Tesla is an Undervalued Growth Juggernaut

[EinSV]

I have been intrigued by Loup Ventures' recent analysis concluding that returns from tech companies with strong revenue growth -- above 20% annually -- have been more than four times higher over the past five years than tech companies with slower growth.

From a basket of 39 leading tech names, Loup identified 14 companies with y/y revenue growth of 20% or more for five years including Tesla, Facebook, Amazon, Netflix and Google, and 25 tech companies with slower growth. The conclusion: "The five-year return for the growth group was 485% vs. the non-growth return of 116%, a more than 4x difference." There's Still No Such Thing as a Value Stock in Tech | Loup Ventures

From Loup's list of 14 high-growth tech companies, the chart below shows annualized growth for the top companies over 3, 5 and 8 year periods (since Tesla went public).

Can you guess which company stands out from the rest?

(Figures are TTM for most recent quarter.)

Two highlights:

• Tesla consistently has been at the top of the chart over 3, 5 and 8 year periods.
• Tesla's growth has been far greater than other top tech growth companies
  • Over the past 5 years Tesla's growth rate was more than double almost every other company on the list -- including leading growth names such as AMZN, NFLX, GOOG, and NVDA.
  • The only exceptions are FB and TWTR, but they also grew significantly slower than TSLA.

IMO, Tesla's unprecedented growth is poised to continue. For example, with the current product pipeline, revenues are in a position to increase another 10X over the next five years (2023).

Using Elon/Tesla's estimates where available (700K Model 3/1 million Model Y/100K Semi/100K S/X), and excluding for sake of argument revenues from the Tesla Network, 2023 revenues could look something like this:

700K Model 3 @$45K $31.5B
1M Model Y @$45K $45B
300K pickup @$50K $15B
100K S/X @$100K $10B
100K Semi @$165K $16.5B
200K solar roof @$40K $8B
5K Roadster at $225K $1.1B
Storage $6B

Total: $133B

This would result in a revenue CAGR of 58%, in line with the past 3 and 5 year periods.

With Model 3 production at ~5K/week, Tesla is now in a position to be sustainably profitable beginning this quarter or in Q4. This is a potential game changer.

Once profitability is here, I believe there is a good chance savvy investors will start filtering out the noise (which is currently at record levels) and recognizing that (1) growth is where the money is in tech; (2) Tesla is a growth juggernaut, and (3) that Tesla's current price does not come close to pricing in its potential.

I am looking forward to the next couple years.

 

[ACA Man]

Time will tell.

 

[TheTalkingMule]

There's not gonna be a ton of money in making cars. Perhaps autonomous networks will prove to be a massive advantage for Tesla, but I'm banking on all market cap above $80-100B coming from energy. $800B or so

 

[bulls96]

AMazon reached $2000 stock price today, was $18 when they filed for IPO.

I am wondering if Tesla has that potential too.

 

[Barklikeadog]

AMazon reached $2000 stock price today, was $18 when they filed for IPO.

I am wondering if Tesla has that potential too.

Hard to see the amazon comparisons as they are vastly different and amazon has probably half a billion people who have shopped there and 100million members.

 

[oneday]

Hard to see the amazon comparisons as they are vastly different and amazon has probably half a billion people who have shopped there and 100million members.

Well, yeah, obviously when you sit here today. But Amazon didn't have 100million members 18 years ago. Besides the fact, that wasn't even his point. At some point in the future could Tesla be worth $2700 per share (this would make it a 100 bagger)? The correct answer: Yes, anything is possible. Is it likely? Now that is debatable, but most likely a boring conversation.

 

[TheTalkingMule]

Hard to see the amazon comparisons as they are vastly different and amazon has probably half a billion people who have shopped there and 100million members.

A lot of people use electricity.

 

[WentOffGrid]

700K Model 3 @$45K $31.5B
1M Model Y @$45K $45B
300K pickup @$50K $15B
100K S/X @$100K $10B
100K Semi @$165K $16.5B

A whole lotta CAPEX is needed for those sorts of numbers. Takes expensive factories (and expensive IP) to make the best transportation.

But that's one of the reasons I like TSLA, and why I will always be one of the longs... they invest in the type of infrastructure that I believe in!

 

[anticitizen13.7]

Well, yeah, obviously when you sit here today. But Amazon didn't have 100million members 18 years ago. Besides the fact, that wasn't even his point. At some point in the future could Tesla be worth $2700 per share (this would make it a 100 bagger)? The correct answer: Yes, anything is possible. Is it likely? Now that is debatable, but most likely a boring conversation.

The lesson I take away from Amazon is that the path to viability and massive success is sometimes not obvious. I did not follow Amazon closely in the 2000's, so I was not paying attention to their growing technology and business in the cloud space (Amazon Web Services).

Nobody today can say for sure the results for Tesla in 5-10 years. They may succeed, or they may not. I see great potential, but no guarantee.

What I am sure of, is that if Tesla eventually succeeds in a big way in 5-10 years, it will be by travelling a path that surprises most people. Most bystanders saw Amazon as just another retailer, rather than a builder of logistics systems and infrastructure. Few people ever thought that Apple could succeed in mobile phones. Remember that in the early to mid 2000's, the mobile phone business was already extremely crowded with experienced players. Sometimes, the "conventional wisdom" is wrong. Today, the "conventional wisdom" I read about Tesla, whether on tech sites like Ars Technica, or investing subs on Reddit, is that Tesla will never make it, for any of a zillion reasons. That's what much of the mainstream thinks. I don't believe that most people in the mainstream have the vision or emotional strength to buy and hold unorthodox but ultimately successful companies to 10x-100x gains.

 

[strider]

I agree w/ @anticitizen13.7 If Tesla stays as purely a car company, their multiple will get hammered closer to the level of other carmakers. The other carmakers are gunning for Tesla and the only moat Tesla currently enjoys is the SC network. But hi-speed charging networks will come along just as gas stations did. The other carmakers are going to be coming out with cars in the next few years that perform as well as a Tesla, have EAP, etc. Tesla will see the margins on their cars plummet as competition comes in. That's just the nature of the beast.

Tesla will need to make some kind of tangential, higher-margin jump in order to continue to command their current multiple.

 

[neroden]

A lot of people use electricity.

A surprisingly large number of people buy cars, too.

 

[AndyH]

I agree w/ @anticitizen13.7 If Tesla stays as purely a car company, their multiple will get hammered closer to the level of other carmakers. The other carmakers are gunning for Tesla and the only moat Tesla currently enjoys is the SC network. But hi-speed charging networks will come along just as gas stations did. The other carmakers are going to be coming out with cars in the next few years that perform as well as a Tesla, have EAP, etc. Tesla will see the margins on their cars plummet as competition comes in. That's just the nature of the beast.

Tesla will need to make some kind of tangential, higher-margin jump in order to continue to command their current multiple.

Yes some other carmakers are making great electric cars but it's not the execution of a single car that matters. What matters is cars produced per year and profit. Other carmakers intend to mass-produce electric cars some time in the future but saying you intend to do something is worthless. Tesla is actually building up the production capacity right now. Other carmakers will have a hell of a time catching up especially since none of them are willing to produce their own batteries. The competition for battery cells will cripple most of their intentions. It might even become brutal. Some of them will no doubt succeed but some will be destined for an elephant's graveyard.

 

[bulls96]

Come to think of it.. Amazon really grew their business with the cloud infrastructure, not their retail business.

Tesla has no other bigger margin business other than their solar panels. And I don't see growing.

On their last stockholder call, Musk said that the only car manufacturers who haven't gone bankcrupt is Ford and Tesla. It's is a hard business.

We do need Tesla to succeed though to move the electrification of cars forward to the future.

 

[Barklikeadog]

A lot of people use electricity.

I'm not sure what this means. Are you saying that Solarcity is going to break out and dominate?

 

[uselesslogin]

AMazon reached $2000 stock price today, was $18 when they filed for IPO.

I am wondering if Tesla has that potential too.

You are forgetting that 1 share of Amazon at IP is worth 12 shares today as they split a few times in the 90s when that was still the fashion. So the $18 share at IPO is worth $24,000 today. Too bad my college-aged self didn't buy at that price.

 

[EinSV]

Quite a few posts above mention Amazon (for obvious reasons). Over the long-term, Amazon's share price has tracked revenue increases more closely than profits, which have been relatively modest.

High revenue growth over long periods of time has propelled companies like Amazon and Netflix to high valuations even though profits have been constrained due to the need to invest in growth. Investors seem capable of understanding the trade-off between long-term growth and short-term profits.

With roughly double AMZN and NFLX's revenue growth and a strong pipeline that suggests ~50% revenue growth has a good chance of continuing well into the future, Tesla hopefully will be in a position to do the same, particularly if it is able to show sustainable profitability.

A whole lotta CAPEX is needed for those sorts of numbers. Takes expensive factories (and expensive IP) to make the best transportation.

But that's one of the reasons I like TSLA, and why I will always be one of the longs... they invest in the type of infrastructure that I believe in!

It's true that a "whole lotta CapEx is needed" but luckily Tesla's operations should start throwing off large amounts of cash beginning as early as this quarter. This high quality analysis, for example, estimates that cash generated from operations in Q3 will exceed $1B and will be even higher in Q4: q2-q4 2018 financial projections

 

[Singuy]

Come to think of it.. Amazon really grew their business with the cloud infrastructure, not their retail business.

Tesla has no other bigger margin business other than their solar panels. And I don't see growing.

On their last stockholder call, Musk said that the only car manufacturers who haven't gone bankcrupt is Ford and Tesla. It's is a hard business.

We do need Tesla to succeed though to move the electrification of cars forward to the future.

People need not forget that profit margin is one of the most important part of the tech high growth story. Tech devices commend high profit margins at 60+% like chips sold by Intel and Nvidia to data centers. Without high profit margins, TSLA will be stuck in the mud with the rest of the automakers using a much lower multiple.

The hope and dream will be in the Tesla brand, as the brand can support higher margins than usual for a similar product like apple phones vs some Chinese companies. "Computer on wheels" have a chance, and cars does not need to be prices at 15k even if batteries are $50/kwh. So we will see where that is going. Most analysis that thinks Tsla is going to 4k/share banks on autonomous driving taxi which commands a stupid large margin. Personally I hope this is not the only margin growth item under Tsla's portfolio.

 

[neroden]

I'm expecting Tesla's P/E ratio to revert in the long run to a "normal" P/E ratio -- but not the hyper-depressed P/E ratios of badly run companies like Ford and GM. Given sufficient growth, the stock's still cheap.

The margins in the car business are poor compared to the looney high margins in some other businesses, but electric cars command higher margins than ICE cars. Tesla seems to have decent margins on battery packs, too.

The most pessimistic scenarios I can come up with are still worth more than $300/share, which is what makes me very comfortable.

 

[Singuy]

I don't think bulding cars will ever give you a high margin vs say high end chips or software. The Capex needed to scale is always daunting and there are just too many components of a car that commends very low margins (like steel, doors, hinges, and massive amount of labor needed for these assembly). I mean if you look at a Nvidia Dgx computer that sells for 250k. The amount of labor/components involved is nowhere near 5x model 3s. Perhaps Tesla can build batteries for $50/kw and sells them to other car companies for $120/kw. Putting all eggs in autonomous taxies can end up being a pipe dream.

 

[EinSV]

The Loup article is intended to challenge conventional wisdom so let’s take a look at the conventional wisdom that tech companies generate high returns because they are high margin businesses.

The Loup article linked above has a table showing returns of high growth tech companies compared to lower growth tech companies (it calls them “Growth” and “Non-Growth”):

The top 9 companies on the chart in terms of total returns were all high growth (>20% annual revenue growth) companies.

Not one of the top gainers was in the lower growth group, regardless of whether it had high margins or not, even though that group was much larger (25 v 14 on the high growth list).

The list of the companies with the highest 5-year returns in order is:

NVDA 1467.2%
NFLX 1430.2%
TSLA 806.5%
MU 558.7%
FB 547.9%
CGNX 538.7%
AMBA 421.6%
MZOR 415.7%
AMZN 362.1%

Companies like NVDA, FB and MU (Micron) with high margins are on this list, but 4 of the 9 companies with the highest returns — almost half — have losses or relatively low margins (NFLX, AMZN, TSLA, MZOR).

So among this group of tech stocks growth was a critical factor. The extremely high margins often associated with tech companies — not so much.

In any case, Tesla’s core businesses should have high margins, even if they don’t reach the stratospheric levels some tech companies enjoy.

Tesla estimates that Model 3 gross margins will reach and then exceed 25%. Two separate, independent groups of engineers — Munro and the german engineers hired by one of Tesla’s competitors — have confirmed that the Model 3 should be highly profitable.

Model Y, Semi and Pickup margins should be as good or better. Tesla has predicted storage gross margins will exceed 20% and there is good reason to believe high margins can be achieved, especially when factoring in the grid services Powerpacks and Powerwall virtual networks can provide. The solar roof is also a premium product that should be able to achieve greater than 20% margins.

Once FSD features begin to roll out we will be in a better position to assess the prospects for the Tesla Network, but that obviously has the potential to generate very high margins.

Also, with the Model 3 ramp well underway Tesla should start demonstrating significant operating leverage, with operating expenses dropping as a percent of revenue.

The combination of extremely high growth into huge markets, high gross margins and operating leverage should be very appealing for investors, especially once Tesla is consistently profitable and generating significant amounts of operating cash flow.