The San Francisco Report

2/17. Tim Cook — please buy Tesla to save California

Dear Tim,

Please buy Tesla and make the electric car a mass product. Tesla CEO Elon Musk is signaling to you he wants you to take over. Just for disclosure, I am a shareholder of your company as well as Elon’s. You should be able to buy Tesla for 350$ , maybe 400$ a share. Even at the high end of this range the price is small compared to the upside your shareholders would get.

There are several reasons for this. Let’s start with the financials. Tesla is expected to make around 6 Bio $ in revenue this year. By 2022 they should bring in around 30 Bio$ in revenue from the car business. Add to this another 10 Bio $ from the stationary battery business and you get 40 Bio$ in sales. At a net margin of 10% that would be 4 Bio$ in net profit. Give them a 25 PE and you are looking at a market cap of 100 Bio.$. So, you pay 50 Bio.$ for something which will be worth (stand alone) 100 Bio in 7 years. That is an IRR of around 11%. That is higher than the interest you are getting on your cash sitting in the bank account.

But of course the financials would look much better if you bought the company. Your scale and execution skills would translate into higher margins and much better returns on invested capital.

This brings me to the other reason you should do this. TO SAVE CALIFORNIA. Please Tim, consider this thought. The state is drying out. We are totally victim to climate change and I don’t care what the underlying reasons are. There must be something we can do to stop this. Let’s get rid of fossile fuels as transport fuel. We can do this. Tesla is a good start.

But Tesla is too small to bring this to mass market. Even with Elon’s projection of 500,000 cars sold in 7 years, the company is just a drop in the bucket.

Tim, you have proven that you can execute at scale. You can build electronic gadgets at scale with a precision and at a cost which is unprecedented. We need something like this to make electric cars a mass market reality. You can do it.

The scientific problem of storing energy in batteries might not be completely solved, but Tesla has done some real good work. Now it’s about bringing the idea to scale, lowering the cost, building a world wide distribution and service network and most importantly, building a supply chain which can support massive growth.

You’ve done this with ipods, iphones and computers. You can do it with cars. I even have an idea for a new model introduced by Apple: the “Model i” or if you want to be creative how about “Model Ai”.

Tim, look at this opportunity. The car is morphing from an assembly of steel, hoses, fuses, bolts and other stuff to a slick electric gadget fueled by electricity and controlled by software. The software architecture of a Tesla is as much a competitive advantage as its design or low price relative to performance.

Now, look at all the potential. You can improve the battery performance by applying Apple’s software expertise to the battery problem. You can bring onboard entertainment and navigation to the next level. You can work on machine learning to improve the autonomous driving experience. Finally, you can work with regulators and stake holders to build out the infrastructure needed to support the growth a solar energy to fuel electric cars.

In short, Tim, nobody has the expertise and skill to develop a successful mass product in the electric car space like Apple. And the capital requirements for this are in your range given how much cash Apple is generating.

Would you rather give that cash to New York hedge funds or help bring us away from fossile fuels and towards a sustainable transportation system. It’s your call now.

Best,

Krim Delko, Principal Orange Capital Partners, San Francisco

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