So all of that is good, except we all know that what they haven’t been able to do yet is redefine the market. In fact, it’s not clear with any of us what market are we really talking about. Is it engine, is it cars, is it [unintelligible] service, it’s a really complicated story. What we do know though is that the early traction of Tesla is tracking very closely to Apple, and this is what is really key. iPhone 1 and iPhone 2 were about [unintelligible] dollars, and iPhone 3 was their breakthrough. That model 3, the third generation was what consolidated and broke down the walls of consumer demand. And what you can see is that [unintelligible] has set the stage for the 3. And when we do the model of forecasting them, which is something we can be quite accurate about, what we see is a business that very reasonably in a decade, can get to about 5% of the global car market. Now to put 5% share of the car market in perspective, it is about half or less than half of the leading incumbents (enter Toyota as an incumbent). And what’s great for Tesla is their cost basis and their operational balance sheet is completely different from these companies. [muffled]. They spend dramatically less on R&D. They don’t have pension obligations. They don’t spend anything on a dealer network. They spend nothing on advertising. They sell software at premium service, so their economic model at selling cars is really meaningful and when we do the waterfall of those economics and think about this business in the context of a Porsche or even for a BMW, and you look at that multiple, what you see is a business that could be worth hundreds of billions of dollars in a decade.
OK, great, so selling cars theoretically upwards of a [muffled]. And again all of these things that we’ve talked about before, [unintelligible] cars, transportation services, energy generation, energy storage, let’s get in front of them and say that they can do these things half as well as cars. So now, all of a sudden, we’re in this mythical territory of potential 10x in 10 years. But again, we have this issue of the capital intensity. What if the credit markets seize up? What if the equity markets seize up? What if we c just can’t execute? Where’s that extra $20 billion going to come from? So it’s very difficult from our perspective to be naked long or naked short the stock. Instead, what we’ve been asking ourselves is how do we share in this potential upside, but frankly protect our downside. And so it comes now to what we believe is our pick for an incredible opportunity, and our 2017 pick itself, which is in 2022 Tesla convertible bonds. Why do we love the convertible bonds? It pays a reasonable coupon, it has a reasonable conversion price, which is only about 4% or 5%. So what does that mean? To the average investor in the room, what that means is for all of us, we can buy these converts and we’re guaranteed not to lose money as long as Tesla’s worth at least $15 billion. Now let’s put that in context. Today, it’s a $50 billion market cap. Even if the equity goes entirely to zero, we’re protected. Because as long as somebody is going to pay $15 billion, which is about less than one-times 2018 sales, or a little bit more than two-times what Google tried to buy this company for in 2013, we get all of our money back. But more importantly, while our downside is protected, on the off chance that this guy (Elon Musk) pulls it off, we get 95-plus percent of the upside.
So let me end by talking about the man for a second. Look, we’ve all been faced with decisions where we try to use a model to figure out innovation. We tried to do that with Jeff Bezos, but we were wrong for many, many years until we were right. There’s a [unintelligible] for Google. We thought Google was in one business until we realized it was probably the most integral monopoly ever built, we were all there. We thought that Mark Zuckerberg could not make the transition to mobile, the stock got hammered, the models were wrong, he was right. And yet again, he had an interesting character. One of these unbelievably iconic entrepreneurs. While we’re trying to figure out how to get an Uber to come to Lincoln Center, he’s figuring out how to send a rocket back from space and land it on a [unintelligible] in the middle of the ocean. While we’re driving our kids around Chuck E. Cheese on the weekends, he’s built a machine that can tunnel under the city of Los Angeles to completely alleviate traffic. And while we’re still trying to figure out how to get Netflix to work on our Apple TV, this guy has built a human brain interface so that his thoughts are translated to machines. I mean the point is, that the 2022 converts for us are an incredible way to make a bet on the right side of history, on the right side of the change, to participate in what theoretically could be another massive 10x in 10 years, in a way that has been complete downside protection and the most important thing of all is to stand shoulder to shoulder with a guy what we think is our generation’s Thomas Edison.
Thanks everybody.
Disclosure: None
