STLA - Tesla: More Than A Car Company?

2023-11-10 09:45:00 ET

Summary

• Tesla, Inc.'s non-car business segments, including Tesla Energy and the charging network, have potential but do not merit a valuation at the current level.
• The Dojo supercomputer and Optimus humanoid robot are still in the early stages and may not have significant standalone value.
• The Autopilot/Full Self-Driving division, should be considered as part of Tesla's core business rather than a separate entity.
• All in all, Tesla is a carmaker and should be valued as such.

In the comment section of a recent article I wrote on Tesla, Inc. ( TSLA ), several persons criticized that I valued Tesla as a car company. Thus, I decided to once more take an in-depth look at Tesla's non-car business segments and what kind of valuation impact they justify. In this article, I will present my findings and make the case for Tesla to be valued as a car company, with special emphasis on the aforementioned business segments.

Tesla Energy

Out of all of Tesla's non-automotive activities, Tesla Energy is the one I am most willing to consider as a viable standalone business. That may well have something to do with the fact that, at its core, the division is based on SolarCity, a company that Tesla acquired in 2016 and combined with its home storage division.

Tesla Energy offers solar roofs and energy storage solutions (" Powerwall ") to consumers. These are highly commoditized products. Tesla's solar modules are not better than competitors', but they are not worse, either. I do, however, believe that there is at least some brand synergy. Tesla drivers may be inclined to buy their solar panels and battery storage from Tesla as well. With regard to the Powerwall in particular, one might also add that their design is (at least in my opinion) quite visually attractive. Aesthetical considerations may entice consumers to spend a little more.

Besides consumer solutions, the division also offers utility scale storage (brand name: Megapack ). Competitors in this field include The AES Corporation ( AES ), NextEra Energy, Inc. ( NEE ) or Northvolt AB. Unlike in the consumer segment, I doubt that the brand name will play a big role. But there may be advantages of scale, as Tesla also manufacturers immense quantities of batteries for use in its vehicles. The underlying technology is largely identical, after all.

Tesla's Autobidder solution - which trades electricity in an automated fashion - is often referred to as a key differentiator. The software does not strike me as particularly unique compared to similar products such as Fluence Mosaic by Siemens Aktiengesellschaft ( SMAWF , SIEGY ) and The AES Corporation. Then again, I am not a software engineer, so if anyone has particular insight about this, consider letting me know via the comment section.

YoY revenue growth of 40 percent is impressive, but QoQ revenue growth is almost flat as of Q3 . In order to really move the needle in terms of Tesla's overall valuation, the division will have to reinvigorate revenue growth. Nonetheless, this is undeniably a real business. As per the quarterly report, 4GWh of storage has been deployed in Q3. Under ideal circumstances, this segment eventually should be worth $10 to $20 billion if growth can be reinvigorated and profitability increased based on other utilities. As I alluded to previously , I believe that a spinoff of Tesla Energy might be an interesting option from a shareholder value point of view.

Charging Network

Tesla plans to open its network of superchargers to other manufacturers. That way, Tesla could monetize the infrastructure initially built to support car sales at a broader scale. There are already deals with General Motors Company ( GM ) and Ford Motor Company ( F ). Wedbush - notoriously bullish on Tesla - estimates a potential for $10 to $20 billion in revenue by the end of the decade. Tesla, according to statements by CEO Elon Musk, aims for profit margins of around 10 percent. If these ambitious target levels were met, the business would justify a standalone valuation of around $60 billion. But that is a capital "If."

Grouped within the Services and Other segment in Tesla's reporting (the segment also comprises part sales, used vehicle sales, insurance and retail merchandising). Quarterly revenue as of Q3 stagnated at just shy of $2.2 billion. While there is no further breakdown of this figure, I believe it is safe to say that it will take a lot of growth to $10 billion, let alone $20 billion, in annual revenues. And again: right now, growth has flattened out.

And even if revenue targets can be met, I assume that, going forward, EV charging will be a highly commoditized, low margin business. Unlike ten years ago, Tesla no longer is the only company that has fast chargers. Compared to competing charging stations, Tesla's superchargers have a nicer design, subjectively at least, but I doubt that this will much matter to customers. Unlike petrol, there is not even a brand differentiation between different kinds of electricity. Tesla electricity is identical to any other electricity. Price will be the key differentiator. Even today's gas stations do not make their real money with fuel. Their profits come from snacks and other profits sold in the adjacent shops.

One should also consider the risk this move poses to the core business: the ability to charge faster than many competitors has been a selling point for quite some time. Opening its network to competitor's vehicles could diminish that advantage. Notably, there is no preferential treatment for Tesla drivers. This could cause some dismay among Tesla customers, thereby negatively affecting brand loyalty.

Also, it is worth noting that Tesla Energy and Tesla Charging are inherently set to cannibalize one another. A car will only be charged once for every battery load's worth of mileage. A car that has already been filled up at a Powerwall will not immediately proceed to the nearest supercharger and vice versa.

Dojo

Unlike the energy division or the supercharger network, the Dojo supercomputer is little more than a concept so far. Assembly of the computer has begun this summer. The primary use case is the training of a neural network to improve autonomous driving capabilities. The main difference between Dojo and similar supercomputers is the use of Tesla's own chip design rather than NVIDIA Corporation ( NVDA ) semiconductors. Provided that the system performs as intended - which, despite Tesla's relatively high semiconductor knowhow (for a carmaker), I do not view as a foregone conclusion - that may give it a certain edge in that specific field. On the flipside, the system may be less well suited for other tasks in comparison, thus narrowing its use cases.

All in all, I do not see a case for Dojo as a business in its own right. Instead, I would view it more as a development tool to be used in other projects. More on that in a minute.

Optimus

Lately, Tesla's humanoid robot "Optimus" is often cited as the innovation that will transform the company and propel its share price to new records. For the time being, this is little more than a prototype. I have read visions of Tesla factories staffed by robot workers who never tire nor think about joining the UAW, supposedly providing invaluable cost advantages. Also, Tesla, as per its CEO's remarks, hopes to sell Optimus for around $20,000 a unit to anyone with demand for a humanoid taking on tedious manual tasks. So far, it has sold exactly zero units. Nor has any car been built by an Optimus.

Admittedly, judging from a demonstration video released by Tesla, Optimus seems to be more than a mere idea. It can do Yoga poses and is able to sort oversized Lego-style bricks by color (albeit considerably slower than a human could). That is impressive for a robot. But it is a rather long way from this to replacing human workers on an assembly line. The Optimus strikes me as a nice project, but not as the future of automation, so far. I almost expect it to start saying "Roger, Roger" anytime. A unit price of $20,000 is a whole different story, too.

I would not entirely rule out that there may be a real business here somewhere down the line. For the time being, however, I see little more than a side project. A moonshot at best, a distraction at worst. It is not even certain that Optimus will keep the promise its name (Optimus is Latin and means "The Best") seems to make. Austin, Texas based startup Apptronik's Apollo seems more advanced in certain aspects.

My approach to Optimus is to view it as I would any other companies venture capital investment. Having a certain portion of such ventures is not uncommon for car manufacturers. Still, they remain exactly that: car companies. No one seriously considers Hyundai Motor Company ( HYMTF ) to be more than a carmaker, despite it owning Boston Dynamics - which has at least sold some robots already and has a longer track record than Tesla in the field of robotics.

Autopilot/Full Self-Driving

Another division that is often referenced as a reason why Tesla is more than a carmaker is its Autopilot (that is Tesla's official name for the system) technology - which is often referred to as "full self-driving," or FSD. I would like to make one point up-front: I do consider the Autopilot system a feature of Tesla's vehicles first and foremost. Therefore, I tend to view it as a part of the core business (and factor in the valuation thereof), not as a standalone business.

But for the sake of the argument, let us take a look at the segment on a standalone basis.

Basically, there are two arguments being made as to why "FSD" should be considered as a business beyond that of a mere carmaker:

1. Robotaxis

First, there is the idea of fully autonomous Tesla vehicles being used as "robotaxis." Whether this would be a business in its own right would depend on who would be the operator of those robotaxis. If Tesla would manufacture these vehicles and sell them to customers, this would be a feature of Tesla cars, not a separate business. The taxi revenue would go to the owners of the cars, not the manufacturer. Whether there is a human driver or not makes no difference in that regard.

Alternatively, Tesla could operate the autonomous fleet itself. Then, of course, there would be the issue of cannibalization. If Tesla were to operate its own fleet of robotaxis, the market for Tesla vehicle sales to customers would shrink. Just think about it: Surely, you would not pay Tesla for a taxi ride, if you owned an identical vehicle that can drive autonomously. Neither, I suspect, would you buy a self-driving car, if you could use the same vehicle on demand for less money. I am somewhat skeptical with regard to the financial viability of sacrificing car sales for service revenue, given the fact that there would also be associated costs of operation and maintenance, whereas a sold car tends to bring additional service and parts revenue over its lifespan.

2. Licensing

The other idea is that Tesla could license its Autopilot system to other carmakers. First of all, I would hardly classify that as a business beyond that of a carmaker. Shared parts and software solutions are hardly a new invention in the automotive industry. Toyota Motor Corporation ( TOYOF , TM ) and Bayerische Motoren Werke Aktiengesellschaft ( BAMXF , BMWYY , BYMOF ) even share an entire platform for the Toyota Supra/BMW Z4 models. Same for Stellantis N.V.'s ( STLA ) Abarth brand and Mazda Motor Corporation ( MZDAF , MZDAY ) - in that case, the Abarth 124 Spider and Mazda Miata/MX-5 are technically identical.

Second - and, arguably, more importantly - other manufacturers have equally advanced, some even more advanced, driver assistance systems. As I have written before, the main differentiator is not Tesla's superior technology, but its more aggressive (and often overly optimistic) marketing of its Autopilot system. Tesla might have a cost advantage due to its use of cameras only instead of additional, costly Lidar technology. The downside being, of course, that this kind of system is potentially less safe. So all in all, I do not think that there is a real market for licensing. Even if Tesla were to make a significant leap forward, ahead of competitors, it would have to carefully consider whether licensing a superior system would not hurt its core business due to the loss of a unique selling point.

For the above questions to arise in the first place, Tesla would have to develop autonomous driving in the first place. As alluded to above, Dojo might help in that regard. At this time, Tesla neither has the capability for autonomous driving above level 2 nor the most advanced automated driver assistance - Mercedes-Benz Group AG's ( MBGAF ), (MBGYY) drive pilot is currently the only level 3 system. Robotaxis, meanwhile, would probably require level 4 or 5. Notably, General Motors' Cruise division is a good deal farther in terms of developing and deploying robotaxis. But these more advanced have achieved mixed results at best in test markets so far.

So, all in all, I doubt that full self driving cars would make Tesla into "more than a carmaker," even if Tesla were able to build them eventually. That is not to say, that it would not have the potential to make it a more successful carmaker. But in any case, I think that it has to be factored into the valuation of the car business rather than added to the company's overall valuation as its own business.

Non-Car Tesla's Value

Right now, I believe that "non-car Tesla" has a combined value in the high single digits, under optimistic assumptions in the low double-digit billion dollar range. Under optimal circumstances, I believe that Tesla Energy and Tesla's supercharger network might reach a value of up to $20 billion and $60 billion, respectively. However, I doubt that both can reach their maximum potential at the same time, due to inherent cannibalization between the products. For the sake of the argument, I think that a valuation of $5 billion for each business may be justified. In the case of the supercharger network, that takes into account the greater maximum potential, despite far lower current revenues.

Dojo, on the other hand, is a tool for the development of (as of yet hypothetical) full self-driving vehicles, which, in turn, are part of the car business or, alternatively, a product cannibalizing the same. Therefore, I would not assign an individual value to them as independent businesses. Optimus, finally, is most akin to a early stage venture investment. There is a small chance of it becoming a multi-billion dollar-business which has to be weight against a disproportionately higher probability of it being sunk cost and nothing more. Thus, I would be willing to assign a valuation of $1.1 billion, in line with what Hyundai paid for Boston Dynamics. I believe that this is a more than generous assumption, given Boston Dynamic's proven track record. At this point, I will add another $1 billion to represent the distant possibility of new business streams arising from an advanced Autopilot system. Think of it as another kind of venture capital investment on the side, in a similar fashion as the Optimus division.

One should also consider that there tends to be a certain conglomerate discount for unrelated businesses under the same corporate roof. There is some synergy in terms of brand and technological knowhow between Tesla Energy and the core business. The charging network, meanwhile, is at least closely adjacent to electric cars. So, while generous, I think it would not be absolutely unreasonable to not apply such a discount in the case of Tesla. That leaves us at a value of some $12 billion for Tesla's non-core business. In absolute terms that is quite a respectable figure, yet it pales in comparison to the company's market capitalization of still more than $700 billion, despite a significant dip since the release of Q3 results .

The Musk Factor

I do have a habit. When reading an opinion piece in a newspaper (or digital equivalent thereof), I try, if possible, to not read the author's name before I read the column. I think that the same might be in order when it comes to Tesla's announcements.

Would a (yet to be completed) supercomputer make sense as a multiplier of a carmaker's value if the person presenting it was not Elon Musk but GM CEO Mary Barra. Would anyone believe Ford CEO Jim Farley's claim that Ford is only years away from mass-producing humanoid robots that will render human labor redundant? Probably not. That leads me to believe that much of the optimism for Tesla has less to do with the reality of the business, but with the CEO's larger-than-life personality (and admittedly also with his track record before and after his acquisition of Tesla, e.g., SpaceX (SPACE)).

When assessing the investment case for a company, however, I believe it to be prudent to take a sober look at the business in question. Elon Musk sending a rocket to Mars does not make Tesla better. Just as I would not expect Tesla's demise based on Mr. Musk's track record at X (formerly known as Twitter). That is, leaving aside the marketing factor, in both cases.

Conclusion and Valuation

All in all, Tesla's business is centered around cars. Even Tesla Energy does at least have synergies with the core business. Maybe, in a few years' time, I will end up buying an Optimus to do all the manual tasks I do not want to do. If so, I am happy to have been wrong back in late 2023. If I get a good bundle deal, I might buy Bumblebee and Megatron, too. But for the time being, there is simply no Optimus business. There is an idea. Other carmakers have venture capital arms, too. But none of them is seriously considered a tech company or "more than a car company" for that reason.

Inevitably, that leads me to a rather sober conclusion: Tesla is a carmaker. Albeit one that happens to also own a medium-sized utility business. It must, therefore, be valued in line with car manufacturers, not software companies. As such, I remain confident that a valuation of $200 billion - translating to a price of slightly below $65 per share - is reasonable under optimistic assumptions for the car business and taking into account the energy division. As of Q3 , sales revenue is declining compared to the prior quarter (-8.9 percent) and only minimally above the Q3 figure last year (+4.4 percent YoY). The operating margin fell sharply to a mere 7.6 percent. If anything, that underlines how ambitious even a $200 billion valuation is. Consequently, I reaffirm my view of Tesla as a sell.

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