Does Rivian Have What It Takes To Challenge Tesla Stock?

Electric truck startup Rivian is now apparently valued at about $27.6 billion following a recent fundraise. ^[1] So what’s really driving this privately held company’s valuation? Rivian appears to be doing quite a lot of things right. Firstly, the company is squarely targeting two of the largest and most highly profitable segments of the auto market, namely, pick-up trucks and SUVs, which together account for about roughly 75% of U.S. auto sales. The company is getting ready to manufacture an electric pickup truck, dubbed R1T, as well as the R1S sport utility vehicles, both vehicles of which are expected to go on sale around the summer. Rivian has also got big-name customers to sign up for its vehicles. For instance, it is working with e-commerce titan Amazon
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to develop and deploy an electric delivery van. Amazon has preordered 100k vans from Rivian, with the first set of vans likely to be delivered this year. Rivian is also very well-capitalized, counting marquee names including Amazon, Soros Fund Management, and Ford as investors. Last week, the company raised an additional $2.7 billion, taking its cumulative funding to more than $8 billion.

That being said, there’s no guarantee that the company will be successful. Competition in the electric truck space is mounting. GM and Ford are planning new electric trucks and SUVs over the next year or so, and EV bellwether Tesla – which has largely focused on cars and luxury SUVs thus far, is looking to enter the market later this year with its Cybertruck pickup. The Cybertruck, which reportedly has over half a million pre-orders already, is likely to be priced starting at around $40,000 compared to Rivian’s offering which will begin at a much steeper $67,500. Also, details regarding Rivian’s competitive advantages remain limited. For instance, Tesla has innovated on the battery, self-driving, and software front while building production capacity relatively quickly. (Just How Far Ahead Is Tesla In The Self-Driving Race?) It remains to be seen how well Rivian differentiates itself. However, to the company’s credit, it is apparently in no hurry to do an IPO, with management noting that it wants to launch products and demonstrate its capability before going public.

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[1/8/2021] Now Valued At $800 Billion, Is Tesla Too Dependant On Elon Musk?

Tesla stock has soared about 8x over the last year, with its market cap approaching $800 billion. Tesla is valued unlike any other automotive stock – at about 200x consensus 2021 earnings, vs about 20x for the broader auto industry. ^[2] The Tesla investment thesis hinges on a lot more than selling luxury EVs. Investors are counting on Tesla to make fully self-driving cars, launch a fleet of robo taxis, make big improvements to battery tech, and more broadly drive the decarbonization of the auto industry. This story is tied in no small measure to the business acumen and leadership of Tesla’s visionary CEO, Elon Musk. Mr. Musk has already delivered big – changing the perception around EVs with highly desirable vehicles, building factories in record time, and taking big strides in autonomous driving. (Just How Far Ahead Is Tesla In The Self-Driving Race?) But Tesla still has a lot to prove and it will probably be years before the company grows into its lofty valuation. If Mr. Musk, left the scene, for any reason, there’s no question that the story surrounding Tesla stock would change dramatically.

The closest parallel to Tesla’s dependence on Mr. Musk would be Apple
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and the late Steve Jobs. However, Apple was much larger and more mature when its visionary departed in 2011. Apple’s Revenues stood at about $110 billion in FY’11 and its business model was largely set in stone. Its computing trifecta of the iPhone, iPad, and Mac were well established in their respective categories and the services business, led by the AppStore, was building momentum. Tesla, on the other hand, is still early in the growth cycle and is barely profitable, excluding its regulatory credit sales. (related: How Regulatory Credits Impact Tesla’s Margins)

While the fortunes of most other mega-cap companies are also tied to their founders or senior leadership to some measure, there is a fair amount of margin of safety. For example, Facebook (with a market cap of $760 billion) and Google
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($1.2 trillion) have their platforms and network effects that power their ad machines. Apple ($2.2 trillion) investors value its ecosystem that locks customers in and gets them to keep spending on products and services, while Amazon ($1.6 trillion) investors are buying into a massive physical and cloud-based infrastructure that powers its e-commerce juggernaut. We think Tesla investors, on the other hand, are really paying a premium for the ongoing innovation and future potential which is heavily tied to Mr. Musk. While this risk is obviously hard to quantify, it’s worth noting for shareholders.

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[12/21/2020]

Tesla will be added to the S&P 500 index on Monday, December 21. The stock has rallied by about 70% since the announcement of the index inclusion in mid-November and is up a whopping 8x this year, with its current market cap standing at about $660 billion. The Tesla story has appeal – the company is at the forefront of two of the biggest trends in the automotive market – electric vehicles and self-driving software. Tesla has also grown despite the pandemic, driven in part by its Chinese business, and has also posted profits over the last five quarters (although a bulk of the profits still come via the sale of regulatory credits).

However, we think the stock is significantly overvalued at current levels. Tesla trades at about 15x projected 2021 Revenue and about 175x projected earnings. There’s little precedent for this sort of a valuation in the highly cyclical and capital intensive auto industry in recent history. In fact, using the industry average P/E of about 15x ^[3], Tesla would have to post over 2x the profits of the top ten automakers combined to justify its valuation. For perspective, the top ten automakers by sales posted net profits of under $20 billion over the last 12 months.

Now with the S&P inclusion likely to bolster Tesla’s position as a blue-chip name, could it still see a correction in the near to medium term? While Tesla stock might see lower volatility post its entry into the index, considering that its shareholder base will skew towards passive investors who won’t be actively trading and potentially managed funds that are benchmarked to the S&P 500, the stock could still get a reality check for a couple of reasons. Firstly, with highly effective vaccines being rolled out things should start getting back to normal, helping the economy. Now even an indication that the U.S. Fed could revisit its stance on ultra-low interest rates could hit valuations for high-growth stocks like Tesla. There are industry-specific risks as well. Mainstream players such as GM and Volkswagen have been doubling down on EV investments. If these players deliver compelling EVs that are well-received with customers, it could change the narrative around the auto majors and potentially hurt the valuation of pure-play EV companies such as Tesla. (related: How Do We Make Sense Of EV Stock Valuations?)

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[11/18/2020] Tesla Will Join S&P 500, What Does This Mean For The Stock?

On Monday, S&P Dow Jones indicated that electric vehicle bellwether Tesla would be included in the S&P 500 index, causing the stock to rally by over 8% in Tuesday’s trading. The inclusion is likely to be effective from December 21, although it could occur in two tranches given that Tesla will be the largest company ever added to the index, and among the top 10 companies by market cap on the S&P 500. So what does this mean for Tesla stock and investors?

Firstly, the inclusion could drive strong near-term demand for Tesla stock from not just index funds that track the S&P 500 but possibly from managed funds that are benchmarked to the S&P 500. For perspective, S&P Dow Jones estimates, based on recent market cap data, that funds will need to sell other positions to the tune of around $51 billion to buy Tesla stock. ^[4] Based on Tesla’s current market cap, this likely translates into roughly 11.5% of Tesla’s total shares outstanding and over 13% of Tesla’s free float (publicly held shares that can be traded without restrictions). Secondly, having a large chunk of Tesla stock held by passive index investors could eventually reduce volatility for Tesla, which has been prone to big swings in the past. That said, the index inclusion doesn’t change the fundamental picture for Tesla. The stock appears pricey in our view, trading at about 110x consensus 2021 earnings, compared to about 26x for the broader S&P 500. At these valuations, Tesla will need to execute very well – banking on new launches such as the Model Y, its international expansion, and higher software sales – to justify its stock price.

[Updated 7/15/2020] Will Tesla Be On S&P 500? Tesla’s Software Has One Clue

As a leader in autonomous driving, we estimate that Tesla recorded $1.4 billion in Software Revenue in 2019 via sales of its Full Self Driving software upgrades. These upgrades, which cost about $8,000 per vehicle currently, are also highly lucrative. So How Do Tesla’s Software Upgrades Impact Its Margins? We estimate that they contributed about 400 basis points (4%) to Tesla’s Automotive Gross Margins (revenues less direct costs, divided by revenues) of 21% in 2019. Excluding software sales, Tesla is unlikely to have been profitable over the last few quarters. No discussion about S&P inclusion.

How Do Software Sales Impact Tesla’s Margins?

• Tesla delivered about 368k vehicles in 2019, and we estimate that about 57% of customers opted for the self-driving software package. (90% of Model X & S buyers and 50% of Model 3 buyers). This translates into about 209k packages sold.
• Assuming an average selling price of $6,500 on software upgrades, this translates into about $1.4 billion in Software Revenue in 2019.
• Tesla’s reported Automotive gross profits, which include software sales as well as vehicle sales, stood at about $4.4 billion in 2019. With Automotive revenues standing at about $21 billion in 2019, this translates into Automotive gross margins of about 21%.
• Assuming gross margins of about 80% on software, software gross profits would have stood at $1.1 billion in 2019. While software companies typically have gross margins of about 72%, we assume that the number is a little higher for Tesla.
• Subtracting out software-related Revenue and Gross Profit from Automotive Revenue and Gross Profit, we estimate that Automotive Gross Margins would have stood at about 17% in 2019. Detailed calculations are available in our dashboard How Do Tesla’s Software Sales Impact Its Gross Margins?
• This means that software sales contributed roughly 400 bps to Tesla’s automotive gross margins in 2019.

Why Software Could Account For A Higher Mix of Margins Going Forward

• As Tesla’s deliveries rise, with the scaling up of new vehicles such as the Model Y, software sales will also grow.
• Moreover, the capabilities of the self-driving system are improving and this could improve attach rates. CEO Elon Musk recently said that Tesla is ‘very close’ to achieving Level 5 self-driving technology – which means that human intervention won’t be required at all.
• Tesla has also been steadily increasing prices on the software. Prices rose from $7,000 to $8,000 starting July 1, and the company has indicated that prices could only keep inching upward going forward as capabilities are added.
• Tesla is toying with the idea of offering its self-driving software as a subscription service – a move that could boost recurring revenue streams for the company while potentially increasing the adoption of the package.

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