Fundamental Analysis of Tesla - TSLA

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.

tesla logo

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!

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Funny I posted a video on this yesterday on my channel! Not as in depth though just a quick glance

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Very good analysis. I also expected the balance sheet to be worse than it actually is.

I personally would not be confident with a 5% stake in Tesla, especially not at this price, but then whilst I tend to “stock-pick” I also diversify alot by picking many, resulting in my largest company holding being 4% (and it is not Tesla).

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I have a much smaller portfolio and do overweight a few holdings, though I have a higher risk tolerance for my ISA.

The balance sheet did surprise me, I suspect I must have overlooked something but it seems fine at face value. Are you a Tesla holder currently?

Please feel free to share! I always welcome other views and like to see how other people do their analysis.


There’s the link there but it was just a quick look over the financials
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Good read :+1:

Personally not a fan of 1 trick ponies in “tech”. But hey people always try to find new Apple’s/Amazon’s etc. Who knows, maybe I be like a fool missing out :partying_face:

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Just placed a big bet on TSLA this morning. Bought 4 CFDs.

I know it’s at all time highs but I don’t care lol. Gonna yolo this, the hype is real. Also elon is taunting short sellers and the SEC.

https://shop.tesla.com/product/tesla-short-shorts
(They sold out of the shorts at a huge profit margin also lol!)

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They should just start selling clothes! :laughing:

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As always Jack, regencies job. I still use the Broadridge Financial one you did for me before now that it’s available to buy.

Love to hear your breakdown on Sempra Energy if you’re interested in an energy/utility…

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You taking requests @jcksmith850 ?

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I’m always happy to take any requests. I have a bit of a backlog and I haven’t had as much time lately, I’ve gotten into some udemy courses, but I do try and look any any suggestions.

I do love looking at interesting companies or hearing different takes, only makes me better at analysing in the long run, or so I hope!

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Fantastic, thanks! Since I’ve already had a request filled before, feel free to prioritise those who haven’t over me. Or whatever you want lol.

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Seeing as there haven’t been that many suggestions, I thought about giving @jcksmith850 some more suggestions. How about analysing Berkshire Hathaway? :smiley: (Class B shares are offered on T212 if you look at valuations).

I don’t know if you are interested in analysing a conglomerate though as it is probably much more complicated. Siemens, Murata and Hitachi are other conglomerates that may be more appealing (the last 2 are Japanese so they are not on T212)

If not, then maybe a UK IT consultancy? (You mentioned several a few weeks ago but I haven’t actually had a chance to look into them yet)

Other suggestions could be a cyber security company such as Palo Alto Networks (PANW) or FireEye (FEYE).

Or if you prefer Utilities, how about Iberdrola (Spanish electric utility with lots of renewables and owner of Scottish Power), Centrica (UK utility) or United Utilities? (UK utility with presence in the USA) Or maybe the grid manager in the UK, National Grid? (UK)

If you prefer semiconductors then how about Micron? (French)

For a Telecommunications company, maybe Orange? (Large French Telecomm with presence in several european countries)

Another airline after your IAG analysis, maybe a lowcost USA airline such as Spirit Airlines?

A hotel company such as Melia Hotels? (Spanish company with large presence in Spain and I seem to remember that also in South/Central America)

Car manufacturing then may I suggest Renault due to its fall in share price in the last year?

For online services, what about Rightmove? (UK)

Electrical services, have you had a look at Legrand? (French)

A high street company, then maybe Inditex? (ITX - Spanish company owner of Zara, Pull&Bear, Bershka, Stradivarius, amongst others)

European Technology, then maybe Atos? (French)

If supermarkets appeal to you then maybe Ahold Delhaize? (Dutch company with large presence in the USA as well as the Netherlands)

A less typical health-care company such as Philips? (Dutch)

Semiconductors such as Taiwan SemiConductor (TSM), Cisco or Intel? (USA)
Or maybe you prefer some dutch technology firms such as Adyen NV, NXP Semiconductors NV and Elastic NV? Or a possible emerging markets growth firm such as Mercado Libre?

Maybe you prefer the possible future 5G providers in Europe, the old shrunken giants of Ericsson and Nokia? (All the Huawei controversy may heavily benefit them)

If you are into videogames then Sea Limited (Signapore but trades in the USA on T212) may be of interest. If you prefer renewables then maybe checkout PNE Wind (German listed)

If you are interested in Television companies and like Discovery Channel or Eurosport, then maybe research Discovery (USA)

If you like music and are a keen user of Spotify, how about analysing it? (listed in the USA, apparently its from Luxembourg though, I only realised recently).

I wanted to contribute a wide range of options as I don’t know what you may be interested in, but I may have come up with too many options. The write up is a bit convoluted but you may find some suitable suggestions that interest you.

Note: I have included either the country or the ticker in brackets. Nonetheless I have written this from memory so it may not all be correct.

Understood. I’ll chuck these suggestions out there and hope there might be some overlap with your own list;

Fiverr International
Yext Inc.
Sea Ltd
StoneCo

Thanks

JOE.