I take a longer-term perspective by looking at their years of financial performance and accompanying financial metrics compared to their competitors. There is a lot of information publicly available about Tesla, detailed quarter-to-quarter analysis and strategies discussion that I do not want to replicate.
Nothing in this article is intended to be financial advice and should not be taken as such, please do your own research before investing.
Tesla is the premier manufacturer and seller of electric vehicles worldwide. The company is also working on related technology in autonomous driving, integrated renewable energy generation and storage systems, and electric battery cells. The exhibits below show Tesla’s financial performance from 2008 to 2021 and its free cash flow in recent years.
Signs of greatness:
- Strong revenue growth
- Improving gross margin in recent years
- Increasing net cash from operating activities as a percentage of sales and free cash flow in recent years
It currently has just 4 car models (S3XY) with several variations. Its strong demand can be seen by its long waiting time with no marketing as well as its ability to increase prices to pass its higher input costs.
Tesla is progressing towards (a) physical vertical integration with factories, machinery, sales, service centres, superchargers, battery manufacturing, FSD etc., (b) digital vertical integration with an operating system with each EV making them more intelligent with FSD and intuitive with data back to their supply chain management and AI stack for autonomous driving as well as (c) multiple sources of revenues beyond the car to energy (solar energy generation, battery energy storage, Virtual Power Plant), charger and charging, insurance — a growing moat whose business is way before selling electric vehicles and towards its mission of accelerating the world’s transition to sustainable energy. These give Telsa a higher margin and operating leverage as it ramps up production and its potential.
The increasing revenue and free cash flow from multiple revenue sources create a gigantic flywheel effect for Telsa to continue to reinvest in its research and development as well as production capacity that its competitors will find harder and harder to catch up.
The financial performance has been the result of the relentless execution of their master plans.
Tesla’s master plans
The Secret Tesla Motors Master Plan (just between you and me), August 2, 2006
– Build sports car
– Use that money to build an affordable car
– Use that money to build an even more affordable car
– While doing the above, also provide zero-emission electric power generation options
Master Plan, Part Deux, July 20, 2016
– Create stunning solar roofs with seamlessly integrated battery storage
– Expand the electric vehicle product line to address all major segments
– Develop a self-driving capability that is 10X safer than manual via massive fleet learning
– Enable your car to make money for you when you aren’t using it
It is challenging the industry giants – internal combustion engine (ICE) automobile manufacturers such as Ford, General Motors and Toyota. Tesla’s financial performance is impressive when compared to the industry’s giants. Compared to Tesla, their revenue growth, margin and cash flow have been mediocre. Their debts to equity are also higher. This can make them difficult to invest in research and development, production capacity and marketing of their EVs to challenge Tesla. Dividends and share buybacks may resume post-covid; making capital reallocation difficult.
On the other hand, the EV startups such as Lucid, Rivian, Nio and XPeng, are still in the early stages of development. Their production is still small and scaling up. They are losing money at gross and/or operating margin levels and relying on their existing cash position to fund their development and production. For a rough gauge, we can benchmark their progress using their financial performance versus that of Tesla to gauge where they are and their pace. Their path to success will not be easy. Tesla was close to bankruptcy at least twice, namely during the 2008 GFC and between 2017 and 2019 with Model 3 production.
Tesla—from Brink of Bankruptcy (Twice) to World’s Most Valuable Automaker
Refer to their financial performances at the end of the post.
Telsa > EVs, FSD + Optimus + Energy > the car business
What is the grand plan of Telsa? How will Tesla look in 2030, 2040 and beyond? Tesla is having many tentacles around and beyond electric vehicles. The exhibit below shows their eosystem and it is more than just vehicle manufacturing like the traditional ICE manufacturers.
Tesa has been opening new Gigafactory facilities in Texas and Germany which will increase its production capacity significantly. Tesla will also be launching Cybertruck and Tesla Semi. Besides being an electric vehicle, Tesla has been continuing to invest in Tesla Energy, Full Self-Driving (FSD), Robotaxi and humanoid robots (Optimus). Sources of revenue will increase. Its moat is expanding; making its competitors harder to catch up.
… I was surprised that people did not realize the magnitude of the Optimus robot program. The importance of Optimus will become apparent in the coming years. Those who are insightful or listen carefully will understand that Optimus ultimately will be worth more than the car business. Worth more than FSD. That’s my firm belief.
Elon Musk, Q1 2022, Tesla earnings call
… I think actually the most important product development we’re doing this year is actually the Optimus humanoid robot. This, I think, has the potential to be more significant than the vehicle business over time.
Elon Musk, Q4 2021, Tesla earnings call
Check out Telsa’s website on Artificial Intelligence & Autopilot
Who will challenge Tesla?
Infinite game. Can the competitors play the infinite game; focusing on the long-term vision, able to move fast with aggressive investment rather than meeting short-term profitability and share price expectations? Will having founders be better at playing the infinite game? Who can drive the innovation of the new S-curve other than Tesla? Also, being in the public market, investors tend to have much shorter-term expectations than having the patience to wait too; resulting in more short-term volatility to each news and quarterly results.
Incumbents versus startups. Can incumbents win against startups when the industry is moving towards the early phase of a new S-curve? History shows that it is difficult.
Startups compete by being agile, innovative, and active experimenters. Unencumbered by legacy systems and heavy bureaucracies, they adapt and move quickly. Incumbents may be less agile or innovative, but they compete due to strong asset bases, well-established brands, along with deep and longstanding relationships with customers and other stakeholders. The strengths that traditionally protected them from smaller and more agile competitors are being whittled away. Startups are maintaining their agility edge, but with easier access to capital, strong brands, and rapid customer acquisition.
Capital allocation. We need to monitor their capital allocation between reinvestment versus dividends payout and share buybacks. Tesla and the startups are all reinvesting as much as possible and not into dividends and share buybacks which the incumbents were doing pre-Covid.
We are still early. Tesla’s challengers can be one of the current companies listed in this post. The challengers may exist in the form of a partnership where they work with various best-in-class (Apple, Nvidia, Mobileye, Cruise, Waymo).
Summary
Tesla’s strong position
- Revenue and growing optionalities as it strengthens and extends its hold. Growing due to strong demand with their branding, pricing power, the ramp-up in production capacity (Gigafactories in Berlin and Texas) as well as new initiatives (Cybertruck, Tesla Semi, autonomous driving, renewable power generation and storage, humanoid robots) offering multiple huge potential revenue sources and a strong moat.
- Margins. Good and should be able to improve as it continues to automate, improve its productivity and with vertical integration.
- Cash. Good net cash position with strong positive free cash flow through operating leverage gives Tesla the capital to keep reinvesting to increase its lead.
- Competition. A more challenging macro environment affects its competitors (ICE automobile manufacturers and EV startups) more
- Increasing moat and barrier to entry. Besides the high Capex for production ramp-up and business infrastructure for sales and servicing, Tesla is progressing towards vertical integration physically and digitally. If executed well, it will give them strategic and cost advantages that are difficult to replicate.
Concerns
- Rising competition. ICE automobile manufacturers have been shifting their priorities toward EVs while more EV startups are raising funds and ramping up production and marketing.
- Key man risk and his distractions. Tesla is closely associated with the visionary owner and CEO, Elon Musk. He is juggling several other businesses (SpaceX, Starlink, The Boring Company, Neuralink) at the same time and soon, Twitter. Will he be able to stay focused on Tesla?
- High valuation. Based on price to sales and/or earnings and its projected growth, Telsa’s valuation can be viewed as rich. Any missteps may not be viewed favourably. The economic slowdown means risk-off and its share price may trade on lower multiples instead together with the market as a whole.
- Volatility. Its share price is highly sensitive to any news that can swing wildly. These can be Elon’s (controversial) tweets, his leaked emails, or any scoops or news regarding Tesla or Elon from Tesla fans and mainstream media.
Check out:
Multi-baggers with growth companies
The section on Multi-baggers for other investing ideas
Some useful information sources:
- From the man himself – his tweets and replies: Elon Musk
- Youtube – Daily news updates and commentaries: Dave Lee on Investing, Tesla Daily
- Twitter – Daily news updates and commentaries: Gary Black, Sawyer Merritt
- Engineering and manufacturing analysis: Munro Live
- Occasional analysis on Tesla: Brian Feroldi
- A good book to read: Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future
Other investing deep dives can be found here.
