Tesla: Downgrading On Macro, Valuation Worries In Spite Of Strong Q4 Deliveries

Jan. 07, 2022 3:23 PM ETTesla, Inc. (TSLA)124 Comments
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MangoTree Analysis
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Summary

  • TSLA reported 4Q delivery numbers Sunday, January 2nd. Headline numbers came in well above expectations.
  • Model S and Model X sales were strong, but Model 3 and Model Y really drove the headline results.
  • The blowout delivery numbers are enabling higher 2022 delivery expectations and earnings expectations. We are revising estimates for 4Q and the rest of next year higher.
  • TSLA continues to benefit from a structural shift in demand from ICE to BEV, and is continuing to unlock supply (Berlin and Austin most recently) to enable the fulfillment of this demand.
  • We're downgrading from Hold to Sell. PT lowered from $900 to $875. Bear case of $393. Bull case PT of $1,182.
Tesla Service Center. Tesla designs and manufactures the Model S electric sedan IV

jetcityimage/iStock Editorial via Getty Images

Headline Beat From Tesla Drives Our Estimates Higher For 4Q and FY2022

Tesla (NASDAQ:NASDAQ:TSLA) posted their 4Q delivery numbers over the New Year's weekend. Heading into the print, we made a long trade that we still are holding. Our reads had Tesla at 270k+ deliveries for 4Q vis-a-vis analyst expectations for ~266k from the analyst community. What we got was really a bombshell: Tesla delivered ~308k vehicles in 4Q to bring their 2021 total to ~936k cars.

How This Changes The Narrative

Well, to be blunt, Tesla's deliveries report doesn't change the narrative at all, it just re-emphasizes the bull case for the stock. Continue delivery growth via supply unlocks is the key to Tesla's success. As a result, we are taking up our expectations for deliveries, revenue, and profits for 4Q and next year.

The way we think of it is this: Tesla is not demand constrained by any means. They are supply constrained. Tesla's run rate deliveries are ~1.23m based on 4Q deliveries. That's huge, and it's excluding Giga Berlin and Giga Texas, which we expect to hit meaningful scale in 2H.

If Tesla isn't demand constrained (our base case and bull case assumption), then we think they could quite easily hit their 50% annual delivery growth target for the 2022 fiscal year. 50% delivery growth off 936k is ~1.404m units in 2022, which assumes ~170k incremental delivery units from Berlin and Austin for the full-year. This could be incredibly conservative, depending on the velocity of production from those factories.

Either way, it looks like Tesla should be able to achieve their goals in terms of sustaining incredibly high levels of growth in deliveries into this upcoming year.

4Q'21 Estimates & FY2022 Estimates

We're adjusting our financial KPI estimates for 4Q now that we have the numbers on deliveries.

4Q KPI Estimate
Deliveries **actual 308,600
ASP $51,500
Auto Revenue (in $b) $15.893
Auto Gross Margin (in %) 30.8%
Energy Revenue (in $m) $804.6
Energy Gross Margin (in %) 1.5%
Service & Other Revenue (in $m) $915
Service & Other Gross Margin (in %) -1.5%
OpEx $1.908
Total Revenue (in $b) $17.613
Share Count (in b) 1.004
EPS $2.88

The new deliveries number is the key driver of our north of consensus business KPIs. Additionally, we saw Tesla raise prices on their vehicles across the board in 4Q, which leads us to have a higher sequential estimate for ASPs in 4Q than in 3Q. As a result, we gross margin expansion into the low 30s for the auto business, while energy and service is at or near breakeven.

FY2022 KPI Estimate
Deliveries 1,404,260
ASPs $51,500
Auto Revenue (in $b) $71.898
Energy Revenue (in $b) $3.661
Service & Other Revenue (in $b) $4.267
Total Revenue (in $b) $79.826
Gross Margin (in %) 27.2%
OpEx (in $b) $8.24
Tax Rate (in %) 15.0%
Shares Outstanding (in b) 1.004
EPS $11.41

We're modeling Tesla's deliveries to grow by 50% in-line with management's delivery CAGR guide. Again, this estimate could prove conservative (or aggressive), and we're going to stress-test it in the valuation section of our article. The idea is, continued supply ramps out of core factories (Shanghai + Fremont + Reno) as well as new factories (Berlin + Austin) enable deliveries growth as supply catches up to demand. Inflation and mix shift towards Model Y enables ASP expansion and gross margins to expand as well. We model aggressive hiring in 2022 at new locations and continue expansion of service centers, superchargers, and R&D to lead to high 2022 OpEx as well.

Valuation - Tweaking Our Base Case, Bear Case, and Bull Case Assumptions & Targets

'22E Base Case Expectation
Deliveries 1,404,260
ASPs $51,500
Auto Revenue (in $b) $71.898
Energy Revenue (in $b) $3.661
Service & Other Revenue (in $b) $4.267
Total Revenue (in $b) $79.826
Gross Margin (in %) 27.2%
OpEx (in $b) $8.24
Tax Rate (in %) 15.0%
Shares Outstanding (in b) 1.004
EPS $11.41
Target YE'22 Rev. Multiple 11x
Target YE'22 Valuation (in $b) $878.086
YE'22 Price Target $874.59
+Upside/-Downside -19.62%
Rating Sell

In spite of the fundamental optimism we have on Tesla, we have to downgrade the stock at this point merely on the back of a negatively skewed r/r. We like the inertia of the business coming into 2022, with high demand, supply unlocks in Texas and Germany, continued BEV adoption, and strong competitive foothold. However, we're modeling ~20% downside to our base case, and we can't put a hold rating on that. Bear in mind, our framework for hold ratings is a stock between 10% downside and 10% upside ahead. Tesla is well below the 10% downside threshold, thus the change of rating.

We think the biggest risk to Tesla is macro and valuation. On a macro level, the Fed's signaling of not just taper and rate hikes, but quantitative tightening as well surprised us quite a bit, and is forcing markets to adapt, pricing risk-on assets lower. As a result of hawkish policy, we see higher yields by year-end then we previously expected, leading us to believe that growth multiples will contract. We think 11x NTM sales embodies a growth tech company with optionality (autonomy + energy) while also asserting that they are early innings on the BEV opportunity.

On the fundamental level, we have mild concerns about competition to Tesla's future product lineup (i.e. semis, compacts, and pickups in particular) from legacy OEMs and new startups. We think Tesla has a lock on BEVs in their current market segment, but they haven't addressed these other segments yet, and we are concerned that players with faster and more focused development velocity might surpass them in the intermediate term.

Additionally, we are concerned by the effects that quantitative tightening, inflation, and interest rate hikes could have on the economy over the next 6-18 months. If the Fed's actions spark reduced economic activity, cars are among the first items to depart a consumer's shopping cart.

'22E Bear Case Expectation
Deliveries 1,044,000
ASPs $51,500
Auto Revenue (in $b) $53.766
Energy Revenue (in $b) $3.105
Service & Other Revenue (in $b) $3.863
Total Revenue (in $b) $60.734
Gross Margin (in %) 26.0%
OpEx (in $b) $7.84
Tax Rate (in %) 15.0%
Shares Outstanding (in b) 1.004
EPS $6.73
Target YE'22 Rev. Multiple 6.5x
Target YE'22 Valuation (in $b) $394.771
YE'22 Price Target $393.20
+Upside/-Downside -63.86%

In this scenario, the Fed's actions drastically reduce economic activity, and the US economy moves towards a recessionary state, thus reducing a lot of the incremental demand unlocks that we're modeling for Tesla's 2022. Additionally, this model has inflation increasing input costs and leading to a slight gross margin deterioration relative to base case.

Additionally, we are factoring in incremental pressures of competition, reduced BEV incentives in China (weighing on demand), and a new narrative on Tesla.

The narrative we see in the bear case is Tesla becoming a tech stalwart of a business, rather than a business early in its growth phase. As such, we give Tesla a tech stalwart multiple to reflect this of 6.5x our bear case sales estimate. We see this as being relatively in-line with big tech stalwarts of today.

'22E Bull Case Expectation
Deliveries 1,580,000
ASPs $52,500
Auto Revenue (in $b) $82.95
Energy Revenue (in $b) $3.808
Service & Other Revenue (in $b) $4.525
Total Revenue (in $b) $91.283
Gross Margin (in %) 28.5%
OpEx (in $b) $8.637
Tax Rate (in %) 15.0%
Shares Outstanding (in b) 1.004
EPS $14.71
Target YE'22 Rev. Multiple 13x
Target YE'22 Valuation (in $b) $1,186.68
YE'22 Price Target $1,181.95
+Upside/-Downside +11.03%

Our bull case models a quarterly deliveries run rate of 320k units per quarter from Fremont and Shanghai, plus an additional 300k annual units from Berlin and Austin cumulatively in 2022. Additionally, we target 28.5% gross margins on continued manufacturing efficiencies, reduced battery production costs, etc. We think that upside driven to gross margins is more likely in this scenario as Tesla passes inflation on to a willing consumer. In this scenario, we model north of consensus ASP pressure (inflation driven) as well as strong margins driving profitability higher.

Multiple-wise, we're targeting 13x sales for our bull case, reflecting realistic optionality in energy and autonomy, as well as incredible strength and upside in core auto (Cybertruck, Semi, Model 2, etc.). We find this to be an appropriately aggressive multiple considering the current market environment.

Summary - An Unfortunate Development in the Macro Picture Forces Us To Downgrade

We got a great deliveries print from Tesla, but unfortunately, macro developments have weighed on our valuation outlook for Tesla stock in this upcoming year. As a result, we think the aggregate risk/reward profile now skews downward and investors will face a tough hill upwards. Keep in mind, our bull case is modeling ~11% upside, versus our bear case modeling downside of ~64%. We think r/r skews downward, so we're downgrading the stock from Hold to Sell, reducing our PT from $900 to $875.

This article was written by

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