There is no doubt that Tesla and its founder Elon Musk polarize investors and markets. 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 11% in 2021 after delivering a 720% gain in 2020.
But for many investors, the question remains: Has Tesla’s share price reached its peak, or has its journey just begun?
From our recent Report, we believe that Tesla offers investors a once-in-a-generation buying opportunity and should be included in every investment portfolio. We value Tesla’s current share price at $US3,369 – substantially higher than its current $US905 share price.
Over the past twelve 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% of the world’s population, our model predicts that global EV sales will surge to 206 million vehicles 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 one 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% 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% of global production. China’s EV leader BYD is the only other global EV automaker that looks able to keep pace with Tesla.
Tesla’s use of AI and robotics across its entire manufacturing process will deliver the company industry-leading profit margins. Further improvements in profitability from increased production scale will allow Tesla to continually reduce vehicle prices and put pressure on competitors’ profit margins.
VW’s CEO Herbert Diess highlighted the massive challenge ahead for traditional automakers when he reportedly said at a recent executive meeting, “A Model 3 is built in 10 hours, more than 3 times as fast as a VW ID.3 (manufactured in German plant). This puts Tesla in another dimension in terms of productivity and profitability.”
The arrival of 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, which we estimate will grow to 15 million vehicles in 2025.
Tesla’s integrated energy solution combines solar panels, battery storage and electric vehicles to offer long-term savings unmatched by any other automaker. A family of four living in Sydney can save A$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 Holon’s EV demand 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% (2030 total demand versus 2019), cobalt by 145%, nickel by 44% and graphite by 198%. While substantial untapped reserves do exist, they must be quickly developed to ensure sufficient supply.
Tesla’s major competitors will struggle to keep up with the company. The world’s largest automakers are drowning in US$900 billion of debt, with half related to customer vehicle financing. The three main German automakers VW, BMW, and Mercedes Benz collectively hold US$450 billion of debt, while GM and Ford together hold US$250 billion, and Toyota holds US$150 billion. Each is also facing steep rising costs from factory closures and staff healthcare and retirement benefit expenses.
Insufficient free-cash flow has prevented traditional automakers from building enough EV capacity, leaving them unable to compete effectively against Tesla. Holon believes that many traditional automakers could vanish in as little as 10 years.
China’s automakers are in a much stronger financial position and look set to capture global market share, particularly across developing markets. Rising wealth across India should see vehicle ownership rise from 9% today to over 30% by 2050, with strong Indian EV brands likely to emerge in a market capturing one in every four EVs sold globally over the next 30 years.
If sufficient raw material can be supplied to meet battery material demand, Holon predicts Tesla’s annual free cash flow will reach $US500 billion by 2037 and $US1 trillion by 2047 and allow dividend payments and share buybacks to begin from 2025.
Using a discounted cash-flow (DCF) valuation approach, Holon’s current share price valuation for Tesla is $US3,369, substantially higher than its current $US785 share price.
We expect Tesla’s revenue to 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. Holon believes that Tesla is a once-in-a-generation opportunity and must therefore be a core long-term investment holding.