Tesla: Unlocking the Age of Abundance

Q4 2022 ER Digest

Edited by Brian Birnbaum.

Note: Most graphs are extracted from Tesla´s Q4 2022 shareholder deck.

Tesla continues to compound its AI, manufacturing and energy businesses. The combination is likely to yield a much higher market cap in the future.

Tesla remains a fundamentally misunderstood company, with the market focusing on its superficial aspects. Tesla as an organization has a supreme ability to evolve. Evolution has created the wonderful universe that we live in via incessant experimentation and iteration. Partly due to its flat hierarchy and mostly due to its culture, Tesla is constantly able to evolve its respective business lines and excel despite pervasive gloomy narratives.

“On a full year basis, revenue increased over 50%, operating income doubled, free cash flows increased over 50%, and our margins remained industry-leading.” - Zack Kirkhorn, CFO @ Q4 2022

In my original Tesla thesis, I outlined how the company is set to unlock material abundance for humankind by compounding and connecting:

1. AI.

2. Manufacturing.

3. Energy.

The gradual commoditization of the above is bound to redefine our economy. Being a shareholder since 2016 (SolarCity acquisition), I see two general paths. On one path Tesla remains a car company. Even within such a scenario, with EVs accounting for a relatively small % of market share, there’s plenty of room to grow. The other path allows Tesla to evolve into a platform for products and services in robotics, manufacturing, and intelligence on a global scale. Naturally, the latter path offers much more runway, therefore justifying a much higher valuation than today´s $654B.

Realistically, the company may successfully yield any number and combination of these verticals and, regardless, greatly increase market cap. As I explore below, the company is executing well on all three fronts and, thus, odds are looking quite favorable.

At the end of Q4, 400,000 customers in North America had access to FSD Beta. This is up from a few thousand just over 2 years ago. The autopilot is still not on par with human performance, but it’s only inevitable as computing power compounds over the next decade and the beta spreads to more owners of Tesla vehicles. Simultaneously, Tesla continues to compound its hardware advances through vast improvements in AI training and inference. Check out my AMD deep dive for an in-depth exploration of Tesla´s approach to hardware.

“ […] we think Dojo will be competitive with the NVIDIA H1 at the end of this year and then hopefully surpass it next year.” - Elon Musk, CEO @ Q4 2022.

Further, in my Tesla deep dive I learned about the company´s quest for lean manufacturing. Thus far they’ve been successful by decreasing the cost of change, enabling rapid iteration as modern software will allow. Evidence of such lies in Tesla´s operating margin (purple line) versus that of other auto OEMs, which the market (sometimes) believes are directly comparable. In Q4, Tesla´s operating margin came in at 17%, despite the inflation and supply chain disruptions.

Tesla is on its way to sell mass market vehicles with Ferrari margins.

Tesla is also ramping up 4680 cell production, hitting 1000/week at the end of FY2022. The 4680 cells not only improve the cars but also serve as the foundation of their energy business. Indeed, renewable energy only goes as far as how much yield  can be stored. In theory, sufficient economies of scale could deliver energy at a marginal cost to the world. Tesla is, at the very least, keeping this vision alive.

Q4 2022 excerpt:

Analyst: “[…] it looks like the investment cost per kilowatt-hour is less than half of what I've seen anywhere else.”

Elon: “And it goes back to the point I was making. I said it several years ago, I think Tesla's really the competitive strength that will be, by far, the hardest for other companies to replicate is Tesla being just d*** good at manufacturing and having the most advanced manufacturing technology in the world. And if you've got that sort of advanced manufacturing toolbox, you can apply it to many things and we're applying it now to battery cells.”

Tesla´s three big bets make their cars better and allow them to maintain the same levels of profitability while lowering prices. In turn, they compound goodwill through economies of scale, satisfying their customer base and paving the way successful distribution of their next-gen products and services. I’d wager the ASP deltas over the last year are noise. I believe Tesla cars are as desirable as they were when the market was pumping Tesla’s share price–perhaps even more so.

With $1.5B in long term debt and $22.18B in cash, the company is inured to recession. At this point I feel somewhat generous labeling the coming recession considering the ceaseless nature of its imminence. The company's ability to generate cash limits my level of worry. I also believe that Tesla is positioned to keep growing come rain come shine. Whilst I cannot put a finger on where the company will be exactly a few years from now, it remains one of the more attractive probabilistic set ups in the market. 

Until next time!

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Disclosure

These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.

Antonio Linares makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Antonio Linares does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Antonio Linares is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.