We’re launching a brand new content under the tag “Product Analysis”. Unlike "Stock Ideas", we focus on goods and services offered by companies with the aim provide useful, succinct and thorough profitability analysis.
In recent months (and years), we've been pitched numerous arguments for and against Tesla. One thing that was not discussed enough is Tesla’s profit margin per vehicle, in our view.
We start by breaking down each vehicle Tesla offers, identifying the key drivers. Next, using company data whenever possible, we triangulate and analyse Tesla’s profit margin per car, specifically its profit per vehicle. In addition, we compile comparables to see where Tesla stands relative to its peers, both electronic vehicles and traditional automobile manufacturers.
Tesla’s naysayers must be fuming with its ~360% return year-to-date despite the coronavirus crisis. It almost feels like Tesla’s stock is mimicking SpaceX’s successful Falcon 9 launch in May. With close to $20 billion short interest (~7% of its market cap), Tesla is arguably the most hotly debated stock so far this year.
What does Tesla offer?
Tesla currently offers 4 vehicles, Model S, Model 3, Model X and Model Y. Here’s a table summarising the interesting specs of the vehicles and its price.
(Info correct as of 12 July 2020)
|Model S (LR+)||3.7s||155 mph||402 mi||$69,490|
|Model S (Performance)||2.3s||163 mph||348 mi||$89,490|
|Model 3 (SR+)||5.3s||140 mph||250 mi||$31,690|
|Model 3 (LR)||4.4s||145 mph||322 mi||$40,690|
|Model 3 (Performance)||3.2s||162 mph||299 mi||$48,690|
|Model X (LR+)||4.4s||155 mph||351 mi||$74,690|
|Model X (Performance)||2.6s||163 mph||305 mi||$94,690|
|Model Y (LR)||4.8s||135 mph||316 mi||$43,690|
|Model Y (Performance)||3.5s||155 mph||291 mi||$53,690|
Model S is 5-door liftback sedan that was first introduced in 2012. As of June 2020, Model S Long Range has an EPA range of 402 miles. This is the highest of any battery-powered electric car produced so far.
Model 3 is a 4-door sedan introduced in mid-2017. As of March 2020, it is the world’s best-selling electric car, with more than half a million units delivered globally.
Model X is a mid-size electric 5-door SUV first introduced in 2015. Seating up to 7 passengers, it is also famous for its iconic falcon wing doors.
Model Y is a 5-door compact crossover SUV (CSUV). A more economic version of the Model X, it is currently planned for production in Q4 2020. At the time of writing, Tesla reduced Model Y’s price and cancels its standard range version. We have not factored this in the table above.
What makes Tesla Tesla and how does it work?
From the beginning, Tesla’s mission aimed at sustainable energy. Founded in 2003, one of Tesla’s initiative was to disrupt the centuries-old car manufacturing industry by creating sustainable transport. Outside electric vehicles, Tesla is also engaged in building a sustainable ecosystem such as solar panels and power storage. Tesla models unique, cutting-edge and 100% electric. Battery powered, it can take up to 12 hours for its cars to be fully charged.
Why is Tesla so expensive?
Tesla vehicles are one of the pricier car in the market, With an average price of just over $60k. In addition to its high demand, here are few key drivers on why Tesla so expensive
- Economies of scales. Having only begun production in June 2012, Tesla continue to lag its peers in terms of economies of scale. The high sunk cost means that Tesla may only benefit from greater production.
- Costly production materials. Tesla source its parts from a blend of high tech industry and traditional automotive suppliers. For this reason, the cost of technology and expertise needed to produce its vehicles are much higher. For example, for its Model S and powertrain programmes, Tesla sourced >2,000 parts from >300 suppliers globally.
- 100% electric. Tesla is fully electric. This means that you will never need to rely on fuel ever again. However, this relies also on its highly costly battery technology.
Is Tesla profitable?
At the time of writing, Tesla delivered positive net income three consecutive quarters since 3Q19. While this is positive, we expect more volatility on this number going forward as global growth and consumption remain hampered by the coronavirus crisis.
Tesla's profit per vehicle
Finally, to the most interesting part of the article. The bellwether of the automobile industry - profit per vehicle (PPV). PPV allows for a like-for-like comparison across different car manufacturers. Specifically, we analysed a handful of car manufacture to paint an idea of where Tesla's PPV will develop in future years.
In this setting, we chose BMW, Mercedes, Porsche, Audi as comparables for Tesla. Tesla’s perceived exclusivity is a good comparison with its luxury peers. In addition, we also added Toyota, one the world’s largest manufacturer, as a peer. Toyota’s mass market approach and maturity as a company may provide an idea of Tesla's roadmap in the future, once significant economies of scales and critical mass has been achieved.
From the charts, Tesla has noticeable more red bars relative to its peers. This is not unexpected given the sophistication of production of its vehicles. Furthermore, Tesla only started its production in 2012.
Porsche definitely stood out with an average profit per vehicle of $17,666. At least, there is some evidence of barriers to entry by serving a niche market. Intriguingly, it can be argued that Tesla is also serving a niche market in the EV space today. On the other hand, it’s fascinating to learn that Toyota’s average profit per vehicle relative to Audi's is much closer than you think!
In addition, Tesla’s average profit per vehicle over the past three quarters is $3,029, which is greater than that of Audi’s. Given Tesla’s product suite and upcoming new products (Roadster and Cybertruck), on a steady state, it is plausible to see Tesla's profit per vehicle outpacing that of BMW’s.
Finally, we think BMW & Mercedes offers an idea of what Tesla’s longer-term PPV may look like (with some upside, of course!). Toyota’s average PPV would likely be an indication of Tesla’s longer term lower bound should they start dipping themselves in the wider market.
We summarise our analysis with the following observations:
- Tesla vehicles are expensive due to its costly production materials, highly sophisticated production process and is 100% electric.
- As a company, Tesla has so far delivered 3 consecutive quarters of positive net income. We expect greater volatility in this number. It remains to be seen how Tesla's profit per vehicle will develop.
- Tesla has reported a positive PPV for the past 3 quarters since 3Q19, with an average of $3,029.
- While still lacking its peers today, our analysis points to an average PPV that could outpace its luxury peers, such as BMW and Mercedes.