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stock continues to fall, and has now fallen to about half of its $ 385 peak. It's bad, but it's nowhere as serious as
Netflix
of the
Inventory decline by 80% in 2011. The decline in Netflix was followed by a period of eight years of growth. Will Tesla shareholders be rewarded in the same way? The question is whether Netflix 2011 is a proxy comparable to that of Tesla 2019.
In 2011, Netflix announced a dramatic price increase and its CEO, Reed Hastings, announced the separation of its streaming business and its DVD business by mail. In a single quarter, Netflix lost 800,000 subscribers, just over 3% of its subscribers, and 24 million.
The belief of the company in their category was at the heart of these expensive decisions. They believed that streaming was the future and had a considerable advantage. And Netflix was 100% right. Now, they have 60 million households in the United States and 150 million in the world. The stock price is 39 times higher than its 2011 low point.
Similarly, Tesla is convinced that the demand for electric vehicles will increase exponentially. In 2018, electric vehicles accounted for 2% of all new cars sold in the United States, but 20% of Americans wanted an electric vehicle (according to a study by AAA). Electric vehicles already have a market share of about 10% in California. Tesla accounts for over 60% of the share of electric car growth. The idea that Tesla's 30,000 deliveries decreased in the first quarter of 2019 compared to the fourth quarter of 2018 highlights a fundamental problem with the demand for electric vehicles (which could easily be in the millions) or Tesla itself (their products being appreciated by consumers) as a stretch.
Netflix also believed in its pricing power, especially as it continued to improve its product (for example, better recommendations and more content, including original and award-winning content). Netflix was also right on this point and continued to raise prices successfully. Although Netflix may have lost some subscribers when they increased their prices, total revenues and profits increased enough to offset those losses.
Tesla did not increase its prices, but the federal rebate of $ 7,500 for electric vehicles was halved by the end of 2018, just as their delivery volume had dropped. Some analysts have linked these two points and found a weak demand for Teslas. The most likely scenario is that this temporary shock on prices had an impact on quarterly sales resulting in some sales in the first quarter of 2019 earlier in the fourth quarter of 2018, since the elimination of the tax refund federal government had been known for some time.
In fact, Tesla's pricing power is strong. The best evidence of Tesla's pricing power is that Tesla attracts mainstream car owners as well as other luxury brand owners. By CEO Elon Musk, the five most traded cars against a Tesla are
Honda
Accord, Honda Civic,
Toyota
Prius, Nissan Leaf and BMW 3 Series. It's no coincidence that, from 2016 to 2018, the Toyota Prius, Toyota Camry, Honda Accord and Honda Civic all declined by 15% in the US . This decline of nearly 190,000 cars is comparable to the 180,000 Tesla sold in the United States in 2018.
Netflix and Tesla also experienced similar difficulties, namely communication and execution.
Although Netflix was finally right in raising prices and focusing on streaming, the way it communicated these changes to its customers was clumsy. The timing of some of these moves was also wrong: it could have allowed a DVD by mail to slowly fade and introduced its price rise when it was launched. Room of cards, its first big success in original content. These were non-forced errors. Likewise, Tesla has had similar, self-inflicted struggles in communication and execution.
The difference between the two companies is that Netflix's execution has been simplified and their communication has become more empathetic. Netflix continued to raise prices, using a better / better / better price strategy to give customers a sense of control. Netflix also recognized that it was expensive to try to be excellent in all areas. That's why they migrated to Amazon Web Services, even though Amazon Prime Video is a direct competitor. They managed to improve and expand their content and geography.
Meanwhile, Tesla seems to be trying to do too many things at the same time, perhaps one of the reasons he is fighting for deliveries. Musk continues to reconcile the roles of Tesla, Space X, and Boring Company, and occasionally posts tweets that are inciting to the SEC.
Although Tesla is right in terms of consumer demand and pricing power, they must also remember that a successful business takes more than that. To be right is not always enough.
Eddie Yoon is the founder of EddieWouldGrow, a think tank and growth strategy advisor, and the author of the Superconsumers book and a monthly newsletter. Find it on Twitter and Instagram @eddiewouldgrow.
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