Author 丨The Value Portfolio
Compilation 丨 Wall Street Events
Optimism about Tesla expects the company's valuation to reach more than $5 trillion over the next 10 years. The company has several strong lines of business, but it's still far from trillions of dollars away. Production of the company's Model S/X is slowing, while the Roadster, Cyber Trucks and Semi-Trailers have all been stalled so far.
In our opinion, the company will never meet the expected bull market valuation. As we will see in this article, even with high cash flow valuations, the company's weak position in the high-end electric vehicle and solar markets, as well as limited growth in other markets, will hurt its ability to consistently generate returns for shareholders.
Tesla's first quarter 2022 results
Tesla's sales this quarter were reasonable, with strong year-on-year growth.
Tesla's first quarter 2022 results; sourced from Tesla press releases
Tesla produced 305,000 cars and delivered 310,000 vehicles, with a normal annual production of about 1.2 million. Production and deliveries of the company's Model S/X have fallen to almost negligible levels, with 17 percent of new cars requiring lease accounting. To a large extent, before the release of new models, high-end business is a dead end.
The company's new sports car could have helped revive the business in this area, however, there was no sign that it was coming out.
Tesla motors business
In our opinion, the company's automotive business is divided into (4) segments. The first is the low-cost car (Model 3/Y). This is followed by a high-end Ferrari (Roadster). The third is the mid-to-high-end model (Model S/X). The fourth is autonomous driving and the company's efforts in this regard.
We're not going to come in order but we want to discuss each one.
The company hyped up the next generation of sports cars. This date has been postponed and the current estimated date is 2023. Whether this happens in 2023 remains to be seen, and Tesla has a history of missing the agreed date. Before it happened, however, the business had nothing to do with Tesla.
Next up are Tesla's Model S and Model X. In our opinion, it is these models that make Tesla what it is today. However, the company hasn't seen strong results for a long time, and at this point, sales are a very small part of the company. For companies, the annualized cost is only a few billion dollars.
However, the company recently updated these two models, but from the perspective of sales, sales are not something that cannot be ignored. In our view, especially given the top competition from companies such as Lucid, Rivian and BMW in the field of electric vehicles, we do not see a significant improvement in this situation.
The next one is autonomous driving. Similar to sports cars, we think the opportunities here are mostly smoke. This is the metaverse business most similar to Meta that we can think of. Will this market one day become huge? Yes. But until then, we don't know if it's going to be there, when it's going to be there, and if it is, whether Tesla will have a reasonable market share.
Tesla has been delaying the date for full self-driving, which has angered consumers who want to achieve self-driving faster after buying expensive packages. The company's basic design decisions, such as not having lidar, or testing on consumers, not only cost the company a lot of cash, but could also cause it to never beat competitors.
Again, we're not saying Tesla won't win. But how much valuation are you willing to give it. Perhaps Waymo, which has fallen from $200 billion to $30 billion, could be a good benchmark. We can say that it is a bit far-fetched to have Tesla's self-driving cars valued at twice that of Waymo ($60 billion).
Finally, let's look at the Model 3/Y. At present, these low-cost models are the core business of Tesla. They represent the vast majority of production growth, with annual production of more than 1 million units. These businesses are a behemoth in their own right. Competition for electric vehicles is rapidly intensifying, but so far, competition from larger brands has been high-end.
The company is expected to exit in 2022, mainly due to the normal production of these vehicles exceeding 2 million units/year. We believe that with the intensification of competition, Tesla is moving towards a mass-market manufacturer in China. Toyota is a potential indicator in the field of reliable low-cost cars, leading the way in this space, with annual sales of 10 million vehicles and a market capitalization of $280 billion.
It is worth noting that even at an annual growth rate of 50%, the gap between 2 million vehicles/ year and 10 million vehicles / year is still very large. Until 2028, the annualized growth rate will be 50%.
Tesla replaces the business
Tesla focuses on several different alternative businesses, mainly in energy storage and solar energy.
Tesla Alternative Business; Source Tesla Press Release
Tesla's alternative businesses are energy storage and residential solar. The residential solar business is particularly tough, with a market share of just a few percentage points. With a market share of just 2 percent, the business has yet to keep pace with the entire solar market. The rooftop solar business doesn't seem to have generated a sizable business yet.
The company is looking to improve profitability, however, with residential solar at 345 MW and $2-3 million per MW deployment cost in 2021, it's a very competitive business, and Tesla doesn't have a significant market position and low-margin revenue.
The company's energy storage business undoubtedly has greater potential. The company's growth has been more stable, with deployments already reaching about 4 MWh. In today's world of rapidly growing demand for batteries, its oversized packaging system is unique. At the last announced price, Tesla charged about $300/Kwh, which means that the revenue here is also about $1 billion.
In the long run, we can see that Tesla is doing a good job of this. However, we don't think of it as a trillion-dollar company manufacturer. Profit margins in this industry are low and intellectual property protection is weak. It is expected that by 2030, the demand will reach 1 hour. If Tesla has 100% market share, that's $300 billion in revenue.
However, there are three things worth noting.
(1) By 2030, storage costs could be less than $150 per kWh. It may go down further. This alone was a 50 per cent reduction from expectations.
(2) Tesla currently has a 7% market share in the industry. The likelihood of turning its market share to 100% by 2030 is close to zero. Over the past two years, the company's market share has grown by about 2 percent. From the perspective of manufacturing alone, the company cannot build factories quickly enough, even if there is demand.
(3) The profit margin is much lower. Tesla has shifted batteries from this space to the automotive space because of their higher profit margins. Tesla has said it hopes to achieve higher profit margins in the oversized packaging business, but the net profit margin is likely to remain in single digits.
Still, it's a decent industry.
Our views
Let's take a look at Tesla in 2030. The most optimistic indicator is that the company's market capitalization so far is $3-6 trillion. It's important to note that the $3 trillion market cap (which triples the stock market value) represents an annualized growth rate of about 13-14%, which, while strong, is not much higher than the historical return of the S&P 500.
Let's skip the timeline given by bullish theory and see how it takes this company to reach a $5 trillion valuation. For a company to reach a long-term valuation of $5 trillion at some point, its FCF needs to cross that threshold to justify that valuation. The company may not have reached valuation yet, but it needs to have a path to valuation.
We see an 8% FCF yield as the threshold for static growth ($400 billion in FCF). We don't think about inflation because we assume that investors don't expect a company's market capitalization to be five times as high just because inflation ends up bringing the dollar value to one-fifth of what it was.
We will be valuing several of the company's businesses.
(1) Autonomous driving
(2) Energy storage
(3) Residential solar energy
(4) High-end cars
(5) Vehicles for the mass market
For autonomous driving, there is a very large valuation range and a very large outcome range. As you can imagine, this range could range from $0 to hundreds of billions of dollars. We think the most generous valuations are among our peers. Cruise is worth $20 billion less than in 2021. Waymo's market capitalization has fallen from $200 billion 1-2 years ago to $30 billion.
In our view, the most generous valuation is a profit of $5,000 per car sold, assuming the company can do that, multiplied by the 5 million cars sold each year. That's $25 billion in free cash flow. At an 8% yield, that means we'll allocate $300 billion to the self-driving business, or 10 times Waymo's current valuation.
Energy storage is another business. The company currently has a 7% market share, and we believe that in the coming years or decades, the company's market share will nearly triple to 20%. Given the company's huge success, some might think it's too low-value, but it's an industry that has never had a major moat.
We also give 20% profit. By 2030, assume $150 per kWh, which means $6 billion in free cash flow and $30 billion in revenue. We'll be more generous and double this. That's $12 billion in free cash flow.
In our opinion, residential solar is one of the least valuable businesses. In our view, the independent value of SolarCity and Tesla has declined due to a lack of interest due to a lack of interest compared to when tesla was acquired for $2.6 billion a few years ago. The company has a 2% market share in an extremely competitive industry. We think it's best to have $1 billion in free cash flow, which means huge growth.
As for the high-end car business, we are considering electric vehicles such as sports cars, or even Model S/X. Once again, we believe that the best way to evaluate this business is to compare the earnings of its peers. A high-end high-end business could be worth as much as Mercedes and BMW combined, or, in the case of very strong performance in recent years, free cash flow of about $30 billion ($375 billion at our value).
By comparison, their current total market capitalization is about $130 billion.
Finally, we talked about mass market value. Here, we will give some assumptions that we consider to be generous. Let's assume that annual car sales peak at 20 million units, twice as much as the current largest automaker, while the ASP per vehicle remains at $50,000. We assume a profit margin of 20%, which is higher than all other automakers.
We believe that these are noble goals. Annual revenue will reach $1 trillion, generating $200 billion in free cash flow. Look at the entire automotive industry (not just cars, but trucks). By 2030, annual revenues are expected to reach $3.8 trillion, compared to about $1 trillion currently.
Even if these five figures are added together, which is $268 billion in annual free cash flow, it is about 65% of the money the company needs to justify a bull market. These, in our view, are some incredibly lofty goals that are unrealistic in almost every way. It assumes that Tesla not only dominates, but continues to grow without competition.
Notably, in the first two highly competitive businesses (residential solar and high-end electric vehicles), Tesla has lost market share significantly. In our view, this highlights the risk of a company's ability to hit a bull market argument.
Risk factors
The risk of our argument is that Tesla is outperforming everyone's expectations. The company's stock price continues to rise, and it is certainly growing much faster than we thought. Companies certainly have the opportunity to continue to grow, learn to compete more effectively, and improve shareholder returns.
The next major risk to Tesla's thesis is competition. As technology has shown for decades, in industries like silicon manufacturing, computer manufacturing, etc., companies that prove this industry are often not the ones that maintain their market share. This is already evident in the S/X model, which has seen a significant increase in competition.
We expect that in the coming years, the energy storage and low-end electric vehicle businesses will become more and more realistic, damaging Tesla's position in these industries.
conclusion
Investors bullish on Tesla continue to predict better-than-market returns. Although the company's valuation has exceeded $1 trillion. While other companies such as Apple have the ability to continue to grow from this level, we believe Tesla will face serious difficulties due to its lack of substantial free cash flow and access to shareholder returns.
However, in addition to energy storage and Model 3/Y, the company has several other businesses that we don't think are important. For these businesses, we can't find a suitable way to justify Tesla's valuation, so we currently recommend avoiding investing in Tesla based on the company's profitability.