Stock of the week - Tesla (22.02.2023)

Tesla - manufacturer of self-driving cars

Tesla (TSLA.US) stock came under pressure last week after news that the company's full self-driving ("FSD") software would be phased out. Nevertheless, a famous EV producer is reaching another important milestone regarding FSD technology, namely autonomous driving, which may be a significant growth trigger. 

Those who have followed the story of Tesla know that Elon Musk has been talking about full self-driving features for almost a decade. As a reminder, Tesla began building the first vehicles designed for self-driving back in October 2016. As a point of reference, let's look at the chart below, which shows Tesla's cumulative production since early 2017, excluding the approximately 15,000 vehicles produced in Q4 2016 that would have been equipped with FSD hardware.

Over the past few years, several versions of the FSD software have been released. Perhaps the next version will be presented during the upcoming investor day on March 1. At first glance the topic of self-driving cars seems to be a distant future, however after a closer look, this feature may soon accompany us in everyday life.

Tesla finances

Tesla's financial situation is starting to show the company's growing potential, especially if we look at the last decade. The company recorded a revenue CAGR of almost 45% and a gross profit of 46.5%. In the period from 2013 to the end of 2022 EBITDA recorded an impressive CAGR of 81.6%.

Company became profitable in recent years, and as of 2020 net profit began to increase from $721 million to $12.56 billion, which equals to CAGR of 317.31%.

The company has a healthy balance sheet with only $1 billion in long-term debt and over $22 billion in cash and short-term investments.

Free cash flow ("FCF") also remains on a good level, with $4.2 billion generated at the end of 2022 compared to - $32.5 million reported at the end of 2013. It is worth recalling that Tesla paid $1.56 billion in stock-based compensation ("SBC"), which lowered the actual free cash flow available to investors to only $1 billion.

Profitability continues to improve

In terms of profitability, the company achieves impressive results. The average selling price (ASP) moves down and then stabilizes around $55,000, while the operating margin continues to increase, approaching 17%.

This is another proof of how crucial it was for Tesla to achieve scale effect. At the moment every dollar of additional revenue is more valuable due to improved operational efficiencies.

Tesla sold 1.31 million vehicles in 2022 and expects to sell 1.8 million cars by the end of this fiscal year. This plan is ambitious, assuming a 50% CAGR increase from 2020 to 2023. As of today, Tesla has a good chance of achieving this goal.

Tesla offer

Currently, Tesla produces four types of vehicles: the Model 3, Y, S and X. While the Model 3 and Model Y are aimed at the mass market, the other two are a different story. Still, starting prices for both the Model 3 and Model Y oscillate between $40,000 and $60,000, which is not appealing to all potential consumers. Prices of other two models start from $100,000.

Future potential?

Tesla has repeatedly stated that it wants to make the production process more efficient in order to lower the average selling price. However, there are other automakers that are able to sell electric vehicles at more affordable prices. Tesla may start producing sub-compact vehicles, but this would mainly benefit volumes rather than margins, as this segment is very competitive and many carmakers are already producing or will soon start production of their electric cars.

Another possible scenario is that Tesla turns into a premium car manufacturer. Thanks to this, it will compete with brands such as Mercedes, BMW, Audi, Lexus and others. While this is a higher-margin segment, volumes are slightly lower - Mercedes and BMW sell around 2 million vehicles a year. As of today, however, it seems that Tesla is more interested in the production of economy class cars, which are characterized by lower margins and higher volumes.