This article was written by Vladimir Mazepa, a Financial Analyst at I Know First.

[Source: commons.wikimedia.org]

Tesla SWOT

Tesla Strengths

Unique Technology

Tesla is a progressive company, which sets new standards in the automobile industry. As a result, they begin to dictate rules. More and more companies begin to realize that if they do not change their strategy, Tesla could kick them out of the market in the future.

Impressive Vehicle Deliveries (Model 3 Boom)

The graph below (Figure 2) is worth a thousand words. It can be clearly seen that every year deliveries are rising, and in 2018 they skyrocketed with the new affordable mass-market Model 3, which was the best-selling premium vehicle in the U.S. for a full year. Their strategy for 2019 is to sell the Model 3 across Europe and China, where deliveries will start in February 2019.

On January 2, 2019 Tesla reported that Q4 deliveries grew to 90,700 vehicles, which is 8% higher compared to Q3. This included figures for the Model 3 (63,150 and 13% growth), 13,500 for the Model S and 14,050 for the Model X vehicles. These figures are 204% higher compared to the last year and 138% higher on an annual basis (2018 to 2017). This is also a positive sign, that according to Tesla, orders are coming from new customers and not from reservations.

Tesla is winning the battle. Model 3 is the number 1 selling vehicle in the U.S. by dollar volume. In my opinion, these are fantastic numbers and they are indicating that Tesla is highly undervalued.

Figure 1

[Source: HyperChange, Tesla]

Figure 2

[Source: HyperChange, Tesla]

Figure 3

[Source: HyperChange, Tesla]

Earnings Turn Positive

Until Q3 2018 the company has not shown any earnings. This is normal for a company which has just started. This is a very important quarter for Tesla, since it has released revenue with a new record of $6.8 billion and $399 million from the energy and battery storage sector. The quarter ended with a profit of $1.75 per share. Note: revenue is 70% up from the previous quarter and 229% year-on-year.

High Gross Margin

Tesla released strong numbers. Tesla Model 3 has just crushed all the expectations among analysts and investors. Tesla said its gross margin was over 20% and is expected to continue to rise to 25%. They have also achieved a total auto gross margin of around 25%.

Starting from 1 January, there was a reduction of the federal EV tax credit from $7500 to $3750 and that is why from 02 January, 2019 Tesla will decrease the price of Model S, Model X and Model 3 in the U.S. by $2000 and it can then be expected for now, that their gross margin will be slightly decreased, but on the other hand, it could bring more customers to buy Tesla and generate more revenue.

Figure 4

[Source: Tesla]

Tesla’s Free Cash Flow Turns Positive

While people and analysts are worried about Tesla debt problems and consistent cash burning.

The auto industry has to be observed at another angle, if talking about such a new company like Tesla, which is literally a startup. Moreover, almost every startup that has successfully thrived, was unprofitable over the first years of operation. The reason for that is that startups need lots of cash to expand fast and scale its business and only then they turn positive and generate cash. If Tesla spends $2 billion on a factory, Free Cash Flow (FCF) will be reduced by all $2 billion. That is why we see huge swings in Tesla’s cash flows, because they have to spend money on building new factories, upgrades, maintenance etc., simply to start and configure the production lines and that costs money, but afterwards you see profits on your investments.

It is quite hard to call a $59 billion company a startup but it is, because it is still pursuing the rapid growth goal and moreover. It is a good strategy unless there are no growth opportunities. Next year it could turn into a profitable corporation and it will no longer be considered a startup. On the chart below, you can see Tesla’s FCF. It could be clearly observed that every time Tesla worked on a new car, cash flow turned negative and then experienced profits after it produced enough cars. This quarter is special, as it can be seen that Operating Cash Flow rocketed and CAPEX goes down. Finally, Tesla generated $881 million of FCF. Consequently, it can be expected that FCF in 2019 will be much higher than current figures, since the company does not have a need to spend so much money on CAPEX, because it has already built the factories and all the processes are configured and working well.

Figure 5

[Source: Tesla]

Figure 6

[Source: Tesla]

Figure 7

[Source: arstechnica.com]

Tesla is a “Brand”

Tesla is now a brand in electric vehicles. When people consider buying a new car, they are more likely to choose Tesla than another unknown electric car like “Lucid Air”, because Tesla is already experienced through the process of making fully electric vehicles and people trust it.

Weaknesses

Debt Problem

Debt problem is a big challenge for Tesla. The company has more than $13.5 billion of debt. It is 231.7% compared to the net worth. Tesla has a direct threat of a $900 million bond payment coming due in March 2019.

However, the task now is to win the international market. Tesla in the U.S. is far ahead than its challengers. Musk wants to continue to show the profitability of the company by laying off the workforce and consequently bringing the price of the Model 3 down. Thus, by showing profitability in Q4 he may take additional debt to continue expansion.

Figure 8

[Source: simplywall.st]

Employee Cuts

Two days ago, Musk said that they can target a profit, but a tiny profit in Q4 2018 compared to Q3 2018, and that sounds great, however, he also claimed that he would cut the workforce by about 7%, and then the stock fell about 12% down. It would be ok, if it was for the first time this year, but this will be the second layoff during the year, the first time it was in June 2018. This is really confusing, why Tesla, which for the first time in its history recorded profits should then cut its workforce?

Elon’s mood in the letter clearly showed that his company will face challenges in 2019. He remarks that their priority is to go beyond the U.S market, since the demand in the U.S. has reached a peak and their target now is Europe and China. In February 2019 Tesla will begin delivering to Europe.

Despite the fact, that cutting off the workforce is showing some obstacles in company’s future growth, I think that Elon rationally estimates the situation and is doing it in time, because he realizes the consequences and difficulties in 2019:

If you look at the chart (Figure 9), it can be clearly seen that the workforce grew from 2016 to 2017 by more than 100%! Currently, the firm employs 45,000 people. It is huge growth, simply more rapid than vehicle deliveries. The rule is simple, if you want to have a higher margin, cut unnecessary spending.

Bear market. Market contraction pushes Tesla to foresee future demand fall.

Tesla is winning now and the question now is how quickly Tesla can go international. Musk wants to win the race among competitors, which are already moving electric. His plan to win, is to come out with a cheaper Model 3 $35,000 and maybe it is not perfect to cut the workforce, but it is one of the solutions to reach a $35,000 model.

Figure 9

[Source: www.statista.com]

Level of Service

While Tesla is pursuing different goals of how to sell more cars, the numbers of complaints about customer’s service are rising. This is a real problem; the company has lost its attention to customers. People are complaining about service. Service is the first thing to worry about, because it leaves a bad mark on a company’s name if people are upset about service.

Opportunities

Boundless International Market

For 2019, Musk has a plan to conquer China and Europe. The market in the USA is already full. However, other markets have not yet been conquered. The question now is how quickly Tesla can go international. Musk wants to win the international race among competitors by making Model 3 much cheaper ($35,000).

This is perfect, because Tesla has almost unlimited potential worldwide.

Electric Solar Panels

Tesla not only produces vehicles, but also solar panels and batteries. This includes: tesla powerwall (accumulates energy), solar panels, solar roof (invisible solar cells).

Tesla energy increases rapidly. They deployed 93 MW of solar energy generation systems in Q3, which is 11% growth sequentially. Their energy business also led this year to higher revenues and significantly better profitability. In Q3, energy storage deployments grew to 239 MWh, an increase of 18% sequentially and 118% compared to Q3 2017. Their goal is to achieve tripling energy storage deployments in 2018 compared to 2017 and they do it well. They added $399 million of revenue from the energy and battery storage sector for the third quarter.

Figure 10

[Source: Tesla]

Tesla Tunnels

Musk’s new plan is to build tunnels for Tesla cars across the different cities, so that to avoid traffic congestions on the streets. He has plans for LA, as well as for Chicago, Washington DC and New York. He has already tested the first tunnel in Hawthorne, California. To ride in a tunnel, a car needs a special system, which can be added for $200, this allows you to ride in a tunnel like in an underground and reach the destination point very quickly. Moreover, Elon claimed that this system will also be acceptable for other cars in the future.

If Musk could agree with politicians to allow him to build these tunnels, this would make Tesla a car with unique features and opportunities, which other automakers do not possess.

Threats

Bear Market

The situation is clearly described in my last article about US markets.

Currently, markets in the U.S. are struggling because of the possible bear market, where a 19% decline could be observed on S&P 500. Economy contraction affects demand, which can push automakers to cut spending, literally the booming growth of Tesla may slow down.

However, Tesla has one advantage. It is not so dependent on the stock market moves and has a lower beta at the same time. Investing in low beta and defensive stocks whilst economic downturns is a good strategy and much better than investing in risky and high volatile beta stocks. So, the stock market fall might not clearly affect Tesla stock price. Moreover, recent Elon’s layoffs show us that he foresees that situation.

Rising Competition in 2020-2022

As we talk about this year, it can be clearly seen on the graph that in today’s world Tesla does not have any competitors in electric vehicles production industry. However, almost every automaker understands now that the future is upon electric vehicles and that is why it is time to start producing electric vehicles.

Figure 11

[Source: insideevs.com]

Conclusion

To sum it up, I am bullish long-term on Tesla, because its position on the market right now is very powerful:

Tesla has unique technologies, it produces not only cars, but also solar energy, batteries etc. Tesla clearly created a new technological brand with decent quality and price.

Model 3 has crashed the market, it is the number one selling electric vehicle in the U.S. by dollar volume. Moreover, Tesla finally begins to generate cash, about 1.4 billion of Operating Cash Flow in Q3 2018 and $881 million in Free Cash Flow. In addition, Mask claimed that a tiny profit could also be seen in Q4.

Released revenue with a new record of $6.8 billion and $399 million from the energy and battery storage and generating earnings per share of $1.75.

Tesla has boundless opportunities worldwide. The plan for 2019 is to conquer the European and Chinese market with a new mass-market Model 3 by making it as much as cheap as it could be.

An allowance to build Tesla tunnels could make it a monopolist, by providing its tunnels to other players on the market, and by providing a unique experience to Tesla’s customers with the possibility for fast journeys.

I Know First Long-Term Bullish Forecast For 2019

The I Know First machine learning algorithm currently has a positive outlook for Tesla. While the stock is bullish over all time horizons, it is most bullish for the 1-year period with a signal of 118.05 and predictability indicator of 0.64.

Figure 12

Past I Know First Success with Tesla Stock Forecasts

On September 20, 2016 I Know First has made an accurate bullish Tesla stock forecast for one year. I Know First AI Algorithm issued a bullish 1year forecast for TSLA with signal of 233.90 and predictability of 0.59. In the one-year period from September 20, 2016 to September 20, 2017, TSLA shares increased by 82.72% with the I Know First algorithm’s forecast. See the chart below.

Link to the article.

Figure 13

Figure 14

This bullish forecast for TSLA was sent to I Know First subscribers on September 20th, 2016. To subscribe today click here.

Please note – for trading decisions use the most recent forecast.