It is hard to find an investor that isn’t familiar with Tesla’s mission, which is “ to accelerate the world’s transition to sustainable energy.” It’s easy to see why it has been a favorite among investors, what better concept is there than trying to make money off saving the environment. Tesla founder, Elon Musk, is widely known for being one of the smartest innovators and visionaries around. While no one doubts his visions, actually executing them can often be easier said than done.
The early story of Tesla and Daimler
According to Bloomberg, “In 2009 Tesla Inc. looked like it might run out of money. CEO Elon Musk was borrowing from friends just to cover his rent. Salvation came from luxury car titan Daimler AG, which invested $50 million for a 9 percent stake in the electric car startup. Musk says without Daimler’s riches Tesla would have been tossed on the funeral pyre.”
For the first few years, Daimler and Tesla had a great relationship. Tesla supplied the electric powertrains to Merecedes-Benz, which is owned by Daimler, for their B- Class electric cars. But as Tesla started to have more success, Daimler began to see the potential in electric vehicles and viewed TSLA as more of a threat. This led to them selling their stake in TSLA and beginning to bring the powertrain and battery technology in house.
Tesla and Daimler today
Now here we are in 2017, and TSLA is worth $60 billion dollars. They have become a major disrupting force among the automotive industry. In addition, they have been a Wall Street darling, fetching a huge premium with a PE ratio of -73.19 despite burning cash with abandon and having earnings (loss) of -4.85/share.
Daimler, on the other hand, is worth $80 billion and trades at a significant discount to Tesla when it comes to earnings with a PE of 8.0 and earnings of 10.83/share. DDAIF seems especially unloved considering that Daimler’s mighty Mercedes-Benz unit sold two million cars for the first time last year. Tesla sold fewer than 80,000.
So why do investors pay such a premium for Tesla? It appears that investors believe in the growth that will come from Musk’s vision“To create an entire sustainable energy ecosystem. To accomplish this Tesla also designed a unique set of energy solutions, Powerwall, Powerpack and Solar Roof, enabling homeowners, businesses, and utilities to manage renewable energy generation, storage, and consumption. From Tesla’s website “Electric cars, batteries, and renewable energy generation and storage already exist independently, but when combined, they become even more powerful – that’s the future we want.”
Daimler executives have taken notice and set out to beat Musk at his own game. They appear more than willing to let Musk continue to get people excited and sell the future of sustainable tech, while they can stay focused on executing it.
Business Insider states, “Now that Musk has gotten people’s attention about certain products, Mercedes is looking to adopt Tesla’s strategies and win by exploiting Tesla’s biggest weakness: a lack of infrastructure to support Musk’s big ideas.”
In May, Daimler took a direct shot at TSLA’s home and solar battery system when it partnered with Vivent Solar.
Per Business Insider, “Daimler, also broke ground on its second massive battery plant in Germany in May. The facility will begin production in mid-2018.
Naturally, the main purpose of both battery plants is to support ambitious electric car plans; the home battery division is just a small slice of both companies’ portfolios.”
Daimler has even invested in Electric Vehicle Infrastructure here in Alabama.
Mercedes-Benz will spend $1 billion “to upgrade its production capabilities in Alabama and jump-start its electric vehicle program in the U.S. Mercedes, said the investment will create 600 new jobs in communities near its plant in Tuscaloosa. The automaker plans to make new electric SUV models at the existing factory, and construct a battery plant nearby. The investment will put the German firm in direct competition with Tesla on its home turf.
With production locations for electric vehicles and batteries in Europe, China and, now, the U.S., our global network is ready for the era of electric vehicles.”
This move even caused Elon Musk to take to Twitter to share his thoughts on the US investment in AL. Musk noted that the reported $1 billion Daimler was spending on taking on Tesla was not enough for such a large company – and Daimler agreed.
In response to Musk’s tweet that the $1 billion figure cited in the USA Today tweet was too low, Daimler said that the Tesla CEO was “absolutely right” and then pointed out that it’s actually investing over $10 billion, including its next generation EV spend on top of its $1 billion investment in battery production alone.
Another area where Daimler is ready to out execute TSLA is in Electric and Autonomous Semi Trucks. “Just a month after Tesla CEO Elon Musk said the company was pursuing an electric truck in his “Master Plan, Part Deux,” Daimler revealed a stylish one of its own.”
From Business Insider:
Daimler feels this is an area where they especially have an advantage. The move is a natural progression for a company that has sought to diversify its portfolio with investments in trucking since the early 2000s. Daimler’s truck unit now oversees four different brands: Mercedes-Benz Trucks, Freightliner Trucks, Mitsubishi FUSO, Western Star, and BharatBenz.
Daimler’s ultimate goal is to launch an entire line of electric trucks, including a heavy-duty truck, as battery tech improves over time.
Within Daimler, Mercedes-Benz Trucks is currently testing its battery-powered Urban eTruckin Germany and plans to bring it to market in 2020. Meanwhile, in 2015, Freightliner Trucks tested a semi-autonomous big rig on a public highway — a first for the trucking industry.
In trucks, of course [Elon Musk’s] stepping into it, but we don’t see him as someone who is threatening us because you need a whole infrastructure,” Marc Llistosella, Head of Daimler Trucks Asia, told Business Insider. “You need dealerships, you need infrastructure, you need maintenance.”
“It’s not so easy like a consumer good, it’s an industrial good, so it will be very difficult for him,” he continued.
Marc Llistosella, head of Daimler Trucks Asia, isn’t concerned that Tesla can bump Daimler out of the trucking space.
“In trucks, of course [Elon Musk’s] stepping into it, but we don’t see him as someone who is threatening us because you need a whole infrastructure. You need dealerships, you need infrastructure, you need maintenance,” Listosella told the press this week.
There’s a clear distinction between consumer goods like the Tesla Model S and upcoming Model 3 – and industrial goods like the Tesla Semi or the Mercedes-Benz Urban eTruck.
Daimler is ready for the competition, he said, and will stand out in that market.
“In class 8, with Freightliner, we are the #1 in America, so we have something to defend,” Llistosella said. “In the smaller ones, the game is just starting.”
He does see the appeal of electric trucks showing up in their lifespan benefits.
The total cost of owning an electric truck can be significantly lower than a diesel truck once lower costs of maintenance and the diesel fuel are factored in.
Daimler wants to be ready to meet that growing demand.
This recent headline caught our attention: Elon Musk just said he’s delaying Tesla’s semi-truck reveal to focus on struggling Model 3 production.
An excerpt from this article indicates Tesla’s efforts on producing the electric semi-truck are not without challenges:
Tesla was set to unveil the semi-trailer on Oct. 26 in Hawthorne, California. It will now reveal the battery-powered truck on Nov. 16, Musk said.
Friday’s announcement marks the second time Musk has delayed the reveal of Tesla’s first big-rig. The company was originally supposed to debut the semitrailer in September.
While Tesla should continue to face numerous obstacles in executing, such as production capacity, infrastructure, international expansion in addition to actually trying to turn a profit, these obstacles shouldn’t pose much of an issue to Daimler, a company who has been around for over 130 years.
Daimler execs reveal “that the company plans to beat Tesla by exploiting its greatest weakness: an inability to launch products on a mass scale.
If Tesla can’t supply the demand for the products Musk has generated excitement for, Daimler is poising itself to step in as the next best luxury provider.”
In my opinion, Daimler has the balance sheet, reputation and infrastructure, which will give them a long-term edge and make them a much better investment than Tesla. I fully expect Daimler to benefit, as this storybook battle will inevitably start making greater traction among the Wall Street community. I am looking for Daimler to fully position the Mercedes brand directly alongside Tesla every step of the way.
Honestly, the Daimler board of directors should think of spinning off the Mercedes segment to take advantage of the Tesla-like growth premium that it should fetch knowing everything we know about its current vision. I’m sure they are thinking about that option as we speak which could be a major catalyst for DDAIF shareholders. The ability to raise capital at Tesla level premiums would only help accelerate the Tesla vision at a faster pace.
Who knows how this story will unfold as we are clearly in the early chapters. This sector is ripe for disruption so there are no “sure bets” but Daimler certainly has positioned them as my horse to bet on.
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Clint Kirby – Chief Financial Strategist
DreamWork Financial Group
Clint Kirby, DreamWork Financial Group, is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.