I am sure you all heard Elon recently on Twitter spaces.
The good news was that he said he would no longer be selling any more Tesla shares for
18 to 24 months.
But it looks like the damage is already done.
Elon also still thinks Tesla could become the most valuable company in the world, except
this time he added a time for when this could occur, saying within 5 years.
So there you go, Elon thinks you might be able to get 10 times return from today's low
low price.
Or at least they sure feel low to me, with a trailing twelve month p/e ratio of 38.
However, the future p/e well that was starting to look crazy.
Or at least until Elon said that Tesla may even reduce their prices to break even or
a slight loss.
This is if we are in a scenario of high interest rates and quite a serious recession, that
Elon compares to 2009 recession.
So Elon says that because we would be in a recession we would have reduced demand, which
is what happens in to the auto industry, as it is cyclical.
Then with higher rates cars are effectively more expensive to buy.
Elon says that in that scenario you have to decide as to what level you want to grow unit
volume, do you lower production, maintain growth or do you increase production.
Then that would all come down to what prices you wish to sell your products.
Elon says his preference would be to grow as fast as they can, without putting the company
at risk.
Elon is saying the reason for this is that the cars possess something that others do
not, is that the cars are upgradeable to autonomy.
So I think Elon believes that his objective is still get as many Teslas out as possible,
so there are autonomous vehicles out there when FSD is ready.
The question is though, how low a price are we talking here?
We know Tesla were making good profit margins when they Model 3 was only $37,000 and the
waiting list in the US was 3 to 6 weeks.
We had a $49,900 Model Y Long Range with 2 to 6 weeks delivery.
These were the prices back in early 2021, when the stock price was still around $300.
We still had autos without regulatory credits getting 22% margins at that time, and this
was also during a Model Y still ramping in Shanghai.
In Q3 2020 they had reached 23.6% margins.
This is why we felt so comfortable staying investing with the company.
These were low cost EVs, and still highly profitable, along with a lot more potential
to reduce costs further.
Tesla became far more popular in the last 2 years, along with EVs.
EVs are a better way of driving, and of course cost significantly less to run.
They come with massive cost savings, perhaps $1500 a year in the US, but twice that in
some nations, which does add up.
An EV is a deflationary good, Teslas just appear expensive as they have had to deal
with huge waiting lists.
And people refer to Tesla as a high end luxury car.
Because it is, it is a comfortable drive, that handles well, has the best safety, and
very highly optioned.
However Tesla are so good at manufacturing they have managed to get the cost of a luxury
vehicle built for the price of a regular vehicle, along with vertical integration and economies
of scale.
Basically Tesla are producing a lot of car, for the same cost that ICE produce something
very basic, for all the reasons we have discussed before at how Tesla save costs.
And then this end product being one that also has a lower running cost as it doesn't need
fuel.
So costs have likely risen with inflation since the start of last year, although Elon
says he is now seeing deflation, and of course more vertical integration and improved manufacturing
processes.
But even if we said that Tesla would break-even if they sold a Model 3 for $35,000, then with
a tax credit it takes it down to $27,500.
A Toyota Camry starts at $26,000, and you have to pay for gas, and they are very standard,
especially compared to a Tesla.
This is the US of course, that does have this tax credit, but equally cars also cost less
in the US.
My point is that it would be very unlikely that Tesla would need to drop their prices
to a break even price, and we are saying that it cost Tesla about $28 to 29,000 perhaps
to make a Model 3 back in early 2021 if we are going by those margins.
Implying that it should cost less than $35,000 to make a Model 3 in the US.
The same for the Model Y, if we are talking about $50,000 at perhaps 22% margin, would
be $39,000 cost, or even if its $42,500 now, with the tax credit it would take it down
to $35,000.
A BMW X3, which is not even close to the same level of car, starts at $45,000.
This is the US, which is the market that has experienced highest price rises, and thus
the most margin buffer to start with, and then the tax credit.
Basically I would assume that Tesla do not need to sell their cars at break even, let
alone a small loss.
If this has occurred, then there may be worse things to be worried about, the economy would
be dire, the legacy auto manufacturers would be bankrupt.
They would have bailouts, but we would assume that if we are in that situation the reserve
banks have pivoted by then.
Other markets also offer subsidies, so it will be a similar scenario there.
But if Tesla reduced their prices to break even in markets like Australia or New Zealand
they would cost less than the BYD equivalent.
I am talking no gross profit, and in all fairness BYD do make some gross profit on their vehicle
sales, so it's not an entirely fair comparison.
But I am just trying use these price drops for indicative purposes.
I don't think Tesla will need to operate at break even.
I think they can maintain a profit through the recession.
Remember the recession is controlled, its up to the reserve banks how hard they want
to make it.
I think they just want everyone to get the message, and stop spending, slow down money,
and wait for everything else to catch up.
If they go too far then even cutting rates and quantitative easing wont necessarily be
enough to restart it again.
Elon is basically saying that even in a worse case scenario they are prepared to grow production
still, so much so they are prepared to even if it meant they have to sell at break-even.
But when we see these numbers, of how low the prices would become, and we factor in
how the demand is so much more elastic for EVs in general, and Teslas too.
If Tesla had to lower their prices to break even, then it would mean the aggregate demand
is so low, that Tesla would end up with about 30% market share in the US.
So this is a double whammy, there would be less demand in the first place of people who
want to buy cars.
Then if Tesla's prices are considerably lower, their prices are relatively lower to the competition.
Which means the competition are losing aggregate demand, and then losing demand from customers
buying a Tesla instead.
However, hard it is for Tesla, its just going to be so much harder for everyone else.
The market is panicking and some Tesla investors are even more.
It is a very unpleasant feeling losing so much money, this is tough to get through,
but at the same time, as far as we can tell it looks like Telsa has the best chance of
coming out the other side in the best condition.
The point is Tesla is in a good position to weather this storm, and they have a strong
cash position on top of that.
Elon has been through these situations in the past, and he is preparing for the worst,
as it was incredibly stressful for him last time.
This also includes his selling for Twitter.
This isn't going to change until the FED pivots, and even when they do, we don't know what
state the economy will be in at that stage, if it is bad, then we would have seen massive
deflation, which would also mean that Tesla's costs should have come down too.
On top of that though, we have Tesla's sleeping giant that is starting to wake up finally.
All that rhetoric Tesla bulls have have been saying over the years, that Tesla isn't just
a car company, well hopefully this is the time when we finally do see that.
There are some serious rumors going around already about energy.
One being that the run rate is already at around 35 GWh a year.
And I did some numbers and managed to see potentially 50% margins, and that didn't even
include the subsidies.
Others are even suggesting margins could be as high as 60%.
Unlike cars, energy is not cyclical, people need energy all year around in all economic
environments.
This would be a great hedge to Tesla that we have been waiting for so long.
Potentially an additional 8 to 10 billion in operating profit next year.
I will put together an estimate of 2023 with price cuts, and see what it comes to.