So what exactly are you looking for (other than Elon's own words) in the ER that will answer the question one way or the other? Even Adam Jonas doesn't believe in the 500k cars in 2020, let alone Model 3s. His estimate is 300k cars, or may be less. And Model X is not a step in that direction either. Elon himself has said so. Model X is more of a deviation.
And even if it is 500k cars in 2020, going by the Price/Sales of other car makers like GM (P/S is 0.36), the then valuation will only be around $6.3 billion ($35k * 500k total sales).
So, I'm curious, what signs you are looking for in this ER to prove or disprove your thesis. What is your valuation target and share count estimate for 2020 when Tesla will be selling 500k cars a year?
The answer to your question probably belongs in the long term fundamentals thread, but since I would only suggest buying on all dips(including the present one) if you believe in the the long term thesis, I'll deviate and answer it here.
First off, you are right, I meant 500k cars, not model 3s. Although I did not specify 2020. Whether it happens in 2020 or a year or two off does not change the long term thesis, it merely delays it. So if we are pushed back due to model 3 issues, I would expect a similar delay in share appreciation as the current trading range we have been stuck in the past 1.5 years, accompanied by the same kind of buying opportunities presented now.
Second, Tesla will NEVER have a P/S comparable to traditional car makers. It will either have a P/S of 0 because it has failed, or a P/S that far exceeds traditional auto makers if it succeeds. This is because, if successful, Tesla's net profit margin will far exceed any traditional OEM.
So, just some simply back of the napkin math:
Current gross margins on ~50k production = 24%-28% depending on currency fluctuation
Versus comparable luxury brands mercedes/bmw gross margin on ~2M production = 20%
1. So currently Tesla has higher gross margins than luxury OEMs producing FORTY TIMES more cars. So what will be the impact of economies of scale as Tesla increases production 100% from here? 1000% from here?
2. The Gigafactory should reduce battery costs by 20-30%, further increasing margin.
All together, I expect Tesla gross margins to be ~35% by the time it is producing 500k cars, very conservatively.
Also, when it comes to net margin, Tesla's current SG&A+R&D expenses are ~40% of revenues. This is due to extraordinary high R&D costs as it develops its first vehicles, and also the expansion of its service network. By 500k cars, Tesla's product offering will have matured, allowing R&D to come down, as well as SG&A coming down after its infrastructure matures. I expect the aggregate of both these costs to come down to roughly 10% of revenues, which is the industry standard.
So at 500k cars, with a mix of 150k S/X and 350k model 3, $90k for S/X, $40k for model 3, we are looking at $27.5B in revenues.
35% gross margin = $9.6B gross profit
SG&A+R&D of 10%($2.75B) = $6.85B net profit
As for P/E, with only 500k cars produced a year, Tesla would still have plenty of room to grow into the millions maintaining a 50% growth rate. Assigning a 30 or even 40 P/E would not be out of the ordinary. But even at 20 P/E that is $137B valuation. You can discount that to present day for what price you want to consider expensive/cheap.
As far as what I am looking for in this particular ER to disprove my thesis, to be honest, almost nothing in THIS particular ER would disprove everything I just laid out. Like I said before, it is just one data point. Model X ramp is late a few more weeks or early a few weeks, pops the stock 10% or drops the stock 10%, honestly, doesn't matter. It would take multiple data points to prove to me if Tesla is no longer on the path to all of the above. And if that happens, certainly I wouldn't be able to sell at the current share price of $200s. Maybe it will be $150, or even $100. But that is what I am willing to risk if I am wrong.
