How I think about Tesla & why I own stock.
It's a non-expiring call option on Elon Musk & the future.
**As of 15th October, TSLA’s market cap is $429 bn
I will start this article by explaining that I am by no means an “early-adopter” or a revolutionary thinker. I typically follow the herd. I am painfully average and by no means exceptional. For this reason, I only bought Tesla in 2020 after the stock rallied massively and the company’s vision was fully formed in my eyes.
I do kick myself for not picking up stock after Elon Musk’s “$420” tweet, but being the sheep I am, I did think the company was headed for disaster as it was stuck in production hell.
Tesla has a $429 billion market cap. 2019 Revenue was $24.5 bn. That gives TSLA a eye-popping Price / Revenue ratio of 17.5x. This is expensive. Amazon currently trades at a 6x Price / Revenue ratio for example.
I think TSLA will become a far more valuable company than its current $429 bn price, and here’s the math for it.
In the last 4 quarters, TSLA earned a gross margin of 19.7%. (Revenue : 25.7 bn, Cost of Revenue : 20.6 bn). In comparison, Toyota earns 18% and Ford does 13%.
TSLA is scaling up battery production with battery manufacturing costs projected to decline 50% in the next 3-5 years. This is inherently capital intensive, expensive and complicated. Check out Battery Day for more. TSLA’s current batteries cost about $127 / kwH. This means an average Model 3’s battery pack is 75 kwH which means it costs $9525. A 50% savings would mean $4700 extra margin / vehicle.
Total US vehicle sales hovered at around 17 million / year. Let’s assume TSLA takes 30% market share in 10 years. That’s about 11 million vehicles in the US alone. Now let’s take demand in China (about 20 million / year) and TSLA takes 20% of that (5 million / year). EU car sales is about 10 million / year and TSLA sells 3 million there. South East Asia car sales is 4 million / year and TSLA does 1 million / year. TOTAL BULL SALES : 20 million / year.
At 20 million / year, with an average sale price of US$25k with 20% gross margin, TSLA’s car sales will be $500 bn with $100 bn of that in gross margin.
Assuming the market matures and gives TSLA an moderate multiple of 4x, the company should be valued at $2T in 10 years.
This is how I look at TSLA. It is bullish because it makes some key assumptions :
TSLA can do 20 million vehicles in 10 years time. I think this is possible since Honda did 19 million vehicles in 2019 alone. I did not even look at sales volume in Japan, Korea, Taiwan and India. Markets that will likely accept a $25k electric Tesla that’s made in China / India
TSLA can build out the factories required to mass produce both battery and vehicles at a 20 mn / year run rate. This is difficult. It’s borderline insane given the production issues TSLA has as recently as 2016.
TSLA can hit that 20% gross margin while selling a $25k car.
Now, one can always write down reasons to not invest in TSLA, but I prefer to be a rational optimist and look at the upside and opportunity. I do think TSLA’s vision is more fully formed in 2020 and the latest Battery Day gives the clearest case for where the company is heading. Here’s why I will continue owning and buying more stock in Tesla :
TSLA Energy contributed 6% revenue. Assuming this drops to 5% in 10 years, a $500 bn car sales revenue will be complimented by an additional $30bn in Energy revenue. This is not to be scoffed at.
As TSLA builds out its factories, it will be able to pump out packs cheaper, better and faster allowing the Energy Business to grow more at better margins.
My calculations don’t take into account the additional revenue from Full Self Driving options, Tesla Insurance (which gives the company float).
My calculations also do not take into account unrealised visionary new products such as the robo-taxi fleet.
My calculations do not take into account demand surge if TSLA can introduce a $25k car. The Model 3 gives some indication of this by becoming the best selling EV in 2020 and also sucking demand away from both lower end Japanese cars and higher end “intro” cars from Mercedes and BMW.
TSLA owns mindshare. When you think “EV” you think TSLA. This is exhibited by their lack of spend on advertising. I would not bet against a company that can generate 20bn in sales with no paid advertising.
I believe TSLA is a far more valuable company in 10 years than it is today. The financials make sense once you look at the opportunity, discount it appropriately and apply some assumptions based on what the company is currently capable of. Let’s say I introduce a 50% margin of safety on my vision laid out above. That would bring TSLA’s valuation in 10 years down to $1T. That represents a 2.3x upside based on today’s stock price.
This means TSLA stock is not only represents ownership in a company, it is also a non-expiring call option on a future by Elon Musk. And I will not bet against that man.
Disclaimer : This is not investment advice and I am not an investment advisor. I merely share my thoughts and you should do your own research and make up your own mind. I currently own TSLA.