International | Oct 25 2021
Tesla's latest result puts the critics and permabears firmly on the back foot, reports Danielle Ecuyer.
-Tesla's Q3 performance triggers earnings forecast upgrades among Wall Street analysts
-Company now aiming to disrupt the insurance industry
-Demand for Tesla EVs has even surprised management
-Software and insurance expected to drive higher margin sales in years ahead
By Danielle Ecuyer
The Tesla price has run up from US$600 in early June and unlike previous quarterly earnings reports, last week’s Q3 results were not the usual ‘sell the fact moment’ with the stock price reaching a record close of US$909.25 two days after the earnings report.
On any metric the earnings result was a stand up and be counted moment for Tesla and analysts applauded the results with an average 13% upgrade in earnings for 2021 and 10% for 2022, according to Gary Black, Managing Partner at The Future Fund.
In the most challenging of times with supply chain problems for all automotive manufacturers, Tesla glided through the cost input maze with a 57% increase in automotive revenues and a gross margin ex ‘green’ credits of 28.8%. The operating margin at 14.8% has now exceeded the medium-term goals of the company.
The Model 3 became the bestselling luxury sedan across the world and the Model Y is expected to be the bestselling car ever; remembering that the current best-sellers notch up one million annual unit sales per annum.
The great results were also achieved with a -6% decline in the average selling price (ASP), and without the higher margin premium Model S Plaid and the refresh Model X, which are just coming back on stream at the Freemont facility in California.
Tesla investors will be looking forward to the Model Y ramp up as the new Berlin and Austin giga-factories come on stream in 2022.
In the Q3 earnings call senior management reiterated that there remain “unknown unknowns” in the ramp-ups, so between ongoing supply chain and cost challenges, the margin improvements displayed this quarter may be tested in the next 4-5 quarters.
But investors need to look beyond the short term to see the big picture.
The Big Picture
Tesla is aiming for 20m vehicles by 2030 and their current annual production rate is bumping up at around 1m EVs prior to Austin and Berlin coming on stream. The aim is to compound volume growth at 50% p.a. putting 5m EVs in range by 2026.
The standout comment from the earnings call was the admission that even management were surprised by the level of demand for electric vehicles and specifically Tesla vehicles with lead times for deliveries running at 2-6 months depending on the geographic region.
Much continues to be made on the bear case for Tesla around valuation and the constant cri-de-coeur of ‘the competition is coming’.
The fact is Tesla is keen for the incumbents to accelerate the transition to EV’s and according to the world’s largest producer of lithium, Albemarle, EV demand will grow from 3.4m units in 2020 to 35m in 2030.
Plain and simple the market for EVs is growing, but the winners will be the companies with the ability to access the capital needed to invest for the transition.
Adam Jonas from Morgan Stanley calls the EV transition an arms race on technology, batteries, and talent; and at this stage of the race, Tesla is winning on all fronts.
It is very challenging for the incumbents to even attract the best engineers when Tesla is viewed as the leading light of engineering across so many aspects of their business model.
This leads me to probably the most interesting part of the Q3 conference call, the rollout of Tesla’s insurance product in Texas.
The Importance Of Insurance
In the constant drive to reduce costs for consumers, Tesla worked out that insurance was one of the biggest challenges to reducing the financing costs for their EVs.
So, what if they used the data to create a personalised bespoke insurance product for Tesla drivers?
Some 150,000 connected drivers who are using the safety score on the full self-driving (FSD) beta product have produced 100m miles of data. Although the insurance industry is heavily regulated, Tesla has been able to start selling Tesla insurance to Texas drivers.
The results thus far show that the probability of a collision using the safety score is -30% lower and that the data are supporting the personalised insurance product.
Vehicle insurance based on real driving data allows for a cost reduction for those safe drivers.
The cost to decarbonise was recently estimated at US$6trn per annum by Goldman Sachs while analyst Dan Ives, MD and analyst from Wedbush calls Tesla the winner from the “green tidal wave”.
Tesla’s aim is to create the most technologically advanced, vertically integrated energy and transport company based on software and machine learning or put simply, computers on wheels.
The comparison with what Apple has achieved is the most cited, a hardware company that has transitioned to a software hybrid model and in Tesla’s case smart, autonomous vehicles and a smart insurance business.
There are many regulatory hurdles to contend with to create the goal of an autonomous robo-taxi fleet.
Wall Street Valuations & Price Targets
Valuing a company like Tesla remains contentious on Wall Street. In the bull pen there are now seven Wall Street analysts/banks that have price targets above US$1000, as follows, New Street Research – US$1298, Piper Sandler – US$1200, Wedbush – US$1100, Oppenheimer – US$1080, Canaccord US$1040, Bank of America US$1000, Deutsche Bank US$1000, followed by Mizuho US$950, Morgan Stanley at US$900, Credit Suisse US$830 and Wells Fargo at US$860.
Gene Munster from Loup Funds argues that in 3-5 years, EVs will represent 25%-plus of total sales with software services such as the FSD and insurance products driving higher margin sales. He even goes as far as to suggest an Apple-like gross margin of 40% is possible with a shift in the sales and earnings mix.
With revenue growth from US$70bn in 2022 to US$400bn in 2027, a 6x times revenue multiple results in a stock price of $2500.
There is no denying that a lot needs to go right for that outcome, but the bulls are firmly in a similar state of opinion.
By contrast the bears continue to value Tesla like a traditional automotive manufacturer with Barclays holding the permabear underweight valuation of US$300.
Tesla will most likely be the next US trillion dollar giant and whilst the story is far from risk free, Tesla has proven its credentials in terms of earnings growth and profitability. There is one thing certain about Tesla, this story is far from over folks!
Danielle Ecuyer has been involved in share investing in Australia and Internationally for over three decades. Due to the success of her first book Shareplicity: A simple approach to share investing (Major Street Publishing $29.95) her second book Shareplicity 2 A guide to investing in US stock markets (Major Street Publishing $34.95) was published in July 2021. Find out more at www.shareplicity.com.au
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