Tesla's Outlook for 2023Dec 14, 2022
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Current Price: $167
Target Date: Click Here To Unlock
Stock: Tesla (TSLA)
It's been almost a year since we updated our Tesla thesis and a lot has changed.
The company went through a stock split, Elon bought Twitter, other competitors are emerging, and we're on the edge of a global recession.
So where does that leave Tesla? Why are they down this year? And what will it take to reverse course?
Let's answer all of this and more 👇
Why We Loved Tesla Last Year:
Before we jump into our new analysis, everything we've said over the last several years, more or less remains true today.
And to summarize, that is, we love Tesla because they are executing on: vertical integration, profitability, market dominance, and access.
And even though the stock is up over 400% since we recommended it, Tesla is showing, now more than ever, its ability to stand out amongst the pack.
So without recapping the entire last analysis, the TLDR on each were:
- Vertical Integration: While not all of their parts are made and created in-house, they outsource a lot less of the manufacturing process relative to their competition. Not only does this help drastically increase margins but during times of supply chain restraint, their business model also shines.
- Profitability: Tesla is leading almost every single automaker in terms of profitability per car. The most impressive of these metrics is their 23% EBITDA margin. This margin means that Tesla is making over $10K of EBITDA per car whereas most manufacturers are in the low single digits!
- Access: Tesla's goal is still to release an EV in the mid-teens price point! This is a prime example of how their mastery of vertical integration, scale, and profitability will allow them to do something no one else is even close to doing. This should push EVs into the mainstream and allow Tesla to finally rapidly scale their operations!
So now that you're up to speed, while these targets have changed, the overall narrative has remained the same even though the stock is down huge this year.
Tesla is continuing on its path of vertical integration, they're still the only profitable EV maker (before tax credits) and they're still pushing to lower the price point of their cars.
So if Tesla has continued to improve, why is the stock down 50% this year?
Why Tesla Is Down:
It's mostly due to the outlook for continued price cuts in China, decelerating macro EV demand, and other market headwinds (Twitter, Crypto, etc.) -- most of which will pull back in due time.
Let's double-click into the main points:
Price cuts in China: Tesla is expected to cut its Model 3 & Model Y by Rmb 14-37k. The new price therefore would be 5-10% lower, which could in hand further reduce market sentiment. With almost 50% of their profitability from the Chinese market, these cuts broadly impact their bottom line. Past the financials, it's no secret that relations between the US/China are far from good. With so much reliance upon this foreign entity, any further geopolitical issues between the two superpowers could massively disrupt their business. While Tesla is actively working on becoming less China-dependent, in the short term, this hangs heavily on their stock.
The continued slowdown of EV demand: Let's be clear here, the potential demand slowdown is due to EVs slowing down in general -- not due to Tesla's unique position in the marketplace. And the reduced demand for EVs is largely due to fears of a severe global economic contraction. Pair that with a growth in the supply of EVs and we're starting to see the balance between supply and demand finally tilt in the other direction as global battery growth is on pace to double from 2021. This is the reason why fears have spread throughout the EV investing space and is one of the reasons Tesla is down big this year. While this is fully warranted, like all economic contractions, bounces back are eventually "inevitable".
Distractions with Twitter: Are these distractions with Twitter actually an issue? In the short term yes. But in the long run, we believe the impact will be negligible. While he's spending all his time on Twitter right now, the classic Elon playbook is to make a mess, clean it up, and automate it. In due time, even if he doesn't "figure it out", his time will slowly navigate more and more to Tesla and away from Twitter. So yes, it's an issue now, but should all be mitigated in due time.
So what's the common theme here? It's that these are all short-term issues.
There is nothing glaringly obvious that could be detrimental to the success of their business over the long run.
Price cuts will continue for all EV makers, demand is slowing demand everywhere & Twitter is a sh*tshow, but these will all go away in due time.
And once they do, Tesla will be in the same position it was last year -- which is to capture all of the downstream tailwinds.
Therefore, we believe these fears are unwarranted, and thus the stock is oversold. But outside of what they're executing on today, and any overblown fears, Tesla is showing long-term potential across several areas.
Why We Love Tesla Even More Going Into 2023:
The first area is revenue growth. Next year we anticipate that Tesla will successfully see 35%+ top-line growth with ~$14.5B+ of free cash flow.
And over the same time period, other EV companies + legacy OEM's are expected to burn up a ton of cash.
That's because while these companies are not profitable, Tesla, as we mentioned, is still the only auto manufacturer that generates a profit (before incentives) on the sale of EVs.
This is massive because the infrastructure needed to scale EVs profitability is still in its infancy and one of its moats is its ability to do this -- years before its competition.
They've been able to do this because they have secured a steady supply of battery metals and other upstream supplies necessary to produce EVs at a scale never seen before.
Therefore in a slowing economy, we believe that while Tesla's business may slow down, the gap between them and their competition will only widen even further.
Pair that with price decreases coming for the average consumer, and Tesla is much better situated to grow over the next decade -- especially as their Texas gigafactory starts scaling up.
Therefore trading at 26x PE, Tesla is starting to look like, dare we say it, a value play.
Risk/Reward: Medium-High / Very High
Dividend Yield: 0%
Market Cap: $525B