawed approach, it is one that should yield a long-term competitive advantage in the race to feed the self-driving neural network. If Tesla wins that race, they’ll put the hammer down on ride-sharing.
Musk commented on the Q1 call that they’re working on a new vehicle, a “dedicated robotaxi that’s highly optimized for autonomy . . . it would not have steering wheel or pedals” and would be “optimized for trying to achieve the lowest fully considered cost per mile.” Elon expects to have volume production of the robotaxi in 2024. Assuming that actual production is delayed a couple of years means that Lyft and Uber, as we know them, have about four years left.
While ride-sharing companies have partnered to find a path to autonomy, and those partners will eventually get the autonomy piece right, they won’t be able to keep up on the production side. Autonomy without production is meaningless.
GEICO and Allstate are in trouble
The last question on the earnings call sparked an update from Kirkhorn and Musk on Tesla Insurance. Typically, the final question on an earnings call is of little interest. That wasn’t the case this time: the executives clearly wanted to talk on their key add-on service.
In six months, Tesla has become the second largest insurer of Tesla vehicles in the state of Texas. By this summer, Kirkhorn believes that Tesla will be the largest insurer of Tesla vehicles, period. Rapid adoption is attributed to Tesla’s lower insurance prices, since both the driver and Tesla receive real-time driving feedback that impacts premiums. Traditional auto insurance won’t be able to compete because they will lack the vertically integrated, real-time data that Tesla can share and optimize. Regular insurance companies offer a tracking dongle to monitor driving habits and provide a discount, but those solutions fall short of the speed and gamification of Tesla’s good driver feedback loop. Separately, real-time feedback improves driving habits which make cars safer and lowers the risk to the insurer.
Long-term, real-time feedback won’t matter because humans won’t drive, and Tesla is already thinking about where to add value in insurance: same-day repair for collisions.
Physical labor is in trouble
Musk is clearly enthusiastic about the Optimus project, saying on the call that “people do not realize the magnitude of the Optimus robot.” He added that the “the importance of Optimus will become apparent in the coming years” and that it’s his “firm belief” that “those who are insightful or who listen carefully will understand that Optimus, ultimately, will be worth more than the car business and worth more than FSD.”
- The Cynic will say: Optimus is just a Musk diversion. My challenge to this approach is that Tesla’s core business is strong and still in its infancy, so there’s no need to divert attention away from it.
- The Pragmatist will say: Musk doesn’t know if Optimus will work, but he knows that he has to sell it to investors and, more importantly, he has to recruit the talent to build it. He’s saying, come work at Tesla and you can build a segment that’s bigger than our auto business.
- The Optimist will say: Musk is onto something. The world is built around the human form, and the fastest way to automate labor is build a humanoid that plugs into the existing infrastructure.
If Musk pulls it off, physical labor will be shifted to robots, and the value created for shareholders would skyrocket past the value of EV and autonomy. It’s a long shot but one worth taking.
Long shots become aftershocks
I think Steve Jobs would admire Elon’s first principle approach: break down a problem to its basic parts and build an innovative solution that’s never been done before. Musk is thinking different — just like Jobs did. Many of the markets that Tesla wants to disrupt (EV, energy, autonomy, insurance, ride sharing, and maybe VTOLs) are long shots and will take nearly a decade to play out.
That said, if one or two hit, the aftershocks of Tesla’s entrance will spell trouble for incumbents well beyond the auto industry.
Gene and Andrew discuss the most important tech events for the week ending on April 8th.
- Musk’s investment in Twitter was no surprise given his vocal stance on free speech and his mission-driven investment approach. Given that he’s now a part of the board, expect to see changes in terms of service in the next 6 mos.
- This week, there have been more shutdowns in China related to Covid, further impacting the supply chain. While this is a 2% headwind to Tesla deliveries for 2022, it doesn’t appear to be having an impact on the availability of Apple products.
- Tesla’s Cyber Rodeo was more than a ribbon cutting for Giga Texas. The factory is a stark reminder to how big of a gap there is between traditional automakers and Tesla.