Category Archives: Electric Vehicles

Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future

Book Title: Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future

ISBN: 006230125X

How strongly I recommend it: 4/5

Marked down because the writer flip-flops between Musk’s businesses and resultingly, it is somewhat difficult to keep track of the chronology.

Amazon Page Link: Click Here

How I discovered it? Youtube (credit to Ali Abdaal)

Who should read it? Anyone trying to make sense of Musk’s sometimes erratic behavior. Focused on Musk’s trials and tribulations in his businesses and less his personal relationships.

SUMMARY

The story of how Elon Musk became who he is today.

Most of the book is dedicated to Musk’s experiences with Tesla, SpaceX and Solar City (his three current and largest businesses), but it also covers some of Musk’s early days of moving to the US (along with his brother, Kimbal) and his earlier ventures, Zip2 and Paypal.

In sum, this is a story of how one man, takes a series of high risk (typically all-in), bets and managed to pull it off. It’s refreshing to hear about Musk’s struggles, often under-reported, and how close he actually gets to failure.

KEY TAKE-AWAYS

  • If you believe in something, just go for it

Musk pockets $22m from his first venture, Zip2. He puts most of that money into Paypal. He then makes $180m exiting Paypal and puts $100m into SpaceX, $70m into Tesla and $10m into Solar City. At one point, he’s so heavily invested to his companies he’s living off his credit cards.

  • No exit without proof of concept

I’ve read too many stories about multi $m exits. Reality is that you need to have proof of concept and scale before that’s even remotely possible.

With Zip2 (Yelp-like business), Musk exited with $22m after about five years. But to get there, he needed VC funding, was actively hiring staff and was still hustling with his brother.

At the time of exit, Zip2 was worth $307m (purchased by Compaq Computers).

  • Don’t compromise on vision

Musk was booted from his company’s multiple times. At Zip2, he was replaced as CEO by a VC backed manager. At Paypal, he was booted by Peter Thiel (whilst Musk was on his Honeymoon in Australia).

Since then, Musk remains committed to maintaining control of the ultimate vision of the company and to never lose that.

  • Not knowing about a certain industry is often a blessing

Musk knew very little about rockets/space before founding SpaceX. Same for his knowledge of auto manufacturing prior to Tesla. This allowed him to come up with more creative ideas and ask the right questions, like; why did the US rely on the Russian space program to get to space and why can’t you make a car out of Aluminum instead of steel.

  • You will hit rock bottom multiple times

Musk went from flying in his private jet, to having to take Southwest commercial flights between LA and SF. He lost a child, got sacked on his honeymoon, got screwed over by investors/friends and was openly mocked for his ideas.

  • There are strong network effects in the start up space

A lot of Musk’s success can be attributed to having a good network and a brand image. Any venture he backs today is instantly credible and he’s used his network to further his business interests. Building something small first, makes it more likely that you will be able to build something big later.

FAVORITE QUOTES/STORIES

Buying Russian ICBMs

Musk has $20m to buy three rockets. He goes to Russia to buy ICBM’s (Inter-Continental Ballistic Missiles) to retrofit (with the help of an ex CIA operative). The Russians want $8m each, he offers $8m for two. In the end he storms out, gets on a plane back and then decides he’ll just make the rockets himself. He puts together his own plan and undercuts the market by huge margin.

Tesla bankruptcy Deal

Tesla was on the verge of bankruptcy. One of the main investors, ‘VantagePoint’, would not participate in another round of funding because they felt it undervalued Tesla but in reality, they were hoping it would go bankrupt and they could then sweep in and sell its business segments for a profit. Musk raised as a debt round instead (which Vantage Point could not block), and the deal to raise $40m closes hours before Tesla would have gone bankrupt (on Christmas Eve).

Google takeover (2013)

Tesla built it’s Model S but it wasn’t a huge success as it had multiple operational failures and was expensive to build. Musk makes a huge drive into marketing and convinces everyone at Tesla that they need to start selling more cars. He reaches out to Larry Page (friend) and Google Co-Founder for a buy-out, and Google was set to buy Tesla for $6bn (with Musk remaining in charge for eight years). A few sticking points held up the deal and that gave Tesla just enough time to boost sales…the deal subsequently fell apart. Tesla in May 2021 had an Enterprise Value of $710bn.

Mary Beth Brown story

One of his closest assistants asks for a pay rise (in line with board member pay) because she is working just as hard. Musk ask’s her to go on vacation for a couple weeks so he can understand how taxing her job is. When she comes back, Musk fires her as he realizes he didn’t actually need her services.

Energy inefficiency

Conventional cars are only 10-20% efficient at turning fuel into kinetic energy. EV’s are 60%+.

In one hour, there is enough solar energy pointed at the earth to fuel an entire years worth of energy consumption.

Rare Earth Metals: Impending Supply Squeeze

So we’ve all heard a lot about short squeezes in the stock market recently. In this post, I want to look at a different type of squeeze. I want to look at the supply squeeze occurring in the market for Rare Earth Metals and which stock I think has most the gain from it.

The Basics

If you haven’t read my earlier post on Rare Earth Metals, here’s a refresher on what they are.

Rare Earth Metals (REM’s) are a series of metallic elements which have special properties; such as making great magnets or being heat resistant. They are not hard to mine (like Gold or Silver) but doing so profitably is very difficult because they are spread out along the earth’s crust.

Rare Earth Metals

The two most REM’s elements here are Nd and Pr. These are used to make magnets which power the batteries and motors used for Electric Vehicles (EV’s) and Climate Change Technologies (e.g. Wind Turbines). These also happen to be the two fastest growing end user markets.

Whats the big deal?

What makes Nd and Pr so important is that they are critical components of the products they produce.  The technologies they are used in are very settled, especially the motors which are used in EV’s.

EV Technologies by producer

Above is an overview of the different EV technologies used by car manufacturers. What is apparent is that regardless of producer, the motorization technology is the same, and to produce these components, Nd, Pr are essential.

There is no known alternative to these elements existing in the world today so these are clearly very important components of our lives.

The Problem

There are two fundamental problems here and in both cases investors have a chance to profit.

PROBLEM 1: THE SUPPLY SQUEEZE

The first problem is that demand is outpacing supply, at a considerable rate. You just need to look at EV policies across the globe to realise the scale of the problem. Nearly every major economy in the world has announced some form of EV push to combat climate change and EV vehicle penetration is going to continue to climb as we can see from the below.

EV Policies Overview
EV Growth

If we overlay the demand forecasts for Nd Pr for the EV market, REM supply will not even meet 50% of the forecasted demand for this in the next 10-15 years. This is before demand for Nd Pr from other sectors like wind turbines or smartphones.

This is the hallmark sign of an impending supply squeeze.

PROBLEM 2: EAST VERSUS WEST

The Second problem is that whilst their demand is global, the supply of REM’s is not.

85% of the World’s supply of REM is in China as the Chinese government has made a concerted effort to increase production and relax regulation (through various means).

This is not supposed to be a politically charged article but I think we can all agree that having so much supply concentrated in another country is problematic. What happens if there’s a trade dispute? Or a military conflict? China can and has banned exports to countries like Japan before, and this can severely disrupt supply chains. Just see the price chart of the last squeeze below.

The Trade

The solution is actually quite simple – we need more production and we need that to be in the western hemisphere. As of today, there is only one company operating in this space and that is MP Materials (ticker MP).

Why I like MP Materials Stock?

There are three things I like about MP Materials.

1) MP has a dedicated plan to shore up US manufacturing capabilities

MP has a three stage approach to shoring up US production.

Three Steps to increase US Production

The first stage of MP’s plan is to specialize in Rare Earth Concentrates production. This is the naturally produced concentrate of REM’s. MP has already completed this stage of their plan and they now produce around 15% of the world’s consumption of these REM’s. This is considerably more than what has been achieved at this mine in the past (particularly under previous management, Molycorp).

Stage 1 has been a remarkable success

The second part of MP’s plan is to process this concentrate into refined metals. They are on track to create an onsite refining of REMs in 2022. This will allow MP to be integrated further down the value chain (and ultimately less dependent on China). This is the most important stage for me and I’m optimistic this will be completed on time, as it has the backing of the Department of Defense and is fully funded.

The final stage is to further integrate downstream and to produce the magnets used to make EV Power Trains; also expected to be the fastest downstream market. This would allow MP to sell directly to companies such as Tesla and transition from mining into manufacturing.

2) MP operates in a sector with extremely high barriers to entry

The second thing about this business is that MP’s competitors are significantly behind as they have high barriers to entry. As we can see below, as MP meets Stage II of expansion, it will be at least one year ahead of competition and far cheaper than new Greenfield Sites opening in the US (with uncertain timing).

MP has a natural monopoly in the REM Market outside of China

3) Very strong Financial Position

Finally, I like this business because it has a very promising set of financials. MP forecasts strong growth in revenues as the company expands into refining/end user products. These products also come with higher gross margins of close to 60%. Meanwhile, the capex to fund this associated production will have already been put up by 2021, leaving sizeable Free Cash Flows for investors. Ultimately, this means more Revenues, Cash Flows and EBITDA (projections below).

Conclusion:

MP is doing everything right for me. The REM market is due a serious supply squeeze in the western hemisphere and is vastly under exploited. The only way to publically invest in this space is via MP which is already targeting production growth and will remain ahead of its competitors in a market with huge barriers to entry. Despite very exciting future prospects, the company is still only trading at 13x forecasted 2023 Sales which I think is a good entry point for new investors.

Verdict: Extremely Bullish
Timeframe: 5+ Years

Driving the bull case for Auto-Insurance

The US auto insurance market is nearly the same size as US car sales market ($309bn vs $545bn)[1]. In fact, auto insurance is the second largest auto related market in the US; 14x bigger than the Car Rental Market ($22bn), 17x bigger than Car Auto parts market ($18bn) and 5x bigger than Car repairs market ($66bn). Yet despite this huge size, the market is expected to continue to grow at a not-so-shabby rate of 3%pa over the next decade[2].

Is car ownership at risk?

On the contrary to what has been expected over the last decade, car ownership in the US is continuing to increase. 93% of households last year said they had access to at least one vehicle in the US and that number has been trending higher over the last decade[3]. Surprisingly, a large percentage of this growth has come in cities where ride sharing services such as Lyft and Uber operate, which studies put down to increasing ownership by drivers (more than offsetting decreasing ownership by riders)[4].

Whilst on paper, car ownership could see some headwinds as younger consumers delay buying a car in favor of public transport to work/ride sharing, for now this is being offset by cheaper financing costs for lease vehicles and the very large percentage of the US population which cannot functionally survive without a car[5]. For instance, millennials still account for 12% of all vehicles sold on the road today.

COVID-19[6]

We are seeing the trend away from car ownership being slowed down significantly by COVID19. The percentage of US consumers who think car ownership is necessary has shot up 14% in the last year (with 60% of those preferring to buy from a dealership).

This is despite ridesharing available to more than 20% of the US population (up from 7% in 2015)[7]. In 2020, ridesharing has experienced a massive hit to demand, with 65-70% of users between the ages of 18-24 having stopped their usage of these services due to COVID-19. Resultingly, Uber has had to lay-off 25% of its workforce (Lyft laid off circa 20%)[8].

Public transportation has experienced similar headwinds although it started from a much lower base. US public transportation has historically had very low rates of adoption (outside of a few major cities) with 45% of millennials (and 38% of general public) having reported to have never used public transportation.

US Public Transportation has a very low rate of adoption

But in the cities where public transportation started at higher levels of adoption (as a percentage of total transport) such as in New York, Jersey City and Philadelphia, we are seeing usage down significantly. In fact, across the US (according to Apple Mobility Data), public transportation remains the hardest hit mode of transport due to COVID-19 and is down 61% on average (compared to driving being down only 20%).

The outlook

What this shows is that car ownership is not experiencing a decline and if anything, the stickiness of consumer decisions to move away from public transport and ride sharing, should continue to provide a steady rate of growth for the auto insurance market over the coming years.

Case for disruption in the market

The insurance market has not changed much over the last 50 years. Put simply, the business operates on the law of large numbers – insurers collect smalls bit of data (like age and driving history), set you a premium and then hope for the majority, that they don’t get into an accident (and on the whole they do ok with 64% of premiums collected being handed out in claims)[1].

That being said, there are underlying problems in this market:

  • Inefficient pricing

The current auto insurance market experiences an inherent (economic) inefficiency arising from a lack of data distinguishing between good drivers and bad drivers. 35% of drivers put in more than more than half of total passenger miles and cause more than half of insurance losses[2]. However, a lack of data about which drivers are causing these losses means that premiums increase for all drivers, to offset these losses (and are not targeted at just the bad drivers). This effectively leads to 65% of drivers overpaying for auto insurance in order to subsidize the bad drivers.

  • Incentive Problem

There is an inherent incentive problem when trying to deal with pricing in the auto insurance market.

Firstly, the existing insurance market relies on a linear relationship between miles driven and insurance losses i.e., the less passengers drive, the less losses an insurance company is likely to experience as a result. In a market which has long been predicted (see above) to experience declining passenger car mile usage due to more public transportation and ride sharing, it becomes harder for companies to overcome the internal headaches/investments to change their pricing models.

Secondly, given that no US carrier currently has more than 20% market share, there is a reluctance on behalf of the larger carriers in particular, to fundamentally disrupt their business (via telematics-based pricing) at the detriment of conceding market share. This is a classic innovators dilemma as the larger companies have focused on sustaining technology/small scale disruptions to meet their customer needs today, instead of overhauling their business with large scale disruptive technologies for users in the future.

Both of these are evidenced by the relatively low penetration of finance technology and advanced data analytics in the US auto insurance today[3].

No carrier has more than 20% market share in US Auto-Insurance
Fintech Adoption has room to grow

The future of the market: Data Analytics

According to a comprehensive auto insurance study by Mckinsey, the auto insurance market in 2030 will belong to the insurers who have the best pricing capabilities[1]. In order to achieve this, insurance companies will need to adopt advanced data analytics and data collection methods (so things like: monitoring real time driving habits, integrating this with information about consumer behavior and then delineating risk to price policies). In fact, by 2030, they expect that over 90% of policies will be automatically priced and for the top tier of companies that can get this right, this will result in operational savings of over 30%.

From a compiled risk of disrupters in the insurance space, we can see this is getting some traction. Approximately 20% of new insurance technology companies are focusing on data analytics and Machine Learning models to improve pricing capabilities in the insurance market.

20% of Insure-Techs focused on Data/Machine Learning

Compiling a list of the major insurance technology disrupters, filtered by those with a market cap of minimum $1bn, there are only three companies dedicated to taking on this challenge in the auto insurance market; Lemonade, Root and Metromile. They are all currently publicly traded (Metromile is in the process of being taken public by SPAC).

How do they rank on key Metrics?

At surface level, Lemonade, Root and Metromile are similar. They all focus on data analytics, are rolling out across the US and intend to or have already expanded to insurance verticals (such as Renters and Pet Insurance). The things I like about each are that: Metromile boasts a pay per mile insurance policy, Root uses your smartphone (instead of a dongle) to track driving behaviors and Lemonade has a fully automated claims processing function (which I have personally used before).

At closer look however, Metromile comes out ahead of the competition on the metrics that will be most important. That is, Metromile is better than Lemonade or Root at (1) pricing insurance risk (i.e. lower Loss ratio), (2) retaining customers on its platform (especially important for insurance cross selling which decreases Loss Ratios by close to 15%!) and (3) has significantly higher life time value per customer in relation to the cost of acquiring these customers.

For me the most striking thing about this is that Metromile is the newest of the three businesses (originated in 2019), with the smallest customer base and in a sector where there are natural economies of scale (the more customers you have, the more data you collect, the better your pricing models).

Conclusion

The auto insurance market is a stable market and ironically, this is what will drive investor returns. The relatively sluggish pace of growth in the overall market (of 3%) has left room for tech disrupters to take a slice of the pie, which will likely come at the expense of the bigger and more inefficient providers of auto insurance. Whilst I don’t expect the industry to outperform some of the more exciting sectors that I have covered in other blog posts, I do expect the market share of tech rivals such as Lemonade, Root and Metromile to expand as they beat out these larger rivals. For now, Metromile is my pick.

Verdict: Moderately Bullish
Timeframe: 1-3 Years

[1] https://www.mckinsey.com/industries/financial-services/our-insights/insurance-productivity-2030-reimagining-the-insurer-for-the-future

[1] https://assets.metromile.com/wp-content/uploads/2020/11/24120556/Ext-Investor-Preso-vFinal.pdf

[2] https://assets.metromile.com/wp-content/uploads/2020/12/16214939/12.16.2020-Metromile-Financial-update-supplement.pdf

[3] https://www.mordorintelligence.com/industry-reports/united-sates-motor-insurance-market

[1] https://www.ibisworld.com/united-states/market-research-reports/automobile-insurance-industry/

[2] https://www.mordorintelligence.com/industry-reports/united-sates-motor-insurance-market

[3] https://www.thezebra.com/resources/research/car-ownership-statistics/

[4] https://www.newscientist.com/article/2264144-uber-and-lyft-operating-in-us-cities-linked-to-rises-in-car-ownership/

[5] https://investorplace.com/2019/04/4-charts-car-ownership-over/

[6] https://www.thezebra.com/resources/research/car-ownership-statistics/#own-lease

[7] https://investorplace.com/2019/04/4-charts-car-ownership-over/

[8] https://abc7news.com/ridesharing-apps-covid-19-rideshare-uber-lyft/6197137/

EV Charging Stations: The smart(er) entry point into the EV market

As of right now, Electric Vehicle (EV) sales account for 3.7% of total vehicles sold globally[1]. That number is forecasted to grow massively over the coming years; growing to 25% in 2025, 27% in 2030 and 35% in 2040[2]. The average range for EV’s on our roads however, is expected to remain within 200miles on a full charge, leaving a huge requirement for EV charging infrastructure to support this fleet. In fact, it’s estimated that the US alone will need 1-2million public charging stations alone. Whilst I do not know who will ultimately win the race to sell EV’s, there is undoubtedly huge demand for charging services to come, and that’s what I want to look into today.

More

Fuel Cell Electric Vehicles – believe the hype?

As someone who missed out on the meteoric rise of the Battery Electric Vehicle (BEV) market, the question I have been asking myself more recently is what will emerge as a viable alternative in the years to come. One such alternative I came across (on an episode of Jim Cramer’s, Mad Money) are Fuel Cell Electric Vehicles (FCEV’s).

Current state of play: Electric Vehicles

Despite having less than 2% global market share (as a proportion of total cars sold), BEV stocks have soared well above conventional car manufacturers in both market cap and YTD stock performance, even when some of those same conventional manufacturers compete in both markets.

Market Capitalisation of Electric Vehicle Stocks vs Conventional Vehicle Stocks
Electric Vehicles Market Share (2019)

How do FCEV’s work?

Put simply, FCEV’s have three key components – (1) an anode (2) a cathode (3) electrolyte membrane. All three rely on one crucial ingredient – hydrogen.

Skipping the technicalities – in goes hydrogen, and with the help of a catalyst, it generates electrical current, water (and some heat).

The beauty of this process is that you don’t need combustion like a conventional vehicle, it operates silently, has no tailpipe emissions and allows you to store energy in the form of (normally liquified) hydrogen in your gas tank.

This is broadly similar to a BEV but replaces the need for lithium batteries as power is generated directly in the gas tanks of the vehicle.

The benefits

FCEV’s are pitched against BEV as a competitor to create zero emissions (in the driving process). In many ways, FCEV technology helps to overcome some of the major problems associated with BEV’s. Namely, they take only a few minutes to fill up compared to closer to an hour for a BEV, have a longer range (over 480km in many cases) and they reduce reliance on heavy (limited supply) lithium batteries, making vehicles lighter and more fuel efficient.

Chicken & Egg problem

Yet despite those efficiencies, the biggest challenge to FCEV’s taking off is the classic chicken and egg problem. It goes something like this – without a viable network of hydrogen fueling stations, FCEV’s struggle to gain in popularity as they have limited appeal to someone who can’t reliably use them. However, without sufficient customers, infrastructure spend on fueling stations remains largely limited.

Whilst BEV vehicles had a similar issue to start, FCEV’s are uniquely disadvantaged. A typical hydrogen fueling station can’t be plugged into the power grid like a charging station can. Any provider will need to insure they have a hydrogen distribution network to safely store and handle liquified hydrogen, a very flammable substance. This makes hydrogen fueling stations costly to set up and increases the cost of entry for new participants.

The average station costs $1.1m vs $600k for a charging station (with 4x 150KWH charging points). No surprises then how sparce hydrogen fueling stations are in the US and Europe. As of 2019, there were only 177 hydrogen stations in all of Europe combined, and 39 stations in the US (35 of which are located in California). The infrastructure is vastly underbuilt.[1]

Hydrogen Fueling Stations – USA

The big picture

You may argue however, that if FCEV’s help us fight the challenge of climate change and CO2 emissions – maybe it’s risk worth taking. Here, yet again, FCEV’s come up short. Hydrogen is typically created by electrolysis – a process of separating hydrogen from oxygen, in water. Whilst we have an abundant supply of (sea) water, electrolysis is an exceptionally wasteful method of creating energy. In fact, the overall efficiency rate of electrolysis in producing energy to powering a car is 30-50% of that compared to a BEV[2]. In other words, for the same $ amount of electricity spent to generate electricity, you could obtain more than twice the amount of energy to power a BEV than you would to power an FCEV.

This is particularly problematic when considering the cost of entry into the market. The average FCEV costs almost 1.5x the price of a BEV before energy costs are considered. That delta only widens when you include the higher cost of fueling your FCEV.

Localised demand

So FCEV’s cost more, struggle from lack of infrastructure and are less efficient (from a cost of energy perspective). So they have and will likely continue to struggle to expand passenger vehicle sales. However, one area where FCEV’s can and have done well, are in localized demand centres such as airports, city busses and utility vehicles.

Companies such as Hyundai and Plug Power have done exceptionally well here as they can cut the inefficiencies associated with heavy batteries and support the investment required to build hydrogen stations, where they can tap into reliable, repeat customers such as city busses or factory utility vehicles. These locations however, often go hand-in-hand with cheap access to renewable power sources to obtain the hydrogen such as Hyundai’s partnership in Switzerland[3].

Final say

One thing that made BEV’s great is having a transformational company such as Tesla pioneer the change. You need a sexy, elusive brand to help drive the change in customer behavior, which then justifies the return in building out charging infrastructure. FCEV’s have an even larger struggle – they require more expensive infrastructure, cannot claim to be more efficient and as for pioneering companies… Honda, Hyundai, Toyota don’t personally strike me as being the right brand to drive the transition to FCEV’s. Whilst industrial vehicles and long range trucks may be the ideal candidate for fuel cell technology, I’d want to see better vertical integration in those companies particularly around renewable power generation, before I part with my money.

Verdict: Cautiously Bearish
Timeframe: 1-3 Years

[1] https://www.automotiveworld.com/articles/why-battery-evs-have-raced-ahead-of-hydrogen-fuel-cell-vehicles/

[2] https://www.bmw.com/en/innovation/how-hydrogen-fuel-cell-cars-work.html

[3] https://tech.hyundaimotorgroup.com/article/the-future-lies-in-ev-or-fcev/