• Superior products with robust demand and growth only limited by production capacity. Forecast 24% CAGR over next 2 years, not accounting for significant Full Self Driving (FSD) contribution.
• Industry leading margins of ~20% due to: 1) vertical integration; 2)design simplification; 3) improving assembly line efficiency; 4) reducing battery $/kWh cost through R&D.
• Future growth to be supported by increasing zero-emission regulations globally. We expect ~40% of all new vehicle purchases to be EVs by FY26.
• Initiate coverage with an ACCUMULATE recommendation and DCF-target price (WACC 9.0%, g 5%) of US$265.00.

Company Background

Tesla is the number 1 electric vehicle manufacturer outside of China. Most of its revenue is generated from selling its EVs, while it also provides end-to-end servicing and insurance services. In addition, Tesla also provides energy storage solutions for multiple use cases.

Investment Merits

1. Superior products, with no shortage of demand. TSLA remains the leading EV brand outside of China, with long delivery wait times for its EVs (6-9 months on average), and a fast growing energy storage and generation business. We expect growth to be limited only by TSLA’s own production constraints, with total revenue growth of 24% CAGR over the next couple of years (Figure 1). This is significantly slower than its 5-year CAGR of 47% and takes into account its factories already ramping up close to maximum capacity, and pricing pressures. We believe growth will re-accelerate beyond FY24 with an influx of production capacity once Giga Mexico is completed in 1Q25. Our estimates for FY23e and FY24e do not account for significant revenue growth in FSD given uncertainties over regulatory approvals. We expect growth in battery revenue to accelerate, but its impact to total revenue to remain limited given its low contribution (<10%) to total revenue.
2. Industry leading margins. TSLA has reached economies of scale faster than expected, and has been able to translate this into massive gross profit growth (5x since 4Q19). At the same time, with its focus on increasing output efficiency, TSLA has also been able to maintain its industry leading gross profit margins above 20% (Figures 2&3) – 2x the industry average. It manages this by: 1) vertically integrating its supply chain for more consistent throughput; 2) simplifying its EV designs to incorporate less wiring and less parts; 3) improving assembly line designs to allow for more simultaneous work; 4) reducing battery $/kWh cost through constant R&D. In addition to maintaining its margins, TSLA has also been able to reduce the ASPs of its EVs (US$45k vs US new vehicle ASP of US$49k), with this being the key to driving better affordability and widespread customer adoption. In the longer term, we do expect the main margin expansion catalyst to come from increasing FSD sales (~60% margins).
3. Zero-emission tailwinds to boost EV industry. The EV industry has been the beneficieries of increasing zero-emission regulations over the last few years, with >90% of passenger EVs sold in FY22 covered by some form of government incentive. And with more countries coming on board with new regulations to support the adoption of net zero-emission passenger vehicles by FY35, we should expect a larger transition by consumers away from traditional ICE vehicles to EVs. We forecast ~40% of all new vehicle purchases to be EVs by FY26 (Figure 4), with TSLA standing to gain the most from this ongoing transition given its industry leading position.

We initiate coverage with an ACCUMULATE rating and a price target of US$265.00. Our valuation is based on DCF valuation, using a 9.0% WACC and 5.0% terminal growth rate.