Sep 17, 2023 16 min read

Investment Thesis: Tesla

The recommendation of the month is a game-changing company in the future of electric mobility. In the rapidly evolving world of electric vehicles (EVs), this company consistently pushing the boundaries of innovation and revolutionizing the automotive industry. With a market capitalization surpassing legacy automakers, this titan has positioned itself as a key player in the transition to a sustainable future. This company is a good long-term investment because it has a number of factors in its favor, including a strong brand, a loyal customer base, a growing market, and a strong management team that can yield satisfactory returns.

This recommendation is just a start, the next step is to do your due diligence process which will then help you to make the investment decision. We strongly advise investors to do their thorough analysis on the recommendation and understand the soundness of the business before investing in this company. Also, please consult your investment advisor before making a decision.

Business Profile (NASDAQ: TSLA)

Tesla, Inc engages in the design, development, manufacture, and sale of fully electric vehicles, energy generation and storage systems. It also provides vehicle service centers, supercharger station, and self-driving capability. The company operates through the following segments: Automotive and Energy Generation and Storage. The Automotive segment includes the design, development, manufacture and sale of electric vehicles. The Energy Generation and Storage segment includes the design, manufacture, installation, sale, and lease of stationary energy storage products and solar energy systems, and sale of electricity generated by its solar energy systems to customers. It develops energy storage products for use in homes, commercial facilities and utility sites. The company was founded by Jeffrey B. Straubel, Elon Reeve Musk, Martin Eberhard, and Marc Tarpenning on July 1, 2003 and is headquartered in Palo Alto, CA.

Tesla is a pioneer and market leader in the electric vehicle (EV) market. In 2022, the company delivered over 1.3 million EVs globally, representing nearly 65% of the battery-electric vehicle market share in the U.S. This represents a 40% increase in deliveries compared to 2021.

Tesla operates manufacturing facilities in Fremont, California; Sparks, Nevada; Buffalo, New York; Austin, Texas; and Berlin, Germany. The company has additional facilities for sales, service, Supercharging and energy storage worldwide. Tesla employs approximately 120,000 people globally as of January 2023, representing a significant hiring ramp in 2022. The company is headed by CEO Elon Musk. With its relentless focus on innovation, Tesla aims to accelerate the world's transition to sustainable energy across personal transport, electricity generation and storage.

Story

Elon Musk - The Driving Force Behind Tesla

Under the helm of visionary CEO Elon Musk, Tesla has experienced remarkable growth and innovation in the past decade. Musk's relentless pursuit of his mission to accelerate the world's transition to sustainable energy has made the company synonymous with electric vehicles and clean energy solutions. His leadership has been instrumental in shaping the company's trajectory.

Clear Vision and Execution: Elon Musk has always had a clear vision for Tesla. He outlined a three-phase plan in the early days of the company, consisting of producing high-end sports cars, creating luxury sedans, and finally, manufacturing mass-market EVs. This master plan has been executed with precision, cementing the company's position as the undisputed leader in the EV market.

Technological Innovation: Under Musk's guidance, the company has consistently invested in cutting-edge technology, resulting in industry-leading battery performance, efficient electric powertrains, and innovative software solutions. This relentless pursuit of technological advancement has propelled the company ahead of competitors and attracted a loyal following of customers and investors. As the company expands its product portfolio and enters new markets, Elon Musk's leadership will continue to drive the company to innovate, pushing the boundaries of what's possible in electric transportation. The ongoing development of autonomous driving technology, energy storage solutions, and advancements in battery technology are likely to keep the company at the forefront of the industry.

Vertical Integration: Musk's emphasis on vertical integration has enabled Tesla to control its entire supply chain, from battery production to vehicle assembly. This strategic approach has resulted in cost reductions, increased flexibility, and shorter lead times, allowing the company to quickly respond to market demands.

Global Expansion: Under Musk's watch, Tesla has already established a strong international presence, with manufacturing facilities in the US, China, and Europe. His vision for a truly global company will continue to guide the firm's expansion, positioning it to capitalize on the rapid growth of the EV market worldwide.

Culture of Excellence: Elon Musk's relentless pursuit of perfection and his high expectations for employees have fostered a culture of excellence at the company. This culture will be crucial in maintaining the firm's competitive edge and attracting top talent as it continues to grow.

Here are some specific examples of how Musk's leadership has benefited Tesla in the past:

In 2008, Tesla was on the verge of bankruptcy. Musk took over as CEO and turned the company around. He did this by raising capital, cutting costs, and focusing on the development of the Model S, a luxury electric car. The Model S was a success, and it helped Tesla to become profitable.
In 2012, Tesla introduced the Model X, an SUV. The Model X was also a success, and it helped Tesla to expand its market share.
In 2015, Tesla introduced the Model 3, an affordable electric car. The Model 3 was a huge success, and it helped Tesla to achieve mass production of electric vehicles.

Here are some specific examples of how Musk's leadership will create massive positive impact in the future of Tesla:

Musk is building a new Gigafactory in Texas. This Gigafactory will be able to produce more batteries than any other factory in the world. This will help Tesla to meet the growing demand for electric vehicles.
Musk is also planning to develop a new battery technology that could revolutionize the electric vehicle industry. This new battery technology could make electric vehicles cheaper and more efficient.
Musk is also planning to develop a self-driving car. This self-driving car could revolutionize transportation and make our roads safer.

In conclusion, Elon Musk's leadership has played a pivotal role in shaping Tesla into the industry leader it is today. His vision, commitment to innovation, and emphasis on vertical integration have set the company apart from its competitors. As the world continues to embrace electric vehicles and clean energy, Musk's leadership is expected to drive Tesla to even greater heights, creating massive value for investors and contributing to a more sustainable future.

Revenue

Competitive Advantages

Tesla has focused exclusively on electric vehicles since its founding in 2003. This gives them over a decade head start in R&D compared to traditional automakers who were still focused on internal combustion engines (ICEs).
Tesla designed and launched its first production EV, the Roadster, in 2008. This was groundbreaking as a high-performance sports car with 245 miles of range, demonstrating EVs could be desirable.
Tesla's second vehicle was the Model S luxury sedan launched in 2012. The Model S received critical acclaim and was the first EV to successfully challenge luxury ICE incumbents like BMW and Mercedes based on performance and styling.
By solely focusing on EVs, Tesla has developed 3 generations of battery packs, powertrains and motor configurations optimized for efficiency, power and range. Their expertise in battery engineering is industry leading.
On the manufacturing side, Tesla has built expertise in automated production lines to improve quality and costs. For example, their factory in Shanghai was built in 10 months. It was also 65% less expensive to build than the Model 3 production system in the United States. Tesla is growing quickly yet also saving on costs along the way.
Tesla's head start has allowed them to learn critical lessons and iterate quickly to build better EVs faster than competitors. This gives Tesla proprietary knowledge in EV tech that will be difficult to replicate quickly.
Tesla is 3-4 years ahead of competitors based on capabilities across batteries, powertrains, manufacturing engineering and integration.
McKinsey estimates Tesla's lead equates to ~$4000 reduction in production costs per vehicle compared to competitors. This is a sustainable competitive edge.

In summary, Tesla's multi-year head start in focusing solely on EVs has given them an advantage across technology development, manufacturing processes, and institutional knowledge that will benefit them as the EV market grows. Traditional automakers are playing catch-up.

Expertise Across Key EV Components

Batteries: Tesla uses cylindrical lithium-ion cells and produces its own battery packs. They have customized battery chemistry over time, moving from Lithium Cobalt Oxide to Iron Phosphate for longer life. Tesla's latest 4680 battery with in-house cell production aims to reduce costs and improve range. In 2022, Tesla began producing 4680 battery cells at its Fremont pilot plant. 4680 cells are larger, have 5x the energy capacity, and are easier to manufacture than previous generations. This positions Tesla to reduce battery costs and improve range.
Powertrains: Tesla designs its own power electronics, motors, and gearboxes optimized for efficiency and performance. Their 3-phase AC induction motors provide high torque and are maintenance free due to having no magnets. The Plaid powertrain introduced in 2021 has a tri-motor configuration achieving 0-60 in under 2 seconds. Plaid demonstrates Tesla's continued innovation in power electronics and motors to push performance boundaries.
Software: Tesla develops complex vehicle software in-house, handling core functionality via OTA updates. This includes battery management, infotainment, automatic emergency braking, autopilot etc. Traditional automakers rely on third-party software. Tesla FSD software remains in beta but makes steady improvements via neural net training and OTA updates. FSD has now expanded to over 100,000 users to collect training data for autonomy.
Integration: Tesla has deep expertise integrating components like batteries, motors, inverters for peak efficiency. Traditional automakers rely on suppliers and struggle with EV integration. The 4680 battery pack integrates cells directly into the vehicle chassis for structural integrity. This innovation improves integration and manufacturability while eliminating traditional pack assembly steps.
Manufacturing: Tesla has automated 70% of manufacturing processes, allowing rapid changes via software instead of reconfiguring machinery. Their factory footprint is much smaller vs output. Tesla's latest factories in Austin and Berlin have been designed for even greater efficiencies and automation. For example, Austin will cast entire rear underbodies from Giga Presses, reducing 70 parts down to 1.
Charging Network: Tesla's Supercharger network removes range anxiety and is an integrated, proprietary asset competitors can't access. DC fast charging is convenient and only ~$15 for a full charge. However, in 2022 Tesla announced they will open part of their network to other EVs by the end of 2023. This could create a new revenue stream for Tesla but also demonstrates their charging dominance as other automakers have partnered with them for EV infrastructure.

Tesla's vertical integration across all key components from cell to software to charging gives them an advantage vs automakers who rely on suppliers. The sum total of Tesla's interlinked expertise is extremely difficult for competitors to replicate in a short timeframe.

Alignment with Future Trends

Here are some key points on how Tesla's mission aligns well with major shifts happening around sustainability, renewable energy, electrification, and autonomous driving:

Tesla's focus on accelerating the transition to sustainable energy directly aligns with rising environmental concerns, government emissions targets, and consumer demand for 'green' products. Their EVs will significantly reduce carbon emissions from transportation.
Tesla also sells solar and energy storage products that allow consumers to generate and store clean energy. This further aligns with growth in residential solar installations and renewable electricity generation.

Widespread transition from internal combustion engines to electric vehicles seems inevitable given regulatory pressure on emissions, improving EV economics, and consumer awareness. Tesla's pure-play focus on EVs positions it strongly for this megatrend.
Analysts forecast electric vehicles could make up 50-70% of total auto sales by 2040 globally. With its headstart, Tesla is poised to be a primary beneficiary as EV adoption accelerates.
Opportunities in autonomous driving also play to Tesla's software and artificial intelligence strengths. They have amassed high quality data from millions of real-world miles to improve their self-driving algorithms.
Morgan Stanley estimates the total addressable market for autonomous mobility will reach $2 trillion by 2030 and $9 trillion by 2040 as adoption increases.

Tesla's entire business aligns well with several inevitable shifts towards sustainable energy, electric vehicles, and autonomous systems. Their first mover advantage places them in prime position to capitalize on these massive opportunities.

Strategy for Growth

Tesla aims to significantly expand sales of existing successful models like the Model 3, Model Y, Model S and Model X across both current markets and new international regions. Increasing production capacity is crucial to meet sales growth targets. Tesla is rapidly expanding Gigafactories in Shanghai, Berlin and Austin while building brand new factories like upcoming Gigafactories in Indonesia and Canada.

New vehicles in Tesla's pipeline like the Cybertruck, Semi truck and next-generation Roadster will help the company expand into high-volume segments like pickup trucks and create excitement. Localizing manufacturing and tailoring vehicles like the China-targeted Model 3 will also help improve market access and cost competitiveness.

Tesla has set hugely ambitious long-term production targets to cement its dominance, aiming for 20 million vehicles per year compared to 1.5 million in 2022. On the battery side, Tesla is quickly ramping up 4680 cell production to lower costs and boost range. Ongoing R&D aims to push battery technology further, like targeting ranges over 1000 km per charge.

For autonomous driving, Tesla takes an incremental approach, steadily deploying new FSD features over time via over-the-air software updates enabled by billions of miles of real-world driving data. Expanding the Supercharger network and service centers will continue to enhance customer convenience globally.

Potential new revenue streams like vehicle insurance, software licensing to other automakers, and EV charging access could emerge as well over time. But Tesla's core strategy remains centered around capacity expansion, battery innovation, autonomous progress, and cost reduction.

Industry Disruption

Tesla has fundamentally disrupted the automotive sector in multiple ways:

Tesla has made electric vehicles aspirational, performance-oriented and part of the cultural mainstream versus the prevailing perception of EVs as boring environmental compliance cars.
The company has accelerated the inevitable transition away from internal combustion engine vehicles toward electric powertrains. This has forced traditional automakers to respond with major investments and model commitments to EVs.
Tesla's direct to consumer sales and marketing have shown that consumers are willing to purchase vehicles online without traditional test drives and dealer negotiations. This challenges conventional auto sales models.
By owning sales, service and charging infrastructure, Tesla owns the customer experience end-to-end rather than relying on third party franchised dealers.
Tesla's focus on frequent over-the-air software updates show the potential for vehicles to keep improving over time versus the static experience of traditional autos. This shifts focus to software-based differentiation.
Tesla has pioneered the concept of the Gigafactory, enabling integration of battery and powertrain production with vehicle manufacturing for greater efficiencies and quality control. This has forced other automakers to rethink their supply chains.
Tesla's embrace of autonomy and large in-vehicle displays has accelerated trends toward more automated driving features and transformed interior cabin designs industry-wide.

In short, Tesla's relentless innovation and Silicon Valley DNA have disrupted across the value chain, from how EVs are marketed to how software enhances the vehicle experience over time. This paradigm shift has compelled other automakers to rethink long-held traditions in design, manufacturing and business models.

2022 Financial Highlights

[Fiscal Year 2022 Compared with Fiscal Year 2021]

Automotive

Revenue increased $23.09 billion, or 52%, due to higher sales volume and average selling price.
An increase of 347,024 Model 3 and Model Y deliveries, and an increase of 38,183 Model S and Model X deliveries year over year.
Automotive regulatory credits revenue increased $311 million, or 21%
Automotive leasing revenue increased $834 million, or 51%
Cost of revenue increased $17.18 billion, or 53%, due to higher raw material, logistics, and warranty costs.
Cost of automotive leasing revenue increased $531 million, or 54%
Gross margin decreased from 29.3% to 28.5%.

Services and Other

Revenue increased $2.29 billion, or 60%, due to higher used vehicle sales, non-warranty maintenance services, paid Supercharging, insurance services, and retail merchandise revenue.
Cost of revenue increased $1.97 billion, or 51%, due to higher used vehicle costs, non-warranty maintenance service costs, and paid Supercharging, insurance services, and retail merchandise costs.
Gross margin for total automotive & services and other segment decreased from 26.9% to 26.5%

Energy Generation and Storage

Revenue increased $1.12 billion, or 40%, due to higher energy storage deployments and higher average selling price of Megapack.
Cost of revenue increased $703 million, or 24%, due to higher energy storage deployments and higher average cost of solar cash and loan deployments.
Gross margin increased from -4.6% to 7.4%.

Overall

Revenue increased $27.6 billion, Cost of revenue increased $20.4 billian and Gross margin increased from 25.3% to 25.6%
R&D expenses increased $482 million, or 19%, as a percentage of revenue decreased from 5% to 4% despite expanding product roadmap and technologies.
SG&A expenses decreased $571 million, or 13%, as a percentage of revenue decreased from 8% to 5% due to a decreased stock-based compensation expense and operational efficiencies.

Tesla's key product history and performance

Tesla Roadster (2008-2012)

The Roadster was Tesla's first production electric vehicle launched in 2008. It was a high-performance sports car intended to prove EVs could deliver impressive acceleration and range. Priced at $98,950, the Roadster was based on a Lotus Elise chassis and powered by a 185 kW motor with 53 kWh battery pack. 0-60 mph acceleration was under 4 seconds. The EPA range was 244 miles per charge, far exceeding any prior EV. This helped alleviate range anxiety in early adopters.

Total Roadster sales were around 2,500 units during its production run through 2012. The car won multiple awards and drove excitement around Tesla's future vehicles.In 2017, Tesla announced a new Roadster which aims to again push performance boundaries with 0-60 mph under 2 seconds, 620 mile range and more. The second-generation Roadster was delayed to 2023.

Overall, the first Roadster was a niche, low-volume product but succeeded in establishing Tesla's credentials as a legitimate auto manufacturer and sparking enthusiasm for electric vehicle performance potential.

Model S

The Model S is Tesla's first mass production EV, launched in 2012 as a premium electric sedan. Pricing started at $57,400 at launch. The Model S offered 225-335 miles of range based on battery pack option. Performance variants later pushed acceleration to under 2.3 seconds 0-60 mph. Unique features included a 17" touchscreen control panel, advanced autopilot capabilities, and free over-the-air software updates.

The Model S received critical acclaim for blending range, technology, performance and style. It was pivotal in changing perceptions of EVs. The latest Plaid+ model promises 520+ miles of range.

The Model S has competitors from Porsche, Mercedes and other luxury brands, but remains the definitive luxury EV offering balancing range, performance, and tech features. Demand for the aging Model S has slowed recently as Tesla focuses more on higher-volume Models 3 and Y. But the Model S remains Tesla's technology flagship.

The landmark Model S cemented Tesla's position as the leading luxury EV automaker. Its combination of performance, range and technology set the standard for all future electric vehicles.

Model X

The Model X is Tesla's luxury electric SUV, launched in 2015 with a starting price of $132,000 initially. The most distinctive design feature of the Model X is its unique "falcon wing" doors that open upwards allowing easier rear seat access. The Model X offers seating for 5-7 passengers depending on configuration. Cargo space is generous at 88 cubic feet. Range has increased over time from 257 miles originally to 333 miles currently for the top-end Model X Plaid. Acceleration is rapid, with the Performance model reaching 0-60 mph in just 2.5 seconds thanks to Tesla's advanced powertrain.

The Model X faces competition from other luxury electric SUVs like the Audi e-tron, Mercedes EQC, and Rivian R1S. Reviewers praise the interior space, performance, and unique style but note reliability issues in early models. As of 2023, Tesla has sold a total of 630,063 Model S and Model X vehicles in the world

The distinctively designed Model X expanded Tesla's product line into the lucrative luxury SUV segment. Despite early qualms, it has become a sales success as Tesla's second most popular vehicle.

Model 3

The Model 3 is Tesla's lower-priced, mass-market electric sedan that launched in 2017 with a starting price of $35,000. It is smaller than the Model S and was targeted to broaden Tesla's customer base beyond luxury segments. Initially available only in rear-wheel drive Long Range (220 mile range) and Performance versions, lower priced and shorter range options were added later.

The Model 3 could accelerate 0-60 mph in as little as 3.1 seconds for the Performance version. Cargo space measured 15 cubic feet. Over 1.5 million Model 3s have been sold globally, making it Tesla's all-time best selling model.

Reviews praised the Model 3's technology, performance and value proposition compared to competitors like the BMW 3-Series and Mercedes C-Class.

Model Y

The Model Y is Tesla's compact electric crossover SUV built on the Model 3 platform and launched in 2020. Initial pricing started at $52,990 for the Long Range AWD variant, with seating for 5 or 7 passengers. EPA estimated range was 326 miles for Long Range and 303 miles for Performance versions. 0-60 mph acceleration as low as 3.5 seconds.

Reviews praised the Model Y's space, performance, and features while noting its similarities to the Model 3. Main competitors are the Ford Mustang Mach E, Audi Q4 e-tron and Volvo XC40 Recharge. Tesla is counting on the Model Y to become one of the best-selling electric vehicles worldwide given strong crossover SUV demand.

Risk

While Tesla has built impressive competitive advantages, its future growth prospects face some notable risks. Tesla has struggled at times to achieve its very ambitious production and delivery targets, pointing to potential execution challenges as the company scales rapidly. Ramping up new factories worldwide and training workers quickly enough has proven difficult, resulting in delays getting facilities like Berlin and Austin to reach full capacity per plan.

Tesla also has an unusually high reliance on its CEO Elon Musk as the company's charismatic leader and chief visionary. If Musk were to leave Tesla for any reason, it could negatively impact the Tesla brand, product roadmap, and more. As Tesla expands into higher volume lower priced segments like mass market sedans, it also faces new cost competitiveness challenges versus established automakers who have greater economies of scale currently.

Looking ahead, Tesla's ability to maintain its dominant electric vehicle market share is uncertain as competition heats up. Well-funded tech giants and startups may achieve battery and software breakthroughs. Additionally, Tesla's stretched valuation at over 100x earnings leaves the stock prone to volatility if growth slows for any reason. Near term demand may also be boosted by temporary EV incentives and subsidies, which are declining in the US and Europe, making underlying consumer demand unclear.

Following data snapshots are as of 09/15/2023 from tradingview website

Key Stats

Performance: Tesla vs S&P 500 (10 Years)

Financial Statements

Income Statement

Balance Sheet

Cashflow

Statistics

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