NEW YORK (TheStreet) -- Forget the “let’s make our patents free” announcement. Tesla (TSLA) made a far more interesting comment during its conference call Thursday: officials met with BMW to discuss… something important.
First, let’s backtrack. What happened? Tesla announced that it was going to make its patents freely available.
This had been widely anticipated. However, I think it was also anticipated there would be a greater PR or other marketing stunt around it. Perhaps there should have been some requirements on those who would use the patents to buy batteries from Tesla’s upcoming battery factory, thereby generating an “Intel Inside” effect greatly benefiting Tesla.
As it turns out, there was no such thing. Tesla just pulled its pants down for free.
But wait, there’s a quirk! Tesla says that it will not sue any company that uses its patents, but only if they do so “in good faith.”
Well, what do they mean by “in good faith”?
On the conference call, Tesla clarified that it meant that if car companies use Tesla patents, in turn the companies should not complain if Tesla uses theirs. Well, other than that, Mrs Lincoln…
In other words, let’s say Nissan (NSANY) were to use Tesla’s technology. This would allow Tesla to use Nissan's patents, or else. Maybe I’m missing something but that sounds pretty much like it’s always been. In other words, the two parties would have to come to an agreement regarding intellectual property, either privately or following litigation.
What this means is that I don’t think much has changed on the patent front, as a result of this announcement: “Yeah, you can use our stuff, but if you do, then we can use yours too, or else…”
At a minimum, this development does not appear to support the investment thesis of those who believe that Tesla is going to become some sort of Qualcomm (QCOM) in terms of generating profits from its electric car and battery pack patents. In addition, Tesla did not even get a revenue tie-in with its future battery factory, or equivalent.
Therefore, while not much changes in practice from this patent announcement, I viewed it as a negative to Tesla’s valuation. No patent income stream and no leverage to other parts of the business. I think this shaves a double-digit percentage off the company’s valuation, compared to the market’s expectations.
But wait, there’s more!
Then came the shocker. On the conference call, seemingly casually, Elon Musk started talking about a meeting that had taken place just the day before between Tesla and BMW.
As to the contents of this meeting, while it was plenty vague and certainly incomplete, he said they had been talking about cooperating in various ways, in particular about Tesla’s charging network. It had always been clear that Tesla had been offering the rest of the industry, at least in principle, the chance to join forces on the charging network side.
Clearly, until now the rest of the industry had rejected Tesla’s charging technology, which goes beyond just the physical plug. One can imagine numerous reasons for this, but at the top of the list could easily be the issue of control. When you’re dealing with a connector/plug standard, it’s important that a competitor can’t mess with it.
After all, it takes approximately five years to develop a car, and you are committing to a long-term standard in the automotive industry that goes well beyond five years. People take decades to get used to things, and you have to install things both at home and at public charging stations. Messing with this plug and standard is a huge issue.
From a strict investment standpoint, it had become clear that Tesla’s charging network was a major advantage. Even if someone else were to deliver a car with 265 miles of pure battery-electric range, all other things equal, a consumer would prefer a car that could be recharged quickly on longer routes.
It was a huge part of the Tesla investment value equation. The idea was that Tesla could use these superior chargers to sell a lot more cars, at much better margins, than otherwise.
Let’s say that Tesla and BMW cut a deal to share these chargers in the future. BMW would obviously pay Tesla for this, as infrastructure is not free. You have to pour the cement and generate the electricity. It’s a construction business.
However, Tesla is not lacking for financing right now. It seemingly has access to as much capital as it wants. Recently, it raised close to $2 billion on a valuation not too far from $30 billion. It’s not as if Tesla can’t spend as much money as it wants on building its charging network. This was the genius of Tesla, and my bull case for the stock.
Where Tesla is constrained is that it can’t hire engineers fast enough, and automotive engineering projects simply take a lot of time. Testing new automotive systems -- batteries, bodies, motors, electronics -- takes years.
If you have a critical advantage, you exploit it. You don’t give it away for a small fee when you didn’t really need that tiny sliver of financing anyway. Today, if you want a 265-mile electric car and the ability to charge it quickly along some of our long-range freeways, Tesla is your only option. So you have to buy the car from Tesla, not BMW.
Apple (AAPL) is a good analogy here. Today, if you want to use the Mac operating system you have to run it on Apple hardware, which starts at $899 for a laptop or well above twice where a Windows or Chrome OS laptop starts.
In the early 1990s, Apple tried the licensing route. It thought it could be the next Microsoft (MSFT) by licensing its Mac OS to other hardware vendors. As a result, it nearly went bankrupt and Steve Jobs ended the practice after he returned to the company in 1997.
Palm: Same thing. It licensed its OS to Handspring and others. Eventually, that model fell apart. Actually, in the long run Palm itself fell apart in terms of handhelds, but that was many years later.
In any case, the fact that Tesla now, after having belittled BMW on many of its quarterly conference calls over the last year, is asking BMW to help it to build out its charging infrastructure should cause an investor huge concerns, in my opinion. Why?
Well, on the surface, Tesla doesn’t need to do this. It doesn’t need BMW’s money. It has seemingly superior technology -- or so they say. Why not tell BMW -- and everyone else -- to just go pound sand? As a Tesla shareholder, isn’t this how you ensure that Tesla maximizes its profits?
The rationale for Tesla’s superior multiple -- let’s call it 10x current sales ($30 billion fully diluted market cap, $3 billion in annual sales, using round numbers) -- compared to BMW’s 1.5x multiple, is that it’s got superior proprietary technology with lock-in. That lock-in would be its charging network, which is proprietary. It is why, as a consumer, you have to buy a Tesla and not a BMW or Nissan.
Opening up this proprietary network would be great for the consumer. It would be great for BMW. Heck, if Tesla opens it up to BMW and then sets the precedent for every other auto company, it would be great for all of those other automakers, too.
However, I don’t see how this could be anything but bad for Tesla’s stock value. The rationale for the gigantic multiple premium goes away. Once it opens up its network, while Tesla will get some help with its capital expenses and will be paid some usage fees, it’s just an automaker -- and those don’t trade at 10x sales. They trade at 1.5x sales, or a lot less.
Tesla said on the conference call that it’s doing this because it is concerned about the environment: It needs to help speed up the adoption of electric cars. That’s great -- for Tesla’s competition and for the consumer. Stock traders, however, don’t usually view their brokerage accounts as some sort of social service charity.
As a result, upon hearing this news from Tesla, I shorted the stock.
At the time of publication the author was long AAPL and short TSLA.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.