Decent Revenue Growth Won't Stop Valuation Multiple Re-rating Lower

Tesla: Growing Where Others Fail

• In an environment where companies are declining, Tesla managed to maintain its sales.
• While Tesla’s CEO tends to be liberal on his growth projections, I am content forecasting 190B in revenue for 2029.
• I believe that Tesla will continue to innovate, and I maintain my forward PE of 29x.
• Robotaxis may become a reality, but it’s too early for me to incorporate them into my present value.
• Musk bought enough GPUs, future capex is expected to moderate and be rerouted to core technologies.

Tesla reported a Q3’24 revenue increase of 8% to $25.182B. The 12-month revenues stand almost flat at $97.15B versus $95.9B in the prior 12-month period. This is not necessarily a bad development considering the current stagnating economic environment.

Breakdown by segment:

• Automotive revenue was up 2% YoY to $20B. Cybertruck sales are developing positively, with more than 16K sold in the U.S. in Q3.
• Energy revenue jumped 52% to $2.38B but is down sequentially from $3B last quarter. It seems that energy demand is a bit more variable, and the next quarter will be a good indication on whether energy solutions have a solid growth trajectory.
• Services were up some 30% to $2.8B, and are expected to grow tied to the number of vehicles in circulation. Management would like to minimize revenues from services by providing superior-quality models. This will alleviate long wait times (find: “wait times”) in service centers, and remove some of the dependency of what is likely a low-margin branch.

As far as revenue guidance goes, Musk interjected a best guess forecast that vehicle growth will reach 20% to 30% next year. This would be above the expected 15% delivery growth from FactSet.

Net income jumped to about $2.17B, up by 17% YoY from $1.85B. TTM net income came in at $12.7B up by 18% YoY, and moving towards my 2029 target of $30.3B

The more than 20% jump in market value seems to be a reflection of the 17% increase in earnings, and the re-accelerating future outlook for a 20% to 30% vehicle growth outlook in 2025.

While Tesla is floating the growth verticals of robotaxis and Optimus, I still view that the company will drive most of its growth from vehicle sales and energy storage. This was never a pessimistic estimate, as I expect Tesla to bring in close to $190B in sales by 2029, more than double from when I initially published my narrative in 2023.

Tesla Has Enough GPUs, Slows Down CapEx

Tesla is on track to deploy 50K GPUs by the end of October 2024 in Texas. However, the company is shifting to a cautious approach with further AI spend, and will strive to utilize existing infrastructure before using more capex to buy further GPUs. Musk also elaborated that they are not training compute-constrained. Both of these statements are somewhat in conflict to what has been recently floated in the media that Musk and Ellison are eager to buy more of NVIDIA’s GPUs. In my cynical view, this was also a stunt to keep good relations with NVIDIA's management and Tesla has ample compute capacity.

The company spent around $3.5B in capex - primarily dedicated to buying more compute power, and does not expect total capex to go beyond $11B for 2024.

Robotaxis Can Be Great For Consumers, Not So Much For Investors

Musk unveiled the robotaxi, also pitching it as a rentable vehicle.

The notion that the robotaxi can be rented out and essentially become the airbnb of transportation is interesting, but investors should be careful of the sales tactic of framing a product as an investment. While car owners can be reluctant to let other people drive their cars, this can be addressed if the robotaxi is tailored as a rental, so I am not worried in this regard.

People also had a similar objection when AirBnB came online - that owners wouldn’t want strangers using their spare rooms, but over time the spare real-estate did become an attractive investment to the point of governments imposing additional taxes to curb the enthusiasm. 

In my opinion, the difference between a robotaxi and AirBnB rental will be that robotaxis will become an exclusively commercial venture, as companies will need systems for fleet management, liability, and security. These may be difficult to achieve for individuals unless Tesla takes on some of the risk.

In other words, a robotaxi, should it work, will take over and transform the taxi/uber system, but may not be a viable investment for individuals. I never understood the value proposition of robotaxis for investors, since should they be successful, they will eliminate the need for a portion of the total vehicles currently in use. However, as far as technology goes, experience has taught me that technology creates demand, so I wouldn’t discount the ambition, I just find it a bit early to incorporate it into the present value.

In order for this business to generate added value for investors, Tesla must constantly stay technologically ahead of competition, stave off government regulation, and charge a premium that is sticky despite competitive vehicle prices. I believe that Musk is already working on the regulatory hurdles by backing an innovation-friendly administration, which will be a net benefit for Tesla despite opposing views on EVs.

Valuation Implications

In my view, much of the market value of Tesla is dependent on speculative technologies that Musk is using as a hook for investors. I believe that if someone can deliver technologies such as FSD, robotaxis and possibly automatons, it is likely Tesla. However, I find these technologies to be too early to incorporate in my forward revenue, much less profit projections, and am comfortable maintaining my present value of $177 per share. This implies 2029 revenues of $190B, net margins at 16% and a forward PE of 29x.