Piper Sandler Initiation Note:
Cash Conversion:
Wright’s Law:
ARK Invest Prediction:
RBC Initiation Note:
Piper Sandler Initiation Note:
Piper Sandler within a recent initiation note for Tesla. stated how the firm was cutting their estimations and price targets to reflect COVID related weaknesses within China.
Interestingly, Piper Sandler does mention how they regard Tesla as a cornerstone holding within an portfolio, due to the deep competitive moats, and first mover advantages.
“New factories in Germany and Texas will be a drag on margins, and COVID-induced downtime in Shanghai is another headwind. TSLA could trade sideways, or even downward, during this period. But then again, any weakness may prompt new buyers, because in our view, downside due to temporary factors will not detract from the longer-term thesis.”
In regards to the outlook for Tesla, it is expected that the company will deliver 1.47M units in 2022, down from 1.54M previously. Furthermore, in consideration of the production in Shanghai, Piper Sandler believe that there will be a negative impact during May, and possibly the following months. Whilst there does seem to be some major tailwinds for Tesla within Shanghai, it is possible that the Shanghai factory may ramp upwards of 200K units per quarter, however COVID is a majorly limiting factor in this regards.
Due to the ramp up within Berlin, the factory is currently only operating at around 7,500 units per quarter now, however this is likely to move upwards during the Summer months, says Piper Sandler.
In regards to Shanghai, Tesla is back to ramping up production at Gigafactory Shanghai. Tesla could reportedly be back to pre-lockdown level as soon as tomorrow and plans to ramp up to new records later this week.
Like many other companies, Tesla had to shut down production at its Shanghai factory last month after local authorities imposed serious lockdowns on the population in an attempt to limit the spread of COVID-19 after a surge in cases during the first quarter.
The automaker was finally able to restart production on April 19 after 22 days of being shut down.
Cash Conversion:
Furthermore, Piper Sandler mention how, “Tesla’s cash conversation cycle continues to impress”. This is because, in Q2 it was estimated by Piper Sandler that Tesla cash conversion cycle was negative by 16 days. This refers to a metric that expresses the time (measured in days) it takes for a company to convert its investments in inventory and other resources into cash flows from sales. In other words, Tesla is getting paid by consumers long before the company needs to pay suppliers.
Piper Sandler does mention however, “cash generation may deteriorate in Q2, but if so, the weakness will likely be short-lived”.
Wright’s Law:
Tesla experiences majorly large cost declines, whilst also increasing output. This is known as Wright’s Law.
Wright’s Law is a hypotheses that there is a “20% reduction in cost, when production doubles”. In so far as 1000 units have been produced, the cost per-unit decrease by 20% when production reaches 2000 units. Another 20% reduction is apparent at 4000 units, and at 8000 units, and so on. This idea states that cost decreases as a power law of cumulative production.
ARK Invest mentioned within an exclusive report that they expect sales to increases roughly 8-fold, from 4.8M units in 2026, to 40M units in 2030 – globally. This is roughly a 53% compound annual growth rate per-year. The reasons for the major increase within vehicles sold is driven by battery cost declines primarily. The analysts at ARK mention the use of Wright’s Law as a viable leading indication into the future of cost declines for Tesla.
We can conspicuously see Wright’s Law in action, through the Human Genome Project. As reported by NHGRI Genome Sequencing Program, the cost of sequencing DNA bases has fallen majorly (more than 700,000 fold) since the first sequencing project. This outstanding improvement from the Genome Sequencing Program has revealed the exponentially large cost reductions that are occurring, whilst simultaneously increases within output.
When looking more closely at Tesla, ARK predict that through Wright’s Law, there will be a rough 28% cost decline in lithium ion batteries for every cumulative doubling within production. For Tesla, this means that by 2023 all EVs will reach up-front cost of prices in which are equivalent or lower than that of an ICE vehicle. This will cause a huge shift in demand in regards to EVs say the ARK analyst.
The reason as to Wright’s Law holds validity within light of innovation is based on the concept of the innovation flywheel. This is achieved when costs decline significantly, whilst output increases, leading to an ability to reinvest and peruse a flywheel of innovation.
ARK Invest Prediction:
ARK Invest have a $4,600 price target on Tesla, as a base case. However, this target can be influenced majorly by the following metrics.
- Capital efficiencies (how much able to increase production y/y on a percentage basis).
- How many cars will be on the ride-hail network.
- Estimated launch for robo-taxis.
Capital efficiency is vital to understand: how much money needs to be spent for an incremental unit of capacity to be built within the automotive industry. When Tesla first started the Model 3, their capital efficiency was $84,000 per incremental unit of capacity. However, this has majorly improved – in 2021 this is down to $7,700 per incremental unit of capacity. Within ARKs upside case, this figure is likely to move downward to £2,000 per incremental unit of capacity.
By far, the single biggest driver for Tesla’s valuation is robo-taxi launches. ARK believes that around 60% of the value within the model can be attributed to the taxi launch.
ARK expect Tesla to launch FSD between 2024, & 2026 as a more conservative estimation.
RBC Initiation Note:
RBC says how, Q1 was strong for Tesla, however there will be some “headwinds” in the future. Interestingly, similar to Piper Sandler, RBC are still hoping for a production capacity upwards of 1.5M units in 2022. Whilst Tesla has lost almost a month of production for COVID restrictions in Shanghai, this may impact Q2 figures. The firm RBC said how, the estimated production impact on Tesla is around 60K units, for the lockdowns within China.
In regards to the second half of the year, Shanghai 2H22 could enable “much higher” production figures, says RBC. To add, whilst Tesla recently launched Giga Berlin and Texas, there will be a “slow ramp”, in which will achieve “higher volume by YE”, says RBC.
When looking at the 4980 battery cell update, “we believe behind initial 4680 goals and indicated will take a few years to achieve initial timeline”. Elon did mention how 4680 as a structural battery pack will be competitive with best alternatives later this year, and exceed them next, says Piper Sandler.
