Tesla-Navigating the Future

Introduction:

Name: Tesla

Ticker: TSLA

Sector: Consumer Discretionary

Industry: Automobiles

Market Cap: Mega 452.99 $B

Eyestock Rating: 97%

While waiting for Tesla to post its financial results after market close on Tuesday, April 23, 2024 (check out our Earnings Calendar section.) we recap the company info, financials, our analysis and outlook for Tesla. 

Summary

Tesla faces a landscape of evolving challenges and opportunities as it navigates the automotive and energy sectors. Despite its innovative prowess and market leadership, the company must address declining profitability margins and intensifying competition. However, with a valuation currently below its minimal P/E level of $146.12 over the last five years, Tesla presents a potentially attractive investment opportunity for those who believe in its long-term vision and disruptive potential.

Overview:

Tesla, founded by Elon Musk, has been a game-changer in the automotive industry, leading the charge for electric vehicles (EVs) and renewable energy solutions. Known for its sleek design, cutting-edge technology, and high-performance electric cars, Tesla has gained a significant following and disrupted traditional automakers.

Apart from its electric vehicles like the Model S, Model 3, Model X, and Model Y, Tesla has also ventured into energy storage solutions with products like the Powerwall and Powerpack, aimed at residential and commercial applications, respectively. Additionally, Tesla’s solar products, such as solar panels and solar roof tiles, aim to revolutionize the way people generate and consume energy.

Tesla’s Autopilot feature, utilizing advanced driver-assistance systems, has been a focal point for the company’s vision of autonomous driving. While it’s garnered both praise and criticism, it’s undeniably a pioneering effort in the automotive industry towards self-driving technology.

The company has faced its share of challenges, including production delays, quality control issues, and controversies surrounding Musk’s leadership style and public statements. However, Tesla’s stock performance, technological innovations, and its impact on the EV market have solidified its position as a major player in the automotive and clean energy sectors.

Tesla’s business model is multifaceted and encompasses several key elements:

1. Electric Vehicle Manufacturing: Tesla designs, manufactures, and sells electric vehicles (EVs). These vehicles range from luxury sedans (Model S, Model 3) to SUVs (Model X, Model Y). Tesla’s EVs are known for their long-range capabilities, high performance, and advanced technology features. According to Q4 Investor Report the amount of revenue generated by EV was 21.6 B USD or 85% of all revenue 25.17 B USD.
2. Energy Storage Solutions: In addition to vehicles, Tesla offers energy storage solutions for both residential and commercial use. This includes the Powerwall, a home battery storage unit, and the Powerpack, a larger-scale solution for commercial and utility-scale energy storage. These products enable consumers and businesses to store energy from renewable sources like solar panels for use during peak demand or in case of power outages.
3. Solar Energy Products: Tesla acquired SolarCity in 2016, integrating solar energy solutions into its portfolio. Tesla offers solar panels and solar roof tiles, which blend into the architecture of a home while generating electricity from sunlight. This allows customers to generate their own renewable energy and reduce reliance on traditional grid power. Energy generation and storage revenues was 1.4 B USD or 5.7%.
4. Software and Services: Tesla leverages software and services to enhance the user experience and unlock additional revenue streams. This includes over-the-air software updates for vehicle features and performance improvements, as well as subscription services like Full Self-Driving (FSD) capability and premium connectivity features. Services and other revenue contributed 2.2 B USD or 8.6% to total revenue.
5. Autonomous Driving Technology: Tesla is developing autonomous driving technology with the goal of achieving full self-driving capability. While this technology is still in development and subject to regulatory approval, it represents a potential future revenue stream through software upgrades and autonomous ride-hailing services.
6. Vertical Integration: Tesla employs a vertically integrated business model, meaning it controls many aspects of its supply chain and manufacturing processes in-house. This includes battery production, electric motor manufacturing, and vehicle assembly. Vertical integration helps Tesla maintain quality control, innovate more rapidly, and potentially reduce costs.

It is crucial to understand that when we break down the revenue by the sources, the key segment of automotive revenues showed very modest growth of 1% YOY. Although, Tesla delivered over 1.2 million Model Y`s, making it the best selling vehicle globally, the competition is fierce and competitors are starting to step on the heels, decreasing the Tesla`s market share and margin, what we would see later in this article. Make sure you check our screener, there are more than 80 public companies worldwide that are in the Automobiles industry, most of them are from China, for example: BYD, Jiangling Motors Co., Geely

Even Xiaomi, from totally different industry steps on the territory of Tesla`s EV with its new SU7.

Overall, Tesla’s business model revolves around disrupting traditional industries, such as automotive and energy, by offering innovative products that promote sustainability, efficiency, and technological advancement.

In order to understand Tesla better, lets conduct Porter`s Five Forces Analysis:

Threat of New Entrants (Low):

• Barrier to Entry: The automotive industry has traditionally had high barriers to entry due to significant capital investment requirements, regulatory hurdles, and the need for established distribution networks. The situation is rapidly changing with the presence of numerous automobile producers in China (over 34 according to our information) adds to the complexity and competitiveness of the market, making it challenging for new entrants to gain a foothold. While Tesla has established itself as a leader in electric vehicles, the proliferation of electric vehicle manufacturers globally, including in China, poses a threat in terms of potential new competition and market saturation.

Bargaining Power of Suppliers (Low):

• Battery Suppliers: Traditionally, Tesla has wielded considerable bargaining power over its battery suppliers due to its large-scale demand and strategic partnerships. However, with the proliferation of smartphone producers in China, the demand for lithium-ion batteries has increased significantly, potentially reducing Tesla’s relative bargaining power. The competition for battery materials and manufacturing capacity could lead to tighter supply conditions and higher prices for Tesla, particularly if it faces difficulties in securing sufficient battery supply to meet its production targets. While Tesla has invested in battery production facilities like the Gigafactories to mitigate supply chain risks, the growing demand from various industries in China and globally may still impact Tesla’s bargaining power over battery suppliers.

Bargaining Power of Buyers (Moderate):

• Customer Demand: Tesla’s brand appeal, innovative technology, and environmental sustainability drive strong customer demand for its products. However, buyers still have some bargaining power, especially in regions with competing electric vehicle options or government incentives. Additionally, Tesla’s pricing strategy and customer service quality can influence buyer decisions.

Threat of Substitutes (Moderate):

• Traditional Internal Combustion Engine (ICE) Vehicles: While electric vehicles offer advantages in terms of environmental impact and performance, traditional ICE vehicles remain a significant competitor. Factors such as range anxiety, charging infrastructure, and upfront cost may hinder the widespread adoption of electric vehicles and sustain demand for conventional vehicles in the near term.
• Other EV Manufacturers: As the electric vehicle market grows, competition among EV manufacturers intensifies. Established automakers and new entrants are developing their electric vehicle offerings, providing consumers with alternative choices to Tesla’s products.

Intensity of Competitive Rivalry (High):

• Competitive Landscape: The automotive industry is highly competitive, with established players and new entrants vying for market share. Tesla faces competition from traditional automakers expanding their electric vehicle portfolios, as well as from startups focusing solely on electric vehicles. Intense competition can lead to price wars, aggressive marketing strategies, and constant innovation to differentiate products and capture market share.

Overall, while Tesla benefits from strong brand recognition and technological innovation, it faces challenges from competitive forces within the industry, the threat of substitutes, and potential disruptions in the supply chain. Continued focus on innovation, production scalability, and market expansion will be crucial for Tesla to maintain its competitive position and sustain long-term growth.

Financial Perfomance:

The Q4 2023 total revenue for TSLA was 25.17 B USD and it grew 3% YoY, the revenue was influenced by growth in vehicle deliveries (+1%) and growth in other parts of the business, and reduction of the average selling price

For the entire 2022-2023 the revenue has not been growing any more with the rate it used to grow and that is an alarming signal taking into consideration the increasing competition in the industry.

The cost of sales was 20.73 B USD, that leads to a gross profit of 4.44 B USD, the gross profit margin is declining down to 18%, signaling that there is no more economies of scale.

The operating profit was 2.06 B USD, partly driven by R&D and AI expenses. The possible future success of Tesla lies in the expense line R&D, because the market is awaiting for Elon Musk`s announcement on 8 August about self-driving cars and robotaxi. 

Net income was 7.93 B USD, it is a quarter record for Tesla, however it was that high mainly because of the one time non-cash tax benefit of 5.9B USD.

Overall, the Profitability ratios are not that great for the Tesla:

• Net profit margin is 15%. It is -5% below the Eyestock benchmark. Signaling that Tesla has no evident competitive advantage. Historically Tesla had never had NPM higher than 20%
• Earnings quality is 88%. It is -12% below the  Eyestock benchmark.
• Gross margin is 18%. It is -22% above the  Eyestock benchmark.

Financial Position:

The overall balance sheet for TSLA looks healthy, but let’s break it down. Tesla assets are 106.6 B USD, with a decreasing debt of 5.23 B USD, the equity is 62.63 B USD.

• Cash flow to debt is 3.624. It is 2.624 above the benchmark.
• Current ratio is 1.644. It is 0.144 above the benchmark.
• Debt to equity is 0.068. It is 0.432 above the benchmark.

The balance sheet analysis of Tesla tells us that it is liquid and solvent both in the short term and long-term.

Efficiency:

Lets evaluate Tesla`s efficiency and how TSLA manage the capital:

• Return on equity is 31%. It is 11% above the benchmark.
• Return on invested capital is 31%. It is 11% above the benchmark.

Tesla is not a dividend paying company and does not have a history of any dividend.

Valuation:

According to Eyestock valuation, we believe that TSLA is currently greatly undervalued. $146.12 could be an attractive investment for the investors who believe  in Tesla, trading below it`s minimum P/E 33.98 over last 5y period of.  

Risks:

According to 10-K form Tesla itself outlines several risks:

• Supplier issues
• Inability to expand further
• Battery issues
• Competition

In the high rate environment the credit for consumers is more expensive this could be also a factor to lower sales in next quarters.

Our Opinion:

According to Eyestock Ratings, Tesla is in the Top 4 of effective car manufacturers in the world. The question lies in AI and R&D, Tesla as a Pioneer does not want to be just one of the car manufacturers with its high competiton, low margins and unions. If in August Elon Musk would reveal the robotaxi and it disrupts the industry once again, the situation could change completely and the market would evaluate Tesla with premium once again. Here is an abstract from Q4 report about AI in Tesla: 

“Artificial Intelligence Software and Hardware In Q4, we released our latest FSD Beta software (V12) to select Tesla employees, and more recently, to customers. V12 utilizes end-to-end training, enhancing the driving experience. We also introduced the 2nd generation of the Optimus robot, which uses Tesla-designed actuators and sensors and improved AI capabilities. Both FSD Beta and Optimus are trained with similar technology pillars: real-world data, neural net training and cutting-edge hardware and software. “