Long-Term Fundamentals of Tesla Motors (TSLA)

[RobStark]

Toyota will be the Honda of EVs and if they delay much longer in this foolishness with FCEV they will be the Mazda of EVs.

Audi sells in the $31k-$200k range. Tesla with Model 3 will sell in the $35k-$145k range. With new roadster Tesla may reach up to $200k.

So Tesla is already planning to start upmarket of Audi.

Elon has already talked of "millions by 2025." Audi is part of VW Group.

BMW is independent and will sell past 2M units this year. 2.3M units if you include Mini. They also have Rolls Royce.

So by 2025 Tesla should be BMW sized circa 2015 and if there are not at least two legacy automakers with a firm foothold on the $15k-30k BEV market Tesla will probably go down market again.

Tesla has/will not have a problem raising capital on Wall Street if the need arises.

Tesla has not had will not have problems scaling up distribution beyond legal/franchise dealer issues and has not and will not have problems scaling up Supercharger Network. It does not need to scale up Superchager Network and service network to keep the last marginal customer in Tinbuktu happy but scale up fast enough to keep demand ahead of production. While expanding production as fast as possible while keeping quality control in check.

 

[electracity]

Presumably Tesla will do what they've pretty much always done - prioritize the production of higher margin cars. ..........

I suppose this is correct. Something like a policy that base cars don't exceed 20% of production unless there is excess capacity.

 

[JRP3]

I presume that half the model 3 will be in the 35-40K range.

I doubt it. Especially for the first few years, which will prioritize the more expensive models. I expect very few base model, no options, 3's to be sold.

 

[ggr]

If they produce and sell 500k of them per year, I don't care what the Average Selling Price is.

 

[MitchJi]

Now pencil out the production capacity Tesla would need to build by 2025. Estimate the capital and time needed to add capacity. If Tesla could contract with Foxconn to assemble millions of cars, then they certainly could have an enormous market cap by 2025.

In that context how does the following make sense?:
http://www.cnbc.com/2015/10/23/tesla-ceo-says-could-start-china-car-production-in-2-years.html

Tesla Motors could begin producing cars in China in two years, Chief Executive Elon Musk said, adding that local production had the potential to slash the sales prices of its models in the world's largest auto market by a third.

Tesla's negotiations with officials on Chinese production have been quite encouraging and it is likely the company will cooperate with a local partner, Musk said, according to Chinese language transcripts of remarks made Thursday and Friday that were provided by the company.

Does this signify that Tesla thinks that either the Chinese government and/or a local partner is going to invest in this? And does it make sense to produce cars in China without a Chinese GF?

 

[chickensevil]

In that context how does the following make sense?:
http://www.cnbc.com/2015/10/23/tesla-ceo-says-could-start-china-car-production-in-2-years.html

Does this signify that Tesla thinks that either the Chinese government and/or a local partner is going to invest in this? And does it make sense to produce cars in China without a Chinese GF?

At first? probably. It already makes financial sense to ship the batteries from Japan to the US, why not ship the batteries from the US to China or Europe? At least... until they can warrant expanding to new battery production. Heck, they could even potentially reroute the Japanese cells to China which should be a shorter route and hopefully cheaper. But they are already paying decently to ship the cars themselves overseas, and the lower level market is much more sensitive to price fluctuations such that reducing those costs is very important to furthering EV sales.

Also the more of the product that is made *NOT* in China the more profits Tesla wouldn't have to share with their local partner... Just an extra thought there.

 

[MitchJi]

Oops!

At a forum at a Chinese university last week, Musk was quoted as saying Tesla TSLA, +2.44% would produce electric cars in China within two years. Not so fast, Musk said via Twitter. A factory in China could come after Tesla launches the Model 3, its proposed mass-market electric car, Musk said.

 

[chickensevil]

Oops!

Which they also confirmed that the Model 3 would ship in two years... Model 3 ships and then they open a factory a month or two later.

The responses on twitter was because of people thinking they would outsource the whole business to China or some such. Because people are always happy to point out that Tesla is nothing but one giant government subsidy and if they took it all to China that would be icing on the cake.

 

[electracity]

If they produce and sell 500k of them per year, I don't care what the Average Selling Price is.

If you are an investor, you will care that the Model 3 average selling price makes more than a 10% margin. Tesla has the market cap of a much larger manufacturer. If their car and battery biz evolves into typical modest margins, the current stock price is not supported.

 

[Perfectlogic]

There has been a few posts in the short term thread expressing an interest in hearing a bearish valuation in more details. Now I don't consider me a TSLA bear, but I have come a long way from my very bullish view a year ago to being pretty neutral now on the stock, and that is even though I still believe electric cars are the future and will gain close to 100% market share within 15 years (sales). One of the main thing that has changed is that I have lost my faith in our lord and savior Elon. The X launch has simply had too many delays, it seems very amateurish and it adds to the thesis that Elon simply is way too optimistic about his projections. Other optimistic projections was the missed yearly delivery last year, this years missed delivery, the 2k/week production at the end of this year and the cash spend. The $2B raised last year should have covered Tesla's part of the gigafactory but those money was spent way before the gigafactory was up and running, resulting in another cash raise recently. Another data point that has made me lose faith in Elon is him saying TSLA will reach a $700B mkt cap in 10 years, that is just incredibly unlikely, the car industry is very different from the smartphone industry.

Another thing is the S demand plateauing, I thought it had longer legs and so did Elon I assume when he was talking about the 2/week runrate EoY. I don't think the X brings that much extra to the table so I don't expect it to double Tesla's demand or even close to that, the S is a large car too with possible seating for 7. S demand has been around 45k/y in 2015, say the X increases demand by 50% (which I even think might be on the high side) that brings the total demand to 67.5k/y. With the demand reaching a plateau this year and a very significant market share I don't expect it to go much higher (we will also start seeing competition in a few years), but lets say it inches closer to 80/y by 2020, that is around $8B in revenue. With all these things not panning out for Tesla as they had hoped I am going to discount the Model 3 sales to 300k by 2020 (which would still be a significant feat considering where they are today), that is $13.5B assuming a $45k ASP, which brings the total to $21.5B in auto sales in 2020.

Now on the margins a lot here are expecting something like a net profit margin of 15%, but I am starting to think that is way too optimistic. If you look around in the industry the net margins are 2-8% with the weighted average probably around 4%, the auto industry has cut throat competition as the competetive advantages are hard to come by. Now some might argue that Tesla does have a competetive advantage be it the supercharger network or over the air updates or battery technology. But the thing is that the first two are easy for competitors to match as these companies are huge with huge budgets. Also on the battery front I am starting to question if Tesla will have any advantage at all in 5 years as LG is looking to be a giant in the space with supply deals already with some of the biggest manufacturers and Nissans CEO claiming that LG has the best car battery tech out there (even though Nissan themselves have inhouse battery production). So to conclude the margin part I think modelling an 8% net profit margin long term would be the be the highest you could realistically go at this point which would give Tesla $1.72B in net profit in 2020. Given that they will still be a young company given the industry and have a history of growth I think a 25 P/E would be reasonable in this scenario resulting in a $43B value of their car business.

On Tesla's stationary storage business I am definately bullish on the market opportunity but just how big it will be I don't know. I do believe though that it will be a low margin industry with high capex so I'm just going to throw a $10B valuation out there for this part. That leaves us with a total TSLA mkt cap of $53B in 2020 compared to $27.6B today (according to Google Finance), I do believe though that we will see some dilution though, so perhaps a 60% return in 5 years adjusting for dilution if my model holds true which clearly isn't bad but I think there are better opportunities in the market.

 

[esk8mw]

I'm not sure why everyone thinks Tesla is trying to be Toyota, Honda, etc. because they are launching a car with a 35k base price.

As someone switching over from BMW to buy a Tesla, it's pretty clear to me that they will be taking a "3 series" approach. Tesla is a "premium" brand like BMW and I doubt they are trying to build Corollas here. 35k will get you the shortest range, bare bones, cloth interior car - like a BMW 320i. I don't think this will be the bread and butter from the time of launch. These will likely option up to 55k or so, with increased performance/range/interior - like a BMW 328/335i. Then there will be a performance model that tops out at 70-80k - like a BMW M3. I suspect the "early adopters" here will be drawn to the higher end midrange model or adding the performance model as a second car to complement their Model S/X. As these prove out to be solid cars and increased battery tech provides longer range at reduced costs, the masses will be drawn to the lower cost base models. My guess is an initial average sales price of ~55-60k, moving down to 45-50k over time. I'm quite bullish long-term, so long as Model 3 doesn't experience significant delays.

 

[Perfectlogic]

I'm not sure why everyone thinks Tesla is trying to be Toyota, Honda, etc. because they are launching a car with a 35k base price.

As someone switching over from BMW to buy a Tesla, it's pretty clear to me that they will be taking a "3 series" approach. Tesla is a "premium" brand like BMW and I doubt they are trying to build Corollas here. 35k will get you the shortest range, bare bones, cloth interior car - like a BMW 320i. I don't think this will be the bread and butter from the time of launch. These will likely option up to 55k or so, with increased performance/range/interior - like a BMW 328/335i. Then there will be a performance model that tops out at 70-80k - like a BMW M3. I suspect the "early adopters" here will be drawn to the higher end midrange model or adding the performance model as a second car to complement their Model S/X. As these prove out to be solid cars and increased battery tech provides longer range at reduced costs, the masses will be drawn to the lower cost base models. My guess is an initial average sales price of ~55-60k, moving down to 45-50k over time. I'm quite bullish long-term, so long as Model 3 doesn't experience significant delays.

Perhaps you should do a bit of research before you make a post like that. BMW sold 2.12M vehicles last year with automotive revenue of 75B euro, that is 35.5k euro ASP. BMWs net profit margin was 7% last year, or 4.4% if you look at the "Total comprehensive income attributable to shareholders of BMW AG".

 

[ludicrousspeed]

On Tesla's stationary storage business I am definately bullish on the market opportunity but just how big it will be I don't know. I do believe though that it will be a low margin industry with high capex so I'm just going to throw a $10B valuation out there for this part. That leaves us with a total TSLA mkt cap of $53B in 2020 compared to $27.6B today (according to Google Finance), I do believe though that we will see some dilution though, so perhaps a 60% return in 5 years adjusting for dilution if my model holds true which clearly isn't bad but I think there are better opportunities in the market.

I think you may be underestimating the storage aspect of the business. Elon expects storage to initially occupy about 1/3 of gigafactory capacity and that energy storage revenue will eventually surpass automotive revenues. I think it was the Q1 ER where he also said long term storage will account more more than double the automotive sales. Although it's very hard to determine exactly when the powerwall/powerpack sales will near vehicle sales, Tesla's energy storage should definitely account for at least 1/3 of the market cap by 2020.

Also, I agree with most of your calculations regarding vehicle sales and their contribution to market cap, but you're leaving out other sources of revenues. For example, they will bring in major revenues by owning their own sales and service network. This source of revenue will increase significantly with the number of Teslas on the road growing rapidly each year as well as older models needing more and more service.

If Tesla grows at a pace that Musk seems to think it will, then the company will still be growing almost 50% annually for at least a few years after 2020. He also believes that in ten years the market cap will be reaching current Apple territory. Something tells me he has more tricks up his sleeve to spur this growth (maybe ride services, supercharger partners, etc.) because no auto-maker has a market cap of over $200B. If this is the case, a 25 P/E is still very conservative given the fact that this is a very slow growth industry. If they're still growing anywhere near that pace in 2020 and the market cap is only ~$50B, the stock would actually be super cheap and probably see outstanding growth from that point on.

 

[Electrifying]

Perhaps you should do a bit of research before you make a post like that. BMW sold 2.12M vehicles last year with automotive revenue of 75B euro, that is 35.5k euro ASP. BMWs net profit margin was 7% last year, or 4.4% if you look at the "Total comprehensive income attributable to shareholders of BMW AG".

I thought you were trying to refute the post above you . But I don't get your logic. Your point from listing those numbers is ?

 

[esk8mw]

Perhaps you should do a bit of research before you make a post like that. BMW sold 2.12M vehicles last year with automotive revenue of 75B euro, that is 35.5k euro ASP. BMWs net profit margin was 7% last year, or 4.4% if you look at the "Total comprehensive income attributable to shareholders of BMW AG".

Cool story, but your stats don't disprove any of my projections (reminder: it's a projection). You are posting worldwide BMW sales while my post focuses on US 3-series sales, which I think Tesla Model 3 will track in a general way. Of those 2.12M BMWs sold (does this include Mini and other low price items as well?), only 142k US 3-series were sold in 2014. I don't have the ASP stats on this particular cross-section of sales - if you do, I'd like to see them. Your 35.5k Euro number is almost meaningless in this context, especially when considering European affinity for smaller/cheaper BMWs that aren't even sold in the US and are likely dragging down the average number. I'll also note the 35.5k Euro ASP is pretty close to the 45K USD average guess I gave above. Continue to suggest that Tesla and it's valuation should be directly compared to mature car companies, though. Perfect logic, indeed.

 

[Perfectlogic]

@ludicrous

I guess where our investment theories diverges is amount of faith we have in Elons word. I would argue that the data is showing that Elon simply is way too optimistic in his projections like I argued in my OP, in pretty much every major category from cash burn to demand and new product launch Elon has been way too optimistic, at some point you have to start discounting his longer term projections.

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I thought you were trying to refute the post above you . But I don't get your logic. Your point from listing those numbers is ?

My point was that even though BMW is a premium brand their ASP and margin isn't that high.

@esk8mb

I assumed you point was that Tesla will achieve a higher profit margin because they are a luxury brand like BMW but the reality is that even BMW doesn't have a high margin. But reading your second post I'm not sure, are you saying that Tesla will have a high ASP in the US therefore my point is moot? How does that make any sense? You argue that BMW has a high ASP in the US, sure but how does that prove anything? How much do you think BMW is worth? Are you just saying random things?

 

[Drax7]

Elon I think was pretty silly with that 700 billion mkt cap.

At the first opportunity to show discipline he pulls out
a complex model x and messes things up. Hope we can overcome
this situation, and hope is not a strategy.

 

[ludicrousspeed]

Elon I think was pretty silly with that 700 billion mkt cap.

I agree. The point I'm trying to make is that such a bold statement requires some sort of belief that Tesla will do something to reach a number anywhere near that. In order to do so, they will need to introduce new revenue streams that are currently unknown. I just simply don't think $700B is anywhere near reasonable with their currently planned product line (even energy products, newer models such as roadster 2.0, etc). Elon knows they will have to do something very different and extraordinary to become the highest valued car company and I just think he has some unannounced tricks up his sleeve.

 

[esk8mw]

@ludicrous

I guess where our investment theories diverges is amount of faith we have in Elons word. I would argue that the data is showing that Elon simply is way too optimistic in his projections like I argued in my OP, in pretty much every major category from cash burn to demand and new product launch Elon has been way too optimistic, at some point you have to start discounting his longer term projections.

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My point was that even though BMW is a premium brand their ASP and margin isn't that high.

@esk8mb

I assumed you point was that Tesla will achieve a higher profit margin because they are a luxury brand like BMW but the reality is that even BMW doesn't have a high margin. But reading your second post I'm not sure, are you saying that Tesla will have a high ASP in the US therefore my point is moot? How does that make any sense? You argue that BMW has a high ASP in the US, sure but how does that prove anything? How much do you think BMW is worth? Are you just saying random things?

Where is this profit margin red herring coming from? I didn't mention margin at any point and I certainly didn't ever say "BMW margins are high so Tesla's will be too." You are the one going off on random tangents. Let's try this again, slowly.

Common argument: Model 3 is in trouble as a 35k car. Look at these calcs, if they act like Toyota then Tesla is only worth x billion with ASP 35k!

Me: 35k is totally stripped and that won't be the typical Tesla M3 buyer, especially early buyers for x, y, z reasons. Reasonably upgraded models with better range (i.e., the initial hot sellers until better battery tech is out) will go for 50k I'm guessing. I think they will follow the 3 series pricing model, where you can buy the bare bones for 28k or whatever, but it options up to 80k+ with perf model. The higher end Tesla models will sell more at first to early adopters and eventually cost conscious buyers will be drawn in if the car is a success, driving down ASP over time. Using 35k ASP in your modeling is a mistake.

You: BMW has a low profit margin with a ~40k USD ASP, you are wrong.

Me: What? My point is BMW's ASP for 3 series models is not equal to the price of the lowest model bare bones no option 320i, so don't project a 35k ASP for Tesla Model 3, it'll likely be appreciably higher, especially in the critical early stages.

You: BMW is a premium brand with low margins!

Me: ????

 

[Perfectlogic]

Where is this profit margin red herring coming from? I didn't mention margin at any point and I certainly didn't ever say "BMW margins are high so Tesla's will be too." You are the one going off on random tangents. Let's try this again, slowly.

Common argument: Model 3 is in trouble as a 35k car. Look at these calcs, if they act like Toyota then Tesla is only worth x billion with ASP 35k!

Me: 35k is totally stripped and that won't be the typical Tesla M3 buyer, especially early buyers for x, y, z reasons. Reasonably upgraded models with better range (i.e., the initial hot sellers until better battery tech is out) will go for 50k I'm guessing. I think they will follow the 3 series pricing model, where you can buy the bare bones for 28k or whatever, but it options up to 80k+ with perf model. The higher end Tesla models will sell more at first to early adopters and eventually cost conscious buyers will be drawn in if the car is a success, driving down ASP over time. Using 35k ASP in your modeling is a mistake.

You: BMW has a low profit margin with a ~40k USD ASP, you are wrong.

Me: What? My point is BMW's ASP for 3 series models is not equal to the price of the lowest model bare bones no option 320i, so don't project a 35k ASP for Tesla Model 3, it'll likely be appreciably higher, especially in the critical early stages.

You: BMW is a premium brand with low margins!

Me: ????

I used $45k as ASP on the Model 3, not $35k.

"Where is this profit margin red herring coming from?"

I assumed you disagreed with my model on some other level than just misreading the numbers I used, specifically on the margins since you talked about brand. Perhaps you should read my posts more slowly next time.