Michael Burry and other short sellers have likely made some good money (or would have) with Tesla (TSLA, Financial) in the last year as the stock is down 72%. However, while the hype and sizzle seems to be wearing off, I don’t think anyone should bet against the company or Elon Musk in the long run.
Over the years, Tesla has grown to become a leader in the electric vehicle market, with a range of popular car models including the Tesla Roadster, Model S, Model 3, Model X and Model Y. In addition to electric vehicles, Tesla also produces energy storage systems for homes and businesses, as well as solar panels and solar roof tiles.
I wrote a lot about Tesla in the past, before it really began to take off, and was wrong every time about the company’s ability to produce positive results. In 2016, when it was under $15 per share (split adjusted) and CEO Elon Musk had just sold $600 million worth of stock, I couldn’t fathom how it was going to produce the earnings to justify the market capitalization at the time. Yet nowadays, in the last 12 months alone, it’s generated over $11 billion in after tax earnings, or roughly 22% of the 2016 value.
Rock solid financials
Tesla continues to report strong financial numbers. It has $21 billion in cash, closing in on $100 billion in annual revenue turnover with margins even Warren Buffett (Trades, Portfolio) can respect. Return on equity and return on assets are 32% and 11%, respectively. Wall Street analysts continue to forecast that Tesla will deliver nearly 1.4 million vehicles in 2022 and 2.1 million vehicles in 2023. Additionally, Tesla announced that it has sufficient funding to carry out its planned expansion, which includes the production of semi trucks starting in December and an increase in Model Y production alongside the highly anticipated Cybertruck line.
That said, Musk has a lot more on his plate these days than ever before. He’s the CEO of five companies, including his newest pet project - Twitter. Twitter seems to be where he’s spending most of his time currently, and boy does he like to work. There are rumors Musk spending 100 hours a week on the job, which is why he gets a lot accomplished - at Twitter, that is. However, we need to remember where Musk's true talents lie. While public opinion seems to see him as a hands-on operator, to scale businesses to levels like this he has to be a capital allocator first and foremost.
Maybe Musk will step aside at Tesla and let someone else run it, or maybe he’ll do that with one of his other multi-billion-dollar ventures. He keeps talking about it, and since he can't be working 100 hours per week at multiple different companies, this seems to be the way to go. Musk stepping down from at least one company could help remediate bearish sentiment at this point.
Competition, finally!
It was only a matter of time before the luxury car brands began producing EVs that could compete with Tesla. The new BMW (FRA:BMW, Financial) I-series and Mercedes EQS models offer similar benefits and different looks, which the market always demands. Up to now, Tesla has gotten away with being kind of basic, but I suspect it will change designs in the coming years as EVs are expected to reach 30% of global auto sales and competiton heats up.
Tesla is known for rarely offering discounts on its vehicles and not engaging in negotiations with customers. However, earlier this month, the company made a rare move by offering incentives of $3,750 for the purchase of a 2023 Model 3 sedan or Model Y SUV. This discount has now been doubled, with customers receiving $7,500 in credit and 10,000 miles of free Supercharging to take delivery by the end of the year. This could roll over into January and is definitely a sign of excess inventory, potentially indicating a quarter of lower deliveries than expected.
Tesla is also exposed to various environmental, social and governance (ESG) risks. Additionally, there is always a chance it may face recalls due to product defects, including issues with its autonomous driving system, though I think this would only have a moderate impact on the company. The company could also face patent litigation over use of new technology in its electric vehicles and energy storage systems. Tesla may also face regulation in some states here in the U.S. due to laws requiring a separation between automakers and dealers. All told, these challenges should be surmountable now that Tesla has the size and scope to manage them better.
Betting on consistency, not potential
Before 2021, investors who bought Tesla stock were paying mostly for potential. Today, I think it's safe to say Tesla bulls are paying for consistency, as it seems the entire auto market is going towards electric power now that Tesla has proven it can be profitable.
Tesla has done an incredible job driving costs down. Cost of goods sold and battery cell costs have come down by 50% since 2017. Vehicles are not the only part of the business model, but by 2032, Tesla believes it could be delivering north of 10 million vehicles per year. In that time, we will likely see massive increases in range, charging speeds and autonomous driving safety features. As the industry leader, I believe Tesla will likely remain the leader in the EV market, even if the likes of Apple (AAPL, Financial) decide to enter the competition as rumored.
While it was easy to be skeptical in the past, I now find it hard to doubt Tesla's growth prospects. If Tesla someday reaches its 10 million deliveries per year goal with the same margins, it could easily be generating $75 billion in net profit. On a 20 times multiple, that represents a market capitalization of $1.5 trillion, which would make the $350 billion valuation today a pretty sizable bargain.
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