Tesla’s Future As A Superconglomerate

JasonDoiy

Tesla, Inc. (NASDAQ TSLA) enjoyed what many would consider a strong quarter in quite a while. TSLA in Q4 2022 beat revenue and earnings, without Elon Musk’s usual absurd commentary on the earnings call. The stock price increased by +25% over the five previous trading sessions due to investors’ positive response. The business is valued at $195/share. We expect upside from new announcements and continued execution, absent shortages in supply chains. TSLA’s strong performance in the trading session after hours continued to Thursday for an additional +10% gain. This brings the market cap of the maker of the battery electric vehicle (BEV) to $500 billion.

We value TSLA stock using a mixture of adjusted EBITDA, P/E multiples, based on FY ’25 revenues of $222 billion. We expect an additional 20% upside depending on hype/optimism related to product roadmaps and deliveries. Tesla reported Q4’22 revenue at $24.32 billion, compared to consensus $24.16 billion and adjusted dil. EPS of $1.19 against $1.13 beat estimates by 5.3%.

We noticed a decline in profitability due to lower ASPs. However, the announcements of higher margin categories such as the Tesla Cybertruck or Tesla Semi Truck make us very optimistic that the net margin erosion will not be as severe even though Model 3/Y’s volume car production is putting pressure on average selling price.

We liked the fact that Elon Musk made reference to the Cybertruck during the Q4 2022 earnings calls.

“Yes, Cybertruck will be equipped with Hardware 4. Cybertruck will have Hardware 4.

Cybertruck is now on the right track and Rivian Automotive Inc. (RIVN), finally has to face its electric rival in 2023.

Summary of investment thesis. We believe there is a compelling argument for why Tesla could produce 1.8 million to 2,000,000 cars by 2023. Tesla is not as limited in supply, and production is beginning to normalize. This is helping to reduce the shortages that were experienced during the pandemic. TSLA is gaining market share in pricing and customer adoption. Market penetration is low enough to suggest a material vehicle opportunity. This is reflected by our analysis.

Figure 1. Figure 1. Tesla’s vehicle production capacity (Tesla).

Elon Musk anticipates 1.8 million vehicle deliveries. However, with ramp-ups of various facilities and some announced production/volume increases within existing production sites there is a bias towards 200k volumes beat. We embed this bias in our model to capture any delivery surprises due to increased demand due to gas price sensitive and electric vehicle credits.

Production surprises are expected in the future, with production ramp-up to reach levels comparable to conventional automakers that use purely BEV technology. ASPs will remain higher for larger volumes of value-added components such as autonomous driving, even though they are increasing in volume.

We anticipate that our profit forecast becomes conservative, as TSLA doesn’t have many of the legacy costs of other vehicle OEMs tied to pensions, and has a more established/efficient production line in the BEV space to sustain better profitability. When battery technology improves and the price of batteries decreases, we expect Tesla to be more profitable.

Figure 2. Figure 2.

We recommend TSLA, and offer a $195 price target. This implies a 22% upside over current levels. We don’t like the CEO’s public behavior or Twitter comments, but we can’t deny that the company is well-positioned for significant growth. We value TSLA using a mix of historical growth based multiples and tech EV/EBITDA multiples. The average value of TSLA is based on FY’ 25 adjusted dil. EPS of $9.30. To arrive at $195, we then discount our assumption by 9.5% (or firm’s weighted average cost capital).

The company is expected to increase sales to $222billion on 4.5m vehicle deliveries. This translates into a business worth $1.2 trillion by 2025. There is no way to achieve a valuation of $4-$5 trillion without material changes to the company, such as the merger or combination of different businesses.

What message is Elon Musk trying? Now, we are stumped. How does Elon Musk expect to surpass two of the largest companies on the planet and ignore his closest rivals? All this while being questioned in court regarding the separate incident where he announced that the company would be privatized at $420 per share, with the assistance of the Saudi fund (a deal later revealed to have been preliminary, not “secured”. According to Twitter polls, most people would prefer to have Elon Musk as their owner.

It’s almost comical, as it’s almost like watching a whole nation of sports fans turn on a team owner. Except that there isn’t anyone on the planet who could afford to purchase such a large tech company. We expect that the portfolio will be reassembled in some kind of death star fashion.

We believe Elon Musk is serious about surpassing both companies in terms of value. Some might have skipped this portion of an earnings call or laughed at it. Elon Musk sees the company growing to be larger than Apple and Saudi Aramco in the future, based on market capitalization. On Q3 ’22 earnings, he said it literally and then he didn’t mention anything about it on the Q4 earnings call.

We are not surprised that he isn’t making wild statements during the Q4 ’22 earnings call after the legal chaos. The stock performs better because it rallied +5% in the hour after Wednesday’s earnings announcement.

Combine Apple Inc. (AAPL), at $2.25 Trillion, and Saudi Aramco, at $1.94 Trillion, to create a market capitalization of $4.19 Trillion. Tesla’s current market capitalization stands at $500 billion. This means that Tesla’s sales pitch for this year is simple: The company will grow in value from $500 million to $4.2 trillion.

Musk has gone on to denigrate every competitor along his $4.2 trillion journey, failing to acknowledge that there is even a distant number 2. Although we believe that Lucid Group, Inc. (LCID) is the distant number two automaker, Elon may be right.

We laugh a lot at Elon Musk’s statements for the past quarters.

George Gianarikas, Canaccord Genuity, asks Elon Musk: How do you see the current competitive landscape changing in the next few years? What do you think your top competitors will be five years from now?

Elon Musk replies, “Five Years is a long period.” Like the Tesla order, AI team, up until late last night, and just we’re asking guys like: so who do you think is closest to Tesla with — a general solution? We don’t know who could be the distant second. It does seem like we are — I mean, right at this moment, I don’t think you can see another place with a telescope. This wouldn’t be possible for forever. In five years, I don’t know if anyone has found it. It’s not one of the car companies we know of. However, I am guessing that someone could be right eventually.

Apple shareholders and Tim Cook have to acknowledge that Elon Musk is going to surpass them in value. But Elon Musk cannot point to anyone else following Tesla Inc.’s path to global dominance. As a way to achieve such an insane goal, the CEO refuses to acknowledge what an analyst suggests.

From Seeking Alpha transcripts, Elon Musk and George Glanarikas, Q3 ’22 earnings calls

George Gianarikas, Canaccord Genuity. “And just as an follow-up: this is for Elon. How much would your acquisition of Twitter, along with your stakes in SpaceX, Neuralink, and Tesla, benefit the combined companies if they were to operate under one superstructure, if any, like a Google Alphabet?

Elon Musk eagerly denies the possibility of the mega-merger, saying “It’s unclear to me what the overlap” It’s not zero but it’s close to — I believe we’re getting there. It’s not something I worry about. I am not an investor. I am an engineer, a manufacturer person, and a technologist. Also, I design and develop products. This is what I do. It’s not a portfolio. We won’t have any investments in it. I don’t know. “I don’t see any obvious type of some — get combined, at least not right now.”

Keep in mind that both AAPL (and Aramco) are likely to grow at the minimum S&P 500 Index growth rate. Therefore, Tesla must not only exceed the $4.2 Trillion figure but also take into account the growth rates of both companies. If $4.2 trillion had a 10-year return rate of 12.5%, Tesla Motors would have to be valued at $13 Trillion, assuming that both companies continue to grow in line with the S&P 500 average.

How can Tesla Inc. achieve $13 Trillion in its next 10 year? Elon Musk could combine all of the businesses he has advised or built to create a super conglomerate. It would be like the Death Star construction in Star Wars Episode 6 with a rebel faction DOJ regulators. This group could stop global dominance.

We don’t mean it in sarcastic humor. But that’s really the only clue we have at $500 billion increasing to $13 trillion over 10 years. If Elon Musk decides to combine everything into one conglomerate, and takes a seat like Warren Buffett (Berkshire), Bill Gates(Microsoft), Tim Cooke (Apple), Sundar Paichai (Google), Jeff Bezos [Amazon )…), it would look just as good as the picture that we carefully assembled.

Figure 3. Figure 3.

This sounds a lot more crazy than the Elon Musk we have come to know over time. Let’s not forget that 6 or 7 years ago, someone laughed when he claimed Tesla would reach $700billion. He ended up with a $800billion peak valuation. We won’t make the same mistake again. Instead, we will try to entertain the genius’s crazy thoughts with our wild interpretations.

It is difficult to imagine how Tesla, Inc. can grow to the valuation growth required to meet the $14 trillion we believe is necessary to surpass the combined value of Apple, Saudi Aramco, and Saudi Aramco by 2033. Although it sounds ambitious, it is possible to see the benefits of Elon Musk merging the businesses he has built into one entity: Elon Musk. We don’t believe his comments to the analyst that he didn’t want to build a portfolio.

If you look at the current structure of the businesses, there are no immediate synergies. Some would argue that they work better as independent companies. It also restricts investors to separate traded vehicles and those businesses are tied to Elon Musk. Apple would not be as valuable if it didn’t diversify into other products and categories, including music and payment technologies.

What is the current value of a super Tesla entity? We believe that merging into a superstructure is a valid option for many reasons.

1) Scale. 1) Scale. TSLA’s potential market in vehicles is large but it also represents saturation risk.

Figure 4. Figure 4.

If TSLA is made conglomerate it will offer many opportunities such as social networking, payment technology and neuro technology, space exploration, mining, online auctions, government computing contracts and so on.

2) The unique portfolio is a result of founder and board cooperation. This allows for consolidation because all businesses are closely related to Elon Musk.

Space exploration is extremely valuable. SpaceX is valued at $137billion. Biotech expansion is also extremely valuable. Neuralink represents a $10 billion market opportunity in medical device technologies. Combining the value of the former publicly traded companies PayPal (PYPL), eBay.com(EBAY), Palantir/PLNT, and Twitter (TWTR), the consolidated enterprise value could eventually surpass the combined value of AAPL/Aramco. However, it would require a 30% aggressive growth rate from the base of 9 to 10 companies into one entity.

Never doubt Elon Musk. Although we may come off as playful and sarcastic we really like to be able to see around corners to see what the future holds. We like the organic growth metrics and the projected run rate for a eventual production volume between 5 million and 10 million vehicles, making BEVs reach scale comparable to the big 3 in America. However, that scenario values Tesla, Inc. stock currently at $195/share with a path to beats taking us to $200 per share.

Profitability is driven primarily by higher ASPs and more consumers who are willing to pay more for goods. Even with these assumptions, we still factor in +20% upside and possibly more upside depending on certain expectation beats throughout each year. M&A activity could increase business size at some point. We believe that TSLA will combine businesses once the BEV business becomes more mature and less profitable.

Tesla, Inc. stock already carries significant upside. Over the next twelve months, shareholders should have enough food due to near-term opportunities in the car business, energy storage and financing. Over a longer period, however, investors will start to wonder if Tesla has the potential to surpass Aramco and Apple.

If Elon believes it is possible, who are we to deny it? We chose to follow Elon’s crazy and reaffirm our positive stance regarding Tesla, Inc. throughout this entire article.

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By: unknown
Title: Tesla’s Future As A Super Conglomerate? (NASDAQ:TSLA)
Sourced From: seekingalpha.com/article/4573174-teslas-future-as-a-super-conglomerate