Tesla Stock Upgrade: Elon Musk Just Got A New Job At The ‘DOGE’
Summary:
- Federal regulations on autonomous vehicles are evolving, potentially boosting the robotaxi market if regulators simpatico with Tesla, Inc. CEO Elon Musk emerge.
- A significant compound annual growth rate is necessary to justify current investment levels and avoid future regret. I think it’s possible if catalysts get pulled forward.
- Speculation surrounds whether Elon Musk might need to divest, with potential Congressional intervention looming if he becomes the head of the “DOGE,” or new Department of Government Efficiency.
- The article provides a rare macro upgrade, emphasizing the importance of regulatory changes and growth metrics in investment decisions.
A rare macro upgrade
I’m a numbers guy. Almost 100% of my articles are based on facts versus fiction. However, this upgrade of Tesla, Inc. (NASDAQ:TSLA) is one of my first macro assumptions that the big bet of CEO Elon Musk on a Trump Presidency will pay off in some shape or form. Dan Ives recently upgraded Tesla again, robotaxis are the catalyst, and I agree that the regulation slog should not be anywhere near as bad as if there were a Harris Presidency. Speeding up this vision could finally provide the next leg of revenue growth to start differentiating the company from the rest of the auto sector.
In this article, I would like to do a deep dive on the actual Federal regulatory oversight in autonomous vehicles. We will see what Elon Musk’s new possible job at the Department of Government Efficiency, or DOGE, might look like and if he may be asked to divest from Tesla if he takes on a role in the administration.
Being consistent in my upgrade, as laid out in my article:
Trump Vs. Harris: Top Stocks To Buy Or Avoid For The November 2024 Election.
Where I listed Tesla as a buy only if his bet on Trump prevailed, I am upgrading this to a buy.
And for those curious, here is my previous article on Tesla assuming these catalysts would not occur in the next 5 years.
Tesla: Robotaxi Event And Optimus Bring Both Hope And Disappointment.
An in-depth analysis of Federal regulations of autonomous vehicles
Here are some great bullet points from Norton Rose Fulbright around what the Federal Government can actually control pertaining to autonomous vehicle use:
Federally, the United States government has merely called for research on the impact autonomous vehicles will have on the transportation system and released a framework to classify the technology used in autonomous vehicles. At the state level, only a handful of states have passed legislation related to autonomous vehicles. The legislation that exists primarily relates to the testing of autonomous vehicles. The current state statutes are not identical – they have different requirements for the testing and operation of autonomous vehicles. As autonomous vehicle technology advances, however, this sparse regulatory response—state and federal—is poised to change.
Additionally, from Holisticai:
At the federal level, a key law governing autonomous vehicles is H.R 3388, the Safely Ensuring Lives Future Deployment and Research In Vehicle Evolution Act, which was passed on 9 June 2017. The law provides that States can enact laws regarding automated vehicles if they are identical to federal standards, effectively paving the way for state-level legislation. Moreover, the law required the Department of Transport to conduct safety assessments and establish a Highly Automated Advisory Council.
After reading through various online resources regarding state versus Federal level regulation of autonomous vehicles, it seems the Federal government puts out the framework and the states adopt their policies based on that.
- Recommendations of regulatory framework seem to start at the Federal level, with the Departments of Transportation and The National Highway Traffic Safety Administration [NHTSA]. They will also be the enforcers.
- Congress, acting on frameworks from these two departments, can draft bills such as H.R. 3388 that further influence the abilities of what kind of regulations can be passed at each state level.
- States enact laws based on Laws passed by Congress.
So, these are a few hoops to jump through. First, at the Federal level, I can imagine Trump appointees at the Department of Transportation and NHTSA could speed up more beneficial guidance.
Second, a sympathetic Congress is needed to both create and pass a better bill to enact said framework at the State level. This second part could be significant if Republicans actually get a sweep of the Presidency, House, and Senate. The reason being is that you both need to create a bill [usually a two house member joint creation] and then pass a bill. If we are assuming that Republicans will be more inclined to push this forward, then this is vital to the process.
Third, these regulations need to be adopted by the States. I still do believe some states would resist legislation that they may deem beneficial to Elon Musk, but there are other players this would benefit to speed up and expand robotaxi adoption.
I can imagine this happening now, especially if there is control of the House of Representatives by Musk’s constituents.
The vision of robotaxis from the most recent earnings call
From Elon Musk on the most recent earnings call:
Cybercab is just not going to have steering wheels and pads. It’s only designed to optimize for autonomy. But now it’ll cost on the order of cost roughly $25,000. So it is a $25,000 car. And you can — you will be able to buy one on an exclusive exclusively if you want. So just what happens to your mobile phones. You don’t need it.
Let’s say Tesla can build these at $25,000 and eliminate the driver and there is mass adoption within 5 years’ time. Tesla can make about 2 million cars a year currently, and let’s say they can ramp up to 3 to 4 million by 2030. They would need at least a third of their capacity by that time dedicated to this to make inroads, in my opinion.
Uber (UBER) currently has $41.95 Billion in revenue, with a gross margin of 32.17%. Let’s assume the margins on this business should be similar for Tesla. With the elimination of the driver, you could more or less drop the gross income line down to the operating line or EBITDA after the vehicles have recouped their initial costs. If they could one day match UBER numbers [which I know also has freight and other revenue involved], this could add about $13 Billion in EBITDA if they could get close to today’s UBER numbers.
Keep in mind there are 7.1 million Uber drivers producing this revenue currently, so Tesla would likely need to double their capacity. So even at 1 million cabs on the road, they could only hope to capture about 14% of the gross margins of UBER, which again I am giving Tesla as EBITDA since they are supposed to be eliminating human operating expenses. That would amount to about $2 Billion in EBITDA using that math.
That number could add about a 15% growth rate to Tesla’s EBITDA in the future for every million cabs they put on the road. This is all assuming that Tesla operates a cab business. It could possibly be even better if they are selling Uber like commission-based services to buyers of the cabs that want to run the business themselves.
A new job at the Department of Government Efficiency?
Cleaning house in Federal departments is nearly impossible. You can change the heads, but a lot of the body will remain. The new proposed government department that Musk would somehow head in his spare time [didn’t know he had any spare time], would be finding overstaffed departments and paring them down. In some cases, eliminating them all together. If you work in a department like the Department of Transportation or the NHTSA, would you dare slow walk anything if you may be deemed to be inefficient? I wouldn’t bet your pension on it.
How much growth do we need to not regret buying here?
I enjoy drawing up these what-if growth rate charts to see the point at which a stock based on its earnings grows into its valuation. In my opinion, high-growth tech companies can support around a 30 X EV to EBITDA multiple for long periods of time. Let’s compute where we’re at today on a per-share basis, and where we would need to be in 5 years to get to that number.
A compound annual growth rate demonstration
First off, let’s see how much EBITDA per share Tesla is currently pumping out:
All numbers in millions courtesy of Seeking Alpha
- TTM EBITDA is $13,244
- Divided by shares outstanding TTM of 3,211 million = $13,244/3,211= $4.12 EBITDA per share
- Discounted by 10% to account for eventual Musk compensation payout and share dilution trends. $4.12 X 90% =$3.71
- Current price : $285 / $3.71 = 76 X EBITDA
- Target EBITDA per share $9.5 to get to a 30 X ratio.
Ok, so the goal here is to see at what CAGR growth rate will we get to $9.5 a share within 5 years’ time.
CAGR rate | 10% | 20% | 30% | |
EBITDA/ share | $3.71 | $5.97 | $9.23 | $13.77 |
Year | 1 | 5 | 5 | 5 |
The answer to this question, to hit exactly $9.5 a share in 5 years’ time, is 20.7%. This growth rate is not entirely out of the ballpark, and many high-quality tech names can consistently grow at such a rate. The growth will come in spurts versus all at once, but seems possible. Tesla will need to pick up the slack fast, but they have proven to be able to hit these growth rates in the past.
As noted above, I think in the most optimistic scenario, the robotaxis could add about 15% per year to the EBITDA numbers per million cabs put on the road. They will need some additional new catalysts to hit their 20.7% 5-year growth rate.
Some other items I would be optimistic about:
- Cyber Truck: With a new Republican base of supporters, I can imagine a net add of new customers on a vehicle basis by selling Cyber Trucks to F150 owners and what would be considered a more conservative audience. He will lose some left-leaning owners, but with the EV space being so difficult to make profitable, competition [at least in the US] seems to be second-guessing whether they want to compete in full EV. Cybertruck became the third best-selling EV in Q3 in the U.S. (behind only Model Y and Model 3)
- Semi Trucks: If autonomous regulations speed up, Semi Trucks without a driver could be a ridiculous cost-cutting efficiency for logistics. This seems like a long shot and far earlier to bet on than robotaxis, but hey, SpaceX can catch reusable rockets with giant chopsticks, I never thought I’d see that either.
- Government Freight: There is also a market for government freight, Semis could play a role here as well in getting Federal contracts.
- Optimus: I am not super optimistic about the resale of these, but they could become efficient menial task executors for Tesla and probably don’t require numerous regulation hurdles to put into action. Once it can do something useful and add to margins, I assume they’ll be used.
- Charging infrastructure: This is sorely lacking in America, and Trump has been all-in on rebuilding America’s infrastructure. If Tesla can get a contract to build universal charging stations for all EVs, this would be a catalyst.
- Energy storage and backup: As cyber-attacks become more prevalent and could possibly shut down grids, selling megapacks as a means of National Security could be another growth channel.
Will Elon Musk have to divest?
A strange, not discussed element of becoming the head of a US Government department could be the forced divestiture of stocks. I have friends with spouses who had a position [not secretary, just an employee] in one of the departments in the Biden administration, they were forced to divest all single stock holdings. This included anything held by either spouse. If Elon Musk has to choose between holding on to all his Tesla stock or heading up the “DOGE,” this could be a tough decision. An all-out divestiture could be a real risk to Tesla stock overall.
Summary
As mentioned, this is the first macro upgrade I have done. Never in my recollection have I seen a CEO get a prominent position in the US Federal Government while massively supporting said campaign in the run-up to the election. This is uncharted territory, where Elon Musk has so much on the line at the precipice of the autonomous vehicle future. Even if the numbers don’t pan out, I believe this will create a 4-year cycle of optimistic future forecasting, even if the future never gets here, it will still keep the stock full of momentum. Buy.
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