For years; I felt that was Tesla was overvalued and headed towards bankruptcy. However, over the past few months, I’ve reviewed the facts objectively and come to the conclusion that I was wrong.
Tesla is not just another auto company(an argument often cited by the bears) - it is a revolutionary, technology company which has created its own industry! In Saul’s parlance, it is a ‘Category Crusher’
Yes, Tesla has a hefty market cap of $60 billion BUT it is growing its top-line by 40-50% per year (will continue to do so) and on a forward basis, its PEG ratio is just 1.7 which is not bad at all and quite similar to the PEG ratios of the legacy auto makers which are also selling for 1-2 times PEG.
Tesla is growing top-line at 40-50% per year; whereas the legacy auto makers are growing in single digits and this explains why Tesla is trading at an inflated forward PE ratio and the legacy auto makers are trading at 5-8 times earnings (hint: their earnings are not growing and are under threat from the EV revolution).
Coming back to Tesla’s competitive advantages (moat); it is way ahead in terms of its battery technology (in terms of range); it owns one battery gigafactory, it has cracked ground on another gigafactory in Shanghai AND it is planning on a 2nd gigafactory in the US; its cars are super sexy; its customers absolutely love its products; most don’t ever want to switch to another brand; it has built a massive supercharging network which covers the entire US, Western Europe, China and parts of Japan, South Korea, Australia and Canada; it is ahead of the pack in terms of its chip/software for autonomous driving; it has a visionary Founder/CEO with skin in the game and it is backed some very large and successful investors - Tencent owns 5% of the company, Ron Baron (billionaire hedge fund manager) has a big stake, so do Fidelity, T Rowe Price etc.
There is no doubt in my mind that the EV revolution is real and here to stay - the cars are clean and cheaper to run/maintain.
At the moment, the cost of the batteries is what is holding back the S-Curve adoption of the EV technology but as the prices of batteries continue to fall rapidly; it is only a matter of 2-3 years; before the ICE vehicle loses its cost advantage.
Currently, EVs represent around 2% of total car sales globally and according to various studies, they will morph to at least 30% of total car sales by 2030. Think about this - in 11 years from now, around 30 million EVs will be sold per year (vs. less than 2 million EVs sold today)! I don’t know about you; but I see this as a growth industry.
Today, Tesla sells less than 300,000 cars per year but it is probable that its unit sales will rise 10-15x within 10-12 years.
Car sales growth aside, I think Tesla’s real competitive advantage lies in its neural network/ride sharing service which it will launch in a few years.
Once Tesla finalises its autonomous vehicle and obtains regulatory approval, it will be able to upgrade (on air) the software of all of its cars sold since 2016 and turn all of them into fully autonomous vehicles (all Tesla’s sold since 2016 came equipped with fully autonomous hardware). If owners choose the fully autonomous option, they will then be able to put their vehicles on the Tesla neural network and earn extra cash (Tesla’s super computer will list their vehicles on its ride sharing network and when these owner cars aren’t in use, they will then be leased for rides in major cities). Since these will be fully autonomous vehicles, there won’t be any driver costs and Tesla will keep 25-30% of each fare. In addition to these owner cars, Tesla will also put its self owned cars on its ride sharing neural network.
Tesla will become the ONLY ride sharing company in the world which is vertically integrated and manufactures its own batteries/cars - Waymo, Uber, Lyft etc. don’t have this privilege - and I can only assume this will be a major plus for the company.
Last but not the least; Tesla is the only auto maker which sells direct-to-consumer and has totally bypassed the dealers - so its margins are higher AND it only produces vehicles after it has received a customer’s order - this drastically reduces inventory and improves cash flow.
All of the above factors have led me to admit that I was previously WRONG about this revolutionary business; consequently, post its recent earnings results, I have now invested in Tesla.
Best,
GM