Elon Must is scheduled to unveil Tesla’s “Cybertruck” pickup tomorrow. It’s a big deal. I’ve long been perplexed by why Elon and Tesla focused on cars when the most profitable market segment for automakers in the US is light-duty trucks and SUVs. This is even truer when one considers the benefits that an electric drivetrain can provide to the segment.
To better understand this consider what is, and is not, important to buyers of pickup trucks. Certainly, one important consideration for pickup truck buyers is towing capacity. Modern light-duty trucks are enormously capable and have become much more so in recent years. Each new model year seems to bring new superlatives in payload, horsepower, torque, and towing capacity. Two of the big three now offer heavy-duty pickup models with diesel engines that offer 4 digit lb-ft of torque. 1,000 for a high-output Cummins powered Ram and 1,050 for the Ford Powerstroke. In any case, all of the big three have pickups whose max towing capacity – when properly equipped – would require a commercial driver’s license.
Electric drivetrains offer the benefit of immediate torque at any speed, which is ideal for moving heavy loads. If you doubt that, consider that trains and aircraft tractors frequently use electric drivetrains. Electric drivetrains tend to be much simpler as well, consequently, they offer another set of benefits to light-duty truck owners; simplicity and durability.
One of the downsides to electric drivetrains is weight, specifically battery weight. The 85 kWh battery pack in a Model S is reportedly 1,200 lbs. However, weight is less of a consideration for pickup trucks which often weigh in excess of 6,000 lbs, and the larger heavy-duty dually pickup trucks are generally over 8,000 lbs empty. Moreover, the diesel in these trucks are typically much heavier than gasoline engines, and all that weight is carried over the front axle. The batteries of an electric truck could be distributed further back, helping to create better weight distribution, which may also help resolve some of the unpleasant ride and handling characteristics some of the heavier duty pickups have when driven empty. Pickup trucks that see snow plowing duty, in particular, might benefit.
Internal combustion engines were the best drivetrain solution we had…until we had access to better batteries. Once the battery and charging solutions improved it became clear that ICE drivetrains will be relegated to the dustbin of history.
There’s another important set of statistics for light-duty trucks that don’t benefit consumers but could materially benefit Tesla, profits. Light-duty trucks not only sell in huge numbers, with 2.9mm pickups sold in 2018, they typically see very high-profit margins. Where GM might make $900 in gross profit on a Cruz, they will see gross profits 20x larger on some of their higher-end pickup trucks that are increasingly popular. Is it possible to build a 20,000 margin vehicle that sells in large numbers? If you’re selling light-duty trucks, yes. Tesla is not bound to the low valuations of other automakers clearly, but one might reasonably ask whether they could grow into the valuation they currently have. With a $74 billion enterprise value as I write this, let’s assume 12.5x EBITDA, which would require ~ 5.9 billion in EBITDA. If they can build a truck with 20,000 EBITDA margin that translates to 296,000 pickup trucks per year, or roughly 10% market share. It’s a tall order to be sure, but the segment would benefit from the technology, and even if you believe that chance is remote, it isn’t impossible. That alone would justify the company’s current valuation if they didn’t sell anything else.
I’m currently short TSLA call spreads, which is obviously a bearish bet – on valuation only I should add because I believe Elon is a visionary and Tesla is changing the world – and a successful pickup truck is the most significant threat to the bear thesis I’ve identified.
Image Source | Chad Russell, Pexels.Com
