NOTE: NOT FINANCIAL ADVICE

Introduction:

TSLA is the world's most renowned Electric Vehicle(EV) automaker, catalyzing the world's acceleration towards Internal Combustion Engine (ICE) Vehicles. TSLA has become the gold standard for what a high-quality EV stands for, all thanks in part to their founder's vision and belief in renewable energy especially during the tumultuous early years of TSLA. TSLA no longer just stands for EV but renewable energy, having branched out into Energy Storage, and Solar Panels. TSLA hopes to create an ecosystem for renewable energy from charging to energy storage to the vehicle used, all this tied together by dedicated software created by TSLA at every point of contact in the ecosystem. This ecosystem business model has seen massive success as evident from businesses like GOOG, AAPL, and MSFT. I believe the next frontier of growth for TSLA comes from energy storage rather than automotive, however automotive will still account for the largest chunk of revenue for TSLA.

Market:

TSLA's closest EV competitor is BYD. TSLA has won BYD on almost every front. A country where BYD has managed to wrest control from TSLA is Thailand. So I'll analyze this market specifically to rationalize why I believe this victory will be shortlived.

In Thailand, the top 3 most popular car models are BYD Atto 3, Netta V, and BYD Dolphin (SOURCE).

In Thailand, 60.17% of the population owns a car (SOURCE) with the average car price being about 0.78M Baht. This means that a Tesla Model 3, TSLA's cheapest model is double the average price of a normal car in Thailand.

SOURCE) which means that the Tesla Model 3 is a luxury good rather than an affordable commodity for the average household. The difference in price between BYD and Tesla is a full year's worth of income for the average household which leads the price-conscious consumers in Thailand to naturally gravitate towards BYD, hence the popularity of BYD over Tesla in Thailand.

Ultimately, I do believe that if TSLA continues competing on quality and finds ways to cut costs such as directly setting up factories in Thailand (SOURCE), it will be able to close the price gap with BYD. As "people are really stretching their wallets to be able to afford a Tesla. It’s quite a difficult thing for them to do, and remarkable that it’s the best-selling car in unit volume, despite being much more expensive than other high-volume cars.” – 2023 Q4 Earnings Conference

Revenue:

TSLA has 5 revenue channels, namely “Automotive Sales”, “Services and Others”, “Automotive Lease”, “Automotive Regulatory Credit” and “Energy Generation and Storage sales”.

Automotive Sales

Automotive sales refers to the direct sale of TSLA’s vehicles fully paid upfront.

Elon Musk believes that manufacturing capabilities will be the most important C.A. for TSLA. “perhaps the most important competitive characteristic of Tesla in the future will be manufacturing technology” – 2023 Q4 Earnings Conference.

When forecasting the Number of Vehicles each Gigafactory can produce, I took into account that Elon Musk recently unveiled in the 2023 Q4 Earnings conference that there is a new revolutionary manufacturing technology that is expected to drastically improve production. He hopes to pilot test this technology at the Texas Gigafactory to produce their low-cost EV before proceeding to replicate the technology in every Gigafactory. “the sensible way to go about things is kind of figure out the core technology of the manufacturing line and then replicate it with improvements throughout the world.” – 2023 Q4 Earnings Conference.
So, in my first 3 years, I assume that the growth rate is below historical averages as TSLA tests out new technology in preparation for the launch of the low-cost EV. I assumed that TSLA’s manufacturing technology was successful.

When forecasting %Vehicles delivered, opting for less granularity I forecasted it as a % of historical averages

When forecasting Avg Price/Vehicles Delivered, Elon Musk doesn’t believe in price increases to increase the topline. As evident in 2021 and 2022 where Elon Musk only increased prices due to supply chain constraints before bringing prices back down in 2023. In China, Elon Musk ended up cutting prices due to being able to source significantly cheaper batteries there. I assumed that over time as TSLA enjoys sufficient economies of scale, they will only increase prices in line with perpetual inflation.

Services and Others

TSLA provides a few services such as home servicing in certain regions or customers pay to access TSLA’s network of SuperChargers.

Lifetime number of TSLA automobile (Ex roadster) delivered (SOURCE)

Assuming that TSLA is properly maintained they can last ~20 years (SOURCE). Opting for less granularity, in my forecast I assumed the total lifetime number of tesla cars remained constant without any churn.

When forecasting Services and Others, Opting for less granularity I assumed that the servicing’s pricing grew following the price of the vehicle in line with historic averages.

Automotive Lease

TSLA has 2 types of lease, “Direct Vehicle Operations Lease” which leases out vehicles to customers for up to 48 months afterwards the vehicle is returned to TSLA. “Direct Sales Lease” either granting the customer title of the vehicle once full payment has been made or the customer has the option of refusing the vehicle.

When forecasting Automotive leasing, as prices for TSLA fell in 2023, Automotive leasing as a percentage of Automotive Sales dropped as it is now cheaper for customers to purchase their tesla in 1 lump sum payment. I assumed that following this trend, as TSLA’s affordability increases over time the %Automotive Sales decreases as well before remaining constant in perpetuity.

Automotive Regulatory Credit

TSLA has excess carbon credit which it sells to competitors.

“It will continue for some period of time, but eventually this stream of regulatory credits will reduce.” (SOURCE).

When forecasting Automotive Regulatory Credit, given that TSLA does not intend to depend on these credits for revenue, I assume that as a %of Automotive sales, credit will contribute to a significantly lesser amount in perpetuity. This is further exacerbated by other automobile companies accelerating their push towards EVs as countries begin phasing out ICE vehicles. So, more companies begin having excess regulatory credits as well. Ultimately, I believe that leading up to 2030 the amount of revenue contributed by Regulatory credits decreases to a significant level.

Energy Generation and Storage Sales

TSLA produces Energy Storage systems e.g. Megapack and Solar Energy related products e.g. Solar Panels which it directly sells to customers.

For energy storage more specifically megapacks, as the world phases out ICE vehicles and begins embracing renewable energy, it leads to a surge in demand for electricity. However, the issue with renewable energy is that “The most common renewable energy sources like the sun and wind are intermittent or have lower baseload capabilities than coal, natural gas, or nuclear sources. This makes it necessary to have a way to conserve excess energy produced during peak hours. This extra energy can then be supplied through the grid or otherwise when the sun is down, or wind speed reduces.” (SOURCE). As an example to elaborate on how much importance is placed on energy storage, China mandates that all renewable energy facilities must store at least 20% of their total output (SOURCE).

The closest competitor to TSLA in energy pack is BYD. The TSLA’s megapack is smaller in dimensions compared to BYD and on top of that TSLA has built its own software to be compatible with the megapack hardware with features such as Autobidder (Software to optimize energy trading) and Powerhub.

Right now what's stopping revenue for energy storage is production capacity, TSLA opened its megapack factory in Lathrop to curb this. TSLA has also announced its plans to build a megapack factory in China to assist with production capacity (SOURCE). As an overarching goal for my forecast, I took into account the TSLA master plan 3.

When forecasting number of dedicated megapack factories opened, I assumed that TSLA would open 1 additional plant every 3 years for the next 10 years, to meet the large surge in demand as countries accelerate their push towards renewable energy.

When forecasting Max Output/Factory, taking into account this article on expected output. (SOURCE). TSLA’s Lathrop Megapack factory can produce 80GWh/Year in part due to them doubling their existing lines and resolving certain issues. Over time I believe that TSLA can massively increase the Max Output/Factory, as TSLA consistently touts their innovations as having an S curve of progression, where progress is slower at the earlier stages before exponentially increasing.

As a sanity check, in my base case assuming that all Mega packs are still at 4 MWh. TSLA has to produce 406,200 Mega Packs or 81,240 Mega Pack per factory a year by 2038. As of November 2023, the Lathrop factory can produce 20,000 megapack. So, in 15 years I believe it is a reasonable amount of time necessary for TSLA to ramp up their production 4x.

When forecasting %GWh Deployed, I had to assume total output which is a function of max output and the number of gigafatories. I assumed that over the years as more countries begin phasing out ICE vehicles in favor of EVs, there is a larger need to deploy more energy storage so this % increases to a large extent.

When forecasting Avg Sales/GWh Deployed, Elon Musk does not like to increase sales through increasing pricing which was why when TSLA enjoyed economies of scale from increasing output in their Lathrop factory the Avg Sales/GWh Deployed decreased. So, applying this principle of TSLA slashing prices when costs decrease due to economies of scale, I assumed that TSLA continued slashing prices before increasing by the perpetual inflation rate.

Cost:

“predicting auto gross margins is extremely challenging since there are many moving parts to this equation, some of which are out of our control like the change in tariffs or local incentives to name a few. While the teams are focused on cost reductions, we are approaching the limits within our current platforms.” – 2023 Q4 Earnings Conference.

When forecasting Automotive and Non-Automtoive COGS, COGS as a %revenue for 2021 and 2022 are likely to be lower due to TSLA pre-emptively increasing sales price to deal with inflation. However, in 2023 COGS as a %revenue increased as TSLA cut back on sales price. Going forward, I’ll assume that TSLA tends towards historic pre-covid average. However, in the long run, as TSLA successfully implements their manufacturing technology this % will decrease even further.
When forecasting R&D, SG&A, and Others, opting for less granularity I forecasted it as a % of historic averages.

WACC:

US 10Y T-Bond (1M Avg) = 4.12%

Beta (SOURCE) = 2.41

Stable Market ERP (SOURCE) = 4.60%

COE = 15.21%

TSLA is rated at BAA3 (SOURCE)

COD (1M Avg) = 5.72%

Marginal Tax Rate = 21.00%

AT-COD = 4.52%

Market Price (5D Avg) = $178.50

Shares O/S = 3184.79M

Market Value of Equity = 568485.02M

Weighted Average Maturity = 2 Years

FY23 Interest Expense = 156M

Market Value of Debt = 4578.78M

%Debt = 0.80%

%Equity = 99.20%

WACC = 15.12%

Currently, TSLA has a very large beta as its stock has increased in volatility in the past few years. However, I believe that this volatility will not persist for very long as most big tech stocks enter a stable stage where their beta tends downwards. So, as a proxy for how low TSLA’s beta will tend to, I looked at other big tech stocks.

Taking the average beta, we arrive at a beta of 1.05. Assuming similar D/E composition and bond rating. I assumed that it took another 10 years for TSLA to reach the stable state.

Stable State COE = 8.95%

Stable State AT-COD = 4.52%

TSLA’s stable stage WACC = 8.90%

Conclusion:

Ultimately in my base case, I value TSLA at $186.88 per share. I believe that there is still room for TSLA to grow, having such a strong first movers advantage in the renewable energy market means that TSLA is heads and shoulders above its competitors. I believe that the market is undervaluing the Energy Storage arm of TSLA's business, and less emphasis is placed on this potentially disruptive segment of business.

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