Blain’s Morning Porridge – April 21st 2023: Fail Fast – Tesla and SpaceX are extraordinary, but does Musk have the Bandwith to solve all his problems?
“The light that burns twice as bright burns half as long, and you have burned so very brightly, Roy.”
This morning: The SpaceX Starship will be a wonderous thing, and Tesla is a great car company, but does Elon Musk have the time to keep them on track while trying to figure out what to do with his Twitter unwanted stepchild? He’ll come up with something nifty, like X Corp, to fuddle it through..
“Fail Fast” is Elon Musk’s unofficial motto, but it would be too cheap a shot to describe the first flight of SpaceX’s impressive Starship on a Heavy Booster in such terms. Yesterday, the massive rocket suffered a “rapid unscheduled disassembly” 4 mins into its first flight, but Space X will have learnt an incredible amount that it will put right for the next launch. I am not normally given to saying this about Musk – but respect for getting the 400 ft thing in the air.
Do not mistake what follows as a love letter to Musk – regular readers will know there is going to be the most massive BUT coming… I love rockets, spaceships and wish I could go to the moon much more than I admire Musk.
I am not a Musk fan, but give him credit: by innovating genuinely re-useable spaceships he and SpaceX has created a paradigm shift in space tech – opening a discernible route to real space based commerce rather than just interesting and very expensive science. It will trigger a boom in space-tech and a space-economy. It could prove a long-lasting industrial revolution as the commercialisation of space in terms of manufacturing, resources and growth expands. It is starting with Musk’s Starlink low-earth-orbit satellite constellation bringing internet connectivity around the globe.. (Ok.. we can actually already access and use the internet via cables, but.. be impressed.. it’s a first step towards the stars.)
A truly profitable, functional and encompassing space economy may still be decades or even a century away, but the moment it crossed from science fiction to feasible commercial reality was the day the first Falcon 9 rocket landed back on its launch pad, quickly being made ready for its next mission. (The Falcon 9 has proved a highly reliable system – less than a 0.2% fail rate.) Whenever I think about how slowly Space tech has advanced since July 20th 1969 (“The Eagle has Landed”), I recall it took less than 70 years from Wilbur and Orville Wright hopping a few meters along Kittyhawk beach before we were crossing the Atlantic on Concorde. (The next step; flying Ryan Air anywhere shows we can also go backwards and de-evolve.)
I’ll be absolutely fascinated to read what actually went wrong with the Starship launch. I’m genuinely interested. The story is the rocket stages failed to separate – but photos appear show some of its 30 Raptor engines hadn’t fired. These enormously complex machines have multiple redundancy, but when one thing fails there are consequences. Whatever they were, Space X has proved repeatedly they can figure it out. If the next one doesn’t sort it, the one after that will. Fail Fast is a good motto.
However, SpaceX has to sort it quickly – NASA’s manned mission to the moon in 2025 depends on a Starship and it would be terribly embarrassing for Musk if he becomes the one creating delays in the space bureaucracy’s plans….
We’re all very aware Musk is a showman. I have a suspicion he knew the launch would fail based on his multiple comments about it being less than a 50/50 chance of flight success. Not what would break, but with so many things likely to break and still to fix, it was inevitable something would give. The blow-up gives him the opportunity to ham it up, tweeting about “learning a lot for the next launch in a few months”, while quaffing champagne with the launch crew.
Musk is not, despite what his multiple fanboys believe, a genius inventor.
He is a genius innovator – taking a concept, and making it deliverable using his superpower of marketing hype. He did that with Tesla, joining what was essentially a vanity project to make an electric sportscar, and in the face of hostility and scepticism turning it into the most valuable auto firm in the world, set to deliver 2 million cars per annum. His genius has been in his showmanship to market the brand, and the force of his personality overcoming multiple production and financial crises – often by just crashing straight through them.
To my cost I know…. I have been following Tesla for over a decade and have constantly and repeatedly made the mistake of expecting him to fall at the next major hurdle. He has not. Just 5 years ago, I was berating the firm for failing to hit its 2000 cars a week target, its financing problems, and the rising competition (Volvo had just announced it was going all electric). I wondered if it would prove the next Betamax. Nope. Did not happen. I now accept Teslas are pretty good cars, and Telsa is the leading manufacturer of EVs – which is deserved as it pretty much invented the sector.
There are two problems.
The first is how thinly Musk is now spread. Tesla, Twitter and SpaceX are all at critical stages in their progression.
- Tesla’s recent price cuts address competition and will solidify its market share, but they are costly, while the Cybertruck should finally hit the roads later this year. Musk’s comments about autonomous driving to kick off his vision of driverless taxis earning real cash are fabrications – there is still much to happen.
- SpaceX has to get the Starship working for the Nasa timetable, and show the effort that went into Starlink is monetizable.
- Twitter is a random mess and increasingly irrelevant – no one is quite sure what it’s now about or what Musk’s vague X Corp – his everything app covering social media to finance. Musk admits he never really intended to buy it, being forced to by the threat of courts. As such his plans seem… random.
All three “projects” need time, focus, serious organisation and Musk’s magic to drive through delivery of whatever they are. (I am modestly clever, but I struggle to put together the Porridge each morning – how would I cope trying to run multiple diverse businesses?)
The second problem is commercial reality and its effect on the myth. Tesla is worth billions, but not the $1500 a share fan-girl Cathie Wood was predicting in March. It is down 60% from its high in Nov 2021, yet still trades on a 45 times PE as inflation looks likely to trigger a clear consumer downturn. There is only so much talk and bluster about how the margins on car sales don’t matter because they will soon be infinite money trees as driverless taxis – no they won’t.
Starlink is worth around $70 bln pre-money based on its last funding round, but with 1800 satellites in orbit, and more to come, and replacing them every 3 years, its not cheap. It’s income depends on subscriptions, of which it has (apparently) a million, many in outback Australia – which makes sense. But its enormously more expensive than earth bound internet access, and not fault free. Its valuation is based on 5% of the earth’s population (400 million) as subscribers in the next 15 years. It also faces competition in space and from constantly improving ground services.
As for Twitter, it’s unclear just what the money plan is. Twitter still makes a loss, but the new X Corp everything app is something else – and no one yet knows what. Paying the debt on the unplanned acquisition is burning cash. Meanwhile, twitter users, including myself, have no idea what its remaining utility is. It feels like squandered time and effort.
The big question is how much bandwith can Musk devote to each of his babies and the unloved red-headed stepchild that is Twitter. What happens if one of them tanks in terms of the damage it will do to Brand Musk?
Five Things to Read This Weekend
FT The true faith of Ursula von der Leyen
BBerg The Nord Stream Explosion Remains an Unsolved Mystery
WSJ Space X’s Starship Explosion: How We Got Here
The Atlantic Elon Musk’s Disastrous Week
FT How Brexiters Live their truth (badly)
Out of time, back to the day job, but have a fantastic weekend..
Bill Blain
Strategist – Shard Capital
4 Comments
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I have theived this from Will Nutting’s Blog this morning:
TESLA: I still view this as uninvestable but fascinates.
Cathie Wood is back talking a $2000 target for Tesla and a lot of her thesis is “autonomous
driving” https://ark-invest.com/articles/valuation-models/arks-tesla-price-target-2027/
The opposing view (Dr W) is this is essentially a promise that will never come true.
“The promise of fantastically profitable robotaxis will never come true meaning that lower margins as Tesla falls into line with the rest of the industry are probably here to stay. Hence, the valuation remains orders of magnitude higher than it should be. Tesla is still the leader in EVs but the other OEMs are catching up and this is forcing Tesla to cut prices in order to stay ahead. In my opinion, part of the problem is the low-quality interiors when compared to German EVs being sold at the same price point. Furthermore, Teslas are not known for their build quality and so Tesla needs to either up its game in terms of quality or cut its prices. Musk appears to be going for the latter with the promise that Tesla will earn much higher margins when its vehicles are capable of moonlighting as robotaxis.
I have a lot of respect for Mr Musk as he generally does keep his promises even if they are many years late, but this one is non-sensical. Musk thinks that he is going to have millions of robotaxis running around for which he can charge $1 a mile for a ride which will cost him $0.30 per mile to provide. The current cost of ride-hailing is about $2 per mile and so it is not hard to see how this is an attractive proposition based on today’s conditions. However, in order to hold onto that price, he needs to be the only one offering the service which means Tesla has to be the only company with a working autonomous driving solution.
The problem here is that all of the indicators available clearly point to Tesla not being a leader in the autonomous driving industry. In fact, for years, I have classified it as an also-ran and I still see nothing to change this view. This means that others are going to get there first, meaning that there will be plenty of offerings available by the time Tesla finally gets it working properly. Robotaxi is going to be a business if brutal, cutthroat competition meaning that with multiple players, the price is not going to be $1 per mile but something closer to $0.40. This means that Mr Musk’s contention that Tesla will earn 70% gross margins on its robotaxi business is a fantasy and even now this is still needed to support the valuation of the shares. Tesla has been a narrative-driven stock where no one cared about the fundamentals but eventually, the narrative always runs out of road. This time may have finally arrived as the automotive industry is closing the gap and Tesla is feeling the pressure which has forced it cut prices which I think is going to continue. Its fantastical robotaxi strategy is very unlikely to deliver the results expected, meaning that Tesla is steadily becoming just another OEM. To be fair, its digital strategy is far superior to everyone else’s and this means that it is in a good position when the market for digital services in the vehicle finally begins to materialise. However, this time is far off and so I am waiting for the valuation to normalize compared to the industry before I look at the impact of digital services”.
There is likely plenty more downside to be had.
In the days of steam, the driver in the cab did everything necessary to ensure that the engine was well stoked and that the power and brakes were applied appropriately to get from A to B whilst obeying all the traffic signals. But this was the tradesman’s part of train management, and it was the man with the gold braid on his cap in the carriages behind who interacted with the passengers and who was the better paid.
Eventually we might be able to replace the engine driver with a fully automated machine but I honestly cannot see us removing the driver of a taxi who is responsible for keeping it clean and tidy and fit for use by the next customer who might to hail it; not unless you take them off the streets completely after say eight o’clock every night.
Bill, when you yourself encountered a group of “hooligans”, at least you were able to check that the doors were locked and turn around and drive away, albeit with a damaged radiator and what other damage. Imagine then, what would have happened if a robo-taxi, which can be stopped in its tracks by merely stepping out in front of it, were to have encountered a similar group of hooligans late at night in a housing estate somewhere!
It might work in a society like Japan where everyone is respectful of other’s property, but certainly won’t see me investing in such a ludicrous venture in the UK or anywhere in the western world!
Bill,
If you think there is an economic future to be had in space beyond earth orbit satellites, then think again. Maybe one day someone will make a trip to Mars for propaganda purposes, but I think that Cape Canaveral will be under water due to Greenland ice sheet melt before a single space tourist gets to view the far side of the Moon.
Remember, global warming is real!
Disagree. I think space based”fabs” making drugs, specialised metals and materials, tech components, nano-chips in ZeroG, plus some asteroid mining will become commonplace. Most of it will be robotic rather than manned missions… but it will happen..
Other aspects of a space economy will follow..