Opening the File on Tesla $TSLA

Tesla is a widely known company, yet its business is still widely misunderstood. From the outside, it may look like one of many auto manufacturers, selling a handful of models into a fiercely competitive market, operating at a much smaller scale than the leading OEMs while barely breaking even. Paradoxically, Tesla has a larger market capitalization than the next three largest OEMs combined, which together delivered about 51x more cars than Tesla in 2020, generating more net income than Tesla’s sales for the year:

World’s Largest Automakers by Market Cap

Company	Market Cap	2020 Deliveries	2020 Sales	2020 Net Income	2020 P/S	2020 P/E
Tesla	$714B	499,550	$31.5B	$0.7B	22.6x	1020x
Toyota	$212B	9,528,438	$257B	$14.8B	0.82x	14.3x
Volkswagen	$157B	9,305,400	$272B	$10.8B	0.57x	14.5x
General Motors	$80B	6,830,000	$122B	$6.4B	0.65x	12.5x

Just as there are plenty of people who buy cars based on curb appeal, there are many investors who have never touched the stock because of headline valuation numbers and a surface-level understanding of competitive dynamics in the automotive industry. Even if the market has correctly determined that Tesla is in the early days of reshaping the automotive industry such that everybody else will be forced to follow, the typical level-headed investor reasons, the stock must have gotten ahead of itself with a valuation like that. Easy money has made speculators forget that the automotive industry is hypercompetitive, cyclical and low margin, and it’s only a matter of time before the incumbents react to stop this little start-up in its tracks, right?

However, making sense of Tesla’s meteoric rise and future prospects requires a comprehensive understanding of what’s under the hood, literally and otherwise. Battery Electric Vehicles (BEVs) offer several important advantages over Internal Combustion Engine (ICE) vehicles to consumers. First, BEVs have already become cheaper than their ICE equivalents based on the total cost of ownership (TCO). According to a recent Consumer Reports study, the average BEV owner saves about 50% on maintenance and repair and 60% on fuel costs over the life of their vehicle. Tesla’s most popular models particularly stand out in terms of lifetime savings over the best-selling ICE vehicles in their class:

In addition to a lower cost of ownership, BEVs have the environmental benefits of zero tailpipe emissions (which is estimated to have caused 385,000 annual premature deaths worldwide as of 2015) and the ability to leverage the ongoing transformation of energy grids worldwide to a higher mix of renewable sources. This transformation should continue to accelerate over the next decade, as the cost of new renewable energy capacity has already fallen below fossil fuel power generation and should continue to fall on an exponential cost curve. Most governments around the world have grasped the importance of BEV adoption to achieving long-term goals for decarbonization and energy independence and have put in place various incentives, taxes and scheduled sales bans to further accelerate the transition away from ICE vehicles.

Beyond the cost of ownership and environmental advantages of their electric vehicles, Tesla has a unique organizational advantage as it competes in many more fields than the incumbent automotive OEMs, which rely heavily on outsourcing for non-core components and functions.

While there are a growing number of competitors in the electric vehicle market, none have achieved such a deep level of vertical integration of hardware, software, and services on a global scale. Tesla’s technological advantages have also enabled them to establish leading positions in adjacent industries, such as energy and artificial intelligence, which must be considered for an accurate appraisal of the Company’s value.

Trailing financial metrics have very limited utility when an industry is facing a major upheaval brought on by new technology. To determine the present value of any industry player, we have to start with figuring out what their place in the world will look like in 2030. This requires combing through a sea of often conflicting information to establish a ground truth about the factors that are most likely to shape the future, and extrapolating them to their natural conclusion. Analyzing Tesla in detail from the bottom up is a more challenging approach to take than most are up for, but it is necessary to figure out how we got here and to have a high level of confidence about where we are going. To bring readers up to speed and develop a useful framework for analyzing the future potential of Tesla and other companies within its orbit, I plan to tackle the foundational components of the business, technology, and competitive environment over a series of posts. This may take awhile; be sure to subscribe so you don’t miss anything!

On that note, dear subscribers: If you thought you were here for uncovering obscure global small caps and are wondering whether I have just emerged from a coma or something for spending all my time researching one of the world’s biggest companies with one of the world’s most widely talked about and polarizing stocks, please stick around! I think a deep understanding of Tesla’s business can pay dividends for any investor down the road, whether it fits into your portfolio or not, as many listed companies around the world, large and small, will be impacted by the revolution in transportation and energy that is only just getting started.

For example, suppose your mandate is confined to Asian small caps. If you also knew what was going on at Tesla six months ago, you might have caught part of the 20x rise in 558:HK LK Technology, which makes a strategically critical machine that will go into all of Tesla’s new factories going forward:

I suspect we will dig up a few more of these along the way, before they happen.

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