What is extremely popular is overrated
Tesla: Extremely lucrative in the past, a lot of uncertainty for the future
We value Tesla's AV business discounted at about $ 13.8 billion in 2030. That figure assumes that Tesla will capture 10% of the robotic taxi market in the US, EU, and China, charging $ 0.25 per mile. We ran scenarios that put the discounted value of the Robotaxi business up to $ 1.2 trillion. This hyper-aggressive scenario assumes that Tesla will hit half the Robotaxi market, charging $ 1.50 per mile with an EBIT margin of 30% - something we think is unlikely given the level of competition in the The year 2030 will prevail, given the efforts of Uber, Lyft, GMs Cruise and other automakers.
The exact profit potential of the AV business will only reveal itself over time, but we decided to add a Robotaxi rating now because September 22nd could bring the news of a battery with a capacity of a million miles, what could mean Tesla's AV fleet hits the market next year. The exact capacity of the AV fleet, in our view, is likely to be more likely to be level 4 geo-fenced autonomy than level 5 (full autonomy). We are aware of the huge potential of AVs, but we think that will be reflected in the stock price as if these things have already happened or will happen very soon, and that only Tesla will make AVs. Those who believe this last point should familiarize themselves with the state of affairs at GM Cruise!
Business strategy and outlook
Tesla has the chance to become the dominant electric vehicle company. Tesla is a leading provider of autonomous vehicles and a vertically integrated sustainable energy company with products for energy generation and storage. We assume it won't reach mass market volume this decade. Tesla's product plans for now don't mean there will be an electric vehicle for every consumer who wants one, because prices are too high. Launched in late 2015, the Model X Crossover starts at around $ 80,000, the Model S Sedan starts at about $ 75,000, the Model 3 Sedan starts at $ 37,990, and the Model Y Crossover starts at around $ 50,000. Tesla's US customers will also no longer receive federal tax credits.
Tesla's Giga factories are currently expanding. Mention should be made of the lithium-ion battery factory in Nevada, with the help of which the company will soon have capacity for almost 600,000 vehicles at the assembly plant in Fremont, California. In late 2019, a new 100% owned Tesla plant opened in Shanghai with a capacity for 200,000 Model 3 vehicles and an additional 150,000 units for Model Y, which are scheduled to go into operation in 2021. The Gigafactory Berlin (3 and Y) is under construction until 2021, as is a Texan plant for the Semi, Cybertruck and 3 and Y.
The delivery forecast for 2020 from before the coronavirus pandemic, after which 500,000 units are to be significantly exceeded, seems unrealistic to us. Tesla sold about 368,000 vehicles worldwide in 2019; CEO Elon Musk is aiming for an annual volume of 20 million, which is roughly twice the size of Toyota and the VW group. We think the global mass adoption of all-electric vehicles is years away. However, it must be conceded that Tesla is a leader in this area.
Tesla will have to overcome teething difficulties and weather recessions before reaching mass market volume. It is also important to keep the competition at a distance, and the debts also have to be paid off. It's important to keep the Tesla hype in relation to the company's limited, albeit growing, manufacturing capacity. Tesla's mission is to make electric vehicles increasingly affordable, which means more assembly plants need to be put into operation to reach millions of dollars in annual shipments. This expansion will cost billions in capital expenditures and research and development annually and will be necessary even in times of economic downturn.
Moat and Moat rating
We do not see a Moat at Tesla, which is why we assign the Moat Rating "None". The company is still relatively early in its life cycle and has a high operational risk, meanwhile it works to continuously introduce new models and create new capacities. This dynamic creates great uncertainty as to whether the company will be able to make great products at affordable prices and whether enough consumers will make the switch from internal combustion engines and hybrid vehicles. There are signs that Tesla will be successful, but if not, Tesla will remain an automaker for the rich. In a January 2014 interview with Automotive News, Musk said, "I think we'll make it, but there's also the possibility that we won't make it."
While Tesla's growth path looks lucrative, that growth requires ongoing substantial reinvestment in platforms, the Nevada Giga factory - which Tesla spends about 40% of the total cost of about $ 5 billion on, while suppliers pay the rest - and yearly Assembly capacity as Fremont's potential production limit is uncertain, as is the cadence of opening new Tesla plants overseas. During this period of growth there will almost certainly be some recession or two. In times of economic uncertainty, it is difficult to say how high Tesla's sales volume will be or what access, if any, the company will have to the capital markets. In the long term, Tesla wants to have between 10 and 12 Giga factories.
In view of the high investment requirements and the lower vehicle volume in the first few years of our forecast, we model the return on invested capital until 2021 under the weighted average cost of capital. We also see the risk of a significant loss of value if the market launch of electric vehicles fails or occurs much more slowly than assumed in one of our three 10-year forecast periods. The company also runs the risk of not meeting its volume targets. For this reason, we are still waiting for a positive Moat rating to be awarded, but see a positive trend as a result of the strength of the brand and the improved cost structure.
While we emphasize the uncertainty associated with investing in Tesla today, the company's competitive position is better than some would expect from a tech start-up that makes automobiles. If we look at our five sources for a month, we find that there are good arguments in favor of the fire (intangible goods) as well as cost advantages.
Some investors may cite the advantage that Tesla is the dominant all-electric vehicle maker. Although Tesla actually has a huge advantage over EVs in the market because of its long range (402 miles EPA range for the long-range S versus about 300 miles for the Ford Mustang Mach-E, 259 miles for the Chevrolet Bolt, 226 miles for the Nissan Leaf, 234 miles for the Jaguar I-PACE and 204 miles for the Audi e-tron), we consider Tesla's competition to be the entire auto industry, not just their electric vehicle divisions. There are far too many automakers around the world that Tesla will have a hard time competing against the numerous competitors.
Fair value and profit drivers
After the adjustment, our fair value estimate for Tesla is $ 173. We added the present value of what Tesla's Autonomous Vehicle Ride Hailing (Robotaxi) business could be worth in 2030 and discounted it at about $ 13.8 billion. That figure assumes that Tesla will take 10% of the robotaxi market in the US, EU and China combined and charge $ 0.25 per mile. Our weighted average cost of capital is 8.8% and our mid-cycle operating margin estimate is 11%. We anticipate the company will continue to lead the way in autonomous driving technology and range. Tesla is also growing in size, and our ability to make beautiful vehicles while generating free cash flow and net income is far better than ever, in our opinion.
We assume total deliveries over our 10-year forecast period of around 15 million. We remain concerned about Tesla's debt burden, albeit less than in the past, due to more consistent free cash flow generation and growing cash on hand.
Tesla is a risky stock and our fair value estimates can change more frequently. We currently add approximately $ 4.6 billion in non-recourse debt to our valuation. We are modeling vehicle deliveries of around 400,000 for 2020; Then deliveries of about 700,000 in 2021 and about 1 million in 2022. We are modeling capital expenditures of $ 3.5 billion in 2021. When modeling Tesla in our discounted cash flow model, we remain open to the disruption potential of Tesla in the automotive industry. For a young company like Tesla, we believe long-term potential is the more important question and value driver than how many Model 3 or Model Y will be delivered in a quarter.
The management’s long-term forecast since going public in 2010 assumes an operating margin in the lower to mid-ten range. The forecast excludes stock option expenses, while we include stock option expenses in EBIT to reflect the dilutive effect. Tesla has upside margin potential if it cuts its battery costs, significantly exceeds the estimated number of deliverable vehicles, and establishes a high-margin warehouse and autonomous ride-hailing business. We model energy sales of $ 2.2 billion in 2020, with that number growing to about $ 6.6 billion by 2029. This income amounts to approximately 4% of our fair value estimate.
Risk and uncertainty
Investing in Tesla stock is fraught with tremendous uncertainty due to the difficult-to-predict future of electric vehicles and energy storage. In a recession, investors may not want to hold the shares of a company whose full potential will only develop in the next decade. There is a risk that Tesla will not be able to raise capital when it is needed. Unless an electric vehicle that is far cheaper than the Model 3 is sold en masse, investors cannot be sure that consumers will be ready to switch to an electric vehicle on a large scale and with all concerns about range and longer charging times (im Compared to internal combustion engines). Tesla is fighting a state-to-state battle to keep its factory-owned rather than franchised stores, which adds legal risk to Tesla and could one day stall growth. Other automakers are pushing into the BEV space. Should the company's growth ever stall or reverse, we would expect its stock price to fall sharply, as we believe current expectations for Tesla are immense. In a young, growing company, there is always a greater risk of dilution for existing shareholders and the risk of over-indebtedness. Tesla also has customer concentration risk, with the US and China accounting for about 64% of GAAP sales in 2019, up from 56% in 2015.
We see immense key man risk for the stock as Tesla's fate is closely tied to the person of the CEO. Should Musk leave the company or the SEC forbid him from running Tesla, we wouldn't be surprised if the stock fell dramatically. Musk also owns 18.5 million Tesla shares as collateral for personal debt. The quick sale of this block of shares can lead to a rapid decline in Tesla's share price. Tesla will soon face massive EV competition from premium German brands as well as GM and Ford. Given the many uncertainties surrounding Tesla today, including COVID-19 and the debt burden, fair value uncertainty will remain very high for a long time.
Tesla's stock was trading at $ 423.43 at the close of trading on the Nasdaq on September 17, well above our fair value estimate of $ 173. As a result, the paper is greatly overvalued, as can be seen from the 1 star share rating.
The analysis in this article is based on our professional investor tool. For more information on Morningstar Direct, please visit here.
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