With quite a bit of media noise, we were recently informed that Tesla has launched a website in Hebrew and will start selling cars in Israel, as early as next month.
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Tesla is without a doubt, the most exciting and talked about automaker in the world. It manufactures electric vehicles that are characterized by exceptional performance, both in the level of travel range between charges and in acceleration and travel speed, which can usually only be seen in exotic sports cars. A fantastic statistic, which many non-vehicle geeks do not know, is that Tesla’s Model S accelerates from zero to one hundredth fastest of all vehicles in the world. Yes faster express, Lamborghini, Bugatti and other supercars.
Tesla has 4 models of vehicles: Model 3 – “family” sedan car, model S – a large sedan car known in Israel as an executive car, model Y – compact SUV and model X – luxury SUV in addition to them there are 3 other models in the design.
Tesla is not just a car manufacturer, its energy activities include production planning and installation of solar systems and batteries. It is considered a leader in installing solar systems on the roofs of private homes and commercial properties and the highlight in this area, are Tesla batteries. Lithium-ion batteries that are used, among other things, to store solar energy that is produced during the day.
Recently, Tesla’s market capitalization crossed the $ 800 billion mark, which is greater than the market capitalization of all traditional car companies combined. Under every fresh tree, there are those who understand and those who are a little less, about the unreasonable price that Tesla’s share has reached – “bigger than all the companies together, can not be” so they say. This article gives some points to think about, it seems that if Tesla achieves its ambitious goals, current market value and share price, while not bargain prices, they are also not detached from reality.
Is there a bubble in Tesla’s share price? The global car market sells about 70 million passenger cars each year, about 20 million of them in China. The global car market is characterized by relatively low growth, as the world population is growing, but urbanization processes and the establishment of large metropolitan areas rich in public transportation solutions reduce the number of potential customers.
The world market leader is the Volkswagen Group with its many brands Volkswagen, Audi, Skoda, Seat and others. The German concern sells about 10 million passenger cars a year. In second place, Toyota with about 9 million cars a year, after which you can find, among others, GM, Ford and the Hyundai / Kia concern with about 7 million cars each. Bottom line, the vast majority of the global car market is dominated by only 5 concerns. In the area of luxury cars, BMW and Daimler (Mercedes) sell about 2.5 million cars each year.
Tesla is a coveted car and we were not surprised that the media dealt a lot with its immigration to the Holy Land. Tesla is purchased online on the company’s website and in order to order Tesla, you must register on the website and leave a small down payment of “seriousness fees”. Tesla publishes in its financial reports, the average number of days from the end of production to the delivery of the vehicle, this number was in the last reports only 11 days! In the automotive world, this is an unusual figure, as traditional companies tend to produce inventory of vehicles that fills various sales pitches and it takes much more than 11 days until an average traditional vehicle is sold.
Metaphorically the rapid sale of Tesla vehicles is reminiscent of the onslaught of iPhone buyers, who are waiting in huge queues before the launch of a new iPhone. No wonder Tesla is a carmaker in rapid growth. In the fourth quarter of 2020, it produced 180,000 cars, compared to 96,000 cars in the same quarter last year. Although the company has almost doubled production, it is not enough to meet demand and so the company is currently setting up new plants in the US and Berlin. In a cold calculation, the annual production capacity, according to the last quarter, is about 720,000 cars per year and according to company reports, production expansions The existing plants currently under construction are expected to bring the company to produce about a million cars a year.
Will Tesla conquer the summit? The world has begun a process of switching to electric vehicles and autonomous driving, and the place of fossil-fueled vehicles is expected to diminish. The long driving range of Tesla’s electric motors 480-660 km is higher than the driving ranges of competitors’ electric vehicles. Tesla vehicles are in full communication with the company, which allows receiving software updates “from the air”, without reaching the garage. About driving, which will allow it to learn better about road driving habits.This feedback makes an unprecedented contribution to Tesla’s autonomous driving system, which is considered to be the most advanced, far beyond its competitors’ major automakers.
The Wall Street Journal recently published an article highlighting Volkswagen’s great failure to present id.3 as a competitor to Tesla. They claim $ 50 billion “caused a shortfall”. After failing to present a worthy competitor to the Tesla Model 3, Volkswagen was forced to pull out another weapon, sharply cutting the price of id.3 and turning to customers looking for a cheap replacement for the Tesla.
If so, in order to estimate the value of the company, we have prepared several possible scenarios for its growth in the coming years. As we mentioned, the company is already capable of producing about a million vehicles a year, even before the launch of the new factories. At the same time, we also mentioned that the company does not produce for stock, since its vehicles are sold in less than two weeks from the moment they are completed, meaning that the bottleneck is in production and not in marketing. Will Tesla reach BMW sales? Sales of about 2.5 million vehicles a year? Or will Tesla become a leading manufacturer like Volkswagen or Toyota with sales of 9-10 million vehicles?
Targets for profits Another strong Tesla card that its traditional competitors do not have is its high profitability rate. The company reports gross profitability (including “green” benefits on zero emissions), at a rate of 24% -27%. That means at an average selling price of $ 35,000 per car, Tesla earns a gross of about $ 8,000. This is a profitability rate that is about twice as high as the main competitors. Given the company’s lean and effective marketing method, using the website there is room to assess that you can display high operating profitability. A sales scenario of 2.5 million vehicles per year will, according to this calculation, bring us to annual sales of $ 87.5 billion and a gross profit of $ 20 billion. The conquest scenario, that is, sales of 10 million vehicles a year, similar to Volkswagen and Toyota, will bring Tesla under these assumptions to sales of $ 350 billion and a gross profit of $ 80 billion. In our economic model, we estimate that Tesla will record, in addition to the profit scenarios from the sale of the vehicles, significant profits from energy activities (solar and batteries). On the other hand, the company will be required to make significant investments, in order to build a production capacity that will enable the construction of 10 million cars a year. We estimate that the company’s net cash flow in this case will be $ 40-50 billion per year.
Bottom line The global car market is expected to grow only moderately, no customer will buy Tesla just because it is an attractive brand. Tesla will have to grow at the expense of its competitors. Any of the leading manufacturers today, who did not know how to offer a worthy alternative in the field of electric vehicle and autonomous vehicle, will probably disappear within a decade.
With a market value of $ 800 billion, Tesla is not a cheap stock, but its value is not unfounded, it simply embodies the optimistic scenario today, becoming one of the five largest car manufacturers in the world with a market share of at least 10% and sales of 7-9 million vehicles per year. The trend of switching to electric vehicles and the technological advantage of Tesla support reaching this destination, the big question, in how long it will happen.
Kobi Segev, managing partner of Accord S.K.L. Investment house
The above should not be construed as a recommendation for the performance of operations and / or investment advice and / or investment marketing and / or advice of any kind. The information presented is for information only and is not a substitute for advice that takes into account the data and the special needs of each person. Anyone who uses the above information – does so at his own discretion and sole responsibility. The company and / or the authors hold and / or may hold some of the papers mentioned above.