2teslaM

Are markets underestimating Tesla?

Equities 5 minutes to read
Picture of Peter Garnry
Peter Garnry

Chief Investment Strategist

Summary:  Despite founder Elon Musks's recent gaffes and scandals, Tesla's Q3 numbers and deliveries are likely to hit targets.


A lot of news has hit Tesla and CEO Elon Musk lately. While Musk’s latest actions have been unquestionably negative for the company and shareholders, however, I believe the headlines have distracted many observers from the real signal. But before we go into my observations, let me just clarify my views of the recent developments:

• The SEC settlement was good and actually cleans up the corporate governance mess at Tesla. Three new independent board members are a good thing for shareholders and increase the likelihood that Musk will keep his focus on production.

• Tesla’s balance sheet is weak, which is reflected in the five-year CDS instrument price being above 700 basis points. Fast-growing deliveries, however, will improve the company's financials and together with an equity raise, Tesla will continue on its current trajectory. The balance sheet is the key risk.

• Production is ramping up and most bottlenecks have been solved, something that will soon be clear to sceptics.


Despite all the challenges and uncertainties, I believe many observers are greatly underestimating Tesla and what’s happening with electric vehicles of late. This opinion piece by a German engineer pretty well sums up my view that German carmakers remain a mile behind and are not willing to sacrifice short-term margins and profits for long-term victory.

Already now, the Tesla 3 is outselling all the leading German brands in the midsize luxury segment in the US; the Germans have already lost ground in what is arguably the future.
Small and midsize luxury car sales (US)
The argument I always hear, from sceptics within Saxo Bank and clients alike, is that when the other carmakers begin to move into EV they will crush Tesla. This sounds like a something we have heard before – remember Nokia versus Apple? The point is that Tesla’s pace of innovation is much faster than the competition right now and the Germans have underestimated Tesla.

Let’s look at the numbers:

As of 2018, Tesla will have spent $6.2 billion on research and development and $12bn in CAPEX. On top of this, Tesla is already climbing the production learning curve of battery and EV mass production. Most importantly, the mass production of batteries is probably where the competition will come up short against Tesla as the CAPEX needed is massive. 

VW has said it will invest $25bn in EVs and start mass-producing in 2022. What a joke! By 2022, if Tesla continues at its current rate and avoids bankruptcy, the cumulative R&D in EV technology will have hit $16-20bn and cumulative CAPEX (gigafactories and production plants) will have hit $32-36bn.

According to analysts, Tesla could have $53bn in revenue in FY'22 (around 24% of VW’s current revenue).

Just for the record, Tesla spends 11.7% of revenue on R&D compared to 5.7% at VW. If you believe R&D matters in the long run, it’s clear that the German carmakers should begin recognising the threat. 
Tesla details
What about the Chinese carmakers? Are they not ahead of Tesla in terms of volume? Yes, but for the foreseeable future, they will only sell in their home market. While China is of course a big market, Chinese consumer companies still do not have the global brand perception necessary to conquer foreign markets. US and European carmakers are unmatched in terms of brand perception against their Chinese rivals in all markets but China. Tesla will not be meaningfully threatened by Chinese carmakers in markets except for China. 

The latest customer satisfaction survey (one million car owners) we have on the car industry is a year old, but here Tesla topped the industry with 90% satisfaction across all models; number two was Porsche at 85%.

Tesla will soon report Q3 numbers and deliveries. My expectation is that the company will hit the target. Tesla is currently at a run rate of 360,000 cars (all models) and will probably hit 500,000 in first half of 2019. At this point, the company will be profitable and the car industry will be shocked at Tesla’s growth rate. The US car market topped out in 2016 and that means that the industry will experience zero to slightly negative growth rates in ICEs over the coming years. The only transition is into EVs, but Tesla already dominates the segment.

The risks, however, are still immense. The biggest risks are bankruptcy, Elon Musk, the new production tent not being approved by the local state, faster-than-expected arrival of competing EVs, and a slower-than-expected decline in battery costs.

These are my observations on Tesla and should not be viewed as an investment recommendation.

Quarterly Outlook

01 /

  • Equity outlook: The high cost of global fragmentation for US portfolios

    Quarterly Outlook

    Equity outlook: The high cost of global fragmentation for US portfolios

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: Commodities rally despite global uncertainty

    Quarterly Outlook

    Commodity Outlook: Commodities rally despite global uncertainty

    Ole Hansen

    Head of Commodity Strategy

  • Upending the global order at blinding speed

    Quarterly Outlook

    Upending the global order at blinding speed

    John J. Hardy

    Global Head of Macro Strategy

    We are witnessing a once-in-a-lifetime shredding of the global order. As the new order takes shape, ...
  • Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Quarterly Outlook

    Asset allocation outlook: From Magnificent 7 to Magnificent 2,645—diversification matters, now more than ever

    Jacob Falkencrone

    Global Head of Investment Strategy

  • Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    Quarterly Outlook

    Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?

    John J. Hardy

    Global Head of Macro Strategy

  • Equity Outlook: The ride just got rougher

    Quarterly Outlook

    Equity Outlook: The ride just got rougher

    Charu Chanana

    Chief Investment Strategist

  • China Outlook: The choice between retaliation or de-escalation

    Quarterly Outlook

    China Outlook: The choice between retaliation or de-escalation

    Charu Chanana

    Chief Investment Strategist

  • Commodity Outlook: A bumpy road ahead calls for diversification

    Quarterly Outlook

    Commodity Outlook: A bumpy road ahead calls for diversification

    Ole Hansen

    Head of Commodity Strategy

  • FX outlook: Tariffs drive USD strength, until...?

    Quarterly Outlook

    FX outlook: Tariffs drive USD strength, until...?

    John J. Hardy

    Global Head of Macro Strategy

  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

None of the information provided on this website constitutes an offer, solicitation, or endorsement to buy or sell any financial instrument, nor is it financial, investment, or trading advice. Saxo Capital Markets UK Ltd. (Saxo) and the Saxo Bank Group provides execution-only services, with all trades and investments based on self-directed decisions. Analysis, research, and educational content is for informational purposes only and should not be considered advice nor a recommendation. Access and use of this website is subject to: (i) the Terms of Use; (ii) the full Disclaimer; (iii) the Risk Warning; and (iv) any other notice or terms applying to Saxo’s news and research.

Saxo’s content may reflect the personal views of the author, which are subject to change without notice. Mentions of specific financial products are for illustrative purposes only and may serve to clarify financial literacy topics. Content classified as investment research is marketing material and does not meet legal requirements for independent research.

Before making any investment decisions, you should assess your own financial situation, needs, and objectives, and consider seeking independent professional advice. Saxo does not guarantee the accuracy or completeness of any information provided and assumes no liability for any errors, omissions, losses, or damages resulting from the use of this information.

Please refer to our full disclaimer for more details.

Saxo
40 Bank Street, 26th floor
E14 5DA
London
United Kingdom

Contact Saxo

Select region

United Kingdom
United Kingdom

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo is a registered Trading Name of Saxo Capital Markets UK Ltd (‘Saxo’). Saxo is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871. Registered in England & Wales.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.

©   since 1992