Tesla: How far is Musk's "Trillion-Dollar Empire Dream" from reality?

For investors this year, starting with a full position in Tesla and Nvidia is definitely a winning strategy. Nvidia has a compelling story and impressive performance in the AI wave, making it a clear winner.

But what about Tesla, which started the year poorly but has now risen by 120%? Is it a car company or an AI company? It's hard to say for sure.

After two and a half years of volatile ups and downs, Tesla's stock price has once again reached the valuation driven by its car manufacturing story at the end of 2020. A report from Goldman Sachs, which focuses solely on Tesla's AI story and disregards its car sales, has added fuel to the fire of Tesla's "transforming car" AI story. It seems that in a short period of time, Tesla has transitioned from being a fierce competitor in the automotive industry to a dominant player in the AI industry.

So, how much of Tesla's capital story revolves around its AI capabilities? Is Tesla primarily a car company or an AI company?

It has been two years since Dolphin Research last delved into Tesla (refer to: Tesla (Part 1): 10 Years, 300 Times Growth, How Much Longer Can the Magic Last? and Tesla (Part 2): Wrong Kill or Overvaluation, Where Does Tesla's Story End?). Now, with a fresh perspective, Dolphin Research will once again lead everyone in a deep dive into Tesla.

1. Car Manufacturing Still Takes Priority

During Tesla's doubling in the first half of this year, Dolphin Research witnessed numerous sensationalized stories. The energy storage story is no longer significant, and while the Full Self-Driving (FSD) technology, the $300 billion charging station business, and the hundred-billion-dollar robot business are impressive, they lack a solid hardware foundation. Without a solid hardware foundation, the narrative of Tesla as a software-focused company is difficult to sustain, especially when compared to companies like Apple and Xiaomi, which have a strong hardware background and a well-integrated "dual flywheel" business ecosystem.

By examining Tesla's business ecosystem and revenue sources, it becomes clear that the barrier to understanding Tesla lies in its core hardware business - car manufacturing. So Dolphin Research will start with the topic of car manufacturing in a down-to-earth manner. Let's first take a look at the business barriers, changes in the main markets of the new energy vehicle market, and the product cycle of Tesla's car manufacturing business to understand the commercial value and valuation range of this part of the business.

2. Does the car manufacturing business have any barriers?

In Dolphin Research's view, whether it is pure B-to-B manufacturing, brand-driven B-to-C manufacturing, or brand manufacturing in the software and hardware interconnection field, the construction of barriers generally revolves around high value in the industrial chain, proprietary technology, closed-loop ecosystem, economies of scale, and brand effects.

The strongest companies in terms of technology, such as ASML and TSMC, are beyond reach. Next is the combination of technology and closed-loop ecosystem, where Dolphin Research sees NVIDIA as the core representative. And when it comes to technology, closed-loop ecosystem, brand, and scale, Apple is the representative. Not every aspect may be at the cutting edge, but the combined effect of these factors is the most powerful tool for doubling market value.

And the financial performance of these companies generally shows high gross profit margins under the conditions of scale and market share.

In the B-to-C manufacturing industry, before the resonance between software and hardware is fully established, and in the absence of brand manufacturing with a sufficiently high technological lead, the core barriers lie in the leading level of core technology, self-control of core capabilities, and industrial layout.

In Dolphin Research's view, Tesla is currently in this stage. Dolphin Research will focus on the car manufacturing aspect to analyze Tesla's core layout in car manufacturing and sales:

After summarizing this part, Dolphin Research has roughly three judgments:

Tesla's dual attributes of brand and manufacturing have a very obvious internet explosive play attribute in terms of "sales". Its self-operating capability is strong and prominent. However, the core of this part, the brand, is more of a result rather than a reason for barrier construction.
On the production capacity side: Dolphin Research noticed that unlike small electronic products such as mobile phones that can be directly outsourced due to their standardized processes and technologies, and medium-sized electronic products such as home appliances and computers that can be produced in one place and sold globally, cars, as the largest and most component-intensive consumer products at the top of the price pyramid, basically mean that unlike the mobile phone industry, although technological level is the most important, factory self-operation and production efficiency are equally important (inner thoughts: questioning NIO's manufacturing model based on outsourcing). .
In terms of the core of barrier construction - technological level: Although Tesla has strong integration capabilities, as the leader in new energy vehicles, its three-electric technology, especially battery technology, which is the most crucial for cost reduction, was relatively late in layout. The self-control capability of the battery industry chain is insufficient.

According to the principle of a barrel, the amount of water it can hold depends not on the longest plank, but on the shortest one. Moreover, due to the late layout of the battery, the self-produced 4680 capacity cannot ramp up, which is also the main reason for the relatively slow pace of overall cost reduction.

Overall impression: Although Tesla, as the first mover, has transformed the manufacturing and sales processes of the automotive industry from the inside out and changed its appearance through its first-mover advantage and technological leadership in the form of new energy vehicles, ultimately raising the threshold for a manufacturing industry with almost no barriers and a gross profit margin hovering around 15%.

However, from the perspective of layout and the gap with competitors, this is not a high barrier business similar to "I have what others don't have, or I have what others have, but the gap is huge, making it difficult for competitors to catch up." Although there are barriers to the automotive business after the transformation, they are relatively weak.

From the perspective of company valuation, there are two major drivers for a high PE company in the long term: a) High growth under industry dividends; b) Only when the company's own barriers are high enough or becoming higher after the industry growth dividend is exhausted, can the PE be maintained or further increased.

For example, during the "hardware" era, Apple's PE fluctuated mainly driven by its products, with a range of only 10-20 times. It was only after the "Internet" story of landing both hardware and software that it achieved systematic valuation improvement, with fluctuations ranging from 20 to 40 times and a stable PE of 20 times.

Another example, CATL is a typical case of having its own barriers, but not high enough. During the high-beta period of the industry, its PE could exceed hundreds of times. However, when the industry growth slows down and competition intensifies, due to its barriers not being high enough, the company needs to make trade-offs between market share and gross profit margin. As a result, its PE dropped from 150 times to just over 20 times.

Based on the experience of predecessors, comparing it with the current PE of 70 times for Tesla, which has weak barriers in the automotive industry, besides the imaginative valuation based on future prospects, a more down-to-earth judgment lies in the assessment of the company's sales growth potential. This is the foundation of its valuation. Therefore, next, let's take a look at how much growth space Tesla still has in terms of selling cars.

III. How much growth space is there on the sales front?

Tesla once set a target of 50% compound annual growth rate for overall vehicle sales, and at the beginning of this year, when the market shifted from supply-driven to demand-driven, the company provided a clearer explanation - the 50% growth is based on the low starting point of 2020, which was the year when the Shanghai factory went into production and the Model 3/Y started to sell in large quantities.

Within this framework of high sales volume, Dolphin Research examines the growth space of sales from two dimensions: first, the penetration space of new energy vehicles in the core market; second, the supply of Tesla's products. 3.1) What are the chances in the United States?

During Dolphin Research's study on Tesla, an interesting phenomenon was discovered. Chinese researchers mostly rely on the hope of a miraculous increase in Tesla sales in the United States. This is mainly because the current penetration rate of new energy vehicles in the American market is low. They believe that after the implementation of Biden's new energy policy, the penetration rate of new energy vehicles in the United States will follow the trend of China and Europe.

On the other hand, researchers in the United States believe that the Chinese electric vehicle market is more advanced in terms of education and has reliable infrastructure. Tesla's product competitiveness in China is good, and there is still room for more surprises.

However, after examining the situation in the American market, Dolphin Research tends to believe that although the penetration rate in the United States seems promising, within a 1-2 year timeframe, the American market is not the "trump card" that can create surprises. Let's dig deeper into the situation in the American market.

I) Why is the penetration rate in the United States so low?

There are many explanations for this question, such as:

a) The game between business interest groups represented by the Republican and Democratic parties has led to a lack of continuity in new energy policies.

b) The high cost of electricity in the United States and the insufficient attractiveness of the price difference between oil and electricity.

c) The poor infrastructure and insufficient number of charging stations in the United States.

d) The price of electric vehicles in the United States is not grounded enough, and there is a large price difference between fuel vehicles and electric vehicles.

However, in Dolphin Research's view, except for the first factor, some of these explanations only scratch the surface or reverse cause and effect. For example, in terms of the price difference between oil and electricity, Europe is actually similar to the United States. The explanation of the ratio of charging stations to vehicles is to some extent a result rather than a cause. As for the price difference between fuel vehicles and electric vehicles, after the price reduction of Model 3 and the federal subsidy of $7,500 plus state subsidies of $2,000, the lowest starting price can already be as low as $30,000, which is within the psychological price range of the American people for a car priced below $50,000.

However, even after the introduction of Biden's subsidies and Tesla's price war, the penetration rate of the electric vehicle market in the United States has not increased rapidly. Since the implementation of the new policy in 2023, the penetration rate has increased by less than two percentage points, which is slower than the rapid increase in penetration rate in China. And for the real reason behind this issue, Dolphin Research has two thoughts:

1) The current approach of the United States' new energy policy is more focused on building an independent, secure, and competitive industry chain based on the direction that the United States considers to be a future major industry.

From the comparison in the figure below, it can be seen that the new policy has clear policy intentions:

a) "North America" assembly, "North America" battery industry chain;

b) Crackdown on imports, imported vehicles without subsidies: Europe and China clearly do not have explicit requirements for these contents. On the contrary, the rise of new energy vehicles in China is essentially the introduction of "foreign tigers", and Europe has not rejected imported goods like Tesla.

c) Because the establishment of the industry chain requires a leading figure, the new subsidies do not benefit everyone, but support the growth and strengthening of local leading new energy vehicle manufacturers.

d) The urgent driving force for the transformation from oil to electricity

China and Europe, two places that rely on oil imports, have mandatory requirements such as the time point for discontinuing oil vehicles and the proportion of new energy vehicle sales. The core behind this is to guide the thinking of automotive power from oil to electricity for energy security.

In contrast, the United States not only has its own oil production but also external supply, and its energy supply is secure and independent enough. The demand for switching is not strong. Purely from the perspective of ESG, conventional hybrid energy-saving vehicles represented by Toyota's technology can also meet emission standards.

And in terms of confirming the results, as can be seen from the figure below, unlike in China, conventional hybrid energy-saving vehicles have almost lost their presence. In the U.S. market, conventional hybrid vehicles are still a significant presence in the fuel-efficient vehicle market, and they have not plummeted due to the new energy subsidy policy in 2023.

a-d) Putting these four points together basically means that the chances of the United States' new energy subsidies reemerging and the penetration rate of new energy vehicles in the United States following the "COPY" path of Central Europe are very small. After all, an independent and controllable North American supply chain system cannot be established overnight.

2) Insufficient supply of high-quality vehicles

Regarding the problem of insufficient supply of high-quality new energy vehicles, Dolphin Research has roughly looked into it and found three main issues:

a) The U.S. market has fewer vehicle models available

Currently, there are nearly 400 electric vehicle models available in the Chinese market, nearly 200 models available in the European market, but less than 100 models available in the U.S. market. The lack of vehicle model supply is also an important reason why the penetration rate of new energy vehicles in the United States lags behind the European market. Currently, there are relatively few traditional American car companies transitioning to new energy vehicles. Currently, there are only three: Ford, General Motors, and Stellantis. Among the emerging forces, only Rivian and Lucid have survived. The number of new energy vehicle models offered by American car brands in the market is also relatively small, around 20 models, indicating a limited supply of models.

However, the competition landscape for new energy vehicles in the United States is relatively stable. Despite offering only 20 models, American car companies are able to maintain a market share of around 71% from 2020 to 2023. Among American car companies, Tesla dominates the market, with its market share accounting for approximately 50% of the entire new energy vehicle market. Tesla is essentially the main producer of electric vehicles with mass production capabilities.

In addition, in the case of limited overall supply, the improvement in the penetration rate of pure electric vehicles in China is partly due to affordable models such as Hongguang Wuling and Dolphin Research.

However, in this market segment that contributes more than 25% in the United States (with annual sales of approximately 3.9 million vehicles in the A-C segment), the penetration rate of pure electric vehicles in 2022 is only 3.6% for sedans (A-C segment) and 4.9% for SUVs (A-C segment), which is significantly lower than the overall penetration rate of new energy vehicles in the United States during the same period, which is 6.9%.

Whether it is Tesla, American emerging players, or traditional car companies transitioning to new energy vehicles, they are more focused on larger or more luxurious models and have not produced such vehicles. Similar models in the United States are mainly Chevrolet Bolt and Mini Cooper, priced at around $30,000. It will take time for Tesla to introduce cheaper models priced between $20,000 and $30,000.

b) Insufficient battery capacity and low cost-effectiveness

Looking at the sales of vehicle models in the United States in 2022, half of the top 10 models are pickup trucks, and the rest are almost all SUVs. The core feature of popular vehicle models in the United States is their large size and high carrying capacity. The high demand for large SUVs and pickup trucks is due to the vastness of the country and the need for long-distance travel.

Such demand essentially requires high horsepower, and for new energy vehicles to replace traditional vehicles, they need to achieve long-range capabilities. However, looking at the top 10 new energy vehicle models in the United States, their range is clearly insufficient.

Comparing the pricing of the Xiaopeng G6 at approximately $30,000 to achieve a range of 580-755 kilometers, the range of popular vehicle models in the United States is generally less than 600 kilometers. The highest range for Rivian's pickup truck is less than 600 kilometers, with a price soaring to $70,000, while Ford's larger gasoline-powered pickup truck is priced at a maximum of $40,000. Additionally, the current popular vehicle models in the United States also include some products that have been converted from gasoline to electric. c) Weak foundation of the US battery supply chain

The demand for long-range electric vehicles could have been met through the establishment of charging stations or by strengthening the battery industry. However, due to the insufficient number of charging stations in the US, the battery industry is relatively weak.

As the core component of electric vehicles, batteries account for 40-50% of the total cost of electric cars. The battery industry involves a complete supply chain, including mining, materials, electrodes, separators, battery cells, and packs. However, Tesla, as the leading company in the industry, did not initially focus on building a self-sufficient battery supply chain in the US, resulting in a lack of development in this area.

According to a report released by the International Energy Agency in May, the US only accounts for 10% of global electric vehicle production, while China holds 41% of the market share. The gap is even larger in the power battery market, with the US accounting for only 7% of global production capacity, compared to China's 73%.

From this analysis, it can be seen that the shortage of high-quality electric vehicles is closely related to the US government's policy intentions. The lack of policy continuity has led to a weak foundation in the industry, and the new policies are not in a hurry to switch to electric vehicles or embrace foreign vehicles and supply chains.

With the introduction of new subsidy policies, the current battery supply chain is still under development and is not expected to be fully operational until after 2025. Perhaps only after 2025 will we see a competitive landscape with a variety of electric vehicles in the US market.

** 二) Can Tesla maintain its dominance in the US?**

Tesla has always been unbeatable in the US electric vehicle market, but due to its low market penetration, its early market share did not have strong reference value. However, the market's original expectation was that with the new electric vehicle subsidies under the Biden administration and Tesla's aggressive price reductions, the company's market share in the US would stabilize. However, the data from the first half of the year does not support this expectation.

Dolphin Research has observed that the two main contributors to the increase in market share in the first half of the year are General Motors' BOLT and Stellantis' new plug-in hybrid models. These two models correspond to the two trends mentioned earlier: the increasing penetration rate of affordable electric vehicles and the opportunity for plug-in hybrid supercars.

However, so far, the loss of market share for Tesla is mainly due to the fact that the US electric vehicle market is still relatively open, and competitors have gained market share through competition in similar price and size segments, especially in the plug-in hybrid vehicle market.

So, will Tesla be heavily divided by competitors in the US market? Dolphin Research has roughly summarized the current market competitors for Tesla in the US, with the following key judgments:

a) Ford: Slow transformation, lack of new high-volume models and a self-owned electric vehicle platform, achieving the target of producing 600,000 vehicles annually by 2024 is difficult.

b) Stellantis: In the short term, they focus on hybrid models in the US market to address the incomplete infrastructure and battery industry chain, which may squeeze the market share of pure electric vehicles.

c) Volkswagen: They have their own electrification platform and can quickly launch new models. Their main disadvantage lies in the software system, but they have already cooperated with Horizon Robotics and Xiaopeng Motors in China to solve this problem. Volkswagen mainly focuses on China and Europe as key markets, with fewer models launched in the US. However, their electrification transformation has been relatively successful, and the future mainly depends on Volkswagen's planning in the US.

d) General Motors: They have opened up the US market with Chevrolet's small car models. Their advantages lie in the Ultium pure electric platform and plans to build their own battery factory to achieve cost reduction. The large gasoline vehicle business contributes cash flow to the electric vehicle business.

e) Rivian: A rising new force, they solve the supply chain bottleneck with their self-developed Enduro motor while achieving cost reduction. However, catching up with Tesla depends on expanding production capacity and launching more affordable models on the R2 platform. The company needs to achieve the target of positive gross margin in 2024 to gain confidence from the capital market for financing.

f) Lucid: They are positioned as high-end luxury electric vehicles, which clearly deviates from the mass market. The current capacity of the electric luxury car market in the US is still too small, and weak demand has always been a challenge for Lucid.

(PS: For a detailed analysis of peers, please communicate privately with Dolphin Research for specific data.)

Overall view of the US market:

1) Summary: Reviewing the US new energy vehicle market, the low penetration rate is due to the issue of policy continuity, resulting in a weak industry foundation. It is also a matter of policy intention. It may be difficult to replicate the rapid increase in market share seen in China and Europe in the next one or two years.

2) When there is a lack of pure electric low-priced cars and hybrid cars, the decline in Tesla's market share is almost a certainty. Its market share will most likely be taken by hybrid player Stellantis. General Motors and Rivian may compete for Tesla's market share, while Lucid has little chance. The main focus for Volkswagen is their strategic planning in the US, which is currently unclear.

This analysis concludes here for now. As part of Dolphin Research's in-depth trilogy on Tesla, we will continue to delve into the Chinese and European markets, speculate on the endgame of Tesla's car sales, discuss recent marginal changes, and explore the intelligent future of electric vehicles. Please stay tuned.

For historical articles by Longbridge Dolphin Research, please refer to: 2023年7月20日财报解读《 Trillion-dollar Tesla? Only True Fans Dare to Embrace》

2023年7月20日电话会《 Tesla Minutes: Gross Margin Lost, Tesla May Continue to Lower Prices》

2023年4月20日财报解读《Tesla: Promising Year on Paper, Challenging Year in Reality, "Long-lasting Companionship" is Tough》

2023年4月20日财报电话会《Tesla: Confident in Selling Cars at Zero Profit with Autonomous Driving as the Cash Cow》

2023年1月26日财报解读《Tesla's Story Reshaped, Testing the Faith!》

2023年1月26日电话会《Tesla Minutes: "No Competitor for Autopilot Even with a Telescope, Second Tesla Might Be in China"》

2022年10月20日财报解读《Critical Question: When Demand is Insufficient, How to Maintain Profitability?》

2022年10月20日电话会《Minutes: "Internal Combustion Cars Will Die, No Production Cuts at Any Time"》

2022年7月21日财报解读《 [Without Shanghai Factory's Lifeline, What Can Tesla Rely On?](https://longbridgeapp.com/topics/3161925? invite-code=032064)》

July 21, 2022 Phone Conference: Musk: I'm embarrassed by the repeated price increases》

June 6, 2022 Opinion Update: Did the US stock market overreact? Apple, Tesla, and Nvidia》

April 21, 2022 Earnings Report Analysis: New energy makes a thunderous sound, Tesla continues to thrive

April 21, 2022 Phone Conference: New factory production capacity ramps up, Tesla to deliver 1.5 million vehicles in 2022 (meeting minutes)》

February 28, 2022 Opinion Update: With scattered confidence, safety comes first when investing in Tesla》

January 27, 2022 Phone Conference: Tesla: Musk reiterates the importance and value potential of FSD (conference summary)》

January 27, 2022 Earnings Report Review: Tesla, the unrivaled leader, taking a halftime break?》

December 6, 2021 Opinion Update: Musk sells tickets to pay taxes, where is Tesla's stock price headed?》

October 21, 2021 Phone Conference: Tesla: On the verge of selling a million vehicles annually, will Musk let go?》

October 21, 2021 Earnings Report Review: Tesla: Cathie Wood shouts $3000, is the sky the limit?》 On July 27, 2021, Dolphin Research held a conference call on the "Tesla Q2 2021 Earnings" (summary).

On July 27, 2021, the Earnings Report analysis titled "Tesla: The Best Keeps Getting Better!" was published (link).

On April 27, 2021, Dolphin Research conducted a conference call on the "Tesla Q1 2021 Earnings" (live summary).

The Earnings Report analysis titled "After Tesla's Unsurprising and Unalarming Q1 Report, What Can We Expect?" was published on April 27, 2021 (link).

In-depth Analysis

On June 3, 2021, an in-depth analysis titled "Tesla (Part 2): Have We Underestimated or Overestimated Tesla? How Far Has Tesla's Story Gone?" was published (link).

On May 21, 2021, an in-depth analysis titled "10 Years, 300 Times: How Long Can the 'Magical' Tesla Keep Its Magic?" was published (link).

Risk Disclosure and Statement for this Article: Dolphin Research Disclaimer and General Disclosure