Tesla has been the ultimate hold as the share price seemed to defy gravity powering ever higher and higher. It was a stock that investors just bought and held as the share price enjoyed a stellar rise. Recently the stock broke the US$1,200 mark, but since then the share price has been hit by turbulence.
Despite the recent fall in the share price, Tesla remains one of the largest companies in the world by market capitalisation. The company sees itself as accelerating the world’s transition to sustainable energy with electric cars, solar and integrated renewable energy solutions for homes and businesses. It is important to realise that there is a lot more going on here than simply the manufacture of electric vehicles (EVs).
Musk takes control
Originally called Tesla Motors, the company was incorporated in 2003 by Martin Eberhard and Marc Tarpenning, who were responsible for the early financing of the business. Elon Musk appeared on the scene at the time of the Series A funding round in 2004 and invested US$6.5 million to take a majority stake becoming Chairman of the board.
In the early days, the company encountered big problems not only in developing technology but also in the production of prototypes and then scaling the manufacturing process. Back then even Musk himself reckoned that Tesla only had a 10% chance of success. Management conflicts and the 2008 financial crisis led to Musk taking over the leadership of Tesla by becoming both the CEO and product architect.
Also 2008 was the year that Tesla built its first electric sports car called the Roadster. In all sales were something like 2,500 vehicles but it should be noted that the Roadster was the first serial production car using a lithium-ion battery.
Impressive vehicle development
Since those days, impressive vehicle development has resulted in the four-door Model S sedan starting to be delivered in 2012, followed in 2015 by the release of a cross-over the Model X. These moves all seemed to pave the way for the launch in 2017 of the Model 3 mass market sedan, which has gone on to become the best selling electric car in the world.
These moves have been followed by the unveiling of an all-electric pickup truck called the Cybertruck in 2019 and the Model Y crossover being released in 2020. Such developments have taken Tesla to the position where it has delivered 627,572 electric cars in the first 9 months of 2021, putting the company way ahead of any other EV manufacturer in the world.
All tallied up since 2009, Tesla has probably produced more than 2 million vehicles by now and the speed of growth is simply astonishing. Rising vehicle deliveries in the first nine months of 2021 have resulted in total revenue climbing to US$36 billion so far this year. Behind those numbers is an impressive year on year growth rate in terms of both vehicle production and delivery.
Musk might have seen the odds as being against the company, but in successfully resolving the myriad of business and technological hurdles, Tesla has successfully been able to produce its one millionth car in March 2020. Today, Tesla delivers more than 200,000 vehicles each quarter. To achieve this level of commercial vehicle production, the company has needed to construct a number of lithium-ion battery and EV subassembly Gigafactories, such as those in Nevada and Shanghai.
Expanding manufacturing facilities
Nowadays, Tesla has five operational facilities – three in the USA, one in China and Germany. Tesla’s Fremont factory lies on the outskirts of San Francisco and is the site where the company’s EV production all began. It was an old General Motors facility which the company bought in 2010 and invested heavily to thoroughly remodel ahead of the production of the first Model S in 2012.
Tesla plans to ramp up production significantly in the future will require more Gigafactories. Musk has big plans for China and is toying with the idea of developing vehicles that are especially designed for the Chinese market which could well include the elusive US$25,000 Tesla.
Ground has already been broken on two further Gigafactories – Giga Berlin and Giga Texas. Gigafactory 4 – Giga Berlin is planned to be the world’s most advanced high-volume EV production facility, kicking off with production of the Model Y. There are lofty ambitions for Giga Berlin as the ultimate plan seems to be to expand capacity to achieve some 500,000 vehicles a year.
Gigafactory 5 – Giga Texas is currently under construction and Musk has promised an ecological paradise. All we know now is that this latest facility is set to produce Model 3 and Model Y to allow for much easier distribution to the eastern side of the US. Giga Texas has also been seen as being the main facility for both the light duty Tesla Cybertruck and the heavy-duty Tesla Semi truck.
If that was not enough, there has been constant market chatter about a second factory in China. Although more recently via Twitter, Musk has suggested that the next location in Asia might be outside of China. Opening a Giagfactory in either Japan or South Korea would be a smart move as it would position the facility closer to the manufacturer of its battery cells. That is not to mention Giga UK and Giga India where so far, no such plans have been publicly acknowledged.
No let-up in EV growth forecast
Global sales of electric cars rose 43% in 2020 to more than three million, despite overall car sales slumping by a fifth during the coronavirus pandemic. There is no shortage of bullish forecasts for the growth in EV, which is not surprising given the wholesale move towards being net zero in 2050. BloombergNEF in its sixth annual Long-Term Electric Vehicle Outlook (EVO) published in 2021 reckoned that there were now 12 million passenger EVs and 1 million commercial EVs on the road with electrification also spreading to other areas of road transport.
Over the near term, Bloomberg forecasts that passenger EV sales are set to increase sharply over the next few years rising from 3.1 million in 2020 to 14 million in 2025. In its Economic Transition Scenario, which looks at EV adoption which is mainly driven by techno-economic trends and market forces with no new policy measures introduced to support their growth, the information provider sees adoption increasing rapidly over the next 15 years leading to an EV-dominated fleet by 2050, where only 39% of passenger vehicles will still be burning fuels.
Similar sentiments have been echoed by others including Wood Mackenzie where its Electric Car Forecasts to 2040 predicted that 38% of global vehicle sales would be EV or hybrids by 2040 – which equates to more than 40 million vehicles per year.
Compelling financial results
The explosive growth in sales of Tesla vehicles has worked wonders for the company’s financial results.
In 2020, the company produced 1,000 times more cars than in 2010. After all the mounting past losses building up the brand, Tesla has become increasingly cash positive over the last few years.
Tesla’s remarkable growth rate and strong economic performance has continued into 2021 even though a supply crunch has been impacting the automotive industry which has reduced the company’s ability to keep factories running at full speed. Despite all that, Tesla was able to report a record quarter for Q3 2021.
In this three-month period, Tesla achieved its best net income, operating profit and gross profit; with an operating margin of 14.6% exceeding the company’s medium-term guidance of “operating margin in low-teens”. In Q3 2021, Tesla delivered 241,391 vehicles, allowing total revenue to grow by 57% year on year with free cash flow standing at US$1.3 billion, US$2.0 billion GAAP operating income and US$1.6 billion GAAP net income.
More cars have been produced at its Fremont factory over the last 12 months than in any previous year and the board reported that there was scope for continued improvement. On top of this, Tesla continues to ramp up production at the Gigafactory Shanghai as well as building new capacity in Texas and Berlin.
Stock performance
Tesla priced its IPO in 2010 at US$17 a share and since then the stock price has unleashed an almighty performance to become the most valuable carmaker in summer 2020. In recent months, Tesla reached market capitalization of US$1 trillion, making it only one of a handful or so of US companies that had ever achieved such a stellar valuation.
However, the stock was hit by a wave of selling in November 2021. On Twitter, Musk proposed selling 10% of his Tesla stock and went on to make disposals of part of his holding. “Elon Musk loses $50 billion in two days in record wealth plunge” read a headline on 10 November 2021 which said it all. Since then, the stock has tried to tread water.
Share sales by Musk may have rattled investors, but these have been a long time coming and has been well flagged by analysts. It all stems back from 2012, when he was awarded a fistful of share options which were due to expire next year.
Exercising these options required Musk to pay a tax bill on the gain in stock price thought to be in the region of US$15 billion, which was always going to need him having to sell some stock. It was simply a case of when. Plus, there was what has been termed an unscheduled sale following the Twitter poll.
But this might not be quite what it seems. Last checked in his string of deals since early November 2021, Musk had acquired more Tesla shares by exercising options than he had sold.
Lofty valuation
To many traditional market watchers, the valuation of Telsa has long been beyond belief exceeding that of the next handful of top automobile stocks. Trading at a 203x historic Price Earnings Ratio (TTM) and 17.5x Price Sales Ratio still does not look that cheap but these ratios have improved markedly over recent years.
Company | Share price (US$) | 52 week high low (US $) | Market capitalisation (US$bn) | Enterprise value (US$bn) | Revenue (US$bn) |
Tesla (NSQ:TSLA) | 993.98 | 1,243.99 – 563.46 | 952.03 | 942.55 | 53.82 |
Between them, the five largest automakers sold close to 40 million vehicles in 2020 versus Tesla’s 500,000. Tesla’s market cap is US$952 billion compared with General Motor at US$64.75 billion (6.8 million vehicle sales in 2020) and Ford at US$64.43 billion (4.2 million vehicle sales in 2020). In comparison to legacy automakers, the disbelievers say that Tesla’s valuation looks absurd.
Tesla is different. It is not just another automaker. The stock has never been cheap as there is a substantial premium paid for such levels of growth and market dominance. Tesla expects to continue growing its vehicle sales by 50% per year over an extended period – which represents truly monumental growth which is pretty well unheard of in the traditional auto industry. Just look at Q3 2021, Tesla’s total revenue grew 57% year on year whilst in the same period Ford’s revenue was 5% lower and General Motors’ revenue fell by 24% on the same basis.
Plenty of good reasons to buy Tesla
Given the fall in Tesla shares after an enviable sustained run, is this a buying opportunity? Well, there have always been plenty of good reasons to buy the stock which has become a strong long-term bet for many investors.
Tesla has a tremendous multi-year growth opportunity within its grasp. The auto industry is involved in a full scale move to EV and Tesla is the brand leader. The launch of Tesla’s affordably priced Model 3 a few years ago was a game changer as market demand went through the roof with the wide appeal to the middle classes to become cleaner and greener.
There is good scope to steal market share from traditional automotive manufactures. The big auto companies cannot rely on their past track record in the petrol-powered vehicle market to successfully compete in EV with a nimbler, cooler, highly entrepreneurial brand like Tesla. With rapidly rising vehicle sales and minimal marketing costs, Tesla has become increasingly strongly cash positive.
At the same time, Tesla has masterminded the requisite manufacturing expertise. There are high hopes for the success of the company’s EVs to be mirrored in trucks. Although slightly delayed, the Tesla Cybertruck is expected to be on the streets by the end of 2022. A while ago there were reports of reservations for something like 500,000 Cybertrucks.
Tesla undoubtedly is seen to possess an ability to address future challenges. The company has gained a commanding position in the automotive industry through successfully combining robust manufacturing techniques together with the next generation of technology. Some of the most advanced electronic components are going into the Model 3. Components that the rivals can only marvel at. So, in terms of technical progress, Tesla has a tremendous leadership over its competitors.
Moreover, Tesla is a diversified company developing a wider portfolio of green energy products beyond EVs which includes solar and integrated renewable energy solutions for homes and businesses. In new and emerging technologies, the Tesla brand acts as an umbrella under which a dozen start-ups exist. All of which brings plenty of scope for growth in other market sectors, helped by its strong brand and loyal customer base.
To cap it all, Tesla is blessed with visionary leadership in having Elon Musk as CEO who is the master of promoting the brand which substantially reduces the sales and marketing budget. Investors do buy into him and his unique ideas. Under his guidance Tesla is continuously evolving and he has big plans for the future revolution in car travel and disrupting other clean energy markets.
Good buying opportunity in the making
Recently the stock has been under pressure. It is not just the spectra of Musk’ share sales that have spooked the market, but there has also been news that the regulators were investigating Tesla’s autopilot system after a number of alleged crashes. Regulators have also been reported to be questioning whether the company may have misled car buyers on this matter.
Truth is that Musk himself seems to have played down the actual capabilities of the autopilot system, but it could all come down to creating reputational damage. This self-driving car technology is seen as being a highly disruptive technology with some experts believing that Tesla is only five years away from developing a fully autonomous system. Such powerful software could generate tremendous potential outside of selling vehicles. The delayed release of the Cybertruck is another negative factor.
Looking at the real facts behind the alarmist headlines, the situation does not look as negative as is being portrayed. Following the share price weakness, we see the stock price stabilising and entering a period of consolidation over the coming months.
Glossary
Enterprise value – a measure of a company’s total value
Market capitalisation – the value of all the outstanding shares of a company at the current market price
Moving average – a technical analysis indicator which is calculated to determine the trend direction for a stock
Price earnings ratio – the current market price of a company share divided by the earnings per share of the company
Price sales ratio – uses market capitalisation divided by total sales, which is used to show whether a company is overvalued or undervalued
TTM – Trailing twelve month earnings per share.
Dr Michael Green is an independent analyst who specializes in growth companies and resources companies. He gained a BSc and PhD in Mining Engineering from Nottingham University. Having been involved in consultancy work, he began working in the London financial market in the 1980s as a Resources Analyst with stockbrokers Buckmaster & Moore and then HSBC-owned Greenwell Montagu Securities. Subsequently, he was involved in analyzing a wide range of growth companies and became Head of Research at stockbroker Everett Financial which specialized in the small cap market. Since, 2006 Michael has been an independent analyst. UK-based DOC Investments Ltd provides research and investor relations.
Disclaimer
The information contained in this article does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investments, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.