I wrote an email over the weekend to a friend who wants to invest in TSLA but worries that he missed the boat with the 600% gain over the last year and a half. This was my explanation why I'm still in it for the long term. Please let me know if you can offer any corrections or improvements to the argument!
First you need to understand Tesla's mission.
Elon has stated many times the purpose for Tesla is to accelerate the advent of sustainable energy in transportation. They're not in it to provide more high performance sports cars for the wealthy, or to dominate (any segment of) the auto market. He wants to slow down carbon emissions, and decided that the most effective way he can make a difference is by convincing the world to switch from internal combustion engine vehicles (ICE) to electric vehicles (EV).
Why would the world switch to electric vehicles? Because when designed properly they outperform ICE vehicles in almost every way. Elon's mission is to shine a bright spotlight on these advantages, prove that costumers really want EVs, and convince other manufacturers to follow quickly.
- The drivetrain is dirt simple (composed of a couple dozen moving parts vs 500-1,000 for ICE), delivers instant torque at any speed (no need for air intake, gear shifting, flywheel momentum, energy transmission thru rods and bushings, etc) meaning the acceleration feels even faster than the published numbers, and allows for millisecond traction control response (almost direct link between motor and wheels).
- Maintenance is dirt simple, with no requirements for oil changes, smog checks, spark plugs, timing belts, water pumps, catalytic converters, etc, etc, etc (only 6 parts require regular replacement: 4 tires & 2 windshield wipers!).
- The revolutionary battery "skateboard" design allows many unique advantages: lowest center of gravity of any sedan; stiff chassis for excellent handling; totally flat underside allows lowest drag coefficient on the market; 3x longer crumple zone in the front; best safety rating of any car ever tested (5 stars in every category; NHTSA couldn't induce rollover; crush test machine broke because roof is so strong); etc, etc.
- The convenience of charging from home is easy to overlook, but surprisingly psychologically powerful (takes just seconds to plug in every night, leave every morning with a "full tank", never worry about range around town, never notice gas prices, potentially full independence from energy providers - plus every home in America already has many "charging stations" built in).
Tesla is a 100% EV-only company, and they alone are committed to breaking down all barriers to EV adoption. Almost as a side effect, this will leave them with world class leadership in battery & electric drivetrain technology & manufacturing, and ownership of the most expansive, technologically advanced high powered charging stations in the world.
- Range anxiety: Their smallest battery provides 200 mile range while all others still max out at ~80 miles); superchargers provide quick charging on the road for free, for life; potential battery swap for fast (couple minute) "recharge" for the cost of a tank of gas.
- Cost: Tesla is executing on their "Secret Master Plan" published 8 years ago to methodically drive down cost. In 2017(ish) they'll deliver the GenIII sedan starting around $35k(ish). This is the keystone to their ultimate plan and they're aggressively burning down risk to achieve it. They have recently announced an audacious plan to build a $5BB "Gigafactory" to provide the Li-ion cells (The Gigafactory output in 2020 will match the 2013 worldwide output of Li-ion cells!).
- Performance & style (already covered above; 2013 Motor Trend car of the year).
- Demand: Perception has been that people don't want to buy EVs, but that's not reality. Dealers don't want people to buy EVs because their profits come from maintenance, which won't be profitable for EVs. Plus, side-by-side comparisons on the lot would make all of their other inventory look antiquated :)
Tesla is different than all other auto manufacturers (and more in line with silicon valley tech companies).
- Exceptional customer service (best ever 99/100 consumer reports customer satisfaction rating) with a stated goal of a profit-neutral service center (total income is targeted to offset total costs).
- Profit margin is highest of all car manufacturers (currently 25% and climbing for Model S), aided by their direct-to-consumer sales model (no middleman marking up prices, and no need for inventory), and no marketing expenses (supercharger rollout is their only "marketing" cost).
- Transparent OUS pricing (example: they sell for ~1/2 the cost of competitive cars in China because they charge the same base price worldwide plus cost of tariffs, shipping, etc while all others "gouge" some foreign consumers because they can)
- Business savvy: When cash was tight they forged deals with Daimler and Toyota to move forward, bought the NUMMI factory and tons of manufacturing equipment from Detroit at firesale prices during the great recession, capitalized on government ZEV incentives to essentially fund the supercharger rollout, timed secondary offerings with stock surges and used the money to pay off government loans (10 years early!) and accelerate R&D, etc, etc - all while attracting the greatest worldwide talent to come help build the future.
But even if they have dominant leadership of a revolutionary product, continuously execute on a bold business plan, attract fiercely loyal customers, and make the competitors look foolish, how could they deserve a valuation approaching $30BB? That would be about half of GMs market cap, while selling less than 0.005% of the number of vehicles sold by GM! Of course they're not worth $30BB today, but I believe in 5-10 years they could realistically be worth many times that much.
Here's a breakdown of some revenue numbers:
- 2013 sales = 22,000 cars ($90k each) = $2.0BB [actual; compared with $413M for 2012 and $204M for 2011]
- 2014 sales = 35,000 cars ($90k each) = $3.2BB [informed estimate]
- 2020 estimate: [total guess, probably conservative]
---> Model S: 50,000 * $100k = $5BB ($1.25BB profit) [25% profit margin]
---> Model X: 100,000 * $100k = $10BB ($2.5BB profit) [crossover SUVs typically sell at >3x volume of their comparable sedans]
---> GenIII: 500,000 * $50k each = $25BB ($2.5BB profit) [10% profit margin]
---> Total = $40BB revenue ($6.25BB profit)
---> Subtract $3BB for R&D + SG&A [was $0.5BB in 2013] = $3.25BB earnings
---> P/E of 20 would yield $65BB market cap, or $525/share (15% annual return starting today)
Those vehicle delivery numbers won't be easy to achieve, but I'm highly confident they will happen. That could justify today's stock price because it would mean an annual return of 15% from today through 2020. However, the numbers can start to look ridiculous if you account for other potential sources of revenue.
Tesla doesn't want to be the worlds largest car manufacturer; they want to convert the world to electric vehicles, which means they need a lot of competitors toeing the line. Since they have such a huge head start over the rest of the world, it makes sense for Tesla to provide components and license technology wherever possible. (Note their recent decision to open their IP to competitors is a big step in this direction, as any new EVs may easily be compatible with Tesla's battery, drivetrain, and supercharging capabilities). According to the Innovator's Dilemma, most established manufacturers will be incapable of making the switch to EV until it's possibly too late. The one's who fight to survive (or new startups strapped for cash) will be really tempted to save costs by not reinventing the wheel; they can easily buy electric drivetrains from Tesla (as Toyota and Mercedes currently do), battery packs from the Gigafactory (which are projected to drive down cost by at least 30%), and license access to superchargers (which will blanket the US, Europe, and China with the most advanced technology for fast charging).
Let's look at some possibilities for the 2020-2025(ish) timeframe:
- Car sales:
---> Current worldwide auto sales = 100M vehicles [conservative assumption that this stays flat]
---> By 2020-2025 maybe 10% will be EV [conservative: Elon thinks it could be 50% by then]
---> Tesla might sell 1% of all cars - maybe $70BB revenue ($10BB profit selling cars)
- What if their Gigafactory provide batteries to 1/3 of the other EVs?
---> Suppose TM sells battery packs for $15k with 20% profit margin
---> 3,000,000 vehicles * $15k = $45BB revenue ($9BB profit selling batteries)
- What if those competitors cars also license access to Superchargers?
---> TM currently charges customers $2k for access
---> 3,000,000 vehicles * $2k = $6BB revenue (maybe $4BB profit licensing supercharge access)
- Gross profit = $23BB ($10B EV sales + $9B battery sales + $4B supercharger licensing)
- Maybe total net earnings = $16BB [conservative]
- PE of 20 would yield $320BB market cap, or $2,500/share (25-50% annual return starting today)
So in order to compare Tesla's market cap with GM, I think you would need to consider what GM might be worth if their cars had the best quality, style, and performance on the market … and they owned the patents on the best engine, transmission, and exhaust system designs … and they owned the majority of gas stations in the world - and the patents on what makes them work well … and they controlled the oil refineries needed to supply the gas.
Not to mention the Gigafactory could make a lot more money selling batteries for home energy storage (to work with rooftop PV cells) and will probably build many Gigafactories in the next 10 years. They'll have awesome new designs for the Roadster and a Pickup truck (among others) in the next 10 years. They'll have the world's most advanced autopilot program in the next 5 years. And those are only the "knowns" as of today. Who knows what else the future will hold?!
(… and all of this pales in comparison to what SpaceX will achieve in the next 10-20 years…)
Other reading material by much more qualified analysts than myself :)
This was the first article I saw that really captured the big picture; admittedly I haven't read it in the last 6 months and don't know if it's outdated and/or contradicts anything I'm saying :) http://seekingalpha.com/article/1463661-on-elon-musk-and-tesla-motors-th...