I find it interesting that Tesla bears (I don’t know if you do this as well) use the fact that TSLA is priced for perfection for the next 5 years to argue against its stock price. But they also use arguments such as VW will own EU; GM and Ford will strongly compete with Tesla even though none of these companies have any seriously competing product out there. Tesla in China is the same argument as iPhone in China. I am sure the Chinese EV autos will get subsidies from the government, so I would not refute that argument. However, I do think China will have to become a more open market in the future especially as they transition from a manufacturing economy to a service economy.
I will ask you the same question as
@Frida's Boss.. what is a fair price for TSLA?
I believe the $306 FMV from Morningstar is too bearish, but their analysis is a good read:
Business Strategy and Outlook | Updated Dec 08, 2020
Tesla has a chance to be the dominant electric vehicle firm long term and is a leading autonomous vehicle player as well as a vertically integrated sustainable energy company with energy generation and storage products, but we do not see it having mass-market volume this decade. Tesla's product plans for now do not mean an electric vehicle for every consumer who wants one, because the prices are too high. The Model X crossover released in late 2015 starts at about $80,000, the Model S sedan's starting price is $69,420, the Model 3 sedan starts at $37,990, and the Model Y crossover starts at about $50,000. Tesla’s U.S. customers no longer receive the federal tax credit.
Tesla’s gigafactories may become terafactories as Tesla seeks to grow its cell capacity to 3 terawatt-hours by 2030 from 0.1 terawatt-hours in 2019. A new factory in Shanghai, wholly owned by Tesla, opened in late 2019 with capacity as of fall 2020 for 250,000 Model 3 and another 150,000 units for Model Y online in 2021. Gigafactory Berlin (3 and Y) is under construction until 2021 as is a Texas plant for Cybertruck and Y. Tesla's global vehicle capacity as of fall 2020 is about 850,000. Tesla sold about 368,000 vehicles globally in 2019 and by 2030 or earlier CEO Elon Musk targets annual volume of 20 million, about double the size of Toyota and VW Group. We think global mass adoption of pure electric vehicles is still years away, but Tesla is the leader in the space.
Tesla will have growing pains, recessions to fight through before reaching mass-market volume, more competition, and needs to pay off debt. It is important to keep the hype about Tesla in perspective relative to the firm's limited, though now growing, production capacity. Tesla's mission is to make EVs increasingly more affordable, which means more assembly plants must come on line to achieve annual unit delivery volume in the millions. This expansion will cost billions a year in capital spending and research and development and will be necessary even during downturns in the economic cycle.
Economic Moat | Updated Dec 08, 2020
Our narrow moat upgrade in October 2020 for Tesla came from two of our five moat sources, intangible assets and cost advantage. Tesla’s brand cachet is not likely to be impaired any time soon as other automakers move into the battery electric vehicle, or BEV, space because we expect Tesla to keep innovating to stay ahead of startup and established competitors. The Model S now offers over 400 miles of range and the plaid mode performance upgrade available in late 2021 will enable the sedan to do 0-60 mph in under two seconds and have over 520 miles of range. We think Tesla’s autonomous program is also well ahead of many other automakers. We think Musk was very smart to not only design a great-looking car, but also have Tesla right away sell vehicles at a premium price point. This created tremendous media publicity for Tesla beyond its customers, which we think creates a halo effect for Model 3 and Model Y demand when they were introduced, as well as for the Cybertruck, which we think is ugly but that ugliness is ironically part of its appeal. We think that if Tesla had started with a mass-market vehicle, it probably would have failed, as too few people would have known about the car and would have been willing to pay for the brand. We also think Tesla benefits from a first mover advantage in electric vehicles that let it build factories and vehicles from scratch and create processes that legacy automakers will likely find hard to match.
The ability to possibly reduce battery cell costs by 56%, as outlined at the firm’s Sept. 22 Battery Day event, suggests a cost advantage that incumbent automakers could take years to catch or may never catch as they won’t want to build many new factories from scratch like Tesla is doing. Legacy automakers are gradually transitioning to BEV production from internal combustion, but we expect they will be saddled with legacy internal combustion engine, or ICE, costs and people costs for a long time. Our projected Tesla return on invested capital assumptions are well above our weighted average cost of capital even in our bear case scenario. The moat upgrade assumes Tesla continues to grow and we see low risk of material value destruction and more reasons to upgrade the moat in October 2020 than keep waiting for further improvement.
We think Tesla's gross margin, all else constant, would have a negative mix shift over time as the cheaper Model 3, Model Y, and a planned $25,000 vehicle become the vast majority of volume, but battery costs should also decline significantly. These reductions and adjusted gross margin calculations we’ve done comparing Tesla to German automakers--along with Tesla's unique factory-owned stores enabling the firm to get retail pricing rather than wholesale pricing--are in our view a cost advantage over other automakers and lays the ground for the moat widening once Tesla's volume allows more scale of its R&D and overhead expense. A similar scale argument can be made for the energy business. Though long term there’s nothing stopping an ICE firm from being a BEV-only firm and narrowing Tesla’s cost advantage, we see legacy firms as having legacy cost structures around ICE vehicle programs that cannot be eliminated overnight as these programs are needed to keep those firms profitable while also developing BEVs.
The other cost advantage comes from the customer side via total cost of ownership, as the cost of electricity for a year versus the cost of gas is not even close. Model S owners' electric costs are a fraction of what ICE owners pay for gas, per our calculations. Our annual cost calculation done in January 2020, defined as electricity or gas, insurance, and maintenance, shows the Model 3's cost per mile at about 15% less than a BMW 330i.
Fair Value and Profit Drivers | Updated Dec 08, 2020
We are decreasing our fair value estimate to $306 from $319 after factoring in Tesla’s $5 billion December equity offering and adjusting our 2020 diluted share count. This raises our share count to about 1.11 billion from about 1.05 billion. Our 2021 vehicle delivery total is 950,000, and for 2022 we model about 1.6 million. Tesla’s annual capacity is increasing rapidly, and the third quarter earnings release has it at 840,000. With new plants partially opening in Berlin, Texas, and the Model Y Shanghai plant all in 2021, we think 2021 deliveries of around one million units are not unrealistic. We then expect another large capacity increase in 2022 as Model Y crossover capacity in each of the three plants above should be at least 250,000.
We add in the present value of what Tesla’s autonomous vehicle ride hailing (robotaxi) business could be worth in 2030, and value it discounted at about $13.2 billion. This figure assumes Tesla captures 10% robotaxi share across the combined markets of the U.S., EU, and China, and charges $0.25 a mile. Our weighted average cost of capital is 8.9% and our midcycle operating margin is 12%. We expect the company to remain a leader in autonomous technology and range. Tesla is also gaining scale, and its ability to make desirable vehicles while generating free cash flow and net profit is far better than it’s ever been, in our opinion.
We model total deliveries over our 10-year forecast period of about 22.7 million. Tesla is a volatile name and fair value estimate changes may be frequent as its story changes. We add back about $4.6 billion of nonrecourse debt to our valuation. When modeling Tesla in our discounted cash flow model, we keep an open mind regarding the disruptive potential of Tesla on the auto and utilities industry. We model the same dollar spending of capital expenditure in all three scenarios totaling about $77.8 billion over 10 years.
Tesla has upside margin potential if it can reduce its battery cost, significantly exceed our delivery estimates, and have a high-margin storage and autonomous ride-hailing business. We model $1.8 billion of energy revenue in 2020, with that figure growing to about $17.5 billion by 2029. This revenue is about 6% of our fair value estimate.
