Why I’m Doubling Down On Tesla

In 2016 I did my research and invested $12,000 into Tesla Stock in my retirement accounts.  My average purchase price per share was right around $200.  With Tesla today trading at $1,740 I’ve had a heck of a run.  The disciplined investor in me wants to sell my winner and buy some losers, however I believe that Tesla is special and has massive growth ahead of it.

Why Hadn’t I Invested More?

I wish I had invested more in 2016.  I wish I had invested more in 2019 when the share price dropped back down to around $200 a share. I didn’t.  Just because I missed a good buy opportunity doesn’t mean that today isn’t also a good buy opportunity. With the current market cap approaching $350 Billion how much further do I think the highest valued car company can go?

I originally invested in 60 shares of Tesla at around $200 a share.  At the time this was a huge chunk of our net worth and our invested net worth.  This was over 20% of our total invested net worth.  $12,000 is a lot of money.  Historically I have been against investing in individual stocks, in favor of mutual funds, so this was a big leap for me to invest over $10,000 in a single stock. At the time the Model 3 hadn’t been released yet and there was a ton of skepticism that Tesla could survive the launch of the Model 3. I had seen that Tesla had grown substantially since 2014, but the stock was still trading in the same range.

Today we have a much higher total wealth picture than what we had 4 years ago.  The success Tesla has had since 2016 is nothing short of amazing and shows that they are well equipped to continue meeting their highly ambitious goals.

Doubling Down on Tesla:

I bought another 4 shares at just under $1,000 a share and I just now purchased 12 more shares at $1405 a share. In total I now own 76 shares.  This additional roughly $20,000 investment puts me at ease compared to not investing more in Tesla.  I don’t want to look back 15 years from now and kick myself for thinking that the company was overvalued at a 250 Billion market cap when its trading at a $5 trillion market cap.  I see within 10 years Tesla being a $5 trillion company.  A $5 trillion market cap would then mean a 20X return on any amount I invest today. If I think $5 trillion is a real probability, investing $10,000 would grow to $200,000.

I can replace $20,000 fairly easily with our current savings rate, what I can’t do is miss out on $400,000 in growth. Note that EVERYTHING I discuss here is back of the envelope math.  This is not a deep dive into technicals, this is a simplistic overview to share my vision with where Tesla is headed and why I am comfortable putting my money in Tesla.

My 76 shares that I have a total of $32,857 invested in is currently worth $132,240.

• At a $1 trillion valuation, my 76 shares will be worth around $450,000
• At a $2 trillion valuation, $900,000
• At a 4 trillion valuation, $1.8 Million
• At a 5 trillion valuation, $2.5 million

How Do I Get To $5 Trillion:

Investor Ron Barron estimates that by 2030 Tesla will have revenues exceeding $1 trillion.  Comparing to Apple this is 4 times Apple’s revenue with a $1.7 Trillion market cap.  All things being equal, This would put Tesla in 2030 at a value of 6.8 Trillion.

Car Market:

The worldwide car market is 90 million. Tesla is growing at 50% per year. Tesla is several years ahead of other car makers in electric vehicle tech and the cost of an electric vehicle, at least an electric vehicle produced by Tesla, will reach price parity with internal combustion engines.  At that point it becomes economic suicide for fleet vehicle purchasers and for personal vehicle purchasers to buy anything else.

Following Tesla’s current 50% growth rate I anticipate that in 2025 Tesla will be selling 16 million cars. If I’m off by a major factor, they certainly would be at this production rate by the end of the decade.  At an average sticker price of $40,000 and 30% gross margins Tesla will net $192 Billion from auto sales alone. Tesla would need to command 17% of the current auto market.

Semi Trucks:

In 2017 the specs for the Tesla Semi made it cheaper than rail to transport cargo.  Of course new semi sales will swing strongly to Tesla. Since 2017 Tesla battery tech has increased at a phenomenal rate.  The pricing makes them substantially cheaper than ICE vehicles when you account for the fuel savings over time.  In America alone Freight-liner currently sells around 200,000 Semis per year and has 40% of the market.  I think Tesla could capture 60% market share and sell 300,000 semis in the US per year.  At $200,000 each and a 30% margin Tesla would gain another $18 Billion in profit.  Going worldwide Tesla could potentially sell 1 Million semis per year giving it a total of $60 billion.

From vehicles alone we are looking at $252 billion in INCOME.  This is on par with Apple’s current income and apple with a PE ratio of 30 has a market cap of 1.7 Trillion.  So if the auto business is worth $1.7 Trillion, how do we get to $5 trillion to $7 trillion?

Auto Taxis:

In addition to being the first to market for practical electric vehicles that are cheaper than internal combustion vehicles Tesla will also be first to market with real self driving.  All Tesla vehicles made in the last couple years, including every model 3, has the hardware for self driving.  Once Tesla turns the software on virtually every Tesla will be able to be autonomous.

This provides a catalyst for sales, but also for Tesla owned vehicles to dominate the ride hailing business.  These autonomous taxis would put Uber and Lyft out of business, since there is no driver to pay.  For Tesla fleet vehicles Tesla would get 100% of the revenue. For individually owned vehicles Tesla would take a cut of the revenue, which would be 100% profit, since someone else owns the car.

The ride sharing value could be more than the vehicle revenue of Tesla.  Ark Investments has a bull case for Tesla to be worth $4 trillion by 2024 if they can execute on full self driving.

What’s crazy is that we haven’t even talked about Tesla’s other business sectors that get largely ignored.

Superchargers:

Tesla owns the Supercharger network.  Although they currently do not plan to make Tesla superchargers a profit center, the income from this network is plowed back into expanding it and creating a massive moat that ensures most EV buyers will choose Tesla.  Can you imagine that if in the 1930s Ford just happened to also own all the gas stations? They also sell a gas station for your house in the form of solar panels to charge your car. Another potential source of revenue from the Supercharger market is to license the ability for other EVs to use it.  The automaker may pay a fee for this, as well as the user paying at least equal to, if not more than the Tesla customer.

Gigafactories: The machines that make the machines. This is what enables the 50% growth rate. Tesla is building Gigafactories at an amazing rate.  Look at how fast Giga Shanghai was constructed.  In under a year one of the largest manufacturing plants in the world was up and running.  Between free cash flow, Zero Emission Vehicle Credit offsets, and government subsidies Tesla will be building several Gigafactories per year.  As they refine as Musk calls it the real product of Tesla, “The machine that makes the machine” Gross margins will improve to north of 40% further increasing the bottom line.

Battery Tech: Tesla is years ahead of everyone else on battery tech.  Because Tesla has invested substantially in battery cell production, R+D, and acquisition of materials Tesla has another major competitive advantage. Tesla also has a partner company, founded by J.B. Straubel that recycles batteries at the end of life.

End of life Telsa batteries which would likely be at around 80% of original capacity could also find a second life in Megapack grid storage applications where the net effect of being 20% larger and heavier than brand new batteries is negligible. Using these recycled batteries once some of the older Tesla’s reach the end of their lifespan will greatly reduce the costs and the capacity constraints of available batteries for grid storage.   This is still of course a ways out, that’s OK.  The megapack catalyst off mass adaptation could still be 15 to 20 years in the future.

If the average battery pack is 75 kwh and Tesla makes 500,000 this year, and the average life is 20 years, then in 2040 37.5 Million kwh of batteries, with 30 Million available kwh after accounting for battery reduction. This is 30,000 MwH, the equivalent of 232 installations equal to the large Australian battery.  Then each year after this scales with how Tesla vehicle production scaled, which should be exponential.

This battery tech in addition to making vehicles more affordable has profound value in other applications.

Car Batteries as distributed grid storage:  When Tesla has a fleet of 10s of millions of vehicles that connect to the grid through home charging, these vehicles represent a very non trivial amount of grid storage.  Tesla, with owner opt in, could utilize a portion of these batteries for grid stabilization and to effectively work as individual small peaker plants, that combined together completely reshape the grid.  This could bring in a ton of revenue for Tesla, and potentially car owners as well.

Solar and Battery: Tesla’s recent revamp of their solar power systems make solar power a better economic deal than grid power in most of the country.  It’s a no brainer in the southwest and in Hawaii.  The rapid reduction in the pricing of powerwall batteries and solar panels through scale, innovation, and simplified marketing and installation processes has solved the code for affordable home solar. Home solar power coupled with a powerwall can be scaled up to not just cover the electric use of the house, but also the electric use of the vehicles.

A 8Kw system installed costs $16,000 before tax credits, $11,840 after.  Adding in a powerwall costs  $8,500 but Tesla gives a $2,500 discount for installing together with solar.  Then after the tax credit the powerwall costs $4,810. $16,650 to never have another electric bill is a major cost savings. For someone who can eliminate a $150 electric bill installing solar with battery backup represents a 10.8% annualized return.  Tesla isn’t going after “just” ground transportation, they are going after the energy system and Tesla could completely disrupt the grid market through home and business solar + battery installations….but wait there’s more.

Tesla megapack installations that replace gas peaker plants and charge up when prices are low and discharge when prices are high.  These batteries can be rapidly deployed to the market and are extremely profitable.  The Australian battery project paid for itself in under 2 years.

Elon Musk himself has said that the Tesla energy business has the potential to be larger than its automotive business.  I think the snowball will take a little longer to get rolling than the car business.  I see the solar business hitting its stride closer to the end of this decade. The energy business could even allow Tesla to become a $10 trillion business within the decade.

Licensing Battery Tech: When Tesla is able to produce all the batteries it needs for vehicles, home and business installations, and grid installations then Tesla could license its battery tech to other sectors.  Companies like Ryobi and Dewalt for tools, or Kawasaki for ATVs and motorcycles, or even Duracell for standard sized home rechargeable batteries.  The batteries would be produced by Tesla and used in these devices. Since Tesla has both a major cost advantage and quality advantage over other battery manufacturers I think this is logical.

SpaceX / Tesla Internet:  The in car displays will become a Tesla service, offering music, movies, games, and of course internet.  Imagine a $20 a month subscription model across a fleet of tens of millions of vehicles, just for the base services.  For internet they could probably double or triple that cost.  This provides a major customer base for the Space X Starlink satellites.  Tesla may pay a flat fee to SpaceX for a specific amount of bandwidth and then resell to vehicle customers.

Added Markets:

Other markets Tesla could enter:

• Boats: Starting with small personal boats and moving up to cargo ships
• HVAC: Using learnings from the HVAC systems in their vehicles Tesla could revolutionize the home and business HVAC system.
• Factory Design Consulting:  In building its Gigafactories Tesla has become a world leader in factory design and efficiency.  Tesla could sour off an entire branch of factory design to assist manufactures in virtually any non-competing business.
• Biotech: Tesla already has a small foothold in biotech.

The Richest Man In The World

As a latent effect of Tesla becoming a $5 trillion company, Elon Musk will become the richest man in the world…by far.  Owning roughly 20% of Tesla, He will become a Trillionaire just off of Tesla Stock.  This is really important.  The mission of Tesla is to accelerate the electrification of transportation and the transition to renewable energy.  The true purpose of Tesla is to enrich Elon Musk, who can then plow his Tesla winnings into his personal goal of making humans a multi-planetary species.  I predict that by 2026 SpaceX will be routinely sending Starship to Mars and Elon Musk will begin selling large tranches of his Tesla shares, tens of billions of dollars a year, to invest heavily in making a city on Mars happening.

I think Tesla will become a multi trillion dollar company. With that being said I am still shocked by how quickly Tesla stock has skyrocketed over the past month.  I expected a large jump due to the buying pressure of Tesla being added to the S+P 500, which would require institutional investors to buy up tens of billions of dollars of stock with a limited amount of sellers.  There is no reason for Tesla to have increased as quickly as it has on the news of exceeding production targets for the 2nd quarter. I think currently there is rampant day trading speculation surrounding the S+P 500 addition and coupled with apps like Robinhood that allow people to easily buy stocks on margin.  Although I predict I personally will see a large return from Tesla over the next decade, I think these people who are trading on margin and engaging in day trading trends will lose their shirts.  Always invest for the long term!

Why Not Invest More Now?

If I really think Tesla will become a multi trillion dollar company why not buy more?  Well currently Tesla represents well over a quarter of our net worth.  I strongly believe in diversification and even though Tesla is a shooting star it of course carries significant risk.  This is balanced with having a lot of our net worth in home equity for our personal residence and 5 investment properties. The debt load on our investment properties is approximately 50% LTV and our personal home is at 20% LTV.  Tesla now outweighs everything else in our paper asset/retirement account portfolios. To make my additional investment of 16 shares recently I sold our REIT index fund and other individual stocks we owned, including Apple, Ford, and Whirlpool. I am not comfortable with our retirement plans and other long term financial goals being at risk because all of our wealth in in 1 individual stock.  If Tesla falls down to my average share purchase price of $432, or even if it falls to $0 our plans will not be affected by any significant margin.

Legacy:

I find how people are remembered to be interesting.  An entire lifetime tends to get summarized into 1 or 2 sentences. If I’m correct on the future value of Tesla I can see my great grandchildren discussing that “what changed the family tree” was me getting “lucky” and investing in Tesla when it was a small company.  I can also see people in my normal life discounting my success to the same singular idea that Tesla was the only factor.  The truth will of course be that high savings rates and 2 decades of living well below our means are how we built wealth and Tesla stock was just 1 small part of the larger equation.  Because we lived like no one else we were able to invest like no one else. Oh well, as long as I’m both Good and Lucky, I’ll be alright.

I plan to hold my Tesla shares forever and if Tesla sees a significant pull back I will purchase more shares in bulk.  Otherwise I will be dollar cost averaging into Tesla buying a share or 2 a quarter to increase my holdings as time goes on.

Do you own any individual stocks? What do you think about Tesla’s future?