Tesla Strategy (TSLA)

Summary

  • Model 3 could potentially increase revenues by 200% in 2018
    • Its likely that TSLA trades at price of $300-600 based on 2.5x – 5x P/S
  • Musk not likely to let the company make money in the near future unless he cuts R&D expenditure altogether or changes the product mix
  • Even if Model 3 ‘fails’, its more likely to be just delayed
    • Given that TSLA doesn’t trade on earnings potential this is irrelevant
  • If Model 3 is a success, TSLA trades in range $300-600, assume likely upside is $450
  • Delays, poor sales the stock falls to around $225
  • Timeframe is 6-9months, no immediate action but we’ll keep this on the watchlist

Strategy

Why is shorting TSLA risky right now if the company doesn’t make money?

Shorting TSLA is a pain trade that even Einhorn is feeling. Potentially explosive upside for the stock if Model 3 is a success:

TLSA quarterly.PNG

  • Tesla pulls in $2.3b in revenue per quarter from Model S and Model X sales which are currently growing at approx 50% per year
  • Model 3 is due to launch with a price tag around $40k
  • 400,000 deposits of $1000 have been taken for Model 3
  • Musk targeting production of 1500 Model 3s by Q3, and 5k per week by Q4 2017
    • This equates to $2.6b in revenue per quarter if they can sell them all
    • Which means that current revenue will double
  • Full capacity is 10k Model 3s per week or $5.2b in rev/q (200% increase)
  • After Model 3 is the Semi-Truck
    • Assuming Model 3 is a success and revenue swells to $5-10b per quarter, Semi-Truck likely to be a smaller percentage increase in revenue
    • So explosive potential for TSLA stock all depends on Model 3 success

How much profit or cash flow will Model 3 result it?

  • TSLA produces Model S and Model X at 25% gross profit margin
  • Operating expenses have historically been 25% of revenue leaving no room for profit
  • R&D expenses have historically been approx 15% of revenue
  • Best case scenario is probably a 5% profit margin if they cut costs (with the current product mix)
    • 5% net profit margin means that P/S ratio = 5% x P/E ratio
    • If Model 3 is a success, revenue grows to at least $5b/qtr, $20b/yr
    • If TSLA growing at 50% per year then prob trades at P/E ratio of 50
    • P/E ratio of 50 = P/S ratio of 2.5
    • Market cap = $50b which equates to approx $300 per share

But will Musk ever let cash just flow to shareholders?

  • Never ending list of global problems that need solving
  • After cashing out of Paypal reinvested everything in SpaceX and Tesla
  • Highly unlikely that Musk will be content with providing a decent earnings yield vs investing in more solutions to global problems

The game with TSLA therefore is probably predicting when most of the early investors start cashing out. But as long as there’s substantial growth prospects around the corner, its less likely these guys will cash out.

So is there a trade to be made?

  • Potentially buy new highs anticipating stock price rally on Model 3 success
    • Revenue likely to be 20-25b/yr (if successful)
    • P/S ratio likely fall as its likely less future growth will be priced in (Semi-Truck vs Model 3)
    • P/S ratio therefore 2.5x – 5x
    • Share price $300-$600
    • Even if Model 3 ‘fails’, its more likely that production is just delayed

tsla p-s.PNG

  • Go short?
    • Could TSLA go bankrupt?
      • Company has $3b of cash on hand (enough for 1 more year)
    • Convertible bonds currently only dilute equity by about 5%
    • Are insiders likely to sell?
      • Most of the remaining convertible debt has strike price above $500
      • No reason for these guys to sell at current levels
    • Does every mum and dad already own the stock?
      • Doesn’t seem obvious, most institutional money won’t touch it
    • It only makes sense to short at a price that insiders would be interested in cashing out

One thought on “Tesla Strategy (TSLA)

  1. Pingback: Value-Momentum Watchlist | Know Your Alpha

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s