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Is It Too Late to Invest in Tesla?

Stocks, US

Written by:

Adrian Tan

By the time you read this, it is likely that you have already digested the latest news on how Tesla Inc. (NASDAQ: TSLA) have closed out 2021 with absolutely monstrous delivery and production numbers.

As a recap, in case you have not heard, have accelerated both production and delivery of vehicles in Q4 2021 to around 306k and 309k vehicles respectively. To get a sense of the magnitude, consensus estimates by analysts were around 263k mark which translates to a whopping 16% beat. This rounds out the year for them with approximately 930k of vehicles produced alongside 936k vehicles delivered for FY 2021.

This consequently sparked euphoria in the stock which ended a full 13.5% higher. As of writing, Tesla has a market capitalization a little north of USD 1.2 trillion, making in the world’s most valuable automaker by a VERY large margin.

At current valuation levels, I can understand why many investors may feel that they have already “missed the boat” in Tesla. However, it may be worthwhile to challenge conventional wisdom and take a closer look to see if it really is “too late”.

Current Valuation

As mentioned, Tesla with its USD1.2 trillion market capitalization is by far the most valuable automaker in the world. To put into perspective just how valuable Tesla is, here is a list I’ve compiled on the 10 largest automakers by revenue based on information from Top 10 Automobile Companies in World 2021 – FirmsWorld

AutomakerRevenue (billions USD)Market Cap (billions USD)
Toyota281259.3
Volkswagen275130.6
Daimler18983.34
Ford15086.99
Honda14249.4
GM13788.81
SAIC12137.59
Fiat Chrysler (Stellantis)12161.21
BMW11767.29
Nissan9619.75
Total1629884.28

That’s right. Tesla is worth more than the 10 largest automakers by revenue worldwide. To add more insanity, Tesla’s TTM revenue of approximately USD 47 billion is only but 3% of what these top 10 automakers generate in aggregate in 2021. By any conventional comparison, this kind of valuation is insane.

There is however, something behind this seeming madness. First, based on estimations by Statista the automotive industry can be expected to grow at a CAGR of approximately 4.5% annually till 2030.  This means, we can expect, on average, the established automakers to be growing at around this rate for the coming years.

If we now turn our eyes to Tesla, we can see the exponential trajectory of Tesla’s growth over the years. They went from delivering a mere 2k plus vehicles to well above 900k vehicles in the span of 9 years.

That is a CAGR of > 97% sustained over 9 years! If we track their recent history from 2018, it is still a super impressive CAGR of > 38% sustained over 4 years.

If we plot out the growth trajectory, it is likely that Tesla will surpass Toyota Motor Corporation (NYSE: TM) to become the largest automotive company by revenue in the world in 4 to 5 years. If we now compare that Tesla is essentially valued at about 5X more than Toyota at current valuations, it is definitely expensive, but the premium doesn’t seem all that unreasonable if we believe there are strong reasons for this narrative to materialize.  

Is It Probable for Tesla to Live Up to What is Baked into Current Valuation?

For Tesla to live up to the valuation that assumes sustained 30% ~ 40% growth for the next couple of years (at least). What is the likelihood of this happening?

Well for starters, we can see that Tesla has currently 2 factories; their Factory in Fremont and Shanghai, that are responsible for the current production numbers. A couple of days ago, they have announced that their factory in Austin is coming online and beginning production and their other factory in Berlin is slated to also be coming online soon. Aside to that, they are also expanding capacity in their Shanghai plant to boost capacity.

Given current run-rate without the new facilities that produces about 1.2 million vehicles a year, I believe a conservative estimate of 1.5 – 1.8 million vehicles, even with their new factory ramping up in 2022 is very probable. Hitting these number would mean a 60% – 90% growth in 2022 and will be ahead of their projected long term CAGR as mentioned above.

Furthermore, if history is any guide, we can likely expect their new factories to ramp to considerable volumes fairly quickly. Just take a look at the Shanghai facility that freshly came online in October 2019 that ultimately became the catalyst for their jaw-dropping performance, with most of its contribution through the pandemic stricken 2020 no less!

What I’m Excited about: Margins of Safety from Tesla’s Optionality

I might sound a little too enthusiastic (or even crazy), but even at current valuations, I believe that there is still quite a bit of margin of safety. In other words, I believe that Tesla is still ultimately undervalued.

Thus far we have only constructed a narrative based on their automotive business potential. While there is undoubtedly a premium there, it is a nevertheless a valuation that can be reasonably explained alongside what market expectations could be. Given this, it is also likely that the other non-automotive businesses of Tesla (i.e. their solar energy business) are currently undervalued.

Of the many things that Tesla have up their sleeve, here are the few things that I am personally most excited about:

1) Moving into Insurance

The announcement in Q3 2021 that they are making notable strides in their foray into insurance. They have launched their product that uses telematics and measuring driver behaviors in real-time and the product is currently in its infancy and being available in Texas.

The auto insurance market is estimated to be around USD 288.4 billion in the US alone. If they are successful here, this can add a meaningful new revenue stream to the company in the future. Furthermore, Tesla being able to offer insurance will also compliment and advance their autonomous-driving / robo-taxi ambitions.

2) Expansion of the Supercharger Network

The Supercharger Network is a network of charging stations that they currently operate.

With their rapidly expanding network of chargers (there is actually a few of them here already on our shores in Singapore!) and their move to extend compatibility of their chargers to work with 3rd party vehicles this could shape up to be a meaningful revenue contributor going forward.

3) Expansion of Vehicle Software

In Q3 2021, they have added some pretty interesting stuff like Disney+ as part of their in-vehicle entertainment system. This is potentially an early signal for realizing a “Tesla App Store” in the future. Also something that could be very complimentary to their autonomous-driving / robo-taxi ambitions.

To realize the likelihood that these “side businesses” can grow to become a meaningful contributor, Tesla will first have to get their cars into as many customer hands as possible.

From what we have seen with their ability to ramp up production, the story comes full circle, which leads me to believe there is some real heft behind Tesla’s optionality and in turn provides margins of safety to stay invested at current valuation levels.

Tesla’s “Moat”

The Electric Vehicle industry has seen some very rapid acceleration in recent times. It is of course no surprise that this market is also one that is rapidly evolving into one that is uber competitive. Will Tesla be able to hold its fort? To obtain some clues here, we would again have to derive some insights from their recent exponential growth in delivery numbers.

To paraphrase Elon Musk, building a concept car is easy, but scaling is extremely difficult.

Engineering Capabilities

The record numbers that came during a time of pandemic uncertainty that eventually evolved into afterburns in supply chain difficulties and semi-conductor shortages is testament to the execution ability of Tesla. It also should inform us on just how far ahead they are in their production technologies to be able to maintain and accelerate at scale.

I believe the aforementioned challenges brought about by the pandemic has only strengthened their lead. One will just have to survey the incumbent leading car makers like Volkswagen Group (ETR: VOW3) and Ford Motor Company (NYSE: F) and their much-delayed efforts producing meaningful competition to Tesla to get a sense. Tesla’s engineering capabilities prove to be a formidable moat.

Strong balance sheet

Aside to that, Tesla also has a fortress of a balance sheet with approximately USD 16 billion in cash and equivalents in contrast to only approximately USD 4.5 billion in debt.

In the current inflationary environment where interest rates are expected to rise, this can put even further distance between Tesla and their competitors that will find it difficult to finance capital expenditures and investments to bridge the gap.

Advanced vertical integration

There is of course the aspect of Tesla that is very far ahead in terms of vertical integration.

With their tentacles reaching far beyond that of the vehicle itself and extending to mining raw materials for their batteries to the aforementioned eco-system development for their charging infrastructure, insurance and in-vehicle software, this first mover advantage should also translate to another moat that is highly defensible.

Loyal customer base with low cost acquisition

Finally, there is one interesting point in terms of its customer base. Have you noticed that Tesla, in spite of its popularity, has not spent anything in terms of marketing / advertising?

This is an absolutely insurmountable advantage Tesla has against its competitors. Where its competitors spend heavily in an attempt to jostle for market share, the same dollars for Tesla can be diverted to extend their lead on their technology and production capacities.

Aside, their fanatic customer base is also far less price sensitive than the average customer that allows Tesla to be able to retain pricing power and margins.

2 Risks that Tesla investors should note

Of course, an investment in Tesla is not without its risks. While there are many that are a little more technical, but I’ll simply sum up 2 of the most obvious.

i) May be overpriced

Paying a hefty premium is always a risk as things may not pan out as we would hope.

While the signs are strong and there is a visible path towards the valuation, it is always prudent to recognize that it is nevertheless a thesis with many assumptions and many angles for the valuation to get shot.

ii) Key person risk

Elon Musk, the visionary behind Tesla is at the same time a key-person risk. Would Tesla be the same company that is relentlessly chasing the vision and executing with the same level of excellence without Musk at the helm?

I have a strong suspicion it won’t be so. As such, whether we like it or not, Musk is a clear risk to the investment thesis.

Growth Runway

It may be hard to imagine, given the market capitalization of Tesla at the moment but let’s take a step back to put things in perspective. Based on Statista, the global automotive market size is forecasted to be approximately USD 9 trillion.

At current levels, Tesla’s revenue of USD 47 billion is only about 0.5% of 2030 forecasted market size. This means, from a purely automotive perspective, there is still plenty of legs for Tesla to run and to grow into its valuation.

Should any of Tesla’s “side business” take-off, we can expect Tesla maintain a premium valuation for many more years down the road in an ideal case.

In Summary

I can understand that many investors will feel the difficulty to invest in Tesla at this point, especially after the tremendous jump in their stock price over the past 2 years. However, to put the price appreciation in context, we need to understand the fact that:

  • In FY 2019 Tesla was still an unprofitable company
  • In FY 2020 Tesla joined the S&P500 as an index member but was still relying on Regulatory Credits to bolster net profits and is saddled with a huge amount of debt

It was a far riskier company to be invested in back then, but as with many great companies, they have managed to improve at breakneck pace and quash many-a-naysayers along the way. Earlier investors who took the risk have been well rewarded. Today, Tesla is a far less risky proposition.

As I have outlined above, there are plenty of reasons to believe Tesla’s growth trajectory is far from being exhausted. While it may have limited scope for short-term “explosive” growth, there is nevertheless an opportunity here for investment in an excellent company that will very likely deliver above average long-term growth.

If it is something still to richly valued for your appetite, it will definitely be something to place on your watch list for a potential nibble when the market presents the opportunity with its many gyrations.

Disclosure: I am a Tesla shareholder.

P.S. if you’re new to investing and wish to learn how you can valuation stocks, read the free Factor Investing Guide here (no email required).

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