Being wrong on Tesla
EDITOR'S NOTE
Goldman Sachs has done quite the U-turn on Tesla today. Their analysts upgraded Tesla to a buy, hiked their price target by almost $300, and now have the highest price target on Tesla ($780, or $3,900 in "old" pre-split terms) of anyone on Wall Street.
This is the same firm that downgraded Tesla to neutral in June; the shares have nearly tripled since then. It's easy to snark about these kinds of late-to-the-game analyst moves, but given the controversy over Tesla's share price (you should have seen my inbox after Tuesday's piece), it's worth taking a closer look at how Goldman justifies a $725 billion market cap for the company. Since Tesla is being added to the S&P 500 at over a $500 billion valuation, its ability to keep growing is of wider interest than ever.
First of all, Goldman's June downgrade wasn't super bearish. They actually raised their price target at the same time, remained "long-term positive" on the stock, and chiefly cited red flags like price cuts and shorter Model Y delivery backlogs as reasons for their caution, especially given the shares' run-up to that point. In today's upgrade, they note Tesla's earnings since have proven there was no demand problem, suggesting the price cuts were instead the "good kind" of passing along lower costs to consumers.
The Model Y is a key part of Goldman's bullishness on Tesla; the crossover carries higher profit margins than the lower-cost Model 3 sedan. It typically sells in the $50,000 range versus $40,000 for the Model 3 but, Goldman thinks, costs around the same to build. The analysts think Tesla can hit 40% of deliveries being Model Y's next year, boosting auto profit margins from about 22% this year to nearly 25% by 2022.
They also upped their forecast for total deliveries to over a million units a year by 2022, saying the global shift towards electric vehicles "is accelerating and will occur faster than our prior view." By 2040, they now think Tesla will deliver 15 million vehicles a year, if it retains its current 20% market share of electric vehicles; and that figure could be 20 million in Goldman's "upside" scenario of faster EV adoption.
So that's the first key part: selling more cars, more profitably. (Their $4.80 earnings per share estimate for next year is a third higher than current consensus.) Second, the analysts think the energy and full-self-driving businesses are worth more than previously thought. Energy (i.e., Solar City), could be a $500 billion annual business between residential solar and storage and industrial Megapack storage; full-self-driving revenue, they say, could hit $60 billion a year, and with typical high multiples for subscription services, be worth upwards of $300 billion in today's dollars.
So while they don't exactly go through and add it all up apples-to-apples, the potential scale of all of these businesses combined helps explain how Goldman thinks Tesla could be worth three-quarters of a trillion dollars. It's a version of why Cathie Wood has been saying for years that Tesla is vastly undervalued; last spring, while the shares were cratering, she said it could be a $1.4 trillion company. Little wonder her investing firm, Ark, has tripled its assets under management this year, and has three of the best performing ETFs.
Am I wrong, then, to be concerned that Tesla is going into the S&P at these levels? Of course I could be. But let's go back over those three buckets. As for the Tesla vehicles (and I loved the handling of the Model S I drove years ago), Consumer Reports has stopped recommending the S and warns the Y has "well below average reliability." Tesla is now second-to-last--besting only Lincoln--in its reliability study. Who knows whether it will still have 20% market share in two decades.
On the energy piece, Goldman's $500 billion is based on extrapolating Tesla's North American opportunity to the rest of the world; if you keep it to just North America their "blue sky" scenario is $300 billion, and that's predicated on selling five million solar roofs a year (plus Powerwall storage panels)--a business which has especially struggled of late. Five million roofs, by the way, is the entire annual U.S. roofing market for replacements plus new homes sold. Which seems unlikely.
And on the full-self-driving side, I still feel the same way as I did in 2015; this technology is a long, long ways off. This excellent piece from the L.A. Times goes through it in more detail, but the days in which Tesla vehicle owners are cashing in from their cars ferrying people and goods around while they're not using them are still in the distant future. For now, though, Tesla charges $10,000 apiece for the "FSD" kits if you want your car to be ready for that moment, and that's helping the company build a nice cushion of deferred revenues.
On top of the up-front cost, Tesla would likely charge users anywhere between $50 and $200 a month for its full-service-driving, Goldman thinks. (Which itself could change the attractiveness of people using it considerably.) It's by using the $200-a-month figure on a base of 50 million Teslas with 50% "attachment" that they arrive at a $60 billion annual business; if Tesla can only charge $50 a month or its install base is much smaller or take-up is much lower, it could easily be a $12 billion business--or less, and there goes the $300 billion figure in today's dollars.
So the bull case for Tesla is a car in every fifth (electric-vehicle) garage; Tesla solar on every new roof; Powerwall storage, and fully-self-driving cars. I'll still take the under.
See you at 1 p.m!
Kelly KEY STORIES
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