On today's earning's call discussing the proposed purchase of SolarCity by Tesla, CEO Elon Musk ruminated on the future of the combined Tesla and SolarCity. If all goes according to plan, he sees the company growing to be worth a trillion dollars:
I think when we're further down the road, not even far down the road — next year — but particularly as you go further into the future, these items are going to seem like very small numbers. As a combined automotive and power storage and power generation company, the potential is there for Tesla to be a trillion dollar company. If we play a major role in transitioning the world to a new form of energy generation and storage and transport, that's kind of what happens. One isn't going to be worried about whether it's a few hundred million dollars one way or the other here down the road, it's not really going to make a big difference.
Musk has always been one to take a long view on his companies, frequently taking losses in the short term in the pursuit of longer-term gains. That's played out time and again with Tesla, which has yet to turn a profit (though Musk swears it could if they weren't investing so much in growth). And that lack of profit is, for now, going to hold Tesla far back from that trillion-dollar dream.
And while there's a lot — and I mean a lot — that will have to go right for Tesla to reach even half a trillion dollars (which would put it in the company of today's Apple, Google, and Microsoft). The launch of the Tesla Model 3 will have to be pulled off perfectly: on time, on budget, with no expensive recalls, and to overwhelming demand. And then Tesla will have to follow up the $35,000 Model 3 with an electric car that's within reach of everybody.
Both of those hinge on the build-out of the Tesla Gigafactory, an enormous facility in Nevada dedicated to the production of battery cells for Tesla cars and energy storage products. The Gigafactory is touted as the lynchpin in Tesla's ambition to make electric vehicles and home energy storage affordable options for the masses. And that can only happen by achieving heretofore unimagined economies of scale:
Our engineering team has worked very closely with Panasonic to make dramatic improvements to the cell manufacturing efficiency. I think we're probably approaching 3x the efficiency of the best plant in the world. I think that's pretty good. Cells will be going through that thing like bullets from a machine gun. In fact, the exit rate of cells will be faster than bullets from a machine gun.
And even if Tesla becomes the preeminent electric car manufacturer, that won't be enough to get them to a trillion-dollar market cap. Far from it. Toyota is far and away the most successful automaker on the planet today. They build more than 9 million cars every year, have 350,000 employees, and raked in $20 billion in profit last year. And they're worth only $182 billion.
The only way that Tesla can possibly become a trillion dollar company is if absolutely everything goes off without a hitch on the Tesla Motors side while Tesla Energy takes off like a rocket. Solar power and home energy storage are expensive options for the average homeowner. Yes, they may prove to be more cost effective in the long run, and they're certainly far less environmentally damaging than almost every other utility-scale power source, but the up front cost of tens of thousands of dollars if often out of reach.
With Tesla's Gigafactory and SolarCity's own Gigafactory (nearing completion in Buffalo), they could dramatically bring down the cost of both home solar and home energy storage to the point where it's achievable for the average customer.
All of that's assuming that Tesla doesn't get undercut by a competitor in the process, run into unforeseen obstacles in bringing down the cost of the solar panels and lithium ion battery cells, or any other manner of calamity that could fell Musk's lofty plans. And at some point Tesla is going to need to turn a profit. They just recently raised $1.7 billion by selling new shares to help build the Model 3, and financing the SolarCity purchase could require another stock offering or raising capital from other sources. In the meantime, the massive infrastructure investments in the Gigafactory, Fremont factory, and possibly an additional factory in China, will continue to weigh on Tesla's debt load. And that's not including SolarCity's debt load — which totals more than $3 billion.
That's not to mention that there's a long way to go to a billion dollars. As of today's trading, Tesla as a whole is worth $29.2 billion. Elon Musk is right about one thing — that's a very small number next to $1,000,000,000,000.