Tesla - Cars First, Everything Else Second
Oh boy. Where to start. I guess first of all: Tesla is a car company, and I will refer to it as such. I don't need you chirping at me on Twitter. Yeah, I get it. "BuT iT's So MuCh MoRe" I hear you croon. Yeah, we'll get to that. First and foremost, this bitch makes cars, so we'll jump into that, then we'll get into everything else. I guess with that, let's dive into Tesla, the car company that's somehow become a cult of personality.
Top-Line Numbers:
2020 FY Revenue: $31.54 billion (+28.31% YoY)
2020 FY Net Income: $721 million (+183.64% YoY)
2021 Q2 Net Income: $1.14 billion (+998.08% YoY)
How Did Tesla Get Started?
Contrary to popular belief, South African lightning-rod-cum-genius Elon Musk did not, in fact, create Tesla. The company was started in 2003 by engineer Martin Eberhard and Marc Tarpenning with the goal of "building a car manufacturer that is also a technology company." Effectively, they wanted to build a car internals and battery company, surrounded by the shell of a car manufacturer. It was a clever idea, and you know who agreed? OK yes, now we can get to him. In 2005, Musk, flush with cash after his sale of his stake of PayPal, came riding in with a $7 million investment in the company to fund the Series A round, and the company was off. Kinda. There was a big lawsuit in 2009 that disputed Musk's claim as a "founder" which was eventually settled to where Musk could call himself a founder. Funny how that works. Anyway, after a few more years, $187 million in seed funding (including $70 million from Musk's own pocket) and a few draft designs, the company was ready to produce its first car: the Roadster.
The Roadster was released in 2006 to much fanfare. It was also released to many issues and general sadness. In 2008, Top Gear reviewed the car and Jeremy Clarkson couldn't get one full lap of the test track out of it, calling it a "barely-running science experiment." It was actually such a crushing failure that Musk assigned the company a "less than 10% chance" of survival after the car was released, something he admitted in a 2016 keynote to Tesla shareholders. The company also had a bizarre business plan written up by the original founders, which Musk recounted in his speech (as recounted by Fortune). Effectively, the plan was to license a drive-train from AC Propulsion, then stuff it into a chassis built by Lotus, creating some sort of franken-car that was somehow...profitable? The whole Roadster development process was also a shambles, resulting in an expensive, unsafe, unreliable blah of a car. This is the genius of Musk: he turned it all around. He purchased a new factory in 2010 from Toyota that was purpose built for car manufacturing at scale. From there, the company ramped up designs of their new flagship: The Model S. During this process, they also went public, floating 13.3 million shares at an IPO price of $17.
What's The Business?
This is a more complex questions than it seems, despite what I've laid out above. Above all else, they make electric cars that people want to actually own because they're cool and fun to look at (sorry Prius and Leaf), but they're expanding. The company jumped into the energy storage industry with the residential Powerwall and commercial Powerpack in 2015, which immediately drove $800 million in orders. They also are now in the solar power market with the 2016 acquisition of SolarCity (more on that later), creating effectively a solar energy and installation business. They actually added so many different facets to the company beyond just car manufacturing that they changed their name from "Tesla Motors" to "Tesla Inc" in 2017. Let's review the current product line:
Tesla Model S and Model S Plaid
The crowning achievement of the company to date. The Model S is a staggering achievement in both penetration into the market, and simply making a really good car. Sporty, sleek and functional, this was the gateway drug for many people in the early days to try and one-up their neighbors with the "yeah my Tesla got delivered yesterday" speech. Now? Not so much. They're way more common, but this former refrain has a second life with the newly released "Plaid" model which has a top speed of 200mph and a top price of $150,000. Ouch.
Tesla Model 3
This is the entry level "budget" Tesla. Touted as the car anyone could afford, that has slowly become less true over the last couple of years thanks to steady price increases. It's like someone put their hands on either side of a Model S and squeezed really hard until its eyes became distorted and it got a fat ass.
Tesla Model X
The dopey cousin to the Mercedes G-Wagon in price but the Chrysler Town and Country in functionality. This thing is...ugly. I have a theory that they had to affix flappy gull-wing doors and weapons grade air filters to it just to take the emphasis off of the kind of gross design.
Tesla Model Y
This is the one I'm most intrigued with. It's like if the Model X was designed correctly and built for the typical American family. It's essentially what the Model 3 becomes once it hits puberty and starts to lift weights.
Tesla Solar Roof
Tesla has expanded into the energy industry with their solar panel and "solar roof" business. It's a unique niche that we'll chat a bit more about later.
Tesla Merchandise
Tesla now has an online shop where you can purchase various apparel items or car accessories for your specific model! Do you or your spouse/child want to look like a complete prick with your "S3XY" coffee mug or a $150 decanter shaped like a lightning bolt that doesn't actually include any tequila? How about a Hot-Wheels type diecast Tesla for $175? Or how about a t-shirt with a...meme(?) on it for some reason? Yes, all of these can be yours, irrespective of your current Tesla ownership status.
Will I Invest In Tesla?
Living in the suburbs of a large metropolitan area like Atlanta, you tend to notice trends pretty quickly. Whether that's the G-Wagon lifestyle of the Buckhead Betty's or the new vegan restaurants on every corner. Tesla has firmly planted itself in the "trend" category of my area, but I don't think this one is fly-by-night. Just in the few streets around my neighborhood, I've counted four Model 3's, two Model S's and six Model Y's. That doesn't include the grocery store parking lot where there's a new Tesla Supercharger lot, and it's basically just a parade of EV's and women in Lululemon stepping out of them. Tesla has, in short, become a status symbol. Where it used to be the Mercedes of the BMW 6 that you'd see the rich parents driving, it's now the Tesla Model X with the goofy, needless doors just to flex on the poor neighbors and give your dad ED. With that, let's chat about the actual business of cars.
Tesla's Effect On the Car Market
Car manufacturing can be a brutal industry. There's very little to differentiate actual cars themselves from their competitors, creating a lot of samieness in the industry. For example: look at the Escalade vs the Yukon, or the VW Tiguan vs the Porsche Macan vs the Audi Q5. It's the same thing, give or take some tech and a different symbol on the bonnet. What I'm saying is that it's hard to stand out from the crowd, which is something Tesla has done immaculately. Actually, maybe too well, because now the crowd is starting to come to them. Jaguar's new i-Pace is just a Tesla Model X with more British charm. The Ford Mustang Mach-E is like the Model 3's inbred cousin. These companies can claim "aerodynamics" and "fair use" all they'd like, but we know why they're getting closer and closer to Tesla's design: they've struck a chord with people. These cars are popular as hell, and other companies have noticed. But why are Tesla's so popular? Let's break down a few reasons.
The Status Symbol
First, we've already touched on it, but they're a status symbol. Driving a Tesla is like wearing Gucci or Lululemon: it's the upscale name brand, but it's not unattainable. It's the local rich mom's car of choice, and now they're fun for the whole family with the introduction of the SUV range. Look out G-Wagon.
They're Weirdly Affordable (Sometimes)
Second, the price points are actually pretty good with the Model 3 originally billed as the mass market consumer car that would provide a cheap and easy entrance into the EV market for most people, especially considering the tax credits that some states offer for driving an electric car. However, Tesla no longer qualifies for the federal tax credit, which may put some purchasers off.
They're also genuinely nice cars for their price. The technology inside them is pioneering and fun, and it's a nice place to be. All this being said, the Plaid model is still out of reach for most consumers. With prices closer to $150,000 and the DUMBEST steering wheel I have ever seen, we're approaching mega luxury car territory.
The Cult of Tesla
Third, they're a little "cult of personality." It's Apple on wheels. Do you want clean designs, functioning, low-maintenance software and a CEO that's a little kooky and irreverent? How about the line of inexplicable apparel I mentioned above? Welcome to Tesla Island. You're gonna love it here.
Tesla Self-Driving
This one is a little bit more futuristic. Usually for about $10,000, you can add Tesla's fully autonomous autopilot technology to your car. Using an array of lasers and sensors, the car can function as either an advanced cruise control, or you can summon the car from a parking lot or garage. You can even install a garage door opener within your Tesla system so it can open and shut the garage for you. Unreal.
Tesla's Future Plans
Tesla is diving headfirst into two new vehicle ranges they haven't touched yet: trucks and bigger trucks. The unveiling of the Tesla Cybertruck was...interesting, to say the least. When it rolled out on stage, onlookers didn't really know what to make of it. Aside from looking like it was designed with an Etch-A-Sketch, the "armor glass" took center stage during a quick demonstration. A Tesla executive held a massive ball bearing and, to prove the resiliency of the window, he threw the bearing at the window. What happened next is straight out of Mike Schur's playbook for Michael Scott:
The Cybertruck is designed for both consumer and commercial use, touting towing capability of 14,000 lbs and able to function like the world's most effective pick-up truck. It's also now the cheapest Tesla on the market, starting at just under $40,000.
The trucks don't stop there, however. The House that Musk Built is now jumping into commercial freight with their attempt at an aerodynamic, all-electric semi truck. Curiously, the website for the Semi brags about how quickly it can get from 0-60 mph, which is bizarre for something designed to haul freight. However, it does boast the most efficient transportation costs, estimating that the price difference between diesel and electric will payback the truck's total cost in two years.
Finally, there's the Tesla Bot. Because I don't want this article to descend into a 45 minute ramble about Terminator and George Orwell, go ahead and check out my piece on the announcement of the Bot during the company's annual "A.I Day."
Finally, the Roaster 2.0. This is one that I think bears a brief mention because of how amazing it looks, how expensive it is and that it claims to be the fastest production car in the world, but production issues and general shortages of everything in the world have delayed this one.
Let's Chat Numbers
Since this is an investment article on a finance website, let's go ahead and talk about Tesla as an investment. Remember when I said at the top "Tesla is a car company?" That seems to get lost in a lot of the shuffle here when valuing the company, at least up until this year. The company has historically been valued as a high-growth tech company, showing strong sales but still wildly unprofitable. 2020 was the first year they had actual positive net income. Prior to that, they were losing right around $1 billion per year, despite pretty strong sales numbers. Now, however, they're crushing sales and turning profit.
At time of writing, shares are trading for right around $785, putting the company at about a $744 billion market capitalization, making it one of the biggest companies in the world. This share price has moved in pretty steady correlation to its turn to profitability, skyrocketing over the last 20 months to the point where Tesla announced a 5-for-1 stock split to bring the per share amount back down. So we now have profitability and stability post-split. Let's look at some hard numbers.
2021 Q2 revenue of $11.96 billion continues the trend of incremental revenue acceleration quarter-over-quarter for the company, which is allowing them to project an annualized revenue beat for 2021 over 2020. The demand for the cars is actually stunning, with Tesla producing 206,400 in Q2, up 151% year-over-year. They also showed a strong EPS beat with a $1.02 EPS, up 920%. The company finally achieved free cash flow over $2 billion, hitting the $2.5 billion mark in that quarter. Additionally, on October 7 of this year, Musk announced that, despite moving the headquarters now to Austin, TX, the investment in their California and Nevada production will increase 50% to keep up with the massive demand increase. I want to mention all of this to put into context the next statement: as of Q2, Tesla has a 15% market share of the electric vehicle market. There is still 85% left to capture of the entire market. That's insane. Almost unbelievable.
So with the above metrics of ever increasing demand and profitability, we can combine that with an industry-leading 6.3% operating margin on a trailing 12 month basis from the Q2 report with 85% of the market left to get. The company also recently announced that, while they can currently produce one million cars per year, they are expanding the aforementioned California and Nevada operations, as well as expanding in Berlin and Texas later this year. Keep in mind that the Cybertruck and commercial-oriented Semi have not yet been released. Jesus.
Business Risks
If you read my previous piece on Penn National Gaming (go check it out, it's really good), you'll know where I'm going: the biggest risk to this company is the leader. Elon Musk is an absolute, card-carrying genius, but he's also enigmatic. While that might lend itself to new ideas and creativity required to lead a company like Tesla, it doesn't lend itself so well to public scrutiny. Before we hop into the controversies surrounding Musk, I wanted to point out that Tesla is not his only day-job. Musk is also the founder of SpaceX, which made news this week by achieving a $100 billion private market valuation thanks to their latest share sale. He was also in a very public, very strange billionaire money battle with Jeff Bezos and Richard Branson to see who could get to space first. We live in a weird world.
OK, let's get into the controversy. Musk is really active on Twitter, which is where he tends to put his foot squarely in his mouth. In 2018, he publicly criticized a British diver who consulted on the rescue of the Thai cave-in, calling him "a pedo guy." The diver sued him for defamation, but that case was dismissed. Musk later tweeted "funding secured" in reference to taking Tesla private.
This pumped the stock price up to the number Musk had referenced on Twitter, which got him in trouble with the SEC, forcing him to temporarily step down from his position of Chairman of the Board at Tesla. He's also been spreading perceived misinformation about COVID-19 vaccines, as well as promoting controversial views around AI. Finally, there's crypto. Musk is referred to on Twitter as "the Dogefather" for his promotion and subsequent pumping of the joke cryptocurrency "Dogecoin" earlier this year. Musk's tweets directly correlated with upward movements of the currency's price, culminating in his appearance on Saturday Night Live in May. Since Musk stopped tweeting about the coin, prices have fallen, though he's now moved onto Shiba Inu coin and we get to start this whole circus again.
Now, let's talk solar. While I mentioned that Tesla acquired SolarCity to get into the solar energy game, I didn't mention who owned SolarCity when it was sold to Tesla. That would be one Elon Musk! Prior to the acquisition, however, the company had a litany of problems, from loss leading products to debt to many, many lawsuits. Turns out, none of that matters after you get acquired in the closest thing the business world has to incest. But did this help push Tesla into solar and make it the industry leader in the space, generating bookoos of cash? Not really. The solar division turned a profit for the first time in 2021, generating $801 million in revenue to $781 million in operating costs, meaning the solar energy division drove a whole $20 million in net income. Not great. Could this area of the business expand? Certainly! It expanded this year by 116%, but the growth is brutally small, so don't look for this one to make a meaningful difference to the balance sheet anytime soon.
When it comes to the EV market, Tesla might be the first name on the team sheet, but they aren't the only game in town. Tesla proved that this business works, and others are nipping at their heels. In the last few years, competition like Nio in China has expanded rapidly, stealing market share in their core markets. Now, American competition is on the rise, and not just from Ford or GM. Rivian, an Amazon-backed EV startup, just filed their paperwork to go public to make themselves the preeminent Tesla competitor in the U.S. They're beating Tesla to market in the pick-up truck game with their flagship R1T. While a hell of a lot more expensive than the Cybertruck, it also looks a hell of a lot better, and is available now.
Finally, we need to talk valuation. It's the same stick I've beaten companies like Palantir and Tattooed Chef with, so we now need to turn the riding crop on Tesla. The company, despite their strong sales and margin numbers, is trading at a PE of 412. That's insane. I just vomited a little. The issue is, we can't really compare the company to Ford or to Apple, because it's somewhere in-between. However, 412 is starting to get into early-stage SaaS company territory, now up there with Cloudflare and CrowdStrike. The numbers are similarly eye-watering when you look at the forward PE of 117, which is indicating that analysts are expecting some EXPLOSIVE growth from this company. The good news here is, Tesla is expecting to fully allocate their capital on continued growth. Musk announced this month that Tesla is not expected to make more acquisitions or issue a dividend anytime soon in an attempt to maximize shareholder value, so at least leadership is aware of the expected growth rates.
The Bottom Line
Tesla is a weird one. While there are red flags all over the place (Musk himself, the weird, half-hearted attempt at solar energy, increasing competition, insane valuation), this company is hard to shake. Just looking around, I see their cars everywhere, and I can't help but really want one. I've considered them in the past, and I'm going to purchase one literally as soon as it's financially viable to me because I love them. Honestly, I really like this company, red flags aside. I think this is a mega cap that could still perform at really high growth rates. I also predict that, despite Musk's recent comments, this company could be a dividend payer in 20 years after they've flooded the EV and energy markets. I think Tesla is a good one to add to the portfolio, but maybe wait for a little bit more realistic valuation before you dive in feet-first to invest.
Short-term: Neutral
Long-term: Long
The following article is for entertainment purposes only, and should not be taken as investment advice. Please do not buy or sell securities based solely on what you read here. For individual situations, please consult an investing or tax professional.
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