FundamentalsWritten by Ophir Gottlieb, 11-27-2015
The skeptics of and believers in Tesla have created a whirlwind of hyperbole the likes of which we haven't seen in decades. Tesla is either the revolutionary creator of electric cars that will push it to the forefront of a trillion dollar industry and transform the world, or it's a flop, haemorrhaging impossible amounts of cash flow and surviving only on government subsidies so large that they match the company's total revenue. These are the two sides and they are very much disputed.
However, an abruptly changing landscape has made Tesla incredibly compelling right now.
THE REAL QUESTION
The Tesla investment hypothesis sits squarely on the shoulders of this small niche auto manufacturer turning into a broad scale operation that can reap benefits of economies of scale from its Giga-factory.
First, we need to recognize that for now, Tesla is a luxury product manufacturer. Its vehicles range from $70,000 to well above $100,000. We just found out that its Model X, which is its follow up vehicle to its Model S, has a minimum price of $80,000, which is actually $5,000 more than the least expensive Model S (there are incentives to reduce the price, but we'll address that later).
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Tesla vehicles come with options, and no this is not a joke, called "insane mode" and "ludicrous mode." These options turn Tesla's into vehicles that can accelerate faster than almost any car ever built, reaching top speeds of 155 MPH.
THE FACTS: THEY ARE NOT DISPUTED
Let's examine Tesla in six breathtaking charts down a path of knowledge, insight and fact.
Tesla has been manufacturing at 100% capacity for over a year, with a backlog proving that at the very least, it can sell a luxury race car cloaked as an electric vehicle. Elon Musk didn't need, nor does he want Detroit's help. He's a visionary that recognized quite quickly that he is the genius in the room -- and there really was nowhere else to start than with his vision. Here's the company's revenue (TTM), below.
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Revenue growth has been a bonanza, up 52% year-over-year and over 200% over the last two-years and all of that is based off of one vehicle. The Model X was just released and my local Tesla store tells me there are already 30,000 in back order. I recently penned an article, "Tesla's Critical Moment in its Existence is Upon Us." That article focused on the release of the Model X and oh yeah, we are going to dive deep into that.
Let's continue with revenue for one more chart, and this time look at one-year growth relative to some of the other auto-manufacturers.
We can see that Tesla is in fact showing incomparable growth for now. We're going to have to keep that in mind as we swing to other metrics.
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EARNINGS, FREE CASH FLOW AND DEBT
So Tesla can sell its vehicle in relatively small amounts at very expensive prices. As a gauge of size, Tesla will sell ~50,000 vehicles this year, while GM will sell around 10 million. Put differently, it takes GM two days to sell more cars than Tesla does in a year. That's in no way a disparagement to Tesla, it just reminds us the difference between a niche product's scale, and the scale to sell in mass.
Let's next turn to a chart of net income (TTM), which is a fancy way of saying after tax earnings.
Tesla is tumbling in losses at nearly $700 million in the last year, and it has hit an all-time low for eight consecutive quarters. If you don't like the look of that net income chart, then skip this next one, because levered free cash flow is an utter disaster.
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Levered free cash flow has been as much a bonanza as revenue, just in reverse. Tesla showed negative $1.2 billion in free cash flow in the last year, down from -$156 million just two-years ago. The company has received billions in government subsidies to keep running and those numbers aren't reflected in the free cash flow.
The bottom line is that for now Tesla is staying in business for three reasons:
1. Unprecedented government subsidies (including $1.3 billion in incentives to help build a massive battery factory near Reno) that total somewhere near $3 billion.
2. Stock sales: Tesla raised $738 million from a single stock sale in August of this year.
3. Huge amounts of debt.
Alright, let's look at debt.
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Debt has risen from under $500 million in late 2013 to now nearly $3 billion. Now Elon Musk hasn't lost his mind, it just takes a huge amount of capital to create the Giga-factory which is the future "enterprise changing" event for TSLA. As a reminder:
CEO and founder Elon Musk aims to sell 500,000 cars in 2020, up nearly 10-fold from the forecast for 2015 as well as produce millions of home energy storage units (batteries).
As we discussed earlier, that large scale volume will not come from the luxury Model S (the sports car) or luxury SUV Model X, but from a yet to be created Model 3, which will be priced in the $30,000 range for broad market appeal.
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With the release of the Model X we actually thought we might have a window into how Tesla would perform creating a vehicle to be delivered to the masses but we were wrong. The cheapest Model X is still $5,000 more than the cheapest Model S. So, Tesla is still selling to the wealthy end of consumers. But, we are learning something about Tesla with the Model X.
If Tesla is going to be a true colossal success as Elon Musk aims to be, the second step after selling one successful vehicle on a limited scale, is to sell a second vehicle on a larger scale. Beyond the obvious, that the Model X is now a second product, it is a bridge to the Model 3. In order for Tesla to even get to the Model 3, Tesla must drive more cash to the company with a higher volume product. The Model X is an SUV crossover, easily the most popular trend in new cars today. As Business Insider puts it so aptly:
The Model S was a platform to prove that Tesla was for real. The Model X will be a platform to demonstrate whether the auto industry is moving toward the car of the future. Source: Business Insider.
Source: Business Insider
Source: Business Insider
Further, a successful Model X will address a reasonable concern which is simply, "can Tesla create and engineer another successful design?" So, our next question is...
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IS MODEL X SELLING?
If you're bullish on Tesla, I know you love this quote: "We've basically sold out next year’s production... It’s somewhere in the, I don’t know, 15,000ish range maybe 20,000ish." That was Elon Musk in 2014, discussing the Model X launch. On September 24th 2015, Tech Insider wrote the article "Tesla's Model X is sold out until the second half of next year."
So there's one answer -- Tesla can sell a second vehicle, the demand is there and although there have been production difficulties and delays, it's happening. Tesla is not a one hit wonder. Period.
Another issue with Tesla stock as an investment surrounds its valuation. Here's how it compares to our peer group.
That's not an "error" on the stock market's part, it's simply a reflection of the astounding growth the market is pricing in to Tesla. There is some probability being placed on a huge Tesla win. That probability makes a company with some of the largest losses ever seen for a company of its size still worth $30 billion in market cap.
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It really comes down to a simple question and answer if we want to discuss Tesla as an investment opportunity. If we believe that Tesla will hit its goals in the upcoming years, starting of course with 2016, then the company very well may be worth its current $30 billion market cap and will be worth more if its sales rise 10-fold as costs plummet due to scale from the giga-factory.
If we do not believe that Tesla actually has a main stream product, then the goals set out by Elon Musk will fall short. That not only means revenue will be substantially lower, but the economies of scale argument will also fail. It would mean Tesla will continue to haemorrhage cash and will have to go to the equity market (sell stock) to raise yet more capital. It's a frightening scenario that the mega-plant its building in Nevada turns out to be a ghost plant -- running at less than 50% capacity.
We must also remember that a week and a half ago Tesla announced it's quest to hire more engineers to accelerate the development of its self-driving car technologies. That means it is pushing technology forward, even as it tries to scale sales. That's a huge part of the investment thesis. This is not a "sit back and hope it works company." It's a disruptor and will continue to do so as long as it has money in the bank.
This was only a snippet from the full Tesla research we published for our pro members which included the real question that must be answered to understand Tesla stock moving forward. Be the expert in the room. Check out CML Pro.