Quick Notes:

• Tesla's record run in 2020 (600%) is another example of the risk/reward of a growth stock. Our Buy opinion on the stock is based on the remarkable increase in the sales volume (36% year-on-year) in complement to the rising demand for EV and sustainability.  

• To the already existing successful fleet of Model 3, X, and S cars, Tesla's model Y debuted in March 2020 and has announced the production of a sports car and trucks (Cyber and semi). 

• We are affirmative that Tesla is traded on the futuristic basis of how the company will be performing in the next decade. This causes momentum trading as the firm announces new information about its plans; we tend to experience a volatile swing in its price.  

• Rigorous technological advancements in batteries and FSD puts the company 3-5 years ahead of its competitors. New factories in Berlin, Germany, and Texas provide the much-needed boost in production to meet Tesla’s demand and manufacturing of trucks.  

• The market in China is facing stiff competition with local automobile manufacturers such as Nio. In an early move, Tesla adopted Bitcoin as a form of payment along with the traditional payments in the cryptocurrency movement.  

Profile:

Tesla, Inc. designs, develops, manufactures, leases, and sells electric vehicles while creating energy generation and storage systems in the United States, China, and Europe. The company operates in two segments, Automotive and Energy Generation and Storage. Tesla manufactures and sells high-performance fully electric vehicles and components and various renewable energy products, including solar, storage, and grid services. Tesla was the first to commercially produce a federally compliant electric car, which achieved a market-leading range on a single charge.

Risk Assessment:

We maintain a medium to high-risk assessment on Tesla. Our risk assessment reflects the auto industry's highly competitive nature and potential execution risk, partly offset by the potential dramatic volume growth we expect for the company. Rising inflation expectations have caused a spike in treasury yields and a rotation out of growth stocks, resulting in the prices of FAANGs and ARK's favorite stocks coming down. Treasury yields are an essential building block for stock valuation because investors typically use the 10-year US treasury yield as the risk-free rate to derive the cost of equity and cost of debt for a company.

Why Buy:

Tesla is currently undergoing a massive expansion of manufacturing, and Elon Musk wants to build 20 million electric vehicles by the year 2030. The stage is set for an extensive ecosystem of autonomous electric vehicles.

Why Sell:

Tesla currently has a market capitalization of more than $800 billion. Yet, trailing-12-month free cash flow sits just above $2 billion. Even on a price-to-cash-flow basis, the stock looks expensive on paper. However, the company looks a bit better on price to sales, with their TTM revenues of $31 billion.

Industry Overview:

The 12-month fundamental outlook for the automobile manufacturing sub-industry is bullish, as most know during the pandemic, the state of the U.S. economy had been transformed to that of a war economy. Auto manufacturers were told to shift their production capabilities centered towards respirators and ventilators to accommodate those suffering from COVID-19. However, in regards, to the EV sector, the sector is turning more bullish. With a democratic controlled house and presidency, the slated agenda is geared toward developing a more environmentally sustainable way of life. With this, we can expect an industry-wide issuance of EV credits to the company for selling EV cars along with the various incentives that are passed onto the consumer through the company and the government. Albeit, we may see an uptick in prices because semiconductor chips experienced an immense shortage at the start of the pandemic to today. Aside from the fundamental use of an electric vehicle, one of the emerging themes is the automakers’ abilities to implement AI technology that enables the car to drive autonomously. This feature is becoming more prominent to different EV companies as their business models center around self-driving capabilities.

Comparative Advantage / Thesis:

• Optimized Battery and FSD technology 

• Customer Malleability and Reception 

• Supercharger network  

What most fail to realize in the advent of electric vehicles is foremost the valuation, but more importantly, the fundamental ways they anticipate transacting a dollar for services in the future. Tesla has in a way created the market for electric vehicles; it is the consumer’s brand of choice. The CEO carries a lot of charisma, and the majority of shareholders in Tesla believe in the investment into Elon's ambitions. This situation has garnered customer malleability to an extent that we have only seen with Apple. Tesla’s autonomous self-driving component has had prices increase almost double what they were a few months ago, and almost 10x the price a few years ago. Each FSD package purchased lasts the duration of the lifespan of that vehicle. As such, it has created a dilemma to leases on the prospect of purchasing that technology on a car the consumer may not own. But after the revelation of a SAAS-based model for FSD, the numbers have been blowing off the charts. Not only has it lured people into buying the full package from trying out the product, but it has allowed a car company to turn its network of vehicles into a subscription-based model for the first time in history. That is right, a SAAS model based on physical assets. The fact that Tesla can continue to profit in a significant way-- no wi-fi subscriptions, Sirius radio, or stuff like that-- on inventory that is sold off the lot is quite unprecedented at this magnitude. Elon could not be clearer in his conviction and transparency surrounding the pricing and rollout of the FSD Level 5, subscription FSD, price increases. He tells his customer base, who are innately valuable & loyal to the company, that the FSD technology will be too valuable in the future as they continue to advance the software and AI behind the technology. People who buy Teslas today are doing so for the technology because what we have seen in the past years and today in the very amicable environment for EVs that as their FSD abilities grew more autonomous in difficulty and subsequent price, more people bought. It's our belief we will see more than 25% of deliveries purchasing the FSD capabilities. What is most crazy about the SAAS model is the growth prospects it has already achieved. Elon Musk was incredibly apparent a year and a half ago when he mentioned that autonomous driving would be increasing from about $1000-$2500 to 10k. Well, that happened, and they got more customers because the technology is accelerating at a faster rate than the current price level is.  

Elon's next price rise, to about $100,000 in a few years, was mentioned in one of his tweets and interviews. Tesla’s technology will eventually be sub-leased out to different transportation and rideshare networks. At this point, Tesla is no longer a car, but maybe a passive income opportunity in which they lease their vehicles out to companies like Waymo, Uber, or Lyft. Full-Time Uber and Lyft drivers currently make roughly $35k-50k a year. But if you could buy a Tesla for $150,000 with FSD package and it has the potential to return $35-50k a year on a conservative basis? We think computers work longer than humans do and given the opportunity, they will quite literally price those drivers out of the market. Imagine if your car was making $75k a year, just because you ponied up for the FSD. It is crazy to think that this could ever be a possibility, but it is becoming a vivid reality. FSD level 5, the most autonomous level, is slated to be done by the end of this year, and we take the fact that FSD will be around $100,000 in the next few years at face value. Simply for the fact that Musk said he would raise prices in the past, rose prices, and got more top-line and bottom-line growth: This is an ecosystem, not a car company. 

Analyst Review:

Tesla is poised for immediate growth both on the demand side of its electric vehicles in culmination with the different long term growth prospects offered by the company. While the goals and long-term prospects are ambitious, Tesla and Musk have been delivering these goals that were deemed audacious yesterday, today. They have begun to ramp to full production as well, so it suffices that they will no longer have supply pressures. We anticipate Tesla achieving these long-term growth prospects as it pertains to FSD, SAAS model, and appreciating software in terms of utility. Should Tesla receive the same confluence of demand and followers to its brand, we believe its fundamental story of valuation will no longer be that of physical units sold, but rather a pivot to the SAAS model so it can leverage its eco-system for future synergies and integrations. Thus, based on the rising software prices, increased top-line and bottom-line growth from pent-up demand, and rollout of more Tesla factories, we maintain that Tesla is undervalued by approximately 30%. By utilizing its FWD/projected EPS for year over year, considering its units sold in this quarter and estimates for next, we see Tesla's value in the range of $929.90 in FY 21' and possibly ranging to $1,240.20 using 22' estimates and a PE ratio of 65, what we deem fair value for this type of company. As such, we recommend Tesla as an underweight attributing to the various prospects they have on the table.