Jun 17, 2021
[15 min Read]
Can Tesla be Touched?
Love them or hate them, there is no denying the fact that Tesla has revolutionized the automotive industry. With new EV manufacturers coming out by the dozen, and legacy automakers changing their whole business model/plan to incorporate EV's many have tried to emulate the success of Tesla; however, none have succeeded. Today I will break down $TSLA - Tesla Inc. and provide my thoughts on them, so that you get a good understanding of their business as a whole. Without further ado here is my analysis.
Tesla designs, develops, manufactures, sells, and leases Electric Vehicles (EV's), energy generation/storage systems, and other sustainable energy products. Tesla sells their products directly to their customers through their website and retail locations across the globe.
Tesla is focused on expanding their infrastructure through expanding their vehicle services centers, Mobile service technicians, body shops, super-charging stations, and destination chargers so that they can accelerate the adoption of their products/vehicles.
Tesla's main goal is to lower the cost-of-ownership of their vehicles, which can be done through increasing the efficiency of their manufacturing process through innovative processes, offering financial services/options to their customers that fit their needs, and by increasing production.
Tesla's mission is to accelerate the world's transition to sustainable energy, by reducing their costs and innovating their technologies.
Tesla operates in two main reportable segments, which will be broken down in the “Investment Information” section of this report.
This segment includes the automotive design, development, manufacturing, sales/leasing, and automotive regulatory credits portion of Tesla's business. This segment also includes used vehicle sales, merchandise, and other aspects that are not directly related with producing their vehicles.
This segment includes Tesla's Model 3, Model Y, Model S, and Model X. Furthermore, it will include other models in the future like the Tesla Cybertruck, Tesla Semi, and the new Tesla Roadster.
This segment of Tesla's business brought in revenues of roughly $29.54B in 2020, which is a 28.16% increase YoY. However, the cost of revenue in this segment was $22.93B, which is an increase of 19.61%. Since the revenue growth is larger than the cost of sales growth their margins should be increasing for this segment, which in 2020 they did, moving from 21% (2019) to 26% (2020).
This segment includes the design, manufacturing, installation, sales, and leasing of solar energy generation/storage systems under the “Tesla” brand. This segment also includes related products and services of these solar energy systems.
Some of the biggest products in this segment include Tesla's Powerwall, Powerpack and their Megapack. All of these “packs” are lithium-ion energy storage systems that come with inversion and control technology.
This segment of their business brought in approximately $2B in revenue in 2020, which is an increase of over 30%. However, the cost of sales for this segment in 2020 was 1.98B, which increase by 47.76%, which is not good as the increase in cost of sales should not be this much higher than the revenue growth. In 2020, Tesla barely made a profit on their Energy Generation/Storage Segment of their business. Their margins on this segment decreased from 12% in 2019, to 1% in 2020.
Battery and Powertrain:
Tesla has designed their own, proprietary, Powertrain systems that are adaptable, efficient, reliable, and cost-effective. Tesla offers dual-motor powertrain vehicles that maximize traction and performance in their AWD configuration. Additionally, Tesla is constantly looking for ways to improve upon their technology and are planning to introduce their tri-motor powertrain for even better performance.
Tesla vigorously tests their technologies, and products by undergoing extensive R&D processes that are meant to improve their battery cells, packs, and systems to deliver the best performance and drive. Tesla is currently developing a new, proprietary lithium-ion battery cell to maximize their productive efficiencies.
Tesla uses both vision and radar-based sensors to power their autonomous driving features. Furthermore, Tesla is developing additional hardware to efficiently use the field data their cars collect to improve their networks for improved self-driving performance.
Tesla is looking to further improve their Full Self-Driving (FSD) technologies so that eventually no human driving assistance is required. This should theoretically improve the safety, and efficiency of driving, and change the way we transport.
Throughout the pandemic there were many different supply chain issues, and surges in demand that left products at a shortage. Early on in the pandemic, there were toilet paper, mask, and hand sanitizer shortages, later on in the pandemic, there were housing shortages, and lumber shortages. One of the biggest shortages that came from the pandemic and is currently ongoing is the semiconductor and chip shortages.
These shortages have caused ripples in the automotive industry, with many producers both newcomers and legacy automakers having to halt production. As you can imagine, this has had adverse effects on the stock price of these companies making the shortage even more painful for these companies.
However, there was one company who saw this coming and adapted the quickest in order to avoid many of the supply chain issues that plagued other automakers. This company was in fact, Tesla.
This can be observed through a snippet of a shareholder letter, in which they said, “In Q1 we were able to navigate through global chip supply shortage issues in part by pivoting extremely quickly to new microcontrollers, while simultaneously developing firmware for new chips made by new suppliers.” Furthermore, Tesla was said to have stocked up on chips before time, which also helped them to maintain high levels of production amidst the shortage.
It was this quick thinking and decision making that helped Tesla to adapt and overcome this obstacle, while many other companies just took it on the chin. Tesla's actions/decisions to avoid this shortage is likely to have saved them millions, if not billions of dollars in revenue that would have been foregone.
In 2020, Tesla brough in revenues of $1.6B selling regulatory credits to other automakers who exceeded their emission caps. This is all well and good except for the fact that in 2020, Tesla's net income was $721M. This means that if regulatory credits were non-existent Tesla would have a net loss in 2020 of $879M. However, we know that regulatory credits exist, and that they are lucrative for EV makers like Tesla, so what is the problem?
In 2021, the competition in the EV space is heating up, as newcomers are starting to release their vehicles (ie $CCIV- Lucid Motors), and there are many different legacy car manufacturers that are starting to design, develop, and produce EV's of their own (ie $GM - General Motors, $F - Ford etc.). This is bad for Tesla for a variety of reasons.
Firstly, legacy automakers will be reducing their own emissions and will have a decreased demand to buy regulatory credits from other automakers, as they will be able to meet emission standards or be closer to meeting them than before. This should have adverse effects on Tesla, as they currently sell their regulatory credits to other automakers, and if these companies no longer need as many credits as possible, then Tesla will not be able to sell their credits and lose revenues on that portion of their business.
Secondly, there are many newcomers to the space, which is also bad for Tesla and their credit selling. This is because these new companies will also be receiving these credits and selling them to other automakers. This increased supply of regulatory credits is likely to devalue existing credits, which may have severe effects on Tesla's profitability.
Regulatory Credits are an important factor in Tesla's business models, and any decline in their regulatory credit sales could have severe effects on the future profitability of Tesla. This is something to keep in mind as an investor, especially if their regulatory credit sales start to slow down.
However, if Tesla can shift its reliance away from regulatory credit and find a way to be profitable through their regular operations, then this worry goes away for many investors, and they may enter positions. I think that Tesla can rely on regulatory credits for the next couple of years as the demand for these credits is not likely to subside in the near term. However, in this time they need to find ways to improve their profitability so they can be self-sustaining moving forward. This is a large speedbump for Tesla, however if they are able to navigate it properly, they will be rewarded.
In their Q1 2021 investor deck, Tesla reported a net income (in Q1) of $464M, and they also reported $518M in income from regulatory credits. This means Tesla would have only lost $54M without the support of their regulatory credits. Although this is still “bad” it is better than their Q4 2020 results, as they would have lost $105M without the assistance of regulatory credits. This shows that Tesla is moving away from their dependence on these credits rather quickly which is a good sign for investors, and something to keep an eye on.
I was able to find Tesla's WACC on a website called Finbox, which shows how they arrived at their WACC. This site estimated Tesla's WACC to be 8%, which I used in my DCF model.
I used Tesla's 2020 EBIT growth rate as my CAGR, which is mainly due to the nature of my DCF model. By doing this I arrived at a CAGR of 20.66% which is somewhat conservative given some of the other CAGR estimates floating around.
Interest Expense Decrease Rate:
To find this figure I took the average decrease rate of Tesla's interest expense (found on Yahoo) over the past 2 years. By doing this I arrived at an average annual interest expense decrease rate of 0.51% which I used in my DCF model.
I found Tesla's effective tax rate for the fiscal year 2020 to be 25% through their SEC 10-K filing.
In order to get the best results out of my comparable analysis, I had to choose the best companies that emulate the business model and operations of Tesla. Ultimately, I decided to choose the following 4 companies based on the above criteria, these companies are $NIO - Nio Inc., $XPEV - Xpeng, $GM - General Motors, and $LI - Li Auto.
Nio, Xpeng, and Li auto are all Chinese EV manufacturers that are do not threaten Tesla's operations, however they have similar technology and are at similar stages to their business. Furthermore, these companies (like Tesla) focus solely on manufacturing electric vehicles which makes their operations mimic that of Tesla's to a certain extent.
Additionally, I have decided to incorporate General Motors as a competitor for a few reasons. Firstly, General Motor's is located in the USA and has committed to a large investment in order to start manufacturing competitive EV's. Furthermore, GM has pledged to release 30 different EV's by 2025 and are committing to an all-electric future. GM poses a bigger threat Domestically and Internationally to Tesla than the other Chinese EV companies (at least currently) and GM is a legacy vehicle maker with the capability to produce large amounts of EV's.
There were two ways in which I was able to value Tesla in order to see if it is currently undervalued, overvalued, or properly valued. These methods include a Discounted Cash Flow (DCF) Model, and a Comparable Analysis.
My DCF model discounts Tesla's projected Free Cash Flows (FCF's) over the next 10 years. I was able to conduct this analysis through various pieces of information which can be found above in the “valuation information” section. By undergoing this DCF model I arrived at a fair value of Tesla of $25.94, which implies a downside risk of 95.73%. As you can probably tell, this projection is very low, and their stock is very unlikely to hit this price. However, this DCF shows the extent to which Tesla is overvalued, and why many investors are cautious when looking to invest in Tesla.
Typically, DCF models are not used to value high-growth companies like Tesla, and often there is not enough data or good enough financials in these high growth companies in order to even conduct a DCF model. For this reason, I am not focusing on the results of the DCF too much, however it is good to know this information.
In order to do a well-rounded comparable analysis, I decided to compare Tesla's EV/Assets, EV/Revenue, and P/B to their main competitors as listed in the “Competition Information” section of this report. Since all oof the comparable companies are high-growth Electric Vehicle companies, the comparable ratio's/multiple's that I chose were the only 3 that I could choose given the negative ratio's/multiples of Tesla and in some cases their competitors.
By comparing Tesla's EV/Assets multiple against their competitors, I arrived at a fair value of Tesla of $149.81, which would imply a downside risk of 75.35%. This is a large downside, so I decided to compare the other ratios to see if tis result was consistent among them.
By comparing Tesla's EV/Revenue multiple to that of their competitors, I found that tesla has a fair value of $248.45, which would imply a downside of 59.12%. This downside is not as severe as the implied downside through the EV/Assets comparable, however it is in agreeance with that comparable based on the fact that Tesla is overvalued. Additionally, I decided to undergo one last comparison to further validate/invalidate this idea.
By comparing Tesla's P/B ratio to that of their competitor's I arrived at a fair value of $331.15, which would imply a potential downside of 45.51%. Once again, this downside less than that achieved by the other comparable analyses, however they all agree on the fact that Tesla is overvalued. To get one final comparable price estimate I decided to take the average of my 3 comparable results.
By taking the average result of each comparable, I arrived at one all-encompassing valuation of Tesla of $243.14, which would imply a share price decrease of 59.99%. This is implying a large decrease in the share price, which most likely will not happen, however knowing Tesla is this overvalued is concerning. There are some problems with my comparable that I will discuss next.
In my comparable analyses, I was comparing Tesla to Nio, Xpeng, Li Auto, and General Motors, and there are some problems that came from doing this.
Firstly, Nio, Xpeng, and Li Auto are all Chinese securities. This could be considered a problem given the nature of Chinese stocks being severely undervalued. Historically, Chinese stocks have been heavily discounted in comparison to many American stocks because of the diplomatic and political uncertainties in China, and as a result people are willing to pay less for these stocks. This is a problem because their low financial ratios and multiples that come with being undervalued are exaggerating how overvalued Tesla really is.
Next, there is some problems that arise with choosing GM as a comparable company. Firstly, GM is a legacy automaker that has historically manufactured cars that run solely on fossil fuels. As a result of this, they have already made significant revenues and are at a different stage in their business than Tesla is. This helps to make GM's ratios lower than any EV manufacturer can be at given the current state of EV companies. This makes Tesla look ridiculously overvalued, when in fact it is just comparing apples to oranges in a sense.