Tesla: Riding The Road To Profitability (NASDAQ:TSLA)

Summary

Tesla has projects that are under development and will make a meaningful impact on the company, but too little is known about them to include them in my final analysis.
Total expenses will be limited to just over $10 billion, reaching this level in 2025, and will not exceed total gross profit at any time.
I expect a total net profit of $4.13 billion in 2020, increasing steadily to $18.799 billion by the end of 2025.
Even without strong long-term demand, Tesla will be able to maintain a profit and pay off = debt, significantly improving Tesla’s odds of achieving long-term profit and self sustainability.
I anticipate Tesla to be worth $375 per share by 2020’s end, $460 per share by 2021’s end, $550 per share by 2022’s end, $645 per share by 2023’s end, and $770 per share by 2024’s end.

This is the conclusion of a series of articles I have written about the future financial impact of Tesla’s (NASDAQ:NASDAQ:TSLA) upcoming production. I’ve discussed how Tesla will be able to obtain 25% margins, Gigafactory 3 production, the Model Y, the Semi and Roadster, solar, and battery storage products. Each article has had a portion at the end discussion the financial impact and this article will put these impacts together and demonstrate the collective impact of Tesla’s future production. I also will analyze Tesla’s debt load in order to determine full profitability along with operating costs and capital expenditures. This article will explore how Tesla will be completely self sufficient in the foreseeable future by maintaining, and growing, profitability.

The Unknowns

The Tesla Pickup, set to be unveiled later this year, is still mostly shrouded in mystery. The “cyberpunk” design Tesla has created for the vehicle has created a lot of confusion about what exactly is means. Besides the design though, we do know a good amount about the truck’s features, from a discussion Musk held on Twitter over a year ago. From this, we learned that the truck will have an option to max at around 500 miles of range, though the battery can also power a 240 volt outlet for power tools as well as an air compressor. The air compressor will utilize the pneumatic system for dynamic suspension, which also is utilizing dual motor all-wheel drive. Dynamic suspension allows for smoother driving, especially offroad, and the dual motor configuration increases torque, with the capacity to tow 300,000 pounds. These advantages, besides range, are things that internal combustion engine (“ICE”) trucks are not capable of. The range is only an advantage over other EVs or electric pickup trucks. An electric pickup truck, especially Tesla’s, does have an inherent advantage over a typical ICE pickup truck.

Later, on Ride the Lightning, Musk said that the truck will start at less than $50,000, which would be less than Rivian’s electric pickup truck starting at $69,000. As of now, Rivian would be the only competition Tesla could face in the electric pickup truck segment, besides Ford’s (but little is known about it right now), but how big is that segment? In 2018, just below three million pickup trucks were sold, though that’s expected to drop down to 2.3 million by 2021, though it's expected to rebound again. Right now Tesla’s pickup truck is garnering more attention than Ford’s F-150, but in the wrong regions. The South is where pickup trucks really shine in America, and that area is still dominated by America’s best selling vehicle, the Ford F-150. In order to really succeed as a pickup truck, Tesla needs to win over the South, something that may actually become easier once Ford introduces its own electric pickup truck, sometime before 2022. As an ambassador of sorts, Ford’s integration of EVs into the pickup truck sector may actually help Tesla get more sales as Southerners see a brand they trust go electric. As the electric F-150 may even be released before Tesla’s own pickup, Ford will begin the real integration of electric pickups before Tesla even makes an attempt. Additionally, being produced in the United States also may help with its acceptance by traditionally ICE dominated areas. However, even without the South, the Tesla Pickup will likely see demand in the Northern, more EV saturated markets, due to its radical design, whatever it ends up being. With the high functionality of the truck, higher than that of an ICE pickup truck, discussed above, it seems that it would be a great asset to have for a construction worker or handyman. Additionally, the truck’s high range and performance, supposedly like that of a Porsche 911, is sure to get it attention even from people who just enjoy the vehicle as-is regardless of its functionality as a pickup truck.

Gigafactory 4 is another huge step for Tesla. While the buildout is unlikely to be as fast as Gigafactory 3’s, due to tighter regulations and a different workforce in Europe, its eventual completion will be huge for Tesla’s continued growth. It will help immensely in capturing the high European demand as Tesla will no longer be forced to pay import fees and can offer their vehicles at lower prices. Markets such as Denmark, Germany, Norway, and many others are leading Europe in rapid adoption of EVs, making this future project, though distant, a very important step in securing Tesla’s brand in Europe. Tesla should have settled on a final location for the factory by the end of this year, though actual construction may not begin for a while. I would be surprised if Tesla completed this factory by the end of 202. All of this being said, there have been no details about production, and pricing of the pickup truck should be taken with a grain of salt, so it would have been foolish to include these in any estimates. The only reason I included these pieces in the article was to make sure I was addressing all future production for Tesla.

Resulting Valuation

This section is the culmination of each article that I’ve released recently, discussing Tesla’s future production. Having completed all of the individual factory and vehicle analyses, I can now start analyzing the total impact for the company. While I didn’t specifically mention the impact of higher efficiencies for existing models, it was used in my analysis to provide higher margins for Tesla’s future vehicles and facilities. In order to successfully determine total future profitability, I will have to include the profit generated by the Model S, Model X, and Model 3 (Fremont production) in the total annual automotive gross profit estimates. The Model S and Model X will likely stay at their annualized production rate of ~64,000 Model S and Model X vehicles (Q1, Q2, and Q3). As the more expensive models, these vehicles command a higher margin than the Model 3, likely hovering around 25%. The average buy price for the two vehicles combined is likely $88,500 because this leans toward the cheaper variants of the vehicles but also allows room for those that prefer highest priced models. Using this analysis, these models will make $1.416 billion annually from now into the foreseeable future. Right now, the Model 3 likely has a margin just below 20%, but still targets 25%. This will likely only be achieved once the Model 3 reaches 10,000 units per week in Fremont as this original assembly is more inefficient than their future assembly lines will be, even as some improvements may come. The average selling price is at $50,000 and stable, according to Tesla’s second quarter report. Here, I will only discuss the Model 3’s Fremont production ramp, not including that in Shanghai. The Model 3 will reach 7,000 units per week by the end of 2019, 8,000 by the end of Q2 2020, 9,000 by the end of 2020, 9,500 by the end of Q2 2021, and 10,000 by the end of 2021 and beyond. Following this, the Model 3 will generate $4.862 billion in 2020, $5.743 in 2021, and $6.5 billion in 2022 and beyond in gross profit. In total, Tesla’s existing production will generate $6.278 billion in 2020, $7.159 billion in 2021, and $8.354 billion in 2022 and beyond in additional gross profit. With this, we now can expect that Tesla’s total gross automotive profit in 2020, 2021, 2022, 2023, and 2024 and beyond will be around $8.783 billion, $15.192 billion, $19.346 billion, $22.929 billion, and $23.867 billion respectively.

Peak Quarterly Automotive Production of Future Vehicles and Facilities:

Source: Author’s projections (using each article linked above)

To reach overall profitability, Tesla also must reduce spending, something that can be broken up into capex and operating expenses. What exactly their future capex may be is far from guaranteed, but it is unlikely to exceed $2.5 billion in the near future. Tesla’s initial guidance for 2019 was between $2 billion - $2.5 billion, and this year included the development of most of Tesla’s biggest future projects, from Model Y assembly to Gigafactory 3 construction. Now that the main parts of Gigafactory 3 and the Model Y assembly has been completed, two of their largest projects, capex should be relatively stable below $2 billion through the near future. Their capex should see a jump when they begin their European Gigafactory construction, maybe in 2021, as they are currently closing on a location for the factory. Additionally, continued construction and production expansion of Gigafactory 1 will likely contribute around $500 million per year in additional capex. Because of this, capex should be stable at $1.3 billion in 2020, $1.8 billion in 2021, $1.7 billion in 2022, and $1.35 billion in 2023 and beyond. Their operating expenses are of more concern for Tesla’s future profitability because of their recurring nature.

As shown by the above analysis of profit potential vs. capex, each project will be able to pay for its own development within, at most, two years, but operating expenses must be paid for every year. This means that you can’t just write it off in just two years time, it must be paid for again and again. Tesla’s operating expenses totaled $1.087 billion in the first quarter and $1.088 billion in the second. However, Tesla’s overall operating expenses aren’t as important to analyze as the individual categories it provides in its balance sheet. The factor that weighs heaviest on their operating expenses is “selling, general and administrative.” What's quite surprising is that, even though deliveries increased 51.11% from Q1 to Q2, this metric decreased 8%, or $56.668 million ($703.929 million to $647.261 million) signaling that Tesla is increasing their efficiency quite significantly. Even more remarkable is that Tesla brought this down by 13.79% year-over-year from $750.759 million in Q2 2018 to $647.261 million in Q2 2019, even as deliveries increased by 133.68% (Q2 2018 deliveries). If Tesla can triumph over their “delivery hell,” as I believe they will through continued learning as they did with production hell, they will be able to continue to bring this number down, even as deliveries increase. The drop in this cost, despite increasing growth, is evidence that they already are improving upon their delivery logistics, even while there's still room to improve. Taking the industry average (GM (NYSE:GM), Ford [Q2 report & deliveries] (NYSE:F), Fiat Chrysler (NYSE:FCAU), Daimler (OTCMKTS: OTCPK:DMLRY), and BMW (OTCPK:OTCPK:BMWYY)) of $4,074 per vehicle in “selling, general and administrative,” we can deduce Tesla’s total cost for this category. Tesla is currently at $6,799 per vehicle (also used Q2 report) which is 66% above the industry average. To find their growth rate, we can average the decline in the cost of “selling, general and administrative” per vehicle from quarter to quarter all the way from Q2 2018 (2018: Q2, Q3, Q4 -- 2019: Q1, Q2). This provides us an average decline in “selling, general and administrative” per vehicle of -13.93% from quarter to quarter, or an annualized rate of -55.72%. It's unlikely that Tesla can keep up this steep cutting, as prices get harder and harder to cut as you go on, so the change to get to $4,074 per vehicle will likely take four years at a decreasing rate. Additionally, as energy products are ordered exclusively online, after Tesla terminated their deal with the Home Depot (NYSE:HD), the cost to sell them is likely relatively small, not exceeding $250 million annually. Using this more precise measurement, we can assume that “selling, general and administrative” will stay at around $4.726 billion in 2020, $6.642 billion in 2021, $7.358 billion in 2022, $7.126 billion in 2023, $7.156 billion in 2024, and $7.306 billion in 2025 and beyond.

The other major contributor is research and development (“R&D”), though this will likely stay consistent at around $330 million per quarter, or $1.32 billion per year, through the near future. The wild card is Tesla’s “Restructuring and other” category because “other” can cover pretty much anything and it jumped from $43.471 million in Q1 to $117.345 million in Q2. What’s even more encouraging is that even $40 million is uncharacteristically high it tends to stay at around $30 million per quarter, or $120 million per year, except for rare one-time expenses (2018: Q1, Q2, Q3, Q4). These one-time expenses also were likely the result of restructuring changes that happened in June 2019 and June 2018. Without the drain of advertising, Tesla also is able to save billions of dollars on their operating expenses. Using this analysis, operating expenses will stay at around $5.966 billion per year in 2020, $8.032 billion in 2021, $8.648 billion in 2022, $8.536 billion in 2023, and $8.496 billion in 2024 and beyond.

Adding annual capex, Tesla would be spending a total of $6.776 billion in 2020, $9.532 billion in 2021, $9.948 billion in 2022, $9.286 billion in 2023, and $9.246 billion in 2024 and beyond. Now that I’ve laid out all of the pieces of the puzzle, I can begin to put them together. With everything that I’ve analyzed throughout this article, it can be expected for Tesla to have a net automotive profit of $2.007 billion in 2020, $5.66 billion in 2021, $9.398 billion in 2022, $13.643 billion in 2023, and $14.621 billion in 2024 and beyond. I’ve also included the annualized interest charges of ~$660, based on the relative consistency shown in Tesla’s earnings report.

Tesla Future Profitability

Source: Author Calculations (using analysis from articles linked above)

Risk Analysis

For this thesis itself to be successful, Tesla has to prove that it can dig itself out of the hole it has dug for itself. The hole is debt. Right now, Tesla has $11.366 billion of it. While the debt load is certainly large, especially relative to Tesla, it’s not all due at once. The charts below depict when certain quantities of debt are due and what the interest for each note is. The cost for each year is as follows: $452 million due in 2020, $1.571 billion in 2021, $2.026 billion in 2022, $1.74 billion in 2023, $1.84 billion in 2024, and $1.8 billion in 2025. All of these loans together add up to $9.429 billion. The reason the below chart puts Tesla’s total debt at $12.16 billion (some notes are due past 2025) instead of the $11.366 Tesla lists is because the table below takes into account the full interest on each loan. That means that each total listed above also takes into account the interest that must be paid when due. I decided not to go past 2025 because it was the last year that is of significance due to proximity and cost. As such, I believe I’ve outlined my point that Tesla will be entirely self sufficient, even with debt payments as none of them exceed the annual earnings that I’ve laid out above.

Images Source: stockdividendscreener.com

Debt isn’t the only thing that bears tend to list as reasons Tesla will fail. Production and demand are the other potentially fatal flaws for Tesla, but I've discussed both production and demand at length in my previous articles. However, it's worth exploring the possibility of weaker-than-expected demand. The above predictions rely on at least 100% demand for the vehicles, relative to production, making it an integral part of this thesis. Tesla has, up until this point, operated with demand exceeding their production capacity as each quarter sees deliveries matching production, or higher, due to cars in transit during previous quarter deliveries. While apparently sustainable for the time being, what’s to keep this from changing as the vehicles have been out for longer and production starts to increase? The two major vehicles that have to answer the question are the Model 3 and Model Y, as both are the most high-volume vehicles. While Tesla continues to prove that its demand is strong, this doesn’t set a guarantee for the future. The main reason I believe that Tesla’s demand will last is simple: They’re the best vehicles on the market. An article by fellow SA author Sean Chandler highlighted this point when discussing the new Porsche Taycan. Tesla is still quite ahead of any EVs in terms of technology, but I said vehicle, not just EV. Tesla has been the best-selling premium vehicle in the US since Q4 2018, when it first broke out into mass production. I’ve also discussed why the Model 3 will continue to have strong demand in a previous article and I discussed above in more detail why the Model Y should have similar, or even greater, success. Essentially, Tesla will continue to enjoy this high demand, but even if they don’t, they will be successful.

With just 75% of demand, Tesla would be making a total net profit in 2020 through 2025, following above guidance, with a total of $1.191 million in 2020, though debt payments would cut that to $739 million. Moving even further past that, Tesla would turn a $1.335 billion profit in 2023 with just 50% demand and debt payments and would continue to turn a profit in the years to follow. If that doesn’t prove self sustainability, I don’t know what does. These profits also assume that operating costs won’t decrease due to reduced delivery volume, even though that would likely be the case. Even if Tesla’s demand were to fall this low, it's quite unlikely that the change would happen this fast, especially as signs of demand are still high. With 90% of orders from non-reservation holders in the second quarter, as well as 63% of trade-ins coming from non-premium categories, and an increased order backlog, even after a record quarter, Tesla’s Model 3 has demand to stay. The Model Y, with its larger market, certainly has demand to last as it hasn’t even begun production yet. I do still firmly believe that Tesla’s demand will continue to outpace its production, for the reasons I’ve already stated, but this analysis adds even more reason to believe in Tesla’s future profitability. With profits, even at 75% or 50% demand, it's quite difficult for bears to make the bankruptcy case going forward.

How to Trade

I believe that the greatest insight this article provides lies in the confidence with which I predict Tesla will be completely self sufficient through the future. Without consistent loss of capital, Tesla will be free from the need to incur more debt in order to stay afloat and will instead be able to operate more freely. As a growth company, this is an incredibly important step in the young company’s life. Because of this, the long-term potential of Tesla is, to me, the sweetest. I believe that initial profits may send the stock higher initially, but as investors begin to expect profitability, it will begin to have less of an impact. That being said, I expect Tesla to experience moderate growth through the foreseeable future as their production seems to be consistently underestimated. I anticipate Tesla to reach a value of $68 billion ($375 per share) by the end of 2020, $84 billion ($460 per share) by the end of 2021, $100 billion ($550 per share) by the end of 2022, $117 billion ($645 per share) by the end of 2023, and $140 billion ($770 per share) by the end of 2024. These prices do not take into account any future dilution or splits, though, due to suitable profits, dilution shouldn’t be of much concern. This article also doesn’t take into account any possible future business with the Tesla Network to avoid detracting from the main point of the article and is much less of a certainty than vehicle production. With all of this information considered, I would recommend taking a long position with Tesla.

This article was written by

Long Term Tips

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I tend to focus on long-term stock ideas, oftentimes rooted in tech or EVs. I have been a casual investor for years with solid returns and want to share what I have learned with others who may find value in my thoughts.

Analyst’s Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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