-Its strong growth will last several more years and the company should be viewed as an early-stage growth company at least until 2025/26.
-This implies a lower multiple and compared to its current valuation, the upside in the next 5 years is not great right now.
-Its current market capitalization is about $550 billion, dwarfing the value of any other carmaker globally by this measure.
-Despite the fact that Tesla still has some advantages over its peers , this position is poised to change in the next 3-5 years, given that due to its own success Tesla’s business model is being rapidly copied by both legacy carmakers and new startups. For instance, this can be seen by XPeng’s ( XPEV ) business model in China that is clearly inspired by Tesla , or Volkswagen’s (OTCPK: VWAGY ) plans to develop a recharging network in the U.S., Europe, and China over the coming years. Moreover, regarding autonomous driving, Tesla is probably nowadays the most advanced company in this field, but XPeng has achieved good progress in China, and technology companies such as Intel ( INTC ), Google ( GOOG ), and Apple ( AAPL ) are also investing in this technology and therefore it doesn’t think that Full Self-Driving ( FSD ) will be a competitive advantage for Tesla over the long-term.
-Furthermore, most likely, Tesla will be only able to monetize its investments in FSD through selling its own cars, which means that customers have to choose FSD as an option, while other carmakers are most likely to choose technology from a company like Intel than from a direct competitor. This means that automakers that are currently behind in the development of autonomous driving capabilities, such as Stellantis ( STLA ) for example, will be reluctant to finance a direct competitor and may decide to choose Mobileye’s technology, or any other that may enter the marketplace, even if it may be inferior to Tesla’s FSD .
-Taking this background into account, batteries may be the only area where Tesla can develop a competitive advantage over competitors in the long-term, which may be key to become one of the largest automakers in the world. Tesla is investing significantly in the development of batteries and wants to include them in the car’s structure in the coming years, aiming to reduce costs and improve efficiency.
-According to IEA, sales of EV’s amounted to about 3.2 million units in 2020 and about 4.6 million units when considering also plug-in hybrid vehicles, an increase of almost 50% from the previous year, with China and Europe being the regions that represented the vast majority of EV sales last year. The market share of EVs was still quite low, at only 4.4% of global car sales, but is increasing quite rapidly (it was only 2.5% in 2019 and near zero in 2010) and this trend is only expected to accelerate in the next decade.
-Indeed, global sales projections for the next years is for compounded annual growth rate ( CAGR ) of about 30%, with IEA projecting sales of 14 million EV units by 2025 and 25 million in 2030, representing a market share of around 22% and 39% respectively, assuming a flat global auto market during this period.
-Tesla delivered close to 500,000 units during 2020, thus despite its leadership position from a technological point of view in the EV industry, its global market share was only about 16%. This is explained by the fact that Tesla has a very large market share in the U.S., being the leading EV manufacturer by far, but in Europe and China, its market share is much lower. This is important because these two regions are ahead in the adoption of EVs and competition is stronger than in the U.S., showing that even in its domestic market Tesla is not expected to be dominant in the future.
-Tesla’s annual production capacity is currently about 1 million cars and with the two new factories, this may well double. Moreover, Tesla may also expand its factories in the future if needed, thus the company’s annual production capacity should not constrain its growth path at least for the next 3-4 years.
-Tesla delivered nearly 500,000 vehicles (from 367,000 in 2019), which was the main reason why its revenues increased by 28% YoY to $31 billion. The automotive gross margin was 25.6%, a much higher level than in 2019 (21.2%), showing that Tesla has been able to achieve economies of scale with increased production and has reduced costs by producing in China.
-Its net income was positive for the first year, based on GAAP, reaching $732 million and its free cash flow was nearly $2 billion, which is a very good achievement for an early-stage growth company like Tesla . Its capex more than doubled from the previous year to $3.1 billion, as the company is investing significantly in its future growth by building new factories.
-In Q1 2021, total revenues amounted to $10.4 billion, up by 74% YoY, and its gross profit increased to $2.2 billion (+79% YoY). Its net income was $438 million, compared to just $16 million in Q1 2020. From a financial standpoint, this quarter was somewhat messy as the company invested in bitcoin and had a $101 million positive impact , making differences with previous quarters less comparable.
-Tesla is currently trading at an enterprise value multiple of about 11x based on its expected 2021 revenues, hardly a bargain!
-Indeed, its business profile is more similar to Apple for instance, given that both businesses have a strong brand in the consumer market and are based on both hardware (cars and the iPhone) and software ( FSD and the App store). Apple is a well-established company that is still growing at very good levels, possibly giving some perspective about Tesla’s valuation in a few years.
-Tesla will only be considered a more mature company by 2025/26, when its revenue growth will start to decline to more ‘normal’ levels. Tesla is expected to have revenues of about $114 billion by 2025, according to analysts’ estimates, and I assume that Tesla’s EV /sales multiple will decline gradually to a level more similar to other mega cap companies, such as Apple .
-This means that a more reasonable EV /revenue multiple in 5 years from now will be about 5-6x annual revenues, which imply an enterprise value of around $630 billion at the middle of the range. Given that Tesla’s current enterprise value is about $560 billion, much of its future growth seems to be priced-in at its current share price, which is not exactly surprising considering the fantastic run it had over the past year.
Credits: Seeking Alpha
Our Opinion: We keep our target @ 380.