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If Musk merges all businesses, Super Tesla is bigger than Apple and Saudi Aramco?

Author | Trade Theory compiles | U.S. Stock Research Society

01 Overview

When based on current fundamentals, Tesla is pricing in order to grow and appreciate, as we expect a 20% upside from current levels.

Tesla's gains in delivery methods are expected to be surprising, as larger producers with more expertise have the ability to take market share away from startups.

We expect revenues of $222 billion and derive our price forecast based on adjusted EBITDA/earnings multiples.

Elon Musk could merge his business into a superstructure entity like Google, which could be worth more than $10 trillion by 2033.

However, without significant M&A activity, Tesla's valuation would not have surpassed that of Apple and Saudi Aramco.

02 Vehicle production capacity increased, and profit ushered in a leap

Tesla Inc. (TSLA) has had very strong quarterly results for a long time, as TSLA performed well in terms of revenue and earnings in the fourth quarter of 2022, and Elon Musk did not make as many ridiculous comments on the earnings call as usual.

Investors have responded well, with shares up 25% over the past five trading days. We value the business at $195 per share and expect upside from new announcements and continued execution without any material shortages in the supply chain.

TSLA's solid performance during the after-hours session continued into Thursday's session, rising an additional 10%, bringing the BEV (Battery Electric Vehicle) maker's market capitalization to $500 billion.

We value TSLA stock using adjusted EBITDA and P/E multiples based on FY25 revenue of $222 billion and expect an additional 20% upside, which may depend more on hype/optimism related to product roadmap and delivery.

Tesla reported revenue of $24.32 billion in Q4'22 versus consensus expectations of $24.16 billion, and adjusted for DILs. EPS came in at $1.19, up from $1.13 and beating expectations by 5.3%.

We note a decline in profitability, which is driven by lower ASPs, but the release of some higher-margin categories such as the Tesla Cybertruck and Tesla Semi Truck gives us great optimism that the net margin erosion will not be as severe, even as the production of vehicles with sales Model 3/Y puts pressure on the average selling price.

We also like Elon Musk's mention of Cybertruck on the Q4 2022 earnings call: "Yes, Cybertruck will have Hardware 4. To be clear, Cybertruck will not make a significant contribution to profits through 2023, but will continue into next year. ”

As a result, the Cybertruck is on track, and Rivian Automotive will finally have to meet its electric rival in 2023.

We expect that there is a compelling reason why Tesla could deliver between 1.8 million and 2 million vehicles in 2023. Tesla was not constrained by supply and production began to normalize, reducing shortages at the start of the pandemic. TSLA gains share in pricing and new customer adoption, and market penetration is low enough to indicate a significant vehicle opportunity, which is reflected in our analysis.

Vehicle production capacity

Elon Musk expects 1.8 million vehicle deliveries, but with the addition of various facilities, as well as production/production increases at some announced existing production sites, we are leaning towards a production beat of 200,000 units, which we embed into our model to help capture any delivery surprises due to increased demand due to gasoline price sensitivity and EV credit.

We expect production surprises in the future and an increase in production to the level of traditional automakers using pure BEV technology. By 2025, value-added components such as autonomous driving will be able to maintain higher average selling prices even with larger sales volumes.

We expect our profit forecast to become conservative as TSLA does not have many of the pension-related legacy costs of other automotive OEMs and has more mature/efficient lines in the BEV space to sustain better profitability. We also expect Tesla's profitability to leap forward when battery technology improves and battery costs further reduce the bill of materials.

Summary of financial models

We see TSLA with a price target of $195, up 22% from current levels.

While we don't like the CEO's personality or attitude in public or his comments on Twitter, we can't deny that the business is poised for substantial growth as we evaluate TSLA using a combination of historical growth multiples, technology EV/EBITDA multiples, and average the adjusted dil value of the FY'25 estimate. Earnings per share were $9.30.

We then discount our hypothesis to 9.5% or the company's WACC (Weighted Average Cost of Capital) and arrive at a target price of $195.

We expect the company to grow to $222 billion in sales, deliver 4.5 million vehicles, and sell at an average price of $49,000, which translates to a business value of $1.2 trillion by 2025.

If there are no major changes to the business, such as mergers and combinations of various businesses... There is practically no way to achieve a valuation of $4-5 trillion in the next 3-5 years.

03 What has Musk tried to convey in past speeches?

We now find ourselves stumped.

How Elon Musk expected that he would overtake two of the biggest companies on the planet and ignore his closest competitors while being questioned in court during the same week regarding his tweet announcing a separate incident of privatizing the company at $420 per share with the help of the Saudi Fund (which later turned out to be preliminary and not "guaranteed"), Twitter users surveyed preferred to have an owner different from Elon Musk.

It's almost comical at this point, because it's almost as bad as seeing fans across the country upset a sports team owner and demanding a change of ownership, except that almost no one on the planet can afford such a big tech company, let alone pry it from the second richest man on the planet after he pried it out of Jack Dorsey's hands.

The bird stays in Elon's portfolio, and we hope the portfolio will be combined in the form of some sort of death star.

We think Elon Musk is absolutely serious about the value of both companies.

Now some may have skipped this part of the early earnings call and laughed. However, Elon Musk envisions the company's future market capitalization exceeding that of Apple and Saudi Aramco combined.

He said this bluntly in his Q3 '22 earnings report, and then he never mentioned anything about it again on the Q4 '22 earnings call.

After the court restructuring, we are not surprised that he did not make such a crazy statement on the Q4 '22 earnings call. As a result, the stock performed better because it rose 5% during after-hours trading after Wednesday's closing earnings announcement.

If we combine Apple (AAPL), which has a market capitalization of $2.25 trillion, and Saudi Aramco, which has a market capitalization of $1.94 trillion, the market capitalization will reach $4.19 trillion. Tesla currently has a market cap of $500 billion, which means his sales pitch this year is simple: the company's total market capitalization will increase from $500 billion to $4.2 trillion.

On the road to $4.2 trillion, Musk continues to condemn every competitor and doesn't even acknowledge the existence of a far second place. We think the second-largest automaker is Lucid Group, Inc. (LCID), but then again, maybe Elon was right and we were wrong, who knows?

What Elon Musk has said over the past two quarters makes us giggle: George Gianarikas from Canaccord Genuity asked Elon Musk, I'm curious how you see the current competitive landscape changing in the coming years. Who do you think is your main competitor in five years? ”

Musk responded: "Five years is a long time. As for the Tesla orders part, the AI team, until late last night, we were just asking people like that, so who do we think is close to Tesla – a universal solution for autonomous driving? We don't even know who will be far ahead.

So yes, it looks like we really — I mean, right now, I don't think you can see a second place with a telescope, at least we can't. So, this won't last forever. So, five years later, I don't know, maybe someone has figured it out. I don't think this is any car company we know. But I'm just guessing that someone might end up out, so yes. ”

So Apple shareholders and Tim Cook have to somehow admit that Elon Musk and Tesla will be worth more than they are, but Elon Musk can't point anyone else to catch up with Tesla and his path to global dominance?

CEOs are reluctant to directly acknowledge analysts' indirect suggestions as a means to achieve such crazy goals.

Elon Musk and George Glanarikas from last quarter, Q3 '22 earnings call, George Gianarikas from Canaccord Genuity, "as a follow-up, this is for Elon." With your imminent acquisition of Twitter and your stakes in SpaceX, Neuralink, and Tesla, how much would the combined company benefit from operating under a single superstructure, if at all, like Google Alphabet? ”

Elon Musk eagerly tried to deny the possibility of a large merger, "It's not clear to me what the overlap is. It's not zero, but it is – I think we're getting there. I'm not worried. I'm not an investor. I am an engineer, a manufacturing person and a technical expert.

So, I'm actually working, designing, and developing products. That's what I did. So, this is not – we will not invest in it. So, I don't know. I don't see something obvious - at least for now combined under the umbrella. ”

Now, keep in mind that both AAPL and Aramco are likely to grow in value at least at the average growth rate of the S&P 500 Index (SP500), so Tesla must not only surpass the $4.2 trillion figure, but also consider the growth rate of both companies.

So, if the $4.2 trillion 10-year return is 12%, assuming the growth of these two companies continues to be in line with the average of the S&P 500, Tesla Motors would need to be valued at $13 trillion.

04 How will Tesla reach a value of $13 trillion in the next 10 years?

Elon Musk can combine the entire business he built into a super conglomerate.

If Tesla combined all the entities, it would mimic the Death Star construct from Star Wars episode 6.

We're not using ironic humor to say that, but it's actually the only hint we've seen go from $500 billion to $13 trillion in 10 years.

If Elon Musk does decide to merge all the companies into one conglomerate and take a back seat like Warren Buffett (Berkshire), Bill Gates (Microsoft), Tim Cook (Apple), Sundar Pichai (Google), Jeff Bezos (Amazon)... It looks just like good or bad, just like the picture we've carefully assembled below.

That sounds crazier than the Elon Musk we've been familiar with for years. But let's keep working on it here, because about 6 or 7 years ago, someone laughed when someone said on a conference call that Tesla was going to reach $700 billion and eventually reach its peak valuation of $800 billion. We won't make that mistake; Instead, we will try to entertain the madness of the super genius with our crazy interpretation of his ideas.

It's hard to imagine how Tesla's own valuation growth could reach the $14 trillion valuation growth we estimate is needed to surpass the combined value of Apple and Saudi Aramco by 2033.

This sounds too ambitious for most measures, but if we carefully consider the consequences of Elon Musk combining the independent businesses he built into a kind of superstructure, this will primarily benefit one person: Elon Musk. That's why we don't believe his comments about analysts about not wanting to put together a portfolio.

Now, if you think about the way these businesses are now structured, they don't provide direct synergies, and some would argue that they perform better as stand-alone companies.

However, it also limits investors to separately traded vehicles that are associated with Elon Musk. Without diversifying into more products and categories, including services and even payment technology, music and entertainment, Apple won't be as valuable as a company.

05 What is the current value of the "Super Tesla" entity?

When we consider the effectiveness of incorporating into the superstructure, we think it makes sense for a number of reasons.

1) Scale. TSLA's market opportunity in the automotive sector, while large, is at risk of saturation at some point in the future.

The combined value of the businesses involved in Elon Musk

If TSLA becomes a group, it will contain many opportunities such as social networking, payment technology, neurotechnology, space exploration and mining, space broadband, online auction marketplace, government computing contracts, etc.

2) Unique portfolio: Significant synergies due to collaboration at the founder and board level to ensure integration, as all businesses are associated with Elon Musk.

3) Space exploration is extremely valuable, with SpaceX valued at $137 billion and expansion into biotechnology extremely valuable, and Neuralink represents a market cap opportunity of more than $10 billion in medical device technology. When combined with existing or previously publicly traded companies PayPal (PYPL), eBay.com (EBAY), Palantir (PLNT), and Twitter (TWTR), the combined enterprise value could at some point be with AAPL and Saudi Aramco, although combining 9 or 10 different companies into one entity would grow by 30%.

To sum up, while we like the organic growth metrics, and the projected operating rate of 5 million to 10 million vehicles eventually produced, bringing BEV to a production scale similar to the top three vehicles in the United States, we believe Tesla's share price is valued at $195 per share today, and our share price will exceed $200 this year.

Profitability is driven by higher average selling prices and consumers responding to a more inflationary/higher price environment. Even with these assumptions, we consider about +20% upside, and some of the better-than-expected upside may be larger throughout the year. M&A activity is likely to increase the size of the business at some point, and we believe TSLA will consolidate the business as the BEV business begins to mature and profitability declines.

Tesla's stock already has significant upside. Near-term opportunities related to the automotive business, energy storage, financing, and insurance should provide enough meat for shareholders over the next 12 months.

However, in the longer time frame, it will be doubtful that Tesla will be able to reach a value that surpasses Apple and Saudi Aramco.

If Elon says it's possible, then what qualifications do we have to say it's impossible?

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