I know we all think 4680s are going to make such an impact, and increase Tesla's profit
dramatically, and take the stock price to a valuation that we think is fair.
But despite all that, I still don't think everyone realizes just how profitable 4680
cells really are.
In fact I think they add about 5 times more profit per kWh than what Tesla are getting
from their LFP cells in Shanghai.
Whoa, did I just say 5 times more profitable, surely that's a bit of a reach, that is a
huge difference.
And would mean that once ramped, Tesla would be insanely profitable, indeed.
So how about we do some numbers and see just how more profitable 4680 cells are than the
LFP cells Tesla is using in Shanghai.
Well we just need some numbers then, actually relatively simple, I hope.
First lets calculate roughly how much profit per kWh Tesla generate from the LFP cells
in Shanghai, and lets go on the more generous side and take the profit of a Model Y RWD,
that currently sells for $42,000.
If we have a gross margin of 28% then its about $11,750 profit per Model Y.
And as they use a 60 kWh battery, that would come to a profit of $195 per kWh.
Alright simple enough to follow.
Now we need to do the same for the 4680 Model Y from Texas.
We have a lot of new advanced manufacturing techniques for cost saving, along with a lower
cost battery, and a much higher priced vehicle.
I mean its highly possible that the Model Y in Texas actually has low cost of goods
sold per vehicle than the one in Shanghai as a result.
And Tesla was selling then for $60,000 not $42,000.
If the cost of goods sold was equal then that would be an additional $18,000, which would
mean a ridiculous 50% margin.
That's the math, if Tesla are getting 28% margin in Shanghai, and it costs the same
to build a Texas Model Y, due to the cost savings of the structural battery pack, front
and rear castings, and lower cost cells.
Yea, there's actually an argument that the costs could be even lower than Shanghai, especially
with further vertical integration like the cathode factory on site, and eventually a
lithium refinery.
That does start to get a bit crazy, to think how low a cost Tesla can truly get a Model
Y.
The thing is though, that I also think that when there is the tax credit that Tesla will
raise the prices.
Along with the cells getting better range.
But let's not go too extreme, and lets say a $65,000 price tag, and lets wind that margin
all the way down to just 40%.
That comes to $26,000 profit per Model Y.
But I really think judging by future cost savings possible from that factory, there
could actually be a further $10,000 cost reduction.
That is extreme, but there is actually a lithium refinery to come on site.
In fact we are hearing they are starting construction on a new large building on that site, and
it was rumored the refinery would start this quarter, and be operational in 2024.
Things we need to keep reminding ourselves, to see the light on the other side, once we
pass through this down market.
And then the current estimate of the battery size for the 4680 is around 70 kWh, which
means $370 per kWh.
Ok, so we are way off 5 times.
Except I said profit, not gross profit, and what if we actually went for operating profit,
a far more important profit, one that only Tesla seems capable of achieving positively
compared to all other BEV manufacturers.
Well in that case we would assume about perhaps an 18% operating margin on the Model Y, meaning
close to $7,300 operating profit per vehicle, or $121 per kWh.
As this ramp up of 4680 cells shouldn't really add anything extra to OPEX, the gross profit,
would equally be the operating profit, so it would actually be more like 3 times as
much operating profit per kWh.
Alright that is a massive amount more profit per kWh than Shanghai, but its not 5 times.
Oh wait, there is another more little factor, we have the subsidies per kWh too for the
cell and battery production in the US.
Which is $35 per kWh of cell production, and $10 per kWh for battery.
Implying a further $45 profit per kWh, taking it to $415 profit, or 3.4 times as much profit.
It doesn't stop there either, as FSD adoption rate is about 5 times higher in the US than
in China.
And even factoring in deferred revenue, I estimate it to be about $25 more per kWh.
Now we are at $440.
Then other services like insurance, over perhaps 10 years, that would come to an additional
profit of perhaps $50 per kWh, taking us to $490.
The 4680 version of Texas will have other upgrades, possibly extended range, but we
have already seen acceleration, and even at a 20% adoption rate, that could be an additional
$15 per kWh.
Then US consumers spend more more money on other upgrades like paint and wheels, perhaps
a further $15 per kWh more than the Chinese.
There is even likely more income from US drivers using superchargers too.
All in all, we might be closer to $500 additional operating profit per kWh for a 4680 Model
Y, than we see from Shanghai.
There is one major caveat though, Tesla need to get their production up first, to start
hitting these sort of margins, and to start seeing the additional benefits of the economies
of scale from ramping up due to the operating leverage Tesla have.
I think a run rate rate of about double volume production, at around 40,000 Model Ys a month.
Which we would need to hit a run rate of around 30 GWh a year for 4680s.
Except Texas 4680 factory has a capacity of 100 GWh, and another 10 from Kato Road, compared
to about 60 GWh a year that Shanghai is currently running on.
This is a lot more profit to come for the company.
It's truly massive, and all determined by when they can ramp up the cell production
line in Texas.
There is also Berlin in addition to this.
We have a base profit for this company, that is more than ample for all the necessary growth
required and then a reasonable amount left over for share buybacks on top of that.
And a lot of the previous profits and capital have been reinvested into technologies that
will reduce costs, like 4680 cells, and new manufacturing techniques and machines like
giga castings, remember only just over half of Tesla cars today even use a rear casting,
let alone front and rear, or structural packs, or in-house batteries.
Then the investments in further vertical integration like cathode factories and lithium refineries.
There is so much more cost reduction on the way, which adds to profits and provides a
larger buffer for potential bad times, and allows Tesla to reduce their prices further
to increase demand, which has a further effect on economies of scale, etc.
Don't take your eye off the prize.
You might think me using operating profit is cheating somewhat, rather than gross profit
per vehicle.
And perhaps if we had, then 4680s are possibly only about 2 and half times as profitable
per vehicle.
Which is still a big difference.
Also bear in mind, that isn't even assuming a lower cost of manufacturing that LFP vehicles,
and nor is it assuming that the price will eventually be closer to the Long Range version,
along with possible further price adjustments for the tax credit.
But 2 to 3 times more profit per kWh, is a big difference, especially when the production
is going to be over twice what we have for LFP, if we also include the capacity in Berlin.
And even if it takes Tesla until the end of 2024 for those 4680 lines to hit their capacity,
then that is obviously massively profitable.
However, using operating profit is probably apt in the way the market thinks.
It's are thinking linear instead of exponential.
As in twice as many cells means about twice as much profit, rather than 4 times as much
profit.
So my overall point is that the market is under valuing Tesla's potential growth.
There are several exponentials at play here.
And if Tesla doubled production with 4680s, the market may just think earnings will more
or less double.
Except due to the operating leverage, it would triple, and then due to the higher profit
per kWh from 4680s its will quadruple.
But just for back of the napkin math, if each kWh of 4680 is worth $450 operating profit,
and Texas and Berlin combined hit 150 GWh annual run rate, then that is actually an
additional $67,500 billion in operating profit, ok Berlin doesn't have tax credits or subsidies,
and FSD take rate may not be as high, so perhaps we can wind that down to $60 billion.
The trailing twelve months operating profit is just over $12 billion.
Which would actually mean 6 times more operating profit that the last 12 months, once they
hit capacity.
Wow, its actually possible that Tesla's operating profit could increase six fold from what the
current past twelves months have been, as soon as they are ramped.
Well actually no, that's just what the 4680s can do.
Energy should also start making significant contributions, and do you really think Tesla
will stop expanding LFP models?
Lets not forget just how much potential is left with this company.
This is why its so tough to trade Tesla, or wait for the dip.
This is what I tried, and sold up about $300,000 of LEAPS, in order to potentially buy them
on a crash.
The stock price had dropped from around $1150, and I couldn't help buying again when were
were below $800, pre-split prices, and the lowest I got was only when the stock was at
$650, before I exhausted the funds I felt comfortable using.
You may feel frustrated that you bought higher and it crashed lower, but I am almost certain,
the remorse of not buying at all, when it starts to run, is much worse than overpaying
by 20 or 30%.