In today's brief, we will briefly consider the Tesla thesis via a five point framework.
I say briefly because each line of business is deserving of its own analysis, complete with assessments of the unit economics of each line of business, e.g, understanding Tesla Energy's Megapack business through the lens of $/kwh alongside the total kwh deployment potential long term, and I have performed this in a series of notes, so this is the summary of those notes.
The five pillars of my Tesla thesis are as follows (the bolded text represents the key element of each point; it represents the foundational pillar on which LAS' Tesla thesis is based):
- While Tesla EVs will likely not hit the 20 million delivery target that the company and bullish analysts expected in bygone years, the company still offers the best vertically integrated EV on earth, rivaled only by select Chinese auto companies (more on this in a moment). Specifically, its most "fat part of the bell curve" friendly Model 3 (as in it appeals financially to the greatest number of consumers) offers the best range/$ of any EV. Tesla also has the best software in its vehicles, and the relatively high assurance that owners will receive the necessary software support over the next two decades to keep their Teslas running. This is arguably the most important element of the thesis, and it's why some pundits have speculated that the auto market will consolidate into just a handful of players globally as EVs become the prevailing vehicle paradigm: EVs need highly competent software teams to keep them running at their best. This means that consumers cannot buy from a manufacturer that may or may not go bankrupt and thus drop software support. Auto companies go bankrupt often, so it's a huge gamble to bet on any other EV other than Tesla or select Chinese companies, and Fisker recently demonstrated this to us when it went bankrupt and dropped software support for its fleet of vehicles, causing a lot of pain to those who bought the vehicles (the vehicles become "bricked," or inoperable, without ongoing software support). Teslas also offer the best acceleration per dollar, routinely achieve the best safety scores, and currently hold the spot for the most American made vehicle one earth, which has been a spot traditionally held by Ford, and this has driven patriotic consumption of Ford vehicles for decades. I can personally say that, as an American, I drive the most American made vehicle on earth, and that's something to be proud of for me, as someone who believes in America's way of life. Very notably, Tesla set a target of 20M EV deliveries by 2030 in its 2022 impact report, and, as of today, it's very evident that it will not remotely achieve this target, with the company delivering about 2M/year presently in 2024. I do not believe that Tesla needs to deliver 20M vehicles by 2030 for the thesis to work from these levels over the long run because its adjacent products, and more specifically, its Tesla Energy Megapack business could be worth more than its entire current enterprise value over time. I'll also add that interest rates rose at one of the fastest rates (it was the fastest for a certain timeframe) in the history of America recently, and, very importantly, interest rates on credit cards, auto loans, and consumer credit broadly have been far higher, and therefore credit has been much tighter than the prime rate (set by the Fed) would suggest. As interest rates rise, this puts downward pressure on lending activity of all kinds, and especially luxury vehicle lending, such as that from which Tesla benefits. I do believe that Tesla's EV deliveries resume growth once we emerge from a tighter lending environment, or once this becomes the new normal and Tesla fully laps all its tough comps. It's worth also noting, as an side, that the yield curve remains inverted, which has been a harbinger of eight out of the last nine recessions. To close, Tesla EVs remain compelling products, though perhaps not as compelling as CEO Musk and the excessively bullish Tesla folks thought, but, as I will discuss in a moment, we don't need Tesla 20M Deliveries™ by 2030 for the thesis to be very successful from these levels.
- The second component of LAS' Tesla thesis is its Supercharger Network, which is genuinely unrivaled. Arguments could be made that Tesla EVs, from purely a range, value, acceleration, or even aesthetic perspective, are not the most attractive EVs, though I believe they are, and the software component makes them very obviously the only choice. That said, Tesla's Supercharger Network also augments this ease of choice. While Tesla has indeed opened its network to other EVs, likely as a strategy to drive Megapack purchases over time because EV adoption will increase electrical grid demand by orders of magnitude, there's no guarantee that Tesla continues to offer this to all EVs in perpetuity, and EVs do not make sense without a robust Supercharger Network. Even at Tesla's current Supercharger Network scale, there's some "dead zones," so to speak. For other EVs, everywhere is a dead zone without Tesla, and it's a huge gamble to buy these EVs knowing that there's weaker software support, no guarantee that the support will be around in a few years, and, in the vein of this second point, no guaranteed, vertically integrated Supercharger Network.
- The third element of LAS' thesis for Tesla is its Full-Self Driving product. The indisputable reality is that Tesla is the only EV OEM, aside from select Chinese auto companies (see previous comment on consolidation of industry), that has fielded a remotely viable, true FSD product. Waymo and the LiDar geo-fenced products are weak. They are not true FSD. They cannot take me from Panama City, FL to Miami with sub 1% intervention (need for intervention out of total miles driven expressed as a percent). Tesla FSD can do this today. Importantly, there is a data-moat and network effect moat that Tesla has already built for this product, which CEO Elon Musk described on the company's most recent earnings call: "So as our fleet grows, we have 7 million cars going to – 9 million cars going to, eventually tens of millions of cars worldwide. With a constant feedback loop, every time something goes wrong, that gets added to the training data and you get this training flywheel happening in the same way that Google Search has the sort of flywheel, it's very difficult to compete with Google because people are constantly doing searches and clicking and Google is getting that feedback loop." -Elon Musk, CEO, Q1 2024 Tesla Earnings Call. There's simply not other OEM on earth, outside of Tesla's few Chinese competitors cited earlier, that has the necessary vehicles fielded and the necessary training data to create a rival, and this widening gap grows by the day.
- Lastly, we have Tesla Energy, which I believe to be the most compelling line of business that Tesla operates today. Specifically, Tesla Energy sells a product called Megapack, and this represents utility-scale stationary storage, and this represents a solution to the most difficult and vexing problem of the alternative energy revolution: Storage of energy generated by alternative sources. Tesla's utility-scale stationary storage Megapack product represents a commercially viable solution to this problem, and, as the recent Tesla data suggested, it's being adopted. Tesla has laid out a goal of 1.5k gwh of stationary storage deployments by the early 2030s, and it just reported numbers indicating that it's at about 40 gwh/year presently. Importantly, this is a business that possesses higher margins than its legacy auto business, so scaling to 1.5k gwh would create what amounts to one of the largest energy companies on earth. Tesla currently sells each Megapack at about $250/kwh. At 1.5k gwh, Tesla energy would generate hundreds of billions in sales at these unit economics. I believe Tesla's Megapack business is "its AWS," so to speak, and the recent gwh delivery numbers were extremely heartening.
- The last element of LAS' thesis is that Tesla fits within LAS' first and third foundational investment frameworks. It has created a vertically integrated car platform (manufacturing, software, charging, service, insurance, etc.), and it has demonstrated a cultural ability to successfully field new products, such as its Megapack product.
Disclosures:
L.A. Stevens has rated Tesla a "buy."
