Dear Elon Musk,
I’m writing on behalf of investors who believe in you and your mission to accelerate the global adoption of sustainable energy.
With Tesla (NASDAQ:TSLA) set to announce its third-quarter 2021 financial results today, I’m as bullish as ever on TSLA stock. Despite all the noise about supply chain shortages and competition, TSLA stock is up 19% year-to-date. That’s in tune with the S&P 500, which has gained 22% gain over the same period. Tesla’s recently reported Q3 production numbers set the company on a course to produce 1 million electric cars a year.
More importantly, if you’d bet on so-called “Tesla-killers” like Nio (NYSE:NIO), for example, you would be facing losses right now. NIO stock is down 25% YTD — compare that to TSLA’s 19% YTD gain.
Likewise, if you were to bet on LCID at its IPO date (July 26) you’d be down 8%. Meanwhile, TSLA gained 32% in the same timeframe.
Even Michael Burry has given up his short position in TSLA stock. (That must have hurt).
Coming off of record production and delivery numbers, most of us are expecting TSLA to deliver another beat-across-the-board quarter. Still, that’s not enough for the bears, who argue your technological innovation will erode over time. These are the same bears who are grumbling about Tesla’s valuation, which is trading at roughly 3x the combined value of Toyota (NYSE:TM) and General Motors (NYSE:GM), despite delivering 15x-20x fewer cars.
So, with that in mind, Elon, here are some key issues that I hope you will address on your earnings call later today.
TSLA Stock: Production Matters
When asked at the recent annual shareholder meeting what you thought would be Tesla’s long-term competitive advantage in a world where most cars are electric and potentially operating off of Tesla’s autopilot technology, you simply answered “manufacturing.”
No doubt about it, Elon: you are clearly expanding Tesla’s market share by cranking up production. Despite global semiconductor shortages and logistics challenges, Tesla once again topped expectations with an eye-popping 241,000 vehicles delivered in Q3. Tesla has been beating new delivery records every quarter lately, but the latest is up 20% quarter-over-quarter and 73% from a year ago.
In contrast, GM’s Q3 U.S. sales fell nearly 33% to its lowest level in more than a decade.
Your goal of increasing deliveries by 50% per year “for quite a while” looks entirely reasonable — especially with additional capacity coming from two new factories: Gigafactory Berlin and Gigafactory Texas. Both factories are supposed to be producing vehicles by the end of the year — but I hope you’ll give us a status update. After all, Giga Berlin aims to produce 10,000 cars per week.
Tesla’s margins should expand as production accelerates in Q3 and Q4. We’d also like to get a sense for margin expansion on products like the Model Y and Model 3. As these become a bigger part of total revenue, they should be able provide a mix benefit. Finally we’d like to get an update on the Model X, which was refreshed along with the Model S late last year. These are expected to begin sometime in early 2022.
Competition, or Not
As you know, Elon, bears like to focus on your competition. First, let’s talk about China.
Despite concerns about market share erosion, quality and safety, Tesla sold 56,006 China-made vehicles in September, up 27% month-to-month. Rising exports to Europe and the introduction of a cheaper Model Y have helped. I hope you’ll give an update on China, particularly as Tesla faces scrutiny from regulators and the public as well as growing competition from local rivals.
Then there’s the big legacy automakers. Despite their rhetoric, you know the big automakers have largely missed the EV boat. Take General Motors, for example. Even if the company can actually make its own guidance, GM’s electric business would still represent about 15% of Tesla’s. GM says it should have $90 billion in EV revenue at the end of the decade. In contrast, Tesla, by my math, should be generating around $700 billion in EV revenue at that point.
Clearly the legacy carmakers are losing market share in the EV world.
Finally, there’s the EV upstarts, Lucid and Rivian. It’s clear that both companies are targeting niche markets. But with companies like Lucid claiming better battery efficiency, I’d love for you to give us an update on the 4680 battery. Tesla plans to build the new Model Y at Gigafactory Berlin based on this new structural battery pack. I hope you’ll provide an update.
Tesla’s Full Self-Driving (FSD) Beta software is also one of the most important levers for future margin expansion. While Tesla has been gradually recognizing more revenue with the delivery of more FSD features, I’d love to know how to account for these revenues over the next several quarters.
Tesla will be able to recognize historical deferred revenue as new features are implemented. FSD should also expand margins on new car sales. Finally, with so much recent attention on lidar (Light Detection and Ranging) technology as a means of enabling advanced safety features and autonomous driving, I hope you will provide an update on Tesla Vision, your camera-based Autopilot system.
Elon, here’s my take: Tesla in no way should be valued as a traditional automaker. Quite the opposite.
Tesla is more like Apple (NASDAQ:AAPL): the company has the brand name, the customer base, the subscription software that could become the platform for mobility and hardware that’s basically leading edge. In contrast, operating margins for the largest automakers have remained range-bound in the single digits for the last three decades.
Tesla is in the early innings of a powerful operating margin expansion story. With production ramping and FSD becoming a reality, we are just on the cusp of seeing how profitable Tesla can truly be.
And that’s why TSLA stock remains a buy, in my opinion.
Market Analyst, InvestorPlace
P.S. What do you think of Grimes’ Love?
What else are you looking for during Tesla’s earnings? Let me know at firstname.lastname@example.org.
On the date of publication, Joanna Makris did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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