Tesla Stock: 3 Things That Separate It From Its Competitors (NASDAQ:TSLA)

I believe it’s a mistake to continue to categorize Tesla, Inc. (NASDAQ:TSLA) as an electric vehicle (“EV”) company because that undervalues the three major characteristics of the business that can be applied to a variety of sectors and segments of the market that have the potential to drive billions of dollars in sales.

The three things I’m referring to are machine learning, AI, and iteration. When combined together, these are powerful forces with the potential to disrupt numerous markets, or create new ones, as evidenced by the push by Tesla toward self-driving vehicles.

In this article, I want to explore the extraordinary potential Tesla has because it has already worked much of this out via its AI, associated with the millions of hours it has had getting feedback from its EVs. As it continues to improve on the process, Tesla is able to rapidly bring products from an idea to a prototype, to a completed product far quicker than its competitors. This is a tremendous moat when thinking of how Tesla has the expertise in hand to apply this to a wide variety of products and services.

Before I get into specific products and possibilities, I want to show readers how they should view the company long term, based upon similarities between Tesla, Apple (AAPL), and Amazon.com (AMZN).

What will Tesla become?

Like mentioned above, I think it’s a mistake to consider Tesla solely as an EV company, even though in the near term that will continue to be the major generator of revenue. The reason why is it limits the growth possibilities inherent in the development of AI and machine learning, combined with failing fast and iteration.

For example, when Amazon was launched as an e-commerce solution for selling books, the thought never entered anybody’s mind that the knowledge it would gather through its growing customer base and its supply chain would result in it expanding to AWS and other products, which would be significant in improving the performance of the company.

In other words, Amazon is far more than an e-commerce company, by virtue of its own processes which turned it into a tech company competing on various fronts. To consider Amazon an e-commerce company would only represent a piece of the puzzle that makes Amazon what it is.

The same is going to be true with Tesla in my opinion, as it leverages its strengths to apply them to products and services that have the potential to generate multi-billion dollars in revenue.

Apple is similar when considering its core business of iPhones. A number of years ago investors and analysts expresses concern of the vulnerability Apple had because of its heavy reliance on its iPhone line for growing revenue and earnings.

While the iPhone remains its flagship product, Apple has expanded to a variety of products and services, that together provide a significant addition to revenue and earnings that complement the iPhone, providing a cushion if sales slowdown.

The difference I see between Tesla and Apple is, I believe, that Tesla has the potential to outperform Apple with its future ancillary products, although it has a way to go before it can compete with the iPhone as a core product. An argument could easily be made that the EV market will eventually vastly outperform the smartphone market, and that will be true, but I don’t think the EV market is going to go up in the straight line that many adherents and fans of the sector think.

The reason why is there is a huge electrical grid problem that is struggling as green tech is increasingly being used as a higher percentage of the grid. The challenge is, there are already weaknesses being experienced by some grids that have to engage in rolling blackouts in order to allow customers to have access to energy. Picture what that will be like as the number of EVs grow in the market and demand for energy expands in response to the need to charge vehicles. That is a major problem that is just beginning to be realized.

The point there is it’s almost certainly going to take a lot longer to meet goals set by governments, which suggests to me the EV sector is going to eventually slowdown in order to allow the electric grid to catch up.

And in the worst-case scenario, people could rise up in anger if they’re forced to go without electricity at times, they really need it, putting pressure on politicians and leaders to solve their energy problems by incorporating more fossil fuels into their energy demands.

As it relates to Tesla, this could be a problem in the not-too-distant future that results in a slowdown of demand and sales because of the possible inability of EV owners to charge up their vehicles without putting huge strains on the grid.

Looking ahead, I think Elon Musk understands the vulnerability of Tesla in relying on one sector to grow its business, and in my opinion, is positioning itself to target other growth markets that will move the revenue needle.

My thesis is Tesla, in the years ahead, is going to be an AI company that leverages its tech and data to launch wide variety of products and services that have the potential to catch competitors by surprise, not only from early mover advantage, but by the rapid pace it’s able to bring a product to market.

A recent example of that is its Optimus robot.

Optimus robot

If you remember last year at Tesla’s AI day, it revealed its plans for a robot that had the appearance of a human being. The announcement was accompanied by a person dressing up like a robot and jumping around on the platform; some people, at first, actually thought it was a robot doing it.

While Elon Musk enjoys doing stuff like that, it was apparent he was serious about the idea behind the robot, understanding it was in fact, at the time, only an idea.

Fast forward to today, and the introduction of Optimus at its most recent AI Day, underscores the ability of Tesla to rapidly develop a product over a period of several months, reinforcing the fact Tesla can fail quickly and make adjustments to improve a product, bearing in mind Optimus is still in its prototype stage.

The purpose of Optimus is to provide a robotic worker that can be used in the home, office or industrial settings that can help with various needs of the particular environment it’s working in.

Not only can it bend down and lift up things that have some weight, it also has the dexterity to hold onto smaller tools.

Assuming the potential scale is there based upon demand, Tesla wants to bring the cost down to under $20,000 in order to appeal to as wide a customer base as possible. That means it’s working on a variety of skillsets the robot can use to perform a variety of tasks in different settings.

The significance of this isn’t Optimus itself, but the underlying AI used to quickly build it. In other words, building the body of the robot is the easy part, designing the software to operate it is the hard part. Being able to do it in a very short time confirms Tesla is able to leverage the AI it is using in its EVs and apply it to other products.

Again, when thinking Tesla can apply this to other products shows the future potential of its AI that goes beyond electric vehicles.

That said, it appears Tesla could have a big winner on its hands as it improves Optimus in a similar way it has been improving its self-driving vehicles. It will probably take several years before we begin to see what type of demand and potential for the robotic worker is.

Concerning competition, other companies like Boston Dynamics and its Atlas robot is far more advanced than Optimus, as it has the ability to perform a variety of acrobatic exercises. Another is Agility Robotics’ Digit, which can avoid obstacles (important in environment humans are present in), pick things up and put things down, and walk across different terrains, among other skills.

This isn’t surprising when considering Optimus went from idea to prototype in only a few months. Going forward, if Tesla’s AI is going to become as powerful as I think it is, it’s going to catch up with and surpass its competitors. The fact there are robots more advanced than Optimus gives investors a good benchmark to analyze the progress and capability of Tesla’s AI when applying it to designing and building products like Optimus.

One final thing to say about Optimus is, in the near term its primary value will be to attract new workers that like to work on cool things. The battle for engineering talent is huge, and companies providing interesting things to work on will be the winners in the competitive job marketplace.

Another important development for Tesla is its supercomputer Dojo.

Dojo

Dojo is a supercomputer built in-house by Tesla for the sole purpose of teaching its AI. This behind-the-scenes tech is the secret sauce behind the ability of Tesla to quickly make so much progress in the tasks it’s working on.

As part of Dojo Tesla has been develop what it calls ExaPOD, which is a way of scaling the supercomputer to improve its performance. The company stated the Dojo ExaPOD includes a spec of 1.1 EFLOP, which translates into a mindboggling one quintillion operations per second. The first ExaPOD or cluster is on schedule to be available by Q1 2023. Below is an example of the ExaPOD.

The company has a goal of building seven ExaPODs. That will make the Dojo the leading supercomputer in the world.

What needs to be considered here is Tesla could have more than enough computer power for the purpose of developing self-driving vehicles. So the obvious question is, why does it need so much computing power? My opinion is it has a number of products and services in mind that we have no idea about.

The most important takeaway is Tesla will have an extraordinarily advanced AI and machine learning system as a result of that type of computing power, that it will be able to fail even faster, giving itself even more of a competitive edge for markets it wants to compete in.

Concerning the near term, when Dojo is fully deployed in 2023, it will have the capacity to accelerate the development of Tesla’s FSD models, which will help the company widen its lead against competitors.

Where Tesla stands today

While we’re talking about extraordinary future potential for Tesla, we still need to look at where the company stands today in order to manage near-term expectations.

As the company stands today, I think it’s valued at close to where it should be. When the company starts to roll out new products based upon its AI expertise and its leading supercomputer, that will change, but it will take some time.

Based upon its EV business, Tesla trades at a huge premium against its competitors, but at 56x forward earnings, it seems to me it’s fully valued. That’s also reflected in its P/S of 8.9x; which is a hefty number.

With the supply chain working itself out, Tesla shouldn’t have too much trouble in gaining the parts it needs to supply the market. The one issue going forward is this: as the interest rates rise, will it end up having a negative impact on demand, based upon affordability?

In other words, as supply issues resolve themselves, the company may be heading into slowing demand. If that’s how it works out, it’ll probably continue on through the middle of 2023, depending upon how much interest rates fall and if the Fed signals it’s done increasing rates.

On the other hand, there is pent-up demand from the supply chain issues, so there could be some decent momentum that higher costs may not have an impact on in the near term.

Conclusion

I’ve read some thoughts on what investors think Tesla is boosting Dojo for, but it really doesn’t matter. Since one ExaPOD is more than enough for its self-driving segment, it’s plain to see that Tesla is boosting its supercomputer power in preparation for something big in the future.

What this confirms is Tesla isn’t just talking about being more than an EV company, but is taking visible steps to improve its AI and machine learning in order to empower the company to take an idea from concept, to prototype, to a functional product or service quicker than its competitors.

The bottom line is, even though Tesla’s EV business has been under pressure lately, it has a lot more in mind for the business than limiting itself to that market, even though it is a very large one that will continue to grow for many years into the future.

It’ll be the bread and butter of the company for the next several years, but I’m expecting announcements in the months and years ahead that will give more clarity concerning what it plans on using its advanced AI and machine learning for.

Since it will end up with the most powerful supercomputer in the world teaching and training its AI, the possibilities are endless, although the company will without a doubt focus on large enough markets that will significantly move the needle of the company.

In the present, Dojo will further advance Tesla’s already formidable AI expertise, accelerating the advancement of its FSD models and other EVs it’s developing.

Once the economy improves, even higher interest rates are unlikely to dampen the pent-up demand with its EVs, and ultimately, its FSD vehicles. There will probably be more short-term pain for Tesla shareholders, but over the long term I believe they’re going to be strongly rewarded once sentiment turns positive.