Another green day today for Tesla, actually not too far off $200 now, would be nice to
be back over that. Of course unless you are still buying, which I am sure there likely
aren't many left, and we probably put everything we could find in when the price was in the
lower 200s, as it seemed like such a good opportunity. And I don't think we were wrong
either, just unlucky. Which is why overall we invest not trade, as that does remove the
necessity for luck when it comes to the market. Whether you bought at 250 or 180, when the
stock price is at 1000, the relative difference starts to dwindle.
Tesla will continue to surprise us though, and have these crazy price drops. So perhaps
in the future it might be prudent to keep some cash for next time. Except where are
you going to get such cash? If you're like me, then only from selling shares, which means
you would have to sell stock at the most exciting times, which as Tesla bulls, tends to be very
difficult.
I think we can all agree though that this was bad luck, as I would say we have likely
lost something in the region of perhaps an additional $50 off the stock price from Elon
selling. That's a lot, for many Elon has cost us millions of dollars. And I am pretty sure
he was selling again today, looking at the volume, and comparing the rest of the market,
with Tesla being down about 3% around the start of the day. And we don't even know if
he is finished yet.
As you know I am analytical investor, and like to use as much math as I can to grasp
the reality as to what is happening with Tesla's stock price, and right now we have recently
seen a new 52 week low. Yes Tesla recently dropped to around $175, or $525 pre split
price if you can believe that. A growth company still growing at an exponential 50% a year,
and actually closer to 70% for 2023, and that's just vehicle production. Profits will be closer
to 100% due to operating leverage and in-house battery production, and a p/e of around 30
relative to this quarters earnings.
CPI The market is rallying as if inflation is
over, the FED managed to finally get it under control. And we still saw 0.3% increase in
inflation in October, down from 0.6% in September from August. The FED have broken the back
of inflation, supposedly. Although 0.3% is still pretty high, but obviously a lot lower.
And closer to where we want to be, but we still want to be about half that rate again.
In other words inflation is still high. But this did come below expectations. And people
infer it to meant that the FED will not need to be as aggressive with interest rates in
the future.
Anyway, it was still a relief to see it reducing, and that potentially things may get better.
And yes of course energy prices are creating supply side inflation too. And we can only
hope that improves too.
ENERGY Although don't forget that Tesla have another
side of their business that is energy too. And that there is a new factory up and running
and finally producing megapacks. Using lower cost LFP cells and Tesla's amazing advanced
manufacturing skills, the batteries will not only be in higher production, but much lower
cost and great margins. And demand for those is also unlimited. Had enough of me defining
Tesla as unlimited demand? Well who can't afford megapacks when all they do is save
you money. What consumer can't afford to buy things that save them money? Hence unlimited
demand, and we are not close to the production capacity of megapacks or energy storage. This
new factory capacity is 40 GWh a year, and the we need closer to 100 times that a year.
Hence unlimited demand. Although historically Tesla's capacities are sometime significantly
higher than they initially state.
VEHICLES But energy is just an additional bonus next
year. Vehicles are still the lions share of this company. The end of this year's run rate
is already at 50% growth from this year, with 2 new factories about to ramp up to volume
production. Increasing margin significantly, currently these 2 factories are really pulling
down margins. Once they get ramped up, they will generate the highest margins than any
other factory. For one reason, due to their advanced manufacturing capabilities, they
can simply produce the vehicles at a lower cost. The other reason being that again due
to their advanced manufacturing capabilities, they can make better vehicles that are of
more value. In other words a product offering more value, which consumers are willing to
spend more on, yet produced at a lower cost.
In other words, the vehicle ramping we will see next year, is the ramping of vehicles
that contain a lot more profit. Like about twice about twice as much gross profit per
Model Y from Texas as one from Shanghai. And with a tax credit and battery subsidy too,
so possibly even more than twice as much. This is not tough math. Resulting in pushing
average margins up, rather than pulling them down.
And Tesla just sent 200 employees from Shanghai to upgrade Fremont. What did Tesla recently
do in Shanghai? Upgrade the lines to increase the production rate around 30%. So perhaps
they are going to do what they can to increase production in Fremont. I would say it likely
mainly for standard range Model 3s, or possibly a new Model 3 variant mid range version, that
is low enough cost to qualify for the tax credit, and Tesla can increase production
rates there. We have in the past had Elon say Fremont is capable of 1 million a year,
yet we are only at around 600,000 now. Tesla wants to really increase production in the
US for this tax credit, I really don't think people understand yet the scale of this, and
what it will do to demand. Well just don't forget I warned you.
OPEX Now all this increase in vehicle production
well it increases vehicle deliveries too, but due to some crazy aspect about Tesla that
seems to happen, is although they continue to increase production and deliveries, well
OPEX barely seems to move. Resulting in the OPEX per deliveries reducing continually,
hence part of the reason Tesla have such a high operating margin, especially when compared
to the competition. I don't know how they do this, but numbers are numbers. So that's
what we go by. This means that there is still a massive $6,000 to come down in Tesla's operating
expense per vehicle. $6,000 more operating profit per vehicle to come. Granted we still
need to increase production 3 fold to hit that level of economies of scale, but it's
coming. That would increase operating margins a further 10%, from about 20% to 30%. Possibly
higher if Tesla start hitting 40 to 50% margins.
GROWTH Elon recently said Tesla will hit 40,000 vehicles
a week by the end of this year. With some quick math, that puts at around a p/e ratio
of 25 equivalent to that end of the year run rate. Note, thats end of year run rate, not
Q4. I repeat 25, a p/e ratio of 25. The same as Apple at the time of this video. And like
I said Tesla will likely have 100% increase in earnings from 2022 to 2023, possibly more.
Sure, assuming no major events that stop production or sales, etc. Assuming reasonably smooth
sailing. So if that's the case we are at a p/e ratio of around 13 relative to the run
rate by the end of next year, if the stock price remains where it is today.
TECHNOLOGY But we are only talking about vehicle growth
here, and energy. Don't forget the cliche fanboy statement that Tesla is not just a
car company, or even an energy company. Well it is certainly a technology company too.
Except the technology isn't even complete. Tesla can't even take full payment of when
people buy FSD. Let alone it actually passing regulation yet for people to actually have
FSD in their cars. But we are close too, and that alone pivots Tesla from an EV company
into a monopoly in the AV industry. Thus increasing demand, profits, and a whole lot more. And
then ultimately this technology goes all the way to Robotaxis multiplying profits by about
15 fold.
Vehicles that produce 15 times more profit, once this technology is complete, yet we are
at around an of the year p/e of 25. That's the insanity. You know if you believe Robotaxis
become a thing. But from an asymmetric stand point, if you think it's more than 7% likely
then it's a positive investment.
Alright perhaps you think Robotaxis are a long shot, and not willing to risk your money
on that, well like I said the market hasn't seen it that way either. Whether you believe
it will happen or not, there is no denying what Tesla is doing with the latest FSD beta
versions is mind-blowing. No one is close, close doesn't even begin to describe where
they are. It's not going to happen. Tesla is alone in this market. If anyone else wants
FSD in their cars, they will have to license it from Tesla, no way around it. And if Tesla
end up delivering this to consumers at the lowest cost available in the form of Robotaxis,
at a price even buses can't compete, then that's the end of most legacy autos. Anyway,
my point is, all the right signs are pointing to it coming to fruition, and I would say
Tesla are leading the way, but that would imply there are others following.
4680 And back to that Tesla isn't a car company
cliche, I am more of the opinion that Tesla is a battery company at it's core. All it's
products require batteries, energy storage, vehicles, even the bot. Yet Tesla don't really
make their own battery yet. Except they have recently started and the production rate is
increasing at high exponential levels. It's not going to take long until they really start
showing some noticeable numbers. The lowest cost battery cell in the world, that also
has the highest energy density, to go in the vehicle that is the most efficient at getting
range and performance. Tesla's core business hasn't even begun. These cells will be at
a higher production rate than any other cell in the world too. Meaning that Tesla can grow
faster than any other EV company. Tesla will also mine and refine their own lithium, and
likely nickel too. Manufacturer their own anodes and cathodes. No one can hold them
back, they have taken care of all limiting factors in their ability to scale, unlike
any other EV company.
This will mean Tesla's compounded annual growth rate will maintain throughout the decade.
Yes, the rest of the decade we should see this growth. Growth in cells and vehicle production,
but also operating profits. Due to improved manufacturing and technologies.
NEW PLATFORM Then we have the next generation vehicle,
at half the cost of a Model 3. This simply means much higher profit margin to come, but
we don't yet know what the business plan is for this product, and whether it will even
be for sale to the public.
CHINA Admittedly things are not looking so good
in China. Even despite this latest price drop, Tesla are now offering an $1100 discount in
China to vehicles in inventory. In theory the worst this means for Tesla is that they
lose some additional margin for the domestic sales in China. This is likely due to the
economy, not Tesla itself. The issue is logistics of exporting these vehicles to where the demand
is. But if it's that bad for Tesla in China, and Tesla are lowering prices there, then
it gets worse for everyone else, as not only will they have the economic issues to face,
they will now also have the issues lower cost Teslas. Remember Tesla has this amazing pricing
power to get them through these sorts of issues. I am not just talking other EVs, but ICE cars
too.
Bear in mind though Tesla ramped production here recently which will reduce cost, and
OPEX per vehicle is reducing as more vehicles ramp, so although gross margins may be down
somewhat, operating margins may not be affected as bad. Although there is also the strong
dollar too, which isn't helping. Tesla just need to concentrate on the logistics of exporting
more, which hopefully is getting easier, as we get further out of COVID. But yea, China
is not without it's risks along with lock downs still, but the future of this company
isn't China.
SUMMARY Anyway, I just stick to the math as usual.
I don't have a crystal ball as to what the market will do, but I can do enough math to
try and predict what Tesla's revenue and profit will be, and I have been fairly accurate as
to it's growth over the years. And that was before I expected EV demand to increase so
much that Tesla could increase their prices significantly. Oh and Tesla's Model Y production
to be at 3.5 times as much as the initial stated capacity. I am just going to feel what
I think is level headed, and ignore the noise and insanity out there.