By Gene Munster
Tesla (TSLA) reported first-quarter 2019 results. Here are the incremental changes:
- The company gave strong indications that they will raise money in the coming months. We believe raising money (debt or equity) would effectively de-risk the story, given the company’s current $2.2B in cash gives little room to navigate the significant working capital required to scale a capital intensive business.
- How much should they raise? For reference, Tesla’s last big raise was $1.8B in debt at around 5.3% in August of 2017. We believe, to appropriately de-risk the business, they should raise between $2B and $4B. Tesla currently has $2.2B in cash and needs about $2B to fund working capital. At current levels, there is little room for error.
- On the call, Elon doubled-down on his conviction that near-term demand is healthy, and reiterated 2019 guidance of 360-400k deliveries. We were surprised by the frequency of his comments that demand will accelerate starting in the June quarter. Despite Musk’s reassurances, we think it’s prudent to model for deliveries below the company’s range. We are modeling for 341k which, while below the low end of guidance, still represents a healthy 39% delivery growth y/y. In 2020, we are modeling for 28% delivery growth to 435k.
- Musk announced that Tesla will introduce an insurance product next month. Its aim will be to more accurately take into account the safety benefits of Autopilot and share some of those savings with the consumer in the form of more affordable insurance.
- Tesla Semi manufacturing is expected to begin next year. Prototypes of the vehicle are currently in use for Model 3 deliveries and are getting positive feedback.
The results, as expected, give insight into the short-term, but do not change our long-term thinking. We remain focused on three elements that we believe are core to understanding the opportunity for Tesla: near-term demand and profitability, long-term demand, and optionality.
Near-Term Demand and Profitability
We believe near-term demand has been negatively impacted by both the reduction of the US EV tax credit and the slowing of pent up demand from early Model 3 adopters. This caused a dip in Model 3 deliveries in the first quarter. As Model 3 reaches a more stable sales rate, concerns shift to the overall appetite of consumers for EVs. Overall, signs point to healthy global demand and the company continues to reiterate guidance of 360-400k deliveries this year. While we are modeling below that guidance, we believe the likelihood of 40%+ delivery growth is intact.
Near-Term profitability is determined by Tesla’s balancing act between continuing to lower the price of Model 3 in the US and shipping higher-priced variants to Europe and Asia. Profitability is also significantly impacted by the take rate of high-margin software options like “Full Self-Driving.” We anticipate this take rate to trend higher as Autopilot continues to become more capable and appealing.
We are staunch believers in the long-term trend of the electrification of vehicles. Despite what will be a loss of market share (currently ~80% in the US), we think Tesla will play a key role in and capitalize on that undeniable transition. Last year, 79M vehicles were sold globally, only about 1M of which were EVs. As that number moves to 100%, Tesla’s long-term opportunity grows, especially considering the value proposition of their lower-priced vehicles.
Tesla’s product roadmap includes more than just vehicles. We see these opportunities as optionality that is not currently being taken into consideration, as it is not clear Tesla will be around to see the full benefit of these products.
- Autonomy as a must-have safety feature for cars
- Tesla network of owned and operated autonomous robotaxis, and a platform for Tesla owners to add their vehicles to the fleet
- Autonomous trucking and logistics
- Solar roof and other solar capture products
- Grid-scale battery storage for renewable energy projects
More to come on the potential value of each of these options and what it could mean for Tesla in the long-term.
Tesla’s Compelling Approach to Autonomy
We left Tesla’s Autonomy Investor Day feeling more optimistic about the company’s long-term prospects. Our takeaways from the event:
- We are more comfortable with Tesla’s camera-based (non-LiDAR) approach to autonomy. If correct, this approach could actually be preferred (safer, more reliable, efficient, better design) and afford Tesla a several-years headstart as other players unwind LiDAR from their solution.
- Our test ride in a Model 3 equipped with full autonomy was, at times, jerky but overall most impressive.
- We believe it’s likely that Tesla will both sell and operate autonomous vehicles.
- Autonomy will take longer than Tesla thinks but will be bigger than Tesla thinks. The initial rollout of these vehicles will likely be 1-3 years later than the company’s end of 2020 target.
- We were given more detail on Tesla’s plan to own and operate a fleet of self-driving “robotaxis” and enable Tesla owners to add their personal vehicles to the fleet once full autonomy is widely enabled.
- Musk suggested Tesla could, in about 10 years, operate up to 10M of their own robotaxis, which he thinks can generate a gross profit of about $30k per car per year.
- The implications of this are staggering. If you take Musk’s comments at face value (which we don’t recommend), the company could go from a loss of $1.3B in 2019 to over $300B in gross profit in 10 years.
- Given investor optimism on the autonomy theme, we believe this is the right time for Tesla to raise money (debt or equity) to de-risk the story with additional working capital.
To read more about what analysts and experts want to see in Tesla’s future, click here.
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.