Introduction – faster than a speeding bullet – more powerful than a locomotive – able to leap tall buildings in a single bound
Well, Elon Musk isn’t really Superman, but I think he’s aiming very high.
The following comment thread from a few weeks ago expressed just how high he plans to go:
The following comments are taken from a Seeking Alpha post, PG&E and Tesla break ground on energy storage project.
I am not a big $TSLA bull but no matter if you love him or hate him Mr. Musk is a visionary and has thought and planned far ahead of most people who consider themselves highly intelligent, he does not get the credit he deserves…
StLouis 81 responded:
I agree. If the planet is livable in 20 years, he will be a big reason. He will probably go down in the history books with Gates, Jobs, Bezos & Zuckerberg.
To which I (DoctoRx) responded:
StLouis, his ambition is to equal the sum of their reputations.
Just as one example of this ambition, on the Q2 conference call, Musk pointed out that TSLA is planning to disrupt the energy industry, which is a much larger industry than the vehicle sector.
But I actually think TSLA is a bigger business and investment story even than EVs, autonomous driving, and the energy business.
However, each of those, as a stand-alone business, might eventually be successful enough to justify the current stock price, especially if one’s required return were high single digits.
In this article, I will review many of TSLA’s known of potential opportunities, but begin with two discussions of why I am interested in it as a risk-on secular growth stock.
Our strange times may work to the secular advantage of growth stocks
The stock vs. bond valuation metric may now favor equities, just as a time of sustained optimism about the economy, 1999-2000, led to valuations that favored bonds. For example, from March 2000 to June 2020, the largest S&P 500 ETF (SPY) returned 5.4% per year with dividends included. Whereas, a high-grade 20-year corporate bond held to maturity would have returned at least 7% per year (assuming no default). But the starting P/E’s were extremely high then (29X for the SPY as of 1/1/2000), meaning that high grade corporate bonds had a much higher current yield (and greater safety) than the earnings yields (reciprocal of the P/E) than shares in the same company.
Now, this is reversed. Take the bluest of today’s blue chips, Microsoft (MSFT). A 10-year MSFT bond yields around 1.0%, whereas the forward P/E on MSFT shares is around 3.0%. With MSFT earnings expected to grow throughout the 2020s, stocks have re-established a traditional discount to their own bonds.
Now, we need to jump to the world of growth stocks and high yield bonds, such as those of TSLA. No guarantees, but I will assume as a working hypothesis that lower quality, potentially high-growth stocks that as well-studied as TSLA is “swim in the same sea” as the blue-chip growth stocks such as MSFT.
So, structurally, today’s challenged economic times, which are centered for a change on services rather than manufacturing, and which have led to ultra-low interest rates, work to the favor of the relatively small number of companies with major, secular growth opportunities.
The bullish reason is exemplified in the following Nordea chart pointing to how depressed stocks are relative to the quantity of money (credit) created by the Fed:
Chart 5. Extreme valuation or not?
So: America’s financial markets pose a massive conundrum. On the one hand, the stock market is massively overvalued by traditional criteria, including the one shown on the chart, namely in relation to GDP. But, on that pesky other hand, stocks are dirt cheap when compared to a standard measure of the quantity of money, M2.
How will things shake out from here?
My answer is to have a foot in the best part of both camps, and in the equity camp, accepting that valuations are rich, I want exposure to secular, volume-driven growth. TSLA fills that bill very nicely for me.
One other big picture point next before moving to company-specific comments.
Elon Musk is Steve Jobs, and TSLA is Amazon (AMZN)
Unpacking that theme, Elon Musk is a superstar techie-CEO who both leads the company technologically and generates massive amounts of free publicity, just as Steve Jobs did after returning to Apple (NASDAQ:AAPL) to lead it in 1996-7. Also, the same emphasis on a coherent line of related, first-in-class/best-in-class products can be seen in AAPL’s evolution from iPod to iPhone to iPad (and different models amongst them) and TSLA’s evolution from Roadster to Models S/X and then 3/Y, and soon, the Semi and Cybertruck. Within those product lines, the geographical growth is also similar. Finally, both TSLA and AAPL began as hardware companies and added higher-margin services to the mix. So, there is a lot of AAPL to the TSLA story.
Then, there is the AMZN analogy. I focus on two main similarities. One is that, while Steve Jobs was financially conservative, wanting lots of cash in the bank and selling lower-volume, premium-priced products to generate massive returns on capital and high free cash flow per dollar of sales, AMZN and TSLA share the goal of rapid growth to generate high market share. Current profits have been placed secondary, given the goal of long-term attainment of high market share and the creation of new industries.
No analogies are perfect, but with TSLA running efficiently, I proffer the insight that TSLA now represents an intelligent synthesis of some of the best of two of the world’s great corporate success stories.
Then, there is something unique about TSLA:
Success breeding success in its change-the-world mission
TSLA is now up about 100X from its IPO of about 10 years ago, so it is one of the great success stories of the decade. Its mission was audacious: eliminate the internal combustion engine with a no-hybrid, no-compromise set of solutions centered on battery-powered electric vehicles (BEVs). What were the odds when it was formed (pre-IPO, of course) that it would be the leader in this effort? Low. Now, success is within its grasp, and the combination of making the world a better place by stabilizing the climate and actual growing business and mission-driven success is giving it the opportunity to hire the best and the brightest engineers. So: success begets success.
This is an advantage of immense proportions. Just in its autonomous vehicle effort, TSLA employs hundreds of top-tier engineers and hundreds more skilled labelers. If it hires the best and the brightest, who are motivated to give their all for the cause, versus average talent, it has a much higher chance of pulling away from the pack.
Now, let’s look at TSLA’s current prime mission:
Leading the EV revolution
IBISWorld estimates the global car and auto business as a $3 T annual business. I will ignore truck sales for now, folding that into the total projected 2030 sales of the same $3 T. Figuring this way allows me to finesse not guessing too precisely at inflationary trends and in other ways discounting for present value.
Bloomberg New Energy Finance projects that, in 2030, EV share of vehicles globally will rise from a 2.7% share in 2020 to 28%. Further, in thinking of dollar value, this comment is important (emphasis added):
EV share of new car sales
The electric share of total vehicle sales is still small, but it is rising fast. By 2040, over half of all passenger vehicles sold will be electric. Markets like China and parts of Europe achieve much higher penetrations, but lower adoption in emerging markets reduces the global average.
This last detail tells me that, while I do not have access to the full report, that projected 28% share is of vehicles sold, but that dollar volume will be higher than that since the lowest price tier markets will be the slowest adopters. Thus, I am going to assume a 1/3 market share for EVs by dollar volume, which under the methodology I am using translates to $1 T in EV sales.
The next question is TSLA’s market share by dollar volume (not unit volume). Based on the latest data out of the US and TSLA’s rapid entry in the China market via local production, I am increasing my estimates substantially. Look at these (partly estimated) numbers for the US market, from Electrek:
Electrek goes on to note that:
What is most impressive is out of the top first five cars on the list, four are Tesla vehicles and all have no access to the $7,500 federal tax credit for electric vehicles [whereas most of the competition has that access].
This is a much better performance for TSLA than I expected after it lost that tax subsidy. Clearly, TSLA has bent the cost curve enough that it has been able to keep 82% of the US market by volume, and I am guessing more like 85% by dollar volume.
TSLA is just getting going with local production and more cost-competitive local component sourcing in China, but similar uptrends in sales volume by dollar (yuan/renminbi) are seen there. From The Driven:
… an interesting picture – similar to what has occurred in the US – is beginning to take shape in China, where the Tesla Model 3, now being manufactured in Shanghai as well as Fremont, is not only dominating the electric vehicle market but disrupting sales of luxury brands such as Lexus, Cadillac and Volvo.
The biggest problem for investors in assessing TSLA versus the competition is that unit sales are not the same as total sales by dollar volume.
But, based on TSLA’s surge in sales in China, with the Model Y probably a major addition to the product line, and the US data, I am going to raise my unit volume target in 2030 for TSLA from 20% to 25-28%.
Now, the AAPL analogy comes in. I expect TSLA to sell at a 50% premium to the global average, meaning about a 40% market share by sales volume.
This comes to a $400 B sales volume.
Because I agree with BNEF that EVs will just be part way into their ramp, and because I expect that between the value of full autonomy – which TSLA will control rather than licensing from Mobileye or Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) and its premium image, I assume that TSLA will continue to follow the AAPL model and generate much higher prices for its products than its competitors. So, I am going to assume a 40% market share by dollar volume, or $400 B.
I will further assume that because of high profit margins (the AAPL analogy again), and lots of growth potential for EVs at only 28% unit share, this division of TSLA will be valued at 3X sales, or $1.2 T.
Finally, because TSLA is handling its rapid expansion without equity financing, I assume only a modest increase in shares outstanding to 200 MM.
This suggests a $6,000 price target, a large increase from my recent estimate of $4,000. The main driver of the difference is the realization of just how immense TSLA’s market share has remained in the US despite premium-priced offerings and despite the loss of the tax credit.
This suggests an 11.5% CAGR per year, which is OK, but that’s not all.
Important caveat: The upside from RoboTaxi is a real potential and would add to that projected return, but for now, I will omit it and move on to two more points.
Next, the Power division and two other points.
Power generation and storage
This currently includes home/office products, including Powerwall and the Solar Roof and Solar panels, and large scale products. These include the well-known Hornsdale, Australia installation and the following, recently announced collaboration with PG&E (PCG), which may be a model for many more such deals:
PG&E and Tesla Inc. began construction of a 182.5-megawatt (MW) lithium-ion battery energy storage system (BESS) at PG&E’s electric substation in Moss Landing in Monterey County.
The system will be designed, constructed, and maintained by PG&E and Tesla, and will be owned and operated by PG&E. Construction is expected to continue into early next year. PG&E aims to have the system energized in early 2021 and fully operational in the second quarter of 2021.
Once operational, the Moss Landing substation system will be one of the largest utility-owned, lithium-ion battery energy storage systems in the world.
As mentioned above, the energy storage and local production business is huge. Since Elon Musk is projecting TSLA’s energy business to be as large as its automotive business, but it appears to be more of a commodity business, I will project 1.25X sales off of $400 B sales in 2030 to give a market cap contribution of $500 B.
That brings TSLA’s projected market cap to $1.7 B.
If there were 200 MM shares outstanding, that would imply about an $8500 share price and a 15.3% CAGR total return, which I find attractive.
But there may be much more, and which tie more into the AMZN analogy than an AAPL one.
Here are two examples that I am considering.
TSLA as a top-tier computing company
Consider these two headlines and brief quotes from two articles from one year ago:
Tesla is harnessing artificial intelligence and machine learning to build one of the most innovative neural networks in the world.
… There is one aspect of Tesla where it is miles ahead of the competition. And that is in its use of data to build what might just be the world’s most sophisticated, cutting-edge neural network anywhere.
Tesla’s in-house chip is 21 times faster than the older Nvidia model Tesla used. And each car’s computer has two for safety.
The company needed better hardware to achieve its 2019 full self-driving goal, in which cars navigate not only freeways as today but also local streets with stop signs and traffic lights… Tesla’s in-house expertise, spanning everything from processors and software to battery manufacturing and charging stations, gives it a major advantage over conventional automakers.
“Other car manufacturers can’t compete,” said New Street analyst Pierre Ferragu in an August report on Tesla…
Two brains for self-driving safety
Each Tesla computer has two AI chips, a redundant design for better safety, [TSLA’s] Venkataramanan said. There’s redundancy in the chips’ power supplies and data input feeds, too. Even the car’s cameras are on two separate power supplies to guard against failures.
Now, the bigger story, first from Clean Technica:
At least since Tesla Autonomy Day in April 2019, Tesla has been working on a “Dojo” supercomputer to train neural networks (NN). At that time, he said, “We do have a major program at Tesla which we don’t have enough time to talk about today called Dojo. That’s a super powerful training computer. The goal of Dojo will be to be able to take in vast amounts of data and train at a video level and do unsupervised massive training of vast amounts of video with the Dojo program … Dojo computer.”
More detail from the Q2 conference call; first, about the potential value of full self-driving (Level 5 autonomy), from Elon Musk:
… the step change to full self-driving depending upon how you calculate it is probably worth at least $100,000 per car. So, it’s a lot of software you have to sell in the App Store or whatever, yes.
Then, a full set of comments from Elon Musk about what is being called Project Dojo (with my correction in the first sentence, and emphasis added in the last sentence):
Well, the actual major milestone that’s happening right now is really a transition of the autonomy system of the cars like AI, if you will, from thinking about things in — like two and a half D [dimensions]. It’s like think — things like isolated pictures and doing image recognition on pictures that are [partially] [ph] correlated in time, but not very well and transitioning to kind of a 4D where it’s like — which is video essentially. You’re thinking about the world in three dimensions and the fourth dimension being time.
So, that architectural change, which has been underway for some time but has not really been rolled out to anyone in the production fleet, is what really matters for full self-driving.
So, what we’ve been doing, thus far, is really just things like 2D — mostly 2D and like I said, not well correlated in time. So, just hard to convey just how much better a fully 4D system would work — does work. It’s capable of things that if you just look — looking at things as individual pictures as opposed to video — basically, like you could go from like individual pictures to surround video. So, it’s fundamental.
I think that a lot of the move in TSLA since earnings relates to this potential game-changer.
What will TSLA do with Project Dojo if and when it helps lead to full autonomy?
Will TSLA keep it to itself? Will it license it, and if so, to which other vehicle manufacturers?
Now, here’s another thought: once TSLA can apply a neural net approach to teaching vehicles to be as good as, and soon better than humans in driving a land vehicle, will TSLA apply this expertise to other moving things? Ships, perhaps? Submarines? What about piloted and pilotless aircraft? Construction and farm vehicles? Tanks and other military vehicles?
If Dojo translates beyond cars and trucks, could this expertise, assuming TSLA is in the lead in this technology, represent a large, recurring royalty stream?
Or, yet another possibility, will TSLA simply buy a manufacturer of those other sorts of moving things, replace the pilot, and suddenly dominate a new industry?
Just as no one I knew could have predicted 15-20 years ago that the online retailer AMZN would develop the world’s first cashier-less retail store, is TSLA now leapfrogging established computing companies to achieve a breakthrough of great value?
Now, to something much different, but which also raises questions of just how far TSLA can go in different directions.
Autobidder may have major implications
In the energy field, TSLA is looking to do things just as correctly as Enron did them badly. An example that may scale is Autobidder, which TSLA’s website describes this way:
Autobidder provides independent power producers, utilities and capital partners the ability to autonomously monetize battery assets. Autobidder is a real-time trading and control platform that provides value-based asset management and portfolio optimization, enabling owners and operators to configure operational strategies that maximize revenue according to their business objectives and risk preferences.
I think this can be a big business. There will certainly be competition, and the success TSLA may have beyond using this software product beyond its own storage batteries will depend on just how good TSLA’s engineers are and how well TSLA can market its product.
As one reads through TSLA’s discussion of Autobidder, it becomes clearer just how much of a tech company TSLA is, albeit one manufacturing large heavy things. For example, consider this from the same webpage (emphasis added):
Autobidder allows owners to realize this value by handling the complex co-optimization required to successfully stack multiple value streams simultaneously…
Autobidder is hosted on Tesla’s highly reliable and secure cloud infrastructure that is engineered to perform large-scale complex computation and is capable of interfacing with market operators, network providers and customer networks via secure web APIs.
Tesla’s team of experienced machine learning engineers, optimization engineers and market trading experts have created a library of sophisticated algorithms that drive the complex optimal dispatch behavior behind Tesla’s batteries.
The algorithms are based on numerous mathematical techniques including classical statistics, machine learning and numerical optimization. The library includes the functionality to perform:
- Price forecasting
- Load forecasting
- Generation forecasting
- Dispatch optimization
- Smart bidding
Autobidder’s algorithms are adaptable to new markets and services, and continuously improve through experiential data to maintain high financial performance in dynamic market environments.
Autobidder was designed to collaborate with and augment the capabilities of human operators.
A couple of comments.
First, I do not know the competitive landscape here, so I cannot begin to estimate a value for Autobidder. Clearly, if my ongoing thesis of the end of the Oil Age and the dawning of the Age of Renewables is correct, energy storage solutions are going to get increasingly important, and over a time frame of decades, not merely years. So, whatever the competitive situation is for Autobidder today, it could be very different next year or next decade.
All that said, look at the theme of this section and the previous one.
They are the same theme: TSLA is reaching for real dominance in Old Economy fields via computer-based, artificial intelligence-based techniques. If it succeeds, then one may interpret Elon Musk’s quasi-putdown of AAPL and the App Store during the Q2 conference call as suggesting that TSLA can surpass AAPL’s market cap.
At a share price above $2,000, TSLA shares now carry significant valuation risk based on forward price/sales and, of course, projected price/earnings ratios. Beyond valuation, I think the risks are too numerous and diffuse to delineate. They do include the macro risk to TSLA that the rise of EVs may not be as fast as bulls are projecting.
There is a substantial chance now of permanent impairment of capital from purchasing TSLA shares now. Please see its regulatory filings for the company’s recitation of various risk factors attendant to an investment in TSLA.
I never expected TSLA to have an 80%+ unit market share of the US EV market after losing all tax credits while most of the competition had that advantage. I have thus increased my long-term estimate of TSLA’s market share, and also taken into account the growing chance of large profit gains via being the first or one of the very first companies to succeed in reaching Level 5 autonomy. This has led to an upgrade in my very long-term price target; thus, I am not taking profits in TSLA even above $2,000. TSLA remains my largest equity holding.
Perhaps, more important, more information is appearing about TSLA as a company going back to Elon Musk’s roots as a computer nerd. Success with Project Dojo, Autobidder and any number of other high-tech initiatives could, in my view, continue to propel TSLA’s stock price higher even than most TSLA bulls are thinking.
Strategically, TSLA’s build-out of its product lines and focus on design excellence, along with technical superiority, is reminiscent of Steve Jobs and AAPL. However, its willingness to go for market share over current profits, and search for adjacent businesses to enter, is reminiscent of AMZN. I see this duality as a positive, but I think it makes TSLA unusually tricky to analyze.
However, risks are now, in my view, very high, both from simple profit-taking as well as from failure of the now-high expectations inherent in TSLA’s market cap being reached.
Thanks for reading and sharing any comments you wish to contribute.
Submitted Monday pre-market, TSLA now $2,115 bid, $2,120 asked. SPY about $342.04.
Disclosure: I am/we are long TSLA, AAPL, AMZN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.