Morgan Stanley: Elon Musk is like Steve Jobs without a Tim Cook

From “A conversation with Katy Huberty,” a note to clients that landed on my desktop Thursday:

Adam Jonas: What do you think of Tesla?

Katy Huberty: There are parallels to draw between AAPL under Steve Jobs and Tesla under Elon Musk. The question for Tesla from here is whether it also needs an operational leader, as Tim Cook is to Apple, in order to become a trillion dollar company. In addition to maintaining Apple’s culture of innovation, design, and customer experience created by Steve Jobs, current leadership has navigated through an intense period of scaling revenue, social issues like data privacy, increased focus on shareholder returns, and intensifying geopolitical risks which have contributed to valuation growth from $354 billion at the end of FY11 to $1.36 trillion today…

Jonas: What’s Apple’s strategy around cars and transportation?

Huberty: The company hasn’t disclosed many details at this point but we believe Apple sees the car, along with other markets like health and payments, as a large market where Apple can contribute to a better solution… Historically, Apple is most successful when they’re vertically integrated and we don’t see any reason their approach to the auto industry would be different. In other words, they’ll need to have more control than they do today. The end game can’t just be a more advanced version of CarPlay in partnership with other auto makers. They need to control the design, the guts and the experiences and services on top of the platform.

Jonas: Long term, do you see Apple and Tesla as partners or competitors?

Huberty: Competitors. I see the end game as a vertically integrated solution and don’t expect Apple to partner with a company that sells a competing product.

My take: The comparisons between Musk and Jobs is always fun. More interesting to me, in this very interesting interview, was Huberty’s analysis of Apple’s valuation:

Jonas: What lessons can you learn from covering Apple with respect to valuation?

Huberty: Across tech, one of the important lessons is valuation alone isn’t a reason to like, or dislike, a stock. If the fundamentals are structurally changing for the better or worse… that is more important than the point estimate on valuation. For a long time Apple was seen as a single-product hardware company and as the market cap grew, investors worried that it could never trade at or above a market multiple. But one of the most powerful valuation drivers in technology is the emergence of new, more recurring revenue streams – AWS at Amazon, Office 365 and Azure at Microsoft, Instagram at Facebook, and Services and Wearables at Apple.

The rule of thumb in technology is that when a new segment becomes significant enough, typically 15-20% of revenue, that the faster revenue and/or higher margins can start to move the needle, investors will begin to reflect the opportunity by paying a higher multiple. We shifted to a sum-of-the-parts valuation framework in March 2018 right as Services was approaching 15% of revenue and that has served us well in reflecting the contribution from this more recurring, higher margin, higher growth revenue stream…

We used to say Apple was a 17x multiple, but with Services becoming 30% of profit we could map to 25x earnings. The lesson learned is that when a business model is evolving, the Street needs to be more creative and long term oriented in its approach to valuation. If you use standard valuation metrics you’ll almost always come out with the wrong answer.

13 Comments

  1. Romeo A Esparrago Jr said:
    Apple and Tesla producing something together? Maybe.

    But remember the iPod+HP and Motorola ROKR+iTunes collaborations? I almost didn’t.

    3
    May 21, 2020
  2. Aaron Belich said:
    Adam Jonas has been the TSLA bull at Morgan Stanley for a loooong time and has started to waver in recent years if I recall correctly. It’s interesting to see such a discussion published between two different analysts from the same company that cover other companies.

    Is this normal?

    1
    May 21, 2020
  3. John Konopka said:
    I still don’t understand the source of helium that is supporting Tesla.

    0
    May 21, 2020
    • Gregg Thurman said:
      In 5 years (or less) EVs will account for 20% of vehicle sales.

      Tesla has invested in the infrastructure necessary to be a leader, if not THE LEADER, in this category. No other manufacturer is as well positioned or have the industry leading technology that Tesla is/does, nor does it have the gross margins that Tesla commands

      When Tesla gets to the point that it can start to deleverage, it’s margins will increase and it’s balance sheet will strengthen.

      I don’t see Tesla expanding its California facilities. There are too many places where the talent exists, shipping is lower to a larger nearby* population, and cost per unit will decline (think southeast US).

      * 2/3s of the US live east of the Mississippi, and distances travelled (daily commute) are far shorter than in the west.

      As are Apple products, Tesla’s are aspirational.

      Tesla is in a very good place right now,.

      2
      May 21, 2020
      • David Emery said:
        I suspect Tesla has 2 problems for scaling up:

        1. Elon Musk and his Twitter account…

        2. No Tim Cook – Huberty is very much on target here. Scaling is very difficult, and requires a different set of skills than the entrepreneur. The technical lead may be significant, but if Tesla can’t produce enough cars, that’ll provide time for the rest of the industry to catch up. (That’s an aspect of Cook’s logistics and production expertise that isn’t appreciated – it keeps Apple well ahead of competition in procurement, manufacturing investments and technology, and logistics.)

        1
        May 21, 2020
      • Bart Yee said:
        I agree with your comments but is there a large enough market east of the Mississippi to justify building a factory there? I’m not convinced that middle America is all that interested in Electric cars, at least for the next 5-7 years considering the low price of oil / gasoline, the penchant for much larger automobiles, SUVs, and trucks, and just maybe the disinterest in a California based idea and product. Not saying the market won’t grow, but more likely in the coastal and heavily populated NorthEast. I don’t have much feel for the South as a Tesla Market in general.

        0
        May 22, 2020
    • Rodney Avilla said:
      It is true that other companies are closing in on Tesla’s technology in terms of battery performance and distance, there is one area that they have not even started to compete in- charging stations. Without superchargers (charging up to 1000 mi/hr), ALL of the other electric cars are limited to short trips close to home. For example, in June I will be taking a 1000 mi trip to Yellowstone (the Park is part open now), with 2 hotel stops and 3 stops for charging, each stop about 4-5 hrs of driving apart. Each stop will be from 20 min (stretch your legs) to 50 min (stop to eat). If I were to make the same trip using non-Tesla charging stations, each stop would need to be 10-12 hrs, making it a 6 day trip. It is this difference that gives them an advantage in the market. Disclosure- I own no Tesla stock (I do agree that it is overvalued), but I did sell some aapl to buy a model 3. Musk = Jobs? Musk has stated at least on 3 different occasions that he believes there is a greater than 50% chance that we all are already controlled by machines (Matrix style).

      2
      May 21, 2020
  4. Fred Stein said:
    Six months ago, I bought a Model 3 and love it. That said, the materials won’t wear that well. They had to cut costs somewhere. No complaints, just saying.

    While I decry these comparisons, Apple could catch up and perhaps pass Tesla. Apple have that much cash. The world has plenty of car manufacturing assets as in people and plants. The question is whether Apple would tie up so much capital in manufacturing. So far they’ve done an superb job of getting the best silicon foundry, the best camera sensors, the best final assembly, etc. all on someone else’s balance sheet.

    Meanwhile, health and finance each provide $Trillions of opportunity. Apple can easily find a few $10’s Billions in each.

    3
    May 21, 2020
    • Romeo A Esparrago Jr said:
      Fred, you’ve made some good points for pondering Apple in the car mfg biz.

      “ The world has plenty of car manufacturing assets as in people and plants.”

      If you say the U.S. instead of world, could Apple establish their Apple Car supply chain (SC) in this region? The Americas.

      “ The question is whether Apple would tie up so much capital in manufacturing. “

      Would they is a good Q. Maybe if Tim could use it as leverage as a “bring mfg back to the USA” accomplishment?

      Wouldn’t that be an easier SC to establish than bringing the China-based current electronic/IOT devices SC over now?

      That would buy Apple time to properly establish and move the IOT SC in the Americas, followed by final assy factories in the US (e.g. like the Mac Pro in Austin) for iPhones, iPads, Watches, Glass, etc?

      The lack of enough high tech Mfg labor in the US would be addressed by using Car Mfg as somewhat of a training pool that could transition to high tech Mfg after.

      The capital investment would be huge of course, but the multi-dimensional benefits over long-term!

      Oh well, just dreaming out loud.

      2
      May 21, 2020
      • Fred Stein said:
        Dream on, bro. I mean this in the positive way. TSMC plans a foundry in AZ.

        1
        May 22, 2020
      • David Emery said:
        Not in the US, but I wonder whatever happened to the Saab plant in Trollhatten Sweden…. https://en.wikipedia.org/wiki/Trollhättan_Assembly At one point a company was in talks to buy Saab automotive and rework the design and factory to produce electric cars. That struck me as a mixed idea. Saab was usually pretty forward-looking in technologies and design, and seemed to have a pretty good workforce. On the other hand, Saab owners I knew always complained about electrical problems with their cars.

        1
        May 22, 2020
  5. Jacob Feenstra said:
    Though Musk has had some problems with ramping up deliveries, it’s not that he totally failed. The guy is a driven man and finds ways to make things happen. He will find his Cooks. So I wouldn’t be too worried about logistics when it comes to Tesla. Like Jobs, Musk is a systems-thinker and a thinking-differently-thinker. Tesla is still significantly ahead of many of the other ecar-wannabes, at a lot of different levels. Their stock may have gotten a little ahead of itself, but TSLA will grow into its ‘projected’ value.

    To be sure, I decided not to invest in Tesla. Yes, David Emery is right regarding Musk and his Twitter account. It’s indicative of Musk’s ethics. It’s his ethics (and antics) where he has lost me. But don’t worry he will succeed without me 😉

    3
    May 21, 2020

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