My Tesla Thesis
Disclosure – I own Tesla stock and am very optimistic about the Company’s future
Scenario One —BMW/Mercedes but with better long term margins
- Overview: Tesla is unsuccessful at disrupting the entire auto-industry, instead scaling to become a mid-sized luxury auto maker, similar to BMW group, by 2022 (eg. ~1 million vehicles per year, up from ~100,000 in 2017 but much smaller than Volkswagen’s ~10 million per year). However, Tesla should have higher operating margins than other automakers due to vertical integration (Tesla’s lack of a dealership model makes the biggest impact, but also the more heavily integrated manufacturing/supply chain). Energy storage / solar roof grows into a decent sized business (maybe equivalent to ~$10bn standalone valuation or 4x Solarcity), but the economics are not as good as originally hoped for. 100% ownership of a new Chinese gigafactory allows for upside. Software powered services business (self-insurance, entertainment system, an API to access Tesla’s dataset, supercharger network) also offers incremental revenue and margin upside, but these remain modest businesses.
- Financial takeaways : certain investments today (eg. in Autopilot) may not realize their full potential, but Tesla has a clear path towards revenue and margins greater than Daimler/BMW (ie. >$100bn revenue, >$20bn EBITDA). Capex efficiency becomes more important over time to the long term value of the company.
- Hypothetical long-term stock price target (5–10 years): $400–450
- Ross’ estimated likelihood of this scenario playing out: 25-30%
Scenario Two — Auto & Energy disruption without Self-driving
- Overview: Tesla captures the bulk of the value stack in the new energy/transportation model in which Tesla-built solar panels are powering Tesla-built energy storage which in turn is charging Tesla-built cars (which can help to stabilize Tesla-managed microgrids). Tesla’s vertical integration allows them to build integrated, user-friendly products that no industry player operating in just one segment alone can compete with, and builds an energy/transport ecosystem into which households choose to opt. Tesla’s competitive advantage in managing the software behind virtual powerplants and operating supercharging networks allows Tesla to capture value vs. incumbent Utilities & Auto-manufacturers even if they don’t own a Tesla car/Tesla solar panels. This scenario assumes that level 5 self-driving across the industry takes much longer than expected and no industry player achieves full autonomy over the next 10 years. Without self-driving capabilities, not many people give up car ownership in favor of ridesharing services, and the predominant business model of selling cars to drivers remains intact.
- Financial takeaways : intensive upfront capex is not only valuable but necessary for Tesla to build out and own the infrastructure upon which the next generation of utilities and transport are operated and maintained. (in the ballpark of: >$250bn revenue, >$40bn EBITDA)
- Hypothetical long-term stock price target (5–10 years): $750
- Ross’ estimated likelihood of this scenario playing out: 40%
Scenario Three — Self-driving Level 5 attained, business model shifts to subscription
- Overview: Tesla’s investment in hardware over it’s first 15–20 year lifespan becomes just the beginning of it’s life as a primarily software revenue driven company. Tesla Network + Energy grid management software allow consumers to subscribe to the Tesla “bundle” and receive unlimited transportation (from Tesla self-driving cars), cargo/logistics, and renewable energy for a cheaper price than their existing utility bill. Tesla continues to produce software-differentiated hardware for people to purchase at attractive profit margins (similar to Apple’s software differentiated hardware which captures the lion’s share of the profits in the smartphone industry), but also operates its own fleet of self-driving cars to ensure network liquidity. Competitive advantages such as proprietary battery tech, limiting Tesla owners to using the Tesla Network (ie. not using Uber/Lyft), and the energy generation/storage hardware already deployed = differentiated margins. Additional revenue synergy opportunities between Tesla, SpaceX and the Boring Company.
- Financial takeaways : Capex made today will help build a critical mass of infrastructure (# cars on the road, # superchargers, # solar roofs, # powerwalls) that, when enabled, will allow the Tesla Transport and Energy as a Service business to scale instantly and build an insurmountable competitive advantage that pushes the long term value of the company to at least match Apple. (>$500bn revs, >$100bn EBITDA)
- Hypothetical long-term stock price target (5–10 years): $3,000+ (~10x from today)
- Ross’ estimated likelihood of this scenario playing out: 5-10%
Downside scenario 1 — Cash burn causes delayed investments and allows competitors to catch up
- Overview: — As Tesla focuses on reducing cash burn it is forced to delay investments in key areas of long term competitive advantage (gigafactory in China, development of new battery tech, slow rollout of Solar Roof). As a result, non-cash constrained competitors (Volkswagen, Chinese rivals, Google) are able to make investments to overwhelm Tesla’s first-mover advantage. Cash constrained, Tesla is forced to resort to prioritizing the sale of high margin items, and finds itself pigeon-holed as a niche market player, and a potential acquisition target (not really any successful independent niche market players).
- Hypothetical long-term stock price target (5–10 years): $200
- Ross’ estimated likelihood of this scenario playing out: 20%
Downside scenario 2 — Software-related failure forces regulatory intervention / breaking of brand halo
- Overview: to date, autopilot related accidents and unfortunate hardware errors have not broken the Tesla brand halo or forced regulatory action that could limit the company from achieving its long term potential. Any major consumer backlash to a crash/death/software related failure could materially harm the company, and if it continues to burn cash it may not be able to whether the storm. Would likely drive the Company’s market cap down to an attractive acquisition price.
- Hypothetical long-term stock price target (5–10 years): $100–150
Ross’ 5-10 year price target = 27.5% x $425 + 40% x $750 + 7.5% x $3,000 + 20% x $200 + 5% x 125 = ~$700 ( or ~$500 w/o scenario 3).
Important note: All of these hypothetical stock prices are based on an assumption of some further equity dilution (maybe up to 10%) given a minimum of one or more capital raises funded through new equity. In my mind Tesla’s biggest risk is being unable to cover its financial obligations before its full vision is achieved (rather than competition), and so as a shareholder I would rather some dilution that allows more cash to be added to the balance sheet without adding more debt to extend the company’s runway and allow it to make the necessary investments to achieve it’s potential.