Tesla: Robotaxis, Regulatory Credits And Greenlight Capital

Summary

• Inflated by the Fed holding down interest rates and larger and larger balance sheet, Tesla stock has returned more than 400% this year with split adjustment.
• As demonstrated in IDC’s survey, consumer's preferred autonomous vehicle providers are multi-disciplined large technology companies and established automotive manufacturers.
• Understanding the unit economics of a business, Tesla’s regulatory credits are recognized per unit basis of value creation.
• Tesla has already demonstrated that the barriers to entry are not insurmountable as Apple can afford to invest billions in R&D without endangering the company.
• Tesla’s electric vehicle is a quality business with a strong brand that provide attractive forward internal rate of return and positioned for the future with its autonomous robotaxis.

Inflated by the Fed holding down interest rates and larger and larger balance sheet, Tesla stock has returned more than 400% this year with split adjustment.

Seeking Alpha contributor Montana Skeptic wrote an article discussing the relationship of Tesla’s share price to fundamentals as pointless. This article discusses a variety of topics, including robotaxis and regulatory credits, and Tesla’s share price should be based on probabilities of Tesla achieving its autonomous robotaxis.

Tesla (NASDAQ:TSLA) emphasizes attractive styling designs and manufactures fully electric vehicles, energy generation and storage systems to accelerate the word’s transition to sustainable energy. Highly improbable to go bankrupt, Tesla is capitalized in the near term and announced the company would be raising $5 billion additional capital. Contrary to its technological development in autonomous robotaxis, Tesla is valued far above its peers of automobile companies and overvalued compared to software technology companies.

The fundamentals of Tesla can be analyzed in many ways and prove or disprove in the short term as its stock quotes can diverge from reality. Tesla is a growing company expanding its capacity and building more gigafactory plants. Drawn by market enthusiasm with high valuations, the company’s autonomous robotaxis is a disruptive innovation and a new business model that many analysts do not know what Tesla will earn in five years. As demonstrated in IDC’s survey, consumer's preferred autonomous vehicle providers are multi-disciplined large technology companies and established automotive manufacturers.

Business Moat

An iPad on wheels, Tesla is a leader in autonomous vehicle technology and the company is overvalued compared to technology companies with a price to sales multiple of more than 16 times revenue to Alphabet’s (NASDAQ:GOOGL) (NASDAQ:GOOG) approximately 7 times revenue and about 0.3 times revenue for GM (NYSE:GM). A competitive advantage with its massive data collection, Tesla has piloted more than 3 billion miles of autonomous driving. In comparison, Alphabet’s Waymo unit has driven more than 20 million miles on public roads and General Motors Cruise recorded less than 500,000 miles driven last year.

The automotive market is undergoing a massive transformation and the first company to enter the ride-hailing market with a consumer preferred autonomous vehicle will be the dominate leader of the industry. Manufacturers and technology companies have begun to include driver assistance systems into vehicles to give consumers a more convenient and safe experience. Developing fully autonomous vehicle capabilities requires automotive manufacturers and technology companies to deploy hundreds of vehicles equipped with sophisticated cameras and sonar sensors capturing data on crash avoidance and safety. Tesla’s competitive advantage is to leverage its consumer fleet to test drive autonomous capabilities and send valuable data back to the company over the air.

Tesla stands ahead of its competition in nearly every category and Tesla’s development of dual redundancy Full Self Driving (FSD.) capabilities remain by far and away, the biggest opportunity in the near term. In addition to Tesla's advantages in battery technology and over the air software updates, Tesla is the only company in the world producing its own vehicles and batteries as well as its own in house chip for FSD. Vertically integrated, Tesla’s neural network artificial intelligence chip is capable of processing 2,300 images per second, a 21 time improvement in frame than its previous computer which was made by Nvidia (NASDAQ:NVDA).

Robotaxis Prospects

Tesla vehicles manufactured all have hardware necessary for FSD and over the air update software that will enable customers to use Tesla’s on demand ride-hailing fleet and generate income. As a ride-hailing network, Tesla electric vehicle owners could potentially charge passengers per mile with Tesla receiving a platform fee that generates high software profit margins for the company. Once fully developed, Tesla’s FSD software technology has a very low marginal cost and the company’s FSD could generate recurring revenue and earnings at higher margins with its robotaxis network.

A business model transitioning from manufacturing vehicles to technology services, Tesla launched traffic stop signs and lights last quarter, which compares software algorithm to real world driver behavior across tens of millions of instances around the world. As it currently stand, Tesla continues to improve its autopilot FSD functionality and the company is confident its proprietary FSD software being complete by the end of this year. Tesla CEO Elon Musk envisions full autonomous level-five vehicles in operation next year in some markets and GM’s Cruise Origin has launched its limited autonomous shuttle service this year.

Regulatory Credits

Regulatory credits are commonly viewed in terms of revenues and not in terms of units of vehicle deliveries. Charting Tesla’s regulatory credits and vehicle deliveries illustrates a sizable increase in regulatory credits for Q1 and Q2 of 2020.

Consistent with Tesla CFO Zach Kirkhorn on the company’s Q2 earnings call, Tesla expects regulatory credit revenue to double this year relative to last year. The above chart shows regulatory credits for the first half of 2020 is more than twice the value of 2019.

Regulatory Credits per Electric Vehicle

A clearer representation of Tesla’s regulatory credit revenue is to divide regulatory credits by vehicle deliveries to calculate regulatory credits per unit of electric vehicle for each quarter.

Up and down from one quarter to another, the average regulatory credit per unit of electric vehicle for the last two years or eight quarters is approximately $2,300. As a form of free market exchange, Tesla has received an average of $2,300 regulatory credits per unit of electric vehicle from major automakers failing to meet regulatory requirements that are facing fines or producing electric vehicles at a loss.

Greenlight Capital

Tesla has been popular within the short selling community, including options short spreads, over the past few years. In Tesla’s latest 10-Q filing and Greenlight Capital's Fund Report, Tesla recognizes revenue of regulatory credits at the time of the regulatory credits is transferred to the purchasing party. Deconstructing Tesla’s regulatory credits, a more appropriate method is to evaluate Tesla’s regulatory credits in relation to units of vehicle deliveries - per car that a counterparty is purchasing - and not just on a quarterly 10-Q basis.

As Tesla's 10-K filings are more detailed and in depth than its 10-Q filings, Tesla’s regulatory credits are in accordance through auto sales for each unit of vehicle deliveries and not mandated to correspond to counterparty’s 10-Q filings. Greenlight Capital’s questionings and assertions in its Fund Report that Tesla and its counterparty’s 10-Q regulatory credits do not correspond are misleading.

Understanding the unit economics of a business, Tesla’s regulatory credits are recognized per unit basis of value creation.

Debt

In Statement of Cash Flows, Tesla raised more than $2.3 billion through a public secondary offering in Q1 of 2020.

The company plans to raise $5 billion in stock to strengthen its balance sheet and capital structure. Tesla has about $8.6 billion in cash and cash equivalents as of Q2, up from $6.3 billion in the first quarter, and close to $14 billion adding latest capital raise.

With $2.4 billion in convertible senior notes that mature in 2021 and 2022 and estimation of average annual capital expenditures to be $2.5 billion, the company is capitalized in the near term. In a capital intensive industry, Tesla has a total debt and finance leases of $14.1 billion.

Risks

Tesla has already demonstrated that the barriers to entry are not insurmountable as Apple (NASDAQ:AAPL) can afford to invest billions in R&D without endangering the company. Autonomous vehicle startups Luminar (NASDAQ:LAZR) and Zoox are arriving and Tesla has to continually develop and analyze fully autonomous driving data to gain a competitive advantage. To stay competitive and maintain automotive gross margin and market share, Tesla has to produce fresh and newer versions of its electric vehicles. Competing electric vehicle startups Nikola (NASDAQ:NKLA), Workhorse (NASDAQ:WKHS), Lordstown Motors, Lucid Motors, Rivian, Fisker and Canoo are bringing new vehicles to market over the next year or two.

Bankruptcy is not a risk given that Tesla has a healthy balance sheet in the near term, but the company burned through close to $900 million with a negative free cash flow in the first quarter.

The auto industry is a competitive industry with competitive dynamics as the company is susceptible to lower average selling price, automotive gross margins contract and reduction in regulatory credits from competitors bringing vehicles to market. Tesla could encounter manufacturing and supply chain issues and the company has to affordably expand manufacturing capacity to be capital efficient. Tesla is a status symbol with a cool factor, but selling cars is a cyclical business and there is a risk from the recent pandemic shutdown and global slowdown in auto sales.

Valuation

The global autonomous ride-hailing industry is a $5 trillion market opportunity, according to Dan Ammann of General Motors’ Cruise unit. Considering the company’s potential in autonomous robotaxis, Tesla has become the world’s largest automaker in market capitalization at around $400 billion. According to Catherine Woods of ARK Investment Management, Tesla is incredibly undervalued and projects an expected value of $1.4 trillion in market capitalization by year 2024. ARK Investment Management assigns a 30% probability for Tesla to achieve full autonomous driving and 25% probability for its bull case valuation in share price and market capitalization.

Tesla is a growing automotive technology company positioned to expand to broader markets with an innovative service business. The company’s electric vehicle is a quality business with a strong brand that provide attractive forward internal rate of return and Tesla is positioned for the future with its autonomous robotaxis. Tesla competes in massive, trillion-dollar markets and the company has a lead on its competitions. The value proposition of its technological achievements, selling superior products with what is regarded as a commodity in the automotive space is undervalued.

Source: Elon Musk

Elon Musk

Elon Musk is an industrial celebrity, CEO of Tesla and SpaceX, and has a history of reducing operating costs for Tesla to be capital efficient and gain economies of scale. Detailed in the book Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future, SpaceX’s main competitor is United Launch Alliance (ULA), with manufacturing facilities in Alabama. Mr. Musk has lowered the cost of reaching the International Space Station from $380 million charged by ULA per flight to $90 million charged by SpaceX per flight.

Tesla has minimum probability of going bankrupt with access to capital markets but faces global competition from traditional automakers introducing electric vehicles of its own and startups coming to market. A regression toward the mean, Tesla has modest probability of validating its market capitalization and earn price to sales multiple comparable to technology companies. Collectively with an integrated electric vehicle and FSD software, Mr. Musk is driving massive changes in the automobile industry to produce its fleet of autonomous robotaxis and expand manufacturing capacity to bring electric vehicles to commercial markets.