@dennis Since you asked for critical feedback, I'll give it a shot.
Autos have proven to be low-margin, cut-throat businesses. This is why auto makers have such low P/E multiples. It takes a ton of capital to scale and when a recession hits it's difficult to scale back without a lot of losses. And the overall auto market isn't growing much and will likely shrink due to ride-sharing and eventually autonomous cars. So, with autos we might see a shrinking overall market in terms of number of autos sold. Tesla might be a rising star in the auto market, but it might not be that exciting if the overall market for autos is shrinking. Tesla needs to find a way to reinvent the business model in autos (ie., transportation as a service), but they have yet to have done that.
With solar, it's also proving to be a low-margin, cut-throat business. Companies are having a difficult time surviving. And now Tesla wants to enter this field. They'll have their work cut out for them.
With battery storage, it seems like a huge and open field. But what's stopping battery storage from becoming a low-margin, cut-throat business (with low P/E multiples) like autos and solar? Tesla's battery storage system tech can be copied, and other companies will gain similar advantages to GF as they scale production. Sure, Tesla might produce more with the GF and have a lower cost, but that cost gap will likely decrease over time as competition becomes more intense. What Tesla really needs is a true technological breakthrough in energy storage. They don't have that yet.
Regarding competition, you mention startups and large auto markers. But I think the real competition is likely going to come from large tech companies, like Google, Uber, Apple, Nvidia, etc. They will provide tech such as autonomous driving to auto makers, and that's how auto makers will bridge the gap with new tech such as autonomous driving. LG Chem and others will provide batteries at competitive costs and can even help with powertrain expertise as well. Sure, it looks like Tesla has an unsurmountable lead right now in EVs, but that gap will likely close over time.
And even if Tesla sells as many cars as BMW or Mercedes, that doesn't mean TSLA will appreciate that much in value (ie., 2x?). Look at the market caps of BMW and Mercedes. Tesla needs to give investors something more than just a typical auto maker business if they want higher multiples. Again, perhaps they can lead the transportation as a service industry... but again Tesla has to prove itself in that arena.
Anyway, I'm super bullish on Tesla long-term but it's not because I like the auto making business, solar business, etc. And not because I like Tesla's current competitive advantages (I think Tesla needs to accrue better and more defensible competitive advantages). But I see a credible path for Tesla to reinvent the business model in autos and I also see a credible path for Tesla to reach a true breakthrough in energy storage w/in the next 10 years. If they can do that, we can talk about Tesla becoming the most valuable company in the world.
So, just wanted to clarify what I said about margins and expound on a few other things.
First, I called the auto industry a low-margin, cut-throat business... and my point being is that's the context of the market Tesla is trying to reinvent. However, this market is also shrinking, most likely, as well. Am I saying Tesla can't have decent margins? No. I'm just saying from an investor perspective, they are going to be skeptical and hesitant to give tech/internet multiples of valuation.
Second, Tesla has struggled with gross margin. Before some of you get upset, look at the facts. Tesla ought be be over 30% gross margin by now. This was their stated goal a couple years ago but they weren't able to reach it. They even made it a milestone for a stock option plan that was given to incentives (not the one for Elon, but for his management team). Also, Elon's stock incentive plan gives a milestone of 4 consecutive quarters of 30% margin or greater. It looks like Tesla is not going to make this milestone since time has basically run out since they will start Model 3 production and that will lower gross margins.
The question we need to ask is why hasn't Tesla been able to reach 30%+ gross margins. BMW and Mercedes have over 20% gross margin and their ASPs are much lower. Tesla has a very, very high ASP of over $90k/vehicle, and it should be within reach for Tesla to achieve 30% or even 35% gross margins with the S/X already by this point.
My theory is that gross margins have suffered with the S/X because Tesla has had to continue to add improvements and not charge for them to keep their annual demand of 50-60k Model Ss/year (and also X). In other words, if demand was more robust, Tesla could have improved the car and charged higher prices, thus growing their gross margin significantly. However, demand has rather been stagnant of the Model S the past couple years (at 50-60k/year) and this is even with Tesla adding improvements (ie., free supercharging, Autopilot, improved options, etc). Basically, Tesla has been improving the car but not charging for improvements in order to keep demand where it's at (50-60k/year for Model S), and this hasn't allowed them to grow their gross margin to the expected level of over 30% for 4 consecutive quarters.
So, why do I bring this up? It's just to show that Tesla is not immune to the industry that they're part of. Yes, they can say that they're going to achieve 30% gross margin for 4 quarters in a row, and that sounds manageable especially if you're selling $90k cars, but it's not that easy... especially when there's a lot of luxury cars to choose from.
With Model 3, Tesla seems to be aiming for a 25% gross margin but if they're having difficult reaching 25% with Model S/X then it might not be easy to reach 25% with Model 3. Also, with Model 3 it appears that Elon is opting for volume as a priority. As a result, I think gross margin is likely going to suffer as Elon wants to make the car as attractive as possible to as many people as possible, and that's going to require Tesla making the car better and better and probably not increasing the price. My guesstimate is that Tesla might have 20% gross margin on the Model 3 in 2018. Not bad... but not revolutionary.
I think it's possible that Enhanced Autopilot (and fully self-driving option) can increase gross margins, but I still think Tesla won't be able to hit their 30% GM target for 4 consecutive quarters in the near future.
Gross margin though is important because it profoundly affects valuation.
For example, let's say by 2020 Tesla sells a million cars. To be conservative, 100k Model S/X ($90k ASP). 500k Model 3 ($42k ASP). 400k Model Y ($43k ASP).
Revenues would be $9 billion for Model S/X, $21 billion for Model 3, and $17.2 billion for Model Y. That would be a total of $47.2 billion in revenue.
Let's say GM for Model S/X is 30% ($2.7B), for Model 3/Y let's say 22.5% ($8.6B). Gross profit would be $11.3B. Net profit would likely be roughly half or less than that (when compared w/other auto makers). That would mean net profit of about $5 to $5.5B. Let's be generous and say, $5.5B in net profit (note: this has a lot of factors that I'm not discussing here due to length).
Now, the big question is what multiple are investors willing to pay. Let's for the sake of the argument remove all other parts of Tesla's business and just focus on making autos. So, we're not including Tesla Network, Tesla Semi, TE, etc.
The going P/E multiple for auto makers is somewhere between 5-10.
If we give Tesla a P/E multiple of 10, then that would value Tesla (at least their auto) at $55 billion. Now you might be able to argue that Tesla could fetch a higher P/E multiple than that for their autos since they're probably still growing at that point. But being 2016 at the moment, we're unable to see that far into the future, so I'm comfortable with giving Tesla a $55B valuation for their auto division in 2020. I hope that they're growing like a weed in making cars in 2020, so that Tesla can fetch a higher multiple for their autos. But I like to be somewhat conservative so I won't go higher at this point that a 10 P/E on 2020 numbers.
So, if I'm investing in Tesla just for their auto division then I would be hoping/expecting/targetting Tesla's market cap to grow from $27.5B to $55B in 2020. However, due to dilution the stock price probably wouldn't double. So, if the stock is $193 today, we might be looking at stock price of $330 or so in 2020.
I hope that doesn't disappoint folks here too much. But if you disagree would look to hear your numbers on how you'd value Tesla auto in 2020.
So, as an investor, I'm not too excited about Tesla auto. Going from $193 to $330 in 2020 isn't my definition of a super exciting investment, especially considering the risks involved in getting there as well.
To me, the reason I'm long (and very long) on TSLA is because I'm getting an "option call" of sorts on three possible mega businesses:
1. Tesla Semi - if Tesla can disrupt the trucking industry worldwide, we're talking about hundreds of billions of dollars of market cap added to Tesla. I won't work out the numbers here due to time, but you can research how large the global trucking industry is and make your own conclusions.
2. Tesla Network - transportation as a service is a much more lucrative business than making autos, IMO. While making and selling cars is a low margin and highly capital intensive business, selling rides (ie., ridesharing, etc) is a potentially low capital and much easier-and-faster-to-scale business.
3. Tesla Energy - while some here are hugely bullish on TE over the next couple years, I'm more reserved. I think we'll have good growth and contribution to revenue, but I think margin might be low (ie., 15-20%). But that might be offset by rapid expansion. However, expansion will be offset by tons of competitors flooding the market as well. Overall, I think Tesla Energy will be a positive contributor over the next few years, but not sure if it will really add more than $5-10B in market cap in the next two years. I'm more excited about the long-term potential of Tesla discovering a true energy storage breakthrough that will allow them to expand into more businesses and become the true dominant player in energy. But my timeline horizon is more looking out at least 5-10 years for this.
So when I divide up my TSLA investments in different arenas of Tesla, I think autos give a decent foundation to the stock in the sense that I think Model 3 will be a huge success and provide Tesla will billions of dollars of gross profit that will let them invest in more areas. I'm hugely bullish on the Model 3 as a fan. As an investor, I'm more confident and mildly optimistic on its impact to the stock price.
Personally, with TSLA I look at it like I'm paying right now $200 for their auto business, $50 for an option call on Tesla Semi, $50 for an option call on Tesla Network, and $50-100 for an option call on Tesla Energy. So, I get $350-400 in value for $200 (current stock price).
