What could get people excited about the potential merger is this ability for the two organizations that have demonstrated that they share the same ability to execute and deliver and execute very fast. And then combining the different capabilities in terms of the AI and the funding capability, it still doesn't change the challenges that Tesla has to solve. Even if you solve autonomous driving for the robo taxi, you still have to create a business, and that business happens in the streets on the ground. So, it's all about making these cars, delivering them, deploying them, charging them, cleaning them, finding customers, and utilizing them, etc. And these are all things that the SpaceX merger would not help. It's still things that Tesla is going to have to figure out by itself.
Welcome to Prof G Markets. I'm Ed. It is October 22nd. Let's check in on yesterday's market vitals. The major indices rose with SpaceX's earnings sparking a rally in tech. SpaceX shares climbed 8% and Tesla's got a boost too ahead of their earnings report. We will get to that in just a moment. Brent crude rose back towards $110 per barrel. The yield on 10-year Treasuries was stable, and finally Netflix shares fell 5% following their earnings. Stick around for the end of the show to find out why. Okay, what else is happening?
Tesla shares rose around 1% after the company reported third-quarter earnings. Total revenue was flat year-over-year, which was in line with analyst expectations. However, its automotive business continued to struggle, with both revenue and deliveries falling from a year earlier. One bright spot was its positive free cash flow, which was a surprise to analysts. But after Tuesday's SpaceX earnings, Elon Musk confirmed that special committees are evaluating a potential merger between Tesla and SpaceX. So, the question on most investors' minds actually has nothing to do with earnings. Most investors are wondering, is Tesla about to merge with SpaceX? Joining us to break down these earnings and this potential merger question, we are speaking with Kareem Booster, co-founder and managing partner at DVX Ventures and former vice president at both Tesla and Lyft. Kareem, good to see you. Thank you for joining us. Let's start with the earnings, which seem to be largely in line with what analysts had expected. I'm most interested in the fact that the auto business, the deliveries and the sales are down. We knew that was going to happen because we'd gotten the deliveries numbers before. So, I don't think there was any surprise here for Wall Street to react to, but let's just start with overreactions to the earnings and also what's going on with the car business.
Mhm. So I think if you look at it, Tesla last week made the Roadster fly, and the question this week was all about the numbers, and answering the question whether the car business that is currently paying the bill can actually pay the bills for the big moonshots that the company is working on. And from the analysis of the numbers this quarter, I would say that the answer is partially yes, because you pointed to negative trends that we've known have been happening for a while. But there's brightness and light for this quarter specifically in that the free cash flow, which is one of the key metrics that we should look at, has improved compared to last quarter. They generated 1.5 billion in free cash flow. Gross margins from the auto business have also improved by two points, and that's driven by execution and the ability to generate increased margins. So these are two very important numbers for Tesla because it shows that out of the big moonshots that the company is going to be working on, the car business can deliver its part in generating some cash that is going to be needed in the coming quarters.
What is the answer behind those improved margins and also that improved cash flow? If the car business is in decline, what is going right?
So I think it's all about execution, because if you look at the numbers, deliveries have not increased dramatically, but the fact that gross margins have improved means that this has been achieved without sacrificing margins with discounts and these kind of things. So I would attribute it really to the level of execution and the focus that the team is able to have to deliver these kind of numbers. Now we have to put it in perspective in terms of what the company has to fund. We're talking tens of billions of dollars in capital expenditure that are going to be needed to be funded in the coming quarters. So this one and a half billion of free cash flow is a small amount, but the important thing for the car business is to show that it can deliver its part in this big funding that needs to happen in the coming years.
When I look at the Tesla valuation trading at more than 300 times earnings, you got the rest of the industry trading at around 17 times earnings. And you can hear I'm skeptical of this stock. But when I see them marginally increasing those margins, improving their execution for a business that is declining, I'm sort of like, I don't see why it matters. Like I'm almost like you need to be pursuing something so gigantic, so enormous. And when I see the Roadster flip and land and fly through the air, I'm like, 'Wow, that looks visually very cool.' But is that the thing that's going to get Tesla to where it needs to be? Because in order to justify this valuation, I mean, this business has to absolutely explode. And so I guess I'm thinking about where's the execution on the robo taxi? Are the humanoid robots proving — are we seeing that there is a real market for these things? So I guess what would you respond to that skepticism from me?
Yeah, I think you're totally spot on. So the demo of last week, the point is to prove that Tesla can still achieve and accomplish extraordinary things.
But what really matters, to your point, is — so like I said, the automotive business doing their part, generating a little bit of money that is going to be helpful to fund the big project. But the next big part of the question is that the robo taxi business and the Optimus have to start demonstrating that they can deliver, that Tesla can ramp them, can scale them. And on that, it's not that much about the numbers because they're too small right now. It's about starting to meet deliverables and milestones. The question that what I'm really going to be focused on in the coming — starting with the earnings call today and in the coming weeks — is are we going to see a plan, a concrete plan, and are we going to start seeing material progress against that plan that shows that these two businesses are starting to deliver against the milestones that are ultimately supposed to take them to achieving these big things?
How do you view it currently? Do you think that they are executing on those deliverables? Do you feel bullish on their execution of the — let's just focus on the robo taxi, because the humanoid, I mean, who knows. Do you think that it's going well?
Well, it's hard to say that it's going well when we don't see any material number or milestones or deliverables announced by the company that we can look into. So what we know is that the company is still going very slowly in an effort to prove that it can run these robo taxis in a safe way with a very small fleet. Now the challenge in this industry for robo taxi, it's all about trust. It's priority zero, one up to ten. You need to build the trust from regulators and from the public. If you don't have trust, you don't have a business. And I think the company right now, the reason why we're not seeing that material progress that we're looking for is simply because they're still tuning and fine-tuning the system. So that's only step one that they have to pass. Then you have to demonstrate that you can do that with 100 — if you do it with 100 cars, can you do it with a thousand and 10,000, and ultimately catch up to Waymo, who's currently delivering 500,000 rides every week in a fully autonomous way.
Shifting gears here to this potential merger between Tesla and SpaceX. Elon said that both companies have formed these special committees to explore a merger. It seems like this is what he wants to do, which seems like it will have massive implications for both companies, for investors, for Wall Street. What do you make of this news? Do you think this is going to happen?
So I think we have to let the processes happen, like you said, with the committees. I think from a pure — what really matters at this point, it doesn't change any of what Tesla has to deliver. The car business has to show that it can fund itself and fund the next moves, and the robo taxi has to demonstrate, as we were saying, that it's going to start delivering. Now, in terms of what it changes, there's for sure interesting opportunities for both companies. I think on the Tesla side, having access to SpaceX compute and AI and being able to share chips is going to be very interesting. The other opportunity for Tesla is the fact that — so unlike Tesla, SpaceX has demonstrated that they are creating this cash-generating engine, demonstrating the ability to rent compute and generate billions of dollars every quarter. So we were talking of the sources of funding for Tesla. That could be a great opportunity for Tesla, along with the common DNA and vision and capabilities that the two organizations share. So that's I think what could get people excited about the potential merger is this ability for the two organizations that have demonstrated that they share the same ability to execute and deliver and execute very fast, and then combining the different capabilities in terms of the AI and the funding capability. It still doesn't change the challenges that Tesla has to solve. Even if you solve autonomous driving for the robo taxi, you still have to create a business, and that business happens in the streets on the ground. So, it's all about making these cars, delivering them, deploying them, charging them, cleaning them, finding customers and utilizing them, etc. And these are all things that the SpaceX merger would not help. It's still things that Tesla is going to have to figure out by itself.
I wonder if Elon believes that it will help, at least from a stock perspective, because — and I think about this a lot, what you told us last time you came on the show, which is that the brand of Tesla, the way it's known among the engineering community, it doesn't have that luster that it used to have during its heyday, and it's struggled to attract the top talent in the way that it was able to get them very easily going back a few years ago. I wonder if this is his way to take the reputation of SpaceX as this forward-thinking, sexy new company that's deploying satellites in space and potentially going to mine asteroids and build colonies on Mars — you name it — that he's taking all of that sexy brand value and then dumping it into Tesla. And then perhaps if he does that, if he merges the two together, then investors will say, 'We're not so worried about what happens on the ground when it comes to your business.' Maybe engineers will say, 'Oh yeah, I am willing to go work for that company because it's sexier and more exciting now.' Like I wonder if this is his way to sort of change the way that investors see this thing and stop focusing on the fact that the business is struggling, at least on the automotive side, and say, 'Don't worry about it because they're launching rockets into space.'
I think I can't comment for what investors might take out of it, but I can comment in terms of the teams and the people. And you're totally right that it's been the consistent approach for Elon. The way he attracts incredible people and incredible talent is by creating this bold vision and putting together these moonshots that tend to attract and mobilize. So it's not only about hiring, it's also about mobilizing the energy internally. And in a way, the demo of last week is part of that. It's showing, look at what we can do, even more so when we put our resources together with SpaceX and we put some thrusters from SpaceX on the Roadster. So it's that kind of thing. Now, do you need a merger to do that? Not necessarily. Because 8, 10 years ago, remember when Falcon Heavy launched their first payload, we put the Tesla — I was at Tesla at the time — we put Elon's Roadster in it, and it did create this kind of shared energy and excitement across the two organizations. So, but you're right that there is a constant need for the company to create this excitement and attract new talent and mobilize the existing talent towards impossible goals.
Do you think it's a good idea? I mean, as an analyst, as someone who used to work for one of these companies, is it the right move to combine?
So, I think whether it's a good idea depends for whom, and it also depends on the deal, and we haven't seen the deal, what the deal looks like. What I can tell you, as I was saying earlier, in terms of what's in it for Tesla, there's definitely good things that are in it: the ability to get access to the AI and the compute and the chips that Tesla needs. It doesn't change fundamentally the work to be done by Tesla, and the merger doesn't help on that, because it's still about ramping up these physical businesses in the real world, and that's hard work, and as we've seen from other ramps, and we see it with every physical ramp, there's lots of risk and lots of uncertainties, but it definitely helps on a number of topics. Yeah, from that perspective.
