TSLA - Tesla: Onward And Upward

2023-10-02 13:40:35 ET

Summary

• Tesla vehicle deliveries declined sequentially due to down-time at production facilities.
• With a Cybertruck back order of 2 million, the pick-up truck battle is Tesla's to lose.
• Additional leg of strong growth ahead, as focus on battery storage business ratchets.
• We reiterate our $492/share Price Target and Buy Rating on Tesla.

Investment Thesis

During 3Q23, Tesla, Inc. ( TSLA ) produced 430,488 vehicles and delivered 435,059. Last quarter, the company produced and delivered 479,700 and 466,140 automobiles. The sequential decline was anticipated, as TSLA had announced downtime at its production facilities for upgrades during the Q2 2023 earnings call . Nevertheless, considering that the number of electric vehicles ("EVs") delivered during Q3 2023 outstripped the production figure, it appears that customer demand for Teslas remains solid.

TSLA is expected to report Q3 2023 financial results on or about October 19. For the period, analysts anticipate ~$24.7 billion in revenues and $0.65 in GAAP earnings per share. Based on the number of Teslas delivered during the quarter, we expect actual results to come in below consensus estimates, on the top line and bottom line. However, although we anticipate a decline in revenues on a quarter-over-quarter basis due to the shortfall in the sequential delivery figure associated with the automobile business, an increase in sales related to the energy storage segment is likely to mitigate some fraction of the impact.

With respect to margins, despite the softer revenues, we expect higher gross margins on a sequential basis, driven by the increase in Model Y MSRP, decrease in commodity prices, labor efficiencies due to greater automation, and depreciation. However, profit margins are likely to come in lighter on a quarter-over-quarter basis, based on expenses related to the ramp in production associated with the Cybertruck and the Megapack, as well as additional spending on artificial intelligence. Consequently, earnings per share are likely to decline compared to the previous quarter, while coming in higher than a year ago.

Considering that the TSLA story has not radically shifted during the third quarter, we reiterate our $492/share Price Target derived utilizing a 10-year Discounted Cash Flow model, that incorporates a 10-year normalized revenue growth rate of 50%, a profit margin of 10%, operating cash flow margin of 18%, yearly capital expenditures of 2%, average cost of capital of 7%, and a perpetual growth rate of 3%. Reiterate Buy Rating.

Key Takeaways From The Third Quarter

First Cybertruck Rolls Off The Assembly Line. With whispers that Cybertruck launch paraphernalia is being sent out, it appears that the vehicle's debut event is drawing close. Given that pick-up truck sales account for 20% of the U.S. automobile market, the lack of a pick-up truck among TSLA's models was a glaring gap, that was necessary to plug. Therefore, we are excited about the Cybertruck eventually becoming a reality.

In regard to the competition, Ford Motor Company's ( F ) F-Series vehicles are the best-selling pick-up trucks in America, followed by General Motors' ( GM ) Chevrolet Silverado models. F's F-150 Lightning is an EV pick-up truck with a range of 320 miles, towing facility of 7,700 lbs, and MSRP of $50,000 on the base model. Chevrolet Silverado EV version has a range of 400 miles, towing capacity of 10,000 lbs, and a price tag of $52,000 on the base model. Relatively, the Cybertruck has a range of up to 500 miles and towing facility of 14,000 lbs. Nevertheless, we view the entire line-up of Ford F-Series and Chevrolet Silverado models, including the internal combustible engine ((ICE)) pick-up trucks as potential competition for the Cybertruck.

Although, based on the Cybertruck's novel features and specifications, we expect strong demand out-of-the-gate, deliveries are likely to initially lag demand, due to the manufacturing complexity associated with the vehicle. However, as demand continues to ratchet, the gap between supply and demand is likely to narrow, as TSLA allocates additional resources to benefit from the popularity of the Cybertruck. In our opinion, sales of the Cybertruck, which, given the vehicle's niche appearance is considered to lack mass appeal, will surprise significantly on the upside.

In addition, although, our argument might appear cliched, similar to the iPhone, the Cybertruck represents a paradigm shift within its industry. The iPhone captured customer attention because of the additional value it provided relative to other smartphones. We believe the incremental value the Cybertruck provides over the typical pick-up truck will reflect in a surge in vehicle sales, over time.

United Auto Workers ((UAW)) Strike Non-Event For TSLA. In our opinion, the UAW strike afflicting F, GM, and Stellantis ( STLA ) is unlikely to benefit TSLA. Although we believe that the shutdown at the factories of the impacted firms is likely to be successful, the companies will absorb the increase in labor costs rather than risk raising product prices and turning uncompetitive. The automobile industry is highly profitable in absolute dollar terms, with F and GM guiding to 2023 net income of between $10 billion to $12 billion and $9.3 billion to 10.7 billion, respectively. Considering that labor costs account for 4% to 5% of the average cost of producing a vehicle, the impact of higher employee wages and benefits on the bottom line is unlikely to be crippling.

Moreover, it is hardly a zero-sum game. Up until the UAW demanded a resurrection of the living wage raises, defined pension plans, and removal of wage tiers, the requests appear reasonable. However, when it comes to wrangling a 40% pay raise for workers, the UAW terms appear onerous, and will only escalate the trend towards automation of core production functions at automobile companies, in our judgment.

Net-net, a potential success of the UAW strike will likely decrease profit margins at F, GM, and STLA, over the short term. Longer term, the impasse represents a margin expansion opportunity as hiring is replaced by automation, bolstering our argument that F's, GM's and STLA's loss is not TSLA's gain.

Focus On Battery Storage Systems Appears Increasing. The Inflation Reduction Act ((IRA)) mandate (including $400 billion in funding) to encourage the purchase of green energy technologies matches up nicely with TSLA's mission to design, manufacture, and market products that accelerate the earth's transformation to renewable energy. Consequently, along with customer subsidies on the MSRP of a majority of TSLA's EV models, the company's energy storage solutions are similarly advantaged with retail and corporate purchases of the firm's battery storage systems (Powerwall and Megapack) eligible for up to ~30% in tax credits on the cost of the products.

In addition, the IRA has earmarked $12 billion in entitlements to escalate the development and deployment of clean energy systems in rural communities across America, which will necessitate the utilization of battery storage technologies. In that regard, it is noteworthy that the U.S. Department of Agriculture ((USDA)) entrusted with managing the venture, has received funding requests for up to 2x the 9.7 billion overlay allocated by Federal authorities. In addition, given our opinion that the nation is highly likely to achieve the target of 60% solar/wind generated power by 2030 compared to the current 13%, large utility companies are likely to turn to TSLA for their battery storage requirements as they shift the electricity grid towards dependence on renewable energy sources.

Further, it is notable that TSLA's energy storage business is global with mega-scale projects that depend on the firm's Megapacks, active in Europe and Australia, with additional projects under development in the geographies. Moreover, TSLA recently tabled a proposal with the Indian government to produce and market the Powerwall in the country. Although Indian officials balked at providing the firm with incentives for manufacturing, it appears that subsidizing customer purchases of the Powerwall is under discussion.

With the Megapack backordered until Q3 2024 and favorable market conditions, TSLA appears to be increasing focus on its energy storage business. In that regard, it launched a Megafactory in China, over the summer, and has stated that its objective is to add several facilities over the short term.

Overall, with what appears to be another strong quarter behind it, TSLA is well-positioned to charge ahead. Onward and upward.

Bottom Line

Considering the highly volatile nature of TSLA shares, they undoubtedly offer an opportunity to generate returns through day trading and other short holding period arrangements. However, TSLA is an investment story, not a trading story. Folks that Buy and Hold TSLA stock for longer time horizons are like to secure greater gains on investment with virtually zero risk relative to traders timing the market in the company's shares.

Tesla, Inc. is a prudently managed firm with products that are key participants in growing markets with fragmented competition. We believe TSLA has high growth in revenues and earnings locked in for at least the next ten years. Buy, Buy, Buy (on pullbacks).

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