Tesla’s Breakout Will Take Longer But Will Be Bigger Than You Think
We are publishing our Tesla model with forecasts out to 2023. We’re believers that Tesla will play a central role in two upcoming paradigm shifts: 1) EV and autonomous transportation, and 2) renewable energy – driven by Tesla’s core competencies in AI and robotics. We believe patient shareholders will be rewarded and expect 2023 to be a breakout year for the company.
Where we’re different than other positive views. We think the Tesla story will take longer but will be bigger than most positive outlooks anticipate. Specifically, we expect it will take 2 years longer for Tesla to hit an inflection point, as defined by manufacturing 1 million cars per year, and at that time (2023) growth rates will accelerate. Our estimated growth in units delivered goes from 30.4% in 2021 to 62.7% in 2023. Ultimately, we believe Tesla will deliver nearly 1.6M cars in 2023. To put this in perspective, BMW sold 2.3M cars in 2016. We believe that this massive ramp is achievable; as more Model 3s and Model Ys enter the marketplace, more consumers will become aware of the benefits of a Tesla. In addition, the vehicles themselves will cost less, primarily due to better production methods.
A thought on timing. Shares of Tesla fluctuate based on timelines; for example, product announcements, preorder numbers, deliverables, and commentary around future production are acute events that have created fluctuations in shares. We expect continued fluctuations in timing over the next five years, and believe shares of Tesla will have dramatic moves (both down and up) around those timing announcements. Despite this expected volatility, we remain confident in the themes that we are laying out, and that Tesla will be a catalyst and a beneficiary of the paradigm shift to both EV and autonomy. We see the quarter-to-quarter timing as less important than the bigger picture of Tesla’s role in this next wave. In addition to timelines, legislation is going to have a dramatic impact on Tesla’s future. Even though Tesla’s vehicles are expected to be fully autonomous within the next few years, it is highly unlikely that legislation will allow for that update. Full autonomy is touched on more when we discuss Tesla Fleet.
Tesla deliveries will continue to build with an inflection point in 2023. We believe that Tesla will deliver just over 100,000 vehicles in 2017, including 6,000 Model 3 units. Elon Musk has shared that by the end of 2017, Tesla will be producing 20,000 Model 3s per month. While there is sufficient demand for that many Model 3s, we believe that the actual delivery of the vehicles takes time. In 2018, we believe there will be just under 310,000 vehicles delivered, including 217,200 Model 3 units. Right now, it’s estimated that there are over 500,000 Model 3 reservations. If one were to order a Model 3 today, expected delivery would be in January of 2019. We feel that there is sufficient demand for the Model 3, and that Tesla’s biggest challenge when it comes to delivering over 300,000 vehicles in 2018 is whether or not it can produce that many. In other words, the demand is there, and the ball is in Tesla’s court to deliver. When it comes to the Model S and Model X, we expect quarterly deliveries to begin to decline with the introduction of the Model 3, and eventually, the Model Y. While there will still be demand for these premium vehicles, the introduction of both the Model 3 and Model Y will lead to some cannibalization of sales.
Speaking of the Model Y, we believe that Tesla will introduce the Model Y in 4Q19. Elon Musk has stated publicly that the Model Y can be expected in 2019. We chose to take the conservative estimate on launch timing, and think it will happen at the end of the year. Long-term, we think the Model Y will be more popular than the Model 3.
SolarCity acquisition a long-term bet on renewable energy. Tesla does not exist to simply build great electric vehicles. Self-driving automobiles are just one part of Tesla’s ambitions as an energy company, as evident in their mission statement:
Tesla’s mission is to accelerate the world’s transition to sustainable energy.
Tesla acquired SolarCity less than a year ago. While we are big believers in the long-term strategy of providing consumers all of the necessary pieces to generate and store energy, we think it will take some time to integrate the two businesses, or more specifically, for SolarCity to adopt Tesla’s culture and operational style. Long-term, we believe that Tesla’s energy generation and storage will become a much larger part of its business. When SolarCity was acquired, Elon Musk stated that “SolarCity may add $1B to Tesla Revenues in 2017.” We are less optimistic, and believe that it will add $864M to Revenue in 2017. We believe the energy generation and storage business will grow by 10% in 2018, 15% in 2019, 25% in 2020, 40% in 2021, and be growing at 50% annually in 2022 and 2023. By 2023, energy generation and storage would be a $4B business for Tesla.
Tesla Fleet has a promising future. In simple terms, a fleet platform from Tesla would allow for an owner’s Tesla to be its own “Uber” while they are at work, at school, or asleep. In theory, you could lend your car out to anyone, whenever you want, and make money through the platform when you’re not using your Tesla. During a TED talk in late April, Elon Musk even went as far as to say their ride sharing program will eventually be cheaper than public transportation. Today, Uber drivers make an average of $19 per hour, which, if calculated at 40 hours per week, adds up to $39,492 annually. It is not likely that owners would lend out their cars this often or at this rate, but this extra compensation (in addition to reduced parking costs) bodes well for future Tesla owners. This option for autonomous vehicles may come sooner than previously thought, with Musk publicly stating that he believes Level 5 (fully autonomous) production to be possible in two years, looking at late 2019 or early 2020. While production of Level 5 vehicles may be available within this two-year time frame, mass adoption and ride-sharing will most likely be held back by governmental legislation and consumer hesitation.
Expect a Tesla Semi announcement this fall; but it will take a long time to bring to market. Over the course of the past year, Elon Musk has been slowly releasing information regarding one of Teslas’s many ongoing projects: Tesla Semi, to be officially unveiled this September. This program is led by Jerome Guillen, the company’s former Model S Program Director and VP of Vehicle Engineering. Musk describes the vehicle as a “heavy-duty, long range semi truck” that will maintain the highest weight capability and long range, meant to alleviate the heavy duty trucking loads. A class 8 diesel truck has a load limit of 80,000 pounds, maxing out with a load around 40,000 due to the truck’s own weight of approximately 35,000 pounds. When asked how the electric semi would size up to current diesel models, Musk’s comments lead us to think there will be little to no competition. The Tesla Semi will have a flat torque compared to a diesel truck’s curved torque, allowing the electric truck to “out-torque” any diesel semi. Musk said that if the Tesla Semi and a diesel truck were in a tug-of-war competition, the Tesla would “tug the diesel semi up hill.” The company’s goal for this project, as stated by Musk, is to “deliver a substantial reduction in the cost of cargo transport, while increasing safety and making it really fun to operate.”
Tesla Profitability in 2021 or later. We believe Tesla’s Revenue will reach $11B in 2017, up 60% from 2016. By 2023, we believe Tesla’s Revenue will be $77B and growing at 55%. When it comes to EPS, we believe Tesla will become profitable in 2021, and ultimately reach an EPS of $28.09 in 2023. We expect Gross Margins to be 23.4% in 2017, and step down slightly to 23.2% in 2018, before climbing slowly, reaching 30% in 2022. The key to achieving 30% Gross Margins lies in Elon Musk’s compensation plan. Elon Musk stands to earn $1.6B in stock options if he can achieve 10 milestones by 2022. Once the first Model 3 is produced and delivered later this week, the two remaining milestones are: aggregate of 300,000 vehicles (at 230,000 after 2Q17), and four consecutive quarters of Gross Margins at 30% or higher. We think Tesla will reach both of these outstanding milestones.
Disclaimer: We actively write about the themes in which we invest: artificial intelligence, robotics, virtual reality, and augmented reality. From time to time, we will write about companies that are in our portfolio. Content on this site including opinions on specific themes in technology, market estimates, and estimates and commentary regarding publicly traded or private companies is not intended for use in making investment decisions. We hold no obligation to update any of our projections. We express no warranties about any estimates or opinions we make.