Implications of a flawless Model 3 launch and ramp to stock price

[farzyness]

I would like to explore the possibility of stock price in the next 6 months to 2 years if the Model 3 launch and ramp is fully successful. Every analyst I see covering the stock has the Model 3 launch either a) not happening b) super slow with an incredibly slow ramp c) slow with their 500k target not being hit until 2025 or later.

Every hint that Elon has dropped so far has gone counter to that.

Past performance is not an indicator for future performance.
Model 3 Release Candidate is being built with almost all final assembly line parts.
Our tier 1 suppliers are WAY better than any other supplier we've worked with.
Model 3 will be a massive cash generator.
Stormy weather in shortville...

This all leads me to believe that Tesla is either on schedule (meaning 500k runrate by 2018 and 1m by 2020) or AHEAD of schedule.

I think it's incredibly important to outline these two points because Q1 ER on 5/3/2017 will be our first look into this. If Elon continues to guide for a July release and no change to ramp guidance, then we know they are 100% ready to launch the car in 2 months from the call (can you believe we are only 3 months away from a full Model 3 release!?!?).

If Tesla is able to launch Model 3 on time this July after giving guidance on such more than a year ago (and don't forget, July was the "impossible date" that Elon and team set for suppliers), then that gives me little to no pause re: their ramp abilities. The only bottleneck here becomes charging/service infrastructure.

Everyday that goes by without any changes to the guidance and tune of Tesla, it's another day that I grow more and more confident that Analysts will have to change their price targets dramatically from where they are today. If Model 3 is on time, that means cash generation is going to be off the hook, which means a tremendous loop of Cash -> Innovation -> killer products -> cash -> innovation -> streamline process -> cash -> innovation and so on.

And let's not forget the Tesla Energy ramp. Once they start ramping up their efforts with Powerwall/pack in the US, but more importantly in places like Australia, Europe, Africa, and the Middle East, then analysts will have to yet again adjust their targets.

I personally wouldn't be surprised to see price targets north of $800 based on 2021 performance and guidance. This is figuring the company shipping ~1m cars and energy being roughly 30% of their portfolio with a revenue to EBITDA ratio of 10%.

I think this is a very real beast that's about to be unleashed, and people are completely dismissing this as impossible. Something's going on here - and my gut's telling me everyone outside of this forum are 100% clueless to it.

 

[MitchJi]

Definitely a different company by summer of 2018, at the latest.

 

[LargeHamCollider]

If the M3 Ramp is *flawless* I think we'll see $500 this year. But I think the probability of it being *flawless* is very low.

 

[ThisIsTrue]

Something's going on here - and my gut's telling me everyone outside of this forum are 100% clueless to it.

Well, probably not everyone, but I get the point. I think your analysis is pretty good. You glossed over this part a bit, though:

The only bottleneck here becomes charging/service infrastructure.

While charging was addressed this morning in rather dramatic fashion, I've long believed that isn't the big gotcha, but rather the second part of your equation is: servicing. It's breaking down under the strain of the Model S and X already. While early adopters are a bit more forgiving of glitches there, we already see (justified) gritching about it. It's going to take a lot to get service ramped up to where it needed to be last year: not just getting techs trained up, but also delivery specialists, finding real estate and improving it, spare part inventories, and more. It's as big a job as superchargers, and maybe more with the specialized personnel resources needed to get there.

 

[farzyness]

Well, probably not everyone, but I get the point. I think your analysis is pretty good. You glossed over this part a bit, though:



While charging was addressed this morning in rather dramatic fashion, I've long believed that isn't the big gotcha, but rather the second part of your equation: servicing. It's breaking down under the strain of the Model S and X already. While early adopters are a bit more forgiving of glitches there, we already see (justified) gritching about it. It's going to take a lot to get service ramped up to where it needed to be last year: not just getting techs trained up, but also delivery specialists, finding real estate and improving it, spare part inventories, and more. It's as big a job as superchargers, and maybe more with the personnel resources needed to get there.

Great point. I would be curious to see if Tesla is also ahead of schedule in this department. Given their progress with Model 3 it would make sense that they also feel really comfortable with the speed of the ramp of their service logistics.

 

[dakh]

It's useful to break down the thinking around price predictions so we can have a meaningful discussion.

1. How much of the M3 success is already priced in? Put it differently, if we ignore other parts of the business for a moment, what is Tesla's automotive business fair value at the end of the year with just the 3 models that are in production?
2. How much would M3 success change the valuation of the company based on this being a predictor of success of future ventures like Semi and solar roof? Current valuation is discounting this heavily due to low confidence in the Company's ability to deliver on those projects in reasonable time and budget. Successful M3 launch would change that sentiment.

I personally like to think about stock value based on these two dimensions: #1 gives us the rock bottom valuation and #2 gives us the wild SP fluctuation range. So I think that at low-300 level #1 is mostly priced in and when folks talk about $500 targets, that would be driven by #2 which sure can pop way up but can't be counted on to stay there unless there's a steady stream of positive news that support the valuation #2 is predicting.

 

[farzyness]

It's useful to break down the thinking around price predictions so we can have a meaningful discussion.

1. How much of the M3 success is already priced in? Put it differently, if we ignore other parts of the business for a moment, what is Tesla's automotive business fair value at the end of the year with just the 3 models that are in production?
2. How much would M3 success change the valuation of the company based on this being a predictor of success of future ventures like Semi and solar roof? Current valuation is discounting this heavily due to low confidence in the Company's ability to deliver on those projects in reasonable time and budget. Successful M3 launch would change that sentiment.

I personally like to think about stock value based on these two dimensions: #1 gives us the rock bottom valuation and #2 gives us the wild SP fluctuation range. So I think that at low-300 level #1 is mostly priced in and when folks talk about $500 targets, that would be driven by #2 which sure can pop way up but can't be counted on to stay there unless there's a steady stream of positive news that support the valuation #2 is predicting.

I think your approach is dead on - however, I would argue that Model 3 is nowhere near priced into the stock. Referring back to my OP - if projecting out Tesla's ramp to 1 million cars (does not include Tesla Energy, Semi, Model Y, etc.) then a $800 share price is totally justifiable. If analysts are willing to price based on 2020/2021 performance, then #2 in your valuation is pure gravy.

 

[EinSV]

@farzyness, I agree that models of analysts and institutional investors will have to change dramatically if Model 3 launches on time and Tesla achieves anything close to 500K vehicles in 2018. (Of course, margins, macros and many other factors can affect whether, when and how this translates into an increased SP).

A great example is Morgan Stanley's Adam Jonas, whose $305 price target is based on very pessimistic numbers for Model 3 deliveries.

Earlier this year Jonas reported that his DCF model resulted in Tesla SP valuation over $700 using Tesla's Model 3 volume guidance, which exceeded even his own "bull" case. And this greater than $700 figure appears to attribute zero value to the storage and solar businesses.

Our previous $242 target assumed 5k Model 3 units in 2018, 130k in 2020, and 283k by 2025. Our $305 target assumes 80k Model 3 units in 2018, 228k in 2020, and 515k by 2025. We believe the company’s own volume targets imply Model 3 volume in the range of 400k units in 2018, 878k in 2020 and as high as 2 million units by 2025. Such volume levels applied to our model would support a DCF value of the business in excess of $700 although such volume exceeds even our own bull case for the stock.

A while back I posted a simplified valuation model using the 1M in 2020 figure plus some assumptions on TE, which resulted in an implied valuation of $1228 per share at the end of 2019. 3 Year Tesla Valuation Model. (This excludes Tesla Semi and Tesla Network.)

Another data point is Goldman. I haven't seen their latest model, but Patrick Archambault's (previous Goldman analyst) model had a SP valuation of $1835 in 2025 for a scenario where Tesla sold 3.3 million vehicles in 2025 at (conservative) 16% margins, with no contribution from TE, Tesla Network, etc. This translates to 1M vehicles in 2020 plus less than a 25% growth rate from 2020-2025. Long-Term Fundamentals of Tesla Motors (TSLA)

It will be interesting to see what Tesla has to say about Model 3 production in the upcoming ER. My operating assumptions are that they will start roughly on time (July-Sept.), the initial ramp may be challenging but they will likely hit their 2018 500K target.

 

[azred]

Well, probably not everyone, but I get the point. I think your analysis is pretty good. You glossed over this part a bit, though:



While charging was addressed this morning in rather dramatic fashion, I've long believed that isn't the big gotcha, but rather the second part of your equation is: servicing. It's breaking down under the strain of the Model S and X already. While early adopters are a bit more forgiving of glitches there, we already see (justified) gritching about it. It's going to take a lot to get service ramped up to where it needed to be last year: not just getting techs trained up, but also delivery specialists, finding real estate and improving it, spare part inventories, and more. It's as big a job as superchargers, and maybe more with the specialized personnel resources needed to get there.

Last week the Tempe Service Center called and said since my appointment was for a minor item, they'd like to free up the service center time by sending a ranger to my house or business, if that was agreeable. Is this an indication that Tesla is following through with the recently stated plan to immediately ratchet up ranger service even in areas with service centers? I hope so and believe this will be a win-win. While hiring/training rangers and delivery specialists, expanding parts inventories, improving/expanding body shop relationships etc etc are still issues, limiting the immediate need for new/expanded service centers in favor of ranger use may go a long way towards solving the issue, at least for the next couple years of exponential growth.

 

[ValueAnalyst]

if projecting out Tesla's ramp to 1 million cars (does not include Tesla Energy, Semi, Model Y, etc.) then a $800 share price is totally justifiable.

Could you provide your back-of-the-envelope calculation for this statement? It seems a bit stretched.

If my crystal ball told me Tesla will produce 1 million cars/year in 2020, I would expect a valuation of ~$600 per share.

But I expect Tesla to be producing 4 million cars/year run-rate by 4Q20 with Tesla Energy on top of that, so $2,000+ per share by 4Q20.

 

[ValueAnalyst]

I would like to explore the possibility of stock price in the next 6 months to 2 years if the Model 3 launch and ramp is fully successful. Every analyst I see covering the stock has the Model 3 launch either a) not happening b) super slow with an incredibly slow ramp c) slow with their 500k target not being hit until 2025 or later.

Every hint that Elon has dropped so far has gone counter to that.

Past performance is not an indicator for future performance.
Model 3 Release Candidate is being built with almost all final assembly line parts.
Our tier 1 suppliers are WAY better than any other supplier we've worked with.
Model 3 will be a massive cash generator.
Stormy weather in shortville...

This all leads me to believe that Tesla is either on schedule (meaning 500k runrate by 2018 and 1m by 2020) or AHEAD of schedule.

I think it's incredibly important to outline these two points because Q1 ER on 5/3/2017 will be our first look into this. If Elon continues to guide for a July release and no change to ramp guidance, then we know they are 100% ready to launch the car in 2 months from the call (can you believe we are only 3 months away from a full Model 3 release!?!?).

If Tesla is able to launch Model 3 on time this July after giving guidance on such more than a year ago (and don't forget, July was the "impossible date" that Elon and team set for suppliers), then that gives me little to no pause re: their ramp abilities. The only bottleneck here becomes charging/service infrastructure.

Everyday that goes by without any changes to the guidance and tune of Tesla, it's another day that I grow more and more confident that Analysts will have to change their price targets dramatically from where they are today. If Model 3 is on time, that means cash generation is going to be off the hook, which means a tremendous loop of Cash -> Innovation -> killer products -> cash -> innovation -> streamline process -> cash -> innovation and so on.

And let's not forget the Tesla Energy ramp. Once they start ramping up their efforts with Powerwall/pack in the US, but more importantly in places like Australia, Europe, Africa, and the Middle East, then analysts will have to yet again adjust their targets.

I personally wouldn't be surprised to see price targets north of $800 based on 2021 performance and guidance. This is figuring the company shipping ~1m cars and energy being roughly 30% of their portfolio with a revenue to EBITDA ratio of 10%.

I think this is a very real beast that's about to be unleashed, and people are completely dismissing this as impossible. Something's going on here - and my gut's telling me everyone outside of this forum are 100% clueless to it.

Here are a few things that I think we should think about further:

"a tremendous loop of Cash -> Innovation -> killer products -> cash -> innovation -> streamline process -> cash -> innovation"

How did that loop work out for Apple? Or even Microsoft? Cash does not necessarily lead to innovation, so I would temper that expectation. What I do expect, however, is that cash will increase substantially, and this will lead to an exponential increase in manufacturing capacity as Tesla will be able to build three gigafactories by 4Q20, and five gigafactories at a time thereafter every 3-5 years.

"revenue to EBITDA ratio of 10%"

Elon previously guided to net income margin of 10%, so EBITDA margin would be higher, but you also have to adjust it down for heavy capex spend, because free cash flow is what matters at the end of the day. If you have a long-term outlook, as you seem to have and as I do, I would recommend focusing on net income margin. I use 10%, which I actually think is conservative (for various reasons).

"And let's not forget the Tesla Energy ramp"

I'm not yet sold on Tesla Energy's profitability. Elon had said in the longer term gross margins should approximate automative business, but I believe investors are waiting for a couple quarters of Tesla Energy margins to take that statement at face value and believe that stationary storage business will not end up like solar panel companies. I think this is reasonable, but I'm optimistic that we'll get some positive news around Tesla Energy margins on May 3, primarily because management qualified Tesla Energy margins in the last investor letter.

"my gut's telling me everyone outside of this forum are 100% clueless to it"

This is a red flag. If at any point if you feel like you're right, and everyone else is wrong, be very very careful.

 

[farzyness]

Could you provide your back-of-the-envelope calculation for this statement? It seems a bit stretched.

If my crystal ball told me Tesla will produce 1 million cars/year in 2020, I would expect a valuation of ~$600 per share.

But I expect Tesla to be producing 4 million cars/year run-rate by 4Q20 with Tesla Energy on top of that, so $2,000+ per share by 4Q20.

Actually - thanks for that catch. That $800 per share calculation DOES take into account TE ramp. In 2021 I'm extrapolation out $62bn of revenue from Tesla Motors, $39bn from Tesla Energy, and with my crappy calc of 10% Revenue to EBITDA which extrapolates out to a share price of roughly $800 discounted 20%.

If I take the TE portion out I get roughly $560 discounted 20%.

EDIT: Changed TM revenue from $42 to $62.

 

[farzyness]

Here are a few things that I think we should think about further:

"a tremendous loop of Cash -> Innovation -> killer products -> cash -> innovation -> streamline process -> cash -> innovation"

How did that loop work out for Apple? Or even Microsoft? Cash does not necessarily lead to innovation, so I would temper that expectation. What I do expect, however, is that cash will increase substantially, and this will lead to an exponential increase in manufacturing capacity as Tesla will be able to build three gigafactories by 4Q20, and five gigafactories at a time thereafter every 3-5 years.

"revenue to EBITDA ratio of 10%"

Elon previously guided to net income margin of 10%, so EBITDA margin would be higher, but you also have to adjust it down for heavy capex spend, because free cash flow is what matters at the end of the day. If you have a long-term outlook, as you seem to have and as I do, I would recommend focusing on net income margin. I use 10%, which I actually think is conservative (for various reasons).

"And let's not forget the Tesla Energy ramp"

I'm not yet sold on Tesla Energy's profitability. Elon had said in the longer term gross margins should approximate automative business, but I believe investors are waiting for a couple quarters of Tesla Energy margins to take that statement at face value and believe that stationary storage business will not end up like solar panel companies. I think this is reasonable, but I'm optimistic that we'll get some positive news around Tesla Energy margins on May 3, primarily because management qualified Tesla Energy margins in the last investor letter.

"my gut's telling me everyone outside of this forum are 100% clueless to it"

This is a red flag. If at any point if you feel like you're right, and everyone else is wrong, be very very careful.

Fair feedback - thanks.

 

[farzyness]

@farzyness, I agree that models of analysts and institutional investors will have to change dramatically if Model 3 launches on time and Tesla achieves anything close to 500K vehicles in 2018. (Of course, margins, macros and many other factors can affect whether, when and how this translates into an increased SP).

A great example is Morgan Stanley's Adam Jonas, whose $305 price target is based on very pessimistic numbers for Model 3 deliveries.

Earlier this year Jonas reported that his DCF model resulted in Tesla SP valuation over $700 using Tesla's Model 3 volume guidance, which exceeded even his own "bull" case. And this greater than $700 figure appears to attribute zero value to the storage and solar businesses.



A while back I posted a simplified valuation model using the 1M in 2020 figure plus some assumptions on TE, which resulted in an implied valuation of $1228 per share at the end of 2019. 3 Year Tesla Valuation Model. (This excludes Tesla Semi and Tesla Network.)

Another data point is Goldman. I haven't seen their latest model, but Patrick Archambault's (previous Goldman analyst) model had a SP valuation of $1835 in 2025 for a scenario where Tesla sold 3.3 million vehicles in 2025 at (conservative) 16% margins, with no contribution from TE, Tesla Network, etc. This translates to 1M vehicles in 2020 plus less than a 25% growth rate from 2020-2025. Long-Term Fundamentals of Tesla Motors (TSLA)

It will be interesting to see what Tesla has to say about Model 3 production in the upcoming ER. My operating assumptions are that they will start roughly on time (July-Sept.), the initial ramp may be challenging but they will likely hit their 2018 500K target.

Thanks for the feedback!

The biggest thing I'm looking for is when analysts will be looking to upgrade the stock. I think May's ER will reward those who will be looking to add to their core holdings. I would be so incredibly curious to hear if Tesla would be willing to give guidance on profitability for the rest of the year (i.e. Model 3 ramp is so on schedule that we feel comfortable turning a profit every quarter for the rest of eternity, including this one). That will force the hands of analyst, because that assumption means that Tesla is on track to ship their goal of 500k and 1m cars.

It might be silly of me to take their statement of "prior performance does not indicate future performance", but this is a company that set a major goal to be the best manufacturer in the world, not just the best car maker. It's been roughly a year since they committed to that. At the speed that Tesla works, this means that a significant amount of headway.

 

[ValueAnalyst]

Actually - thanks for that catch. That $800 per share calculation DOES take into account TE ramp. In 2021 I'm extrapolation out $42bn of revenue from Tesla Motors, $39bn from Tesla Energy, and with my crappy calc of 10% Revenue to EBITDA which extrapolates out to a share price of roughly $800 discounted 20%.

If I take the TE portion out I get roughly $560 discounted 20%.

Glad I can be helpful.

Question for you:

If you're projecting $42 billon of revenue from the automotive segment in 2021, that's less than 1 million cars in 2020?

Since Tesla is planning to ramp GF1 up to 1.5 million cars/year capacity (with third half million used for Tesla Energy), why do you think they just announced three more gigafactories? What do you think these additional gigafactories will do?

 

[farzyness]

Glad I can be helpful.

Question for you:

If you're projecting $42 billon of revenue from the automotive segment in 2021, that's less than 1 million cars in 2020?

Since Tesla is planning to ramp GF1 up to 1.5 million cars/year capacity (with third half million used for Tesla Energy), why do you think they just announced three more gigafactories? What do you think these additional gigafactories will do?

$42 was a typo - meant to write $62. Corrected it

 

[ValueAnalyst]

$42 was a typo - meant to write $62. Corrected it

Still ~1.2-1.3 million cars in 2020/21, so my question stands...

Anyway, my point is that even the TMC community (which is more bullish than the market) is greatly underestimating Tesla's massive production capacity that will start coming online in 2020 with "Gigafactories 3, 4, and possibly 5."

The most bullish projections for 2020 that I've so far seen here, Tesla is planning to achieve with Gigafactory 1.

 

[farzyness]

Still ~1.2-1.3 million cars in 2020/21, so my question stands...

Anyway, my point is that even the TMC community (which is more bullish than the market) is greatly underestimating Tesla's massive production capacity that will start coming online in 2020 with "Gigafactories 3, 4, and possibly 5."

The most bullish projections for 2020 that I've so far seen here, Tesla is planning to achieve with Gigafactory 1.

I 100% agree with your assessment - this is where I'm taking a more conservative approach (i.e. not taking into account growth potential related to Gigafactories 3, 4 and 5). I don't want to get too excited thinking about the potential of these additional facilities.

 

[Waiting4M3]

This is a red flag. If at any point if you feel like you're right, and everyone else is wrong, be very very careful.

W.r.t TSLA, I think the bulls and bears are just so clustered in a bimodal distribution, many people point to the other camp and think "bubble!", and that they are the contrarian and will benefit when the other camp's bubble pops. In the short term, this doesn't help predict which way the stock will go, it only indicates that one way or the other, many people will get hurt in this stock. In the long term, I think it's safer to be in the long camp.

 

[austinEV]

Last week the Tempe Service Center called and said since my appointment was for a minor item, they'd like to free up the service center time by sending a ranger to my house or business, if that was agreeable. Is this an indication that Tesla is following through with the recently stated plan to immediately ratchet up ranger service even in areas with service centers? I hope so and believe this will be a win-win. While hiring/training rangers and delivery specialists, expanding parts inventories, improving/expanding body shop relationships etc etc are still issues, limiting the immediate need for new/expanded service centers in favor of ranger use may go a long way towards solving the issue, at least for the next couple years of exponential growth.

Yeah They have said that most service can be done with rangers and they are following through with that. I needed my 12V battery replaced and a ranger came to my work. I volunteered to drive to the SC and wait and they begged me not to. (I wanted to look at the model X, I just went anyway )