2021 was a record year for Tesla, in terms of profits and deliveries. But could its focus on deliveries instead of new models in 2022 hurt its stock price? Anthony Okolie speaks with Jacky He, Global Auto and Materials Analyst, TD Asset Management, about the bull and bear case for Tesla.
Yeah. Anthony, thanks for having me. You made a great point. Tesla just made a record profit last year. And if you think about making an EV is hard, making it profitable is even harder. Tesla is a unique case here. It's a megacap name still growing the top line 20, 30%, and it's cash positive. Why? Very profitable. Think about every car Tesla sells. They make about $15,000 U.S. gross profit on average. But thanks to their manufacturing, thanks to their cheaper battery and supply chain management, the story does not stop there. Going forward, they can potentially have a lot more potential if they can recognize more recurring software revenues. All these years, they have accumulated a lot of drivers' data, that helps make their software smarter. So that positioned them really well when we move to the autonomous vehicle work.
OK, next, talk about Tesla's approach to supply.
Yeah, that's important, Anthony. I think especially the whole industry is facing the chip shortage and supply constrained environment. Companies like Tesla and Toyota outperformed the industry last year. One of the reasons is because of their differentiated business model. You mentioned iPhone uses about 700, 800 parts. A typical car can use from thousands to tens of thousands of parts and a missing part can create delays in production and then in sell sales. The differentiating model for Tesla is vertically integrated, so it has better control with upstreams. That allows them to better contain cost and more importantly, better secure supplies. And going forward, when the work becomes more competitive. Tesla can be really nimble. Think about if they want to upgrade some features to be more competitive. They don't have to go back and forth with suppliers to find out the optimal parts for the optimal software. They can just integrate their hardware with their software very quickly. More recently, later this quarter, we're probably going to see Tesla equip their Model Y with their latest battery cell 4680, so that can be a plus.
OK. And your final bull case, brand value.
Yeah, it's final but I think it's probably a bigger case for Tesla. We all know Tesla has a good management and visionary leadership. Its product is really fun to drive and has a sleek design. All those things contribute to Tesla's brand value. What that means is while a consumer, like myself, thinks about buying an EV, Tesla will be the first brand coming to my mind. That's why last year, of every four electric vehicles sold, one was from Tesla. And as the whole industry is transitioning, Tesla still has a long runway to grow.
OK, so those are some strong factors for Tesla being bullish. Now we're going to take a look at the bear case for Tesla. Now let's start off with Tesla. Shares are pretty expensive right now.
Yeah. Yeah. Anthony, they have been expensive and we have been really struggling with Tesla's evaluation. Even today, put it this way, the whole automaking industry market cap is like free streaming and Tesla represents one third of it. And it triples the second largest Toyota market cap, with only one tenth of the sales volumes. Is that fair? Well, people argue Tesla is about the future. You can't look at today's market. OK, we can look at the future. The market is pricing in about 40% bottom line growth through 2025. If you do the math every $100 we invest in today, by 2025, it returns to $2. Is that 2% earnings yield attractive when we can potentially find now two different yields from five year government bonds.
OK, next talk about Tesla facing increasing competition.
Yeah, that's another barricade for us. Think about Tesla as being the only option for consumers, for investors for many years. But since last year also a lot of those big players with deep pockets started giving full commitments to EV. It could be development, could be rolled up. And I'm not only talking about Toyota, GM or Volkswagen. I'm talking about more tech giants like Amazon, Google or Apple, they're also interested in the competition. So starting this year, for the next few years, you're going to see hundreds of new EV models introducing to the market. That will make the market more and more competitive. And a lot of those new models have comparable performance so that could face some competition issue.
OK, and your final bear case, momentum is moderating.
Yeah, Tesla is a momentum stock. Part of the reason is because half of the investor base is individual investors. They tend to be more affected by momentum. The problem is Tesla's momentum is slowing. Last year we saw, you just mentioned, Tesla doubled, they almost doubled their volume from the year prior. That was driven by the accelerated ramp up from Shanghai facilities. That is not repeatable. This year, we're going to more rely on onboarding and Austin's facilities. We don't see that we'll grow at the same pace and we have already seen something delay. So we have to monitor that closely.
Some very strong bull and bear cases for Tesla. What are your final thoughts on the stock?
Yeah, Anthony. Bottom line Tesla is a well-run company with secular tailwinds. So with the recent pullback, we think it can find a space in a diversified portfolio. But until this year, we become more cautious on the name just because we are in the face of a tightening cycle. That means all the long duration cash flow companies like Tesla will likely face more pressure than they did before. Overall, the competition is picking up. Tesla is no longer the only option for consumers or for investors, and interest in this could be a year for traditional automakers to catch up.
Jacky, thank you very much for joining us.
Thank you, Anthony.