Saptarshi Das, CFA

Why is Apple and Tesla miles ahead of its competition?

Steve Jobs once quoted Alan Kay with " People who are really serious about software should make their own hardware. ”. This design thinking - the art of merging software seamlessly into hardware- was fairly new to the technology product development framework, and strangely enough, it still remains so. Apple and Tesla are two of few companies which have adopted this design thinking and where their one plus one was not two, but three in user experience.

Why the drought of such companies you may think? And more often than not, the answer would lie on the very genesis of why a product exists. Where most product companies consume themselves to the idea of beating the competition which in itself is all about product features, companies like Tesla and Apple have embedded the idea of amazing customer experiences as the bedrock of their product development framework. This difference has serious consequences. Apple software is notorious in limiting what a user can consume and how it consumes. It directs user experiences, and is not fulfilling them. Jobs always started with an assumption that the customer does not know what it wants, and then created an experience for product users to mould into. Samsung can never do that.

Tesla is not very different, and like Apple, it can curate experience as it controls software (Christmas theme). Since its initial days, Tesla’s vehicles gathered reputation as “ iPhones on wheels ”- a revolutionary technological leap that did for cars what Apple’s smartphone did for consumer tech. Interestingly enough, chargers for both iPhones and Teslas are non-standard and unique. Tesla stitched all aspects of consumer mobility formula into one. Both Apple and Tesla have/ had esoteric people run the show who did/ do not conform to the traditional knitting. Both Elon Musk and Steve Jobs are/ were very hard task masters and their pace of innovation and execution is/ was too fast for competitors to catch.

Volkswagen AG tried and failed to create software and approached Microsoft to create an Android like operating system for their cars. It is fairly obvious that customer experience will be sub-par. Likewise, no one apart from Apple has a meaningful custom OS running on their phones. Many tried but failed.

Notwithstanding similarities, there are differences in Apple and Tesla’s business dynamics. Apple is a software first company and Tesla is obviously a hardware first company, and their relative capabilities to scale are different too. Tesla’s time lag to increase production (installing Giga factories) is significant even though it has successfully compressed Giga factory installation time from more than 2 years to less than 6 months. Apple, apart from semiconductor shortage which impacted Tesla too, is probably not as impacted by the scale issue.

Despite the burgeoning scale of operations of both companies, it is clear that runway for growth is quite high as untapped markets remain still huge. Apple threw out $111 Bn in free cash flow in 2022 and is growing. A simple back of envelope discounted cash flow analysis places the present value of cash flow at around $3.5 Trn (a 50% upside from current stock levels of $140) without taking into account what a more affluent middle class in countries like India can inject. The same analysis imparts a conservative valuation of $1.2 Trn for Tesla, a 100% upside from current levels of $180 on the stock. Point to note is about considerations of a 6% discount rate for valuations. With an assumption of 4% discount rate, Apple may have a 1x times upside and Tesla a 4x.

More importantly, at Tesla investor day 2023, Elon musk highlighted on the high elasticity of demand as they lowered prices, and there comes the home run, which is an undeniable conclusion that, excluding affordability considerations, very very few would buy a mobile but an iPhone and almost no one would want to own another car than a Tesla.

Would you want to buy GM at $36? Be my guest.

Saptarshi Das, CFA @ KGS- Investment Management

Saptarshi Das, CFA

Ahmedabad, Gujarat, India 1K followers 500+ connections

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KGS- Investment Management

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Imperial College London

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Chartered Financial Analyst (CFA)

CFA Institute

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