Tesla is the world’s most valuable automotive manufacturing company. It’s future value (and stock price) is of course tied to it being much more than just an auto company.
◾Dominant market position in the US
The US EV market which accounted for less than 0.25% of total passenger vehicles (PV) sold in 2016, has increased its share to ~3% by 2019. In the EV market, TSLA holds a dominant market share with ~80% of all EVs sold. The company has achieved this position through aggressive investment and developing technology and expertise. TSLA’s head start has set up the company to control a significant part of the market for a long time. The company now has a deeper understanding of battery design, a large charging network, and more advanced self-driving capabilities.
◾Revenues increasing with deliveries
TSLA has come a long way since reporting revenues of $7 bn in 2016 to $24.5 bn in 2019 at CAGR of 52%. The company primarily derives revenues from sales and services of automotive (85% of total revenues) and energy generation & storage. In 1Q20, TSLA’s revenue from automotive and services segment increased 35% YoY to $5.7bn, due to increased deliveries of Model 3 from its China facility and commencement of Model Y deliveries.
TSLA’s management remains committed to delivering at least 500k vehicles in 2020. Despite the impact of Coivd-19 shutdowns, the company has ramped up production at the China facility and making measurable improvements in the production of the Model Y in Fremont.
◾Approach to monetize further enhancements
TSLA has been making continuous enhancements in its self-driving or autopilot platforms and adding new features. The company provides the option of these upgrades to all its US customers, through its Full Self-Driving Capability (FSD) software for $7000 per vehicle. The company recognizes half of this as revenue and the other half is treated as deferred revenue associated with features, that will be released over time. As on Mar’20, the company reported deferred revenues of $1.53bn($1.47bn in Dec’19) related to access to the company’s Supercharger network, internet connectivity, and FSD features and other over-the-air software updates.
◾China: Strong demand supported by growing capacity
China is the world’s largest market for EVs accounting for almost half of the global electric car stock in addition to being Tesla’s second-biggest market. EV adoption in China is mainly due to the push by the Government through incentives and subsidies.
Tesla is the EV leader in China, reporting sales of 32.5k vehicles from Jan-May’20 (11.5k in May). Tesla’s $2bn Gigafactory in Shanghai became operational in Dec’19 and has increased its Model 3 capacity to 200k. The company expects the production rate to reach 4k/week rate by mid-year.
◾New battery technology and localization to drive China margins
After capturing market share, Tesla is now focused on improving margins. The company has received approval from the Chinese Government to use Lithium Iron Phosphate (LFP) batteries in its China-made vehicles in place of existing cobalt-based batteries. The LFP batteries are expected to be low cost and indicate that it would help in reducing vehicle’s price by 15-20% and improving the gross margin on vehicles to ~40%. The company also remains focused on reducing cost through localization of supply chain and expects China Model 3 components to be entirely localized by year-end.
◾Storage and generation business continues to grow
Owing to resources being focused on optimizing Model 3, the energy business had to be in the back seat till 2019 but recently the company has been scaling up energy storage and solar. The company beat its own record in deployment of energy storage devices in all four quarters of 2019 reaching an all-time high of 530 MWh in Q4 2019 followed by a slump in Q1 2020 owing to the global pandemic. Revenues from energy and storage generation grew at a 17% CAGR from 2017 onwards and stood at $1.5bn as of 2019. The storage and generation segment has also comprised an increasing share from 2.8% in 2016 to 6.6% of total revenues in 2019. CEO Elon Musk has previously stated that their energy business could be bigger than its automotive segment in the future.
◾TSLA remains a long-term play
The TSLA stock price has been very contentious for a long time and can be very volatile short-term, but remains a good long-term buy due to its potential to change the landscape of EV and battery technology with a positive outlook due to its leadership's continuous focus on innovation, clearly demonstrated through improvements in products, technology, and processes. The company is now focusing on improving its presence in the European market having selected a site for a new Gigafactory in Germany.