Why Tesla’s worth three times the price

The diversified car maker has entered the $1 trillion club but investors still underestimate the most widely held overseas stock in Australia.

‘Tesla’s integrated energy solution combines solar panels, battery storage and EVs to offer long-term savings unmatched by any other carmaker.’ Above, a Tesla supercharger station in Los Angeles. Picture: AFP

The valuation of diversified electric car maker Tesla has just passed $US1 trillion ($1.33 trillion), following a powerful surge in the stock to just above $US1000.

Can it keep rising? Let me tell you why Tesla is worth three times this much.

There is no doubt that Tesla and its founder Elon Musk polarise investors and markets, including in Australia, where it is the most widely held overseas stock among local investors.

Some investors are Tesla fanatics who follow every tweet from Elon like a religion, while others, including Michael Bury (of The Big Short fame) call Tesla the “greatest short in the world”.

Once again, Tesla’s share price has defied critics, up 150 per cent in the last 12 months after delivering a 720 per cent gain in calendar 2020.

Holon Global Investments believes that Tesla offers investors a once-in-a-generation buying opportunity and should be included in every investment portfolio. We value Tesla’s shares at $US3400.

Over the past 12 months, Holon has developed a 30-year demand model to estimate the global shift from internal combustion engine vehicles (ICE) towards electric vehicles (EV) over the next 30 years. Covering 92 per cent of the world’s population, our model predicts that global EV sales will surge to 206 million per year by 2050, more than double the current record of 93 million vehicles (both ICEs and EVs) in 2018.

There are two principal factors driving global EV demand over the next three decades. The first is government policy commitments to cut greenhouse gas emissions (under the 2015 Paris Agreement).

We believe governments globally will ban the sale of new ICE vehicles by 2040 and ban their use by 2050. The second factor is rising income across the developing world that will create a billion new vehicle owners, mostly in China and India.

Tesla will continue to race ahead and dominate the EV market. Tesla looks set to capture 20 per cent of global EV sales this year. With gigafactories in Nevada and Berlin opening soon, Tesla will have the necessary infrastructure in place to reach Holon’s 2025 production estimate of 5.5 million EVs per year.

Adding additional gigafactories over the next five years will allow Tesla to push its manufacturing capacity above 15 million by 2030, equal to 25-30 per cent of global production.

China’s EV leader BYD is the only other global carmaker that looks able to keep pace with Tesla.

Tesla’s use of AI and robotics across its manufacturing process is delivering industry-leading profit margins. Further improvements in profitability from increased production scale will allow Tesla to reduce vehicle prices and put pressure on competitors’ profit margins as they try to restructure their manufacturing towards EVs.

Level 4 autonomous driving (driver attention still required) is also expected to arrive by 2025, with the Tesla’s FSD (full self-driving) system the industry leader. Tesla’s advantage is its ability to capture the massive volume of data necessary to develop and test an effective autonomous system from its own fleet of vehicles.

Tesla’s integrated energy solution combines solar panels, battery storage and EVs to offer long-term savings unmatched by any other carmaker.

A family of four living in Sydney can save $70,000 in electricity and fuel bills over the next 25 years, covering the purchase cost of a Tesla Model 2 in 2023 and a second Model 2 vehicle in 2035.

The biggest threat to forecasts is insufficient raw materials supply to meet lithium-ion battery demand. To meet our production forecasts until 2030, lithium supply will need to grow by 298 per cent (2030 demand versus 2019), cobalt by 145 per cent, nickel by 44 per cent and graphite by 198 per cent. While substantial untapped reserves do exist, they must be quickly developed to ensure sufficient supply.

Tesla’s competitors will struggle to keep up with the company. The world’s largest carmakers are drowning in $US900bn of debt, with half related to customer vehicle financing.

The three main German carmakers, VW, BMW, and Mercedes Benz, collectively hold $US450bn of debt, while GM and Ford hold $US250bn, and Toyota $US150bn. They are also facing steeply rising costs from factory closures and staff healthcare and retirement benefit expenses.

Insufficient free cashflow has prevented traditional carmakers from building enough EV capacity, leaving them unable to compete effectively against Tesla.

Holon believes that many carmakers could vanish in as little as 10 years.

China’s carmakers are in a stronger financial position and look set to capture global market share, particularly across developing markets. If sufficient raw material can be supplied to meet battery material demand, Tesla’s annual free cashflow will reach $US500bn by 2037 and $US1 trillion by 2047 and allow dividend payments and share buybacks to begin from 2025.

Tesla’s revenue should hit $US1 trillion by 2032 and surpass $US2 trillion from 2039, allowing Tesla to accumulate long-term investment assets reaching $US10 trillion by 2050. This would support a valuation beyond $US20 trillion by 2050.

Tim Davies is director of research at Holon Global Investments.