Tesla Revenue Analysis: How Far it Leads?

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Here is the transcript (edited – smoothed – filtered) version of the discussion about Tesla revenue analysis in our small-hidden group. As usual, our answer always tries to give insight beyond the number that is written in the financial report.

Q: What is the most interesting point from Tesla Financial Report 2021?
A: In our Tesla Revenue Analysis, we have to admit that Musk and co. really do a good job on Gross Profit Margin

We begin with the fact that Tesla’s Gross Profit Margin (GPM)(1) rises from 17.66% in 2019 to 26.54% in 2021. A good number, but we can’t find out how Tesla could achieve it. According to shareholder deck 2021, Tesla said that the glorious profit margin is contributed by the use of 4860 batteries, which we doubt.

Why are we not sure? Because the use of 4860 batteries will be executed in early 2022, the effect of it won’t be materialized in FY 2021. The good news is we could expect another GPM improvement in FY 2022.

Rising Gross Profit Margin is our concern on Tesla revenue analysis
The trend of GPM, 2019 – 2021, source: Tesla Annual Report 2021.
Comparing Gross Profit Margin with other carmakers is our concern on Tesla revenue analysis.
Tesla GPM against other carmakers, source: Tesla shareholder deck 2021

Q: Can you explain why this become our first topic of conversation, how vital is this?
A: The first and the foremost is because in the industry with cruel competition like auto – so many players on the field – the margin will help a lot.

When the competition heats up, companies with a high margin like Tesla could reduce the price of its vehicle to beat competitors. Let me explain.

More margin means more room for Tesla to develop batteries or other technology to make the EV more affordable via Research and Development. As a result, the Texas-based company could deliver the cheaper vehicles and lead the competition among other carmakers.

And we think Tesla is good in this field.

Take a look at its brand-new battery 4680 type as an example. Despite some cons, the battery delivers the following advantages compared to the current version:

  1. 16% further range
  2. six-times power
  3. 56% cheaper in kWh and
  4. 50% less cost to build.

To give you perspective, the first generation battery from Tesla is Tesla Roadster that could drive you 244 miles, the 4680 could make it 279 miles.

So, if you ask me, what matters with Gross Profit Margin? Man, it tells a lot of stories. A lot.

  1. Gross Profit margin is simply how much your rough profit is in percentage from total sales. In Tesla’s case, if Tesla could sell one sedan with a $200,000 price tag and produce that sedan requires $150,000 your GPM is 25%.

Q: 2021 is The Second Year of Positive Earning, Any Comments?
A: We believe that Tesla’s economies of scale start to kick in. So, this section should discuss the effect of economies scale on Tesla revenue analysis

Long story short, The sales finally exceed all the expenses – whether it is production cost, sales, or administrative. The Production cost itself has had no problem since 2018, Tesla has had a positive Gross Profit since then, but the problem is the Gross profit still can’t exceed the administrative and marketing expense till 2020. We don’t need to pay attention to the administrative expenses, it is fixed costs, the tricky part is the marketing.

As we know, the marketing bill for auto companies is swinging wildly to attract public attention. We aren’t sure that tesla didn’t pay Big Bang Theory to present Elon Musk in front of Howard Wolowitz or when to shake hands with my all-time favorite actress Gwyneth Paltrow in Iron Man 2.

Pepper Pott, gentleman

What we admire is, that Tesla could make positive earnings while another carmaker still struggles to make their EV cost-efficient. In the mathematical expression, the other carmaker difficult to make the sales exceed the cost of production. Let alone the marketing cost.

What we like is, that even with this leading position, Tesla is still at full speed. As we see at its balance sheet for long-lived(2) assets aka factory. The facility is almost double the value, which means that it is ready to manufacture more and more EVs.

Tesla long-lived asset, source: Tesla Annual Report 2021

  1. a long-lived asset is an asset that is estimated to give long-term economic benefit, in the Tesla case, it is the factory itself. A unit that produces the EV.

Q: OK, besides the GPM, is there any other important thing?
A: We need to take back to cost structure.

This brings us back to the previous section. Guys, actually we are still in the conversation about GPM, but for the sake of conversation flow, let us change the subject with the expense. We already have production costs that relate closely to the Tesla Gigafactory scale, and we also have Gwyneth Paltrow related to marketing expenses. In the last item we talk about, the long-lived asset also plays a critical role.

By opening factories in strategic geographic locations like Europe and China, Tesla could reduce sales cost further. Since it will reduce the shipping cost. Delivering one sedan from Texas to Beijing could be pricier than in Shanghai.

Once again we see Tesla’s position is in the front.

Q: It seems that Tesla’s position is extremely well.
A: Yes, but it needs to be very careful

As we have said, we will say again and again. Tesla competes in the cruel industry. It is price sensitive, tight competition, tight regulation, high capital expenditure. To remind you, Tesla’s competitor has existing advantages like a manufacturer that spread globally, fuel station, no need to worry about the range, has a selling channel and service center. Listen up, if the incumbent player like GM, Toyota, or BMW could deliver EVs at scale, the advantage of tesla could be replicated overnight.

To overcome this, Musk and co. need to:

  1. Keep R and D, keep reducing battery cost even further.
  2. Build more and more superchargers integrate them with Tesla energy. One of Tesla’s advantages is it is an integrated energy company. If Musk could optimize this, Tesla could be relevant for a long time.

As we see today, we have faith that Tesla could fulfill this, but investors need to stay alert.

We have baterry development, scale advantage, so it means that Tesla is unparalleled in EV industry?
Yes, but we know the end of this question. We don’t think EV is the massive disruption like Google, Apple or Amazon. We can’t make valuation as if Tesla is them. Tesla Revenue Analysis should consider this.

Yes, and yes. Tesla is the undisputed champion in the EV world, but don’t get it wrong. Thinking of Tesla as EV and Tesla as the big wave of disruption is extremely different. Let us give you several points as follows:

  1. We know that some investors think of Tesla as the next Apple, Google, or Amazon. they expect Tesla to be the next wave of disruption. Reason? Tesla has its own ecosystem – selling channel, software, and battery – it looks like Apple. But we recommend you to visit here to get a deeper insight into this issue.
  2. Practically, we would like to recommend investors think of Tesla as a carmaker. It has its own OS, and ecosystem, yes we know. But as Satya Nadella said, every company today is a tech company. Having software doesn’t make a competitive advantage for Tesla to get stronger.
  3. Never underestimate another carmaker’s effort to catch up with Tesla. So, with ultra-luxury valuation, the little potential to be a massive wave of disruption, and other carmaker threats from distance, we beg investors to be careful. Tesla is a good company, but not that great. Even when it is really that great, it still doesn’t deserve unlimited valuation.

We urge investors to read another section regarding Tesla’s competitive advantage.