Tesla (TSLA): The Bull Case Remains Intact
Tesla’s (TSLA) plan to reduce headcount by 7% does not change our long term view on the company. Note that Tesla increased headcount by 30% last year to ramp Model 3 production. Realized manufacturing efficiencies will allow the company to reduce headcount while increasing output.
Here are our key takeaways:
- Musk’s blog post indicated the company made a small GAAP profit in Dec-18, but less than the 4% reported in Sep-18. The fractional profit in December was driven by higher priced models (i.e., the average Model 3 priced around $55k), but the growth in the EV market will come from the sub $40k model.
- Tesla needs to operate more efficiently and sell cheaper models to survive and ride the growth of EVs. Given the recent news of a 10% workforce reduction at Spacex, Musk’s focus appears to be shifting to profitability.
- EVs accounted for 1% of cars sold worldwide last year; as prices fall, we estimate that EVs will be 100% of cars sold in ~20 years. Over the next decade, we believe Tesla can capture 20% of US EV market (down from Tesla’s 50% US EV market share in 2018). If EVs account for a third of cars in the US in the next 10 years and Tesla has 20% share, the company would sell 1.3m cars annually in the US alone, compared to 245k sold worldwide in 2018. Assuming outside of the US accounts for more than half of EV sales, Tesla can grow units at 25% per year for the next decade and ramp sales from 245k cars in 2018 to over 2.5m cars in 2029.
- We estimate the average selling price of the recently announced EVs from Audi, Jaguar, and Porsche will be $85k, higher than the advertised ~$75k price. Mainstream automakers (GM, Ford, Toyota, Honda, etc) don’t yet have a scalable, affordable EV option. Eventually, they will. This year Tesla will begin to sell the most attractive sub-$40k EV (accounting for battery range and vertically integrated tech).
- As a reminder, Tesla has a $920M note due in March of this year (convertible at $360). We believe the company does have cash on hand and significant cash flow from operations to service the debt, and there is a chance the debt converts if the share price is above $360 on the due date. There is an additional $566M note due in November of 2019, but the conversion price is currently significantly out of the money at $759.
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.