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Here's a thought for everybody ahead of earnings tonight:
What if, Tesla's increased operating margin and capex efficiencies are going to allow Tesla to increase its rate of growth going forward. Let me explain.
Everybody who closely follows Tesla should be aware that Tesla's FCF (Free Cash Flow) has improved a lot as of late, and that Tesla's operating margin and FCF are only going to get better in the coming 1-2 years, because they haven't even started MiC M3 and MY deliveries yet.
|OPEX as a % of revenue - https://hypercharts.co/tsla|
We also know that Tesla's capex efficiency per unit of production has improved dramatically with Giga Shanghai, and that the MY production ramp is looking like it'll be similarly efficient in terms of capex. Furthermore, this should only be the beginning, because this is the first time Tesla has designed and built a factory from the ground up. This is not unlike the Model S, which was the first vehicle Tesla designed and built from the ground up. So we can expect Giga 5, 6, and 7 to see further improvements just like the Model 3, Model Y, and Cybertruck have seen on the vehicle front. I don't believe we've reached Alien Dreadnought 3.0 yet.
Now, considering Tesla's rapidly improving operating margin and the fact that Tesla is also rapidly improving its capex efficiencies, we could see Tesla's rate of growth accelerating in the coming years as a result of this double increased leverage. Tesla will grow revenue and profits (standard growth), Tesla will add more profits per $ of revenue growth (increasing operating margin), and Tesla will need to spend less money to grow the same amount (increased capex efficiencies). What do you get when you combine these three factors? Potential for an exponential growth feedback loop on steroids.
What if on the conference call tonight, Elon discusses the plan for the next five years, and announces that they plan to build up to 10 total Gigafactories and reach an annual production output of 10M vehicles by 2025. How fantastic would that be?
The demand for 10M EVs in 2025 should easily be there. If cost parity with ICEVs isn't here already, it certainly will be here by 2025, and don't forget that many consumers still don't realise how much they would save in fuel and maintenance costs by buying an EV. When more people realise this, and EV prices drop a tad bit more, demand is going to explode.
Traditional manufacturers, assuming they can build compelling EVs that consumers desire, won't have anywhere close to the battery supply required to fulfill all of that demand. Tesla can capture a large market share, if it increases the rate at which it scales production. The increased leverage from its improving operating margin and improving capex efficiency, might allow Tesla to do just that.
For people who are skeptical of this, I suggest you study Tesla's financials. Tesla has increased its cash position in the second half of this year, in spite of building out a factory in China, and preparing for Model Y production. Once Giga Shanghai and Model Y start ramping, they're going to be accumulating a LOT of cash.
In my bearish projections for the next two years, I see Tesla's cash position increasing by $10.5B excluding capex. In my bullish projections, I see it increasing by $18.5B excluding capex. I'll probably post this model in a future blog post, but for now I'll say that the bear model assumes 570k vehicles delivered in 2020, and 830k vehicles in 2021. The bullish model assumes 650k vehicles delivered in 2020, and 1.2M vehicles delivered in 2021.
So where is all this money going to go? I think Tesla might announce two new factories in 2020. One factory for Cybertruck/Tesla Semi, unless both of these are going to be built at Gigafactory Nevada. And a second factory in China or a factory in India, as soon as Gigafactory Shanghai is successful and contributing to the bottom line.
Even if Tesla doesn't talk about this during earnings tonight, I'd be shocked if their internal plans don't at least target annual production of 5M vehicles by 2025. The biggest risk to Tesla not achieving this is in my eyes their battery supply chain. Therefore, let's hope for an epic Q4'19 earnings, and a great Battery & Powertrain Investory Day some time in 2020.
P.S. Just a friendly reminder that the market will likely not care nearly as much about future projections as it will about Q4'19 financials, which if they disappoint, could tank the stock pretty hard in the near term. It's also very likely that the market will simply refuse to believe a target as aggressive as 5-10M by 2025, just like few people believed 500k by 2020 back in 2015.
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