Thoughts on TSLA growth trajectory (TSLA at $183.40)
My kingdom for a DaveT megapost sometime again soon -- after the sting of the debt crisis wears off, perhaps?
As we head into Q3 earnings, here's some of my thoughts on TSLA and how growth trajectory is so important. (ps., thanks to all those fighting to keep the quality of posts high on this thread.)
Why growth trajectory is so important
As long as TSLA is growing at a fast pace, then TSLA stock will continue to rise. But as soon as the trajectory slows, TSLA stock price will slow or likely "correct". The reason for this is because the stock price reflects people's value on the future earnings potential of the company. And the future earnings potential of a company differs radically depending on their growth trajectory.
Let's take the example of compound interest. If I take $100,000 and can grow it at 6% per year, then in 12 years the $100k will be $200k. In another 12 years (total 24 years), it will double again ($200k to $400k). So, in 24 years at 6% per year growth, the $100k will be $400k.
At 12% growth per year, you might imagine you'd have $800k (ie., double the $400k of 5% growth) in 24 years. But because of compound growth, you'll actually have $1.6 million.
At 24% growth per year, at the end of 24 years, you'll have $25.6 million.
(see
Rule of 72 - Wikipedia, the free encyclopedia to learn how to calculate these things in your head.)
This same principle applies to stock price. If a company is growing revenue at a fast pace, then that puts the company in a very steep trajectory that takes advantage of the principle of compound growth. That's why investors give high-growth stocks enormous P/E multiples. No company can keep up crazy revenue growth (ie., 100% per year growth) because at some point the trajectory slows as they penetrate (or saturate) the market more. However, as long as the high-growth company can continue to grow revenues at an impressive rate, then the stock price will reflect a high multiple.
Tesla's breath-taking revenue growth
Now, let's apply this to TSLA. Currently Tesla is growing revenue at a breath-taking pace.
2010 - $100m
2011 - $200m
2012 - $400m
2013 - $2 billion
2014 - $3.5 to 4 billion
*all numbers are approximate.
Once a company gets up in the billions of $ in revenue, it's gets even more difficult to keep up super high growth. Yet, Tesla is doing it largely because 1) it has a stellar product, and 2) the auto market is one of the largest markets in the world.
If you look at just the numbers above, you'd imagine the revenue to start growing at a much slower pace starting 2015… ie., $5 billion. But if Tesla sells 80k Model S/X in 2015, we're looking at probably $7 billion in revenue, thus this would continue it's close-to-100% yearly growth rate. This is astounding.
Then, in 2016 you'd imagine growth to slow because what company can continue near 100% yearly growth after reaching $7b in revenue. But in late 2016 (or 2017), Tesla is set to reveal Gen III. I think revenue growth could slow due to production ramping issues but still the revenue potential of Gen III is immense and can fuel astounding revenue growth for Tesla for many years to come. For example, when they sell 1 million Gen III cars in a year (whenever that is), that would be $40 billion (average selling price of $40k) in yearly revenue and that's not including any Model S/X sales.
My point being is that there are very few companies with revenue in the billions of $ that have estimated 50+% revenue growth rates for the next several years. Actually I can't even think of one. In this respect, I think Tesla's revenue growth potential is truly remarkable.
Stock price will usually follow revenue growth. So when you have a company growing revenue fast, then their stock price movements will usually reflect this.
However, not only does Tesla have crazy revenue growth, it also has impressive gross margins. This allows Tesla to actually make profit from their vehicles and to use that profit to re-invest into growth.
So why am I sharing all this? Well, I'm giving you the keys to learn how to interpret earnings reports (and other substantial news) in the coming years and to gauge their effect on TSLA's stock price.
As long as TSLA is able to keep an impressive growth trajectory that meets or exceeds expectations, then the stock price should be fine. However, if TSLA disappoints in some way and their growth trajectory is affected in a meaningful way where it now is lower than expectations (of those invested in the stock, not just observers) then this is bad news for the stock price.
Currently, I think we've got substantial upside potential over the next couple years with TSLA. The reason being is because I don't think investors are expecting Tesla to earn $7 billion in revenue (ie., 80k Model S/X cars) in 2015. I think the expectations are more in the order of $3 billion in 2014 and $4.5-5 billion in 2015. (At the end of 2014, if investors have caught up with expectations and expect $7 billion in revenue for 2015 then I can expect a stock price of at least $350. The reason is because with $7b revenue TSLA could have $1b earnings and investors will likely give at least a 50 forward P/E, making TSLA's market cap at least $50b which is double today's market cap. Investors could give a higher forward P/E and the market cap could be much higher as well, which is probably the more likely scenario if at the end of 2014 Tesla has sold over 40k cars in 2014.)
In order for revenues to continue to grow and outpace investor expectations, two main things are required; namely, production and demand. For example, in order for Tesla to sell 80k Model S/X cars in 2015 there needs to be the demand for that many cars, and Tesla needs to be able to produce that many cars to meet the demand. So, when you're interpreting earnings reports (or other substantial news items) you want to ask the question, "how does this impact demand and production?"
Q2 Earnings Report
Last quarter's (Q2) Earning Report was very impressive but enthusiasm was tapered because of production constraints. Elon Musk noted that they can't grow production as fast as they'd like and they didn't raise FY 2013 guidance. If Tesla has less production constraints and had raised FY 2013 guidance during Q2 Earnings Report/Call, then you'd see TSLA stock have a lot more momentum then it does have now.
So, one of the bigger questions for TSLA price action is when will TSLA overcome their production constraints and start producing significantly more cars.
Hopefully, Q3 ER might answer this question.
Q3 Earnings Report
Q3 ER is super important because it will likely shed light on Tesla's production goals for 2014 via their FY 2014 guidance they will likely share. Here's a Q3 ER good/blowout scenario:
1. Tesla shares they've overcome most of their production/supplier constraints and have ramped production to over 600 cars/week by end of Q3, have sold over 6000 cars in Q3, and have achieved 20%+ gross margin.
2. Tesla gives FY 2014 guidance of 35k-40k cars sold citing super strong demand in U.S. and Europe.
Currently I'm about 80-90% confident that Tesla will announce at least 35k cars guidance for 2014 and will sell 6000+ cars in Q3.
There's a big difference though between guiding 35k cars vs 40k cars for 2014. If Tesla guides 40k cars for 2014, then it will truly be a blowout ER because investors will have to significantly revise their expectations for future revenue/earnings (and we'll see a whole slew of analyst upgrades as well). If Tesla guides 35k cars in 2014, then I think it will be enough to not disappoint investors. However, if they guide less than 35k then I'd be concerned. For example, if TSLA guides 30k cars for 2014, then investors might actually have to lower their future revenue expectations and this could really hit TSLA stock price quite hard. 30k cars vs 35k cars might not sound like a lot but when you factor in the principle of compound growth then it's a huge amount.
China
China has potential to do wonders to TSLA stock price, but it's unclear when this will be realized. Personally, I think it's too early to expect China to have any impact on TSLA until after they have been selling cars in China for at least a couple quarters. But that's just my opinion and it could be sooner that we realize China's impact.
Here's how I'm looking at China. China's auto market is huge and foreign cars sell well. It's almost an ideal market for Tesla. They only problem is the high tariffs for cars made outside of China; and this will apply to Tesla because their cars are made in Fremont. It's my understanding that Tesla is not able to get around this tariff by simply doing final piecing together of powertrain and body in China like they do in Europe. In other words, Tesla will have to set up a factory (as a joint venture) to manufacture cars in China to get around the import tariff.
Until Tesla gets around the high import tariff, the Model S will be priced at a large premium and this will affect demand. I think the Model S will still sell well (ie., 8,000-10,000 per year) but if they can manufacture the Model S in China and get around the import tariff, then I think the cost of the car could be up to 1/3 cheaper and in that case they could likely sell in the range of 40,000-50,000 Model S cars per year (probably double the demand as the U.S. or Europe).
I'm guessing that Tesla's strategy is to roll out the Model S in China early 2014 and to see how high demand is. If they're on pace to sell at least 10k cars/year in China, then Tesla will likely announce that they will be making a factory in China to produce the Model S domestically (which might take a couple years to realize). That announcement could be a catalyst for a TSLA stock price bump because it profoundly affects demand and production for Tesla's cars.
Data Points
Going back to Q3 ER, I wish we had more data points that would help us to determine what actual production numbers were for Q3. In Q1 we had reliable VIN analysis. In Q2 we had quarterly production numbers from factory tours. But in Q3, we're lacking some reliable "first data" points. We have general VIN analysis but it's not super reliable because of gaps and Europe shipments. We have had a few people mention store visits where employees mentioned (or didn't deny) production numbers of 700/week achieved in Q3. But we haven't had much discussion on this.
I wish we had some more people share any info or data points (ie., from factory tours or store visits) for Q3 production.
Part of the value of these forums is that we're crowdsourcing the info, data and analysis available for Tesla cars and the company. As we freely share info, more people are encouraged to freely give and they've received. But if we decide to hold back info, then I'm afraid this investor section will no longer hold the value it did previously and many people will lose interest. Part of the reason I share these megaposts freely is because I receive freely and want to encourage others to share as well. So, if you have data points that could be helpful, please share.
I'd also like to ask Sleepyhead to re-post his article about his store visit (the article that was taken down from Investnaire). To sleepyhead - please post the article in this investor section as a new thread or under Q3 earnings thread. To me that article was an interesting data point (ie., conversation with store employee) that we need to openly discuss. Maybe others can share experiences that confirm sleepy's data point, or maybe people have other info that contradict it. However, if we don't share these data points (or have them removed), then it's truly a loss for everyone here. Also, I wouldn't worry about people on the Street looking at these forums and taking info. It's not just the info shared here but it's also the depth of how we interpret info and also the timing that gives us an advantage. So, let's all freely give as we've freely received.
Please share any data points for Q3 production on the Q3 ER thread,
Q3 2013 results - projections and expectations .
