That which doesn’t kill Tesla makes it stronger

Tesla’s recently clawed its way into the Trillion dollar club, sharing thin air along side Apple, Microsoft, Saudi Aramco, Alphabet (Google) and Amazon. True Tesla believers playfully wager whether or not this is the year Tesla will overtake Apple to be the world’s most valuable company, while automotive analysts continue to dismiss and ignore Tesla the same way indigenous Americans viewed Spanish ships for the first time. As is often the case, the truth is somewhere in between.

Tesla is an absolute monster, unintentionally created by the industries is will destroy

Let’s start by acknowledging Tesla has outmaneuvered the most aggressive and overt attempts to derail any company in recent memory. Here’s a small sample of dirt thrown at Tesla:

  1. Drunk Driver sues Tesla’s AutoPilot driver assist system
  2. Consumer Reports shows a six-step process to hack Tesla’s Autopilot
  3. Biden refuses to acknowledge Tesla’s existence
  4. Chamath Palihapitiya warns about alleged red flag because Musk is selling stock, fails to recognize Musk’s total share count INCREASED
  5. Full Page Ad in New York Times warning people about Teslas… put out by a company that offers a competing product
  6. GM CEO, Mary Barra, creating a reality distortion field concerning GM’s leadership role in EVs in epic gaslighting demonstration
  7. Tesla accused of self-driving murder, later overturned in actual NHTSA investigation
  8. Toyota’s CEO claiming that EVs increase carbon dioxide
  9. Stellantis CEO claiming EV demand isn’t consumer driven

And look, I’m not a conspiracy theory guy, but I do recognize there’s a cause and effect relationship between advertising dollars, mainstream media narrative, and their intended audiences. After all, there’s a good reason why Fox News advertisers are relegated to selling questionable health supplements and lubricated catheters.

Source: Statista

There’s something funny about the chart above — Tesla isn’t on it.

Tesla doesn’t have a PR department, and doesn’t pay for traditional advertising. This isn’t to say that Tesla doesn’t advertise, but they don’t pay for advertising on TV, radio, news, or Social Media platforms. Instead, Tesla has done something much more clever — they’ve opened up the use of Tesla trademarks for free under the condition they aren’t used nefariously. What followed was unprecedented in the advertising industry: user generated advertising.

Because Tesla isn’t threatening to sue everybody who uses their trademarks, content generators on YouTube, Twitter, TikTok, Instagram, and Facebook have carved out massive fan bases by freely using Tesla’s brand, likeness and image without fear of legal action. Further, Tesla’s CEO leverages his star power for free advertising on social media. With over 70M Twitter followers, Elon Musk can troll haters, support pro-Tesla influencers, and actively oppose false claims against his companies for free. And sure, Musk’s approach is unlikely to convert the same buyers who make purchasing decisions based on 30-second TV ads featuring a Sam Elliott voiceover of a double-denim clad cowboy doing slow motion farm work next to a Chevy truck, but those buyers aren’t ready for electric yet.

Will climbing interest rates be a problem for Tesla?

Above are attacks on Tesla the company and it’s product lineup. But what about claims that Tesla’s stock is overvalued, especially in an environment with increasing interest rates?

The basic concern is that if interest rates increase, then cost of capital will increase, which negatively impacts discounted cash flow models, and brings down net present value for growth stocks. Whew… that’s a mouthful. In simpler terms, because high growth companies routinely borrow money while expanding their business, the interest owed on future debt hurts their ability to grow. But is this true for Tesla? No… hell no… not even close.

The easiest way to dispel the notion that higher interest rates will hurt Tesla is to ask a very simple question, will Tesla need to borrow money in the future? I conjecture that the answer is no, and add that even if Tesla does need to borrow money, then it’ll be at a far lower rates than most assume. Let me elaborate.

The following are facts about Tesla’s financial position in 2021:

  • Tesla is simultaneously building two new factories (Berlin, Austin) and expanding two existing factories (Shanghai, Fremont)
  • Tesla has $16B in cash as of Q3 2021
  • Tesla paid off $3.1B in debt in 2021, with a $6.4B outstanding balance
  • Tesla made $3.6B in Q3 2021, and is likely to clear $4B in Q4 2021, bringing total GAAP earnings over $10B for 2021
  • Tesla owns over 40K Bitcoin, valued over $1.6B today (counted under assets, not cash)
  • Tesla currently has a BB+ (junk) bond rating, but will likely get upgraded to investment grade in 2022 at BBB-, or better
Credit: @iCannot_Enough (James Stephenson)

There are some profound takeaways from these facts that paint a very rosy picture for Tesla going forward, especially when we start to pair the facts together. Also worth noting that I gathered this financial data from 10Q filings on the SEC website and are NOT updated to reflect Q4 2021 earnings, or Tesla’s total 2021 earnings… which I expect to be spectacular, by the way.

1. Tesla has more cash on its balance sheet than debt, meaning it could theoretically retire ALL of its debt if desired.

2. Tesla is growing its earnings exponentially while simultaneously growing its capacity at an exponential rate — in other words, because their profits vastly exceeds their growth expenses, Tesla is currently self-funding its growth and can do so for the foreseeable future.

3. Tesla is so profitable (Audience: How profitable are they?) Tesla is so profitable that they’re retiring existing debt obligations early, despite the extraordinary capital expenditures associated with growing +50% year-over-year.

4. Because Tesla is likely to be upgraded to “investment grade” corporate bond status, they’ll be able to borrow money at a cheaper interest rate than before. This approximately means that even if interest rates rise, Tesla’s cost of capital, if they needed to borrow (unlikely), is likely to remain unchained because of Tesla’s improved creditworthiness. Think of this as if Tesla’s credit score went from 650 to 730… they’ll get better loan rates, if needed.

5. I put the part about Bitcoin in there because it *may* provide Tesla with a 200IQ party trick that I haven’t seen any company with a Bitcoin treasury try: collateralize their Bitcoin holdings for a short term loan. What would that look like? Let’s say Tesla suddenly and unexpectedly needed $100M worth of Euros, or Yuan. It might be difficult to get that money moved through FedWire or SWIFT given holidays, time-zone / dateline challenges, and difficulties moving money between the US and China. However, a 1% loan collateralized against Tesla’s Bitcoin holdings is something any major crypto exchange could do in less than an hour. Seriously.

To sum up Tesla’s position headed into an increased interest rate environment: Tesla is positioned better than any automotive company to grow without needing to borrow money. As evidence, consider the announced investment plans coming from Ford, GM, or VW to finance their transition to EVs.

Graphic Credit: Reuters

As Reuters shows, automakers have announced commitments to invest over $500B towards the transition to Electric Vehicles. This presents a Catch 22 for any automaker that currently makes gas powered cars. The paradox is that legacy automakers must get investment capital from one of two sources: 1) Redirecting profits from their shrinking gas car business, 2) Take on debt to fund the required investment. Which of these two terrible options will legacy automakers choose? The answer, obviously, is both.

Is that all? No. It gets worse for legacy automakers. Combined, Ford and GM have over $250B in long-term debt obligations. But wait, there’s more! GM and Ford’s debt is collateralized by used cars. I firmly believe that when a new electric car is cheaper to buy than a used gas car, then the entire used car market will implode, taking out Ford and GM as collateral damage.

Yes, Ford and GM might restructure their debt through bankruptcy, which will also provide a much needed divorce from the dealership model, and maybe they can secure another just-in-time government bailout, but will they be able to make EVs profitably with that level of chaos destroying their core businesses? I doubt it.

I suspect 2022 will be the year analysts quit viewing TSLA as a growth stock, and instead view Tesla as a value stock with tremendous growth. What’s the difference? Growth companies must borrow money, and value companies don’t.

The Battery Problem

Perhaps the most obvious and overlooked choke point for EVs are their batteries. Tesla was the first to identify batteries would be the limiting factor to their growth, and took swift action.

  • 2012–2019: Tesla buys as many batteries as possible from Panasonic… needs more
  • 2020: Tesla buys as as many batteries as possible from LG… needs more
  • 2021: Tesla buys as many batteries as possible from CATL… needs more
  • 2022: Tesla begins manufacturing it’s own battery cells… needs more
  • 2022: It *appears* Tesla will also buy battery cells from BYD

The point is that if Tesla’s cell consumption is growing at over 50% compound annual growth rate, and their cell suppliers are only growing at a 10% compound annual growth rate, then Tesla is forced to broaden it’s battery cell partnerships in addition to manufacturing their own.

Here’s a scary question… if Tesla is gobbling up the majority of the world’s battery cell supply, how exactly will Ford and GM secure enough cell supply to compete? Or phrased differently, what premium will Ford and GM have to pay to outbid Tesla for battery cell supply? 10% extra? 20% extra?!? Ironically, the sort of leverage GM used to stymie Tesla’s early progress will now be turned against GM as they struggle to secure enough batteries.

But it gets worse.

Because Tesla is far and away the leader in battery economy, they’re able to achieve better range and performance with fewer batteries.

Credit: Bjorn Nyland

The implications of Tesla’s battery advantage are grim for legacy automakers. Tesla is likely buying batteries for less than their competitors, and doing more with them. This one-two punch will likely bankrupt legacy automakers… this isn’t hyperbole.

Ford, for example, is operating at roughly 7% automotive gross margins compared to Tesla’s 30%.

You don’t have to outrun the bear, you just have to outrun your friend.

In all likelihood, Ford will lose money on every EV it sells for half a decade. Hell, Tesla didn’t become profitable until 2020! It’s VERY expensive and painful to reach the economies of scale required to be profitable as an EV manufacturer. But the problem is that Ford should’ve been making this transition in 2015, NOT in 2021. Why? Because with a 30% automotive gross margin, Tesla has the power to undercut any Ford product and remain profitable while Ford bleeds cash.

I can’t stress enough that I’m not rooting against Ford. As an American, I want every American company to succeed internationally. My concern is that Ford and GM still see Tesla as their competition, when in reality their real competition will come from South Korea and China. Truth is Tesla doesn’t have competition yet, and EV transition efforts from GM, Ford, Toyota, Stellantis, VW, Toyota and Honda feel like too little too late.

Game theory suggests that the first mover in a competition for a scarce resource will accrue benefits disproportionately compared to followers. Currently, Tesla buys more cell supply than the rest of the automotive industry combined, and has secured the partnerships, raw materials, and intellectual property necessary to accelerate its lead while the rest of the legacy manufacturers fight for the remaining scraps… mark my word, it’s going to get brutal when nations start viewing battery supply as a matter of national security the same way they view oil supply.

Tesla’s had two near-death experiences: one in 2009 during the Great Recession, and again in 2018 during the ramp of the Model 3. Tesla emerged from both of those difficult periods leaner, stronger, and smarter. I’m confident that Tesla is in a dominant position to successfully navigate the coming battery supply crisis as easily as it managed the semi-conductor shortage.

Tesla has already survived the crucible of scaling their EV manufacturing business to profitability. Crossing the chasm from tech-startup to industry leader was as improbable as it was miraculous, and while Tesla made their journey to profitability look easy, I have serious concerns that legacy automakers will falter when attempting to follow in Tesla’s footsteps.

Strap in, friends, the next 5 years going to be wild!

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I love my family, Tesla, Bitcoin, and California... in that order.

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Derek James Elliott

Derek James Elliott

I love my family, Tesla, Bitcoin, and California... in that order.

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