Fundamental
I have concluded that the fair value of Tesla is $700B, which implies $730 per share. This only accounted for it being a dominant EV manufacturer. Adding the autonomous technology subscription, the solar roof, and other aspirations, one can easily make an argument that Tesla is worth much more than that.
Key assumptions:
· Discount rate = 10%
· EBITDA margin will continue to expand. Tesla has a mature manufacturing capacity. It allows the company to continue to lower the cost of manufacturing while maintaining a competitive price. Keep in mind that the machines you need to build an EV are different from the ones you need for an ICE. So good luck to them. Press F to pay respects.
· SG&A will continue to increase but shrink relative to sales as it keeps expanding. Tesla’s SG&A to sales ratio will continue to shrink because of its direct-to-consumer retail model, the popularity of Elon Musk, and the network effect of Tesla.
· No margin expansion from Level 5 Autonomy. I have not accounted for Tesla achieving Level 5 Complete Autonomy because of government hurdles. I never doubted Tesla’s ability to achieve L5 autonomy. But unless Tesla can achieve 99.99999% safety, it would be difficult to convince regulators that it is sufficiently safe to roll out on a national level.
· I assumed that Tesla to deliver 13 million cars in 2030. Back in 2019, some analysts expected 2020 delivery to be 2.5 million and the market will grow at an annual rate of 28.6% through 2030. The global EV sales in 2020 turned out to be 3.1 million (24% higher than the estimate). This happened during a freakin pandemic when total passenger car sales dropped 14%. Based on that number and the growth rate of 28.6%, the number of total EV delivery is expected to be 39m in 2030. Assuming Tesla taking one-third of the EV market, that would imply 13m cars in 2030. Compare that to the annual delivery of 0.5m in 2020, that’s 39% CAGR. 39% annual growth is conservative compare to Tesla’s own guidance of 50%.
Why I Like the Stock
Good Management
Elon Musk can be unpredictable, but he is able to attract some talented people. Zach Kirkhorn is the perfect person for the CFO position. If Elon is the alpha chad, then Zach is the math guy that does all the homework. He came in during the most difficult times of Tesla and he was able to turn it around by utilizing a series of successful capital raises. He also demonstrated greater accounting discipline and provided a more conservative forecast. He turned Tesla into a force to be reckoned with.
Leader in EV
Of all the “Tesla Killers” out there, NIO may be the only one that has even come close to Tesla. But it is expected to remain in its domestic market in the coming few years. For the rest of the world, a simple google search will tell you that neither the ID.4 from Volkswagen nor the Mach-E from Ford is a real threat to Tesla. Tesla is better in terms of price, range, technology, and overall efficiency. Think about Over-the-air Updates, Supercharging Network, Scheduled Departure etc etc. For the new players in the space, as we learned from Tesla, designing the car may be easy, but ramping up at scale is the real difficult task.
More importantly, the EV market is still expanding. It does not necessarily have to be a zero-sum game between the current EV players. The EV market is big enough for all these companies to thrive. Companies such as Nio, Lucid, and Rivian have huge potentials, but Tesla will continue to be the leader in the segment.
Subscription-Based Full Self-Driving
FSD is becoming more mature. I am not even talking about the autonomous taxi network because I think that’s still years away from becoming a reality. I am talking about the subscription-based FSD service that is coming later this year. Currently, Tesla is charging $10k for the service and many Tesla owners are hesitant. But the adoption rate would be through the roof once they roll out the subscription-based model. Tesla will be able to generate a recurring, reliable software-driven revenue with a high EBITDA margin.
Healthy Balance Sheet that can Withstand the Economic Uncertainties
In the past 6 months alone, Tesla has raised $10 billion dollars in two share offerings. Tesla is sitting on over $19 billion in cash and they are successful in generating consistent free cash flow. In Q4 2020, they reached a record $1.9 billion while continue spending heavily on growth and investment. It has a quick ratio of 1.49 and a current ratio of 1.87, which suggests it can withstand any short-term negative impact from economic uncertainties.
Many Untapped Revenue Drivers
Currently, less than 14% of revenue comes from sources other than their automotive revenue. The revenue from these sources, such as Solar Roof and energy storage solutions, is expected to grow in the coming years. Tesla Insurance is another key potential revenue driver that is often overlooked. Currently, it is only available in California, but it is expected to expand to other states soon. Based on the data collected by Tesla, I believe they can offer a more competitive price for consumers while maintaining a high margin for their insurance business. Other potential ideas are autonomous network, in-car entertainment, and many more.
More Than A Car Company
I expect Tesla to benefit greatly from the Biden Administration’s push towards renewable energy. Tesla is more than a simple car company. Tesla has so much to offer on the renewable energy front. Powerwall, Solar Roof, you name it. Their in-house development of battery technology will be a key to their future development success.
Why I Less Like the Stock
Unnecessary Risk Exposure to Cryptocurrency
It recently announced that they have purchased $1.5 billion dollar worth of Bitcoin. Regardless of my view on cryptocurrency, an investor in an EV/Car/Renewable Energy company should not be exposed to the unnecessary risk of cryptocurrency.
Overreliance on Chinese Market
One-fifth of Tesla’s sales are from China. China is the biggest EV market in the world, and EV sales are expected to continue expanding with the huge push from the Chinese government. While demand is still stronger than the supply, but as Chinese competitions keep arising, there is a legitimate concern that the Chinese government may favor domestic companies over a foreign entity. China has done it many times across different industries. For example, between 2004 and 2009, China increased tariffs on import auto parts and assemblies and, at the same time, heavily subsidized the use of domestic carmakers. While the EV market is still expanding, it may not be in the best interest of Tesla to rely too much on the Chinese market.
Technical
From the data from the past 5 years, you can see that pullbacks of this magnitude (around 30% off-peak) are common and are usually short-lived. We are currently around 34% off-peak. Interpret this information however you like.
https://imgur.com/XKTQQFc
Upcoming Catalysts
Feedback from FSD Beta that has rolled out in the last couple of days.
Any update on Cybertruck.
More memes from Musk?
Not financial advice, I don’t know what I am doing.
My positions:
I am long TSLA, AAPL, and PLTR.
Sources:
Canalys: Global Electric Vehicle Sales up 39% in 2020 as Overall Car Market Collapses; https://www.businesswire.com/news/home/20210208005423/en/Canalys-Global-Electric-Vehicle-Sales-up-39-in-2020-as-Overall-Car-Market-Collapses
Electric Vehicles: Setting a course for 2030; https://www2.deloitte.com/us/en/insights/focus/future-of-mobility/electric-vehicle-trends-2030.html
Tesla to raise up to $5 billion in share offering; https://www.cnbc.com/2020/12/08/tesla-to-raise-up-to-5-billion-in-share-offering.html
TSLA10K; www.sec.gov
Submitted March 07, 2021 at 07:58PM by MisterBing18 https://ift.tt/3bpEX64
