The Case for the Tesla Stock and why you need to invest now. Warning: Can be too hot to handle!
By A Uppuluri on The Capital
It’s important you understand the company behind the promise of delivering the future before investing.
I got burnt several times and I wasn’t alone. Several investment managers cannot seem to get to grips with its volatility either, the biggest being the 8 billion miss out by the Public Investment Fund of Saudi Arabia.
Tesla has been one of the most remarkable success stories of the past decade both in innovation and at the stock market. At a time when conventional oil engines dominated the automotive sector, and at a very competitive business and cultural setting that oil held in America, Tesla was an audacious idea that seemed too farfetched to make viable economic and business sense. Competing against the gigantic American auto industry at their home turf, with the price of oil cheap did not make sense for most analysts. As Elon Musk, the earliest investor in Tesla and now CEO wrote in a blog post, "New technology in any field takes a few versions to optimize before reaching the mass market, and in this case, it is competing with 150 years and trillions of dollars spent on gasoline cars."
The company’s business model was starkly different — most automakers saw electric vehicles as a nice-to-have in their portfolio of models, and were clear that a percentage of profits from traditional carbon fuel cars would subsidise the cash guzzling R&D that EVs require. The motto for selling cars was very much ‘why tinker with experimental tech when the industry is operating just fine’. Tesla on the other hand was all-electric, focusing their complete energies into developing the necessary technology — batteries, motor, and auto-pilot; instead of trying to bankroll it as a subsidiary of gasoline cars.
Their market model was again quite novel — starting off with producing expensive cars and investing the profits into further R&D and subsidising their subsequent models to make the newer cars truly mass market by driving down costs. The company first started with the Tesla Roadster in 2008, an all-electric sports car that could beat a Ferrari and or a Porsche in a head to head showdown, with twice the energy efficiency of a Prius. The Roadster was priced a little over $100,000 but plans to draw profits from the model never materialised, as the company was left with under $10 million in cash on hand, and required significant investments from Daimler AG and a half billion loan from the Department of Energy to remain afloat. After going public in 2010, Tesla finally stabilised its internal finances and addressed its immediate short-term capital concerns. The Tesla stock opened at $17 a share on the NASDAQ and helped raise $226 million with its IPO. Fast forward June 2020, Tesla shares broke the $1,000 barrier for the very first time — a whopping 5,782% percent increase in 10 years!
The year 2012 was a phenomenal one for the company. Four years after the Roadster, Tesla launched the Model S at $76,000 — three quarters the price of the Roadster. The Model S was critically acclaimed for its innovation and design, had a range of 300 miles, and reduced charging time. It was also a demonstration of Tesla’s vision in fruition — the new generation car was cheaper, far efficient, and a little more affordable.
In 2012, the company also launched the Supercharges in California — their very first freestanding charging stations, enabling Tesla owners to charge their cars for free, which were far faster than a normal charging outlet. By the end of that year, Tesla stock grew 73% to $33.22, and the company retired the Roadster to focus on newer sedans. All these innovations delivered Tesla it's very first quarterly profit in Q1 2013 — it would take another 6 years before the company could post its first annual profit.
The company next delivered the all-electric SUV Model X in 2015, after delays in design and manufacturing (the Model X was revealed in 2012). The Model X was Tesla’s most advanced car yet, with a range of sensors including cameras, radar, and sonar systems enabling partial self-driving and automatic braking safety features that can even work at high speeds. The seven-seater car came with falcon doors, which Tesla claims can open with only 30cm of space either side of the car, and has sensors to detect objects and people and avoid hitting them when opening or closing. The Model X costs a whopping $130,000, a third more than the Roadster, and nearly double the Model S.
Building on the success of the Model S and the Model X, Tesla launched the Model 3 Sedan in 2016, with a price point below $70,000, delivering closer to the mass consumer market. In 2019, the company finally struck the deep and competitive mass market announcing the standard Model 3 at $35,000, with 220 miles of range, a top speed of 130 mph, and 0–60 mph acceleration of 5.6 seconds. The Model 3 Standard Range Plus, which offered 240 miles of range, a top speed of 140 mph, 0–60 mph acceleration of 5.3 seconds, and premium interior features was priced at $37,000. As the company pitched it, “for 6% more money, you get 9% more range, more power, and an upgraded interior.”
To achieve this steep drop in prices while remaining financially sustainable, the company (which already does not advertise) announced the closure of all its physical stores and moved the sales online worldwide. Customers in America could also order their Tesla over the phone in under a minute, with the service being planned to be extended worldwide; and instead of test drives, customers could now return a car within 7 days or 1,000 miles for a full refund. From the exact word of the company “Quite literally, you could buy a Tesla, drive several hundred miles for a weekend road trip with friends and then return it for free. With the highest consumer satisfaction score of any car on the road, we are confident you will want to keep your Tesla.”
Further elaborating their strategy, Tesla added “Shifting all sales online, combined with other ongoing cost efficiencies, will enable us to lower all vehicle prices by about 6% on average, allowing us to achieve the $35,000 Model 3 price point earlier than we expected. Over the next few months, we will be winding down many of our stores, with a small number of stores in high-traffic locations remaining as galleries, showcases, and Tesla information centers. The important thing for customers in the United States to understand is that, with online sales, anyone in any state can quickly and easily buy a Tesla.”
Why Tesla stands out as an investment opportunity
Tesla defines itself as an American car and clean energy company and defines its purpose of existence is “to accelerate the world’s transition to sustainable energy”. Along with these efforts, the company has invested its efforts targeting a diverse array of sectors — automation, solar panels, and batteries.
What makes Tesla a truly standout investment opportunity (and a reason why its stock can only go upwards provided good financial management) is its history of innovation and stockpile of data. This cannot be emphasised enough as Tesla has a high degree of vertical integration both in hardware and software, making it a valuable data-rich company that sets it apart from its competitors. Its overall focus on EVs research has meant the company has over 17 years of R&D and test miles across its hardware and software that no other company has.
A lot of the competitors continue to play catch up with Tesla, as most companies as mentioned earlier, never believed in Tesla or the market for EVs, batteries, or autopilot. Tesla’s initial delays in delivering their cars on time were always perceived by other automakers as proof of an unsustainable, money guzzling vanity project and many competitors wrote off the company. While it was true that its projects including the Model 3 faced heavy production and delivery delays, in December 2019 it closed the year as the third best-selling car in all of Europe.
Tesla’s competitors also currently operate in a word of warranties and service stations, but the company is in a completely different dimension — operating on a software plane, rolling out routine updates, and constantly upgrading the vehicle remotely for its millions of users. Tesla has been able to accomplish this through multi-year efforts in building its own high-performance custom computing architecture for FSD (Fully Self Driving) which includes multiple AI accelerators and machine learning. Tesla’s FSD computer, which to date is still not capable of ‘Fully Self Driving’, claims a compute performance of 144 trillion operations per second. A teardown of Tesla Model 3 by Nikkei Asian Review found its electronics to be 6 years ahead of Toyota and Volkswagen — the number one and two automakers in the world! As per the article, ‘one stunned engineer from a major Japanese automaker examined the computer and declared, “We cannot do it.”’
Here are some of the cutting-edge features unique to Tesla:
Autopilot
All new Tesla cars come standard with advanced hardware capable of providing Autopilot features today, and full self-driving capabilities in the future — through software updates designed to improve functionality over time. Currently, the autopilot can handle the ability to steer the car, accelerate and brake automatically within its lane. As per the regulations, the autopilot features require active driver supervision and do not make the vehicle autonomous.
Full Self-Driving Capability
All new Tesla cars have the hardware needed in the future for full self-driving in almost all circumstances. The system is designed to be able to conduct short and long-distance trips with no action required by the person in the driver’s seat.
All you will need to do is get in and tell your car where to go. If you don’t say anything, the car will look at your calendar and take you there as the assumed destination or just home if nothing is on the calendar. Your Tesla will figure out the optimal route, navigate urban streets (even without lane markings), manage complex intersections with traffic lights, stop signs and roundabouts, and handle densely packed freeways with cars moving at high speed. When you arrive at your destination, simply step out at the entrance and your car will enter park seek mode, automatically search for a spot and park itself. A tap on your phone summons it back to you.
The future use of these features without supervision is dependent on achieving reliability far in excess of human drivers as demonstrated by billions of miles of experience, as well as regulatory approval, which may take longer in some jurisdictions. As these self-driving capabilities are introduced, your car will be continuously upgraded through over-the-air software updates.
For details, information refers to the Future of Driving on Tesla’s website.
Batteries
Batteries are the biggest cost factors in EVs, and this is where gasoline cars currently hold a thin advantage on price points. For electric cars to be able to compete with gasoline cars on price and remain profitable, battery technology needs to be more efficient and cheaper to produce. According to a recent Reuters report, new, low-cost batteries designed to last for a million miles of use and enable electric Teslas to sell profitably for the same price or less than a gasoline vehicle are just part of Musk’s agenda for 2020.
The report also sheds light on the grandiosity of the company’s plans — With a global fleet of more than 1 million electric vehicles that are capable of connecting to and sharing power with the grid, Tesla’s goal is to achieve the status of a power company, competing with such traditional energy providers as Pacific Gas & Electric and Tokyo Electric Power. These broader strategies of Tesla have never been reported until May this year.
Access to high-performance batteries is perhaps the most critical aspect for the success of Tesla. To ramp production to 500,000 cars per year, Tesla alone will require today’s entire supply of the world’s lithium-ion batteries. To better control and manage its battery requirements and in line with its vertical integration strategy, Tesla began the construction of its Gigafactory in late 2014 and started limited production of Powerwalls and Powerpacks in 2016 and large scale production of battery cells in January 2017. According to Elon Musk, one hundred factories like it would be necessary to transition the world to use sustainable energy. Tesla also operates the Giga New York and Giga Shanghai and is currently constructing a Giga Berlin as a hub for European manufacturing.
Take a tour inside Tesla’s Gigafactory in Nevada:
According to Tesla, it’s battery packs are designed to outlast the car: “Vehicles get scrapped after roughly 130,000 to 200,000 miles of usage, depending on the region. Based on our fleet data, battery degradation of Tesla vehicles which have achieved this type of mileage was only ~ 10%.”
Most batteries that Tesla recycles today are pre-consumer, coming to the company through R&D and quality control. “None of our scrapped lithium-ion batteries go to landfilling, and 100% are recycled,” the company adds.
Read more from the company’s annual Impact Report 2019.
Along with new million miles technology and investments in production automation, Tesla clearly places exceptional importance on financial math for delivering cheaper electric cars. These R&D advancements are once again propriety of Tesla, making it best placed to capture the mid and low-cost markets that other competitors can only dream of.
A company beyond cars
Tesla’s deep-rooted passion goes beyond cars — the company has dabbled its hands at re-imagining things from trucking to solar panels and roofs. Here is what the company is currently focusing on simultaneously:
Tesla Semi — Reimagining the trucking industry
The trucking industry has had its fair share of problems, from rising expenses to driver hour limits behind the wheel. An analysis on the sector requires a standalone article, however, this video should help explain the industry:
Tesla has entered the industry to revolutionise the future of freight and logistics, by launching an ambitious project — the Tesla Semi, an all-electric battery-powered Class 8 semi-truck currently under development. The company initially announced that the truck would have a 500 miles range on a full charge and with its new batteries it would be able to run for 400 miles after an 80% charge in 30 minutes using a solar-powered “Tesla Megacharger” charging station. Tesla also announced the Semi would come standard with Autopilot, allowing semi-autonomous driving on highways. Companies including Walmart, DHL, UPS, FedEx, and PepsiCo have already placed orders for the truck, expected to be produced in 2021.
Many industry analysts question the feasibility of the all-electric truck being delivered on time, citing the limited range of current battery technology, suggesting that Tesla may be betting on increased battery density advances in the next couple of years to meet its stated goals (source: Fortune).
Other useful reading: Tesla’s Newest Promises Break the Laws of Batteries (Bloomberg).
The Cybertruck
The Cyberturck appears to have been developed to appeal to the heavy gasoline guzzling American cultural symbol — pick-up trucks. The Tesla Cybertruck is an all-electric, battery-powered vehicle which is expected to have a range of 250–500 miles depending on the model, and estimated to cost $39,900 and upwards. Production is expected to begin in 2021 and will aim to capture a market of 6,500 gasoline-powered trucks sold per day in the United States.
Tesla Solar Panels and Roofs
Beyond automobiles, Tesla has also been working on delivering sustainable energy to homes and commercial establishments, designing, engineering, and installing solar panels and solar roofs.
The solar roof tiles, which are designed to look just like normal roof tiles when installed on a house, while doubling as solar panels to generate power, are currently a work in progress. As per the estimates on the company’s website, a roof for a 2,000 sq ft home would cost about $42,500 with 10kW solar panels. After federal tax incentives, the actual cost would be around $33,950 — making it cheaper than a new roof plus solar panels (Source: TechCrunch).
As per the TechCrunch report, Tesla envisions to make the Solar Roofs available worldwide: “The total addressable market that Musk sees for this product is somewhere on the order of 100 million houses worldwide, and Musk stressed that the company does indeed intend to make this available worldwide.”
However, Tesla has been behind on delivery for the solar roof tiles, reminiscent of its delays with its cars.
How have the analysts read this?
One of the critical factors for the industry has always been disbelief in the possibilities envisioned by Tesla. Every delay in delivery has been touted as proof of the ambitious nature of its projects, and analysts continue to critique the company on this front. Many also point out to the bold bet the company has placed on battery tech, with doubts on delivering both range and reduced costs before the estimated timelines — primarily for the Tesla Semi trucks by 2021. Added to these delivery failures, Tesla had also been losing money and could only post an annual profit for the first time in 2019. Previously, the company had delivered only a handful of quarterly profits.
The company’s stock has always moved based on these estimates but has gained significant attention since the Model S, with the Stock riding in the $200s in 2016, $300s in 2017 and 2018, pulling down to lows of $180s in 2019 and catapulting to $440s by the end of the year. Under two months in 2020, the stock gained nearly 110% to highs of $900. In a similar vein to the larger stock market reacting to the COVID-19 pandemic and shutdowns, Tesla shares crashed on March 20 by a steep 52%, reaching $420s.
Even before the pandemic, Tesla’s journey into the $900s was not a straight line, it was always defined by erratic peaks and troughs moving by the $100s each day. This is the continued complexity of the Tesla stock — at its stormiest, and both institutional and retails investors have not been able to properly grasp until this day. Nothing can summarise the market misreads and miscalculations than the massive stock dump by the Public Investment Fund (PIF), Saudi Arabia’s sovereign wealth fund — one of the world’s biggest. The fund sold off 99.5% of its Tesla holdings in 2019, choosing to hold only 39,000 shares, and missing out on 2020’s astronomical rally. At today’s price of nearly $1000, the shares would have been worth over 8 billion dollars!
Investors across the experience spectrum have been burnt handling the Tesla stock (including myself) as the erratic peaks and troughs have been too volatile. Personally, I had entered in the $600s, re-stocked in the $900s, and immediately sold off all holding at a loss when the stock re-entered $600s. The stock proved too fiery for me to handle. This fear was too real while riding the wave, but upon reflection was a massive miss-calculation. Most investors appear to share my experience.
Upon months of deliberation, I believe the Tesla volatility appears to have been influenced by a number of factors, including a mix of profit-taking, a Fear of Missing Out, and sell-off at the first signs of appearing overpriced.
Renewed faith in Tesla
Tesla’s stock movements in the last six months, carefully paired against the company’s ambitions have renewed my faith in the stock. For now, based on the potential, it appears the stock can only move upwards, but one must be prepared for riding the highest of peaks and the steepest of troughs. Having a long-term strategic outlook is very important, and it has to be very clear — day trading can never be a viable option. Significant risks remain — the COVID-19 pandemic led economic slowdown can hurt consumer spending on new and expensive auto-market, and Tesla’s production and delivery plans could also be impacted. Before any investments in, it's very important to read and understand the company’s Q1 2020 performance report. The report warrants its own blog post for analysis, which I hope to cover next.
On 10th June 2020, Tesla uprooted Toyota to become the world’s most valuable automaker, after its stock peaked at $1,011. The surge in Tesla’s valuation is attributed to Elon Musk’s decision to ramp up the production of his Tesla Semi commercial truck. The future at Tesla certainly looks electrifying!
By A Uppuluri.
Tesla’s Timeline (Source: The Street):
2003 — Tesla Motors founded by Martin Eberhard and Marc Tarpenning in San Carlos, California. They serve as its CEO and CFO, respectively.
2004 — Elon Musk invests $30 million and joins Tesla as the Chairman of its Board of Directors.
2006 — Tesla showcases the prototype for its first car, the all-electric Roadster.
2007 — Eberhard resigns as CEO of Tesla. He is replaced by interim CEO Michael Marks.
2007 — Ze’ev Drori takes over as Tesla’s permanent CEO.
2008 — The Roadster enters production. Elon Musk receives the first vehicle produced.
2008 — Ze’ev Drori resigns as Tesla’s CEO. He is replaced by Elon Musk who remains CEO to this day.
2008 — Tesla announces its plans for the Model S sedan.
2009 — Eberhard files a lawsuit against Tesla and Musk alleging that he was forced out of the company, and that Musk has taken credit for creating a company that Eberhard and Tarpenning built. He drops the suit later that year.
2009 — Facing financial troubles, Tesla seeks an investment from Daimler AG and a loan from the Department of Energy.
2009 — Tesla relocates its headquarters to Palo Alto, where it remains to this day.
2010 — Tesla goes public, raising $226 million in its IPO.
2011 — Tesla showcases the prototype for its Model S, the company’s first sedan.
2012 — The Model S sedan goes into full time production.
2012 — Tesla discontinues production of the Roadster.
2012 — Tesla launches its first Supercharger charging stations with six locations in California.
2013 — Tesla posts its first quarterly profit.
2014 — Tesla announces its Nevada Gigafactory, where the company will manufacture the batteries for all of its products.
2015 — Tesla delivers Model X
2015 — The company enters the solar power market, announcing a line of products to power homes and businesses based on a combination of solar panels and batteries.
2016 — Tesla announces plans for the Model 3 sedan, its first car aimed at a mass market.
2017 — Tesla Motors changes its name to Tesla, Inc. This remains the company’s name to this day.
2018 — Tesla misses quotas for the Model 3 sedan, producing over a three-month period less than half of what it had forecast it could produce in one week.
2018 — Musk announces on Twitter that he plans to take the company private at $420 per share, and that he has already secured the funds to do so. He does not take the company private and has not, at time of writing, done so. This leads to a flurry of trading that drives up the price of Tesla’s stock.
2018 — The SEC charges Musk with securities fraud.
2018 — Musk and Tesla accept a settlement from the SEC. Musk pays $20 million and steps down as the Chairman of Tesla’s Board of Directors. He is replaced by Robyn Denholm. Tesla also pays $20 million and agrees to oversee Musk’s Twitter account.
2018 — The Department of Justice begins an investigation into whether Tesla misled investors about its Model 3 production capacity.
2019 — The SEC seeks a contempt order after Musk makes a Twitter announcement regarding Tesla’s production capacity. The settlement is revised after a judge finds that Tesla has conducted no oversight of Musk’s Twitter activity.
2019 — Musk and Tesla unveil the “Cybertruck,” an electric six-seater pickup truck. Musk later claims that Tesla has gotten 250,000 orders for the Cybertruck.
2020 — On the wave of a strong fiscal quarter and analyst upgrades, Tesla stock surges, eventually reaching over $900.
2021 — Tesla Semi and Cybertruck to likely go into production.
In the upcoming blogs, I would like to cover why the 23rd of March 2020 was perhaps the best day to invest — the most definitive moment in a decade.
Investors across the experience spectrum have been burnt handling the Tesla stock (including myself) as the erratic peaks and troughs have been too volatile. Personally, I had entered in the $600s, re-stocked in the $900s, and immediately sold off all holding at a loss when the stock re-entered $600s. The stock proved too fiery for me to handle. This fear was too real while riding waves, but upon reflection was a massive miss-calculation. Most investors appear to share my experience.
