Tesla (TSLA)

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WHAT HAS CHANGED?

Tesla's Q3 2021 Earnings

Tesla published a strong set of Q3 2021 results, with revenues rising by almost 57% year-over-year to about $13.75 billion, and adjusted EPS rising almost 2.5x to $1.86. While revenue growth was driven by expanding sales of the Model 3 and Y vehicles and greater traction in China, the company also made solid progress boosting its margins. Automotive gross margin, excluding regulatory credits, rose to 28.8% in Q3, up from just 23.7% last year and 25.8% in Q2. Margins have scope to grow further, as Tesla ramps up sales of its refreshed Model S and X luxury vehicles. Model S and X deliveries dipped -39% year-over-year in Q3 as the company is currently rolling out refreshed versions of the vehicles.

Tesla Battery Day Updates

During its Battery Day event held in mid-September 2020, Tesla outlined a host of improvements to its battery technology including the way batteries are designed, manufactured, and integrated into its vehicles. While these enhancements could take about three years to fully materialize, Tesla expects them to help cut the cost per kilowatt-hour of batteries by about 56% per kilowatt-hour. Tesla is also betting big on manufacturing its own batteries and targeting 100-gigawatt hours (1 gigawatt-hour is 1 million kilowatt-hours) of internally produced battery capacity by 2022. For perspective, that’s about 3x the battery production capacity that it has at Gigafactory 1, in collaboration with Panasonic.

BUSINESS SUMMARY

Tesla is a Silicon Valley-based automobile manufacturer focusing on the design, manufacture, and sale of electric vehicles and related technologies. The company's current model line-up includes the Model S luxury sedan, the Model X luxury SUV, the Model 3 sedan, and the Model Y compact SUV. Tesla also sells renewable energy products such as solar panels and battery technology. The company's upcoming products include the Cyber Truck electric pick-up, the Semi truck, and the second-generation Roadster sports car.

SOURCES OF VALUE

The majority of Tesla's value comes from its Mass Market vehicles.

Future model launches

Tesla Motors launched the Model S, a battery-electric luxury sedan, in June 2012 and followed up with the Model S SUV. The two vehicles together sell under 100k units per year. In 2017, the company introduced the Model 3, a mass-market electric car with a base price of under $40,000. The company delivered roughly 300k units of the vehicle in 2019. In 2020 Tesla launched a compact SUV - dubbed the Model Y and the Cybertruck pickup truck is likely to go into production by 2021. Tesla is expected to take its first step away from the luxury passenger vehicle market into the commercial space, with plans to launch an all-electric semi-truck.

Transition to EVs should go quicker than expected

President Joe Biden committed that the United States would reduce its greenhouse gas emissions by between 50% to 52% below its 2005 emissions levels by the year 2030. The U.S. has also pledged to achieve carbon neutrality by 2050. We are seeing similar commitments from other developed countries across the world. This means that the process of decarbonizing the transportation space will have to speed up, with gasoline-powered vehicles being replaced with cleaner EVs and hybrids. This should bode well for Tesla, which is the market leader in the premium EV space.

KEY TRENDS

Falling battery costs to speed up the adoption of electric cars

According to Bloomberg New Energy Finance (BNEF), the industry average battery costs (cell + packaging) have declined from $288 per kilowatt-hour to $176 between 2016 and 2018, driven by higher volumes and improved technologies. Tesla's battery costs are likely to be lower than the broader industry, considering the company is one of the largest EV players.

The electric car space is getting increasingly competitive with both established manufacturers and start-ups set to introduce new models

Mainstream automotive manufacturers are getting more serious about their electric vehicle programs, as they look to take advantage of the performance and cost advantages offered by all-electric drive-trains. General Motors now offers the Chevy Bolt, an all-electric vehicle with a range of over 200 miles, while Nissan launched the second generation of its popular Leaf with an improved 150-mile range. Volkswagen announced that it would invest as much as 70 billion euros (~$84 billion USD) to bring around 300 electric models to market by 2030.

Government incentives for the electric vehicle industry

In order to reduce dependence on oil, governments across the world are providing incentives to both consumers and manufacturers for the adoption of electric cars. In the U.S., for example, the federal government offers tax credits of up to $7,500 for the purchase of "advanced technology vehicles" (this includes EVs although Tesla vehicles no longer qualify for this credit). There are several other regulations, such as corporate average fuel economy (CAFE) regulations, the Zero Emission Vehicle program (ZEV), and subsidized loans for battery research and the manufacture of electric cars that can accelerate the pace of adoption.

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