If we’ve ever spent more than 20 min together, you have likely heard me share my undying love for Tesla. I still have a lot to learn about investing but Tesla has been one of my favourite and most profitable stocks to date. I spend hours reading and watching all things Tesla. I highly recommend Tesla Time News from Now You Know.
I started investing in Tesla in early 2019 at around $40 a share split adjusted. At the current price of ~$870 a share my original shares would have had a ~22x return. I sold some of these at a much lower return. It’s hard not to cash out as something becomes a much larger share of your overall portfolio. I even made the mistake of completely selling out near the beginning of the pandemic expecting lower vehicle sales and then realizing my mistake and buying back in at a higher price. I really should have just bought and held it. Still lots to learn.
That being said, my overall return on Tesla so far including sales and buying back in is sitting at ~9.5x my initial investment and it’s my largest individual holding.
I’m making the bet that Tesla is still undervalued at this high price given it’s long term potential and it’s still one of my highest conviction stocks. I’m expecting a 3-10x return over the next 5-10 years from the current price point. That would likely make Tesla the world’s most valuable company which I think is appropriate given it’s future plans in 3 of the largest markets in the world: vehicles, energy, and insurance.
This is made possible by a confluence of cost curves.
Cost Curves
Tesla is coming along at a perfect time as several technologies are becoming widely commercially viable for the first time.
Solar power becoming the cheapest form of energy and exponentially reducing in cost. Think $100 a watt in the 1970s to <$1 a watt now.
Cost of lithium ion batteries is exponentially decreasing. Think $1200 a kWh vs ~$137 a kWh now.
Machine Learning algorithmic capapability increasing faster than Moore’s law.
Current Tesla Products
Electric Vehicles
Tesla has a goal to sell 20M vehicles a year by 2030. That would make it the world's largest auto manufacturer by a wide margin. Toyota / Volkswagen both do around 10-11 million currently as the largest manufacturers. This would put Tesla at ~25% of global auto sales which may seem crazy but consider a few things:
Tesla currently has ~80% of the North American battery electric vehicle (BEV) market share and ~20% of worldwide (BEV) market share.
Tesla has plans to release a compact car (the 25k car) which will be much more competitive outside the North American market. North Americans like big cars, SUVs, and trucks.
The world is transitioning to electric vehicles, and it is going to be very difficult for any of the existing manufacturers to transfer to electric. Tesla has a tremendous head start. Tesla's most challenging competition will likely come from Chinese automakers (BYD, BAIC, XPeng, NIO, etc) exporting, not traditional automakers.
Consumer Solar / Storage
Tesla’s solar business has declined since its peak in 2016 when the company it acquired, Solarcity, was the largest installer of residential solar. Tesla had to divert all resources from this business during the production ramp for the Model 3 where Tesla almost went bankrupt. Now that Tesla’s vehicle business is extraordinarily successful, Tesla has renewed focus on the solar business with a new strategy.
Tesla’s strategy for solar is threefold:
Have the cheapest cells on the market by selling direct to consumers and not spending any money on sales and marketing.
Package storage with solar and software in an integrated system that creates synergies.
Successfully ramp the solar roof.
The combined system of Tesla Solar + Power Wall + management software is a compelling product that is seeing great 200% YoY growth.
Other manufacturers don’t have the same level of vertical integration in their solar products or easy to use software.
Utility Storage
As Solar and other renewables (ex: wind power) are becoming one of the cheapest forms of energy, storage is needed in larger quantities to offset times when the sun isn’t shining or the wind isn’t blowing.
Tesla is being picked for many of these commercial projects as their integrated software / hardware solution is industry leading:
They have unique software capabilities including opticaster and autobidder to manage these resources and intelligently decide when to sell power back to the grid.
Their recently opened megapack factory should be able to do about 40 GWh of Megapacks in a year which is 13000 megapacks or 10x growth in the Megapack business vs the ~4 GWh done in the Trailing 12 months (TTM)
Supercharger Network
With >3000 world wide locations and >27,000 individual stalls growing at ~45% YoY, Tesla has the largest EV charging network and it is growing exponentially. Tesla is considering opening this network up to other car manufacturers which could result in a significant source of revenue for Tesla.
With some rough calculations from Goldman Sachs, this could eventually be something like a 25B ARR business.
Autonomous Driving
Tesla is working on self driving cars which, if successful, would be a trillion dollar technology. It’s not clear if this is actually possible and most companies in this space have not lived up to the predictions they’ve made. It currently seems to be one of those technologies that’s always 5 years away.
However, even if this just remains a driver assist feature that does 80% of the driving for you, it is likely Tesla will continue to make substantial recurring revenue selling this as a software subscription or one time upgrade to their millions of customers.Tesla’s full self-driving (FSD) is a one time cost of $10,000 or a monthly subscription of $199. Currently the take rate of this is around 11% of Tesla vehicles.
Even if they just maintained this, the eventual Tesla fleet at sales of 10-20M cars a year; Tesla could potentially have 200M cars on the road. If 20M had FSD that would be:
$199 * 12 * 20M = 47B in high margin software sales per year
Insurance
Tesla also sells car insurance in California and has just launched insurance in Texas as well. Using the data / sensors built into the car they are able to price rates based on driving behaviour instead of actuarial tables based on a driver’s gender or age. It seems this far they’ve been able to offer cheaper rates to insure Tesla’s than other insurance brokers (especially in Texas). If Tesla manages to become the world's largest auto manufacturer they could also end up one of the world’s largest car insurers.
Future Products
Tesla has talked about making autonomous robots, HVAC, electric VTOLs, some kind of bus, potentially machine learning training as a service, and probably others I’m not thinking of. Tesla has no shortage of ideas of where to invest capital in order to launch new products with large potential markets.
Valuation
If Tesla operates on parts of its plan the numbers get big quick. Even if we assume Tesla never solves for fully autonomous cars, and never launches a robotaxi / doesn’t launch any future products in the next 10 years.
In a potential scenario Tesla sells 20M cars a year in 2030 and has 56M cars on the road with 6M paying for FSD. Assuming electric cars get cheaper we could put an average selling price (ASP) of $35,000 a car or $700B in revenue for car sales + 6M * $200 * 12 = $14.4B in FSD subscription revenue. Superchargers might be doing something like $10B in revenue by then, and maybe the solar + storage business is half the size of the car business by then, so say $350B in revenue.
At a 20x P/E ratio Tesla would sit at 2.2T -> 3.27T or 2.6X->3.84x from here. If Tesla were to successfully launch a robotaxi network each car would have a net present value (NPV) of ~200k. Therefore making 20M robotaxis a year would be generating 4T in value a year. This would lead to truly huge valuations, which is some nice optionality along with any other future products.
I actually think Tesla is going to have a much better operating margin than 10-15%. They're already at 11% and haven't even ramped up their more efficient newer factories. I also suspect a 20X PE ratio is low if their still substantially growing revenues in 2030 and launching new products. So Even if Tesla misses their goals by half and does something like 10M cars a year, there’s still upside here. Apple has an operating margin of 25% and I could see Tesla getting to something similar.
Disclaimer: This does not constitute financial, investment, tax, legal or accounting advice nor does it constitute an offer or solicitation to buy or sell any securities referred to. Individual circumstances and current events are critical to sound investment planning; anyone wishing to act on this article should consult with his or her advisor.