I wanted to create a model that will give us some indication of how much impact increased
gross automotive margins could potentially effect earnings. As I have a feeling we have
barely seen the start of the economies of scale kick in. By which I mean these fixed
costs are starting to dwindle more and more relative to the earnings.
So just to be clear, I am making a model to show the impact of what improved margins do
the company, whilst economies of scale are in effect due to the increased level of production.
I really hope you all understand this, and realize I am not creating some sort of projection
or price target here. I am just curious as to how much increased margins impact earnings.
We will estimate that Tesla have achieved full capacity of the new factories by 2024.
In reality the year is not overly important, but I would expect it to be fairly close to
that that timeline. I am going to estimate what I think the capacity will be at each
factory. We will be taking Fremont at 700,000, Shanghai at 900,000, Berlin at 1.8 million
and Texas at 2.7 million.
In this model we will also only be using Model S, X, 3, Y, and Cybertruck. The quantity of
Roadster sales is likely inconsequential in this model. The semi truck opens up a myriad
of complexities, so it makes it easier to remove. I fully appreciate the potential of
the Semi and believe it will reshape logistics as we know it. So bear with me here, and lets
just see what happens when we play with margins at this level.
We are also going to exclude the compact model. This is sort of like us discovering the most
Tesla can get our their current line up more so, before the compact model enters, and with
the all the factories we have at present.
Now we need to calculate the average selling price of each model. We will be using global
average selling prices, rather than factory specific, to reduce complexity. I am using
this model as an indicative way, to explore impact of the potential margins I think Tesla
can actually reach. Please do not take this is any kind of price target. I just wanted
to know how big some of these profits could potentially be.
Anyway, we can start by creating the model and we can run several simulations through
it, the objective is basically to see what impact there is on profits at various automotive
gross margins.
Now as we are at full capacity, and we have estimated that this could be in excess of
5.5 million units a year, then I am going to reduce the average selling price somewhat.
Although demand is very high for Tesla, when we start approaching these numbers, then we
may need to reduce prices to meet demand. Of course no prices are adjusted for any potential
inflation. In addition to that its highly possible that demand has reached much higher
levels than what we see today. And remember even the Y has a lot of untapped markets even
today, it has only just been launched in the UK for example, still not Japan or Australia.
And there isn't even the standard range available in the US. Plus overall demand for EVs and
Teslas continue to climb. With reduction in prices, and more features available, then
that will continue to escalate. Especially if it also offers FSD.
But it might not just be a demand thing, it might be supply too, there may not be many
other auto makers out there, making many vehicles, Tesla might be dominating. It's just difficult
to ramp up a business that sells products that lose thousands of dollars each.
But I have a starting price of the Model 3 at $35,000 and the Model Y at $39,000. I am
using these as international averages, whereas these would likely be the US prices, and Teslas
are generally more expensive outside of the US, except China. As for the Cybertruck, I
am going to stick with the original pricing, although it looks likely that there will be
a price increase. It sounds like the tri and dual will be the most popular versions though.
Now as we are keeping an average selling price global, we do not need to factor in the different
models from each factory. Instead we can just break them down by models.
Model S and X isn't going to have too much impact on here. It's possible Tesla have ramped
up production of them somewhat but I am going to keep them at just 250,000 a year. On the
earnings call I inferred that they should be getting to a run rate of 20,000 for each
the S and X next year. So 250,000 a year by 2024 seems reasonable, especially when they
start offering the lower cost versions. But they could even be using 4680 batteries by
this stage, and demand might be higher again. But who knows there could competition from
Lucid and Rivian too. Anyway, like I said, these models wont impact our simulation much
anyway.
Model 3 sales haven't been growing as much as Model Y lately, or much at all really,
because Tesla is focused on ramping up the more popular, more profitable Model Y. But
once there is ample capacity, then Tesla can start ramping up the Model 3 more. Imagine
a model 3 performance with structural 4680 battery pack, front and rear single piece
molds, and all other improvements. Yea, thats going to be a really cool car, and exceptional
for the money. Therefore I think Tesla can reach 1.25 million
Model 3 units a year. Especially when we have a starting price of $35,000. Remember when
you factor in the other Tesla savings, a $35,000 Tesla, has a cost of ownership of about a
$15,000 ICE car. Which more people will understand by this time too, that cost of ownership is
not all about the initial price tag.
Now Elon tells the Model Y will be the best selling car in the world, outselling the Toyota
Corolla. The Corolla is about 2 million sales a year. That doesn't mean the Model Y will
be 2 million sales a year. It means it will beat 2 million sales a year.
Therefore I am assigning 3 million Model Y sales a year. Maybe it could be higher, but
this is how I have decided to break down our numbers.
Tesla could sell 1 million cybertrucks a year. What, 1 million a year for a car that ugly.
I suggest if you still think the cybertruck is hideous, you need to get your head around
that, as it could cloud your judgement as to the success of this vehicle. This isn't
just the coolest vehicle ever created, but quite possibly the coolest product that has
ever been available on the planet. If the hideous F-150, and sure if you were brought
up with it as a kid, then I can understand the nostalgia you may have around such a vehicle.
But from objective stand point, when you compare it next to a cybertruck, then it is plain
ugly, inside and out. Minimization designed around first principles applications ends
up making the best design. So if the F-150 can sell a million a year just in the US,
well the Cybertruck certainly can globally. Anyway, I am not sure the F-150 will even
be around by this time, so there wont be much choice anyway.
Look maybe these numbers are a little high, and perhaps Tesla need to do a little bit
of advertising even to get that number of sales, Elon hasn't ruled out advertising,
Tesla just don't need to. Yea, don't forget, advertising creates demand. Elon has said
if he was to advertise, it would be to educate consumers about their cars, rather than something
to manipulative consumers to depart with their money.
On the other hand, you are all expecting Tesla to hit these run rates, and you aren't expecting
a compact model before this stage, so how else did you expect the models to be broken
down?
When we plug these numbers in, we get an overall average selling price of $47,271. I know the
current trajectory we are seeing is a reduction in the average selling price, but obviously
with the inception of the Cybertruck, that's not going to happen as much as people expect.
Right, thats quite a big deal. I am not sure many people have considered that. Anyway we
have do much lower average selling prices for Y and 3. This is still slightly lower
than Q3s average selling price which was $49,000. And don't forget, it anything the semi truck
will raise this further.
Anyway, the revenue is in excess of $1/4 trillion. Let's run the model first with 30% margin
as a base, and start from there. Now of course we are excluding energy and everything else.
Ok we have $78 billion gross profit. That's a big number. Now Tesla's R & D, and Selling,
general and admin, have changed very little at all since Tesla is delivering even twice
the vehicles today, back then. This is part of the economies of scale.
I am going to pretty much double where R & D spending has been lately, and take it to $4
billion for the year. S, G and A, well the one of the major costs there is the depreciation
on all the capital expenditure. By this stage the depreciation wouldn't be as high many
more, and in this scenario we should also exclude any depreciation from a new factory
if there is one in development, as it doesn't factor in to our model. There isn't a lot
of reasons for S, G and A to really increase, but so be it, lets just double it again, and
take it to $8 billion for the year. Stock based compensation will still be in there,
and Elon likely has a new compensation package too, but in reality that should be shared
across the other sides of the business too. You see as the other sides of the business
grow, namely energy in the near future, well these fixed costs should continue to remain
relatively low, improving operating margin. Operating margin is a good figure to judge
how economies of scale are improving. Giving us an income from operations of $66
billion. Which is an insane operating margin of 25%. Remember we aren't factoring in energy
or anything else in here. Which also might mean our s, g and a is too high as well.
I am not going to include any interest, as by this stage Tesla most likely have positive
net interest. Now as there is less to depreciate here, so there will be a slightly higher tax
rate. Coming in with a net profit of $57 billion.
Now when I increase the gross margin from 30% to 40% then although the margin has only
risen 33%, i.e. 33% of 30% gross margin is 10%, add the 10% on to the 30 and we are at
40% margin.
Well the profit has now increased from $57 billion to 80 billion, thats an increase of
$23 billion. The costs remain the same, as we aren't even increasing production numbers,
solely improving margin, likely through Tesla incorporating their own in-house batteries.
But $23 billion more profit is a 40% increase in earnings. You see, as the economies of
scale kick in, 33% increase in gross margin, gives 40% increase in earnings. And as Tesla
make more cars, these will improve further. This is also a 35% operating margin.
Now we know Tesla can easily reach 40% margin with their new processes and batteries. And
sure there are tons of tweaks and alterations on the production lines Tesla can also make,
to improve margins here and there, and more vertical integration. But is there any other
major development we may have left out, that could improve margins significantly higher
again?
Yup, who guessed it? FSD. Right, that's a really high profit margin element to Tesla's
business. If we are saying this will all be happening around 2024, I assume the vast majority
of you would agree that there is a high probability that FSD would have reached level 5 autonomy
by then. This means 2 things, 1 being Tesla no longer has to defer any FSD revenue and
can realize 100%, it also means that adoption rate is a lot higher.
Yes, a lot of drivers may be using the subscription model, but we will take a value of $10,000
per FSD vehicle, the subscription model likely has more value over the lifetime of the car
though.
How about we add that in, at even just 50% adoption rate. Then thats a further $27 billion
of revenue.
Now if we add that figure on to our auto gross profit we are at a total gross profit of $131
billion. It also brings our overall margin for vehicles to over 45%.
Right yea, 45%, how is anyone ever going to come to close to that? Obviously they are
not. Tesla is out in a league of their own.
The earnings come to $103 billion. Now if you are uncomfortable thinking Tesla is capable
of selling over 5 million units a year, then if you allocated $3 billion of that into advertising,
then that should do more than boost sales to increase your confidence of reaching that
figure.
Now remember this is not an official forecast, but just for fun we could put 50 times multiple
on that earnings figure of $103 billion and quite easily come up with a $5 trillion valuation.
Not bad for 3 years time. Oh and we are only at 5.5 million cars. We have 20 million cars
to come, a figure I think is sandbagged. Oh and potentially robotaxis. Oh and then energy
will be at least as big again, oh and robots bigger than that again. Oh dear, I have increased
my conviction again haven't I? Right, looks like Im going to have to back into my account
and get another one of these LEAPS then doesn't it. I usually wait for dips, but Im feeling
a little more hasty right now.
Thanks