A while ago I’ve written an essay about What People Don’t Understand About Tesla. This piece is a continuation of this exploration.
Tesla is currently valued at 10x Price-to-Sales, and Trailing Twelve Months Price-to-Earnings of 743. This makes Tesla grossly overvalued, right? In the short term, probably yes. But is there a way this valuation can be justified in the next 10 years?
High level thesis
I believe that by the end of this decade, Tesla will be the first $1 trillion market cap car company. Except it’s not a car company. It’s fundamentally a technology company.
Tesla is best compared to Amazon. They started as a boring book retailer. Low margins. Complicated logistics. Nothing too exciting.
Who would have thought in 1997 when Amazon went public that 23 years later the business would look like it does today? There was no AWS, no Amazon Advertising, no Amazon Prime, no Amazon Marketplace, no Alexa, no Kindle. In their IPO prospectus they described themselves as “the leading online retailer of books.”
So what was different about Amazon? Jeff Bezos. A visionary owner-operator with an extremely long-term focus and customer obsession.
Exactly the same is true for Tesla. It may look like a car company today. But 10 years from now it will look very differently, thanks to Elon Musk.
How Tesla will look like in 2030
It’s reasonable to expect that they will keep growing volume by 35 percent per year (so far it has been >50 percent). That means in 2030 they will produce about 10 million cars. With an average selling price of $25k (not including $10k of software, see below) this will generate $250 billion in revenues. If we assume a similar 5 percent net income margin as Volkswagen this would generate after-tax net income of $12.5 billion.
I expect each sold car to generate $10k worth of software revenues. Currently, the Full Self-Driving option alone sells for $8k, and there will be many in-app-purchases like the $2000 acceleration boost, which is delivered over the air. This will generate $100 billion in revenues on top. With a net income margin of 20 percent this would add after-tax net income of $20 billion.
Ride-sharing / robotaxi business
Tesla will add ride sharing capabilities, which will enable it to earn a cut (usually 20-30%) from rides on their network.
That means that Tesla will not just make money from cars and software, but also make money from each mile that is driven on its ride sharing network.
The only question is, how big will this get? If they don’t solve full self-driving, then this will just be another version of Uber/Lyft or Zipcar or Turo. It can be substantial, but probably not huge.
But if, and this is still a big if, they solve full self-driving and can offer fully autonomous robotaxis, this can become gigantic, especially if they are the first ones. This is not unlikely, because they have the largest fleet and by far the largest data pool to train their neural nets.
Tesla currently offers the lowest-cost solar panels in America. They plan to massively scale this business. They also offer a more premium solar roof option where the panels are directly integrated into the roof.
If we assume they scale this globally to 5 million roofs per year by 2030 and an average selling-price of $15k, this will bring in another $75 billion in revenues. With a 3 percent net income margin this would add $2 billion in after-tax net income.
Tesla will be the undisputed leader in battery technology. Soon, they will start manufacturing their own cells, which will likely last 1 million miles.
A Powerwall costs $8.5k and adds energy independence and backup. Pretty much every buyer of solar panels will buy one or more, which means millions of units per year.
The recent positive attitude by Volkswagen chairman Herbert Diess towards Tesla (see here, here, or here) can only mean one thing: Volkswagen wants to potentially license Tesla’s software and technology.
Elon Musk confirmed his willingness to do so:
It’s not realistic that every single car company in the world will be able to build all the necessary hardware and software in-house.
It will look more like computer or smartphone operating systems, dominated by two or three players. Tesla may be one of them, which might translate into substantial revenue.
When we add everything up, Tesla will be a $500+ billion revenue company in 2030 with healthy profits. So I believe a valuation of >$1 trillion is justified, leaving a 4x upside from today’s price.
And if they solve full self-driving and become the leading robotaxi provider, the revenue and profit from that will be substantial.
But make no mistake. There will be huge challenges and volatility. It won’t be a smooth ride. And there is still a “black swan” type chance that they will go bust.
If they are able to pull it off, I have no doubt in my mind that Tesla will become one of the largest and most important companies on the planet.
And who knows what other products or businesses they will come up with along the way?
This is part 2 of my exploration of Tesla. Read part 1 here.
Disclosure: I am a TSLA shareholder.