Is Tesla A Green Dot Stock?

Tesla (TSLA) has been in the Green Screens "Hare" list for some time now. Being such a popular brand, company, and stock, I thought it would be interesting to run it through the standard analysis process and see if it makes the cut as a "green dot" stock.

What It Does

This is really a firm we don't need to spend a lot of background time on, as it is so well known.

85-90% of revenue comes from sales of fully electric automotive vehicles (EVs). Tesla's product line at present is pretty simple and easily understood. It sells two tiers of sedans / SUV pairings. On the luxury end, the Model S and Model X cover these categories, respectively. On the lower-cost, high volume end, we have the Model 3 / Model Y.

While the company was built on its luxury models, today the vast majority of sales (close to 95%) are of the Model 3 and Model Y. Tesla has reached quite impressive scale, a critical factor for success in the auto industry. It delivered over 1.3 million vehicles in 2022, making its volume output comparable to Subaru or Nissan, and quite a bit larger than luxury competitors like Mercedes or BMW.

The remaining 10-15% of revenue comes mostly from sales of solar battery storage products (known as Powerwall), although some of that is also from installation of solar panels and its "solar roof" roofing tiles.

The Growth Outlook

Growth has always been the allure with Tesla stock. The company has been the driving force behind the emergence and growth of the electric vehicle market over the past decade. Since launching the Model S in 2012, Tesla has gone from $400 million in sales to over $81 billion in 2022 - a phenomenal 70% compound annual growth rate (CAGR).

There seems to be plenty of growth legs left in the stock. 2022 sales grew over 50% from 2021. Most analysts see Tesla continuing to grow sales at 20%+ annual rates over the next 5 years. Its current vehicles remain popular, with 30% growth in deliveries for 2022.

On top of that, the firm has new products nearing production. Tesla Semi, its electric long-haul semi truck, has started delivery. Its new high-end sports car, the Roadster, could also launch this year. The biggest potential catalyst is the company's entry into the $115 billion pickup truck market, known as the Cybertruck. Deliveries on that are slated to begin late in 2023.

There's no question the growth story remains strong, but one thing we are missing here are recurring revenues. Tesla is a product company. Purchasers of a Model Y may or may not return to Tesla for their next vehicle, and even if they do, that could be a decade away. The same goes for the solar/storage segment, which are also mostly large, one-off sales.

We like recurring revenues as a bulwark against economic downturns. Firms like Tesla that sell expensive one-off products can easily suffer 20, 30, 40% or larger sales declines in a recession. While the company has weathered recessions well so far, it remains to be seen if it can do so as an established player in the future.

Is There A Moat?

Tesla has basically been the EV market for most of its existence. Up until very recently, there was virtually no meaningful competition for its Model S, X, 3, or Y. That has changed today.

Nearly all of the major automakers have launched very credible competing models to Tesla's. Ford's Mustang Mach E, Volkswagen's ID series, Kia's EV6, and GM's Equinox and Blazer EVs are all direct challenges to Tesla. In the pickup truck space, Tesla has already been beaten to market by Chevy's Silverado EV, Ford's F-150 Lightning, and Rivian's R1T.

This will put to the test what looks like a strong consumer BRAND MOAT that Tesla enjoys. There is little question that Tesla has become an aspirational brand, one many people look to own as a signal not only of their own success, but of their concern for the environment and their contributions to improving it. For many, a Tesla is also the ultimate "tech toy" to own.

I would also argue Tesla's brand acts as a "default purchase" in EVs. As strange as that may sound, there is little question that anyone considering buying an EV is going to have a Tesla model high on their shopping list.

Tesla has somewhat of a NETWORK ADVANTAGE over its competitors through its nearly 5,000 strong Supercharger network. One of the big concerns with EVs are range anxiety. With the Supercharger network, Tesla has made it possible for owners to take long-distance trips without worrying about range. No other EV maker can really claim that. At present, the Supercharger system is only compatible with Teslas.

Leadership and Financials

As virtually everyone knows, Elon Musk is CEO and really the de-facto founder (he has been there since well before the firm had revenues). His immense wealth - over $180 billion - makes him one of the 2 or 3 richest men in the world, and the bulk of it is from his 13.4% ownership stake in Tesla.

It is hard to fathom what Musk has accomplished. No new American car maker had been successful in nearly 80 years before Tesla. The engineering, financial, and structural challenges in getting Tesla to where it is today were immense, and anyone who has read bios of Musk or Tesla knows just how close the firm has come to bankruptcy numerous times in the past. It takes a very special leader to do this, and Musk is just that, no matter how controversial his personal viewpoints may be.

With his forays into Twitter and continuing divided attention to SpaceX and other pursuits, some have expressed concern over his focus on Tesla, but I am less concerned. At the firm's investor day in 2023, Musk put the focus onto Tesla's strong managerial bench. I wouldn't be surprised to see new leadership in the future, with Musk more as a chairman/oversight figure.

Also, this is no longer a company on the financial brink. Tesla is generating very healthy mid-teens free cash margins now, with little debt (only $1.3 billion, down from $13.4 billion in 2019). The firm has established modern production plants all across the globe and has the resources to build more if it needs them. Bankruptcy risk was very real for Tesla as little as 4 years ago - today it is one of the more financially healthy auto makers in the world.

Risks

Hoo boy... while Tesla doesn't face nearly as many existential risks today as it did 5 years ago, there are still a TON of things to be aware of with an investment here.

First, we've already mentioned competition. The big, global automakers are (finally) bringing quality EVs to market to take on Tesla. In some cases (like pickups), they are already ahead. Can Tesla stay ahead of the market long-term? I think the answer to that is very much in question.

Second, I wonder about some of the company's growth catalysts. The Cybertruck has a very unusual design that I'm not sure will resonate with traditional, rural pickup truck consumers. Ford and GM styled their electric pickups very much like traditional gas trucks for a reason. I have my doubts about how much market share the Cybertruck can really take. The same goes for the Tesla Semi, in what is a much smaller market.

Third is valuation. At close to a 7 price/sales ratio, Tesla trades more like a software company than a heavy industrial. To be fair, it has more growth and better margins, but can it maintain that kind of ratio? Even the best car makers like Toyota and BMW trade at P/S ratios under 0.6. That's a LONG way down if growth starts to flag.

Fourth is a question that not many may think about but... is the EV trend sustainable? Much of its growth has come from government-driven tax incentives and early, climate and tech-focused adopters. But there's still a question of what kind of market share EVs can take given their current cost and infrastructure challenges. 2023 has seen EVs as a percentage of new car sales stabilize at around 7-8%. Tesla will need a lot more than that to continue its growth.

Finally, I believe over time Tesla will face a lot of the same issues as traditional car makers. Its factory workers are likely to unionize (some efforts have already begun). There will eventually be a lot of used EV inventory on the market, a situation the company has not had to deal with yet but will challenge new car sales. Recessions will strain profitability as there will always be a ton of fixed costs in a business like this.

Conclusion

Everything I wrote probably won't matter to Tesla believers, and to be fair those folks have made a LOT of money investing in the company to date. And why not... despite the risks in the past, Tesla faced very little competition in an enormous potential market up until very recently.

But the challenges going forward are different. Staying on top is often much harder than getting there. Now the company will have to weather competitive challenges, a likely pullback on EV credits that effectively make their cars more expensive, offering competitive vehicles in new categories, and so forth. Can the company do it? Absolutely. Do we have super high confidence in them doing it? Well...

Given the lack of recurring revenues and long list of risks, objectively I want to stay away from Tesla. It just doesn't have the "high probability" characteristics to make it a Green Dot stock. That said, if you love and believe in the company and brand, you should invest in it and enjoy the ride.