Traders and investors betting against electric carmaker Tesla Inc (NASDAQ:TSLA) have been out of luck this year as the Model 3 euphoria drove TSLA stock to all-time highs.
Don't Get Too Excited About Tesla Inc's (TSLA) New Streaming Service
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But, finally they have something to cheer about. TSLA stock has tanked more than 11% over the past two weeks in one of the company’s worst selloffs in recent times. That crazy move gifted TSLA shorts a cool $1.4 billion, following Tesla’s announcement that it had delivered ~22K cars and SUVs during the quarter ended June, a sequential decline from Q1 deliveries of 25K units.
Misfortunes never come singly, they say, and Tesla is now being forced to run the gauntlet. Recent news that the Model S had failed to ace some safety tests has caused quite the stir, considering its stellar record in the past.
Predictably, management threw a hissy fit after the damning revelation, saying:
“IIHS and dozens of other private industry groups around the world have methods and motivations that suit their own subjective purposes … The most objective and accurate independent testing of vehicle safety is currently done by the U.S. Government which found Model S and Model X to be the two cars with the lowest probability of injury of any cars that it has ever tested, making them the safest cars in history.”
Wrong Timing by Elon Musk
Whether the IIHS tests were objective or not is anyone’s guess. But, that shouldn’t detract from the fact that part of Tesla’s problems are of its own making. I warned that Elon Musk tends to get his timing wrong whenever he pans TSLA stock for being insanely overvalued. The problem with Musk’s approach is that he usually makes those comments right after a huge run up by Tesla shares.
The last time he did that in 2013, TSLA stock tanked 35% over the next two months.
Now, its déjà vu all over again. TSLA stock has been badly hammered just six weeks after Musk declared that Tesla is overvalued. But, the CEO went further this time, highlighting something that the bears have yet to pounce on:
“We’re a money-losing company. This is not some situation where, for example, we are just greedy capitalists who decided to skimp on safety in order to have more profits and dividends and that kind of thing. It’s just a question of how much money we lose. And how do we survive? How do we not die and have everyone lose their jobs?”
Tesla bears have focused on delivery numbers and, lately, Model 3 production timelines and execution risks. But, it’s inevitable that they will start paying attention to the bottom line as soon as the first Model 3s start rolling off assembly lines.
According to music industry sources, Tesla is in the process of creating an in-car streaming music service similar to Pandora Media Inc (NYSE:P). It’s not yet clear exactly how the service will come packaged, although it’s likely that it will be available in multiple tiers.
This begs the question, why doesn’t Tesla simply integrate existing streaming services such as Spotify and Apple Inc.’s (NASDAQ:AAPL) Apple Music, especially considering that Tesla already has a deal with Spotify for cars sold outside the U.S. According to a Tesla spokesperson, the company is looking to provide an exceptional in-car entertainment experience.
The idea of a new revenue stream is definitely welcome for any business. Apple Music is more of an afterthought by Apple, yet it’s already crossed the $3 billion run rate.
Tesla’s streaming music may sound like a good idea, but that’s without considering financial implications on the bottom line. The streaming music business model is a money-losing proposition, as Spotify and Pandora have already demonstrated. Spotify has been growing its subscriber base like a weed, which currently sits at 50 million paid subscribers. But, losses have been expending at an even faster clip; sales jumped 52% last year to $3.26 billion, while losses doubled to $601 million.
Pandora hasn’t been faring any better. It’s 80 million subscribers brought in $1.39 billion in revenue last year, yet the company finished in the red to the tune of $343 million.
Broken Profit Model
Pandora has been around since the Dot.com era, but has never managed to turn a profit, despite growing the top line more than 7,000%. Pandora’s business model is straightforward, too. The company makes more than 80% of revenue from ads inserted into audio playback, much akin to your typical FM or AM radio station.
The big problem with Pandora’s model is that operating costs have been growing faster than revenue. Operating expenses ate up 45% of sales in 2013, but shot up to 55% currently. Pandora spends about 50% of revenue paying for content licensing. Comparatively, Spotify recently negotiated its royalty rates down to 52% of revenue from 55%, thanks to its rapidly expanding customers base. Apple pays out 58% for the same.
Tesla will start off with a much smaller customer base, making it hard for the company to negotiate favorable rates with music labels. Even more worrying is the fact that Spotify and Pandora have proven that costs in this business scale much faster than revenues.
Tesla could very well become a service company, selling media, mobility and other perks in the future. The company might be able to generate significant revenue from membership fees, just like Amazon.com, Inc. (NASDAQ:AMZN) does with Prime. But, the bears might enjoy another field day if it later emerges that Tesla Music is losing hundreds of millions of dollars every year, making it even harder for the company to turn a profit.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
