Tesla (TSLA) has a chance to be the dominant electric vehicle company in the long-term. It is a leading autonomous vehicle player as well as a vertically integrated sustainable energy company with energy generation and storage products.
However, we do not see it having mass-market volume this decade. Tesla’s product plans for now do not mean an electric vehicle for every consumer who wants one, because the prices are too high.
The Model X crossover released in late 2015 starts at about $80,000, the Model S sedan’s starting price is $69,420, the Model 3 sedan starts at $37,990, and the Model Y crossover starts at about $50,000. Our $306 fair value estimate puts the shares solidly in 1-star territory.
Tesla is Ramping up Capacity
Tesla’s gigafactories may become terafactories as the company seeks to expand its cell capacity to 3 terawatt-hours by 2030 from 0.1 terawatt-hour in 2019. A new factory in Shanghai, wholly owned by Tesla, opened in late 2019, Gigafactory Berlin is under construction, as is a Texas plant for the Cybertruck and Y.
Tesla’s global vehicle capacity as of autumn 2020 is about 850,000. The company sold about 368,000 vehicles globally in 2019. But by 2030 or earlier, chief executive Elon Musk targets annual volume of 20 million – about double the size of Toyota and VW Group. We think global mass adoption of pure electric vehicles is still years away, but Tesla is the leader in the space.
Tesla’s mission is to make EVs increasingly more affordable, which means more assembly plants must come online to achieve annual unit delivery volume in the millions. This expansion will cost billions a year in capital spending and research and development and will be necessary even during downturns in the economic cycle.
Tesla has Brand Cachet and Cost Advantages
In October, we upgraded Tesla to a narrow moat rating, a decision which came from two of our five moat sources: intangible assets and cost advantage. Tesla’s brand cachet is not likely to be impaired anytime soon as other automakers move into the battery electric vehicle space because Tesla will likely keep innovating to stay ahead of start-up and established competitors.
We think Musk was very smart to not only design a great-looking car, but also have Tesla right away sell vehicles at a premium price point. We think if Tesla had started with a mass-market vehicle, it probably would have failed, as too few people would have known about the car and would have been willing to pay for the brand.
We also think Tesla benefits from a first-mover advantage in electric vehicles that let it build factories and vehicles from scratch and create processes that legacy automakers will probably find hard to match.
The ability to possibly reduce battery cell costs by 56%, as outlined at the company’s September event, suggests a cost advantage that incumbent automakers could take years to catch or may never catch, as they won’t want to build many new factories from scratch as Tesla is doing. Legacy automakers are gradually transitioning to BEV production from internal combustion, but we expect they will be saddled with legacy internal combustion engine costs and people costs for a long time.
Though long term there’s nothing stopping an internal combustion engine (ICE) company from becoming a BEV-only company and narrowing Tesla’s cost advantage, we see legacy companies as having legacy cost structures around ICE vehicle programs that cannot be eliminated overnight as these programs are needed to keep those companies profitable while also developing BEVs.
The other cost advantage comes from the customer side via total cost of ownership, as the cost of electricity for a year versus the cost of petrol is not even close. Our annual cost calculation done in January 2020, defined as electricity or gas, insurance, and maintenance, shows the Model 3’s cost per mile at about 15% less than a BMW 330i.
Uncertainties Around Tesla and Electric Vehicles
In a recession, investors may not want to hold the stock of a company whose story will not play out until next decade, or Tesla could fail to raise capital when it needs it. Until an electric vehicle far cheaper than the Model 3 goes on sale in mass volume, there is no way to know for sure if consumers in large volume are willing to switch to an EV and deal with range anxiety and longer charging times.
In the US, Tesla is fighting a state-by-state battle to keep its stores factory-owned rather than franchised, which raises legal risk for the company and could one day stall growth. If the company’s growth ever stalls or reverses, we would expect a severe decline in the stock price because current expectations for Tesla are immense, in our opinion.
We also see immense key-man risk for the stock, as Tesla’s fate is closely linked to Musk’s actions. Should he leave the company, or if the Securities and Exchange Commission (SEC) bans him from running Tesla, we would not be surprised to see the stock fall dramatically. Also, Musk has 18.5 million Tesla shares as collateral for personal debt. Selling this block of shares quickly may cause a rapid fall in Tesla’s stock price.
Tesla will soon have formidable EV competition from German premium brands, as well as GM and Ford, that it’s never had before. It’s also uncertain if Tesla vehicle owners will want solar panels and batteries in sufficient volume to justify buying SolarCity. Given the many uncertainties regarding Tesla today, our fair value uncertainty rating will remain very high for a long time.
Tesla's Growing Cash Pile
Since its 2010 initial public offering, Tesla has used convertible debt financing as well as frequent secondary equity offerings and credit lines. At year-end 2019, the company has $3 billion in unused committed amounts under credit lines and financing funds.
At times, the stock has been so popular that we think the company could dilute shareholders at those times and the stock would not suffer. Three offerings in 2020 totalling over $12 billion support that premise. The stock also increased in value after the August 2015 announcement of an equity offering, likely due to cash burn concerns being eased. Offerings like the $2.3 billion stock sale in February 2020 and $10 billion in late 2020 add to the company’s expanding cash pile, which gives the market optimism that Tesla can keep growing.
Total debt at year-end 2019 was about $12.5 billion of principal, with $4.6 billion of that amount nonrecourse debt mostly backed by SolarCity’s asset-backed security issuances and a warehouse line secured by cash flows from vehicle leasing contracts. Musk said in 2018 that Tesla will pay its debts off rather than refinance, which if achieved would alleviate our balance sheet concerns, but the May 2019 debt offering delays Musk’s debt reduction goal. Tesla has raised over $12 billion of stock in 2020, so we think for now the balance sheet is in good shape with $14.5 billion of cash as at September 30.
