- Tesla escaped a controversial quarter with scrapes and wounds.
- However, I anticipate the company to reach most of its 1 million production target by 2020.
- Furthermore, I have built a financial model to reflect the risks/upside and assign a price target of $232.92.
Coming out of Tesla's (NSDQ:TSLA) quarter there was a lot of uncertainty pertaining to the production ramp of the Model 3. With demand outstripping Tesla’s current production capacity there are risks to the investor thesis that have already been priced into the stock and should be on the minds of investors but not to the extent that it should dissuade investors from maintaining a position in the company.
However, the long-term value/growth dynamics still seem compelling given the widened durable competitive advantage and low likelihood of meaningful competition in the BEV (battery electric vehicles) space over the immediate five-year timeframe. In other words, Tesla’s already leapfrogged the competition several times over, and I believe the five-years following 2020 implies some breakthrough in battery technologies. In other words, Tesla likely has a second generation battery technology in the works and has a long-term plan for introducing relevant technologies to drive refresh and sustain consumer demand while also maintaining its competitive position.
Tesla will likely sustain a monopoly over a subcategory of the auto market, which makes it more compelling than investments in peers relying on dated technologies and lack of meaningful innovation over a multi-decade timespan. In other words, Tesla’s pattern of execution is what’s keeping the vast majority of momentum investors onboard, and while the value thesis is hard to articulate, I’m making my value-thesis based on historical tech multiples as a peer group as opposed to the conventional auto manufacturer.
Here were some key points from analyst consensus coming out of the quarter, I’m using 2018 estimates on diluted earnings/revenue and price targets as it’s more pertinent to a long-term investment thesis:
- $16.97 billion revenue and non-GAAP EPS of $10.10 for FY’18 with a price target of $185 from $170. – Ryan Brinkman from J.P. Morgan
- $14.982 billion revenue and non-GAAP EPS of $4.24 for FY’18 with a price target of $250 from $245. – Patrick Archambault from Goldman Sachs
- Non-GAAP EPS of $2.22 for FY’18 and a price target of $330 (maintained). – Adam Jonas from Morgan Stanley
- $21.264 billion revenue, non-GAAP EPS of $13.01 for FY’18 respectively and a price target of $290 (prior) $280. – Rod Lache from Deutsche Bank
- $16.857 billion revenue, GAAP EPS of $(.80) for FY’18 respectively and a price target of $160 (prior) $140. – Colin Langan from UBS
- $18.372 billion revenue, non-GAAP EPS of $11.45 for FY’18 respectively and a price target of $385 (maintained). – Colin Rusche from Oppenheimer Co.
- $20.288 billion revenue, non-GAAP EPS of $5.50 for FY’18 respectively and a price target of $252 (prior) $180. – Joseph Spak from RBC Capital Markets
From the analysts I can survey, the consensus estimate for FY’18 is currently $18.11 billion revenue and non-GAAP EPS of $7.75. The estimates seem fairly realistic, and beatable over a multi-year duration assuming Tesla reaches volume manufacturing by the beginning of 2018. The timetable for initial sales ramp/production is somewhat different from the remaining consensus, but some part of my stance is somewhat in-line with the remaining consensus. Many of the analysts covering the company don’t anticipate the company to meet its production target of 1 million units. However, I do anticipate the company to come close to that figure by the 2020 timeframe.
My financial thesis on Tesla Motors
Source: Alex Cho
I’m anticipating the company to reach its production target of 500,000 units by the end of 2018. However, I don’t anticipate the unit composition to lean as heavily towards the Model 3 as other analysts. Furthermore, I’m anticipating an ASP that’s $5,000 higher than the base configuration.
Since Tesla has been in the process of constructing the Gigafactory since 2014, a timetable of 3 years is roughly attainable assuming the plant is completed by the middle of 2017, and meaningful production of the batteries sustains for the following two quarters. Procurement of the remaining components will likely land in Q4’17 with meaningful volume production starting in Q1’18. As such, I have adjusted my model to reflect these changes. I don’t anticipate much difficulty in procuring the mechanical components of the car, or the battery units. However, the timing of electronic components will likely lag the remaining components given the timing of fabs and Tesla’s transition to next generation autonomous driving systems.
Source: Alex Cho
As for my expense calculation I made some adjustments along the way to reflect the differences between the GAAP and non-GAAP figures. Furthermore, I don’t anticipate the company to drive further expense reductions beyond their earlier commentary. I’m assuming gross margins for the blended categories to fluctuate between 20% to 25% over the next five-years and modeled a gross margin of 20% for FY’20. Furthermore, I anticipate operating expenses as a percentage of revenue to decline considerably and anticipate stabilization at appx. $3 billion in FY’20, which would make the level of investment into future technologies roughly comparable to some of the larger technology firms.
Furthermore, I model a 30% tax rate assumption once we move to future years, which reflects some of the net operating loss carry forwards from prior years with some of it also reflecting blended international tax rates for some of its international channels. When working off of GAAP EPS I project $17.30 for FY’20 and anticipate this figure to level off quite considerably, but still sustain at mid-teen to high-teen growth rates beyond the ending year. As such, I differentiate my estimate by not using a terminal growth assumption and instead value the business by the final year using comparable PEG-based multiples. I also forecast non-GAAP EPS of $27.73 by FY’20, which does compare to consensus figures.
Source: Alex Cho
I’ve reconciled the GAAP to non-GAAP by making fair estimates based on historical share-based compensation and likely performance of options in an environment where Tesla’s share price outperforms the broader market. The imaginary impact from the GAAP accounting of deferred profits and non-cash interest expense is added in as well. To adjust for the impact of taxes I’ve netted out the presumed incremental tax from these added sources to reconcile it back into a non-GAAP estimate.
Furthermore, I’ve increased the diluted share outstanding by roughly 20 million shares, which is partially due to ongoing dilution from option contracts and the remainder from a larger scale secondary offering of shares to raise the remaining capital necessary to fund investment into an even bigger plant than the supposed 1 million/year. I’m sure Tesla will find out that as we fast forward three years, demand will yet again outstrip their expectations, so they’ll have no choice but to shoot for production targets of 2.5 million+ by 2022, so they’ll start deploying capital to reach an even loftier target.
To reflect this impact, I anticipate a $4 billion equity raise towards the latter half of 2017. I’m anticipating paid in capital of $7.5 billion in debt/stock, which also gets reflected in my interest expense, so obviously, I’m not buying Elon’s commentary on CapEx because they’ve increased investment every time demand far exceeds available capacity. Why would any of this change over the next five years? As such, I’m highly convinced they’ll moon shoot their capital plans… sort of how Elon launches stuff into space.
We’ve all got to realize that the current investment cycle will orbit into space before we ever see significant dividend checks or share buybacks. Even so, I’m initiating my price target at $232.92 and maintain my buy recommendation, which compares to current consensus price target (approximate) of $264. I’m anticipating the stock to move 12% higher this year, and I don’t anticipate the stock to trade at new highs. I believe the run-up following the Model 3 pre-sale announcement was more of a one-time event, and anyone who was caught in the run-up will have to wait 12-18 months to find a better exit. Even so, I believe the long-term value potential is compelling, but I apply an aggressive (venture capital type) discount rate of 32.33% against an end of five-year price target of $945 to reflect the risks of the stock.