April 28th, 2019 by Zachary Shahan
Our conversation ran for 1½ hours, so I’ve split it into two episodes. Below is the second episode (and a text summary). The first episode (+ summary) is here.
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At the kickoff to this second portion of our conversation with Galileo Russell, I was rambling about the loss of Elon’s spirit from some portions of the company, which was probably unavoidable as the company grew. This idea was first planted in my head years ago by someone in Europe who felt that the Tesla Energy division was not representing the heart of Tesla well. He explained how passing on the hiring to others as the company grew could so easily lead to this. I noted briefly that this problem and some kind of core communications problem has extended across the company — in sales, service, marketing, PR, internally, and more. Frankly, this is not my own observation. It is something I’ve heard numerous times from Tesla fans and owners, and have been asked a number of times to cover.
Galileo jumped in and fully supported the thesis, adding that he sees this as a growing pain. However, in the grand scheme of things, he considers it as a minor issue — a road bump — that hurts the company and stock value right now but should be easy to solve and evolve beyond. I added, though, that since it is a human and community/group problem, it is complicated in different ways from the normal technical or engineering problems Tesla is accustomed to solving.
This tied to the #1 question/concern from retail investors on Say on the Q4 2018 Tesla conference call. Galileo emphasized what I had heard from Tesla shareholders elsewhere: “They actually glossed over it and basically answered it — because they saw those questions ahead of time — so they answered it in the prepared remarks, sort of, but didn’t tackle it head on.” He noted that they answered it “as a customer service issue from ‘let’s get parts to you faster,’ not ‘let’s communicate when parts are getting to you better.’ And that’s what really needs work. I don’t think people are caring about the waiting as much as, like, ‘Tell me when I can get my parts. Tell me when I can get my car.’”
Chanan took us toward some more exciting topics by bringing us back to the Joe Rogan podcast with Elon Musk, highlighting that Galileo was particularly excited about the electric airplane and Tesla air conditioning possibilities. Galileo first noted that the key takeaway was that “he wasn’t that good at smoking weed,” which is ironic given the headlines around that puff.
In other words, Galileo basically made the case Ron Baron has made on a few occasions — Elon’s propensity for innovation and disruption is why Tesla seems like such a good long-term investment to him. And Gali highlighted an electric jet and Tesla AC system as two potential surprises down the road.
I took a break from that fun topic to highlight a theory I have that I think is quite important. I think Tesla critics and short sellers figured out over time that attacking Tesla and its products was not getting them very far, but then they stumbled into (or heartily planned) attacks on Elon himself. I think they found that Elon’s human sensitivity and inclination to fight back in the face of unfair criticism and attacks worked well for their intention — driving down Tesla’s stock price. As such, I think this group’s core aim for the past few quarters or year has been to smear and attack Elon, and try to trigger him on Twitter. I’d say the approach has been pretty effective.
Galileo highlighted the important flip side of that: “I want to be invested in a company whose CEO and chief technology officer or product officer is so valuable and such a genius and so irreplaceable that if he leaves the company, that’s a disaster. … He’s irreplaceable because he’s adding so much value, and this is, like, an extremely rare person.” He then runs through Elon’s history with Zip2, PayPal, SpaceX, etc.
I couldn’t help but bring it back once more to the core point I wanted to get across — that there is a clear smear campaign (or multiple campaigns) to attack Elon and anyone who supports him. How do we solve that problem? That’s a critical question in my mind — for cleantech, society, and our planet of sentient life as a whole.
Galileo brought up David Einhorn’s book Fooling Some of the People All of the Time: A Long, Short Story. “The biggest takeaway was the amount of meetings these short sellers set up with regulators and their involvement with regulators and, like, their spoon feeding of, like, ‘You should look at this, because he violated his tweet thing.’ You know, it’s not illegal, but they’re just pushing the regulators to do it.” I added that’s basically how lobbyists work in politics, and this campaign to smear Elon and crew is very similar to a long-term political smear campaign.
We then got into a side tangent about: an infamous Jim Cramer video about manipulating stock prices (legally and illegally), Jim Chanos, and the Fairfax case. I had to also bring up Andrew Left of Citron Research, who switched from being vocally short on Tesla for years to going long on Tesla just before the 3rd quarter of 2018 financials were released. Left used 4 CleanTechnica charts in his letter explaining the flip. Interestingly, Tesla’s market cap rose $1.11 billion just after that letter was published. Wow. Imagine if Chanos, Spiegel, and other vocal shorts flipped or simply said they were done shorting the stock. Though, that’s harder to imagine given the seemingly deep bias they hold against Elon Musk and Tesla.
We finally got back to the topic of electric airplanes and air conditioning. Gali pointed out that the key driver of change in several industries is dropping battery costs — and, to some extent, improvements in things like motors and inverters. Whoever is leading in those core areas can lead in multiple realms.
Gali notes Elon Musk’s previous comments that the energy density of batteries needs to get to 400 Wh/kg for electric airplanes to be viable. He then references work Matt Joyce of Loup Ventures has done highlighting that the energy density of Tesla’s earlier 18650 battery cells was 206 Wh/kg and that rose to 260 Wh/kg in the 2170 cells used in the Tesla Model 3 and Semi. That’s a 26% increase in efficiency, and to go from 260 Wh/kg to 400 Wh/kg is only another 55% increase in efficiency. He added JB Straubel’s guidance of 5% improvement a year, and thus notes Tesla could hit 400 Wh/kg by 2028 with that pace of improvement. It is probably too far out there and there are too many loose assumptions to include this in a long-term investment thesis, but the idea of Tesla potentially launching an electric airplane before 2030 is an astounding possibility.
Chanan mentioned that Elon had a cameo in Iron Man talking about an idea for an electric jet, and I noted that the first meeting between Tesla CTO JB Straubel and Elon was reportedly about JB’s desire to build an electric airplane, which led to Elon and JB teaming up for what would become Tesla.
Dropping a loud mic and going on an excellent rant, Gali noted, “I was invested in Tesla … since the twenties per share, when I was at NYU and nobody believed Tesla. I was crazy for liking Tesla. Now it’s 10× from there. And it was like, ‘Well, there’s only 20,000 — if they’re going to produce 20,000 Model S [per year] A) that’s just — no way they’re going to sell 20,000 Model S [a year], B) even if they do, that can’t justify a $3 billion company.’ You put it in all these boxes, and the thing about Tesla is they’re creating all new boxes. They’re creating all new products. You can’t model out the cash flow of something that’s never existed before.”
We then talked about Tesla’s autonomous driving leadership, and I noted that I thought it was insane a lot of people are putting no value on Tesla’s autonomy leadership — not realizing that Gali puts no value on it in his model. Whoops. 😛 But that actually made it an interesting discussion. Gali and I both agree that Tesla is far ahead on autonomy (note that this conversation was before Tesla Autonomy Day, which Gali attended and seemed to be impressed by).
Galileo’s big point was, “When does this come out? We need to have a billion in revenue, at least, before this remotely matters to TSLA. So, what year does that have to be?” His thought was that we could be 15 years out before this matters financially. I mentioned that Elon said on ARK Invest’s podcast that he thought full autonomy (to the point where the driver could sleep) was 2–3 years out, technically, but then it comes down to regulators. Obviously, some people don’t trust that forecast, but I basically do, and I emphasized that I think people are overly concerned about regulators. (For more on the autonomous driving matters, see my conversation with Tasha Keeney — part 1 and part 2 — and check out our coverage of Tesla Autonomy Day.)
Basically saying stuff highlighted on Autonomy Day — before Autonomy Day — Galileo noted that cars could go from very low-margin products to very high-margin products with a move into services and robotaxis. This potential “transition over the long run from huge hardware sales and very profitable to even more profitable service sales is what we’re going to see.” He adds, “My question is, is service 10% of Tesla revenue in 2025, is it 10% in 2030, is it 80% in 2030? That is just where I have zero confidence and ability to predict that.”
At the end of our Autopilot chat, I mentioned how it came about that I got to say hello to Elon and shake his hand while at the Tesla Fremont factory in March. The tie-in was that he was headed into a weekly Autopilot meeting and there were a lot of people in the room for this weekly detailed discussion. How many auto company CEOs do you think could lead a weekly technical meeting on autonomous driving?