Tesla: Master Plan 3 And The Road To $10 Trillion Market Cap

Summary:

• Master Plan 1 was published in 2006. 10 years later, Tesla’s market cap reached $34 billion.
• Master Plan 2 was published in 2016. As of this writing, Tesla’s market cap reached $623 billion, an 18-fold increase.
• Master Plan 3 is set to be revealed on March 1st, laying the plan towards a $10 trillion market cap.
• This will be a long and difficult road, but management has a track record of delivering what they promise.
• Considering its durable competitive moats, strong financials, and technological megatrends, Tesla has what it takes to reach this status.

Tesla (NASDAQ:TSLA) is the epitome of an innovator, a disruptor.

It has been on my radar for quite some time but could not bear to buy the hype as its valuation was too crazy. Now, the stock has cratered, which got me interested in starting a position.

But instead of buying blindly, I need to do my research first — one of my investment rules is to write an article about the company first before I can buy the stock.

So, here’s my deep dive on Tesla. You need a coffee for this one. Enjoy!

Investment Thesis

Ambitious company targets, continued product innovation, and secular industry trends will be the growth engines for Tesla. Its durable competitive moats and strong financial position should protect the company as it marches toward the $10 trillion mark.

After 2 decades since its inception, Tesla will be revealing the highly-anticipated Master Plan 3, which could be the catalyst for significant long-term price appreciation.

More importantly, it will lay out the next phase of hypergrowth initiatives that will accelerate the world’s transition to sustainable energy.

Shares appear to be trading at fair value — I would consider buying shares during pullbacks.

Value Proposition

Although current CEO Elon Musk has long been the face of Tesla, he did not actually found the company. In fact, Tesla was founded in 2003 by Martin Eberhard and Marc Tarpenning.

Previously, the two engineers co-founded NuvoMedia which developed the first-ever e-reader in 1997. After selling the company to Gemstar-TV Guide International for $187 million, the pair decided to join forces once again.

Combining his love for sports cars and his concern for global warming, Eberhard wanted to build “a car manufacturer that is also a technology company”, focusing on crucial components such as “the battery, the computer software, and the proprietary motor”.

And thus, Tesla was born.

The company was named after the 19th-century inventor, Nikola Tesla, who was well-known for his inventions in the electrical engineering field, more specifically, alternating current generation and transmission.

The two co-founders began their search for outside capital and that’s when Elon Musk came into the picture. In early 2004, Elon Musk led Tesla’s $6.5 million Series A funding round, of which Musk contributed $6.35 million, which consequently placed him as chairman of the board.

Two years later, word of the EV startup began to spread like wildfire. In 2006, Tesla raised additional capital from two separate funding rounds, which include big names such as Google (GOOGL) co-founders Larry Page and Sergey Brin, as well as JPMorgan (JPM).

Shortly after its funding rounds, Tesla revealed its first-ever sports car prototype, the Roadster, on July 2006.

More importantly, Musk published Tesla’s first Master Plan, outlining the company’s mission as well as its reasoning behind launching the Roadster.

…the overarching purpose of Tesla Motors (and the reason I am funding the company) is to help expedite the move from a mine-and-burn hydrocarbon economy towards a solar electric economy…

(Elon Musk — The Secret Tesla Motors Master Plan (just between you and me)

The Master Plan consists of four oversimplified steps:

1. Build sports car
2. Use that money to build an affordable car
3. Use that money to build an even more affordable car
4. While doing above, also provide zero emission electric power generation options

Step 1 was pretty much done. But getting to steps 2, 3, and 4 was not as easy as Musk would’ve wanted. It took nearly two years for the Tesla Roadster to finally be delivered to customers. Not to mention, there were three CEO changes in 2007 and 2008 — Musk took the big job on October 2008, in the depths of the global financial crisis.

Against all odds, Tesla survived.

In 2009, Tesla unveiled its second car, the Model S, which received an overwhelming response, including a $465 million loan from the US Department of Energy. At the same time, the company sold around 2,500 units of the Roadster (discontinued in 2012), which had a base price of $109,000.

With cash flow from operations and outside funding, this huge capital injection allowed Tesla to scale production and finally bring affordable EVs to the masses — the Model S’s planned-priced was much lower than the Roadster, at a base price of $57,400.

Fast forward to today, Tesla is now the most valuable automaker in the world. Along the way, Tesla has poured billions into new products and technology innovations — not just cars. These include EV charging stations, solar power systems, and energy storage solutions.

Safe to say, everything went according to the company’s original Master Plan.

Many companies would’ve grown complacent after achieving such a feat. But Tesla is not like other companies — it remains as hungry as ever to fulfill its ultimate mission:

Accelerating the World’s Transition to Sustainable Energy

(Tesla)

This is why Musk wasted no time in writing a new Master Plan, perhaps sounding as overly ambitious as he did back when he wrote the first Master Plan.

In 2016, Musk published Tesla’s second Master Plan:

1. Create stunning solar roofs with seamlessly integrated battery storage
2. Expand the electric vehicle product line to address all major segments
3. Develop a self-driving capability that is 10X safer than manual via massive fleet learning
4. Enable your car to make money for you when you aren’t using it

Let’s take a look at Tesla’s current product line to get a better understanding of how the company aims to deliver its second Master Plan.

Energy Generation and Storage

In 2015, Tesla announced that it will be entering the energy generation and storage business by launching Tesla Energy — “a suite of batteries for homes, businesses, and utilities fostering a clean energy ecosystem and helping wean the world off fossil fuels.”

To scale this new project quickly, Tesla acquired SolarCity — at that time, one of the largest solar energy companies in the US — for $2.6 billion.

Today, Tesla Energy has two distinct offerings:

• Solar Energy Generation: Existing homeowners can purchase retrofit Solar Panels to install on their rooftops. These panels are low-profile and durable, delivering maximum solar energy production all year round. On the other hand, homeowners who want the complete package can purchase the Solar Roof, which completely replaces traditional rooftops by combining glass solar tiles and steel roofing tiles. With its solar products, customers can power their homes using the clean, renewable energy of the sun.

• Energy Storage: Tesla’s solar products also come with Tesla’s energy storage solutions, which together, reduce customers’ reliance on the grid and thus create a self-sufficient home solar energy system. There are two products in this category. First, the Powerwall is a compact home battery designed to store energy for homes and small commercial facilities. Second, the Megapack caters to larger customers, particularly for commercial, industrial, and utility purposes. Both devices stores clean energy for use anytime.

Customers can also monitor their energy production in real-time and control their systems remotely through the Tesla App.

Ultimately, Tesla’s solar energy system lower both the user’s carbon footprint and energy bills, while storing energy for the grid reliably and safely, for use anytime, even with outages.

With that said, Musk has completed the first step of Master Plan 2: “Create stunning solar roofs with seamlessly integrated battery storage”.

On to the next one.

Automotive

As of this writing, Tesla offers four consumer EVs, which when aligned perfectly, produce the codeword “S3XY” (I forgot to mention that Musk is the king of trolls).

• Model S: The first Model S was officially launched in June 2012. It represents Tesla’s luxury full-size sedan line with some of the most advanced features in EV technology. The base model has a range of up to 405 miles, a top speed of 149mph, and can hit 0-60 in 3.1 seconds. Following Tesla’s recent price cuts, the Model S now starts at $94,990.
• Model 3: The Model 3 was first introduced in 2017 and it is Tesla’s most affordable car with a starting price of $42,990. This mid-size sedan was designed for mass production and appeal to the average consumer. Compared to the Model S, the Model 3 has lower performance specifications: a range of 272 miles, a top speed of 140mph, and hits 0-60 in 5.8 seconds.
• Model X: The first Model X was delivered in 2015. Just like the Model S, the Model X offers consumers high-performance, more-luxurious features. This 7-seater mid-size SUV has a range of 348 miles, a top speed of 155mph, and reaches 0-60 in 3.8 seconds. The base model starts at $109,990.
• Model Y: This compact 7-seater SUV completed Tesla’s main S3XY lineup. The Model Y was launched at the dawn of the coronavirus outbreak, in March 2020. The Model Y is the more affordable SUV option with a starting price of $54,990. It has a range of 330 miles, a top speed of 145mph, and hits 0-60 in 4.8 seconds.

And of course, Tesla’s S3XY models are all packed with some of the most advanced technological features in the auto industry. This includes its smart vehicle controls, interactive touchscreen display, and infotainment software, which can be updated via over-the-air software updates. In addition, customers have access to several charging options: 1) Wall Connector home charging, 2) Destination Charging at select locations like hotels and restaurants, and 3) Supercharger Connectors for high-speed charging.

Along with passenger vehicles, Tesla is also expanding its product line to “address all major segments” as outlined by Musk in step 2 of Master Plan 2.

More specifically, Tesla has announced three new vehicles in its automotive lineup:

• Cybertruck: This futuristic pickup truck was first unveiled in late 2019. According to its Q4 release, Cybertruck “remains on track to begin production later this year in Gigafactory Texas”. This truck is expected to have a range of up to 500 miles and hits 0-60 in 2.9 seconds.

• Roadster: In 2017, Tesla announced that the company is planning to enter the super sports car market by reintroducing the new and improved Roadster. With an estimated price tag of about $200,000, the Roadster could be the king of electric super sports cars, boasting a top speed of 250mph, 620 miles of range, and hits 0-60 in 1.9s. Impressive.
• Semi: The Semi was first unveiled in 2017, which meant Tesla’s intention to enter the commercial truck space. In late 2022, Tesla finally delivered its first production Semi. It has the potential to travel 500 miles on a single charge, reach 0-60 in 20 seconds, and operators can save on fuel costs of up to $200,000 within 3 years.

With the introduction of these three new vehicles, Tesla is essentially addressing all major segments of the automotive industry, as shown in the picture above.

But wait.

What about the mysterious device under the word “ROBOTAXI”?

Well, as the name suggests, Tesla is also planning to establish an autonomous Tesla ride-hailing network.

How?

By fulfilling step 3 of Master Plan 2: “Develop a self-driving capability that is 10X safer than manual via massive fleet learning”.

Currently, Tesla’s S3XY lineup is equipped with an AI-based driver-assistance program called Tesla Autopilot. It was first launched in 2014 and it literally allows customers to let go of the steering wheel and let the car do its own driving. This is achievable through Tesla Vision, a 360-degree computer vision system that detects nearby cars and objects within 250 meters.

By analyzing real-time visual data from its nearby environment as well as historical data collected from billions of miles of driving, the car has the potential to maneuver itself automatically and intelligently. There are three tiers to this feature:

• Basic Autopilot: This is the default feature included in all new Tesla vehicles. This feature enables the car to steer, accelerate and brake automatically within its lane.
• Enhanced Autopilot: At an additional cost of $6,000, this package includes more advanced features such as auto lane change, autopark, and smart summon.
• Full Self-Driving (“FSD”): At an extra cost of $15,000, customers get all Basic and Enhanced features, as well as the most advanced features such as traffic and stop sign control.

However, even with FSD, do note that Tesla cars are not fully autonomous yet, as disclosed by Tesla:

The currently enabled Autopilot, Enhanced Autopilot and Full Self-Driving features require active driver supervision and do not make the vehicle autonomous. Full autonomy will be dependent on achieving reliability far in excess of human drivers as demonstrated by billions of miles of experience, as well as regulatory approval, which may take longer in some jurisdictions. As Tesla’s Autopilot, Enhanced Autopilot and Full Self-Driving capabilities evolve, your car will be continuously upgraded through over-the-air software updates.

(Tesla — Autopilot and Full Self-Driving Capability)

Nevertheless, Tesla is inching closer and closer to truly becoming FSD-capable, and eventually, Autopilot would become “10X safer” than manual driving. In fact, as of Q3 2022:

In the 3rd quarter, we recorded one crash for every 6.26 million miles driven in which drivers were using Autopilot technology. For drivers who were not using Autopilot technology, we recorded one crash for every 1.71 million miles driven. By comparison, the most recent data available from NHTSA and FHWA (from 2021) shows that in the United States there was an automobile crash approximately every 652,000 miles.

(Tesla — Tesla’s Vehicle Safety Report)

If we do the math, that makes Tesla Autopilot 9.6 times safer than manual driving. In other words, Musk could basically mark step 3 as “complete”.

Now on to step 4: “Enable your car to make money for you when you aren’t using it”

That’s Tesla’s plan to build an autonomous ride-hailing network of Tesla robotaxis.

When FSD receives regulatory approval, we could see massive adoption of FSD. And with Tesla’s Autopilot progress thus far, it won’t be long before step 4 come into full realization. In my opinion, we could see Tesla cars “making money for you” within the next five years. By then, Master Plan 2 is complete.

When true self-driving is approved by regulators, it will mean that you will be able to summon your Tesla from pretty much anywhere. Once it picks you up, you will be able to sleep, read or do anything else enroute to your destination.

You will also be able to add your car to the Tesla shared fleet just by tapping a button on the Tesla phone app and have it generate income for you while you’re at work or on vacation, significantly offsetting and at times potentially exceeding the monthly loan or lease cost. This dramatically lowers the true cost of ownership to the point where almost anyone could own a Tesla. Since most cars are only in use by their owner for 5% to 10% of the day, the fundamental economic utility of a true self-driving car is likely to be several times that of a car which is not.

In cities where demand exceeds the supply of customer-owned cars, Tesla will operate its own fleet, ensuring you can always hail a ride from us no matter where you are.

(Elon Musk — Master Plan, Part Deux)

Market Opportunity

According to the United Nations, fossil fuels are the largest contributor to climate change, accounting for ~75% of greenhouse gas emissions and ~90% of all carbon dioxide emissions. Transportation is one of the major culprits, contributing ~25% of these unwanted emissions due to the combustion of petroleum-based products in internal combustion engines (ICE).

Musk has long believed that if the world were to continue to burn fossil fuels indefinitely, civilization, at some point, would collapse. To avoid such a disaster, it is necessary for the world to achieve a sustainable energy economy. For Tesla, that means replacing a century-old device: ICE cars.

Without a doubt, Tesla played a pivotal role in the auto industry as it not only pioneered EVs but also made them available, affordable, and accessible to average consumers, not just for the elites. We can confidently say that Tesla accelerated the world’s transition to EVs, inspiring major automakers and small-scale startups to join the electric revolution.

According to Bloomberg, EV sales increased 22-fold from 452k units sold in 2015 to 10.3 million units sold in 2022. Since 2020, EV sales have more than tripled. Bloomberg expects this number to rise in 2023 — albeit at a slower growth pace — to 13.6 million EVs globally, a ~32% increase from last year.

As you can tell, EV markets are expanding quickly and they’re taking market share from ICE cars. By estimation, there are now 27 million EVs on the road globally, and that number is expected to reach 40 million by year-end. Although this represents a mere ~3% of the global vehicle fleet, it’s a massive increase from less than 1% at the end of 2020.

The combination of higher EV manufacturing capacity, refreshed federal tax credits, better affordability, climate change awareness, and hype contributed to surging EV adoption. As EVs continue to take share, gas-powered vehicles are struggling to grow, with sales declining YoY in 4 of the last 5 years.

For Tesla, the opportunity lies in taking additional market share from ICE cars.

Of the 2 billion cars and trucks on the road, we only have about 3.5 million. So, we’ve got a long way to go to even reach 1% of the global fleet.

(Elon Musk — TSLA 2022 Q3 Earnings Call)

In the next few decades, ICE vehicles could turn obsolete while EVs become the primary mode of transport. In fact, some countries are working towards being 100% electric. As shown below, Norway’s EV share has already reached 83%. On the other hand, EVs in the US only has a 6% market share. This paints a picture of how the EV market could evolve in the next few decades.

Not only passenger vehicles, but commercial vehicles are also making their electric transition — global electric commercial vehicle sales should reach almost 600k in 2023, up ~80% from 2022. According to Allied Market Research, the heavy-duty truck market — the subsector where the Tesla Semi operates — could be worth $328 billion by 2031. If Tesla could capture just 5% of this market, that equates to ~$16 billion of revenue opportunity for the company.

The growth of both passenger and commercial EVs is highly correlated to the growth of EV charging stations, which is a key component of mass EV adoption:

• More EV customers require more EV charging stations.
• More EV charging stations, especially in rural areas, could encourage more EV adoption.

According to Bloomberg, the number of public EV chargers grew from 1.8 million in 2021 to 2.8 million in 2022. Strategic Market Research reported that the global EV charging market could be worth $142 billion by 2030. Again, if Tesla takes a 5% market share, it could generate $7 billion worth of revenue for investors.

In addition, full self-driving technology could also significantly increase the value of the EV market. There are several benefits to autonomous driving (AD):

• AD systems are safer than manual driving, as discussed in the previous section. This is especially true when we have a drunk or drowsy person behind the wheel.
• Full self-driving cars may mean lower insurance premiums since the AD software — instead of the customer — is in control, and therefore, will be held liable for car accidents.
• Features such as auto parking and car summoning make AD systems more convenient.
• AD systems allow the “driver” to be more productive — hours on the road could be used for work.
• AD systems can be programmed to maintain optimal speeds, saving additional charging costs.

These benefits are reasons why customers are willing to pay a premium for AD features. According to a McKinsey survey involving 25,000 participants, about 25% of them said they are likely to opt-in for advanced AD features in their next car purchase. Two-thirds of these interested customers are also willing to pay up to $10,000 for an L4 highway pilot, which is capable of hands-free driving on highways. The chart below shows the different levels of driving automation. For context, Tesla cars are still at Level 2.

Whether it be in the form of a one-time fee, subscription, or per-use basis, customers are willing to pay a premium for these features. According to McKinsey, the AD market alone could be worth $300 billion to $400 billion by 2035.

When AD systems achieve adequate levels of performance and safety, autonomous ride-hailing is the next driver of value creation. According to Statista, the ride-hailing and taxi market are worth about $276 billion today. Adding the “autonomous” component could boost the market value of the ride-hailing and taxi industry.

Although too early to tell, Ark Invest estimated that the autonomous ride-hail industry is likely to create an $11 trillion addressable market. The innovation-focused fund also argued the possibility of autonomous taxis replacing 60% of short-haul airline flights, which means unbundling the domestic airline industry. Only time will tell whether these predictions will come true.

Nevertheless, addressing safety concerns, educating consumers, and gaining regulatory support are keys to successfully rolling out autonomous ride-hailing and logistics networks. In the meantime, developing nationwide parking-and-charging infrastructure is essential for robocar deployment. For example, Tesla could partner with industrial REITs like Prologis (PLD) to build dedicated autonomous loading/docking and charging stations in their warehouses to facilitate smooth inbound/outbound operations. Another example would be to partner with parking garage owners to provide parking spaces for Tesla robotaxis to park and stand by for customers to hail a ride.

Aside from the automotive industry, Tesla also operates in the solar and energy storage industries, which are also in their infancy.

Solar and energy storage systems are gaining in popularity as they’re environmental-friendly, reduce energy bills, and can operate off the grid.

To elaborate on that last point, currently, the power grid is still struggling with large-scale power outages during extreme weather conditions such as the 2018 California wildfires or the 2021 Texas winter storm. Some of these outages can go on for days or weeks, which, unfortunately, could prove to be fatal. With an off-grid solar energy system installed in people’s homes, they can worry less about outages.

For these reasons, people and governments all over the world are investing heavily in solar and energy storage solutions — long-term demand for these solutions should remain robust.

Based on a study by the IEA, solar photovoltaics’ (PV) installed power capacity is expected to become the largest source of electricity by 2027 while coal, natural gas, nuclear, and oil generation are expected to plateau and decline over time.

In addition, according to Bloomberg New Energy Finance, energy storage installations are projected to reach a cumulative 411 gigawatts by the end of 2030, which is a 15-fold increase from 2021.

The exponential growth in solar PV and energy storage adoption will be a massive tailwind for solar and energy storage companies all over the world, including Tesla’s renewable energy business.

To sum up this section, Tesla’s growth potential revolves around some of the greatest secular trends in modern times, namely EVs, autonomous driving, autonomous ride-hailing, solar energy generation, and energy storage. Tesla, being the frontrunner in each of these trends, should be well positioned as one of, if not, the most dominant force in renewable energy solutions in the coming decades.

Business Model

Tesla generates revenue from three major operating segments: Automotive, Energy Generation and Storage, and Services and Other.

Automotive

Automotive Revenue consists of:

• Sales of new S3XY Models and Semi (cash deliveries and lease).
• Premium in-car internet connectivity ($9.99/month or $99/year).
• FSD features.
• Free Supercharging programs.
• Over-the-air software updates.
• Sales of automotive regulatory credits to other automotive manufacturers.

Energy Generation and Storage

Energy Generation and Storage Revenue include:

• Sales of solar energy generation and energy storage products (Solar Panels, Solar Roof, Powerwall, Megapack, etc.).
• Services related to these products.
• Sales of solar energy systems incentives.

Services and Other

Services and Other Revenue consist of:

• Vehicle services and maintenance.
• Paid Supercharging (charging price varies depending on location, but the average seems to be $0.50/kWh).
• Sales of used vehicles.
• Tesla merchandise (Tesla shorts anyone?).
• In-house vehicle insurance program.

Now let’s dig into Tesla’s financials.

Growth

FY2022 Revenue was $81.5 billion, a 51% increase YoY. In Q4, Revenue was $24.3 billion, a 37% increase YoY. Although growth has been decelerating over the last few quarters, these numbers still demonstrate strong demand for its products. Given Tesla’s sheer size, it won’t be surprising to see growth continue to decelerate from here. Nevertheless, I believe Tesla will be able to achieve 20%+ growth over the next 5 years, propelled by ambitious company targets, continued product innovation, and secular industry trends.

Below, you can see how Revenue has trended over the last few quarters.

Robust Revenue growth was primarily due to surging EV sales. Total Automotive Revenue for FY2022 and Q4 was $71.5 billion and $21.3 billion, up 51% and 33% YoY, respectively.

Automotive Revenue increased primarily due to growth in vehicle production and deliveries. Tesla produced 1.37 million vehicles and delivered 1.31 million vehicles in FY2022, which is a YoY increase of 47% and 40%, respectively. This was made possible by increased production of Model Y at Gigafactory Shanghai and the Fremont Factory, as well as the commencement of production at Gigafactory Berlin and Gigafactory Texas.

The table below shows the production and delivery numbers over the last few quarters.

Higher average selling prices (ASP) also contributed to the growth of Automotive Revenue. As you can see below, ASP in 2022 was slightly higher than in 2021. This was due to higher ASP from Model Y sales, as well as significant increases in deliveries in Tesla’s luxury Model S/X.

Tesla also mentioned that FSD in North America alone contributed $324 million in Automotive Revenue in Q4, which is an annual run rate of about $1.3 billion. Imagine what this figure would be when FSD becomes more mainstream, domestically and globally.

FY2022 and Q4 Services and Other Revenue both grew by 60% YoY, to $6.1 billion and $1.7 billion. The increase in Services and Other Revenue was due to revenue increases in used vehicle sales, maintenance services, paid Supercharging, insurance services, and retail merchandise.

The table below shows the growth of Tesla’s EV network, which correlates with Services and Other Revenue — as the network expands, more customers will be utilizing these ancillary services.

Turning to Energy Generation and Storage, Revenue for the segment was $3.9 billion and $1.3 billion in FY2022 and Q4, respectively. This is a YoY increase of 40% and 90%, respectively.

The growth spike in Q4 was primarily due to strong demand in the Energy Storage business. Storage deployments increased by 152% YoY in Q4 to 2.5 GWh, compared to just an 18% increase in solar deployments in Q4. For this reason, Tesla is ramping up production at its dedicated 40 GWh Megapack factory in Lathrop, California to meet excess demand for its storage products.

Tesla’s growth, without a doubt, is nothing short of spectacular. Not only is Tesla’s growth a confirmation of the ongoing transition to a sustainable economy, but it also shows how Elon & Co. is able to execute according to their (master) plans amidst a shaky global economy and a challenging competitive landscape. Although we can’t expect Tesla to report blistering growth numbers similar to what we’ve seen in 2021 — deceleration is likely as Tesla expands from a larger base — Tesla’s growth story remains intact. Given its track record and future potential, the company is poised to deliver 20%+ growth in the next few years.

Profitability

Perhaps, one of the biggest competitive advantages that Tesla has over competitors is its level of profitability. Let’s have a look.

Q4 Gross Profit was $5.8 billion, which represents a 24% Gross Margin. This figure has been trending downwards over the last few quarters due to inflationary pressures, temporary suspension of production at Gigafactory Shanghai, and inefficiencies from the new Gigafactory Berlin and Gigafactory Texas. But if we zoom out, Tesla’s Gross Margin is trending upwards, showing economies of scale and increased earnings potential.

Despite the recent downtrend, Tesla’s Gross Margin is relatively high compared to competitors. For context, Stellantis (STLA), NIO (NIO), and Ford (F) have Gross Margins of 21%, 13%, and 9%, respectively.

The superior Gross Margin enables Tesla to cut vehicle prices, which could significantly increase market share in terms of the number of vehicles sold. However, many thought that the recent price cuts were an act of desperation to bump up sales in the face of a deteriorating economy. Musk addressed this concern during the earnings call:

The most common question we’ve been getting from investors is about demand. Thus far–so I want to put that concern to rest. Thus far in January, we’ve seen the strongest orders year-to-date than ever in our history. We currently are seeing orders at almost twice the rate of production.

(Elon Musk — TSLA FY2022 Q4 Earnings Call)

Clearly, Tesla’s plan to take market share by cutting prices is working. Nonetheless, here’s a look at how much Tesla makes, on average, for each unit of vehicle sold. As you can see, Revenue Per Car Delivered is trickling down but take notice that Cost of Revenue Per Car Delivered is also trending downwards. In other words, Tesla is maintaining strong margins even with the lower prices. Management explained this further:

Our ASPs have generally been on a downward trajectory for many years. Improving affordability is necessary to become a multi-million vehicle produce. While ASPs halved between 2017 and 2022, our operating margin consistently improved from approximately negative 14% to positive 17% in the same period. This margin expansion was achieved through introduction of lower cost models, buildout of localized, more-efficient factories, vehicle cost reduction and operation leverage.

(Tesla — TSLA FY2022 Q4 Investor Presentation)

On a per-car basis, Tesla makes a 26% Gross Profit Margin (as of Q4). Tesla should see margin pressure in the next few quarters as Tesla drops prices. But this should be partially offset by efficiencies as the new Gigafactories ramp up production.

Moving on, Gross Margin for the Energy Generation and Storage unit was 12% in Q4, an improvement from -7% last year. This was driven by a higher proportion of Energy Storage sales, which has higher margins than the solar business.

Services and Other Gross Margin was 6% in Q4. Gross Margin in this segment has been improving as the segment achieves economies of scale through a larger Tesla fleet.

Operating Profit in Q4 was $3.9 billion, a record for the company. This represents a 16% Operating Margin, which has trended higher over the last few years. The improvement was due to higher ASP and vehicle deliveries, higher Gross Profit, FSD revenue recognition of $324 million, and lower Stock-based Compensation. This was offset by inflationary pressures, the cost of production ramp of 4680 battery cells, and a negative foreign currency impact of $300 million. Nevertheless, the increasing Operating Margin shows that Tesla is gaining operating leverage as it scales further.

Again, Tesla has superior Operating Margins compared to competitors — in the latest quarter, Stellantis, NIO, and Ford have Operating Margins of 13%, -30%, and 3%, respectively.

Finally, Net Income was $3.7 billion, which represents a Net Margin of 15%. Compared to competitors, Tesla has very little debt, which means lower Interest Expenses, and ultimately higher Earnings for investors. For example, while Stellantis have Operating Margins close to that of Tesla, it has $29.6 billion of Total Debt, compared to just $5.7 billion for Tesla.

Fundamentally, Tesla has formidable profitability metrics, which enables the company to cut prices, spend more on product innovation, as well as scale quickly through production ramp. As the company scales further, we should see profitability continue to improve over time. In the process, shareholders should be rewarded with higher earnings. That is the financial competitive advantage that Tesla has over its competitors. The only other automaker that has comparable profitability levels is Ferrari (RACE), which is not really a competitor as it targets high-end clients.

But considering its growth rates and potential, Tesla’s profitability margins are in a class of its own, beating both the averages for the auto industry and the S&P 500.

Financial Health

Turning to the balance sheet, Tesla has Cash & Short-term Investments of $22.2 billion and Total Debt of about $5.8 billion, which brings its Net Cash position to about $16.4 billion. For comparison, Toyota Motors (TM) and Ford have a Net Debt position of $143.6 billion and $108.3 billion, respectively, which limits their potential to grow. Yet another advantage over incumbents.

Tesla also has a current ratio of about 1.5x, which is relatively liquid and slightly higher than the auto industry.

Unlike most pure EV companies, Tesla is already cash flow positive. For example, Rivian (RIVN) and Lucid Motors (LCID) burned $4.7 billion and $1.9 billion in the last twelve months alone, whereas Tesla generated $14.7 billion of Cash from Operations in the same period. While Tesla is reinvesting back its profits for expansion, smaller competitors face bankruptcy risks.

In 2023, Tesla expects Capital Expenditures to be about $6 to $8 billion in 2023 and between $7 to $9 billion in the following two years. Given its strong Net Cash position and Cash from Operations, Tesla has the luxury to pursue its growth plans with little to no liquidity concerns. All these Capital Expenditures are mainly used for building new Gigafactories and expanding existing production capacities.

In the last twelve months, Tesla generated $7.6 billion of Free Cash Flow that can be used for other needs such as expanding the team, paying down its remaining debt, as well as buying back shares. As a matter of fact, Tesla has been paying down its debt over the last few years, dropping down from about $15 billion in 2020 to just $5.7 billion in the latest quarter.

All in all, Tesla has one of, if not, the most pristine balance sheets among automaker peers. Its strong balance sheet should help with Musk’s growth plans as well as protect the company from impending economic storms.

Outlook

In terms of the outlook, Tesla does not provide quarterly or annual revenue and earnings guidance. However, management does provide rather vague, but ambitious, targets.

We are planning to grow production as quickly as possible in alignment with the 50% CAGR target we began guiding to in early 2021. In some years we may grow faster and some we may grow slower, depending on a number of factors. For 2023, we expect to remain ahead of the long-term 50% CAGR with around 1.8M cars for the year.

(Tesla — TSLA FY2022 Q4 Investor Presentation)

Tesla produced 1,369,611 cars in 2022 — 1.8 million units this year represents a ~31% increase from the previous year. Clearly, this growth rate is a far cry from management’s long-term target of 50% CAGR. In addition, given that Tesla is growing over an even larger base, I can’t imagine Tesla achieving 50% production growth in 2024, let alone 2025.

Fear not, Tesla is planning some major production expansions which could help the company achieve that 50% target:

• Tesla to invest $1 billion in a factory in Mexico
• Tesla to invest $717 million to expand Gigafactory Texas.
• Tesla to invest $3.6 billion to expand Gigafactory Nevada.
• Tesla plans to open a Gigafactory in Indonesia.

In addition, the company mentioned that:

Cybertruck remains on track to begin production later this year at Gigafactory Texas. Our next generation platform is under development, with additional details to be shared at Investor Day (March 1st 2023).

(Tesla — TSLA FY2022 Q4 Investor Presentation)

Musk also hinted that Master Plan 3 would be revealed at Investor Day, which should lay out the next hypergrowth initiatives in the next decade. What could Master Plan 3 look like? Here are some of the things that popped into my mind:

• Expand the electric vehicle lineup to the seas and skies.
• Generate renewable energy from other elements such as water and wind.
• Build 99% fully autonomous factories with Dojo and Optimus.

Elon Musk, being the visionary he is, will come up with far more aggressive plans, which is why I’m looking forward to what he has to say at Investor Day.

But let’s get back to the numbers.

Q4 ASP was about $53,000, and if we assume an ASP of $50,000 (after price cuts) in 2023, 1.8 million cars sold would translate to $90 billion worth of Automotive Revenue, which is about a 26% increase YoY. Adding the Energy Generation and Storage business and Services and Other segment, Revenue could easily surpass $100 billion in 2023. Analysts expect Revenue to increase 26% YoY, to $102.6 billion in 2023.

In my view, we could expect a slightly higher figure than analyst estimates as Tesla has a good track record of beating estimates. Perhaps, $105 billion of Revenue in 2023 is a reasonable figure.

However, given a tough macroeconomic environment, Tesla may fall short of expectations. The near-term outlook may look bleak for some, but I believe the long-term trajectory of the company remains optimistic.

Competitive Moats

Based on my research and analysis, I identified four competitive moats for Tesla: technology, brand, scale, and cost advantages.

Technology

Because Tesla ventured into the EV space way earlier than its competitors, Tesla has developed a technology stack that is far ahead of its peers. This stack consists of batteries, powertrains, Gigafactories, charging infrastructure, vehicle software, and Autopilot. Not only has Tesla developed industry-leading EVs, but it has also actually done so at a massive scale.

Tesla also has a ton of optionality. The technological expertise that the company has can be applied to develop new products, which increases the growth potential and market opportunity of the company. For example, Tesla is developing a supercomputer that Musk claims to be competitive with NVIDIA H1 (NVDA). Another example would be robotaxis, which could be massive if it reaches full scale. Here’s one more: Tesla launched its in-house insurance program in 2019 which solidifies its vertically integrated ecosystem.

The insurmountable amount of data it has collected since inception has also created a flywheel of improvement whereby additional data fed into the Tesla ecosystem improves the overall performance of the Tesla fleet through machine learning and AI. For instance, as of Q4, Tesla has deployed FSD Beta to roughly 400,000 customers in North America in city streets, which has accumulated about 100 million miles of FSD outside of highways. As Tesla gathers more data each day, it won’t be long before FSD becomes mainstream.

Time and time again, Tesla has demonstrated that the company is capable of innovating, which is one of the most powerful competitive advantages any company can have in modern times.

Brand

Tesla is like a cult. Its brand is so powerful that Tesla doesn’t need to spend on marketing to promote its product. Here are some statistics to prove its brand moat:

• According to Experience Benchmarks, Tesla has a Net Promoter Score of 97!
• According to Bloomberg, 99% of Tesla customers would recommend the Model 3 to friends or family.
• According to Consumer Reports, Tesla has the highest owner satisfaction among all car brands.

• According to Experian, Tesla has the highest brand loyalty — 70.7% of Tesla owners who sold a Tesla acquired another new Tesla.

Its CEO is also clever to make occasional circus acts to get the world’s attention. Uncensored tweets, bizarre dancing, and selling Tesla shorts are some of the creative, perhaps quite involuntary, strategies that Musk has incorporated to attract media attention. What about the failed Cybertruck demo where a steel ball shattered the “bulletproof” windows of the vehicle? I believe it was done on purpose to gain media attention.

That’s guerilla marketing 101.

Scale

Tesla is the largest EV company in the world. According to CleanTechnica, Tesla has an 18.2% market share in the global pure-battery EV market in 2022. Although this is a drop from 23% and 21% in 2020 and 2021, respectively, an 18.2% market share is still commendable and it is still far ahead of second-place Chinese EV maker BYD (OTCPK:BYDDF). In the US alone, Tesla has a 58% market share.

As competition grows, Tesla’s market share will naturally shrink. However, I believe Tesla will remain at the top of the EV food chain.

Tesla is also a formidable player in autonomous vehicle development. While Tesla is not the leader in autonomous vehicles — startups like Waymo and Cruise are ahead of the game — it could one day be in the future. As mentioned earlier, Tesla’s technology enables the company to retrieve vast amounts of data that no other company can come close to. As shown below, there are ~2.7 million Tesla vehicles on the road that are collecting data each day, compared to just ~1,000 and ~300 vehicles for Waymo and Cruise, respectively.

Sure, these smaller startups may have an edge today, but running a full-scale autonomous ride-hailing network is a different story. For state-of-the-art autonomous driving networks, companies will need substantial amounts of fleet data to put together the highest-performing algorithm for smooth operations. When FSD is fully launched, Tesla could essentially deploy robotaxi services nationwide almost instantly. It’s a “winner takes most” market and Tesla is well-positioned to capture this opportunity due to its massive scale.

Cost Advantages

As discussed in the previous sections, one of the biggest competitive advantages that Tesla possesses is its industry-leading profitability levels.

Tesla is able to achieve this through economies of scale even with ongoing expansion plans that put pressure on margins. The higher operating margin enables Tesla to slash prices in an attempt to lure more cost-conscious buyers to purchase Tesla cars. For instance, a Wedbush survey found that Tesla is taking market share in China following its recent price cuts.

Such price cuts also force other automakers to consider cutting prices if they want to compete for market share, which puts them in a worse position as they already have thin margins.

Tesla’s ASP has dropped over the years as it aims to bring affordable EVs into the market. The beauty of it is that even with lower ASPs, Tesla is still able to improve Operating Margins.

That’s cost advantages at play and that spells danger for competitors.

Valuation

Tesla’s share price has gone through a roller coaster ride over the last few years. At the November 2021 peak, Tesla’s share price reached $400 a share, which represents a $1.2 trillion market cap, a major milestone for the EV company. But Tesla lost its trillion-dollar status in the blink of an eye, plunging more than 75% from its high. Insider selling, Twitter distraction, growth stock selloff, high inflation, and interest rate hikes were some of the reasons why the stock collapsed.

The selloff seemed endless up until recently — Tesla stock started 2023 with a bang, rallying 100% from the lows of $101 as the markets rebounded and macro conditions turned out better than expected.

With that said, is Tesla stock still worth buying after the rally?

Let’s take a look.

Looking at Tesla’s valuation multiples, the stock seemed to be trading cheaply based on historical standards.

• Price/Sales of 7.6x, which is at the lower end of its historical range of 1.4x to 33.5x.
• Price/Earnings of 54.4x, which is a big discount to its high of 450x.
• Price/Free Cash Flow of 82.4x, which is off from its high of 500x.

Now, just because valuation multiples have contracted doesn’t mean that Tesla is cheap — we may see another leg down as valuation multiples drop to more reasonable figures.

What is considered reasonable? Well, that’s up to the markets to decide. But for the sake of comparison, Apple (AAPL) and Ford (F) have Price/FCF ratios of 24.5x and 21.1x, respectively.

Sure, Tesla is disrupting the auto industry and it has higher growth potential than its peers. I acknowledge that Tesla should trade at a premium, but in my opinion, multiples seemed too frothy still.

Below, I’ve also done a quick DCF analysis to find the intrinsic value of the company. I try to be as conservative as possible in my assumptions.

Here are my key assumptions:

• Revenue Growth: followed analyst estimates in the first three years and then gradually drop to 12%.
• Cost of Revenue: improve to 65% of Revenue by 2032 as the company achieves economies of scale and enjoys higher margins from software-related products.
• Capital Expenditures: $6 to $8 billion in 2023 and $7 to $9 billion in the following two years, as guided by management.

Based on the above assumptions, I have the following DCF forecast. I project a $421 billion Revenue by 2032 and an FCF margin of 21.1% — higher than Stellantis’ FCF Margin of 9.0% but slightly lower than Apple’s FCF Margin of 28.2%

Using a perpetual growth rate and a discount rate of 3% and 12%, respectively, I arrive at an intrinsic value per share of $182. That said, Tesla appears to be trading slightly higher than fair value.

My intrinsic value estimate is also lower than analysts’ average price target of $193.

For growth stocks, I like to apply a wide margin of safety to help me sleep well at night, usually 50% of my already-conservative price target. But in Tesla’s case — given its durable competitive moats, fortress balance sheet, and huge growth potential — I may use a lower margin of safety.

If we see a pullback in prices, I’d be interested in starting a position in the stock. If it hits new lows, I’ll be aggressively buying to make Tesla a core holding in my portfolio.

I see the potential for the stock to generate significant alpha. Just look at the returns ever since Master Plan 2 was released on 20 July 2016 — shares surged more than 2,000%.

Musk has a history of delivering what he promised. Tesla Investor Day is approaching and Master Plan 3 will be revealed. If Musk delivers once again, we could see another 2,000% increase in the stock, which will blow past the $10 trillion mark. This will be a long, difficult road for sure, but I believe Tesla has what it takes to achieve this coveted milestone. Even Musk thinks so:

I’m of the opinion that we can far exceed Apple’s current market cap. In fact, I see a potential path for Tesla to be worth more than Apple and Saudi Aramco combined.

(Elon Musk — TSLA FY2022 Q3 Earnings Call)

Catalysts

• Roadster, Cybertruck, and Others: With the recent launch of the Tesla Semi, the additions of the Roadster and Cybertruck should provide a boost to Revenue, and therefore, investor sentiment. Future unveiling of other vehicle types can also bring hype to the markets — some examples include eVTOLs, buses, and boats.
• Optimus and Dojo: Tesla unveiled Optimus, an autonomous humanoid robot, on AI Day in October 2022, which could cost less than $20,000. The company also unveiled the updated Dojo supercomputer which Musk claimed could be a “service that you can use that’s available online where you can train your models way faster and for less money.” Not much has surfaced about these products but they definitely open new revenue streams for Tesla once they are commercialized.
• Robotaxi: Continued FSD development and the official launch of the robotaxi network could potentially disrupt the ride-hailing industry, particularly the duopoly held by Uber (UBER) and Lyft (LYFT). When drivers are not involved, the costs of running a ride-hailing network significantly decrease, which will be extremely difficult for Uber and Lyft to compete with. When this robotaxi feature “enable your car to make money for you when you aren’t using it”, the incentive to purchase a Tesla increases.
• Insider Buying: Over the last two years, Musk has sold almost $40 billion worth of Tesla stock, which is also a major reason why the stock sold off. Although Musk reassured investors that he won’t sell any more stock for the next two years, Musk purchasing stock could provide the plot twist and confidence that the markets need.
• Master Plan 3: It’s been 7 years since Master Plan 2 was released. On March 1st, 2023, Musk will reveal the new Master Plan. Mark your calendars.

Risks

• Rising Costs: Limited supply of raw materials and raging inflation could put pressure on Tesla’s profitability. Although Tesla is the one automaker that is best positioned to withstand this problem, uncontrollably high prices mean Tesla needs to sacrifice margins or increase prices, which could decrease sales volume and slow down EV adoption.
• China Exit: Due to geopolitical tensions, there’s a certain level of risk where Tesla needs to shut down operations in China, which supplies most of the exports to non-US markets.
• Competition: This is by far the biggest bear argument against Tesla. All this competition could take market share from Tesla as well as put pressure on margins. Competitors include:
  • Chinese rivals like BYD, NIO, and Xpeng (XPEV).
  • Smaller EV players like Lucid Motors, Rivian, and Polestar (PSNY).
  • Incumbents are also catching up: Ford, Mercedes, and Volkswagen.
  • Self-driving technology like Mobileye (MBLY).
  • Charging companies like ChargePoint (CHPT) and EVgo (EVGO).
  • Tech giants like Apple are also planning to enter the EV market.
  • Solar players like Enphase (ENPH) and SolarEdge (SEDG).
  • Energy storage firms like Stem (STEM).
• Cannibalization: If the cost of hailing Tesla robotaxis is low enough and if access to robotaxis is super convenient, it could potentially reduce the need for people to purchase cars. As such, the development of one product may cannibalize the sales of another product — in this case, robotaxis cannibalizing auto sales. According to Ark Invest, global auto sales may decline as robotaxis hit the road.

Conclusion

Tesla is accelerating the world’s transition to sustainable energy. The company is riding the wave of megatrends including EVs, self-driving technology, and clean energy.

Tesla possesses technology, brand, scale, and cost advantages moats. The company is backed by strong management with a proven track record of execution and delivering the unthinkable. With its strong cash flow and balance sheet, the company has incredible growth potential for decades to come.

For these reasons, I believe Tesla stock is a great long-term buy, although we may see volatility (as it has always been with Tesla) following the rally in recent weeks.

Ever since Master Plan 2 was published, shares have returned handsomely for investors. All eyes are on Master Plan 3 as Musk lays the steps necessary to take Tesla to the next level — and potentially to $10 trillion stardom.

Thank you for reading my Tesla deep dive. If you enjoyed the article, please let me know in the comment section below.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in TSLA over the next 72 hours. 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.

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