Have you noticed the similarities between Tesla (TSX:TSLA) and Apple (NASDAQ:AAPL)? While there are many, the one I am talking about is the way they are building an entire ecosystem around their hardware. Both ensure end-to-end control of the ecosystem to provide a seamless user experience and consumer security.
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Tesla’s version of Apple’s business model
Apple launched the first touchscreen phone and changed the world of mobile phones. Similarly, Tesla created the first electric vehicle (EV) and changed the world for cars. Today, Tesla’s cars sell for a premium and so do its services. People buy them because of the user experience and even the government subsidies. While it had the first-mover advantage in EVs, it is now facing competition from almost all major automakers introducing EVs.
Despite competition, Tesla continues to be a market leader because of its ecosystem business model. The first stage of the ecosystem is to build critical components like batteries and controllers in-house. The next stage is to make the manufacturing efficient. The third stage is to provide supplementary services like charging stations and supplying renewable power to these stations. Tesla has even opened these stations to GM and Ford.
So far, Tesla is an automotive company, tech company, and power company.
Automotive insurance: The next step in Tesla’s ecosystem
Tesla has also ventured into insurance with its real-time auto insurance that gives personalized coverage premiums based on your driving behaviour (speeding, unbuckled seatbelt, and collision warnings) and car usage (driving mileage). Using telematics, Tesla halved the average cost of full coverage for a driver with good credit and driving score.
With the growing level of autonomy, the traditional way of calculating car insurance is becoming expensive. Safety scores based on current driving habits could help optimize insurance and reward people with lower premiums for improving their driving.
Monetizing the ecosystem
Tesla is also working on over-the-air software updates and continues to reduce the cost and increase the energy efficiency of new car models.
The way hardware works, there comes a point when the market saturates, technology saturates, and your device sales slow. Apple reported its first decline in iPhone sales back in 2016. Many analysts expected this to be the peak of the stock. But from there began the second phase of growth, wherein it used the iOS userbase and started monetizing services with Apple Pay and Apple content while maintaining customer data privacy. Today, its services segment (20%) is the second largest revenue contributor after iPhones (52%).
Presently, Tesla is riding the EV adoption wave. But it has also started expanding its services segment, which contributes 8.6% to its revenue. There are ample growth opportunities in this segment, like after-sales services, auto insurance, vehicle components, and software services. This segment will grow further when full self-driving cars hit the roads.
How can Tesla stock make you rich?
Tesla stock might look overvalued, trading at 60 times its forward earnings per share. When you look at the long-term growth prospects and addressable market it is tapping, the leading EV maker has the potential to grow revenue and profits even when EVs reach a saturation level.
Apple found its next trillion-dollar valuation in services, and so can Tesla. A device sale is not the end of the revenue generation but a contribution to the average revenue per user (ARPU).
This type of vertical integration has its benefits, but it takes time to materialize and is highly inefficient in the early stages. Another company building an ecosystem through vertical integration is Nvidia. It started by building graphics cards for PCs, moved to data centre GPUs, network infrastructure and cloud, and now embedded devices like cars.
Apple, Tesla, and Nvidia are growth stocks worth buying at any dip and holding for the long term. They have diversified their revenue streams through vertical integration.
