Series: "The AI Investor's Desk": Deep Dive – Tesla: The AI Leader Revolutionizing Electric Vehicles and Autonomous Technology #2
A comprehensive exploration of Tesla’s business model, ground-breaking AI advancements and its growing dominance in both electric vehicles and autonomous driving sectors.
Executive Summary
Key Highlights
■ Investment Thesis: Tesla continues to dominate the electric vehicle (EV) market, with its strong focus on innovation, scalable production and integration of advanced AI and autonomous driving technologies. The company's recent developments in battery technology, energy storage solutions and expansion of its manufacturing footprint globally underpin its long-term growth potential. Tesla’s diversified revenue streams—spanning EVs, solar energy and software—position it well to capitalize on the growing demand for sustainable energy solutions.
■ Company Overview: Founded in 2003, Tesla specializes in the design, manufacture and sale of electric vehicles and energy storage systems. Tesla operates two major segments:
Automotive: Tesla’s lineup of electric vehicles includes the Model S, Model 3, Model X and Model Y, with plans for new models like the Cybertruck and Roadster.
Energy Generation and Storage: Tesla’s solar and energy storage business provides residential and commercial energy solutions through products like Powerwall, Powerpack and Solar Roof.
■ Q2 2024 earnings: showcased strong financial performance, reporting $25.5 billion in revenue, a 2% year-over-year (YoY) increase. The energy generation and storage segment was a key driver, growing 100% YoY to $3.0 billion, with record energy storage deployments of 9.4 GWh. Tesla produced 410,831 vehicles during the quarter, slightly affected by supply chain constraints, though efficiency gains mitigated the impact. Automotive revenue came in at $19.9 billion, down 7% YoY due to price reductions across its Model S, 3, X and Y lines. Additionally, the Cybertruck emerged as the best-selling electric pickup in the U.S., contributing positively to overall revenue. Tesla’s GAAP operating income was $1.6 billion, with an operating margin of 6.3% and the company generated $1.3 billion in free cash flow, signaling improved cash generation after previous quarters of decline.
■ Recommendation: Buy (Long-Term): Tesla’s leadership in the EV market, strong product pipeline and robust balance sheet make it a compelling long-term investment. The accelerating adoption of electric vehicles globally, coupled with Tesla’s advances in autonomous driving, suggests substantial upside for long-term investors.
2. Q2 Earning Results
■ Summary: Tesla’s Q2 2024 earnings reflect strong financial performance. Tesla reported $25.5 billion in revenue, marking a 2% year-over-year (YoY) increase. Energy storage deployments reached record levels with 9.4 GWh and the company generated $1.3 billion in free cash flow during the quarter.
■ Revenue Growth: Tesla posted $25.5 billion in revenue for Q2 2024, with its energy generation and storage segment growing significantly, up 100% YoY to $3.0 billion. Key takeawyas:
Energy Storage: Record deployments of 9.4 GWh in Q2 2024 significantly boosted revenues in Tesla’s energy segment.
Deliveries: 410,831 vehicles produced, slightly impacted by supply chain constraints but offset by increased production efficiency.
Automotive: Tesla’s automotive revenue was $19.9 billion, down 7% YoY, largely due to price reductions for its Model S, 3, X and Y vehicles.
Cybertruck: The Cybertruck has become the best-selling electric pickup in the U.S., contributing to the revenue uptick.
■ Profitability & Margins: Tesla’s GAAP operating income was $1.6 billion in Q2 2024, with an operating margin of 6.3%. Free cash flow was $1.3 billion, a positive indicator after previous quarters of reduced cash flow.
2.1 Key Growth Drivers
■ Autonomous Driving & FSD (Full Self-Driving): Tesla’s Full Self-Driving (FSD) technology continues to expand, with over 2 million vehicles enrolled in the FSD beta program by the end of Q2 2024. Tesla has reduced FSD prices in North America and launched free trials, increasing customer awareness and adoption.
■ Battery Technology: The ramp-up of the 4680 battery cells production continues, improving energy density and lowering production costs. Tesla’s battery technology is expected to provide significant long-term cost advantages.
■ Gigafactory Expansion: Tesla’s new Gigafactories in Texas and Berlin have expanded vehicle production capacity, with Tesla producing 410,831 vehicles in Q2 2024, a slight decrease from the previous year due to supply chain constraints.
2.2 Financial Outlook
■ Overview: Tesla’s long-term growth prospects remain solid, with strong contributions from both its automotive and energy storage businesses. For FY2024, Tesla expects total revenue to exceed $100 billion, driven by increased deliveries of the Cybertruck and continued growth in energy storage solutions.
■ Q3 2024 Guidance:
Revenue: Between $27.5 billion and $28.0 billion, representing approximately 23% YoY growth.
Adjusted Operating Income: Expected to range from $5.3 billion to $5.5 billion.
■ Full-Year FY2024 Guidance:
Revenue: Expected to range from $105 billion to $108 billion.
Operating Income: Tesla projects GAAP operating profitability for each quarter in FY2024, driven by increasing automotive sales, the Cybertruck launch and growth in energy deployments.
2.3 Valuation
■ Current Share Price: Tesla’s current market price is $244.5 per share as of October 8, 2024, with a market capitalization of $766.13 billion.
■ Multiples: For FY2024, Tesla’s EV/EBITDA multiple is 48.7x and for FY2025, it is 40.2x—significantly above industry averages, reflecting investors’ long-term confidence in Tesla’s growth potential.
■ DCF Valuation: Using a terminal growth rate of 3%, the intrinsic value of Tesla shares is estimated at $242 per share. This reflects more conservative assumptions about long-term growth, taking into account Tesla’s large market share and continued global expansion.
■ Key assumptions used for the Discounted Cash Flow (DCF) valuation of Tesla:
-Revenue Growth Rate:
2024-2026: 18% annually (reflecting continued growth in the automotive and energy segments).
2027-2030: 10% annual growth as the company matures and faces more competition.
-EBITDA Margin: Starting at 15% in 2024, increasing to 20% by 2026 due to cost reductions, scale efficiencies and higher-margin software (FSD) revenue.
-Free Cash Flow (FCF) Margin:
2024: 5.3% based on reported Q2 free cash flow.
Rising to 15% by 2030, driven by lower capital expenditures as Tesla’s production stabilizes.
-Discount Rate (WACC): 9.5%, reflecting Tesla’s growth prospects and the risk profile typical for the sector.
-Terminal Growth Rate: 3%, assuming long-term sustainable growth beyond 2030.
-CapEx: High capital expenditures through 2025 due to Gigafactory expansions and R&D investments in autonomous driving and battery technology, gradually declining as these projects mature.
Investment Thesis, Macro, Catalysts, Risks and Analyst Recommendations
3.1 Investment Thesis
Industry Leadership: Tesla continues to lead the electric vehicle (EV) industry and clean energy sectors, benefiting from cutting-edge technology and a highly innovative business model.
Vertical Integration: A key strength of Tesla lies in its vertical integration, which includes in-house battery production and proprietary software developments such as Full Self-Driving (FSD).
Global Production Scale: Tesla’s global network of Gigafactories enables large-scale production, providing it with a competitive edge in the rapidly growing EV market.
Diversified Revenue Streams: Tesla is positioned for long-term growth, with expanding revenue streams from both the automotive segment and its energy solutions business (solar energy and energy storage products like Powerwall and Megapack).
Growth Potential: Despite Tesla’s high valuation multiples, its leadership in global EV adoption, advancements in autonomous driving and growth in the energy storage market underscore its attractiveness as a long-term investment.
3.2 Macro
The global economy is experiencing a paradigm shift towards sustainability, driven by heightened awareness of climate change and supportive government policies. The International Energy Agency (IEA) projects that EVs will account for over 30% of global vehicle sales by 2030. Low-interest-rate environments and significant fiscal stimulus in major economies further bolster consumer spending and investment in green technologies.
3.3 Catalysts
4680 Battery Technology: Tesla’s progress in scaling production of its 4680 battery cells, which promise to lower costs and improve vehicle range, will be crucial for margin expansion.
Full Self-Driving (FSD) Software: Tesla’s advancements in autonomous driving, with the broader rollout of FSD capabilities, will enhance its recurring software revenue streams and reinforce Tesla’s technological leadership in autonomous vehicles.
Energy Storage Growth: Record deployments of Tesla’s energy storage products, such as Megapack and Powerwall, are expected to drive substantial revenue growth, particularly as demand for renewable energy solutions increases globally.
3.4 Risks
Valuation Sensitivity: Tesla’s high valuation multiples leave little margin for error. If growth expectations are not met, the stock could face significant downward pressure, especially in the context of broader market corrections.
Supply Chain Constraints: Tesla remains vulnerable to global supply chain disruptions, particularly in sourcing semiconductors and critical raw materials like lithium for battery production.
Regulatory and Competitive Risks: Increasing competition in the EV space from both legacy automakers (e.g., Ford, GM) and new entrants (e.g., Rivian, BYD) could erode Tesla’s market share. Additionally, delays in regulatory approval for Full Self-Driving (FSD) technology could hamper Tesla’s plans for autonomous vehicles.
Macroeconomic Headwinds: Rising interest rates, inflationary pressures and economic slowdowns in key markets like the U.S. and China may reduce consumer demand for EVs, while also raising Tesla’s operational costs.
3.5 Analyst Recommendations and Scenarios Analysis
Bull Case 310$: Accelerated adoption of EVs and FSD, leading to higher revenue and margin expansion.
Base Case 275$: Steady growth in line with industry trends and company's guidance.
Bear Case 200$: Supply chain disruptions and intensified competition resulting in slower growth.
Based on 35 Wall Street analysts offering 12 month price targets for Tesla in the last 3 months. The average price target is $207.83 with a high forecast of $310.00 and a low forecast of $24.86. The average price target represents a -15.00% change from the last price of $244.50.
3.6 Catalyst Calendar
4680 Battery Production: Updates on scaling the production of Tesla’s 4680 battery cells will be a key driver of margin expansion and cost reductions.
Q1 FY2025: Tesla is expected to open new orders for the Roadster, targeting the premium EV market and enhancing brand prestige. Expansion of Full Self-Driving (FSD) features and broader regulatory approval for autonomous driving in key markets will drive software revenue growth.
1H FY2025: Expansion of production capacity at the Gigafactories in Texas and Berlin and potential announcements of new facilities, particularly in Southeast Asia.
Conclusions
Tesla remains a dominant player in the electric vehicle and clean energy sectors. While the company’s strong innovation pipeline and global market leadership ensure long-term growth, investors should remain aware of the potential risks, including valuation sensitivity and regulatory challenges. However, Tesla's robust financial position and leading-edge technology in both the automotive and energy sectors continue to make it an attractive long-term investment.
Bibliography
Tesla, Inc. Q2 2024 Financial Results and Company Updates
International Energy Agency (IEA) Reports on EV Adoption
Market Analysis Reports from Bloomberg NEF and McKinsey & Company
Regulatory Updates from the National Highway Traffic Safety Administration (NHTSA)
Industry Competitor Financial Statements and Press Releases
Tiprank website