Certainly we've all heard of Tesla and maybe we even know someone who has bought one of their cars or other products. I was lucky enough to get into this stock early on (cost basis of $44) and this stock is what sparked my interest in the markets. Rather than go into a full post and outline all aspects of a company like I normally would, I wanted to simply address the company's operations, catalysts, total addressable market (TAM), my discounted cash flow model, and my revenue/expense model. The goal of this post is to reevaluate my bullish thesis on the company and see if it's a stock worth investing in for anyone who doesn't hold a position.
Tesla was founded in 2003 with the goal in mind of accelerating the world's transition to sustainable energy. The company was founded by a group of engineers who first and foremost wanted to create electric vehicles that would prove to be better, quicker, and more fun to drive than gasoline (ICE) vehicles. Today, Tesla builds all-electric vehicles and infinitely scalable clean energy generation and storage products. In 2008, they unveiled their battery technology by introducing the Tesla Roadster. After that, Tesla introduced the Model S which is a premium all-electric sedan and has become the best car in its class in every category. The Model S has the longest range of any electric vehicle, over-the-air updates that make it better over time, and a record 0-60 mph acceleration of 2.3 seconds as proved by Motor Trend. In 2015, Tesla introduced the Model X which is the safest and quickest sport utility vehicle in history and holds 5-star safety ratings across every category from the National Highway Traffic Safety Administration. In 2016, Tesla unveiled the Model 3 which is a low-priced, high-volume electric vehicle that began production in 2017. Shortly afterwards, Tesla unveiled the fastest truck ever, Tesla Semi, which was designed to save owners a minimum of $200,000 over a million miles based on fuel costs alone. The Model Y was introduced in 2019 and is a mid-size SUV with seating up to 7. In addition, Tesla introduced the Cybertruck around the same time and was designed in mind to have better utility than a traditional truck and more performance than a sports car. Tesla's vehicles are produced in Fremont, California, and Gigafactory Shanghai. In order to prioritize safety, the company requires production employees to participate in a multi-day training program before ever setting foot into the factory. In terms of their energy business, Tesla manufactures a set of energy solutions including the Powerwall, Powerpack, and Solar Roof which enable homeowners, businesses, and utilities to control their renewable energy generation, storage and consumption. What's supporting their automotive and energy products is Gigafactory 1 which is a facility designed to drastically reduce battery cell costs. As a result of having brought their battery cell production in-house, the company manufactures batteries at volumes required to meet their production goals.
According to Mordor Intelligence, the electrical vehicle market was valued at $260.63 billion in 2020 and is expected to reach $1,046.8 billion by 2026. That growth represents a compounded annual growth rate of 23.06% over the forecasted period. In 2020, sales of electric cars were 4.6% of total car sales around the world. Even in the midst of the Covid Pandemic, electric car registrations increased by 41% in 2020 while global car sales dropped 16%.Factors such as increasing cost of fuel, government initiatives to promote the usage of EVs, increasing investments by OEMs, rising environmental concerns, the decreasing cost of batteries, and advancement in charging systems are driving this market. More than 130 countries have now set or are considering setting a target to reduce emissions to net zero by 2050. Of the 191 parties to the Paris Agreement, more than 150 have so far submitted new or updated national action plans, called Nationally Determined Contributions (NDCs), as required by the agreement. Keep in mind that the Paris Agreement has the goal of limiting global warming to under 2 degrees celsius and in order to limit global warming to no more than 1.5 degrees celsius, there needs to be a 45% reduction in emission by 2030. Another factor to take note of is the decreasing price in batteries. EVs are generally more expensive than ICE vehicles today because of the price of batteries. This is the reason why governments are offering subsidies to help make EVs more affordable. According to Bloomberg, Lithium-ion batteries (the ones used in Teslas) have fallen from $1,200 per kilowatt-hour to just $137/kWh in 2020. As this trend continues we can expect the prices of EVs to fall and in turn increase EV adoption. Out of all geographic regions, Asia-Pacific is expected to witness the fastest growth, followed by Europe and North America. For context, according to Allied Market Research, Asia-Pacific and Europe accounted for close to 75% of the market in 2019. More specifically, the Asia-Pacific region accounted for close to 52.4% of the share in 2019. The combination of these facts and trends, in addition to others, is what is ultimately driving the market. An extensive list of global EV policy's can be found here.
1 - Vehicle Capacity
In the most recent quarterly update deck, Tesla said that "Our Fremont factory produced over 430,000 vehicles in the last four quarters and we believe there is room for continued improvement. Model S production continued to ramp successfully in Q3 and Model X production ramp and first deliveries have begun." In addition, Gigafactory Texas is making progress and according to a recent report from Teslarati, Tesla may be ready to start production at the factory soon. This news comes from recent filings with the Texas Appraisal Review Board. The filings show that the applications are for Giga Austin's five primary sections which includes Body in White, Stamping, General Assembly, Casting, and Paint. The date for completion of all five facilities is listed as December 31, 2021. More so, Tesla stated that China continues to ramp well and remains their main export hub. In order to drive improvements, they've shifted to Lithium Iron Phosphate (LFP) batteries. According to greencubestech.com, "LFP batteries have an intrinsically safer cathode material than NMC/LCO batteries and do not decompose at higher temperatures. This means LFP batteries provide the best thermal and chemical stability, which results in superior safety over NMC/LCO batteries." Thus, the shift in focus to these different batteries is a result of the increased safety they provide. In terms of Giga Berlin, Tesla stated that the factory remains on track with the testing of the equipment going well. They expect that the final permit will be approved before the end of 2021. All in all, Tesla continues to make strides to be able to fulfill orders and focus on improving their capacity and technology.
2 - Core Technology
In October Tesla announced that they started to expand on their full self-driving (FSD) streets beta to more drivers. They continue to monitor fleet data closely to make sure the rollout is smooth. In addition, according to a chart that Tesla released in their most recentQuarterly Update Deck, their cars continue to prove that their FSD capabilities on their cars is safer than that of the US average by far. The data shows that there is roughly one crash per ~4.3 million miles driven for Tesla's on autopilot compared to the U.S. average of one crash per 500,000 miles. Even with no autopilot or active safety, Tesla vehicles still prove to be superior to that of the U.S. average. However, we still need more data to come to get a complete picture regarding the safety of Tesla vehicles on autopilot or active safety compared to that of the U.S. average. Furthermore, the company continues to update their vehicle software. They recently added the Disney+ streaming video service, the Sky Force Reloaded scrolling arcade shooter game, Car Wash Mode, and a number of improvements to cold weather performance. As time goes on even more games and capabilities will be available to Tesla vehicle owners and many of them can be found on Tesla's Youtube channel. Another exciting development that will translate to increased revenues is Tesla's insurance product. In Q3 they rolled out their "Safety Score" functionality which will be used for their telematics insurance product. The technology that the company has built into their cars will allow them to monitor braking, turning, tailgating (unsafe following), forward collision warnings and forced autopilot disengagements in order to predict the probability of a collision. As more data is received, this system will continue to be fine-tuned. They launched the telematics insurance program in Texas in early October. As a result of the immense amount of data that the company collects regarding the driving style of Tesla vehicle owners, insurance premiums will be able to more accurately reflect the chances of a collision compared to traditional insurance companies. The data they collect will also be used to communicate to Tesla vehicle owners how they can adjust their driving to decrease the probability of a collision. This service will contribute to increased revenues and potentially be one of their largest services in the future. These exciting advancements in Tesla's core technology is what I believe makes the company superior compared to other automotive companies.
3 - The Energy Business
According to Tesla's most recent Q3 2021 Quarterly Update Deck, energy storage deployments increased a whopping 71% YoY in Q3. The increase was primarily attributable to strong Megapack deployments. In addition, solar deployment came in at 83 MW in Q3 which is an increase of 46% YoY and specifically Solar roof deployments more than doubled YoY. While the growth of Tesla's energy business is outstanding, it's important to remember that their energy business accounts for only roughly 6% of their revenue. Nevertheless, Tesla is making great strides to increase their energy production capabilities and recently introduced a new facility called 'Megafactory' in Lathrop, California. As shown from the chart below, total energy storage deployments compounded at an annual growth rate of 96% over 4 years. More so, the chart shows that the company is focused on aggressively growing their Megapack capacity. As time goes on and consumers catch wind of the constantly improving technology behind Tesla's energy products, I suspect that their energy business will become profitable and prove to expand the company's earnings.
*NOTE* - Please refer to the revenue/expense model in the pictures
As you can see from my model, I have Tesla growing revenue at close to 50% per year. The reason why I have Tesla growing at that rate comes from the fact that in October Elon stated that he expects their production to grow by at least 50% per year "for quite a while." Also, Elon stated that he thinks the Model Y SUV will be the world's best-selling vehicle by 2023. So far Elon has proven himself to be a forward thinking entrepreneur with high ambitions and Tesla has managed to post record profit despite supply chain issues. For 2022 analysts have the company reporting EPS in the range of $5.25 to $11.3 and my 2022 EPS of $6.58 comes below the average analyst estimate of $8.22. I have Tesla's EPS below that of consensus because I wanted to stay conservative with my projections. I expect that what will make 2022 such a great year for Tesla, and potentially result in higher EPS, is supply chain shortages starting to clear up in addition to ramping of their energy business and improvements in their app store and FSD capturing the attention of consumers. More so, their Cybertruck is expected to launch in late 2022 and based upon the chart below from CNET we can see that the Cybertruck boasts the best combination of power, torque, and range according to estimates. As the company scales their factories in Berlin, Texas, and China, Tesla should be able to meet demand if they achieve their goals.
*NOTE - Please refer to the table in the pictures
After conducting my research I've come to the conclusion that holding my Tesla shares should prove to be profitable in 2022 and beyond. What I could see holding back this company is competitors resonating with consumers and stealing market share from Tesla, failure to meet their production and factory goals, and a decrease in demand. However, with Elon at the helm of Tesla, the risk/reward with this stock is in my favor. I love how this company is constantly innovating and focused when it comes to things such as listening to consumers and building out new products and services (insurance, Cyberquad for Kids, Cybertruck camping mode, etc.). Taking a look at the chart I constructed below, based on conservative numbers I believe Tesla has significant upside over the years. While the chart below doesn't show Tesla stock yielding double digit returns every year, I believe that the numbers that I inputted in my model have a high likelihood of being beat. For those investors that don't hold shares in Tesla, I recommend buying shares below $930. With the run-up that the markets have had this year, we may see opportunities to buy Tesla in the $800 dollar range if the markets have a healthy correction. I don't expect the stock to go below $850 unless something significant happens that would cause Tesla stock to fall. Nevertheless, 2022 should be yet another great year for Tesla.