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Do legacy automakers really want to sell EVs?
Analyzing how these OEMs view EVs and why:
autoinsights.substack.com/p/…
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Now that the first electric vehicle SPAC is filing for bankruptcy, it’s a good time to reflect on the insanity and outright fraud across EV SPACs
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The only thing more impressive than Tesla's revenue growth is its operating leverage
One of the most capital efficient businesses in any industry
$TSLA
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Throwback to the wildest exchange I've ever seen on a conference call. This is a multi billion dollar company
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$TSLA's capital efficiency & operating leverage are the most underappreciated aspects of its business
How was this achieved and is it sustainable? What are the long-term implications going forward?
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1/ Ford CEO Jim Farley explains Tesla's many competitive advantages against legacy automakers
A timeline:
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EVs sold in the first half of 2023 from US-based automakers
1. Tesla: 889,015
2. GM: 32,322
3. Ford: 25,709
4. Rivian: 20,586
5. Lucid: ~4,000 (final # TBD)
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Toyota falsifying two of the worst tests possible: safety and emissions
Ironic how it gets swept under the rug
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Tesla is one of the fastest growing companies in history at this scale
Here's how its growth compares to today's largest tech companies after crossing $10B in revenue
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$TSLA 10-K released this morning and one line really jumps out at me. They don't expect to capex to increase much from 2021 ($6.5B) through 2024,while profits will likely 5x over this period
Extremely impressive capital efficiency and ROIC
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New auto sales total $2T+ per year, one of the largest TAMs globally. Why is the market assigning so much value to Tesla relative to legacy OEMs?
While they serve the same end market, they are fundamentally different business models, proven in 5 key areas today. A quick thread:
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Twitter is a prime example that dollars spent on R&D doesn’t correlate with innovation
$455M in R&D in Q2. That’s 39% of revenue. What are the innovations exactly?
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For years, EV competition from legacy OEMs was supposed to hurt demand for Teslas, but this hasn’t come to fruition
This won’t change going forward
THREAD backed by data, facts, and commentary from top auto execs/suppliers
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There’s an elephant in the room that isn’t being discussed enough in the auto industry
A quick thread:
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$TSLA estimates (shown here) continue to move higher, but margin forecasts are still way too low
Thread:
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Interesting data point
About a year ago, analysts expected $TSLA to do $6.9B in operating profit in 2022
Tesla almost achieved that a year early with $6.4B in 2021 EBIT despite prolonged supply chain challenges. The 2022 estimate is now $12.2B
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YoY $TSLA growth rates in Q2:
Revenue +42%
Gross profit +47%
EBIT +88%
GAAP EPS +91%
This is despite covid shutdowns shuttering their main production facility for half the quarter
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This week CEO Jim Farley reiterated that Ford doesn't have the expertise to produce EVs & can't compete against Tesla on talent & distribution
Are there any other industries where multiple CEOs consistently state they can't compete against the company disrupting them?
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Putting $TSLA deliveries into perspective
There is no company nearly this big growing this quickly
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Putting $TSLA Q1 deliveries into context
Tesla grew deliveries by 68% YoY
Total global automotive deliveries are expected to fall by 16% YoY
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Consensus is Tesla is overearning this year and EPS will decline beyond Q4'22 because vehicle prices are coming down
This ignores the other side of the equation: cost reduction
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$GOOG is trading at <22x LTM, likely <18x forward, earnings from just Search, Google Network, and YT, excluding net cash. Even less if you adj. for SBC
You get the rest of the business - Cloud ($18B LTM rev), Waymo, Ventures, Verily, etc - for free
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It took Fremont 7.7 years to make 1M cars
It took Shanghai 2.6 years to make 1M cars
Tesla will make ~2M cars in the next 12 months
$TSLA
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Wow even CNBC falsely reporting that Tesla had negative FCF without btc sale. It’s easy to understand why the company is so misunderstood when nobody bothers to read the financials
. $TSLA shares higher in whipsaw trading after profit tops target. @andrewrsorkin, @JoeSquawk and @BeckyQuick discuss:
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Tesla's non-automotive businesses quietly doing $15B annualized revenue and growing 57% y/y
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The market size of car sales is much larger than the global advertising, software, streaming, cloud, and smartphone markets *combined*
Why do legacy auto OEMs have such low market caps relative to leaders in other industries?
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Haven't seen this reported anywhere: Tesla wait times in China have raised again to normal levels of 4-8 weeks
As predicted, Tesla prioritizing exports again now that Q3 delivery wave is basically over. Domestic customers have to wait
$TSLA
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The key thing people get wrong when thinking EV competition is bad for Tesla:
Vast majority of consumers aren't prioritizing the environment when choosing a car. They just want the best product & technology, which Tesla offers and just happens to be an EV
$TSLA
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Inflation/commodity price fears are overblown for Tesla
Here’s why Tesla will continue to expand margins, and grow its EV lead, despite these issues
$TSLA
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If you’ve followed me, you know I’m a huge proponent of EVs even though I’ve never invested in any of these companies. While I remain optimistic on the future of EVs, the amount of deception/fraud mixed w market euphoria here is truly insane & more bankruptcies are likely to come
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I think the market is slowly realizing that $TSLA will generate ~$8B of FCF in H2'22
Consensus estimates are just $5.4B
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My biggest takeaway from the $TSLA shareholder meeting is more clarity on factory targets
- new factory location to be announced this year
- goal is 10-12 factories averaging 1.5-2M units each
- Fremont is an outlier but could still reach ~800k/year
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Point here isn’t that Tesla is undervalued, but that you can't compare it against traditional OEMs. The market seems to realize this, but many people are still missing these differences and continue to compare metrics like unit sales. Hopefully this provides some clarity
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In summary: Tesla just posted the highest GAAP EBIT (14.6%) & auto gross margins (30.5%) by any major auto OEM in any quarter in at least 25 years
Since this is unprecedented, analysts are being conservative by not assuming much margin expansion. I think they’ll be proven wrong
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1) Distribution: Legacy OEMs sell wholesale to dealers but Tesla is only DTC. This changes the unit economics, so Tesla doesn't need to sell more cars than incumbents in order to surpass them in revenue & profit. Tesla's Q3 vs Ford/GM illustrates this difference in unit economics
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$NKLA reached a peak market cap of $34bn (currently $2.3bn) after projecting $300mm in revenue this year, growing to $3.2bn by 2024
Turns out, they faked videos of their trucks by rolling them down a hill and still haven’t generated any material revenue
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The "EV competition" argument against Tesla is fundamentally flawed. The main competition (with 89% share!) is ICE vehicles
Which category is most likely to lose market share with the introduction of new EVs?
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EVs still face a major awareness problem
>60% US consumers aren’t interested in any EV. Their primary reason is that the cost is too high, which simply isn’t true
Tesla’s opposition to advertising has hurt its brand, business, margins, and ability to scale
Massive mistake
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Despite a challenging year with plenty of noise, Tesla significantly outperformed expectations
FY22 est. revenue
1 year ago: $72.8B
Today: $82.9B
FY22 est. GAAP EPS
1 year ago: $2.38
Today: $3.21
FY23 estimates are also much higher than a year ago
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1/5 Layoffs are an unfortunate part of operating a business, but this is not surprising or concerning
Tesla CEO Elon Musk says the electric carmaker needs to cut staff by around 10%, noting he had a “super bad feeling” about the economy, Reuters reports citing an internal email trib.al/HKdrTT3
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Argo AI shutting down is a good reminder that consultants and MBAs aren't the right people to assess new technology
Autonomous Driving Leaderboard 2021 has been published by Guidehouse Insights. Summary is here: inverse.com/innovation/best-… , complete report here guidehouseinsights.com/repor…
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Tesla's vehicle inventory is only 4 days of supply
This is unprecedented in the auto industry. Another sign of strong demand
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7/ June 2023
Legacy OEMs have no experience writing code or developing software
They outsource the software to 150+ different companies, all of which are siloed and own their own IP, which makes the integration near impossible
Ford CEO Jim Farley explains why legacy auto software sucks.
To survive, legacy automakers will need to learn how to be software companies for the first time.
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You can tell GM has strong EV expertise by looking at its two key EV investments to date, Lordstown and Nikola
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$TSLA grew Q2 deliveries +27% YoY despite Shanghai lockdowns shuttering their main production facility for half the quarter and causing supply chain disruption across other facilities
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EV battery and powertrain warranties are 2-3x longer than warranties for gas cars and typically last many years post-warranty
Yet people think batteries are replaced every few years
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Toyota in 2017: we're nearing a technological breakthrough to bring solid-state batteries to market in about 5 years!
Toyota in 2023: we're nearing a technological breakthrough to bring solid-state batteries to market in about 5 years! 600+ mile range!
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Today’s news puts the “Tesla China demand is collapsing” narrative to rest
- Sep 19-25 registrations above estimates; on track for 80-85k Sep China deliveries (record)
- targeting 265k Q4 China production (33% above prior record). Even with 7% downtime, above estimates
$TSLA
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From a natural consumer demand perspective, EVs will erode ICE residual values because EVs offer:
1) significantly lower depreciation
2) higher customer satisfaction
3) 40-50% lower maintenance costs
Hertz tested >20k EVs and confirmed these findings on their Q2 earnings call
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The Tesla Model Y and Model 3 were the two best selling cars in California last year (gas or electric)
Each sold >40% more units than the next best selling car, which is much cheaper
Despite political drama, each model increased market share in Q4 in the most democratic state
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As we enter a potential recession, it's important to understand Tesla's level of consumer demand
Why this shouldn't be a concern for investors and is not the true risk to achieving their growth targets
$TSLA
forwardcap.substack.com/p/an…
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$ELMS reached a peak market cap of $1.7bn after projecting $613mm in revenue and $15mm in EBITDA this year, growing to $791mm in EBITDA by 2025
They never generated any revenue and have now filed for Chapter 7 BK
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$TSLA expectations are so low that even bullish analysts now expect negative EPS growth in 2023 relative to Q4’22 annualized
Anything is possible, but this prediction ignores Austin/Berlin ramps, IRA credit starting in Q1, & declining production costs
Great setup for investors
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$TDOC had a $30bn TEV when it announced its acquisition of Livongo for $18.5bn
Less than 2 years later, the combined companies have a $5.5bn TEV
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Tesla:
- one time CEO Award/payroll tax falls $537mm QoQ
- half of vehicles sold now use LFP cells w/ zero nickel
- raised prices across all models
- prioritized premium trims due to long wait times
- higher S&X mix
TSLAQ: "how can margins possibly increase? it has to be fraud"
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He probably isn’t even aware that the Hummer doesn’t quality for the tax credit
On my watch, the great American road trip is going to be fully electrified.
And now, through a tax credit, you can get up to $7,500 on a new electric vehicle.
ALT President Biden test drives an electric vehicle.
Community note
It should be noted that some rules for the clean vehicle tax credit are on hold until further IRS guidance is issued in March: cnbc.com/2023/01/25/inf…
IRS resources:
1) Credits for New Electric Vehicles Purchased in 2022 or Before: irs.gov/credits-deduct…
2) Credits for New Clean Vehicles Purchased in 2023 or After: irs.gov/credits-deduct
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Elon and the company are spending more time and money promoting his comp package than the company’s products
Sad state of affairs
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Conclusion: Tesla’s cost reduction allows them to lower prices to expand the addressable market, while maintaining industry-leading margins
This has been the company’s mission, and my investment thesis, for years. 2022 was unique given inflation for both costs & retail prices
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If you're wondering how this is possible and if it's sustainable, I wrote more about Tesla's operating leverage here:
autoinsights.substack.com/p/…
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2) Manufacturing: Tesla’s ROIC is rapidly improving & already higher than incumbents largely due to its vertical integration & production efficiency, despite investments in growth. CEOs at Ford (3rd pic) and VW (4th pic) have taken note
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People used to think customers were buying multiple $50-100k cars because they liked the CEO
News flash: customers care about the product & ownership experience more than anything else. This has always been the reason Tesla is #1 in customer satisfaction & brand loyalty
Elon Musk may be turning off some consumers, but Tesla is no worse for wear in an annual analysis of car brands' US customer retention trib.al/lbxZFuX
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Latest available EV margins (Q1 2023)
- Tesla: 21.1% auto gross margin
- Ford: -102.1% EV EBIT margin
- Rivian: -80.9% gross margin
- Lucid: -235.0% gross margin (not a typo)
- GM: doesn't disclose EV margins
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1b) This difference will continue to expand over time (see gross & operating margin trends) as Tesla scales volumes, localizes production, and brings battery production in-house (4680 cells) and as legacy OEMs cannibalize their most profitable products (point #3 of this thread)
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$GM EV sales over the past year
Q3’22: 15.2k
Q4’22: 16.3k
Q1’23: 20.7k
Q2’23: 15.7k
Reiterates 1M unit capacity guidance in 2025. Color me skeptical
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The implications of this real-world demonstration can't be overstated
Tesla continues to leverage its competitive advantages (i.e. powertrain & software) towards other massive industries
Here's my list (in order) why Tesla Semi will re-shape the commercial transportation market
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Random twitter accounts: Tesla has no advantages in manufacturing or software
CEOs of Ford & Volkswagen: I have news for you
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Auto OEMs have massive financing divisions that are heavily dependent on the residual values of their cars
For example, GM and Ford have $94 billion and $118 billion in financing debt, respectively
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My final thoughts on $TSLA Q2. Some negatives and positives
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Waymo and Cruise are at <50M cumulative miles combined across a fleet of <1k vehicles combined
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Some personal news: I’m starting a substack to cover long-term investing across the automotive sector, including Tesla/pure EV OEMs, legacy OEMs, and services/technology
My first post: Why autos is a very important, yet overlooked, industry for investors
forwardcap.substack.com/p/in…
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Mercedes’ level 3 autonomous driving system shows why the current rating system is flawed
It’s only designed to drive:
- on a straight road, no curves
- with a lead car to follow
- under 40 mph
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$LCID gross margin over the past 12 months
Q3'22: -152%
Q4'22: -139%
Q1'23: -235%
Q2'23: -268%
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Interesting findings from Uber’s entrance into the EV market:
- 95% of drivers had never driven an EV before
- 77% now want to stay in the program or purchase an EV themselves
- 94% of drivers had a positive experience with a Tesla
NEWS: Uber has announced that in the last 12 months, Teslas rented through Hertz have completed 5+ million trips & traveled 40+ million miles in the US.
As of Aug 1, 19.9k+ metric tonnes of CO2 tailpipe emissions have been avoided, equivalent to avoiding ~2.1M gallons of gas.
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