Tesla Remains “Just” a Car Company, Despite Bulls’ Arguments Otherwise. One of the most common arguments bulls make to justify Tesla’s valuation is that the company is more than just a car company. Instead, the argument goes: Tesla is a software, tech, insurance, energy, transportation, “insert any other blank” company. However, the financials bear out a different picture and show the other businesses are more hype than substance. At this point, Tesla is the only car company and generates the entirety of its profits from vehicles.
Per the following figure, Tesla generated 88% of revenue from Automotive Sales in 3Q21, which is up from 87% in 3Q20, and above the quarterly average of 86% since 3Q19. For reference, automotive sales made up 87% and 93% of General Motors’ and Ford’s 3Q21 revenue respectively.
Tesla’s two other segments, Energy generation and storage and Services and other, which make up 12% of revenue in 3Q21, are unprofitable. Over the TTM, Tesla generated $10.8 billion in gross profit. $11.2 billion came from its Automotive segment while Energy generation and storage and Services and other racked up gross losses of $113 million and $263 million. Despite many claims and promises to the contrary over the years, Tesla doesn’t generate gross profit doing anything but selling cars.
Insurance Business Is Not Material. Tesla bulls will also point to Tesla’s insurance business as another way to drive profit growth. We’ve previously covered how Tesla insurance does not have the competitive advantages that bulls ascribe to it and has a long way to go before it can get meaningfully off the ground.
Even if Tesla’s insurance business gets off the ground, we would not expect it to make much money. For example, from 2004-2006, General Motors generated about $70 per car sold in GAAP net income from its insurance business. If we assume Tesla can generate the same level of business, Tesla insurance would result in just $57 million in GAAP net income based on TTM vehicles sold.
Bulls will counter that Tesla will be so much better at insurance than GM and that GM is not a good comp. There is no way to know for sure. Nevertheless, we concede that anything is possible, but the likelihood of Tesla’s insurance business being material profit producer is extremely low.
Regardless of how successful Tesla insurance is, the potential profits from it are nowhere near enough to help to justify the expectations baked into Tesla’s stock price.
Production Capacity Growth Will Require Billions of $. Current and expected production capacities of all known Tesla factories equals ~2.7 million vehicles, or 12.9 million short of the 2030 production implied by its stock price. See Figure 6.
In other words, despite the new factories coming online, Tesla must spend billions and build many new manufacturing plants before it can approach the capacity needed to sell the number of cars implied by its valuation.
Given the many issues in ramping production in the past, investors should not assume Tesla can increase its production by 5x without any problems.
Incumbents Must Fail for Tesla to Meet Growth Expectations. For many years now, incumbent automakers have spent billions of dollars building out their EV offerings. Automakers other than Tesla already account for 85% of global EV sales through the first half of 2021.
The global EV market is simply not big enough for Tesla to achieve the sales expectations in its valuation unless nearly all of the incumbents reverse course and completely fail to sell EVs.
Here are the projections from the large incumbent automakers that have provided specific goals for future EV production.$VOLKSWAGEN AG(VLKAF.US)$
projects that 50% of its global sales will be fully electric by 2030$Stellantis NV(STLA.US)$
projects 70% and 40% of its European and North American sales, respectively, will be fully electric by 2030$Ford Motor(F.US)$
projects that 40% of its sales will be fully electric by 2030.$Toyota Motor(TM.US)$
projects that it will sell 2 million EVs by 2030$Honda Motor(HMC.US)$
plans to sell only EVs in China by 2030$BAYER MOTOREN WERK(BMWYY.US)$
expects at least half its sales to be zero-emission vehicles by 2030$MERCEDES-BENZ GROUP AG(DDAIF.US)$
manufacturer of Mercedes Benz, expects half its sales to be “EV and hybrid by 2025”$General Motors(GM.US)$
is targeting EV sales of “more than 1 million” by 2025$VOLVO(AB)(VOLVF.US)$
plans to sell only fully electric vehicles by 2030$NISSAN MOTOR CO(NSANF.US)$
(in U.S.): 500,000, 2% market share
Total = 19+ million vehicles and 75% market share
These estimates do not include other incumbents and new entrants (e.g. Jaguar Land Rover, $NIO Inc(NIO.US)$
, $Rivian Automotive(RIVN.US)$
, $Lucid Group(LCID.US)$
and more) or other Chinese EV makers because we could not find specific projections for EV production. Nevertheless, we are confident that their combined market share will be more than zero.
The point is that the rest of the world is not planning to stand by, give up existing market share, and let Tesla own majority of the EV market. Many very experienced and successful automakers are spending many multiples of what Tesla is spending to compete in the EV market.
The bottom line is that it is hard to make a straight-faced argument that Tesla can achieve the sales implied by its valuation in a competitive market.
Incumbents Can Afford to Spend More than Tesla. Incumbents already have infrastructure to produce and sell vehicles at scale, and they are spending billions of dollars to compete in the EV market. Ford, Volkswagen, General Motors, and Stellantis alone are planning to spend at least $280 billion through 2025 and produce over 12 million EVs by 2030.
Given the huge investments from multiple competitors, we expect the EV market will be extremely competitive, as manufacturers fight for profits and market share. The “winner take all” outcome implied by Tesla’s valuation is extremely unlikely. Perhaps, Bernstein analyst Toni Sacconaghi said it best, “the automotive industry is an increasingly global and hypercompetitive industry and we believe that surplus profits and technology innovation will likely be competed away over time, as has been the case historically." In such a market, Tesla cannot achieve the market share implied by its valuation.
Unlike Tesla, the incumbents generate plenty of free cash flow (FCF) to fund their EV investments and don’t have to dilute existing shareholders to expand EV capacity as Tesla does. For instance, over the last five years, General Motors, Stellantis, and Ford generated a cumulative $12.4 billion, $7.1, and $6.1 billion in free cash flow while Tesla burned -$19.5 billion.
FSD Continues to Overpromise & Underdeliver. Full-self driving (FSD) has been consistently plagued by issues that, unfortunately, have deadly consequences. Industry research provider Guidehouse Insights ranks Tesla last in its 2021 ranking of Automated Driver Systems (ADS), and states flatly, “Tesla needs a thorough rethink of its approach to developing ADS. It has overpromised with its marketing for nearly 5 years and severely underdelivered.”
Per the following figure, Tesla lags the competition by quite a large margin, as it’s the only company that falls into the "Followers" category.
The most recent problems with Tesla’s FSD version 10.3 forced the company to roll back the update as users reported false crash warnings and other problems with autosteer and cruise control. These issues resulted in Tesla recalling nearly 12,000 vehicles because “a communication error may cause a false forward-collision warning or unexpected activation of the emergency brakes,” according to the National Highway Traffic Safety Administration (NHTSA).
While the roll out of an updated 10.3.1 has restarted, Tesla’s haphazard approach to deploying FSD remains unsettling and led Guidehouse Insights to note, “Tesla’s approach to testing its system is fundamentally at odds with virtually every other company in this industry.”
Alphabet’s Waymo routinely ranks as the best automated driving system. Importantly, many of the firms ranked ahead of Tesla are focused solely on building automated driving systems and are not distracted by scaling up automobile production, delivery logistics, and the general day-to-day operations of producing cars. Even so, other direct competitors such as GM Super Cruise also get better scores from third-party organizations.
Increased Regulatory Risk. While Tesla has mysteriously avoided regulatory crackdown on its sales of FSD and practice of beta testing software on live drivers and roads, renewed requests from the NHTSA/National Transportation Safety Board (NTSB) signal that Tesla might be held accountable for practices that many find highly misleading and dangerous to citizens.
Missy Cummings, recently appointed as senior advisor for safety at the NHTSA, has expressed concerns about Tesla’s FSD in the past, tweeting as far back as 2019 that Tesla’s “autopilot easily cause mode confusion, is unreliable and unsafe” and that “NHTSA should require Tesla turn it off.”
More recently, Tesla requested “confidential business information treatment” on its responses to a litany of information requests the NHTSA made as part of its investigation into FSD. If approved, the public would likely never see Tesla’s responses to key questions pertaining to Tesla not issuing a recall for Autopilot after multiple accidents involving parked emergency vehicles, the selection criteria for Tesla’s FSD beta testing program, and the non-disclosure agreements Tesla was making drivers sign before they could use the beta system.
The NHTSA is not alone in criticizing Tesla and its FSD rollout. On October 26, 2021, the head of the U.S. NTSB, Jennifer Homendy, said that Tesla has not yet officially responded to the NTSB regarding its safety recommendations while calling the use of full self-driving ”misleading.” She stated, “my biggest concern is that Tesla is rolling out full self-driving technology in beta on city streets with untrained drivers and they have not addressed our recommendations that we’ve issued as a result of numerous investigations of Tesla crashes.”
Battery Technologies Are Nothing Special. Tesla announced it will be switching to a lithium iron phosphate (LFP) battery in all standard range cars. These batteries are already being used in vehicles built in the Shanghai factory, and this switch is expected to bring down costs. The timing of this change comes as other battery producers, in partnership with incumbent auto manufacturers, are ramping up production, which should drive down battery costs for all EV makers. In other words, the competitive advantages of a cheaper battery may be short-lived, as incumbents build economies of scale in their own supply chain in the coming years.
Additionally, while the much heralded 4680 cylindrical battery, produced by Panasonic for Tesla, and nearly ready for production, should bring a higher energy density in a more efficient package, competitors’ offerings all aim to provide the same.
General Motor’s Ultium platform will enable up to 400-450 miles of range, and the firm is building a new battery research facility aimed at building batteries capable of 600 miles on a single charge. General Motors recently announced a joint venture with LG Chem to build a second U.S. battery cell plant, which is expected to have an annual capacity of 35 gigawatt hours, or slightly above the 30 gigawatt hour capacity of its first Lordstown battery plant. Morgan Stanley analyst Adam Jonas noted that the “formation of Ultium/Ultium Cells LLC will prove to be a critical point of strategic differentiation that will ultimately drive value creation for [GM] shareholders.”
Ford’s Mustang Mach-E became the first electric SUV not made by Tesla to reach an EPA-rated range of up to 300 miles, and the company recently entered a partnership with SK Innovation to build three U.S.-based battery plants to power 1 million EVs annually.
On its own, LG Chem plans to expand its existing U.S. facilities and build two more plants that will produce both pouch cells used by General Motors, Ford, Jaguar, Audi, Porsche, and more, as well as the cylindrical cells used by Tesla.
Ultimately, the race for the “perfect” battery is less important than the race to procure battery supplies to build the number of EVs each manufacturer aims to produce in the coming years. The incumbents have proven they can maintain and win a race to procure supplies, and they’ve only been doing it for multiple decades now.
Not All Supply Issues Can Be Coded Away. To its credit, Tesla managed the global chip shortage relatively well by re-writing software to allow the use of alternative chips. However, not all supply issues can be solved via software, as evidenced by the growing wait times for Tesla’s vehicles. As Electrek notes, Tesla recently updated its delivery timelines for new orders, and depending upon specs, some vehicles won’t be delivered until September 2022 if ordered today. New orders for the Model 3 Standard Range Plus, which is Tesla’s cheapest vehicle, are currently on pace to be delivered in May 2022, or seven months from now.
While certainly not unique to Tesla, extended delivery/wait times give consumers ample time to comparison shop and possibly switch orders to a competitor’s EV that would be available sooner.
Delivery delays aren’t exclusive to in-production vehicles, but Tesla’s future vehicles as well. The much-hyped Cybertruck has recently been delayed again, this time until at least 2023 (compared to an original late 2021 release), which ultimately gives competitors more time to establish a presence in the EV truck market.