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Will the Hyperloop Cannibalize Tesla's Business?

Tuesday - 8/27/2013, 6:45am  ET

Tesla CEO Elon Musk has long hinted about his Hyperloop pet project, and now he has revealed its inner workings. The Hyperloop is Musk's retort to California's proposed $70 billion high-speed rail system , and will use a series of advanced-engineered tubes to allow people to travel extended distances.

The design is expected to allow someone to travel from San Francisco to Los Angeles in 35 minutes . Yet perhaps the most interesting element of what Musk is doing is that he is changing the dynamic of the transportation industry for consumers. Those consumers are the same ones that would likely buy a Tesla. So what gives?

Tesla as a Technology Company...

The reality is that Tesla is more of a technology company as opposed to a car company the way that it operates. Technology moves a lot faster than the old school style of automotive engineering. Tesla, in effect, is akin to the Apple of automobiles.

Apple is not afraid to introduce a product that is going to eat into its existing business. It's done that with the iPhone taking business from the iPod, where sales continue to decrease, down 25% just in 2012 . They will soon do it again with iTunes Radio taking business away from the widely used iTunes download market, which grew 38% from 2011 to 2012 . 

Apple has executed this to great financial success. In their fiscal year of 2012, the company had $121 billion of cash on hand . That same year, they made $156 billion ! Last year, they had 77% of the cash on hand that they made selling their products and services!

Apple knows that in a highly competitive market, it needs to cannibalize itself. Tesla knows that too. Will we someday see a Tesla-branded Hyperloop? That's up to Musk, but if we know anything about the guy, it would not come as any surprise, and it actually might be good for Tesla's overall business to continue to diversify in that manner. 

Self-Driving Cars

The only other company that can be described as taking car concepts and melding them with technology's breakneck pace would be Google . Regulation is a challenge in terms of car safety, but Google has been able to get regulators to approve its self-driving cars in California, Nevada, and Florida . 

Will Google actually get in the car business? It's tough to say. No one ever thought that the company would offer broadband to consumers, but they are going to in a few U.S. cities. They've been in talks with Tesla about licensing its driverless technology, although Elon Musk says that Google's system is not yet a priority.

Google's going to expand its business beyond just search and web services, there is no doubt. Since 2010, the company has boosted its research and development spending 78%, to $6.8 billion. Expect to see that number continue to increase as Google tries to expand its proportion of revenue outside of what it calls "Advertising Revenue" which totaled $43 billion for 2012. Outside of ad revenue? The company only made $2.3 billion in 2012, which is a scant 5% of revenue . Diversification is important.

Tesla's Feeling Good

Perhaps Musk isn't at all bristled by the idea of the Hyperloop taking anything away from Tesla. The plan appears to sweep car buyers from existing manufacturers. In fact, Tesla's revenue from car sales in 2012 was $385 million, a 160% increase from 2011.

In fact, Tesla's automotive sales have been impressive as of late, with the company beating the likes of Chrysler, Volvo and Cadillac, among others in California for a 12% market share. While the company will need to do better in markets other than California to be successful, it would not be surprising to see good revenue increases for 2013 as well. 

Tesla saw a $30 million profit last year, and it's looking likely that they will do better this year. Operational costs need to drop, as total costs of revenue at $383 million is almost as much as their $385 million in car sales. What helped them was their development services revenue at $27 million to bring some profit numbers instead of a loss for once. Could the Hyperloop affect Tesla? Maybe someday, but right now it appears to be on a trajectory to take market share from incumbent higher-end carmakers, and not the market for mass transportation. 

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