Fundamental Analysis of Tesla, Inc.

Posted on by Finance Infopedia

When I am writing this post on 12 May 2021, the last traded price for one share of Tesla, Inc. was $590. Amazingly on 31st May 2019 one share of Tesla was trading at $37, and just after 20 months ie on 8th Jan 2021, the same stock was trading at $880. This means in just about 20 months this stock has jumped 23.7 times. And when I calculated I realized that if I had invested Rs. 5 lakhs in this company, it would have jumped to Rs. 1.15 Crores. If you are a US citizen and if you would have invested $1000, your investment would have grown to $23700.

Anyway, the price has come down from its peak of $880.02 to $589.89 and I am waiting for the stock to come down to make my investment. The stock is still trading at a PE of 505 which is unrealistic for a fundamental investor like me. I am suffering from FOMO right now as I really understood the future growth potential of Tesla, Inc. but as a Warren Buffet follower, I don’t want to invest in a company that is trading at an astronomical PE ratio.

What Tesla company do?

The mission of Telsa is to accelerate the world’s transition to sustainable energy.

Tesla is in the business of designing, developing, manufacturing, selling and leasing high-performance fully electric vehicles and energy generation and storage systems, and offer services related to sustainable energy products.

Tesla basically operates in two segments:

  • automotive
  • energy generation and storage

How many facilities does Tesla have?

Manufacturing facilities of Tesla are located at

  • Fremont Factory (Manufacturing Model 3, Model Y, Model S and Model X)
  • Gigafactory Shangai (Manufacturing Model Y and Model 3)
  • Gigafactory Nevada (Manufacturing of energy storage products)

Automotive Segment

The automotive segment of the company includes electric vehicles. Tesla’s different models of electric cars are

  • Model S
  • Model X
  • Model 3
  • Model Y

Model S

Model X

Model S is a four-door full-size sedan that we began delivering in June 2012. Model X is a mid-size SUV with seating for up to seven adults, which we began delivering in September 2015. Model S and Model X feature the highest performance characteristics and longest ranges that we offer in a sedan and SUV, respectively, and we manufacture both models at the Fremont Factory.

Model 3

Model 3 is a four-door mid-size sedan that we designed for manufacturability with a base price for mass-market appeal, which we began delivering in July 2017. We currently manufacture Model 3 at the Fremont Factory and at Gigafactory Shanghai.

Model Y

Model Y is a compact sport utility vehicle (“SUV”) built on the Model 3 platform with seating for up to seven adults, which we began delivering in March 2020. We currently manufacture Model Y at the Fremont Factory and at Gigafactory Shanghai.

Energy generation and storage segment

The energy generation and storage segment include designing, manufacturing, installing, selling and leasing solar energy generation and energy storage products and related services and sales of solar energy systems incentives.

Tesla’s major types of energy storage products are

Powerwall, powerpack and megapack products use lithium-ion battery energy storage technology which is supported by inverters and control technology.

Powerwall is designed to store energy at home or a small commercial facility.

Megapack and powerpack energy storage solutions or commercial, industrial, utility and energy generation customers, which may be grouped together to form larger installations capable of reaching Gigawatt hours (“GWh”) or greater.

Tesla also offers integrated systems combining energy generation and storage. Our energy storage products are currently assembled at Gigafactory Nevada.

Tesla sells retrofits solar energy systems to customers and channel partners and also make them available through lease and power purchase agreement (“PPA”) arrangements and subscription-based sale of solar power, which is currently available in limited U.S markets. Tesla purchases most of the components for our retrofit solar energy systems from multiple sources to ensure competitive pricing and adequate supply.

In 2019, we commenced direct customer and channel partner sales of the third generation of our Solar Roof, which combines premium glass roof tiles with energy generation. We ramping the volume production of Solar Roof at Gigafactory New York, and we are improving our installation capability and efficiency.

Tesla unveils Powerwall 2 and Solar Roof

Ordinary roofs can be replaced with Solar Roof having energy storing capacity. This can power a home completely with helps you to save on electricity cost in long run. In case if you don’t want to replace your existing roof, you can simply fix solar panels on the existing roof of your home. This again will save your monthly electricity cost.

Review of Tesla solar roof after 1 year

Now the advantage of Solar Roof tiles is that it is three times stronger than normal roofing tiles and the company is giving a 25-year warranty for their products which shows their confidence in the products they are selling. Good thing is the company’s in-house team will take care of the complete installation starting from removal of existing roof to the installation of solar roof.

Installation of Tesla solar roof

If you look at both the electric vehicles and solar roofing/panel system developed by Tesla, Inc. you will realize that this company is completely into Green energy initiative products which is the need of this hour and future.

Future plans of Tesla

Tesla has announced different versions of electric vehicles to address additional vehicle markets, including specialized consumer electric vehicles in Cybertruck and the new Tesla Roadster and a commercial electric vehicle in Tesla Semi. Tesla has also planned to introduce in the future a lower-cost vehicle to leverage developments in our proprietary Full Self-Driving (“FSD”), battery cell and other technologies

Image of Tesla’s Cybertruck

Image of Tesla’s Roadster

Image of Tesla’s Semi

Tesla’s Moat or Tesla’s Competitive Advantage

Now, it is my investment policy that I won’t invest in any company if I don’t see any competitive advantage or entry barrier for a particular company which is also called as MOAT of a company. More than any numbers or ratios this “MOAT” factor of a company is the most important things for me while selecting a company for investment.

Those who are against Tesla says that Tesla does not have any special advantage over other prominent car manufacturers like BMW, Benz, Toyota, Porsche. They claim that the market share of Tesla will get eroded the moment other car manufacturers start actively making electric cars. But I think that is not the case. So what are those special entry barrier that Tesla has to avoid competitors eating away Tesla’s market share?

So let us look at the moats of Tesla that make it difficult for other companies to compete with Tesla.

Battery Capacity

For electric vehicles, the energy required is taken from batteries. If that is the case, then you need to have a very good battery that can be quickly charged and the battery backup should be very long. Right now, the battery technology of Tesla is the best in the universe. There are plenty of battery companies out there in the market and automobile manufacturers who are getting into electric vehicle manufacturing can associate with these battery manufacturing companies to make batteries for their cars, but Tesla’s battery technology is the best one available in the market right now. In terms of Battery energy density, volumetric density, gravimetric energy density, Tesla’s Nickle Cobalt Aluminium battery chemistry is the best available technology in the market.

Right now all other EV manufacturers are having any one battery manufacturing technology, but in the case of Telsa they are already into 2 to 3 battery manufacturing technologies. They are using Lithium Ion Phosphate batteries They also use nickle cobalt aluminium technology for battery manufacturing. None of the battery manufacturing technology of any other companies is better than any of the better technology Tesla is following. As they have so many vehicles on the road, they are able to collect data from different locations under different conditions on how their batteries are performing and this gives Tesla an edge over the other companies. This makes them to monitors more vehicles and their battery performance which will help them in making better batteries.

Manufacturing facilities

All the other manufacturing companies being so big and old, they have a bureaucratic attitude where the decision to make changes from the existing model and difficult and slow. In the case of Tesla, they have a mentality of continuous improvement. When I say “They”, I really mean “Elon Musk” who is the pillar of continuous innovation and improvement in Tesla’s manufacturing processes. Mode Y built in Berlin is go completely different from Model Y built in another manufacturing unit. The company is constantly trying to improvise the process to reduce the cost of manufacturing. They are bringing in casting machines to cast the body of the car in the manufacturing unit itself is a kind of vertical integration thereby the cost of manufacturing cars reduced through economy of scale where they start selling more units of a particular model.

Now lets have a look at the cybertruck model of Tesla. What is it special about this model? Cybertruck’s advantage is huge cost efficiency advantage and the reason for that is simple design and straight lines of the Cybertruck. For a truck, design is more important or cost efficiency is more important?

This design disrupts the traditional designs and it brings the cost of production to the bare minimum. It is now like there is no other method where you can reduce the cost of production. All the methods available are already taken up by Tesla. Now if there is any method remaining, then that is available in Elon’s brain.

Now, look at this design. In the first look, you may feel that the design is odd. But just have a close look at the design, you cannot see any paint used on the vehicle and you can see the body of the vehicle is 100% straight without any shape of curves. A design that is already cheap, once they start selling more units, because of economy of scale they will be able to distribute the fixed cost to all units they sell which inturn again reduce the selling price.   Read more.

Promoter run company

Tesla is a promoter run company. As you know, Tesla is run by Elon Musk. Now what the difference between a promoter run company and others? In a non-promoter company, decisions are taken after getting approval from board members where the number of people who are capable of making decisions is more. Whereas in a promoter company especially the one which is run by a charismatic person like Elon Musk, decisions are taken very quickly.

Software

Tesla at its core is a software company. You can call it a car manufacturing company, but I feel by its heart Tesla is a software company. Tesla develops almost all of their software, including most of the user interfaces, internally and update their vehicles’ software regularly through over-the-air updates.

Tesla also developed software capabilities for remotely controlling and dispatching their energy storage systems across a wide range of markets and applications, including through their real-time energy trading platform.

As in the above tweet, there is a group of people who say that the lack of buttons in a car make a worse automotive design. My point is if Elon can put all functions of a car just into a tab which no one has done yet in any models, just imagine the kind of functionalities and options. Read more about the Tesla Tab options here. Now the software in Tesla is a vertically integrated in-house department of Tesla, Inc. For other companies their service should be outsourced to other private companies which is not the case in Tesla.

Self-driving vehicle

via GIPHY

Tesla is a self-driving car where you don’t need to worry about the traffic and other vehicles running on the road. Even though practically Tesla is not complete or 100% autonomous right now. Self-driving is possible because of the FSD (Full Self Driving) chips available in Tesla cars. Now Tesla is working on a complete self-driving software that will allow the vehicle to recognize all the signals, movements, signals and traffics around the moving vehicle. As more people drive this car, they collect millions and now billions of miles of data. This Software can collect data on different situations the car will encounter and this helps the Tesla team to learn from the data available to make better software. Once the software gets mature, Tesla vehicle will reach a stage where it can move around anywhere without the assistance of someone sitting in the driver’s seat. Or if I say in another way, Tesla is on the mission of making the term “DRIVER” obsolete.

Driverless taxi network by Tesla

In the next 5 years, if the above points that we discussed regarding complete automation of Tesla vehicles become true, we will see vehicles moving around without the assistance of any driver. Then driverless taxi is something that we are gonna see. Once 100% automation is achieved by Tesla, this will open up a big business opportunity for Tesla in taxi network which is presently lead by Uber. This is gonna be a big money minting business for tesla. This will change the way we call taxi for a ride. The need for owning a car will become just an option instead of a must decision. Tesla having so many vehicles and so much data with better software and hardware is getting ready to be in the driverless taxi network. Uber taxi network business model is the app or software they have that connects the driver with the rider. Now once there is no need for a driver because of driverless vehicle all that is required is a good app or software that connects the vehicle with the customer which is quite to do for Tesla. Now, at this stage even if uber tries to do something, it is now impossible for them to stay protected from this obvious threat that is gonna come from Tesla.

Tesla superchargers and destination chargers

Click here to find the map around the world with locations where superchargers and destination chargers for Tesla is available. I have given the image below with locations of supercharges available in USA. All the red dots that you can see on the image below are the locations of Tesla chargers available in USA. Just from the image, we can realize that Tesla charger is available in every nook and corner in US. Especially if we look at the area around New York, the numbers are so high that you really don’t need to move around to find charging locations.

This is the case in places like China, Europe, Canada etc and the numbers are still growing.

Even though it is definite that competitors will come up with their charging stations, Tesla has already moved forward a lot that the competitors take a long time now reach up to the level of Tesla and by that time based on Tesla’s and Elon’s speed at which they are innovating new technologies they would have definitely moved much forwards which makes the competitors always lagging behind which inturn gives Tesla the first-mover advantage.

Financial Performance of Tesla

Trailing 12 months (TTM)

Key metrics – Quarterly

The first image is trailing 12 months (TTM) quarterly performance of Tesla. The second image shows the last 12 quarterly performance of Tesla.

It is evident from the graph that vehicle production is growing continuously and we all know that the market of electric vehicles is huge and the growth we can see here is just the beginning.

Ok. So we agree that the company is selling vehicles. Remember that they are into selling solar panels and solar tiles also. So all together look at the company’s income and EBITDA. They are also growing at a good rate.

Now there is a quote that goes like this

Turnover is vanity, profit is sanity, cash is a reality

We want to ensure that almost all of the profits company made is turned into real cash. You will be astonished to know that company’s cash flow is in fact much higher than its net profit. The company is able to generate cash more than the net profit it achieved during a fixed period. Now how does that happen? I think this mainly happens in Tesla due to the advance or booking amount they have collected but the vehicle is yet to deliver. And the extra cash above the net income company is able to generate is called “FLOAT”. More the FLOAT is, the company can use that extra cash for operation expense and sometimes even for CAPEX. So CFO, ie cash flow from operations, company is doing good.

Now the final point that makes all sense for investing in a company is FCF or free cash flow. FCF is the cash company can keep aside after deducting all CAPEX. If you look at the company’s FCF in the Trailing 12 months (TTM) chart, you will find that the FCF also is growing continuously for the last 4 quarters.

Altogether I can conclude that the company has already started doing goo in terms of financials.

Tesla’s brand awareness in the market 

Many studies show that the brand awareness among the public about Tesla’s electric vehicles is very high when comparing with other established competitors. So there is a clear question on why and how Tesla got this much of name among the public. following are the reasons I found out

  • First mover in large scale manufacturer of electric vehicles
  • The self-driving capability that Tesla created in its electric car is something that no one has ever achieved so far
  • The charismatic character of Elon Musk

via GIPHY

  • A deep belief in Tesla’s capability in making innovative products especially because of having a CEO who is capable to start to rocket manufacturing company ie SpaceX where they built rockets that can land back on the ground
  • Unique brag-worthy (USB) proposition (To learn more about USB watch this link from 6.44 minutes) – All those who were able to buy the Tesla model, many of them went to Youtube and started bragging about the amazing features they are able to experience using the newly bought Tesla model. These features are something that many of the viewers have not experienced and seen in their life and they all want to experience the same. Also for Tesla in the beginning there were no competitors and gave them the first-mover advantage. As more people started buying Tesla’s self-driving electric cars more people started bragging themselves about the amazing machine they own.

As given in Tesla’s annual report

We have been able to generate significant media overage of our company and our products, and we believe we will continue to do so. Such media coverage and word of mouth are the current primary drivers of our sales leads and have helped us achieve sales without traditional advertising and trelatively ow marketing costs.

All these helped Tesla to increase their sales without paying much for advertisements and still this process is continuing because even when I am writing this post, there is no serious competitor for Tesla as of now.

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