Interesting debates: Tesla Motors Inc (NASDAQ:TSLA), SolarCity Corp (NASDAQ:SCTY)
Forget for a minute the hype that surrounds Tesla Motors Inc(NASDAQ:TSLA) and the debate surrounding its pricey shares. Consider instead Elon Musk’s ambition to transform not just the auto industry, or the solar industry with SolarCity Corp(NASDAQ:SCTY) but the industrial economy in general.
The folks at Bespoke Investment Group explain what Musk is trying to do with Tesla Motors and Solar City:
Musk is essentially trying to turn both Tesla Motors and SolarCity into goods-producing versions of the giant tech companies that dominate online commerce today: Google (GOOGL), Facebook (FB) and Amazon (AMZN). The goal of the Tesla Motors patent open-sourcing is to create network effects; Musk isn’t worried about whether Tesla Motors can sell enough cars for the time being (there’s a massive waiting list) but whether the total addressable market will ever be large enough to justify the existence of his company. Every competitor that uses his patents expands that total addressable market, creating more opportunity for Tesla Motors. This approach is famous in Silicon Valley, and it’s now seeping into the industrial economy. Whether it will hurt or help Tesla Motors is unclear at this point.
Secondly, Musk is trying to create as many economies of scale as he possibly can. The massive “gigafactory” that Tesla will build is one example; SolarCity’s new facility is another. He’s seeking the same benefits currently enjoyed by software companies: high upfront development costs but an incredibly cheap per unit cost after.
Both of these strategies are risky, and only time will tell if they pay off. Musk may not be successful running two industrial firms like online social media or cloud-focused firms, but he’s also not making decisions entirely out of altruism; he’s just using a non-traditional approach to creating value for his shareholders.
Credit Suisse analyst Patrick Jobin and team discuss the implications of SolarCity’s version of the gigafactory:
This is a major business model shift for SolarCity who had previously been panel technology agnostic, buying commodity cells primarily from Chinese manufactures, with a capital-light and flexible cost base to mitigate risks. While we do have modest hesitations with this shift, primarily due to increased execution, technology, fixed cost risks, there are compelling reasons the evolution of the business model makes sense –
primarily cost reduction potential and supply security of high-efficiency cells. The strategy can result in a higher payoff if the technology enables a cost advantage. Simply from utilizing higher-efficiency cells at comparable costs, we forecast SolarCity can capture a $0.20 increase in NPV/watt by 2017 (16% boost vs. current profitability levels), or looked at differently, make a 33% ROIC on the plant. We reiterate our Outperform rating and $75 Target Price and believe the risk/reward remains favorable ($170 blue-sky, ~$32 downside).
Morgan Stanley’s Adam Jonas and team still think Tesla Motors is the world’s most important car company. They explain why:
Not even two years after the delivery of the first Model S, Tesla Motors has transformed from fledgling start-up to arguably the most important car company in the world. We are not joking. Tesla is also emerging as an emblematic force in America’s effort to foster high tech manufacturing job growth.
That’s a big claim, but Jonas has the goods to back it up. He notes that “suppliers who once shunned Tesla who are now considering dedicated lines and facilities only to supply them;” that established automakers “respect them” and that BMW “will be a stronger company longer term because Tesla is around;” and that politicians desperately want Tesla to set up shop in theirs states.
For Jonas, those factors mean that “Tesla cannot be valued on near-term multiple metrics like traditional auto companies.” He explains why:
…we expect Tesla to multiply revenues by more than 10x from 2013 to 2016 by nearly 30x by 2020 and around 60x by 2028. We have thus chosen a 15-year time horizon for our DCF which captures the full maturation of the Model S, Model X (and top-hat derivatives) and also the ramp up of its mass market electric vehicle (the Gen 3). We have applied an 11% WACC with a range of 9% to 13%. The terminal value, calculated on a midpoint of 10x EV/EBITDA accounts for roughly 50% of the total DCF value across the range of methodologies we have applied to arrive at our [$320 price target].
Does Tesla get to that price target? Your guess is as good as mine. But you have to admire the massive ambition that’s driving its share price.
Shares of Tesla have dropped 1.3% to $228.71, while SolarCity has fallen 2.5% to $62.91, Amazon.com has risen 1.2% to $329.50, Facebook has dipped 0.1% to $64.35 and Google has advanced 1.2% to $557.35.
Tags: SolarCity Corp (NASDAQ:SCTY), Tesla Motors Inc (NASDAQ:TSLA)