A Look at Tesla’s Future Growth Drivers and Valuation Prospects
Tesla’s distinctive value proposition and what can be expected from the EV maker and Renewable Energy Giant until the end of the decade.
Tesla -The Company
Tesla, Inc. designs, develops, manufactures, leases, and distributes electric cars and energy generation and storage solutions worldwide. Its major segments are automobiles and energy generation and storage. The Automobile section sells electric cars, regulatory credits, retail goods, and insurance. This segment offers sedans and SUVs through direct and used vehicle sales, Tesla Superchargers, and in-app upgrades; purchase financing and leasing; electric vehicle services through company-owned service locations and Tesla mobile service technicians; and vehicle limited warranties and extended service plans. The Energy Generation and Storage segment designs, manufactures, installs, sells, and leases solar energy generation and energy storage products and related services to residential, commercial, and industrial customers and utilities through its website, stores, galleries, and network of channel partners. It also provides energy product services and repairs. Tesla’s mission is to accelerate the world’s transition to sustainable energy.
The Tesla Story This Decade
Tesla manufactures its electric vehicles, and battery packs in four Gigafactories in the United States, Germany, and China. Since 2020, Tesla has progressively expanded its whole production capacity, and in its most recent earnings call, the company reaffirmed its 50% CAGR delivery increase over a “long period” Tesla had a production capacity of around 1.9 million units as of the end of 2022. Tesla plans to establish new gigafactories and boost the efficiency and automation of its present and future operations to accomplish its goal of delivering 20 million electric vehicles per year by 2030. To boost the chances of the company reaching its annual target of 20 million EVs, in March 2023, Tesla revealed plans to construct its fifth Gigafactory in Mexico and an extension of its Nevada Gigafactory for the manufacturing of its new mass-market vehicle and semi-truck, respectively.
The energy installations of Tesla’s Energy Generating and Storage division have increased significantly from 3 GWh in 2020 to 6.5 GWh in 2022. Tesla manufactures the majority of its energy products in the United States; in October 2022, it inaugurated a new megafactory with a 40 GWh megapack production capacity. Tesla outlined its plans to aggressively innovate and invest in R&D to expand its renewable energy and utilities sector at its Investor Day Event in March 2023. It intends to be able to produce up to 1 TWh of energy storage by 2030.
Tesla Services division is comprised of businesses that support the company’s overarching mission. It consists of Tesla’s subscription-based autonomous driving software called Full-Self Driving (FSD), Tesla’s insurance business for electric vehicles and battery storage units, and the Tesla Supercharger network, which provides EV charging stations for Tesla and non-Tesla owners to charge their electric vehicles. To boost the entire customer experience, Tesla has also hinted at establishing a social centre with huge charging stations, a Tesla-branded café and other entertainment.
Tesla’s Supercharger Network is the most pronounced part of its services segment, the company has been able to create a competitive moat within its excellent charging network. The Supercharger network has nearly doubled the number of charging stations and connectors since the start of the decade, making it the most comprehensive charging network in the world. Tesla has agreed to allow non-Tesla EVs in the US to use its extensive charging networks after agreeing to a deal with the White House in a move that could see the company become “the gas station company” of the future should the company continue to expand the network and allow more cars to use its facilities. Because competitors’ alternatives are not as efficient or dependable as Tesla’s Supercharge network, the significance of the Tesla Supercharge network to market trends and consumer sentiment increases.
Tesla’s services business has grown more rapidly than its automobile or energy businesses, in part owing to the need to provide services that promote a sustainable transition to renewable energy and alleviate consumer pain points.
Analysis of FY 2021 & 2022
In 2022, Tesla produced a record 1.37 million vehicles and delivered a record 1.31 million vehicles, an increase of 47% and 40%, respectively, compared to 2021 figures of 930,422 vehicles produced and 936,222 vehicles delivered worldwide. In 2021 and 2022, the automotive segment accounted for 88% of Tesla’s total revenue. Tesla automotive revenues increased by 51% to $71.4 billion in 2022 from $47.2 billion in 2021, this resulted in an automotive gross profit margin (including regulatory credits) of 28.5% in 2022 and 29.5% in 2021. Tesla’s total automotive revenues include regulatory credits earned by selling electronic vehicles eligible for zero-emissions tax credits at the local, state, and federal levels, it also includes electronic vehicles sold under finance and operating lease agreements.
Tesla’s Energy Generation and Storage & Services and Other segments represented 12% of total revenues in 2021 and 2022. In 2022, the Tesla Energy segment’s revenues increased by 40% to $3.9 billion from $2.7 billion in 2021, and its gross profit margin increased to 7.3% in 2022 compared to -4.6% in 2021. In 2022, the Tesla Services and Other segment’s gross profit margin was 3.4%, compared to a gross profit margin of -2.7% in 2021. In 2022, the segment’s revenues increased by 60% to $6 billion from $3.8 billion in 2021.
In 2022, Tesla’s total revenue was $81.4 billion, representing a 51% increase compared to $53.8 billion in 2021. In 2022 and 2021, Tesla enjoyed industry-leading gross profit margins of 25.6% and 25.3%, respectively. Tesla’s operating leverage improved between 2021 and 2022, as operating expenses accounted for only 8.8% of 2022 revenues, compared to 13.2% of 2021 revenues. In 2022 and 2021, Tesla’s operating profit margin was 16.7% and 12.1%, respectively.
In 2022, Tesla’s GAAP Net Income increased by 127% from $5.55 billion in 2021 to $12.5 billion. In 2022 and 2021, net profit margins were 15.4% and 10.2%, respectively.
Tesla generated $14.7 billion in Net Operational Cash Flow in 2022 and ended the year with $22.1 billion in cash and cash equivalents with $6.6 billion in total interest-bearing debt.
Tesla’s balance sheet as of the end of 2022 indicates total assets of $82.3 billion and total liabilities of $36.4 billion.
In FY2022, Tesla’s Diluted Earnings Per Share (EPS) was $3.62 per share, a 122% increase over FY2021’s EPS of $1.63 per share. Tesla has a total of 3.4 billion diluted shares outstanding.
Source — Tesla Q4 & FY 2022 Earnings
To achieve 20 million annual vehicle production, one terawatt energy storage products, and to scale the battery production, services, and charging capacity that will drive this growth, Tesla estimates it will need to invest approximately $162.5 billion which is at the midpoint of the range (investment to date stands at $28 billion. One of the ways Tesla plans to reach 20 million vehicles is by introducing a cheaper mass-market vehicle that will be manufactured at its planned gigafactory in Mexico by the end of 2024, with an annual production capacity of one million vehicles. In October 2022, it commenced production at its new megafactory in the United States with a 40 GWh megapack production at full capacity, which will be five times greater than five times the amount of energy storage units produced in all of 2022.
Tesla intends to achieve its long-term objectives by innovating on cost and efficiency, enhancing product affordability and expanding its product line (which will ultimately increase prospective TAM), and reinvesting operating cash flow to attain unprecedented scale.
Source — Tesla Investor Day (March 2023) \\ Page 164 & 166
Valuation Forecast & Assumptions for 2023–2030
Source — Revisiting Tesla in January 2023 (YouTube) by Aswath Damodaran
For Tesla to achieve the growth it anticipates by 2030, it will need to reinvest extensively in its business; this places Tesla on the Growth/Reinvestment trade-off spectrum shown above.
This model forecasts that Tesla will reinvest approximately $115 billion of its Cash Flow from Operations into the firm between 2023 and 2030, resulting in revenue growth of over 35% CAGR.
Tesla will use the funds to construct new manufacturing facilities for its autos and renewable energy products. Tesla is reportedly considering new locations in the United States, Canada, Western Europe, Indonesia, Thailand, South Korea, and other facilities in China to construct eight to ten new gigafactories with the potential to produce at least one million vehicles annually. Based on this financial model, Tesla is projected to deliver 1.75 million electric vehicles (EVs) in 2023 and nearly 16 million EVs by 2030. This will result in a compounded annual growth rate (CAGR) of 37% for automotive deliveries.
The release of a mass-market vehicle which is expected to be in late 2024 is key to Tesla’s ambitions, it is anticipated that the average selling price of a Tesla EV will decrease steadily from 2023 through to 2030 as the mass-market vehicle will command a greater share of vehicle delivery mix on an annual basis. In this model, the average selling price of a Tesla EV in 2023 is estimated to be $47,500 thereafter declining to $40,000 by 2030. This will allow Tesla to expand its customer base by increasing the affordability of its products and significantly boosting vehicle deliveries. Tesla will be among the car companies that will benefit from provisions in the Inflation Reduction Act that will allow customers in the United States to receive up to $7,500 tax credits, contingent upon the company’s ability to meet certain requirements; the tax credit will increase demand and make vehicles more affordable for customers. In the United States and Europe, Tesla will receive additional tax credits for acquiring and refining battery material for its automotive and renewable energy businesses.
Tesla will look to expand its renewable energy business; this model anticipates that the company will construct and scale up at least five megafactories between 2025 and 2029 with China being a prime candidate, this is for the company to increase its energy production capacity and multiply revenues by tenfold in 2030 compared to forecasts for 2023.
It is anticipated that Tesla’s services sector would continue to expand at a far faster annual rate than its automobile or energy segments. This growth is anticipated to result from the expansion of Tesla’s supercharger network, which may earn up to $25 billion in revenue, Tesla’s capacity to solve autonomous driving via its $15,000 subscription-based FSD software, and the expansion of Tesla’s insurance and other services-related ventures. In Q4 2022 (Page 6), Tesla recognized more than $300 million in automotive software sales. Additionally, the company stated that it expects to recognize nearly $1 billion of deferred revenue that remains for such customers over time as software updates are delivered. Tesla has approximately four hundred thousand paying customers on FSD. Roll-out of Full Self-Driving to new customers and take-rate as a percentage of total Tesla fleets is expected to increase as more users purchase vehicles and FSD software and the software is approved and released in more geographies.
Tesla's services segment is estimated to grow by 46% on a CAGR basis between 2023 and 2030.
Tesla has shown the ability to raise its gross and operating margins along with rising revenues due to scale and operational efficiencies. According to this forecast from 2023 to 2030, the automotive and energy sectors’ gross margins will rise as a result of upcoming investments in new factories and the transfer of present expertise and technology to new facilities.
A reduction in production costs between 2023 and 2030 should be possible thanks to Tesla’s size and industry-leading output, which have made the company the largest customer for some of the key EV supply chain suppliers, allowing them to demand preferential treatment and pricing in crucial battery materials and production equipment.
To keep its competitive edge and enable the business to find new ways to cut costs or increase efficiency, Tesla will need to invest significantly in research and development. It is expected that between 2022 and 2023, R&D spending will rise by 50%, reaching 4% of revenue per year up to 2030. The Tesla 4680 battery cell is one of the creative methods in which the firm is employing research and expertise to build the batteries required to manufacture millions of vehicles and thousands of stationary energy storage units. The company has teamed with some of the world’s largest battery manufacturers and is running joint ventures with them to mass-produce batteries that will help the company enhance productivity and cut costs over time.
The firm revealed in its Q4 2022 earnings release that it will be focusing on maximizing operating margin. This model predicts that Tesla will be able to exert even greater operating leverage over the next eight years.
This model uses a tax rate of 15% from 2023 to 2026 and 20% thereafter (2027–2030). This is owing to the US and global proposals for increased corporate tax rates.
Discount Rate (WACC) — 9.5%
Perpetual Growth Rate — 3.5% (proxy US 10-yr Treasury Yield)
- The closing price of Tesla’s stock on March 31, 2023, will be used for this financial model.
Financial Model & Valuation Analysis
· Income Statement
Between 2022 and 2030, revenue is projected to increase by more than 11.5 times or at a compound annual growth rate (CAGR) of 35.7%. It is anticipated that the Gross Profit Margin will hover at 26% in 2023 and 2024 before gradually increasing to 32.5% in 2030. Tesla is projected to demonstrate greater operating leverage as operating expenses as a percentage of revenues decline from 9% in 2023 to 7.6% in 2030.
This model employs a 15% tax rate from 2023 to 2026 and a 20% tax rate thereafter (2027–2030). This is a result of U.S. and international efforts to increase corporate tax rates.
The Net Income attributable to Common Stockholders is projected to increase from $12.5 billion in 2022 to $189 billion in 2030.
Net Other Income/Expenses & Net Income(loss) attributable to non-controlling interest could not be reliably estimated.
· Tesla Profit Margins Estimates
While Tesla continues to gain unprecedented size and executes with accuracy by relying on vertical integration as well as outstanding supply chain and logistics management, the company’s profit margins continue to improve substantially between 2023 and 2030.
· Earning per Share (EPS) & Price-to-Earnings (P/E) Estimates
Between 2022 and 2030, Tesla’s earnings per share (EPS) are estimated to multiply by 15 times. P/E multiples for Tesla at its current market price are also expected to continuously shrink from 57.4x in 2022 to 3.7x in 2030.
Nos. of Shares Outstanding (in millions): Basic (3,160) & Dilluted (3,471).
Stock Price: $207.46.
· Cash Flows & Valuation
In conclusion, the discounted cash flow method estimates a fair value market capitalization of $889.9 billion (or $281.61 per share) with a Weighted Average Cost of Capital (WACC) of 9.5% and a terminal growth rate of 3.5%. This is a 35.7% upside potential relative to the market’s closing price as of March 31, 2023.
Authors Note:
This report was done for academic purposes only and contains assumptions and estimates that may or may not come to fruition.
A list of resources used to prepare this report and financial analysis.
Comprehensive Excel Sheet containing the underlying assumptions and detailed income statement for this report.
