Are electric vehicles overrated

Tesla shares remain overvalued

We increased our fair value estimate for Tesla to $ 349 from $ 306. The change results primarily from the mid-cycle operating margin increase by 100 basis points to 13% and the increase in total vehicles delivered over our 10-year forecast period by around 25% to 28.4 million.

The prospect of higher margins should give investors more confidence that the investments unveiled at Battery Day in September 2020 will result in significant cost reductions and greater economies of scale over time. The number of vehicles delivered is likely to increase from around 500,000 in 2020 to 4.3 million units in 2030.

We've also increased the growth rates for deliveries from a higher starting point in our forecast, which means deliveries in 2024 are now around 2.7 million, up from around 2.1 million previously. We're downgrading our forecast for 2021 shipments from 950,000 to 800,000 as we expect the semiconductor shortages affecting the automotive industry to slow down Tesla's production.

That's still around 60% growth from 2020, which is in line with the forecast for growth this year, which is above the company's planned annual growth rate of 50%. We're modeling growth rates of at least 50% through 2023, but that rate will drop into the mid-single digits through 2030.

CEO Elon Musk says that if Tesla goes well, it can sell 20 million vehicles a year by the late 2020s. We can't model that because it means that Tesla would then be about twice the size of Toyota and Volkswagen today. However, if Musk proves us wrong, modeling 20 million units by the end of this decade would bring fair value to over $ 1,500 if everything else stays constant.

We believe the stock is trading by option value, as it might look a few years from now, rather than fundamentals and free cash flow generation, so we believe investors should consider the upside and downside risks when looking at them want to chase the momentum.

Business strategy and outlook(updated on February 24, 2021)

We increased our fair value estimate for Tesla to $ 349 from $ 306. The change results primarily from the mid-cycle operating margin increase by 100 basis points to 13% and the increase in total vehicles delivered over our 10-year forecast period by around 25% to 28.4 million.

The prospect of higher margins should give investors more confidence that the investments unveiled at Battery Day in September 2020 will result in significant cost reductions and greater economies of scale over time. The number of vehicles delivered is likely to increase from around 500,000 in 2020 to 4.3 million units in 2030.

We've also increased the growth rates for deliveries from a higher starting point in our forecast, which means deliveries in 2024 are now around 2.7 million, up from around 2.1 million previously. We're downgrading our forecast for 2021 shipments from 950,000 to 800,000 as we expect the semiconductor shortages affecting the automotive industry to slow down Tesla's production.

That's still around 60% growth from 2020, which is in line with the forecast for growth this year, which is above the company's planned annual growth rate of 50%. We're modeling growth rates of at least 50% through 2023, but that rate will drop into the mid-single digits through 2030.

CEO Elon Musk says that if Tesla goes well, it can sell 20 million vehicles a year by the late 2020s. We can't model that because it means that Tesla would then be about twice the size of Toyota and Volkswagen today. However, if Musk proves us wrong, modeling 20 million units by the end of this decade would bring fair value to over $ 1,500 if everything else stays constant.

We believe the stock is trading by option value, as it might look a few years from now, rather than fundamentals and free cash flow generation, so we believe investors should consider the upside and downside risks when looking at them want to chase the momentum.

Moat and Moat rating (updated on February 24, 2021)

Our "Narrow Moat" rating has been in place since October 2020. Tesla comes up with two out of five possible Moat sources, the intangible assets and the cost advantage. It is unlikely that Tesla's image and brand will be compromised anytime soon when other automakers move into the battery electric vehicle (BEV) space, as we anticipate Tesla will continue to innovate to stay ahead of the competition . The Model S now offers a range of over 400 miles and the performance upgrade for Plaid Mode (starting at around $ 140,000), available at the end of 2021, will enable the sedan to go from 0 to 100 km / h in less than two seconds accelerate and achieve a range of over 520 miles.

We think Tesla's autonomous driving program is way ahead of many other automakers too. It was a very smart move by Musk to not only design a great looking car, but also to sell Tesla vehicles at a premium price right away. This created a tremendous media exposure for Tesla, which we believe created a halo effect for the demand for the Model 3 and Model Y when they were launched, as well as the Cybertruck, which we consider ugly, but that ugliness is ironically Part of its appeal. Tesla would have failed if it had entered the mass market right away because too few people knew about the car and would have been willing to pay for the brand. We also believe Tesla will benefit from a first mover advantage in electric vehicles that will allow the company to build factories and vehicles from scratch and create processes that older automakers will likely find difficult to compete with.

The ability to potentially cut battery cell costs by 56%, as outlined at the company's Battery Day event in September 2020, suggests a cost advantage that incumbent automakers will take years, or perhaps never, to achieve because they don't want to build many new factories from scratch.

The established automakers are gradually switching to BEV production, but we assume that they will be burdened with the costs of the internal combustion engine (ICE) and personnel costs for a long time to come. Even in our bear scenario, Tesla's forecast return on invested capital is well above the weighted average cost of capital.

We think Tesla's gross margin, all other things being equal, will show a negative mix shift over time, as the cheaper Model 3, Model Y, and a planned $ 25,000 vehicle make up the vast majority of the volume. However, battery costs will also decrease significantly. These cost reductions, combined with Tesla's in-house stores, give Tesla advantages over other automakers and lay the foundation for a wide moat that will take effect as soon as Tesla's volume allows its R&D and overhead costs to scale more widely.

The other cost advantage comes from the customer side via the total cost of ownership, since the electricity costs for one year are not even close to the gasoline costs. According to our calculations, the electricity costs for Model S owners are only a fraction of what ICE owners pay for gas. Our cost calculation carried out in January 2020, defined as electricity or gas, insurance and maintenance, shows that the costs of the Model 3 per mile are around 15% lower than those of a BMW 330i.

Fair value and profit drivers (on February 24, 2021)

After rolling our Tesla model forward a year for 10K filing, we're increasing our fair value estimate to $ 349 from $ 306. The change results primarily from the mid-cycle operating margin increase by 100 basis points to 13% and the increase in total vehicles delivered over our 10-year forecast period by around 25% to 28.4 million. The mid-cycle margin increase is intended to give Tesla more confidence that the investments unveiled at Battery Day in September 2020 will result in significant cost reductions and greater economies of scale over time.

We've also increased shipments growth rates from a higher starting point in our forecast, which means shipments are now roughly 29% higher at 2.7 million in 2024. We have reduced our shipments forecast for 2021 from 950,000 to 800,000 as we expect the semiconductor shortage to slow down Tesla's production. That's still around 60% growth from 2020, which is in line with projections for growth this year, which is above the planned annual rate of 50%.

We're modeling delivery growth rates of at least 50% through 2023, but that rate will drop to a mid-single-digit value through 2030. CEO Elon Musk says that if Tesla does well, it can sell 20 million vehicles a year in the late 2020s. That's something we can't model yet because it means that Tesla would then be about twice the size of Toyota and Volkswagen are today. However, if Musk proves we're wrong, modeling 20 million units by the end of this decade would change the fair value estimate to over $ 1,500 if everything else stays constant.

We add the present value of Tesla's autonomous ride-hailing business (Robotaxi), which could be worth in 2030, and discount it at about $ 14.4 billion. That figure assumes Tesla will hit a 10% Robotaxi stake in the US, EU, and China and charge $ 0.25 per mile. Our weighted average cost of capital is 8.9%. We add about $ 4.6 billion in non-recourse debt to our valuation.

In modeling Tesla in our discounted cash flow model, we remain open to Tesla's disruptive potential for the auto and utility industries. In all three scenarios we model the same capital expenditure totaling approximately $ 106.5 billion over 10 years. Tesla is a volatile name, and its fair value estimate can change frequently as the company's history changes. We model energy revenues of $ 2.6 billion in 2021, with that number increasing to about $ 27.5 billion in 2030. This turnover corresponds to about 7% of our fair value estimate.

Risk and uncertainty (updated on February 24, 2021)

Investing in Tesla is associated with enormous uncertainties due to the future of electric vehicles and energy storage. In a recession, investors may not want to hold the shares of a company whose business success will not materialize for the next decade, or Tesla may not be able to raise capital when it needs it.

As long as an electric vehicle, which is far cheaper than the Model 3, is not sold in large quantities, there is no way of knowing for sure whether consumers are ready to switch to an electric car and are concerned with range and longer charging times compared to usage to deal with a gas station. Tesla is struggling in individual states to operate its stores independently and not as a franchise, which increases the legal risk for Tesla and could one day slow growth.

Other automakers are entering the BEV market and there is a threat of a shortage of chips in 2021. Should the company's growth ever stall or reverse, we would expect its stock price to fall sharply, as we believe current expectations for Tesla are immense. A young, growing company always runs the risk of diluting its shareholders or taking on too much debt to fund growth. Tesla also has a customer concentration risk, as the US and China account for about 69% of GAAP sales in 2020, up from 56% in 2015.

Tesla has a lot of ESG issues to ponder, the most important for us being what we see as massive key man risk surrounding the company's stock price linked to Elon Musk's actions. We believe Musk will be associated with Tesla for the rest of his life, but in the event of a sudden exit, we see the risk of Tesla stock falling sharply. Musk also owns about 21% of Tesla stock and uses it as collateral for personal loans, which increases the risk of a big sale should he have to sell stocks to pay off debt.

On the upside, Tesla's mission to save the world through sustainable energy makes the company attractive to ESG-focused investors. Musk has been banned from the role of chairman of the board of directors for three years following a 2018 settlement with the SEC over a civil law suit for securities fraud.

Capital allocation / stewardship (updated on February 24, 2021)

In our new scoring method for capital allocation, Tesla receives an “Exemplary” rating for capital allocation. Tesla's balance sheet gearing looks manageable, and we think the company is investing to make Tesla a much more efficient manufacturer. There are no share buybacks or dividends, which we think is appropriate given that Tesla is a young company and management is rightly focused on reinvesting for growth like building new factories.

We're far less concerned about Tesla's ability to service debt than we have been in the past. Three stock issues in 2020 raised $ 12.3 billion, bringing cash to year-end 2020 to $ 19.4 billion. That liquidity, our predictions for a healthy long-term return on invested capital, and the fact that we currently believe Tesla has virtually a blank check for further capital increases whenever it wants without the market penalizing the stock for dilution means that that we don't worry about debt maturity.

The total recourse debt due in 2021 is $ 760 million, and through 2023 the company's largest maturity is approximately $ 1.9 billion in credit line debt due in July 2023. The total debt due for 2023-25 ​​is $ 4.8 billion and we are confident that Tesla can repay or refinance that debt given its continued size and cash holdings.

Tesla set out its investment plans at its Battery Day event in September 2020, which we discussed in our September 22, 2020 note. CEO Elon Musk said the world would need about 10 terawatt hours of battery cell capacity for vehicles and 10 TWh of cell capacity for power generation and storage to move the world away from fossil fuels. To this end, Tesla announced the goal of increasing its own cell capacity from 100 gigawatt hours in 2022 to 3 TWh by 2030. This goal is in addition to the cells being bought from existing battery partners like Panasonic.

Another new investment point came in 2021 when Tesla announced in its 10-K that it had purchased $ 1.5 billion worth of bitcoin in January 2021 and will soon be accepting bitcoin for transactions. The accounting rules force Tesla to record Bitcoin as an intangible asset so that there is no volatility from quarterly non-cash market value adjustments, but the rule also means that Tesla cannot appreciate the value but can only write it off if it is considered depreciated. We are seeing tremendous uncertainty about the future of Bitcoin, so we believe the risk of depreciation is real, although we believe Tesla's financial health can easily absorb any loss. In late February, we estimated that Tesla's $ 1.5 billion stake generated an unrealized gain of approximately $ 600 million.

We see a hypocritical aspect in Tesla's purchase of Bitcoin, as mining Bitcoin requires high energy consumption, which seems to be the opposite of Tesla's mission. Tesla also received $ 1.58 billion in revenue from carbon credit sales in 2020. Investing the same amount in Bitcoin does not, in our opinion, fit Tesla's environmental image, although we do not expect consumers to avoid Tesla as a result.In February 2021, the BBC reported an investigation by Cambridge University that bitcoin consumed 121.4 TWh of electricity per year, which is higher than the consumption of Argentina. If Bitcoin were a country, its consumption would be in the top 30 nations worldwide. For comparison: Annual electricity consumption in the USA is around 4,000 TWh.

Tesla shares were listed on Wednesday, March 24th, 2021 at noon on the Nasdaq at USD 646.22. That's over 90 percent above our fair value estimate of $ 349, which explains the stock's one-star rating.

The analysis in this article is based on our professional investor tool. For more information on Morningstar Direct, please visit here.

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