Mention Tesla and there is a high chance most people would have heard of it before. If you have not you might just be living in a well…😆
Whether due to its fleet of electric vehicles (EV) or its eccentric CEO Elon Musk, Tesla is fast becoming a household name for everyone, just like Apple or Microsoft.
With its rise in popularity, Tesla has also garnered significant interest from investors in recent years. Since the start of 2020, Tesla’s share price has increased by more than 750%, as seen below.
Given its market performance so far, I thus decided to analyse Tesla to see if it is indeed worth the hype or not. In addition to the market interest, Tesla also caught my attention due to its investment in green energy.
As always, treat my post as a source of insight and not as a recommendation to buy or sell Tesla stock. With that out of the way, let’s get right in.
As a whole, Tesla’s business model is divided into three main segments; the automotive segment, energy generation and storage, and finally services and other. I will just briefly cover what each segment entails next.
Tesla’s automotive segment consists of everything related to its EV fleet. This includes the design, development, manufacturing, sale and leasing of both its EVs and network of charging stations, aka the Tesla Superchargers.
Currently, Tesla has 4 EV models on the market; Model 3, Model S, Model X and Model Y. Model 3 and S are sedan cars while Model X and Y are SUVs. Besides these models, there are also other models of Tesla vehicles in their final stages of development such as the Cybertruck and Tesla Semi.
For the energy generation and storage segment, it consists of Tesla’s design, manufacturing, installation, sales and leasing of its energy products. These products include Tesla’s lithium-ion battery packs, solar energy cells and solar energy roofs for both residential and commercial use.
Lastly, Tesla’s services and other segment basically consists of the after-sale services for its EVs. These include things such as vehicle insurance, sales by third-party subsidiaries, retail merchandise and sales of used vehicles.
Unsurprising throughout the years, the automotive segment has contributed the most to Tesla’s overall revenue.
In terms of growth rate, all three segments have seen tremendous positive growth in the past few years.
While the growth rates for Tesla’s energy and services segments were higher than that of its automotive segment, they still only constitute a rather small part of Tesla’s total revenue.
Having briefly looked at what each of Tesla’s business segments entails and their respective performance, I will now look at which country or region contributed most to Tesla’s revenue.
In Tesla’s financial reports, its revenue is split into three geographical areas; The United States, China and Others.
As seen, United States is still the major revenue contributor for Tesla. However, contributions from China and other countries has steadily increased over the years.
The significant increase in China’s revenue contribution in 2020 is mainly attributed to the ramping up of model 3 and model Y production in Tesla’s Shanghai Gigafactory. With the introduction of a standard Model Y version in China in Q2 2020, revenue contribution from China should remain relatively healthy.
In addition, I also expect revenue contribution from Europe (which is parked under Other) to rise exponentially in the future. This is due to the expected completion of the Berlin-Brandenburg Gigafactory either in late 2021 or 2022. Once completed, the Gigafactory is slated to produce 500,000 vehicles a year.
Production and deliveries
Currently, it is no secret that the demand for Tesla’s EV far surpasses that of its production capability. New buyers of Tesla’s EVs are put on a waiting list that can last anything from weeks to months.
To meet this demand, Tesla currently has three factories located in Fermont, Nevada and Shanghai catered to the production of its EVs. There are also another two factories currently under construction in Berlin and Texas.
While the number of factories helps in meeting EV demand, much of Tesla’s production woes come from supply chain issues and the ongoing global shortage of semiconductor chips, as revealed during Tesla’s Q2 2021 earnings call.
With the upcoming completion of the Berlin-Brandenburg Gigafactory, it should alleviate some of the supply chain issues. However, there is nothing much Tesla can do about the global shortage of semiconductor chips for its battery packs.
On the bright side, Tesla’s production and deliveries have seen year-on-year increases.
With production and deliveries numbers increasing year on year, Tesla has shown that it has no problems ramping up production in the foreseeable future. The only constraint is whether there are enough parts and components.
Furthermore, the rising number of deliveries also show that Tesla’s EVs continue to have wide appeal in the EV market.
Having briefly looked at Tesla’s business performance, I will now turn my attention to the financial side of things.
Top and bottom-line results
When it comes to Tesla’s top and bottom-line results, it has been mixed in recent years.
While gross revenue has been growing year on year, Tesla only became profitable last year. Moving forth, I do not feel this would be a big issue as the scale of Tesla’s production and delivery of EVs should ensure that Tesla remains profitable from here on out.
Furthermore, based on Q2 2021 results, Tesla’s financial results should comfortably exceed that of 2020.
As seen, for 1H 2021, total revenue already amounted to more than US$22 billion. Operating profit came in at around US$1.9 billion, while net profit amounted to around US$1.6 billion. Hence, I think it is safe to say that 2021 results will blow 2020 results right out of the water.
Due to its negative net income in the past years, I thus did not look at its return on equity (ROE) as there would be no value in doing so.
When it comes to Tesla’s overall profit margins, it pretty much follows that of its bottom line.
As seen, overall profit margins only turned positive last year as expected. It has also been on an upward trend in recent years. As a comparison to other automotive companies, Tesla’s operating margin is pretty much within the industrial average of 6% to 8%.
Looking at Tesla’s core automotive segment, gross profit margin hovered between 20% to 25% in recent years. This is a pretty healthy margin if you ask me.
Moving forth, I expect this profit margin to increase slightly due to economies of scale. Furthermore, in its Q2 2021 earnings call, Tesla also highlighted material cost savings in the production of its EVs, which should also further boost profitability margins.
With regards to the margins of its other two business segments, I was slightly surprised by the low margins of Tesla’s energy segment. Hopefully, with better battery technology and wider acceptance and demand for solar energy, profit margins can climb in the future. However, I still foresee margins for the energy segment to either remain low or decrease as Tesla is currently concentrating much of its attention on the automotive segment.
For the services and other segment, profit margins should trend upwards as more Tesla EVs enter the market.
In terms of financial stability, there is no major financial issue facing Tesla in the short term.
With a current ratio of 1.88 in 2020, there is little risk that Tesla would not be able to fulfil its near term financial obligations. While the debt to equity percentage was significantly high prior to 2020, this was mostly due to a negative cash flow which I would cover in the next section.
Tesla’s debt to assets percentage is also rather healthy with it being below 50%. All things considered, Tesla is being financially prudent even as it is aggressively capturing EV market share.
Taking into account Q2 2021 results, Tesla’s financial ratios were healthy too.
In Q2 2021, the current ratio came in at around 1.51. The debt to equity percentage worked out to around 37.9%, which was considerably lower than 2020’s figure. Debt to assets percentages were also low at 17% and 17.6% for total assets and tangible assets respectively.
As a whole, Tesla is on a stable financial footing based on its results thus far.
With regards to Tesla’s cash flow, it only turned positive in recent years.
As seen, Tesla net cash generated from its business only turned positive from 2018 onwards. For its free cash flow, it only reached healthy levels in 2020.
Looking at the Q2 2021 results, Tesla has continued generating positive cash flow.
Looking at Q2 2021 net cash generated from operations, there was a huge jump from a year ago. In addition, it also increased from that of Q1 2021. In terms of free cash flow, it continues to remain positive, albeit at a small amount.
Judging from Tesla’s top and bottom-line results as a whole, I am quite confident that it would continue to increase in 2021 as Tesla fulfil more orders of its EVs.
For Tesla to maintain or build upon its current market share, it has to have a competitive advantage over its competitors. Current Tesla competitors include not just EV companies such as XPeng and NIO but also other automakers such as Volkswagen or Ford.
For Tesla, I think its main competitive advantages are its technology, vertical integration and branding.
On the technology front, Tesla’s advantage can be broken into two main aspects, battery and AI development.
On the battery part, while Tesla is not a major battery supplier (yet), it performs extensive R&D to make its battery cells more efficient, be it in the manufacturing or utilization process. Furthermore, Tesla also produces its own battery packs for use in its fleet of EVs. Currently, Tesla has partnerships with major battery suppliers such as Panasonic, LG Energy Solution and CATL.
During Tesla’s 2020 battery day, a new 4680 battery was announced. The 4680 battery will have a larger form factor, which translates to more battery power, and has a tabless design, which reduces thermal output. Besides announcing a new battery, Tesla also mentioned how they are refining the battery manufacturing process by reducing waste byproducts, eliminating the use of cobalt and transitioning to using silicon rather than graphite for anodes in the battery.
All of Tesla’s research on batteries means they are able to produce more energy-efficient EVs that have a longer range and better power. Additionally, having its own in-house battery pack for its EVs also gives Tesla a significant leg up from other automakers that do not have in-house battery production.
If you have watched Tesla’s 2021 AI Day, I would pardon you if you came out from that video feeling a little stupid😂. I personally felt that way, to be honest.
The amount of information presented about Tesla’s autonomous driving system was just mind-blowing. While some of it was a bit too technical for me to fully grasp, I was really impressed with the progress made by Tesla on its EV autopilot programme or otherwise commonly known as full-self driving (FSD).
As a whole, Tesla’s autonomous driving is fundamentally based upon car cameras and computer vision. This means that the AI behind the autonomous system is learning about the physical environment and how to react to real-life situations based on how the human eyes see it. Effectively, Tesla is developing its AI to function like how a human brain processes information while we are driving.
In addition, Tesla’s current fleet of EVs would provide substantial data for its AI system. This allows the AI to learn more about real-world situations and how to react in dynamic situations. Thus, Tesla’s EVs would not just only be vehicles but also computer brains on wheels or as Elon calls it “semi-sentient robots on wheels“.
In the long run, I think that an autonomous driving system that is based on computer vision would beat one that is running on Lidar, which depends on sensors and laser beams to map out a 3D model of the physical surroundings. After all, driving on the roads can sometimes be rather unpredictable due to human actions and behaviour.
Besides technological advantage in both hardware and software, another of Tesla’s strengths is its vertical integration economic model. This means that much of Tesla’s business operations are managed in-house, from production all the way to delivery.
Adopting a vertical integration model provides several advantages for Tesla. Firstly, it allows Tesla to lower production costs and improve profit margins due to economies of scale. This effectively allows Tesla to price its products lower than that of its competitors, which would definitely drive product sales.
In addition, proprietary technology and software upgrades would enable Tesla’s products to perform more efficiently. This is much like how Apple products work seamlessly with each other as the software that runs these devices are developed in-house. Additionally, any software upgrades to Tesla EVs can be easily downloaded and installed via its in-car system.
Thus, while Tesla’s technology might not be better than its competitors (though I would argue it is), Tesla has a significant influence in shaping a positive user experience.
Lastly, with vertical integration, Tesla is able to ‘duplicate’ its technological improvements into other product categories. For instance, battery improvements would not only allow Tesla’s EVs to travel further distances but also allow better energy storage for its solar products. Another example would be AI development for autonomous driving being brought over to develop the Tesla Bot, which was also unveiled in Tesla’s 2021 AI Day.
All in all, vertical integration allows Tesla the room to not only deliver cheaper and more efficient products but also open up future growth avenues.
Branding and first-mover advantage
While branding and first-mover advantage is fundamentally different, I feel they are intricately linked in the case of Tesla. Let’s touch on branding first.
While it comes to pure EV, otherwise known as battery electric vehicle (BEV), Tesla would be one of the first things that come to people’s minds. This association of Tesla to BEV has literally made Tesla become a household name when it comes to EVs. This strong brand association could perhaps explain the current demand for Tesla EVs and its impressive stock market performance.
Personally, I feel much of Tesla’s current strong branding is due to first-mover advantage. This is taking into account that Tesla does not do paid advertisements.
While Tesla is not the first company to sell BEVs, it was one of the first few companies able to do so profitably. This enabled Tesla to significantly ramp up production and deliveries and capture a majority market share of the US BEV market.
As a whole, with all these competitive advantages, Tesla should be able to stay ahead of its competitors in the EV industry.
Having gone through Tesla’s financial results and competitive advantages, I would next consider its growth prospects. For this section, I will look at both the short and long term growth prospects.
Needless to say, Tesla’s short term growth prospects are extremely positive. Demand for Tesla EVs remains high with current production not being able to meet demand.
In addition, the global EV market is also set to grow at a CAGR of 26.8% all the way to 2030. While there is no estimated growth rate of BEVs. it is good to see that BEVs make up a majority of new EV registrations. Personally, I see BEVs being the way to go with hybrid electric vehicles (HEVs) becoming redundant sooner or later.
Besides the automotive segment, Tesla’s energy and storage segment could also see huge growth. As the world transits to more sustainable energy sources, there would be an increased demand for ‘clean’ electricity.
This is where Tesla’s energy products such as the Powerwall and Megapack would come into play. By connecting such energy storage products to the electricity grid, these products can be used to power residential or commercial electricity use. This is already happening in Texas where Tesla Energy Ventures, a wholly-owned subsidiary of Tesla, has filed to become an electricity provider.
Thus, as the world transits to sustainable energy and transportation, I expect Tesla to experience exponential growth for the next 5 to 10 years.
While the next 5 to 10 years might be extremely positive for Tesla, its longer roadmap is a little more complicated. From 2030 onwards, I expect Tesla’s sales of mid-range sedans to taper a little.
For Tesla’s automotive segment to grow at an exponential rate past 2030, Tesla has to release EV models that appeal to the mass market. The good thing is that Tesla already has plans to do so with the Tesla Semi and the rumoured US$25,000 Model 2. However, these two cars are nowhere near the production phase yet and hence it is still hard to judge the market receptiveness.
Furthermore, past 2030, I expect that demand for sustainable energy products would also taper down. This is with the view that the world would have transited to such products before 2030. For the sake of the world, I hope I am right. So, if the world has already moved to sustainable energy sources, where would Tesla’s growth come from?
Personally, I feel that answer lies in going into robotics. This was quite evident in the unveiling of the Tesla bot during Tesla’s 2021 AI Day. In addition, Elon also mentioned that “Tesla is arguably the world’s biggest robotics company“.
With the Tesla bot, it is quite clear that Tesla is looking to create robots that can take over mundane and physical tasks that humans are currently doing. This could mean labour intensive jobs or last-mile delivery services.
With that said, would Tesla look to mass-produce the Tesla bot in the future? Honestly, I am not quite sure myself but there is a strong possibility it could happen. At the end of the day, I guess we can only adopt a wait and see approach when it comes to Tesla’s future plans.
Possible growth inhibitors
Although Tesla’s growth prospects are great in the short to medium term, there remain factors that can impede this growth. I will be listing three factors I feel could be significant in the long run.
Currently, this is what Tesla is experiencing right now. With the global shortage of semiconductor chips, Tesla cannot produce enough EVs to meet the demand. Thus, waiting time of months is not uncommon for Tesla’s Model 3 and Model Y, the EVs that Tesla is mass-producing right now.
While Tesla is circumventing the chip shortage by sourcing alternative chips and rewriting its EV firmware to support these chips, it is but a temporary solution. In the long run, if the chip shortage issue continues, it will heavily impact Tesla’s growth ceiling due to cascading negative effects.
For a start, a continued chip shortage would result in Tesla reaching equilibrium for its current fleet of EVs at a much later date. This would result in delays in the production of both the Cybertruck and Tesla Semi. The longer this delay last, the more market share that Tesla is conceding to competitors which specialise in electric trucks, such as BYD or Volvo.
Unfortunately, there is nothing much that Tesla could do but weather the semiconductor storm. While there are calls for Tesla to open up its own semiconductor factory, Elon said that it would still take between “12 to 18 months” to bring the factory up to speed.
Affordability and mass market
Another possible growth inhibitor for Tesla is that of its EV prices. Tesla’s current fleet of EVs mostly caters to the mid-range and luxury automobile market. Even the cheapest Tesla EV, which is the Model 3, is priced at around US$40,000.
This is rather high in comparison to the current prices of internal combustible engine (ICE) vehicles. Given that consumers would be more inclined to stick to cheaper options, despite the potential long term environmental and cost benefits, Tesla has to come up with an EV that is cheap enough for consumers to switch from ICE vehicles to BEVs.
While Tesla plans to produce the Model 2 which is rumoured to be priced at US$25,000, it would only be available earliest in 2023. From now till then, Tesla might just lose BEV market share to companies that are able to produce way cheaper vehicles. As a matter of fact, this is already happening in China.
In China, the current best selling EV is the Hongguang Mini, which is produced by Wuling (a joint venture between a state-owned automotive company and General Motors). While it pales in comparison to the Model 3 in terms of performance, it is priced at just around US$4,500.
Based on 1H 2021 figures, the Hongguang Mini has already surpassed the sales figure of the Model 3 in China. This shows that the price of EVs remains a dominant factor for mass-market adoption, no matter how ugly the vehicle might be.
Fuel cell vehicles
Besides potential production and affordability issues, fuel cell electric vehicles (FCEVs) might also affect Tesla’s growth. As opposed to BEVs which are powered by battery packs, FCEVs are instead powered by a fuel cell and hydrogen tank.
The main advantages that FCEVs have over BEVs are that they weigh lesser and have a shorter refuel time. As compared to a BEV that requires anything from 30 minutes to 12 hours for a full recharge, a FCEV can be quickly recharged in under 5 minutes. Although a FCEV’s range is shorter than that of a BEV, there are arguments that a FCEV is more electricity efficient per mile.
While the efficiency of FCEV or BEV can be argued either way, the main drawback of FCEV is the current lack of infrastructure and dependence on natural gas.
Globally, there is currently less than a thousand hydrogen refuel stations as compared to more than a million electric charging stations. Furthermore, building infrastructure to store hydrogen as liquid fuel is also highly expensive as compared to simply using existing electricity.
In addition, more than 95% of liquid hydrogen used currently is powered by the burning of natural gas. This completely flys in the face of using green and sustainable energy.
In the long run, while there might be a use case for FCEV, I do not yet see them as a huge competitor to Tesla’s BEV.
For this section of the post, I will be touching on Tesla’s valuation. Is its current price overvalued or fair? Do note that valuation itself is super subjective and can vary a lot based on what estimations are used.
Additionally, it is even harder to come up with a proper valuation for a company such as Tesla, due to its involvement in multiple industries. Nevertheless, I would still try to do so with rational estimations based on the EV and solar energy industries.
To start off the valuation process, let’s first estimate the potential market size of these industries in 2030. The EV market is set to grow massively from 4,093 thousand vehicle sales in 2021 to 34,756 thousand in 2030. In addition, the global solar energy market is also slated to reach US$ 293.18 Billion by 2028.
Using these figures we can put forth some estimation of Tesla’s revenue in 2030. I thus created three possible scenarios for Tesla’s future growth, a baseline case, an optimistic outlook and a pessimistic outlook.
The baseline scenario
For the baseline scenario, I will be using the following assumptions and estimations:
- Tesla’s EV market share to be 15%
- Tesla’s energy generation and storage segment to generate revenue equivalent to 5% of solar power market value
- Operating profit margin of 12%
- Average revenue US$40,000 per EV delivered
With these assumptions, Tesla’s total estimated revenue would thus be US$223.75 billion, consisting of US$207 billion (automotive revenue) and US$16.75 billion (energy segment). This would also result in an operating profit of US$26.85 billion.
To derive a valuation based on these figures, I used current tech companies in the market, namely Amazon, Apple and Google, as forms of comparisons. Based on the TTM revenue of these companies, their respective revenue multiplier are as follows:
- Amazon: 3.9x
- Apple: 7x
- Google: 8.6x
- Average: 6.5x
If TTM operating income was used, the multiplier number would be as such:
- Amazon: 59.7x
- Apple: 24.3x
- Google: 30x
- Average: 38x
Putting these average values back to Tesla would result in a market price ranging from US$928 to US$1322. Do note that this price is the ‘expected’ price in 2030 and assumes that the number of outstanding shares remains the same.
An optimistic scenario
For the optimistic scenario, I used the following assumptions and estimations:
- Tesla’s EV market share to be 20%
- Energy segment revenue to be equivalent to 10% of solar power market
- Operating profit margin of 18%
- Average revenue of US$42,000 per EV delivered
These assumptions worked out to a revenue of US$325.5 billion and an operating profit of US$58.59 billion.
If the same multiplier values were used, Tesla market price would range from US$1954 to US$2056.
A pessimistic scenario
On to the final scenario, I assume that Tesla’s growth remains on the current trajectory. With that thought, here are my assumptions and estimations:
- Tesla’s EV market share to be at 12%
- Energy segment revenue to be 3% of solar power market
- Operating profit margin of 8%
- Average revenue of US$40,000 per EV delivered
With these figures, Tesla’s revenue would be US$176.9 billion, with an operating profit of US$14.15 billion.
Using the same revenue and profit multiplier from the previous scenarios, Tesla market price would range from US$496 to US$1061.
A weighted valuation
With figures for all three scenarios calculated, the only thing left to do is weigh them according to their probability. For that, I came up with the following figures:
- 60% for baseline scenario
- 30% for optimistic scenario
- 10% for pessimistic scenario
Using these percentages, I then multiplied them back to the average price for each scenario. At the end of it, I arrived at a weighted average share price of US$1354.35. In current terms, this would thus value Tesla at US$1.47 trillion.
As a note of caution, this share price is highly speculative and subjective, hence do take it as a pinch of salt. Personally, if you ask me, there can never be a right valuation since no one can predict the future. We can but only make educated guesses based on a few factors that we hold as constants.
To sum it up, I would say that Tesla is a good investment for the future. This is based on the technological edge it has over its competitors. It is also worthy to note that Tesla is more than just an automobile company. If you ask me, I would definitely classify or term it as a tech company instead.
In addition, if you are looking to invest in Tesla, do be mindful of the market volatility that comes with its shares. I think the best strategy for investing in Tesla is to come up with your own valuation of the company and dollar cost average into the stock when the opportunity arises.
Of course, also keep yourself up to date on Tesla’s sales figures and developments in the BEV industry. This is extremely crucial as the BEV landscape is constantly changing with different EVs being released by different companies.
On a final note, this analysis post only covers the bare skeleton of what an investor should know about Tesla. I tried to condense as much as I know into this post. If I were to explain in-depth, I fear this post would take up more than 10k words.
As such, I might be writing more posts about Tesla in the future. Do let me know in the comments if that would be helpful. Also, I would love to hear what you guys think about Tesla as an investment.
As always, invest safely and rationally.😊