Buy a Ticket on the Tesla Rollercoaster?
The TSLA stock has been on a wild ride lately, mostly because investors are concerned about the potential of running out cash — which they seem to remember whenever Elon Musk musk Tweets or does something odd.
So putting emotions aside: given Friday’s stock price, is the stock price favorable based on future business outlook?
Emotions Aside…
So let’s forget about a) the genius of Elon Musk, and b) all other drama, including smoking pot or taunting the SEC.
I think right now there’s only three factors in pricing Tesla, both of which have to do with their vehicles: 1) Demand for cars (orders), 2) Delivery of cars (manufacturing) and 3) Margins for making cars (costs).
Tesla is an innovative company (it’s their moat), but I’m sure there are tons of great ideas for future enhancements and revenue from new products, like the truck, solar roofs, and so on… but given their cash position, they just seem to generate cash by producing lots of vehicles.
Demand has been strong.
I think the demand side is less of a concern. Tesla has a pretty sexy brand here in the US. There’s also a huge untapped opportunity in China, which will come with it’s own host of challenges. Reservations have been noted to be strong based on the company’s Q2 report (reported at 420,000, even though they’ve delivered very little cars).
Revenues need a lot more cars delivered.
I used Trefis to build a quick model that would support a $262 stock price. Revenues would need to increase to $16.9B in 2018 and $21B in 2019. Revenue for first two quarters of 2018 were $6.6B.
Tesla will have to produce a very significant number of new cars delivered. The majority of the growth is riding on the $35K Model 3. That’s about 200K Model 3’s in 2018 (they’ve done about 95K as of Oct 7th), 340K in 2019, and 440K in 2020. That’s a total of about 1M new cars over the next three years. (As a point of comparison, Ford sells 21M cars in North America each year across all their segments).
Margins have a ways to go.
Margins would need to reverse a downward trend to a steady increase to 26% over the next few years. Here’s what Musk said about margins at the end of Q2. Given the below, margins are somewhat tied to the production pains.
“…when it’s going up the production line, there are a tremendous amount of inefficiencies. There’s a lot of hurry up and wait, where some parts of the production line move well. Then, one part doesn’t and you have associates waiting around with nothing to do.
There are parts that we thought were right but then it turns out they weren’t right. We then send them back to the supplier. It’s just like the whole sort of giant machine. It just needs to kind of lurch into a high pace and there’s a lot of lurching, which is very inefficient.
So, you end up having super high labor costs per car and it just takes time to sort of spool up this giant machine. Basically, a production system is like a giant cybernetic collector and it moves as fast as the slowest part. So, as we address those slow parts and as we improve efficiency, gross margin and so the profitability per car just improves dramatically…”
If Tesla can’t pull off the above then their stock may very well not be worth the $262 it is today. Fixing margins will take time. Hitting production numbers could buy Tesla the time to work on the margins. The real bet is can production numbers continue to increase and beat the numbers above? Producing 340K Model 3s in 2019 is 7K a week, and then increasing to 8.5K a week in 2020. Seems doable? But can that be achieved without significant additional CAPEX? And improving margins?
We’ll see what the Q3 results shows. My guess: there’s been significant enough progress made to enable Tesla to meet demand.
Thoughts?
Pre-Mortem
- Market demand drops (small risk)
- Model 3 production cannot meet targets (medium risk)
- Margins cannot be improved (high risk)
The key risks appear to be all execution.
