The case for Tesla

0:29nd pushkin Tesla reported earnings last week. Maybe not. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am Rob Armstrong coming to you from the small and sweaty Unhedged World headquarters in New York City, joined by Aidan Reiter, the newest member of our team. Howdy. Howdy to you, partner. Today on the show, what is Tesla and how much is it worth? Okay, so the stock has not been great. It's been sideways for a couple of years. It was down on the earnings report. But the fact is, this is still an enormous company. And what we're trying to figure out here is, how come?

1:13Yeah, so what we did is we looked at the Wall Street consensus estimate of what Tesla will be worth in the future. And we tried to back it out using the little logic our brains have. Yes. So we're looking five years into the future. So 2029, Tesla's revenue last year was kind of just below$100 billion. What is the street looking for five years hence? The street is looking for somewhere between$240 to$250 billion. Okay. And this year, Tesla's expected earnings are$250 or something. And what is the street looking for in five years? The current earnings per share is$250. The street is looking for$950 to$10.

1:51So we got we got quadrupling earnings. Yes. And that's earnings that are already 94 times current. Yeah. Yeah. So it's expensive stock now. But if you get if you get to 10 bucks of earnings, let's say in five years, it's a two hundred and thirty dollar stock or something that at least is in the general realm of sanity, like a two hundred dollar stock with ten dollars in earnings. You know, I know it's in the future and you have to discount and all that, but you're in the realm of sanity there. So what do we have to do to get there? Yeah. To get there, you have to look at Tesla's current balance sheet.

2:23And what we did is we tried to divvy up what are their current revenue streams or their future revenue streams and try to back out out of consensus estimates. We should probably caveat that consensus estimates are just based on a couple of people. Yeah. It's just a Wall Street number, right? It's 10 analysts filling out their models or whatever, but it gives us a convenient target to shoot for. Yes. And some say, you know, forecasting the future, especially for someone as hard to read as Elon Musk is a fool's errand, but it's also really fun. That's what we're here for. Exactly. Let's start with the car business.

2:54So currently Tesla has two revenue streams. They have their cars and they have their energy business. And then they also have servicing those cars and the energy business, but we'll just call that a broader servicing cost. So on the cars front, as you said, Rob, didn't have a great year so far, not selling as many cars as they were expected to. We assumed in order to get to 250 billion, and again, other people can make different assumptions, that they would have$150 billion in revenue in cars. That would be about 3 % of the total car market if you assume the current car market grows by the rate of global GDP growth.

3:29Yeah. So they become a significant, they go from being an important but still somewhat niche electric car maker to being a kind of global player in cars over the next five years on the scale of the big car names in five years. Right now, that's not the trajectory. We're assuming a level of growth in the car business over the next, consistent level of growth in the car business over the next five years. They are not currently achieving. Not achieving. And it doesn't sound like they really intend on achieving. Right. Or at least they're not emphasizing it. They're not banging the table on how much the car business is going to grow.

4:05There's other stuff they're banging the table on. Yeah. So we're assuming that's 150 billion energy. Yes. Currently, they actually have a huge technological advantage on other energy businesses. Yes. They have these mega packs that they're selling to big utilities. I love the battery business. I feel like there's a huge tailwind because green energy is coming in. A lot of sources of green energy, you need storage attached to it. Sun's not out all the time. Wind doesn't blow all the time. The green revolution needs batteries, and Tesla appears to be very good indeed at making batteries. Yeah. So, you know, we assume about a 30 % caker.

4:37this is a great business and they're going to get$34 billion in revenue in the next five years. Yeah. By five years out, it's going to be a$35 billion revenue business. Yeah. And currently, it's not that large, but they did overshoot earnings expectations in the last earnings report on this part of their portfolio. I feel like you do not have to indulge in fantasy to imagine this business getting quite big. Absolutely. So then there's the other, quote unquote, we'll call them the fantasy businesses, right? The things that Tesla talks about that haven't yet materialized. Yes. First is their robo taxi slash AI business.

5:09Essentially, Elon Musk has promised a self-driving fleet of robo taxis that you don't need to have a car anymore. You can just hop in one of these autonomous vehicles and go wherever you need. That is built on the current technology they have, which is semi-autonomous driving. Got it. So we assume that we lump these things together and we assume that it does really great, right? Robo taxis are super popular. And then the software that they already have, they start selling to other car companies, which they've said they might start doing. Car companies, camera companies. And we say that's going to result in$32 billion in revenue.

5:39Yeah. So it's a big business. Now, I think there's more question marks around this one than there is around the battery business. A, you have to assume that robo-driving takes off, which is a question mark. I love the idea of robo-driving. I think people spending their days driving cars is a waste of human potential, and there's better things for all of us to do. And that's a very good idea. And I don't see why the technology can't work. However, you also have to assume that Tesla is an industry leader in the space for this to become a big business five years out. I think the robotaxi thing I'm not so sure about, but the selling software to other companies I think could be a great business, right?

6:15A lot of people like myself are not so sure how we feel about getting in a robotaxi, a little afraid. What Tesla has right now is semi-autonomous driving, right? Where they have a lot of data sets, they have a lot of drivers on the road where they sit in the driving seat and they let the steering wheel do the thing and then they jump in when there's something wrong. Yeah, their major issue, of course, we have to deal with is how we handle it as a society when people are struck and killed by an autonomous vehicle. Absolutely. Which has happened already. And look, people are struck and killed by cars people drive all the time and maybe the robots will do it less.

6:47But even if the robots kill less people, there's an issue of moral responsibility and all this stuff. So that's a question mark you have to have about this business. Yeah, but Tesla gives us an easy out, which is, oh, Robot was driving, but I was in the driver's seat. So they have this half, it's like the hybrid car for the electric company. I also worry about Waymo, which does have autonomous taxis on the road right now in a couple of American cities. It was Google's autonomous driving unit. It's now an independent business. And it looks like Waymo has a lead in this area. I'm not an expert, but that's a question mark.

7:20But still, we have it growing into a good-sized business. Moving on. Robots. Yes. Yes. Elon Musk has said that every single human being on the planet will want a robot and every business will need multiple robots. Yes. We think that is a large overestimation of the market. Yeah, of the market for robots. Yeah, I don't see, I think there's going to be a market of approximately zero for humanoid robots. And why do they have to be humanoid? Yeah, why, like the whole, like people do people things. Robots should look different and do things robots are good at. You know, it's like building a submarine that is shaped like a person.

7:56That's just a dumb way to build a submarine. Use a propeller instead. But if they don't like humans, how do we fall in love with them and create movies about it? Yeah, that is the thing is we need to have the experience of loving our robot overlords. In any case, so what's our estimate for that business? We are, you know, we don't think it's going to be as large as Elon says, but we do give them a generous$1.6 billion. It's a$1.6 billion robot business. Okay, are we done now? Do we have the top line revenue all lined up? There's two other areas. One, we're just going to assume that the current servicing will continue because they have to service all the robots and the cars.

8:29They'll get about$15 billion from that. And batteries, whatever. They have a nice recurring revenue service business. Yeah. And then there's the other bucket. Yeah. There's the Elon Musk or the people who work for him come up with some other business we don't even imagine yet. And here's$12 billion for that. Okay. Great. So that gets us to a top line of what,$250 billion-ish? Yes. Take us down the rest of the income statement. Yeah. So we assume they still have high R &D, right? This is an R &D intensive industry and they want to make new robots and new cars and new energy. We assume their margins widen with economies of scale.

9:01They're getting bigger. I think that's reasonable. We also assume their tax rate is lower than the typical corporate tax rate. Yeah. If Elon Musk has proven anything, he's very good at getting government revenue and choosing the right industries to go to. He is the greatest harvester of subsidies that our world has ever known. In the last 12 months, they've actually gotten$5 billion back in regulatory credits. So far from paying taxes, taxes are being paid to them. Yes. So we assume a net tax rate in that year of 10%. Yeah. And that's very important. Of course, the standard US tax rate is 21%.

9:33So they remain five years from today, a remarkable manipulator or optimizer of the tax system. Let's put it that way. Great. And that gets us to 10-ish bucks a share. Well, we also have to assume that the share count is stable. Yes. And what do you think about that being reasonable? I think that is not reasonable. I think one thing Elon likes to do is issue shares. But I think if you're going to get to 10 bucks a share, you cannot assume massive share dilution. That would that would demand an even greater level of revenue, even higher margins. And just to keep the estimate reasonable, you have to assume he gets religion on not diluting shareholders and not increasing the share count.

10:12Yeah. So just to recap, they become a dominant car brand. They introduce robots to the world. Robot taxis and self-driving software not only is a great business, they're a leader. And they come up with a 12 billion other business in the next couple of years. And shares don't increase. How reasonable do you think this is? Okay. That's the question. How reasonable do you think that is? Okay. One thing you must keep in mind is that Elon Musk has formed building businesses and he's built a lot of them and a lot of good ones. The car business, he was involved in other businesses before he even got into Tesla, PayPal or whatever.

10:46Built the car business, built the battery business. He's built a successful satellite business. The guy knows something about starting and growing businesses. He is good at this. So I think for another person, these estimates might be wildly optimistic and make the company as it is now seem wildly overvalued. But I think this guy, whatever you think about him, his personality, his politics, whatever, this guy can kind of do it. And I think that he deserves a premium valuation based on future expectations simply because of his track record. Yeah. Again, while we made these assumptions and tried to back them up, I think they're a little outlandish.

11:25But in order to really believe he can do this, you also have to dispense with your beliefs of corporate governance, right? Elon Musk has diverted, he has asked in the last week, as our FD colleagues reported, he's asked to put money from Tesla into XAI, into X, because he views them as an integrated play, right? X will get AI and that'll go back to Tesla. Elon Musk has also gotten this crazy large pay package from Tesla, which has raised questions about a supine board and broader legal systems in the United States. So I think what you're gesturing to there, which is important, is two questions.

11:58One, when you buy a Tesla share, are you sort of buying a share in Elon Musk, Inc.? Because value and assets might move around between these entities that aren't, as it were, legally the same entity, the same entity you're investing in. That's a question. But that could be an advantage or a disadvantage, depending on how you feel about Elon Musk, Inc. Right. And it seems like people who buy Tesla believe in Elon Musk, right? Remember, he won this pay package with shareholder support. Overwhelming shareholder support. Overwhelming. They're all for it. Yeah. Yeah. The second question you're asking is, should there be a corporate governance discount?

12:37This guy likes to pay himself a lot of money. He's a bit sloppy. He's moving. He wants to be in Texas. He wants to be in Delaware, all of this stuff. Should we temper our expectations because his, let's say, unconventional approach to corporate leadership. I think Elon Musk is a singular example of corporate governance. You can believe that he can do this. It's hard to believe anybody else can do this. Yes. So, you know, I think if you view Tesla as a venture capital fund that's funding Elon Musk through relatively good car sales. Yeah. I think it's very believable. Okay. If you think it's a car company that Elon Musk is, you know, ignoring in order to focus on other things, I'm not so sure.

13:16Yes. Okay. So let's wrap up. Things are a little slow at Tesla right now. Revenue is not growing very much. Are things getting better or worse in the next leg of Tesla's existence? Well, again, right now their main revenue is energy and cars. So until they release that robo-taxi fleet, which was just indefinitely delayed in the last earnings report, it's not looking great. All right. What do you think? I don't know. The number is too high. $700 billion is too high for this business. It may not be too high by much, but it's too high. On that pessimistic note, we'll be right back with Long and Short.

14:04We're back. This is Long and Short, the portion of the show where we go long the things in life that we like and we go short the things in life that we don't like. Aidan, are you long or short something? I am. I am long the Japanese yen. We wrote a story this past week about how the Bank of Japan is, you know, theoretically going to raise rates. Just yesterday that happened, they raised rates and they're now starting what appears to be a rate raising cycle. Simultaneously, the Fed seems like they're going to start cutting interest rates. That's all a recipe for the yen getting stronger. And that might undercut Donald Trump's fears about a weekend.

14:40Yeah. Well, speaking of currencies, and while it makes me physically nauseous to say it, I am long Bitcoin. As longtime readers of the newsletter will know, I hate Bitcoin and think it is nonsense. But a weird thing has happened in recent weeks, which is it turns out that Bitcoin bros are a political constituency that needs to be pandered to. And both parties seem to be busily pandering away in this presidential election season. And because Bitcoin runs on nothing but hype and expectation, I think we're in the hype and expectation part of the cycle. And for a short-term trade, maybe Bitcoin is going up.

15:24Having said that, I will now resign as a financial journalist. That might be dramatic. If I change my mind about my resignation, we will be back in your feed next week. Thank you for listening.

15:45Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

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