Loup Ventures

About the Author Loup Ventures

At Loup Ventures, research is in our blood. The spirit of our team has always lived on the curiosity to discover new insights that yield investment opportunities. For years we did this on Wall Street, focused on public tech companies. Now we invest in private frontier tech companies, but public companies like Tesla, Nvidia, and others are also meaningful innovators in frontier tech. These public companies are shaping the emergence of AI, robotics, autonomous vehicles, and AR/VR just as much as early stage startups. As a result, we’ve always kept a watchful eye on public market participants to inform our private investment strategy. Gene Munster is a managing partner and co-founder at Loup Ventures. Prior to Loup Ventures, Gene was a managing director and senior research analyst at Piper Jaffray where he covered technology companies including Apple, Amazon, Google and Facebook. During his 21-year tenure, Gene received many acknowledgements including: Top Stock Picker from Forbes, Best on the Street from The Wall Street Journal, and was widely recognized for his work on Apple. Gene holds a bachelor’s degree in finance and entrepreneurship from University of St. Thomas.

Tesla’s (TSLA) Fundamentals Are Trending in the Right Direction

By Gene Munster

Tesla (TSLA) reported Dec-18 mixed results, beating revenue but missing earnings. Shares are down, reacting mostly to news of CFO Deepak Ahuja leaving the company. Bottom line: the company’s fundamentals are trending in the right direction, and the list of systemic risks continues to be pared down.

Our takeaways:

  • Model 3 gross margins were above 20% for the second consecutive quarter despite introducing a lower-priced variant and facing headwinds in China.
  • While Musk’s commentary on the call was optimistic, based on aftermarket trading, investors are taking a wait-and-see approach. See more below.
  • Free cash flow of $910M exceeded our expectations, and the company added $718M to their cash balance in the quarter. They now have $3.7B in cash, and can comfortably service the $920M note due in March.
  • CFO Deepak Ahuja leaving Tesla will be viewed as a negative by investors, evidenced by the stock moving sharply lower upon the announcement. Senior departures are rarely a positive, but Deepak has stayed with the company through hard times and may be passing on the roll during a time of relative stability. Deepak will be replaced by Zack Kirkhorn who has been with the company for nearly a decade.
  • The company’s primary focus for the next several years will be profitably producing more affordable variants of the Model 3 and eventually the Model Y. The company is still planning on introducing the $35k base model later this year.

Autonomy Is Critical to Tesla’s Mission

Perhaps the most misunderstood aspect of the Tesla story is the significance of autonomy. On the call, Elon compared their efforts in autonomy to their mission to accelerate sustainable energy – both are at the core of the company’s purpose. He mentioned its potential to save millions of lives and give people their time back. While it is well understood that Tesla is working on autonomy, it is nearly impossible to value. As a loose reference, Waymo has been valued by several investment banks at more than $100B. We believe, over the next several years, especially with the introduction of Hardware 3.0 (more to come from Loup), that Tesla’s autonomy efforts will positively impact its valuation as investors begin to see that they are doing more than just making the best electric vehicles.

Positives that Investors have a Hard Time Believing

The call was also flush with positive data points that investors aren’t buying, as evidenced by the after-hours stock movement. As usual, we tend to add a layer of conservatism to Elon’s claims and timelines.

  • Musk says, even in a recession, he expects deliveries would be up 50% in 2019. The Street is expecting 64% growth, which assumes stable macro conditions. Musk also commented that he believes Model 3 demand in a strong economy is 700k-800k vehicles per year. Tesla delivered 245k vehicles in 2018.
  • The company plans to reach weekly production of 10k vehicles later this year with the addition of the Gigafactory in Shanghai. Gigafactory construction is only just starting, but Musk is adamant that Model 3s will be rolling off the line by the end of the year due to radical simplification of the production line. Additionally, the company expects “the capital spend per unit of capacity for this factory to be less than half of that of our Model 3 line in Fremont,” which is a positive for free cash flow.
  • This year, Tesla will start tooling factories for Model Y production, and the first cars will be produced next year. This implies the company will hold a preview event for the Model Y this year, and Musk mentioned the possibility of a Pickup unveiling this summer.

Disclaimer: We actively write about the themes in which we invest or may invest: virtual reality, augmented reality, artificial intelligence, and robotics. From time to time, we may write about companies that are in our portfolio. As managers of the portfolio, we may earn carried interest, management fees or other compensation from such portfolio. 


Wall Street Verdict

Wall Street is undecided on the electric car maker’s stock, as TipRanks analytics exhibit TSLA as a Hold. Out of 22 analysts polled in the last 3 months, 6 are bullish on Tesla stock, 7 remain sidelined, and 9 are bearish. With a slight potential upside of 3%, the stock’s consensus target price stands at $318.75. (See TSLA’s price targets and analyst ratings on TipRanks)


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