Game Design, Programming and running a one-man games business…

The late 2021 case for buying and holding TSLA (yes…still)

I blogged about how you should buy shares in Tesla many years ago, then I revised it. The first revision was able to happily mention that the stock had tripled since I first blogged about it. Well… its quintupled since then. (There was a 5:1 share split, so it looks like its about flat but is anything but…). Given that a stock is now worth 15 times what it was when I first suggested buying the stock, how can I possibly not be selling? How does this make sense? This is just a meme stock right?

No.

Lets update some figures since I last blogged on the topic. Here are numbers a year on from the last blog post:

  • In 2020 Tesla produced 499,950 vehicles. (vs 367k)
  • The market cap of the company is currently $1.06 Trillion. (vs 180bn)
  • The automotive gross margin is approximately 30.5% (vs 25%)
  • YoY revenue growth is 28% (vs 38%)

Those are all VERY good numbers, but given a 5x increase in the stock, you would expect absolutely insane numbers, so on the face of it, this is pretty underwhelming. The number of vehicles produced is still only half a million in 2020, and revenue growth was great but not incredible. However, there is massive, massive context.

Vehicle Production

Firstly, the year 2020 is now so far in the rear view mirror its almost laughable to try and assess the correct stock price with 2020 figures. It makes more sense to look at quarterly figures to see the real picture. Here are the last 4 quarters

  • Q4 20 180k vehicles
  • Q1 21 184k vehicles
  • Q2 21 201k vehicles
  • Q3 21 241k vehicles

If you extrapolate from Q3, we are looking than an annual run rate of 964,000 vehicles. Thats pretty good when we compare it to 499k, but probably does not justify a 5x stock growth. The two points to be aware of here are:

Firstly… we have just had the twin pains of a global supply crunch caused by covid19 combined with a chip shortage that has effectively paralyzed the car industry

Secondly, Tesla are imminently (ie: likely December) opening TWO new factories. One in Berlin, One in Texas. Both are HUGE. Both of these will easily match the shanghai factory. Meanwhile, the Fremont factory (where Tesla started) is basically the runt of the litter. A badly designed, un-optimized mess built originally to make ICE vehicles.

Analysts have given Tesla a lot of credit for weathering supply chain and ship shortage woes far better than any other car company. Take a look at global car sales from the big brands and you would see almost everyone is heavily DOWN year on year, except Tesla and some super niche luxury brands.

Why? 2 reasons: Tesla is very vertically integrated, so it can handle a lot of supply chain issues internally, and secondly, its very software centric. Tesla managed to adapt to chip shortages by rewriting its own firmware to use different chips. Volkswagen just do not have this expertise, and nor does Toyota, GM or Ford.

So…vehicle deliveries are pretty good considering the market, and set to explode pretty heavily next year as Texas and Berlin start producing cars. Thats great… but again we are talking a 5x stock growth so… we need to be dazzled more.

Profitability

Did you notice that the automotive gross margin actually went UP? (you would expect it to fall as the company moved from luxury sports cars to more affordable models like the 3 and the Y) TBH it was already exceptionally good, but it looks like the profit margins on Tesla cars are actually rising, quite considerably. Best of all, the model Y is likely the same cost to produce as the 3, yet sells for way more. The introduction of new casting methods to hugely simplify assembly is likely to make the Y even cheaper to produce, and a shift to 4680 batteries and a structural battery pack will push costs lower still. Meanwhile, Tesla keeps increasing the price of the model Y. Having a Texas and Berlin factory will reduce the shipping cost to the customer as well, and stop Tesla paying EU import tariffs.

Much was made recently of Hertz ordering 100,000 model 3 cars from Tesla. They even ran an ad campaign about it. This is a car company that spends $0 on advertising, and yet its business partners actually do the ads for you. This is nuts. Plus it means Tesla don’t need to give a damn about arranging test drives. You want to try one out? go to hertz. If not… there is no shortage of demand.

Hertz ordered 100,000 cars (to start with) and got 0 discount. To the great masses of opinionated ‘analysts’ on twitter, that sounds like it cannot be true, but if you follow Teslas order backlog and wait times, you know its true. If hertz didn’t want to pay full price, they can go elsewhere, the model 3 backlog is huge already. The model Y is also massively in demand. I ordered one recently, and am told to expect it in April/May maybe. If I’m lucky. Paid full price, obviously. There are zero discounts on teslas cars…

In the US… it looks like people are going to get a $7,500 tax rebate when they buy an EV, with no upper limit on how many cars this applies to. Conveniently Tesla have raised the model Y price about $8,000 this year. That means all someone in the US ordering now, will get the car for the same price in January, but Tesla make ANOTHER $8k profit on top of the already high gross margin. The 2022 profit margin for Tesla is going to be embarrassingly high.

Competition

What competition? Much is made of a long sad history of cars that were considered to be ‘Tesla Killers’. One by one they have come and gone. Arguably the Porsche taycan is a good car, if you don’t want a supercharger network, autonomy or over-the-air software updates, AND want to pay an extra $50k for the privilege… but the audi-e-tron? who cares? its just a rounding error in terms of EV sales next to Teslas mass-market cars. Illustrative chart below:

Does it really look like the VW ID.3 or ID.4 are any competition? It sure does not look that way, especially as VW seems top be in crisi meeting after crisis meeting trying to persuade its own workforce that making EVs at some point in the future might be a good idea maybe? Meanwhile any German engineers actually interested in working in EVs have likely left to join Teslas Berlin factory.

The Future

There are so many catalysts to push Tesla’s profitability and net income higher its almost ridiculous, but lets go through a few of the big ones.

Firstly, they have over a million pre-orders for the cybertruck. Yes really, yes, the one you think looks weird. Yes, its really going to be built, and yes, its going to be incredibly popular. The plan is that they start building them next year. These vehicles look so unusual they all act like billboards for the company.

Secondly, they are switching to a structural battery pack and 4680 format batteries linked to front and end cast metal design. All three of these changes are about a single metric: efficiency. When efficiency is better, you car is both cheaper to make, and gets better range and performance. The comparison of Tesla efficiency versus other EV’s is telling, and thats current models:

  • Model 3 240 wh/mile
  • Nissan Leaf 260 wh/mile
  • VW ID.3 265wh/mile
  • Audi e-tron 290 wh/mile
  • Ford Mach-e 315 wh/mile

In other words, rivals are charging more, for less. And thats also without a supercharger network or over-the-air updates or autonomy. (oh I forgot to mention Tesla is starting to earn revenue from selling use of its supercharger network to owners of non tesla EVs. A hilariously good marketing channel to known EV-buyers, that will cost Tesla nothing, in fact people will pay them money to sit and stare at a big red tesla symbol as they charge…)

Thirdly, the long awaited improvements to autopilot are rolling out, meaning a LOT of ‘deferred revenue’ for selling ‘full self driving’ can be recognized as profit over the next few years.

Fourthly, the semi-truck is coming, which will be a BIG part of the business.

Fifthly, there will be eventual revenue from cloud computing of neural network training thanks to teslas’ in-house designed chip that forms a scalable supercomputer. (yes really).

Sixthly: slowly but surely Tesla are rolling out their own insurance product. Eventually they will sell you the car (direct, at 0 advertising and 0 discount and 0 dealership fee), the fuel (via supercharger network), the insurance, and software/entertainment services in the car, through payments for premium connectivity, and an autopilot subscription.

Seventhly: Battery storage and solar roofs. This is a business that has floundered a bit for the last 5 or so years, but Tesla are also in the energy storage and generation market. This gives them an advantage over every other provider of such services, as they can leverage the brand built on the car business to cross sell solar panels and home battery storage. They are obtaining licenses to even sell you power, starting in Texas.

So yup, I’m holding Tesla stock, at least until three or four of the above things become common knowledge. Until then, most analysts, and almost all retail investors have absolutely zero clue as to the future profit potential of this company.

Lots of credit should go to Rob Maurers excellent, hyperbole-free youtube channel in which all this stuff is plainly spelled out for everyone to investigate for themselves.


11 thoughts on The late 2021 case for buying and holding TSLA (yes…still)

  1. I don’t dispute your analysis but yikes did this post make me not want a tesla. No, I don’t want them to control my car, make changes to it without telling me, own and control the fuel network and insurance. It sounds very scary to me to put that much trust in one company. But most people don’t care about that stuff so it will probably sell very well and you’re probably right about the stock. Thanks for an informative post!

  2. You can insure through someone else, and generate your own fuel at home, or buy it from someone else if you want, they just offer the convenience of one company handling all 3, if you want that.

      1. TBH I don’t know, but it wouldn’t make any sense to do so. My car has tons and tons of new features and capabilities added and improved through software, for free, since I bought it. In the future all cars are going to be online all the time. Its just way, way too convenient. It would be like buying a phone and then declining all updates, to the O/S and all apps.

        1. “It would be like buying a phone and then declining all updates, to the O/S and all apps.”
          I would love to be able to do that. Yes I know this is unusual and I know it’s inevitable, soon my toaster will probably be connected as well. But if I want to postpone it as long as possible I might have to avoid tesla. A shame since no other manufacturer has close to the same range. In any case I really like your blog, thank you.

  3. A defence of democracy over technocracy, in polite disagreement with respect to your here post.

    Hi Cliff. I understand your point about trusting the experts. But there are times that experts and consensus could be wrong. This isn’t to say not to listen to experts, merely to advocate rational skepticism. I would like to point out some examples:

    1. UFOs. Most people who research UFOs in a serious manner know that most or almost all can be explained with conventional explanations, such as birds, classified prototypes, optical illusions, electronic warfare, psychological reasons and many others. But even accounting for all of these factors some UFO sightings remain truly unexplained (“true UFOs”), those scientists, such Lincoln La Paz, Jacques Vallee, J Allen Hynek and others who seriously study such Aerial Phenomena, know that they cannot be just explained away. But when faced with ridicule, “true believers”, pseudoskepticism, government secrecy and suppression (such as Project Grudge), it takes a special scientist to resist the conclusion of consensus that UFOs are all humbug. Project Gutenberg has a book by Edward J Ruppelt on the UFO phenomena, who was one of the directors of Project Blue Book, he later disavowed as nothing more than a space-age myth, but it did not take away from his investigation of sightings for PBB. You can also read the books written by Vallee and Hynek and go to archive.org to look at the preserved copies of Project Blue Book there. One such sighting investigated, was the Ellsworth UFO sighting.

    2. Child Abuse by Parents. In contrast to the present, for a long time in the 20th century in anglo-saxon countries (and perhaps elsewhere), the occurrence of child abuse was not considered seriously. The consensus was that parents would not harm children. This was challenged and eventually brought to light, mid-century. In some parts of the World, this view is still prevalent. That parents cannot harm their children (ignoring the countries where this is known and legal).
    https://www.jstor.org/stable/pdf/800083.pdf?refreqid=excelsior%3A522c25af86c76e7bcefa9f42cea76ed5

    3. Homeopathy. No doubt it isn’t like Allopathy at all. But, as a placebo, it is known to calm people. Calming people reduces their stress levels (among other things, cortisol), which allows allopathic medicines to take better effect on patients. This could be considered, the social and psychological aspect of Homeopathy.

    4. Climate Change. Often times it is assumed that Climate Change will be apocalyptic and nothing short of a global mobilization will stop it. True, climate change is bad. But is it apocalyptic? Will nothing short of a global mobilization (possibly at the expense of other issues) stop it? Could it be that these apocalyptic visions be influenced by the Christian Apocalypse? Could it be possible to stop Climate Change without a global mobilization (of the scale activists talk about)? Will the final temperature where Climate Change stops truly be unadaptable for humans? As a personal example. I wrote to some scientists at the USGS, I asked them about Mark Lynas’ claim that Six Degrees of global warming will lead to such large methane leaks that a little bit of lightning could set off nuclear bomb sized explosions or bigger, which could destroy cities? I did not get a yes. It seemed unlikely that something like this could happen. This is not to question Mr. Lynas’ convictions or his research, merely that in this apocalyptic messaging, are we going to inadvertently cause a problem which we cannot handle? Will we stymie climate change action through such apocalyptic imagery and messaging? We know that such messaging and imagery sells well, history is a good guide. Here the consensus is not at fault, but some of the science communicators may be. Greta Thunberg’s zeal is appreciated and needed, but what does the 5000+ page AR5 say truly?

    5. Tesla. No doubt a very successful company. But should its trillion dollar value be taken at face value? As you mentioned in your post, the company sold half-a-million cars during a time of supply shortages and that its profits were lower than the last year by about 10%. Should we overlook issues with the safety of its cars where crashes have taken place through its automated driving system, or where cars have ignited and caught fire? No system is perfect, and doubtless, it will improve over time (one hopes so), but for the sake of optimism bordering on boosterism, should we overlook such lapses and others such as the lack of infrastructure for electric cars in many places, the strange behaviour of the CEO (criticizing covid-19 lockdowns, actively resisting them and potentially endangering his own workers?), it may be that if Tesla expands faster than infrastructure and the slow processes that develop such infrastructure (where the US infrastructure bill costs as much as the valuation of the company), it may be left with stranded assets, such as those which fossil fuel companies may face mid-century (21st)? Will this make its value plummet at some future date and lead to correction (as many companies do go through such a phase of correction)?

    6. The victory of capitalism over socialism. With the fall of the Soviet Union and the “end of history”, Capitalism emerged victorious and true Socialism was relegated to the garbage bin of history. The clear assumption being that only capitalism and only capitalism is the way. This is true for many polities in the world, but not all. If we look at Rojava and the Zapatista communes, we know that pure socialism works somewhere in the World, in an area larger than a few sq decametres and a few dozen people. This is not to say that they are without their faults. But these examples in the real world go against the consensus that Socialism cannot work in the real world at all. If we take an example from the capitalist world. The Brazilian export company of Semco. The son of the founder, inherited a company badly off. He instituted radical reforms after almost quitting. Worker’s democracy, worker’s share of profits, worker’s ownership of the company, workers on the board, workers choosing to hire, fire, raise and cut salaries and whom to be manager, etc. (these facts should be checked for Semco, they may not 100% accurate). But these changes brought the company out of its malaise and it grew even during the 1990s hyperinflation in Brazil. And most importantly of all, its worker productivity was at record levels.

    7. The current exploration of the link between the Wuhan virology labs and the covid-19 outbreak, which was previously considered too outlandish to research.

    The point of this long post is not to say that experts should be distrusted and not listened to, but that all experts are human and prone to make mistakes. And that rational skepticism and democracy (in spite of their own faults) should take precedence over blind faith in a technocracy (expert run society).

    My intention is not to change your mind through argument by exhaustion (or ad nauseam), merely to provide counterexamples and food for thought. :)

    1. With regard to the climate change point, there are a few things that don’t require expert confirmation if you give it a bit of thought. For instance, with some thought, it becomes clear that a 6C increase in global temperatures would represent an ENORMOUS shift in habitability for humans. Consider an elevation where temperatures in late autumn/late winter drop to around 20-25F in previous conditions. Precipitation in those timeframes would turn to snow, building up a snowpack. Add in 6C (10.8F) of warming, and the snowpack is no longer forming (since the temperature stays above freezing) during a significant chunk of the time it previously was. Even with 1C of warming, we’re already seeing shrinking snowpacks and declining reservoirs, resulting in less water for agriculture during late summer and autumn. Since this is an effect of crossing a threshold (the freezing point of water) it shouldn’t take much imagination to realize how 6C of warming would be much, much worse.

      1. Yes, 6 degrees of warming is undoubtedly worse, but my opposition to the description of its effects, is where Mark stated that it would be civilization ending. Which I find to be dubious. To state that explosions bigger than the biggest nuclear bombs would level entire cities is most definitely, if not certainly an exaggeration, and I don’t think that helps the argument for climate change action.

      2. In fact, in light of this, I would like expert confirmation for the facts in Mr. Lynas’ book, which are true congruent with measurements in the real world, and which are exaggerations or gross exaggerations.

  4. The only thing that stood out to me from this post: why did you, as an eco geek concerned about environmental impact to the point of building your own solar plant, order a *second* car when you already own a Tesla? That seems like an unnecessary indulgence?

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