Chit Chat Stocks - What Is Tesla Stock Worth Right Now? (TSLA)

Episode Date: June 12, 2024

On this episode of Chit Chat Stocks, Brett and Ryan talk with Simon Erickson from 7investing on all things Tesla in 2024. Check out 7investing: https://7investing.com/ (00:00) Intro (44:39) Elon Musk's Compensation and XAI Formation (53:14) Valuation and Future Prospects of Tesla ***************************************************** Subscribe to our YouTube channel: https://www.youtube.com/@ChitChatStocks  Follow us on Twitter/X: ⁠https://twitter.com/chitchatstocks  Follow us on Substack: ⁠https://chitchatstocks.substack.com/  ********************************************************************* Options are not suitable for all investors and carry significant risk.  Option investors can rapidly lose the value of their investment in a short period of time and incur permanent loss by expiration date.  Certain complex options strategies carry additional risk.  There are additional costs associated with option strategies that call for multiple purchases and sales of options, such as spreads, straddles, among others, as compared with a single option trade. Prior to buying or selling an option, investors must read and understand the “Characteristics and Risks of Standardized Options”, also known as the options disclosure document (ODD) which can be found at: www.theocc.com/company-information/documents-and-archives/options-disclosure-document Supporting documentation for any claims will be furnished upon request. If you are enrolled in our Options Order Flow Rebate Program, The exact rebate will depend on the specifics of each transaction and will be previewed for you prior to submitting each trade. This rebate will be deducted from your cost to place the trade and will be reflected on your trade confirmation. Order flow rebates are not available for non-options transactions. To learn more, see our Fee Schedule, Order Flow Rebate FAQ, and Order Flow Rebate Program Terms & Conditions. Options can be risky and are not suitable for all investors. See the Characteristics and Risks of Standardized Options to learn more. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Open to the Public Investing, Inc., member FINRA & SIPC. See public.com/#disclosures-main for more information. ********************************************************************* FinChat.io is The Complete Stock Research Platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠https://finchat.io/chitchat/?lmref=J3bklw  ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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and carry significant risk. Full disclosures in the podcast description. Welcome to Chit Chat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome to Chitchat Stocks. Today, we are joined by longtime guest and friend of the show, simon erickson he is the lead advisor or one of the lead advisors and uh founder of seven investing and today we're going to be talking about a little known company some of you may have heard of it uh

tesla and simon brought this to us and basically he's like you know would you guys be interested in this this discussion and it for such a big company and something that seems so talked about it seems like just a really unique time to kind of revisit Tesla as an investment. And you just did a ton of work on them. So I'll kind of push it to you for a second here, I guess. Welcome back to the show, Simon. And then maybe what encouraged you to kind of revisit this? Thanks for having me again, Ryan and Brett. You know, I always enjoy chitting and chatting about stocks with you guys over several years now. And we've talked about Tesla, like you said, quite a few times over those last few years. But like you said, it seems like NVIDIA is grabbing

all the headlines, even though Elon is out there doing some really big and important things. And I think that to answer your question, what I did a lot of work here this last month, I like to say it was social isolation and over-caffeination for a good 30 days, was really to say, you know, everyone's got an opinion about Elon, everyone's got an opinion about Tesla. It's kind of one of those battlegrounds out there. Either you love me or you hate me. Very few people are kind of like, oh yeah, Tesla's okay. Either they're out there trying to buy a Tesla or they're, you know, talking about what an idiot Tesla is. And I said, you know, with all of these opinions in the media and all these things that are published about Elon

and whatnot, let's try to quantify for investors, what is the stock actually worth? And if you're buying Tesla shares today, what are you buying into? And so it was really kind of an evaluation exercise. It was a discounted cashflow evaluation model that said, you know, if Tesla does this, then the stock is worth this and i kind of built a whole bunch of scenarios that is the sum of the parts it was really kind of an interesting quantitative exercise okay and for anyone interested simon does have those published on the seven investing website and we will link those in the show notes uh two separate ones actually which we will be dividing the show up into we have the car company which was first or the automotive the ev maker first and then some of the moon shots

for the second part. So the links will be there if you want any of the written analysis. There's a lot of detail there. Let's follow on with this discussion. First, for any context for listeners, because this is a company that's doing a lot of things. It's always got different updates. It's always got new products coming down the line. So let's say a listener hasn't followed Tesla for the last year. What important updates are there from the company that investors should know about. Cybertruck, the first Cybertruck I have seen down here in Houston, Brett, has now gotten off the lot. It's, you know, out of the Gigafactory in Austin. They just started manufacturing them here at the end of last year, and they're out on the streets. Pretty crazy.

Look, have you guys seen the Cybertruck out there on the streets yet? We have. Yeah, it's wicked looking, right? It's crazy. You've never seen anything else like it. Yeah. But they're selling, And they're selling for an incredibly high price point, $80,000 right now. They kind of pulled back on the base model. They said, you know, we're going to go out kind of like they did with the Roadster. They're going to sell at a premium price first. Elon's going to reduce that over time. And ultimately, the goal is for Tesla to sell 250,000 Cybertrucks per year.

I actually think they're going to do that. I think that there's a lot of people that are hesitant about this. I think there's no way it's going to ever sell as well as some of the other vehicles in America. But I think that the reception is very, very strong. They've already got 2 million reservations for it. If he actually wants to convert those into sales, he's going to have to get the price point down. $80,000 is too much for most people to pay for trucks. But I do think that there's a lot of people that are looking forward to getting their hands on this.

That's one of the nearest-term drivers that's very optimistic. The other one, on the other side of it, Brett, is that there's a lot of competition in China right now. You know, as good as the Cybertruck reception has been in the United States, Tesla has been stockpiling the Model 3 in the Shanghai Gigafactory out in China. They reduced the price of the Model 3 multiple times this past 12 months. They are facing significant competition from plug-in hybrid providers like BYD. A plug-in hybrid is not a full battery electric vehicle. It's one that you can actually have gas and electric in a hybrid configuration. They've also, at the high end of this market, facing premium competition from companies like NIO.

If you guys have followed them at well, they've got a really good brand out there in China. And even a company that used to make smartphones called Xiaomi has now decided it wants a piece of the electric vehicle market. And they've introduced their base model for EVs as well. So the Chinese market was originally so lucrative to Tesla. you know, they can manufacture at a much, much lower capital intensity out of Shanghai than they could out of Austin or out of Fremont, California. But again, the downside is there's just a lot of people that want a part of this market. China is very heavily subsidizing both Teslas and then also its own domestic manufacturing of electric vehicles. And I think that, to be

quite honest, I think that Elon and Tesla as a whole are going to have to discount even further and accept lower margins they were probably originally expecting to in China, just because it's a really competitive market. Okay. And I think we're kind of going to go about this as talking primarily about the car automotive side, and then we'll talk about some of the more exciting things if we want to use that as the term. So let's dig in a little further here. We mentioned that you've got your model out there now as well. Let's go through some of your assumptions for Tesla's car business specifically, what are your sort of mid, near, and long-term assumptions here?

Sure. And so maybe if it's helpful just to kind of review, what does the discounted cash flow model do? You know, what this is, is a DCF is basically taking all of a company's future free cash flows and discounting them back to this moment in time in the present. And so all of the cars that a Tesla is going to sell, we have to make assumptions of how many it's actually going to be. You know, how much is it going to cost them to make those cars? You know, you've got these gigafactories, you've got to have people that are manning those gigafactories, the cost of the materials, the components, all of these things, et cetera. And then it's also really expensive to build the gigafactories and anything else that's a capital expenditure. So all the

revenues minus all the operational costs minus all the capital costs, you've got free cash flows that are resulting, and then we discount all of those back to the present, which is in all years up to the year 2040, Ryan, which is a heck of a lot of uncertainty, right? No one knows for sure what's going to happen next quarter with Tesla, but it's still worth it to say, okay, best case scenario, worst case scenario, somewhere in the middle of those two is the truth of how I think Tesla is actually going to perform. And we can tweak that over time. We can change incrementally as we get more information every quarter. But basically what I did was said, okay, if Tesla, first step, if Tesla is just selling cars, if they're selling the Model 3, the Model

Y, the Cybertruck, the Model 2, which might come out in a couple of years, that's a mass market affordable car that is going to be between $25,000 and $35,000. We make assumptions about how many cars is Tesla going to sell globally. And then we're going to kind of look at, you know, how much is it going to cost them to make those cars and how much do they have to spend on gigafactories. At the end of the day, if you bring all of those back to the present, and then at the end of the day kind of kind of answer the question of what is the price per share that tesla's worth as a car company that's what i ended up trying to solve for with this whole dcf exercise over

the last month or so and it was kind of interesting you see it as a car company it's uh not not as high of a valuation as a lot of people might be expecting yes and given yeah given the it's a 10 bagger over the last 10 years or maybe more way more um it is that there is a premium valuation There are, as you mentioned, the expectations of the cash flows. You know, there are high expectations here. We're going to get into the details of, you know, the near and then long-term stuff, as you mentioned, with those new models that might come out. But for the podcast, what do you think Tesla's car operations per share are worth right now? What came out of your modeling?

Well, the first thing I'd like to say is that I wasn't overly conservative in what I was modeling. You know, I do think that Tesla as a whole, they follow an S-curve rather than growing linearly. What that means for people that might not be as familiar with that phrase is typically people will kind of model, you know, okay, if they grew 100,000 cars this last year, they're going to grow another 100,000 cars the next year and so on. But in reality, Tesla really steps on the accelerator when it's ramping up production. That's going to be true with the Cybertruck and then with the Model 2, that they're probably going to blow it out of the water in terms of what their expectations are and what they actually sell in a good way. And so my expectations is that Tesla as a whole is going to sell about 6 million cars per year by the year 2030, and then about 9.5 million cars per year by the year 2040. And that's a pretty big statement. People that might be hearing those numbers might say, well, Simon, that's a big statement considering they're only going to sell about 1.7 million cars for this year.

But again, you look at kind of I'm expecting the ramp up in Shanghai, expecting a double production capacity and sales in China at a lower price point like we talked about. And then this Model 2, I think that Model 2 at steady state is going to be selling more than 4 million vehicles a year because it's going to be priced similar to a Honda Accord or a Toyota Camry. You know, we can get into that price point of something like $25,000. This is something that's going to sell very well in the mass market, including all of the benefits that Tesla puts into those vehicles. Full self-driving, you know, autonomous, autopilot, you know, the supercharger network, a lot of benefits that you're not getting even in the mass market. Tesla, when it works its cost structure down, is going to be very, very appealing when it competes against some of those other vehicles out there. And so to answer your question, Brett, even with kind of some not-so-conservative assumptions, I still think Tesla, the car company, is worth right around $104 per share. And when you consider that Tesla is selling at $180, maybe $185 today as a stock, two things.

One, the car company business just isn't that lucrative, right? You can only charge so much. It's very competitive. You know, gross margins are only 20, 25%, even at steady state, just not a really, really attractive business. But on the other hand, Tesla is doing things fundamentally differently than a Ford or a GM or a lot of those traditional automakers that we know today have ever done. And so this is kind of why we've broken it up into two parts.

I threw a number out there of $104 a share, which ruffled quite a few feathers. We immediately said, no, no, Tesla is doing a lot more things than this. And I said, that's exactly the point. Tesla is not just a car company, but when you look at the car side of the business, it really isn't as attractive as a lot of people might be thinking. Okay, let's do a couple of follow-ups on the car business. Now, you mentioned near term there are the China supply, I call it an issue, or maybe just there's a change where that country, you know, given it was a little bit of a top-down mandate from the government

And there's a lot of companies out there building this cheap supply along with Tesla, who does have factories there. In the near term, what kind of assumptions did you make for that? I know a lot of people look at the last few quarters have been weak on revenue growth. And obviously, a few quarters doesn't make a business you're looking at for the next five or 10 years. So what kind of assumptions did you make there and where do, I don't know, how do you think they get through it is more of my question. Like when would, what are you looking at to say, okay, we've gotten from this 1S curve and they're able to get to that next one, as you mentioned. Yeah, I think one of the big ones is China, like you said, right? They're actually not at capacity of what they want to be.

They're not selling as much as they can potentially manufacture at a gigafactory Shanghai right now. They were sitting on inventory last quarter. And for those who follow the Tesla news, they actually missed their expected delivery numbers. That's unusual for Tesla. Usually Tesla, you know, always sells out and has got plenty of orders in line. And Wall Street kind of raised an eyebrow because they missed their own forecast by about 15% this past quarter. That's a bad sign. Tesla's going to have to move that inventory off of the Gigafactory lot before it can make more.

And so you saw a price cut here. They've got some preferential financing that they did here. They coupled insurance with a lot of the cars here in China. They're kind of doing what they can to sell it. And then on top of that, too, Tesla's in a hiring freeze right now this year. They cut a lot of the team that used to work on the supercharger network, And then they also have kind of cut back on a lot of jobs that were open before. And so I think that we have to be realistic as investors that, you know, maybe Tesla is going to be going through a couple of speed bumps and not really just stepping full speed on the accelerator here within the next three years or so.

But on the other hand, Brett, I think that the long-term trend of electric vehicles replacing internal combustion engines, especially when subsidized by the government, is inevitable. I think that once you work out some of these hiccups, I think that the long-term opportunity in China, even with competition, it's still there for Tesla. And I think that, you know, in kind of the nearer term, I think that by 2027, so let's call it three years out, I think that the production from Shanghai is going to double from about a million vehicles this past year up to about 1.9, maybe call it 2 million vehicles by 2027. Again, mostly the Model 3 is kind of one of the focuses over there in China. It's going to be a lower price point because you're competing against BYD and others. But I do think that in the near term, the long term, I'm sorry, near term weakness in China, long term opportunity in China. Okay. And for anyone that's watching, I did share a chart from our friends at FinChat where it shows that the last few quarters,

there has been a little bit of a stagnation in deliveries, but we're at about 1.8 million, 1.7 million total deliveries. Let's just say just under 2 million. And I guess we look midterm, your assumption is that they can go to 6 million-ish deliveries per year. What separates them? Because we have existing car makers out there like Toyota or Volkswagen or Honda, I think do uh in between five and ten million deliveries a year what makes tesla different where people like what separates them that's going to convince people to switch from their honda hybrid or ice vehicle to to the tesla like what makes them special there's two pieces to this answer the first is going to be how many people are going to adopt the model 2 for their own driving

interests. And then the other is how can you use Tesla to make yourself money and have this be a revenue generator for you personally? The first one, you know, model two is going to be, we haven't gotten full clarity on what this is going to look like, but Elon has kind of promised to unveil it later this summer. It's going to be what he wants to introduce as a $25,000 to $30,000 electric vehicle and with full self-driving capabilities, right? And so you can, you know, kind of one of the big things has been the range anxiety. You know, is there enough supercharging networks out there? You know, what's the range that I can get out of Tesla? That's a two-beer conversation that we're going to have some other time about the technology that's going into these, but it's

not going to be an issue as much by the year 2026. And I think that people are also going to be much more comfortable with the safety record that the Model 2 is going to have by 2026, two years out now, too. A lot of people are still kind of hesitant to even step in a full self-driving car. I think that within two years, we're going to be a lot more further along the adoption curve from kind of the earlier adopters to more comfortable in the mass market. And so the answer to the question is the first one is kind of, you know, what is out of that number that I threw out there of 9 million vehicles by 2040 and 6 million by 2030? I expect about half of them to be the introduction of this new car by 2026, right? think that it's going to sell phenomenally well by people that either want to drive it for themselves and are comfortable with the full self-driving, or they're going to be using it

for their own. It's going to be kind of like an Uber situation. The other piece of this, and I don't want to jump the gun too much because we can talk about this in the second part of the show, but there's what's being referred to as a robo-taxi network, where Tesla will sell you a car, Brett or Ryan, you buy it from them for $25,000, and then you send it out to give other people rides. You're not necessarily using it to drive yourself. You're using it as a moneymaker. And Tesla's going to make this as simple as possible for you, right? They're going to give you the insurance for it. They're going to give you the preventative maintenance for it. But you're going to be the one that's on the hook for charging it every day, for sitting it out there, cleaning

up, kind of taking care of this like a fleet of vehicles. But if you think about it, if a rider is paying you every single day for every single ride, this probably will pay for itself in less than one year. So it's going to be an incredibly good ROI. Tesla receives not only the upfront sale of the car, but also the ongoing take rate from every car, every ride that you send out there. That's kind of a win-win for both Tesla,

who gets a lot of data from this and gets the upfront sale, and from you, who all of a sudden has got a moneymaker that, you know, is going out there and giving rides to other people. Okay, I've got a question. So you've, you said 6 million deliveries in this model by, I think it was 2030 was the number, not maybe nine by 2040. Is there, do you see any risk of like Tesla fatigue almost like people are seeing so many Teslas on the road?

I mean, maybe this is just my little corner of the world here where in Redmond and Seattle, Washington, it seems like there are tons of Teslas and it's maybe that's because it's super tech heavy. but is there any risk that people kind of get wary of the brand or it seems less attractive to have a Tesla if so many Teslas are already on the road? I don't know. Do you see that as a possibility? It could be. There's a lot of uncertainties of how this is and there's certainly risks like that to keep in mind. I would actually think it's the opposite though, Ryan. Since they started high and then kind of worked the brand down to the mass market, I still think Tesla carries a premium brand, at least here in the US and in Europe too. To give some context of how I came up with the numbers, you know, there was about 90 million light vehicles sold globally

last year in total. Passenger cars, you know, things that are vehicles that are being sold, then about 13 million, 30 and a half million of those were electric vehicles. So let's call it 15% of the global passenger cars that are sold are electric right now. That's up significantly from just a single mid digits, you know, in terms of percentages, even just five years ago, the world was adopting electric vehicles. And I think that's going to continue out of those 90 million light vehicles and those 13 million, 13 and a half million electric vehicles. Tesla sold 1.8 million vehicles last year. And I think that it's going to get to 6 million by the year 2030, even as the light vehicle market grows right around there with GDP.

But I think that the percentage globally of light vehicles that are electric rises from 15% last year in 2023 to 35% by 2030. And this is a collection of research from Deloitte, a lot of kind of forward-looking expectations, subsidies, improvements in supply chain, improvements of cost of the components. You just kind of see, and this is something that even Ford taught us back with the Model T, and just kind of as you scale things up, it doesn't kind of just kind of go linearly you see improvements that are out there you see brands that are building on themselves you see a supercharger network that gets out you see the cost of components coming down you see the capital costs of building things coming down it's things that tend to grow quicker than we're expecting and so i think it's it's more than likely that one out of three light vehicle sales in 2030 is going to be electric and i think tesla

It's going to hold on to about a 16% market share of those electric vehicles, even in, you know, what are we at, six years out from here. So to answer the original question, I think you were asking, you know, are people going to get fatigued if Teslas are going to get, you know, it's going to lose a little bit of its brand, you know, attraction out there. I think it's actually quite the opposite. I think that Tesla is still going to be one of the largest electric vehicle companies in the entire world that holds a similar market share as where they are today for the EV business. Right. That makes sense. similar market share they can still grow just because there is a massive tailwind for the industry i think one if there's any bears listening or any uh we hate to do like the it's not a battle there's going to be people that are always skeptical about about a company but

anyone skeptical about the company that's listening to this is probably saying well what are the margins going to be you know we talked about the china supply i know you talked about a little bit we might have anything else on that if you want but if we saw on you know When the stock hit all-time highs in 2021, I think it was 2021, the margins looked fantastic. I think gap operating margins looked like they were about to push to 20%. It was like 16%, 17%, along with deliveries soaring. Prices were staying high. But today, that has come back down a bit.

And I see, like I said, I probably don't need to share the screen. people can tell from our friends at FinChat, where the revenue today is about $80 billion. So if I look at, you know, they could say triple deliveries, and you could get that to $80, $160, $240 billion, let's say $250 billion in revenue, or maybe even more. But the big question is, what are the margins on that? Because if you have a 30% operating margin versus a five, that's a huge difference. I want to know your opinion after doing, you know, following this company for a long time doing your updated analysis here what do you think your steady state or mature margins could be you know either either gap operating or whatever margin is your

preference for tesla um as they grow over the next five to ten years yeah great question mark excuse me next mark the next mark for the company great question brent um you know we we post first of all the things we mentioned in finchad.io i mean you guys um you know ryan you guys have got some fantastic KPIs and metrics and just kind of how things are tracking along, which is fantastic for a company like this that thrives on how well are they executing. I also have posted the full model that I have for Tesla, 27investing.com. It's free for everybody to look at that if you want to follow along with how I'm discussing this. But I do want to appease the bears here too. I talked about the bullish side, right? Tesla is going to sell all these vehicles. Now let's talk

about how much money they're actually making. You mentioned $80 billion in automotive revenue this last year, which is correct, and I expect that to rise to $100 billion by 2026, ultimately $300 billion by 2040. That's top line, but let's address the gross margins they're actually making because cars are expensive and Tesla, you know, isn't making a ton of money on the gross margin line item. I do actually only think they're going to keep it the kind of maybe low 20% gross margin line item for the automotive business through 2025, 2026. I think that once they introduce the lower priced vehicle, they're going to increase that. I think that eventually they're going to get into the low 30s on a gross margin line item. And then that kind

of walks its way down the income statement too, right? You've got to pay for R&D. You've got to pay for kind of overhead of the business. Elon's got a lot of stock out there that's going to dilute shareholders and things like this. But just in terms of the business itself, this is why we can't say that there's a lot of money to make in the car business just because even at, you know, even at a price point that is attractive for Tesla right now, they're just not generating a whole lot of gross margin dollars as efficient

as they are, you know, as, you know, as efficient as they run the ship and it's getting as many vehicles off a lot as they possibly can. It's just not a super lucrative business. And that kind of comes back in terms of the cash flows that get discounted to the present. I said that that's $104 a share because it's just, you know, you've got to do more than that. And Elon knows this. And, you know, when people that are saying, oh, Tesla's too expensive as a car company compared to Ford or GM, yeah, it sure is. But this is why Elon wants to embed full self-driving.

This is why he wants to have Robotaxi. He wants to turn these vehicles from an upfront revenue generator to something that's providing him with continual revenues and continual cash flows over time. For those who have followed along, he now has the full self-driving option for $99 a month, where if you just want to, you know, take your hands off and enjoy the ride, the car will take you anywhere you want to go. This is not just autopilot. This is like door-to-door full self-driving, and it continues to iterate and improve all the hardware that's already in to the Model 3, the Model X, the Model Y. All these vehicles have it already, but if Tesla can continue to generate $1,200 a year off of just full self-driving, you can make assumptions of how many Teslas are on the road today and how many percentage of those are actually going to embrace this, And then how much money is Tesla actually going to generate off of the full self-driving subscriptions alone? It's not insignificant. By my numbers, it was about $100 a share to the current stock price that could be based off of even just, you know, sub-10% adoption of full self-driving even within the next five, six years.

This is, again, changing Tesla from being an upfront car company that's just selling, you know, aluminum paint and batteries one time to people and then doing a little bit of service with them to having these cars be, you know, kind of software companies that are generating recurring revenue each and every month and each and every year. Okay. Question on full self-driving. I guess, is it legal? like can like what are the parameters right now because i know there's a lot of stuff in the news around it's not supposed to you know you're still supposed to have like your hands near the wheel ready to adjust at any moment i guess what what are the steps between where we're at today and okay i'm gonna click on my phone and my tesla will go pick someone up and i'll collect

some revenue? Like how far away, I guess, do you think that is? And do you, it sounds like you think this is a very real possibility? Yes, it is. And so people are already using FSD today, right? It's not allowed everywhere, but you know, I just chatted last week with some guys in California. People are using it all the time. They say, yep, get in the car. It's in my driveway. I put in FSD. I put the address I want to go to boom. And then I'm there and, you know, it goes for other drivers too, right? A lot of people, their wives are becoming more comfortable with this. It was a fun conversation about, you know, if you've never used FSD before, You're not the primary driver of the Tesla.

You can get in and immediately get exactly where you want to go. The numbers that I've seen is, you know, out of the vehicles that Tesla has on the roads right now, Ryan, the estimate in the first quarter of 2024 is about 5.3 million Teslas globally. And of those, 10% have at least tried the free first month of full self-driving. 10% of the entire global base of Teslas, again, the hardware is installed already, ready for you to go. 10% have said, okay, I'll take you up in the free month. And actually only about 2% are paying for it right now. Either up front, you used to be able to pay $8,000 up front for full self-driving and automatic upgrades in perpetuity,

or you pay the $99 after your first month expires. And so I've kind of walked that forward, you know, of what are my expectations, if you know, how many people are actually going to take Tesla up on this and how many are actually going to be paying for it. I think that it's really going to kind of kick in in 2026. I think it's still going to take a couple of years until we start seeing any higher numbers than this out there. And Tesla's still got to pay for some new costs, which are the machine learning inference and the data centers and the neural networks to actually steer these things around, right? You don't just do this for free. You've got to actually design the chips and do the computing and pay for the electricity and the power of your data centers to steer the cars and navigate them where they need to go.

And so there's an upfront cost to that. You've got to install these NVIDIA chips and you've got to kind of have some ongoing operational costs as well. But overall, I think that this is going to be a real big cash flow generator just from the full self-driving subscriptions. I think that, you know, we're going to see some losses in terms of the cash flows for these first two years. But I think that you're going to break even by 2026 and start generating, you know, a couple of billion dollars. I've got $2 billion in full self-driving, free cash flows by 2026, rising up to significantly more than that by 2020, 30 in the out years. And again, you know, this is a software subscription. You know, this is something you're paying for the car to drive you around. Tesla just got to make sure that it's safe. It's accepted.

The regulators sign off on it, and people are willing to pay up for it. It's going to take a little bit of time. I've seen other valuation models that expected that by this year, Tesla was going to have X million vehicles that were already full self-driving out there. We haven't seen that yet, but if you follow the autonomous software, we're a lot further along this year than I think a lot of people expected. Now, it's just a matter of actually getting the adoption. FinChat.io is the complete stock research platform for fundamental investors. they have all the standard financial data on more than 100,000 stocks globally. And beyond that, they have company specific segment and KPI data on more than 1500 stocks. So to give some examples

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The link will also be in our show notes. Earlier in the show, you heard us talk about the investing platform, public.com. that's where you can trade options with no commissions or per contract fees and you get a rebate of up to 18 cents per contract nerd wallet recently gave public five out of five stars for options trading if you want to see why go to public.com and start getting a rebate of up to 18 cents per contract traded this is paid for by public investing options are not suitable for all investors and carry significant risk full disclosures are in the podcast description U.S. members only. Okay, now I'm going to ask a question that I think the people that are very

bullish will like, but don't worry, we're going to temper your expectations with some follow-ups. Why is the Robotex fleet so valuable in your DCF? That was one thing that really stood out to me. While reading it, I'd like to hear your thoughts on that. Yep. So to quantify this a little bit, apologies that I'm a little off the rails. We're going a whole bunch of different directions, but I swear I'll reign it back here. Tesla, the car company, we said was worth $104 a share. Tesla, the car company, adding on the full self-driving subscriptions and the assumptions that I made is worth $200 a share.

Tesla, with a robo-taxi network, which does incredibly well, is worth $645 a share. That's what makes Tesla the multi-bagger. The car company, if it's just a car company, there's no way it's worth $180 a share. If it's a car company that's got some full self-driving subscriptions, probably worth $200 a share, worth a little bit more than what it's selling at today. But Tesla is a true AI company where these cars are going out there and competing not against

Ford and GM, but against Uber and Lyft. It's worth a lot more than $180 a share today. And by my estimates, Brett, $645 a share is really, it's an aggressive assumption, but it's doable by Tesla in terms of if we're buying these cars, not just for ourselves, but to send out to this robo-taxi network, how many realistically cars can be out there in this robo-taxi network? How much can Tesla charge for a ride with a completely autonomous Tesla that has no driver in it? And then what kind of cash flows can return back to the corporation of Tesla in terms of a 20% take rate that rises in my model up to 30%

by the year 2034. And then what are the cash flows that are resulting out there? If Tesla really is best in class in terms of the regulators approve it, it's safe, customers accept it, and then the costs are low enough to make it profitable.

What is all that worth to investors today? It's worth a lot of money, man. I can definitely see how... Oh, sorry. Go ahead, Brett. Yeah, so... So I guess you just talked about the RoboTaxi. So my follow-up on that would be, I think, again, I'm just going to frame it as anyone that's listening that's kind of skeptical about the company's plans. They would say in 2019, Elon had his proclamation that they would have RoboTaxi soon. they talked about the app they talked about the uber competition the the thesis that you laid out there that can generate a ton of value why should we believe him when he said this in

2019 nothing's happened yet he's now saying it in 2024 can we it feels a bit like a boy who cried wolf situation i wonder how you think about it as you know when modeling the the dcf here In my opinion, Elon always overestimates himself in the short term, but proves himself right over the long term. And I think that that's a valid statement to make, right? If you take Elon by his word that something's going to happen by the date that he says it, you're going to be disappointed. And that's why the stock sells off sometimes. But also look at what Tesla has accomplished globally. It's absolutely amazing. If you look at what Tesla has built and done and attracted the money and actually put steel on the ground

and, you know, the technology that they've come so far and even the stuff we haven't even talked about in the energy industry. It's amazing what this guy has done. And it's because you've got Elon Musk at the helm of this business, right? He's not only a visionary that is guided by this, you know, master plan that he lays out for everybody to see, but he also is willing to put in 100-hour weeks and sleep on the factory floor to make sure everything is perfect.

I don't think I would like to work for Elon. I think that would be a very stressful job. But just in terms of investing in this business, Elon does what he says he's going to do, even if it doesn't coordinate with exactly when he says he's going to do it. And so for this reason, Brett, I've been purposely pretty conservative in the short term. We talked a lot about that with China, with margins, with Tesla's hiring freeze. My model is pretty conservative up to the year 2026, 2027, 2028. But once I think he actually starts getting this going, I think that it's okay to be a little bit more aggressive and not just grow linearly like so many of these models that I've seen have done.

Let's put some numbers to what the Robotaxius network is worth, because I know that we've got a pretty technical audience for your show here, and we can go through a lot of these assumptions. But just to put some numbers to them, let's look at the year 2030, right? This is six years out. I think that by 2030, there's going to be 33 million total Teslas on the roads, right? I think of that number, 25% of them are going to have full self-driving subscriptions active. So call it 8 million vehicles will have full self-driving capabilities. And also of this, I think that there's going to be a cumulative number of 9 million Model 2 vehicles that are on the road. Out of all the Model 2 that gets introduced in 2026, I think there's going to be 9 million total of those on the roads.

And so if you look at that same percentage in terms of what percentage of those are going to go into the robo-taxi network, right? We've got 9 million total Model 2s, and they all look exactly the same. Some of them that are going to go to the robo-taxi network are not even going to have a steering wheel. They're just going to be an autonomous vehicle whose sole purpose is to give other people rides. And so I've estimated that about 8% of the 9 million Model 2s in the year 2030 are going to be part of the robo-taxi network. By the numbers, that's 720,000 vehicles. Of those, I also think that the average, let me step back, if that makes sense.

Are you guys following me so far? Am I jumping too far? Okay, yeah, okay, perfect. So 720,000 vehicles that are part of this robo-taxi network, they're only giving people rides. I think that the average vehicle, if this is all you're using this car for, is going to be doing that for 50,000 miles a year. That's a lot less than taxis are typically driving today, but I think it's a valid assumption. Again, completely autonomous.

And today, if you're getting a ride from Uber, on average, you're paying about $2 per mile in terms of the fare. Tesla doesn't have to pay the driver. It's completely autonomous. So I'm modeling out $1 per mile per robo-taxi drive. So if you've got a robo-taxi, you buy the car up front for $25,000. In the first year, the total amount that it's making is $50,000 in total fares. I think that you keep four-fifths of that, and you pay Tesla 20% of that. So you're making $40,000 off of the car.

You've still got to juice it up. You've got to refill the battery every day with electricity. You've got to do some maintenance on it, things like this. But $25,000 up front, $40,000 in revenue for you every year, this really quickly becomes pretty profitable if you buy one of these robo-taxis and send it out for you. And then Tesla, if they're taking 20% of $50,000 per car per year, that's $10,000 per car times 720,000 vehicles that are out there. That's $7.2 billion in revenue that Tesla is generating in 2030 for the robo-taxi network. you know high margin revenue too very very high margin right and we've got to discount that right you know that's not money today that's money in 2030 and so those who have run discounted cash

flows in the back in the past know that 7.2 billion dollars that year is really only worth about 3.7 billion dollars today when you discount things back uh but you can kind of see um that's that's the business you want to be in you don't want to just be selling it 15 or 20 percent gross margin you want these really really high cash flows it's just this is something that's really really hard to do and so elon's got to lay a lot of the groundwork here within the next five years to get this size of prize by 2030 that's so lucrative so appeal okay two follow-ups on that one i think the it's a lot you know it's logical all that stuff makes sense and how this is a business that people would want like everyone in that ecosystem would want it's in whatever you

call it a non-zero. It's a win-win situation, non-zero sum outcome. Does full self-driving work? And two, why do you think they're behind versus Waymo, who already has one of these out there? I'm not sure on the behind. I think that it is a both winning scenario, right? Full autonomy is a tough thing to achieve, right? And that's why Elon's still striving for it. And I think all the other companies, all the other automakers are doing this reactively rather than proactively. In my opinion, Tesla still is attracting some of the smartest minds when it comes to AI and machine learning inference to work on these projects. There is turnover, Brett, right, to appease the bears listening to this show. You know, a lot of people have come and gone from

Tesla, but I've also talked to the people that work there and they say, yeah, it's a grueling week, right? You're putting in a lot of hours because Tesla is so demanding and it has to be perfect. And I think that's what you want. If you're going to step into a car that it has to be perfect, it's not going to get in a wreck, you have to be comfortable with it. And at the end of the day, you know, let's not forget the ultimate goal here is to replace fatalities on the roads, right? It's not, it's great that Tesla's making money. It's great that we're making money as investors, but like, why are we doing full stop driving in the first place? Well, it's because the track record of an autonomous vehicle in terms of safety is much better than we are as human

drivers. And I think that we shouldn't forget that. We're quick to point out there are things that go wrong. You can't be completely perfect as you develop this. It's very unfortunate that there is fatality still that have happened from Tesla cars. But I think that it's also a very noble goal to try to say, OK, at the end of the day, we're trying to prevent fatalities. And that's kind of the goal of what Full Self-Drive is trying to do. So I think it does work. Yes, I do think it's going to get there. I think that once we get two or three or even four years out, again, And this is why I'm saying 2028 for this, for the RoboTaxi Network, not 2024. But I think that when we look at this four years from now, I think we are going to see a lot of Teslas that are out there that people are very comfortable getting in those cars.

Okay. Question on, I guess, a little bit straying away from the technology a bit here to, I guess you'd call it the proxy statement and sort of a tumultuous situation. situation maybe a bit of a battle if you will musk has somewhat famously now had a pretty large pay package in the past and it looks like he's potentially being granted a new one what do you think about this and as a shareholder is this a concern for you or do you prefer it i've modeled it that it can that entirely goes through ryan um you know elon is on the what is it a 50 billion dollars you remember what the number was the what was the number thrown out there the value of it 48 i think i believe 55 i believe 55 but i don't know uh okay don't quote

me i i don't remember the exact number either it's i think it's 300 million shares though that elon uh back in his 2018 compensation package was due if he hit certain milestones it was revenue it was vehicle deliveries there were i think that there was something about margins in there too But it's basically Elon had to do A, B, C, and D. And he did them. He did all of them. And then the Delaware courts kind of came back and said, you know, this is excessive compensation. It's not for the interest of shareholders.

We've got to crawl some of this back. And that was basically fighting to get what he was agreed to back in 2018. I'm a Tesla shareholder. I should disclose that transparently. I'm voting in favor of this. I think that you want Elon at the helm. I do think he's not irreplaceable at this point. If this becomes a huge thing where Tesla either doesn't approve the vote or Elon isn't back to the, what is it, 20%, 25% ownership stake that he says he wants to have, I think that if Elon were to leave Tesla, they really need to take the autonomous opportunity very seriously and get somebody like one of their AI chiefs who's departed now or somebody that, like I guess Sam Altman out there, somebody who really understands AI and the software opportunity for this business.

rather than somebody like a J.B. Straubel or somebody that was more of the car, electric vehicle, battery technology guys. Just because I think that Tesla's future in 10 years looks a lot different than its past. They have to go after this autonomous opportunity if they're going to do right for their investors and their shareholders. Okay, I have a bit of maybe a concern. So he got awarded the large pay package. He is the largest shareholder, right, if I'm not mistaken. Maybe there's some large funds. that are up there as well but are you not in your head is he the largest shareholder

i believe so yeah i have to double check that ron i don't have it in front of me i think so i think it's mid-teens right he's back to the mid-teens again he used to be 20 but then he sold a lot to buy twitter and um you know a lot of those were tesla shares that you put on the table okay so i guess is it a concern that you may have to continue giving the largest shareholder huge share grants to retain him because when it like i don't know i feel like if you have 15 or whatever you have more than enough incentive if i'm the richest man in the world i'm pretty comfortable with my financial situation that's what i would think i guess would you be worried at all that you get in this situation where five years down the road we're doing the same thing

and we're diluting everyone else at the expense of retaining him when he already owns a decent a chunk. This is so interesting right now, because Elon is flexing his muscle and saying, hey, I built all this at Tesla. Look what I did. You guys want to keep me at the helm of this company. And that's why he's saying, you know, the compensation structure is, or the compensation package is important, right? He wants more shares. But then he also wants to get his percentage stake from the mid-teens or whatever it is today, 13%-ish, back up to 25%. Because in Elon's mind, he wants to say that if he's got enough people on his side for the vote of what he wants to do, the vote should go through right 25 ownership plus another 25 call it 26 now he's got 51

majority to push things through and so it's kind of like if elon's at 25 it's kind of like this uh this this ethereal number that he says okay if i can convince enough people or enough voting power to see my side on this i can push through and basically retain control of the business versus if he's only a minority shareholder you know 13 he's really got a campaign pretty hard to get a lot of votes on his side of things. On the other hand, you know, as shareholders, first of all, I didn't like that Elon sold a lot of his Tesla shares to go out and buy Twitter. I think that he really is doing that more to influence the American public for the opportunities to disrupt industries. And he wants to have hundreds of millions of people to see directly what he's

saying about them and control the narrative more than this being a financial good decision. I understand why he's doing it, but I think that financially that was a net negative for Tesla shareholders. And now the vote is coming up. Are we going to give him to Elon? Are we going to give him the increasing share package? What's the next compensation package going to look like? Is it going to be that we have to keep paying Elon more and more and more so that he can kind of get his way on things like this? That's a separate conversation.

Shareholder governance. You want to have somebody who's highly motivated like Elon Musk at the helm. But on the other hand, what are you giving up to give him this? There's been a lot of examples in the past of companies that have really turned south and soured because an executive who thought they were doing all the right things didn't end up doing the things that were the right things for shareholders. And that can be really bad for investors and actually be a reason to sell if they get a little too egregious out there. I got a solution. Dual class stock. stock that seems to be the the easiest way to go forward here but we don't need to talk about that

for the uh i don't know that's a that'll resolve itself and we'll kind of figure it out you know it's still up in the air going forward one other thing i thought was interesting lately was that musk has started a new company called xai he loves i guess the name x he's got a child named that as well uh what's what are your thoughts on him raising funds for xai i think it was six million maybe and doing it yeah doing and doing something ai whatever it ends up being i guess it's an early stage thing through this new entity that's not under tesla does that have any concern to you because that's i don't know the empire like investing in tesla doesn't mean necessarily investing into the entire Musk business empire. What are your thoughts as a

shareholder? AI is such a broad field right now that I think it's okay to kind of set the swim lanes of who is doing what, as long as it's not starting to see overlap where, you know, XAI is doing some stuff that Tesla's AI division should be doing. From what I understand about XAI right now, and I'm less familiar with this than Tesla, so bear with me, but I believe This is more comparable to the large language models like we've seen with ChatGPT, you know, with all of the large hyperscalers are launching their own right now. It's something that's supposed to be a platform for developers to build on so you can understand and be conversational with users. That's a very different type of AI than what Tesla is doing for its navigation of its vehicles, which is the cars have been trained. You know, it sees a stop sign. It understands that this is a stop sign. And then it has to stop. And you've got to train it with just so, so much video feed and video footage so the neural networks can understand everything. Basically, it has to be perfect. If a deer jumps out in front of you, it has to know to stop.

If a kid is jumping out, you know, in a purple Halloween outfit and it has no idea what that is, it needs to default to stop. I mean, just this number of scenarios you see every day that human drivers intuitively will react to, you've got to train its cars to do that. And so there's this training component of it. And then Tesla's AI is really more about machine learning inference, which is now the cars that they've been trained are responding the way that you want them to. And so I think I'm okay as a Tesla shareholder with XAI doing things that are different than what Tesla would be doing with its own AI ambitions. But again, this is all happening so quickly and innovating so quickly. I haven't seen really, you know, any kind of set swim lanes on who is doing what and making sure that they wouldn't interfere with one another. Okay.

I think we've got a final question here, unless Brett has any more. He's shaking his head. He's giving me the thumbs up here. So let's wrap with this. What is the one thing investors need to know before making an investment in Tesla? I think that to wrap this all together, it's very helpful for investors to know what you're buying at any given time with the company. And Tesla is the perfect example of this because it seems like sometimes everyone's just so optimistic about what Tesla is going to achieve and the stock sells for $300 a share, which is the high point of the last 52 weeks.

And then other times, you know, people are pissed off at Elon for buying Twitter or, you know, it just seems like people are leaving, you know, the executive ranks or there's pessimism. And then the stock is selling for $125 a share. And, you know, all points in between those is the truth of what is the future going to look like. I think that my goal of spending the last 30 days on this discounted cash flow for Tesla was to show if you think that Tesla is just a car company that is going to fail in the AI ventures that Elon has said he wants to achieve,

do not buy the stock today because it's probably worth $104 a share, even with very, very reasonable assumptions that are not super conservative. If you think that Tesla is going to continue to embed full self-driving into its cars, collect a recurring high margin revenue stream from those and have pretty good success with people accepting this and adopting this, it's probably fairly priced. You know, maybe it's worth $200

a share. It's selling, what are we at? $185 today. The market has priced that in today for that to be successful. If you think Elon will be successful with the robo-taxi network, Tesla is significantly undervalued today, probably by a factor of three or four. It's probably worth at least 200%, maybe 300% upside from today's price. And so choose your adventure, right? You don't have to invest in Tesla. If you think it's just going to stay as a gigafactory, EV producing machine, maybe it's not worth $180 a share. If you think that Elon is going to achieve this, There's a lot of uncertainties along the way. But as investors, we all have our opinions, our own risk tolerances.

Some people might be in retirement right now, might not want to take that risk of something that's going to take 10 or 15 years to play out. Other people are saying, yeah, I'm on board with Tesla. Ryan, we haven't even talked really about the energy business. We haven't talked about the autonomous robot business. Elon's got a lot more projects within Tesla that we didn't even discuss here on this podcast. But you have to be comfortable with uncertainty and risk if you're going to take a stake in Tesla at $180 a shift today. All right.

That's a great way to wrap things up. Simon, thank you for joining us as always. And why don't you give a little tease for anyone? You know, if you've come all this way on this episode, this hour long here, you probably would like to hear more of what Simon has to say and write. So tell listeners where they can find more of the work of 7investing. Yeah, thanks very much, Brett. Thanks for having me on the show.

Thanks for the opportunity to talk just a little bit about our company. You know, 7investing is, our job is to empower individual investors. And one step beyond that is we actually make stock market recommendations each and every month, and then we follow them, you know, in perpetuity. We people, if they buy Tesla, you know, a couple of years ago, that's great if it was a new recommendation then. But even more so is like, is Tesla a buy right now? Do you still have conviction in a company, even that's been on the scorecard for several

years? And so one of the things that we do with 7investing is kind of we have an interactive dialogue. You know, things like this Tesla valuation model isn't just going to be a one-time said and done. It's going to iterate and it's going to improve. And we want to showcase that behind the paywall at 7investing.com. Our subscription is only $17 a month. It's $200 a year. If you use promo code TESLA at 7investing.com slash subscribe, you get another 15% off, and it's only $170 a year.

And depending on, you know, how long you want to be an investor for, I think that it's kind of helpful to have a co-pilot to help you navigate this crazy thing called the stock market out there, not just in terms of buying stocks up front, but also knowing kind of how to valuations change over time. Are you still getting a good deal today? We try to empower a lot of those things at 7investing.com. Beautiful. Yep. And the links will be in the show notes. And I've done it before. If you search on Google 7 investing, it'll be the first thing that pops up. Yeah. Portfolio management is quite important and definitely something underrated by a lot of people out there, which you guys do can help out a lot with. But let me hit the disclosure. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I, or any podcast guest

may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you everyone for tuning in and we'll see you next time.