Description

One of my ex-girlfriends mentioned to me recently that her husband wanted to name their second son “Elon”. He didn’t get his way, but I was impressed with his fanboy conviction. As evidenced by my VIC comments over the years, I too am an Elon fanboy. So I thought, “How do I top this?” Do I get an Elon tattoo on my ankle? Oh I know, I’ll post a long recommendation for Tesla stock on Value Investors Club. NOTICE ME, SENPAI!

Tesla’s enterprise value is $69 billion and the company has an accumulated deficit of $4.3 billion. Tesla burns through money at an impressive rate and thus must continue to raise outside capital. The company nearly died the last time capital markets closed and this could certainly happen again. The company is taking on the largest industries in the world with powerful competitors. Lots of things can go wrong. The stock can get blown up at any time. Size appropriately, people.

However, Tesla has shown an incredible ability to innovate and execute because of Elon Musk. The dude is an inspiration because in a world where the scope of ambition has been to figure out how to best send disappearing nudes, he wants to increase the probability of humanity’s long-term survival by hastening the adoption of sustainable energy and putting a colony on Mars. I think Tesla eventually wins because of this. The lever of technology continues to amplify the differences in output between superstar performers and everyone else. If you’re one of the top minds coming out of school, are you going to work for General Motors or go save the god-damned world with Elon at Tesla? And when you get to Tesla, you will work 100 hour weeks because the CEO is working even more hours because, oh yeah, we’re trying to save the god-damned world.

I won’t pass out any more Kool-Aid because honestly I want it all for myself, but that’s the core assumption of the long thesis. It’s like looking at Bill Gates when he said, “a computer on every desk” and deciding if he is crazy or the right kind of crazy. A single person wielding the lever of technology with an inspirational goal that attracts the best talent and has the moral authority to demand superhuman efforts really can build hundreds of billions of dollars of wealth. Up to you to decide if Elon is crazy or the right kind of crazy.

Tesla has the potential to blow up an unspeakable amount of market capitalization over the next 20 years.

Automakers

Many of the traditional automakers look like Nokia in 2007 to me. Constrained by their legacy business when a vastly superior clean sheet design from a vertically integrated new entrant shows up. I pulled up the competitor list to GM in Factset, so I’m probably missing some companies, but I’m not worried about precision. This list of 19 companies represents $1.87 trillion of enterprise value on $1.88 trillion of sales and $111.5 billion of operating income.

A few reasons why Tesla may blow up all these companies:

1. Tesla’s cars are just plain S-3-X-Y, like the iPhone. Tesla made something people want.

2. Electric cars are already cheaper to operate than internal combustion (ICE) cars. Quick math. A Tesla Model X 90D uses 39kWh per 100 miles. I pay $0.15/kWh, so it would cost me $5.85 per 100 miles. A BMW X5 xDrive35i does 20MPG and my gas costs $3.69/gallon, or $18.45 to drive 100 miles. That's $1,500 per year on 12,000 miles. Electric cars also have few moving parts, thus are cheaper to maintain.

3. Lithium ion batteries are the primary reason electric cars are currently more expensive than ICE cars. Battery costs are coming down quickly though, and we’re probably close to the point where electric cars are no longer more expensive to make than ICE cars. If the battery cost curve continues, electric cars will be cheaper to make than ICE cars.

4. Automakers can’t transition off their legacy cash flow: “Yeah, you know, electric cars are just better than ICE, but keep buying our ICE cars anyway until we get some electric cars out.”

5. Even if the legacy automakers wanted to go all out electric, where are they going to get the batteries? There were 103GWh of lithium ion capacity in Q1 2017. Excluding other battery uses, of which there are many, that is enough for only 1.37 million 75kWh battery packs. There is one company out there building Gigafactories worth of battery capacity. You can guess which one.

6. Autonomous driving may end up as winner-take-all. The more road data that is fed into the machine learning algos, the better the algo becomes at driving which leads to more cars with those algos, which leads to more data to make those algos better… you see where this goes. Tesla’s Autopilot 2.0 update asked the owner’s permission to collect road data from the cars.

You can throw in the automotive supply chain and car dealerships as companies that will get blown up with the transition to electric, but what’s a few more billion in enterprise value when we’re already at $1.8 trillion.

Energy

Elon is reported to have said that his family worries Russia will assassinate him. Kind of a joke, but kind of not really. According to the U.S. EIA, around 50% of oil is used for gasoline. Sometimes I try to think through all the cascading effects of a 50% reduction in oil demand, but then my head hurts and instead I check VIC to see if bowd57 has posted something awesome. In any case, here are some big energy companies.

That’s $2.69 trillion of enterprise value on $2.07 trillion of sales and $137.5 billion of operating income. I really don’t know what the legacy oil companies do. Buy some lithium mines? Electric cars are better products and better for our planet. I guess some portion of the population is virulently anti-reality/science so maybe they obfuscate with things like the “long tailpipe” argument. Or try to kill Elon.

Electric Generation

Tesla owns SolarCity and they have Gigafactory 2 to make solar cells in Buffalo. Elon has stated Gigafactory 2 may end up with 10GWh of annual solar production. That’s small beans compared to the 3.9 million GWh consumed annually in the U.S., but presumably more Gigafactories can be built. Let’s look at this pretty picture from Tesla showing their solar roof.

I think if I was an executive at a boring utility company earning my regulatory return and trying to get better at golf, this picture would give me the yips. First, Tesla’s solar roof. Instead of unattractive solar panels a homeowner can now have a sexy tempered glass roof that will basically last forever and comes with a forever warranty anyway? So people don’t have to replace their roofs every 15-20 years and they can get 100% of their power needs potentially saving thousands per year? Then on to the Tesla Powerwall sitting next to the house. Even if the house is still connected to the grid, the Powerwall can smooth out consumption over the day and night which means the billions I’ve spent on peaker plants are stranded? Wait, wait… it costs like $0.03/kWh for electricity transmission, what if solar gets below the cost the transmission? Every single utility is dead if that happens. Mr. Burns saw the future.

Here are some U.S. electric utilities. I’m sure I’m missing some, and you can add in utilities in other countries if you want. This is another $940.0 billion of enterprise value on $255.6 billion of sales and $51.1 billion of operating income.

A Trillion Dollar Company?

Adding it up, this is $5.51 trillion of enterprise value on $4.21 trillion of sales and $300 billion of operating income. If anything, I’m underestimating the amount of value that will be disrupted. I don’t know what Jim Chanos is doing short Tesla. He should be going around telling his investors some of the most epic short opportunities in history are going to happen over the next 20 years as electric, autonomy, and solar blow everything up. Invert my writeup and it’s a short roadmap for the next 20 years.

Can Tesla become a trillion-dollar company? That will give you a ~15X return from here. It might be crazy to think Tesla can get to $50 billion of operating income and a 20X multiple on that, but you see enough technology cost curves and adoption S-curves throughout history that you begin to think there are much crazier and less likely propositions being offered by Mr. Market today. Tesla isn’t going after small markets. Come, have some Kool-Aid with me.

Catalyst

Elon saves us from the heat death of the universe.