Well, it took a bit, but finally here's my full analysis of Tesla.
Disclaimer: I have a small position in Tesla with an average price of around $150/share.
The post covers the following:
- Introduction
- Fundamental analysis of Tesla's automotive business, including cars sold, capacity, and future investments required.
- Competitive landscape (profitability, debt & future growth/ROIC)
- Historical financial performance
- Assumptions & valuation
- Valuation based on assumptions different than mine
Introduction
I'd describe Tesla as a car company with big dreams and impressive technology. There are bulls and bears with different assumptions about the future, but if we look backward, there's no doubt that as a company, it disrupted the industry and accelerated the transition to EVs.
It operates in two segments, automotive (responsible for 96% of the revenue and almost all the gross profit) and energy generation and storage (attributing the remaining 4% of the revenue).
Now, I mentioned big dreams. That's of course, coming from Elon Musk. Let's take a look at a few of them:
- FSD (Full self-driving capability) & robotaxis – Tesla was to some extent the first mover in this area and is likely the company with the most data. However, in my opinion, the competitors are catching up. As for the robotaxis, there's still some time until it becomes a reality and when it happens, Tesla won't be the only player on the market.
- The “energy generation and storage” segment is to be worth as much as the automotive segment – Another big prediction that so far seems to have an incredibly low probability. Its current size is insignificant, it's not a profitable segment, and in order to become a significant portion of Tesla's value, well, it will take a long time.
- Optimus – The humanoid robot is expected to be on sale by 2027 with a cost of $20k. This was revealed on the latest AI day and some engineers who followed the event (and are not employed at Tesla) weren't impressed. They weren't impressed by the current state of Optimus, although they were impressed by the progress made in such a short period of time.
- Tesla will sell 20m cars annually by 2030 – This is something that we'll come back to.
One of the jobs of Elon Musk, like any other CEO, is to be positive and optimistic about the future. That doesn't mean everything will happen nor that the timeline is accurate (especially with Elon).
There are 110k employees at Tesla, yet the tweets of one of them seem to have more impact on the share price compared to all the work the others do. It seems as if Elon has shifted from being one of Tesla's biggest assets to one of its biggest liabilities. However, this post will not be about Elon, it will focus on Tesla as a company and its fundamentals.
Fundamental analysis of Tesla's automotive business, including cars sold, capacity, and future investments required.
Let's zoom out for a moment. It is obvious that there's a lot of stuff going on (and who knows what else will be announced in the next decade), so in my forecast, I'm expecting that the automotive segment will account for 90% of Tesla's value, leaving 10% for all the other stuff (Optimus, energy generation and storage, etc.)
To value any car company, there are two main inputs:
- # of cars sold annually
- Margin per car
For younger car companies, capacity is also something to be looked into.
If we look at the statistics, the number of cars sold worldwide annually is pretty flat over time.
2019: 74.9m; 2020: 63.8m; 2021: 66.7m; 2022: 65.4m; 2023: 71.0m (expected)
We can round that to 70m cars/year.
Tesla has been growing quite fast when it comes to deliveries
2018: 245k; 2019: 367k; 2020: 499k; 2021: 936k; 2022: 1.4m (expected – rounded)
So, based on the 2022 numbers, Tesla has roughly a 2% share.
If we go back at the 20m cars/year prediction, that represents a staggering 28.5% share! How realistic is that? Well, I'll let you be the judge.
How about the production capacity? Currently, that's around 1.9m. So, if Tesla wants to grow, they need to invest here A LOT. How much? Let's take a look at their historical investments:
The Berlin factory cost around $5b and comes with a capacity of 250k cars. So, on average, Tesla would need to invest around $20k in capex to increase the production capacity by 1 car. Using the gross PPE from the balance sheet as a metric for all past investments ($43.9b) that led to the 1.9m capacity, we get to a similar outcome. Of course, not all of the $43.9b is related to manufacturing, there's a portion for R&D, general support functions, etc.
This gives a good idea of the future investments required. If Tesla wants to increase capacity by 4m units, they need to invest roughly $80b.
Competitive landscape
In this segment, I'd like to take a look at 10+ competitors in this industry and look into quite some metrics. I'll start with what the critics normally point out, the price of the company.
| Company | Revenue (in $b) | Market cap (in $b) | P/E ratio |
|---|---|---|---|
| Tesla | $74.9 | $381.7 | 36.5 |
| Toyota | $232.2 | $188.6 | 10.0 |
| BYD | $47.6 | $96.3 | 51.0 |
| Volkswagen | $261.2 | $71.9 | 3.6 |
| Mercedes-Benz Group | $141.4 | $70.7 | 5.1 |
| BMW | $128.9 | $58.9 | 3.1 |
| General Motors | $147.2 | $47.8 | 5.7 |
| Ford | $151.8 | $46.4 | 5.2 |
| Stellantis | $172.7 | $46.1 | 2.8 |
| Honda | $108.1 | $38.8 | 7.9 |
Tesla's P/E is roughly 7x higher than the average of the competitors (with a few exceptions). The question that is asked over and over is, how the hell is Tesla worth so much more than Toyota when Toyota sells 10m cars a year (with Tesla 1.4m for the full 2022)? To answer that question, we need to look into 3 segments:
- Profitability
- Debt
- Future growth/ROIC
Let's start with profitability:
| Company | Revenue (in $b) | Gross profit | Operating expenses | Operating margin | Operating profit (in $m) |
|---|---|---|---|---|---|
| Tesla | $74.9 | 26.6% | 9.9% | 16.7% | $12,510 |
| Toyota | $232.2 | 17.0% | 9.9% | 7.1% | $16,511 |
| BYD | $47.6 | 15.1% | 11.8% | 3.3% | $1,547 |
| Volkswagen | $261.2 | 18.5% | 10.2% | 8.3% | $21,555 |
| Mercedes-Benz Group | $141.4 | 22.5% | 11.0% | 11.5% | $16,279 |
| BMW | $128.9 | 16.5% | 6.6% | 9.9% | $13,079 |
| General Motors | $147.2 | 13.6% | 5.4% | 8.2% | $12,025 |
| Ford | $151.8 | 11.4% | 4.3% | 7.1% | $10,696 |
| Stellantis | $172.7 | 20.2% | 8.5% | 11.7% | $20,173 |
| Honda | $108.1 | 20.0% | 14.4% | 5.6% | $6,097 |
The companies are sorted based on their market cap. Although Tesla has 1/3rd of Toyota's revenue, they make almost as much operating profit! Why? It's obvious, they have higher margins. So, what contributes to that? A few points have to be noted:
- Tesla does not sell through dealerships – this allows them to have higher gross margins as there are no 3rd parties to pay.
- Tesla famously doesn't spend money on marketing (funny enough, Elon bought a company that depends on advertising, but anyway, let's get back to Tesla)
- Tesla could build factories from scratch, perfectly suited for EVs, while the big companies have to invest to re-purpose their existing factories.
There are only two luxury cars that have higher operating margins than Tesla (Porsche & Ferrari), but they're targeting a very niche audience and not the mass-market.
Let's continue by looking at the debt of each company:
| Company | Operating profit (in $m) | Market cap (in $b) | Net debt (in $b) | Market cap + Net debt (EV) | EV / Operating profit |
|---|---|---|---|---|---|
| Tesla | $12,510 | $381.7 | $ (15.2) | $366.5 | 29.3 |
| Toyota | $16,511 | $188.6 | $143.6 | $332.2 | 20.1 |
| BYD | $1,547 | $96.3 | $ (3.0) | $93.3 | 60.3 |
| Volkswagen | $21,555 | $71.9 | $157.0 | $228.9 | 10.6 |
| Mercedes-Benz Group | $16,279 | $70.7 | $95.1 | $165.7 | 10.2 |
| BMW | $13,079 | $58.9 | $83.3 | $142.2 | 10.9 |
| General Motors | $12,025 | $47.8 | $89.2 | $137.0 | 11.4 |
| Ford | $10,696 | $46.4 | $97.8 | $144.2 | 13.5 |
| Stellantis | $20,173 | $46.1 | $ (20.1) | $26.0 | 1.3 |
| Honda | $6,097 | $38.8 | $28.3 | $67.1 | 11.0 |
Why is looking at the debt so important? Well:
- First of all, it isn't free. It needs to be repaid and with interest. The auto industry is known to be cyclical, but the debt doesn't really care about that.
- The companies that are better positioned from a financial leverage perspective can afford to lower prices temporarily and steal market share. Tesla is in a great position for this, while the giants cannot afford to break even (from an operating profit point of view)
- High leverage combined with unprofitable business leads to bankruptcy.
So, I decided to look at this a bit differently. I wanted to check how much would one pay to acquire each company debt-free and what is the return (measured through operating profit). Now, Tesla's ratio isn't 7x higher, but less than 3x higher than the average competitor.
Remember Toyota? It needs 9 years of operating profit to cover its net debt! Tesla costs 367m to be bought debt-free, while Toyota 332m – quite close!
P.S. I took a shortcut for the EV calculation, it's not 100% accurate (it doesn't take into account minority interest, for example), but it's quite close.
Lastly, let's take a look at the last piece of the puzzle, the growth & ROIC
| Company | Operating profit (in $m) | EV / Operating profit | NTM revenue growth | ROIC |
|---|---|---|---|---|
| Tesla | $12,510 | 29.3 | 45.0% | 26.4% |
| Toyota | $16,511 | 20.1 | 14.5% | 4.0% |
| BYD | $1,547 | 60.3 | 46.7% | 7.9% |
| Volkswagen | $21,555 | 10.6 | 5.8% | 6.0% |
| Mercedes-Benz Group | $16,279 | 10.2 | 3.5% | 8.7% |
| BMW | $13,079 | 10.9 | 6.5% | 7.0% |
| General Motors | $12,025 | 11.4 | 9.4% | 6.5% |
| Ford | $10,696 | 13.5 | 5.9% | 6.2% |
| Stellantis | $20,173 | 1.3 | 4.0% | 19.5% |
| Honda | $6,097 | 11.0 | 24.0% | 4.1% |
It's obvious that Tesla and BYD are the exceptions when we look at the expected revenue growth for the next 12 months.
However, what's also impressive is that Tesla has the highest ROIC – They're making the best return on their investments. All of that while also spending money on all kinds of side projects.
In my opinion, the culture within Tesla seems to be better suited for innovation, compared to the old-school, traditional, car manufacturers.
Historical financial performance
Tesla's revenue has increased significantly, from $21.5b back in 2018 to almost $80b in the last twelve months. At the same time, the gross margin increased from 19% to almost 27%.
The operating expenses (R&D and SG&A) have decreased as % of sales from 20% to 10%, leading to an operating margin of 17%, which is much higher than the average.
Over the same period, they reduced their debt from $14b to $6b (while accumulating $21b+ in cash) leading to a net debt position of -$15b.
Assumptions & valuation
As mentioned above, I'm expecting that the automotive segment will account for 90% of Tesla's value, leaving 10% for all the other stuff (Optimus, energy generation and storage, etc.)
My assumptions are as follows:
Revenue growth: 35% in the next 12 months, declining to 30%, then to 25%, all the way down to 5% in year 10. By then, the projected revenue is close to $400b (an increase of 431% vs. LTM) – representing roughly 6m cars per year (8.6% share) – This also means $80b in capex over time (4m additional capacity x $20k)
Just a reminder of how Tesla's deliveries have progressed over time:
2018: 245k; 2019: 367k; 2020: 499k; 2021: 936k; 2022: 1.4m (expected – rounded)
Operating margin: 10% for the next 2 years due to a recession, then recovery to 18% over time.
Discount rate: 9.5%
Terminal growth rate: 5%
The valuation based on my assumptions is $563b (179.84/share)
Note: Adjustments have been made for cash/debt, unearned revenue as well as outstanding equity options
Now, before anyone jumps on me, these are my assumptions and I could be significantly wrong. So, if you have other expectations, I hope the table below can help.
Valuation based on assumptions different than mine
The table below shows how the valuation changes (per share), based on assumptions regarding the revenue in 10 years, the operating margin, and how the market share / # of cars to be sold to get there.
| Revenue/ Operating margin | 16% | 18% | 20% | 22% | Cars/year (share %) |
|---|---|---|---|---|---|
| 250% ($262.0b) | $109.5 | $125.2 | $139.2 | $152.2 | 3.5m (5%) |
| 325% ($318.1b) | $129.5 | $148.4 | $165.5 | $181.2 | 4.5m (6.5%) |
| 431% (397.4b) | $156.3 | $179.8 | $201.1 | $220.8 | 6m (8.6) |
| 1670% (1.33t) | $445.6 | $519.3 | $589.2 | $654.8 | 20m (28.5%) |
The last row represents Elon Musk's crazy scenario of selling 20m+ cars per year (without even taking into account the energy generation and storage segment to be the same size as the automotive one) For that to happen, Tesla needs to grow at a rate of 35% annually for a decade.
Based on my assumptions, Tesla is undervalued at the current price levels, however, it was significantly overvalued for a long period of time.
I hope you enjoyed the post and apologies for the length, I wanted to make sure to cover all the points that I find important.
I welcome disagreements on everything mentioned above.
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