Telsa, along with its infamous current CEO Elon Musk, is best described as a marmite investment, you either love it or hate it. I’ve avoided looking at Tesla due to the unprecedented volatility and market defying rallies it has experienced. With COVID-19 forcing many companies to take their foot off the pedal, for Tesla, it was merely a speed bump towards becoming one of the biggest auto manufacturers on the planet.
With this in mind, I don’t think there will ever be a “quiet” time to look at Tesla. Let’s charge up and drive through some fundamentals.
How Does Tesla Make Money?
I’ll skip over the usual “who and what is Tesla?” because, even with stay-at-home orders and a global lockdown, nobody has time to pick through that essay.
Let’s focus on how Tesla makes money to help us understand what the business is focusing on and why.
Source: Tesla Q1 2020 Presentation
Broadly speaking the business is split into three areas, selling cars (and leasing them), selling solar power and batteries for storing electricity, and supporting businesses such as selling power to charge your Tesla (charging stations.)
Tesla is best known for their cars, their market strategy is a simple one. Start by building high-end luxury vehicles which are limited in supply. Reinvest these gains into building vehicles targetting more of the mass market at a lower price point, and keep repeating. The result being everyone owns a Telsa at any price point while retaining that original luxury image. Currently, this has been the case, with Tesla’s regarded as a luxury manufacturer even when compared to direct competitor products.
Having a strategy is nothing without execution, and right now the limiting factor is manufacturing capabilities.
Source: Tesla Q1 2020 Presentation
While this helps the luxury aspects of the brand due to the limited supply, this has not been intentional.
Limited production also means the additional services will also suffer. Charging stations are not exclusive to Tesla vehicles but with many manufacturers partnering with suppliers and charging ports directly, there is less of an opportunity here versus running a petrol station. There are additional streams such as the fully self-driving car upgrades, and ongoing costs associated with the in-vehicle features, all of which require you to own a Tesla in the begin. Expect this revenue line to follow the main auto manufacturing line item.
Source: Tesla Q1 2020 Presentation
The last item to cover is the energy generation and storage side of the business. Taking a page out of Amazon’s book, if you have an internal solution is that a viable business in its own right? Tesla’s efforts to expand its battery technology led them on a journey to acquiring a solar company (SolarCity.) Now able to offer a complete charging and storage solution, or split individually to both end consumers and even government bodies alike.
What About Tesla’s Fundamentals?
There is a lot to cover when it comes to Tesla, I’ll try and keep us focused (for your sake and mine) as this write up should serve as the appetiser and not replace your due diligence. Plus, reading the last 10-Q I spent as long reading about lawsuits versus how they make their revenue.
Source: Genuine Impact
Unsurprisingly Tesla is very expensive and seems to follow the trend of a technology company rather than any manufacturing company. Even the future momentum is lower than you would expect, largely due to the recent rally passing sell-side analyst expectations. What you might be shocked to see is the relatively poor condition of Tesla’s finances. We know Tesla has had a few close calls when it comes to bankruptcy and their aggressive growth as resulted in no single year being profitable.
With that in mind let’s dig into the raw details to find out what these ranks mean to us.
Source: Wallmine
With the last three quarters showing a positive profit margin, the COVID-19 lockdown has been a very painful shock for Tesla, what should have been a successful Q2 2020 is likely to be a slip back into negative profit margins again. One question to ask, how negative is a negative profit margin?
Last four quarters Tesla has made $26bn. While it beats Ford’s $0.3bn, it is nothing compared to BMW’s $117bn. However, revenue is a meaningless figure on its own. We need to break down the cost of revenue.
For the full financial year of 2019, Telsa has a pitiful gross margin of 16.56%, which is then reduced again but all the additional costs bringing us to a -3.51% profit margin. This reduction isn’t as much as I expected. The extra expenses are heavier on general admin than R&D which isn’t what I expected to see. This does mean Tesla has additional money it can access in a pinch, though you can argue that will cost them in terms of long term competitive advantage.
While Tesla is busy opening up new sites and investing heavily into the build quality these are headway expenses that will hopefully reduce with scale.
Source: Tesla Q1 2020 Presentation
While an odd example this is the kind of focus Tesla are trying to bring into the business, optimising their existing processes. Reducing their costs to increase the margins, while making the process simpler.
A bit part of Tesla is their debt, which is eating away around $170m each quarter in interest payments.
Source: Tesla Q1 2020 10-Q
In terms of short term (due this year) liabilities Tesla owe $11.98bn, oddly it’s the payments to their suppliers which is the highest contributor to this (barely.) Long term Tesla has $13.9bn which will be due in the future. Given accounts payable made up a third of this year’s debt, debt wasn’t as big of an issue as I expected. The debt to assets last quarter was 71.19%, while high it is still very manageable.
I was fairly surprised to see Tesla has been building up a war chest, last quarter they had $8bn in cash. In terms of Tesla assets, the manufacturing sites make up the bulk, sitting at a cool $20bn.
Source: Google Finance
The last six months for Tesla has represented some incredible growth. Even now Tesla is up again by almost 4% following a bullish analyst claiming the Q2 numbers can be beaten.
As an investor, Tesla is a tech stock, meaning extremely high valuations. The negative profit margin saves Tesla from the shame of meaningful P/E ratio. However, we can always see what kind of premium we are paying by looking at the book to price, 26.90x. Even the cash to share ratio is an unpleasant 36.94x.
To justify these ratios, Tesla must have some strong backing by the sell-side analysts.
Source: Genuine Impact
As I keep saying, this is not the case. It’s rare to see such a hotly disputed stock. We are seeing analysts shift from hold to both buy and sell. While analysts are extremely hopeful with future EPS and Revenue figures, the target price is the topic of many debates.
Source: Wallmine
The current target price (taking the average of 32 analysts!) is negative compared to where we are right now. The current price is higher than that screenshot says, by a solid $80 a share.
Are The Fundamentals Meaningless For Tesla?
Fundamentals are a tool in your belt, it has a time a place and you use it to help you make decisions. Maybe the last bit didn’t make too much sense, you don’t ask the hammer before you cut wood but you get the point.
The fundamentals are showing a business which is slowly increasing its margins but scaling. Each new factory, each new mass-market vehicle, it all brings us closer to Tesla’s ultimate goal.
The debt is more under control than I first assumed, their long term debt is aggressively priced with a few 7% bonds in there, these could do with some refinancing. Surprisingly Tesla has been doing a good job of keeping money in its own pockets, while still pumping out an alarming amount of new vehicles.
Summary Pros
- Arguably one of the cutting edge auto-manufacturer if not the manufacturer they can be a provider into another eco-system
- The vertical integration and in-house nature works at scale, something they are starting to achieve
- New sites opening up, the growing Chinese market being a prime target
- Cult following similar to Apple in terms of brand loyalty and high levels of advocacy
- Leasing is high margin and helps drive the fully autonomous vehicle research, a potentially large revenue stream if achieved with the right partners
Summary Cons
- Extremely overpriced, even account for their growth, the next three years feels very comfortably priced in
- Emotionally linked to Elon Musk, for better or worse and I’d put this down as a con as much as a pro
- A constant struggle to hit a year of profitability is resulting in higher financing which keeps slowing Tesla down
- Big brands like BWM are innovating at the same speed and make for extremely tough competition
My Thoughts?
The cult of Elon gives and takes. The passion that drives Tesla can not be ignored. If the next model of Tesla vehicle requires a new alloy to be created, few companies could be capable of such a task and yet this always feels within Teslas reach. Making the impossible seem like business as usual is something Tesla does with incredible ease.
There are very substantial and real threats to Tesla and a lot of spinning plates. It’s easy for Tesla to be distracted and lose sight of the big picture, but that is also the charm of the business. The same way Steve Jobs pushed to reduce the size of his phones, the small details create something greater than their parts.
I currently have less than 5% of my portfolio exposed to Tesla (indirect through an investment trust) and it’s something I am comfortable with.
A bet on Tesla is not a fundamental decision, it’s a decision on what I want tomorrow to look like. Few companies offer services today while looking to build tomorrow the way Tesla does. This is the kind of innovation that drags the world kicking and screaming with it.
I don’t know if Tesla will “win” the electric vehicle race, but I do know our world is better for having Tesla in it.
Let me know what you think, is Tesla something you are watching? Are you on the fence like the analysts or do you have a strong view?
Thanks for reading and stay safe!
(Class B shares are offered on T212 if you look at valuations).
