We recently had a one-on-one meeting with Mr. Maynard Um (IR Lead) of Tesla Inc (TSLA). The meeting was used as an opportunity to reassess our investment thoughts on the Company and get an update on business operations. During our meeting the official position on the bitcoin investment was one of long-term. However, recent tweets from Elon Musk on bitcoin appear to contradict this. Below are the key points from our discussion.
Management believes TSLA should be viewed as a tech stock versus an automotive company
Rather than being viewed just as an automotive/solar energy company, management feels TSLA should more be viewed as an innovative technology company which can morph its existing capabilities into more revenue streams. E.g. working on FSD (full self-driving), this could eventually morph into TSLA offering subscription type options for people to constructively utilize their time on road like in vehicle entertainment options like gaming by importing the unity engine to Tesla so game developers can develop games for Tesla vehicles. TSLA already has an advantage over traditional automotive players given its domain/software expertise. Additionally, management feels, its energy business represents a big opportunity as TSLA can change a lot of the ‘traditional energy’ paradigm (e.g. the traditional model of supplying energy in the U.S. is very outdated where a small fire) with solar by storing it and disrupting the utility space in terms of how energy is generated / supplied.
Competition
Management views competition as healthy given it is a sign of the total EV market growing (data indicates when people trade in a vehicle to buy a Tesla, 98% of all vehicles are coming from trading in internal combustion engine vehicles). Whilst management expect the EV market share of Tesla to decline as new players enter the market, the growth in the overall TAM should continue to drive unit volumes. Additionally, management also remains confident that no player can undercut Tesla on pricing (EV and battery) unless they are ready to lose money.
Continuing to build capacity
The Company continues to build capacity given the high demand it is experiencing, building new factories in Berlin (250,000 units capacity) and Texas (250,000 units capacity), with first delivery from those factories expected by late 2021. Forecasting by end of 2021, Model Y to start ramping up volume and achieve the level of scale to get to peak gross margins above Model 3. We note, the economic return on building capacity is quick, with the factory typically paying for itself (NPV positive) in the first year, and Company’s operating expenditure remains relatively fixed (not growing at pace of revenue growth). So as long as volume grow the operating margins will continue to expand.
Regulatory issues in China
Management remains comfortable with the dynamics in China and remains confident that the regulatory environment in the country doesn’t pose a threat with the Company continuing to maintain good relationships with the government.
Pricing of vehicles
Compared to its competition, TSLA has already achieved price parity (comparing to ICE equivalent, the EV’s from competitors on an average today are $10,000 higher than their gas-powered counterparts), with the Company (with its 4680-battery cell) expecting to achieve a -56% reduction in battery costs and a +54% increase in range, leading to a decline in ASP without having any impact on gross margins (in FY20 ASPs declined yet gross margins went up on YoY basis reflecting reduction in cost base). However, in the near-term management expects an opposite effect (ASP going up) as Model Y, Model X and Model S increase as percentage of overall mix. which are all higher ASPs.
Energy storage business
The Company’s energy business continues to perform well (demand for the products continues to be phenomenal despite the Company raising pricing of Powerwall), with the storage side of business having the largest backlog of all the products (a Powerwall has a backlog of 9 months, a Megapack has backlog of ~2 years), and management working on precuring spare capacity of batteries from suppliers (Samsung/Ford) to fulfil the orders. Management expects to see the storage business quadrupling in FY21 over FY19, leading to ~6gw hours in 2021.
This is only a snippet of the full report sent to BanyanTree Investment Group clients.
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Investment Manager / Director at BanyanTree Investment Group
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