Tesla: Sell-Off Is Unwarranted

Summary:

• We think the Tesla, Inc. automobile business will generate ~$50 billion in profits by 2030.
• Tesla is more than simply automobiles. Additional potential strong growth drivers are solar, energy storage, FSD, and Robotaxis.
• In particular, Megapack sales are poised for significant growth over the next three to five years.
• We are reiterating our $492/share Price Target and Buy Rating.

Investment Conclusion

Since Tesla, Inc. (NASDAQ:TSLA) reported 2Q23 financial results, the market value of its stock has declined by ~18%. At one point, TSLA shares were down by ~25%, before recovering somewhat over the prior week. We believe the sell-off is unwarranted. The factors that drive our argument include the solid 2Q23 financial performance, that the month-over-month reduction in Tesla deliveries in China for July was likely due to the expected launch in September of Model 3 Highland, which along with design and function upgrades is rumored to be priced at a discount to the current Model 3 MSRP, and that investors are overlooking the company’s additional businesses, which represent strong drivers of long-term growth.

Contrary to Mr. Market’s opinion, during 2Q23, relative to 2Q22, TSLA produced 83% more cars, and delivered 86% more. Specifically, ~480,000 cars were produced and ~466,000 were delivered. Sure, margins suffered, driven by discounting on Teslas, that was implemented to fuel demand consistent with the growing production levels. However, given that Full Self-Driving (FSD) software loaded onto Teslas once fully functional will deliver high margin recurring revenues associated with a potential Robotaxi business, profits associated with Teslas are dynamic, and will multiply exponentially over time. In addition, the firm is capturing market share, which given that a buyer of a Tesla is more likely to eventually replace the car with another Tesla model, is a significant benefit. Moreover, with more Teslas equipped with the company’s FSD on the road, the firm is accruing valuable FSD miles to train the platform. Overall, deploying price cuts to sell Teslas is a net benefit, in our opinion.

Events that have unfolded over the prior few quarters have demonstrated that TSLA is no longer the scrappy underdog. With its Model Y as the best-selling car in the world and its supercharger turning into the de facto standard in North America, market forces have christened the company as a leader of global automobile. However, TSLA’s rapid evolution over the previous decade will appear slow and steady, compared to the fast and furious growth its business is likely to experience, across the next decade of its lifecycle.

Undoubtedly, TSLA’s story ahead is about the momentum building in its automobile business (surmising that 20 million Teslas are delivered in 2030, an average price of 25,000 and a profit margin/car of 10%, would amount to $50 billion in profits). However, predominant drivers of TSLA’s next chapter, are also likely to be its ancillary segments: solar panels/roofing, energy storage, FSD, and Robotaxis. They are likely to match the success of the firm’s automobile business head-to-head.

In order of magnitude of growth, we view TSLA’s energy storage business, as the show stealer, over the next three to five years. TSLA has created an entire ecosystem to facilitate the generation, storage, deployment, and monetization of solar power. For generation of solar energy it provides solar panels/roofing, for storage of the generated power it provides Powerwalls and Megapacks, and for selling surplus energy to the grid, it has Autobidder. Considering that TSLA has simplified activities associated with solar power, its solar panels/roofing, Powerwalls, and Megapacks are experiencing strong customer demand.

As Powerwalls are relatively lower priced home power storage systems, majority of sales associated with TSLA’s energy storage business will be derived from its Megapacks, which are designed for commercial enterprises, including large utility companies that supply electricity to the grid. Given that solar energy is relatively cheaper to produce than electricity generated deploying fossil fuels, and that it prevents further degradation of the environment, we expect customer demand for Megapacks to expand exponentially. In that regard, it is important to note that Megapacks are backordered until 3Q24.

Accordingly, to benefit from the solid customer demand for Megapacks, TSLA has announced plans to rapidly ramp on production. Currently, Megapacks are manufactured for the most part, at TSLA’s Lathrop, California facility, which is equipped to produce 10,000 units/year. However, upgrades to the factory are underway, which will double manufacturing capacity, over the next year. In addition, a Megafactory is expected to debut in Shanghai, China during 3Q23, with production of Megapacks anticipated to begin during 2024. Moreover, TSLA has indicated that it plans to launch several Megafactories over the next few years.

With each Megapack featuring a storage capacity of just 3MWh, hundreds of units are required to facilitate large scale sustainable energy deployment. Among completed Megapack projects is the 212 unit 350 system in Victoria, Australia, that provides backup energy to the city, a 81 unit 100 MWh system in Angleton, Texas, that provides the grid with outage protection, and a 37 unit 46 MWh system in Soldotna, Alaska, that increases the sustainable energy capacity, and offsets electricity produced at gas turbines.

Ongoing projects include a PG&E 367 unit 1.1 GWh (1,100 MWh) system in Moss Landing, California which will supply electricity to the grid, and a 189 unit 565 MWh system in Kapolei, Hawaii, which will support the state’s transition to sustainable energy.

With respect to earnings potential, each Megapack is priced at ~$2.4 million, and TSLA has indicated that profit margins are consistent with the 10% associated with the company’s automobiles. Given the ramp in Megapack production expected over the next few years, it appears that the business is well positioned to deliver solid earnings over the medium term. In regard to demand, it is noteworthy that given the significant benefits associated with sustainable energy, global transition away from fossil fuels is imminent, particularly across the Southern Hemisphere of the globe, where sunshine is abundant and oil imports stress foreign currency reserves.

Any discussion on TSLA is incomplete without discussing the firm’s FSD platform. FSD is being developed to automate Teslas to a level where they can function without driver intervention. In essence, the plan is to transform Teslas into driverless cars. TSLA’s FSD is currently at Level 3 automation (conditional driving automation), which indicates that although Teslas with FSD have the ability to drive from point A to point B, automatically, driver attention is mandatory, at all times, to intervene in case of malfunction.

Level 4/5 Automation is required for Teslas to be considered fully automatic, with full ability to function without a driver. TSLA has noted that six billion FSD miles will be required to train the platform to achieve Level 5 automation (full driving automation). At the end of 2Q23, Teslas had traversed 300 million miles on FSD. In addition, 400,000 Teslas in the U.S. and Canada are equipped with FSD. Further, 2.3 million Teslas feature Autopilot, the driver assist system, that is loaded onto every Tesla.

Acceleration in the evolution of FSD requires FSD miles and compute power. To support compute power, TSLA has developed the Dojo super computer, which will increase the pace of neural net training associated with FSD. With regard to FSD miles, the greater the magnitude of FSD equipped Teslas on the road, the faster the opportunity to achieve the six billion FSD miles required to achieve full automation. Given the dynamics, TSLA’s FSD will achieve Level 5 automation, it is a matter of when not if. However, given the substantial gap between the six billion FSD miles requirement and the 300 million FSD miles currently travelled, it appears that full driving automation for Teslas is ways off.

However, Level 4 automation (high driving automation) might be more easily achievable. At Level 4 automation, vehicles can operate in self-driving mode without a driver, usually in urban settings. Once Level 4 automation is achieved, TSLA might be positioned to embark on its Robotaxi business. Alphabet’s (GOOG) Waymo Robotaxis operate on Level 4 automation. In addition, at Level 4 automation, FSD at $15,000, might become more attractive to potential Tesla purchasers.

Management has indicated that its Robotaxis will be fleets of driverless vehicles without pedals and steering wheels, built specifically for ride sharing, and private FSD equipped Teslas that owners can potentially ply out through a dedicated Robotaxi application. Given that the cost/mile associated with the Robotaxis is anticipated to be approximately $0.18 compared to the current $2 to $3 linked to car services, the potential for profits is significant. TSLA has stated that it anticipates splitting profits 50/50 with private Tesla owners that join the Tesla Robotaxi network.

To ballpark potential revenues associated with the service, it is noteworthy that General Motors’ (GM) affiliated Cruise, that provides Robotaxi service on the West Coast, has projected that revenues linked to its business are likely to touch $50 billion by 2030. Considering that automation associated with Cruise EVs is based on mapping of entire cities, while Level 4 automation Teslas could be plied anywhere without limitation, the potential for revenue generation related to Tesla Robotaxis is exponentially higher.

However, FSD has to achieve Level 4 automation before TSLA’s Robotaxi business can even be launched. Unless the company changes track and launches a Robotaxi service based on mapping entire cities. Considering, that we view such a scenario as highly unlikely, a potential launch estimate for TSLA’s Robotaxis is yet to be determined.

Net-net, investors should not be valuing TSLA on the basis of one month of declining deliveries of Teslas in China. They should be focusing on the sum-of-the-parts associated with the firm’s multiple segments. Given business conditions, we believe TSLA’s stock at current levels represents a Buying opportunity. Therefore, we are reiterating our Price Target of $492/share and Buy Rating. Please note that our Price Target excludes earnings from solar panels/roofing, energy storage, FSD, and Robotaxis, pending additional color from TSLA.

Bottom Line

Armed with government support from all over the world, the industry’s largest and growing production capacity, the ability to deploy price cuts to keep inventory moving, and competition that appears slow on the uptake, all is well at TSLA automobiles. As the pioneer of the industry, the company’s cars are as synonymous with EVs as Xerox was to photocopying and Cadbury’s was to chocolate. Now TSLA appears well positioned to work its magic on additional verticals associated with sustainable energy – solar panels/roofing and battery storage systems, and potentially FSD and Robotaxis. Earnings will keep rolling in, for sure. Blue skies for Tesla, Inc. Blue skies for TSLA investors.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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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