Valuentum Exclusive Analysis for the Discerning Investor

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Image Shown: Shares of Tesla Inc have more than tripled year-to-date, as of this writing, due to growing optimism about the electric vehicle and battery maker’s long-term growth outlook.

By Callum Turcan

On July 2, Tesla Inc (TSLA) provided an update on the number of electric vehicles it produced and delivered during the second quarter of 2020, when its domestic manufacturing capabilities were hit the hardest by the ongoing coronavirus (‘COVID-19’) pandemic. This report likely acted as the catalyst for the latest run up in shares of TSLA as its technicals have "gone parabolic" of late.

Production Update

During the second quarter of this year, Tesla reported that it produced ~82,300 vehicles (including ~6,300 of the more expensive Model S/X vehicles) and delivered ~90,700 vehicles (including ~10,600 Model S/X vehicles) even though production operations at its Freemont, California, vehicle manufacturing plant were negatively impacted by the pandemic. Operations at Tesla’s ‘Gigafactory’ (battery making facility) near Reno, Nevada, were also negatively impacted by the COVID-19 outbreak and reportedly operations at its relatively new vehicle manufacturing plant in Shanghai, China, were negatively impacted by lingering effects of the coronavirus last quarter as well (keeping in mind China was hit hardest by the pandemic during the first quarter of this year).

Tesla is reportedly in the process of aggressively expanding its ‘Gigafactory Shanghai’ facility to both increase its annualized vehicle production and to allow for the manufacturing complex to build more of the parts used in its Tesla vehicles (to reduce dependence on third-party suppliers). While Tesla is currently producing its Model 3 vehicle offerings at the production plant, by the first quarter of 2021 (depending on how things play out given uncertainties created by the pandemic) the company aims to begin producing its Model Y vehicles offerings at Gigafactory Shanghai as well.

The Model 3 vehicle offering is considered Tesla’s way to break into the “mass auto market” though the vehicle is still priced far above what some consider to be the average automobile a middle class US consumer could afford (and that likely holds true for developed markets worldwide). Over time, a growing manufacturing presence would likely enable Tesla to offer automobiles with far lower starting pricing points, thus enabling the electric vehicle maker to further extent its growth runway by expanding its target market.

Concluding Thoughts

Having a global manufacturing presence helped Tesla mitigate some of the major headwinds created by the ongoing pandemic. In the first quarter of 2020, Tesla leaned on its domestic manufacturing facilities to produce ~102,700 vehicles (supporting ~88,500 vehicle deliveries that quarter) as its overseas production operations were curtailed by the pandemic and related quarantine efforts. Pivoting to the second quarter, while Tesla’s overseas production operations experienced some road bumps, for the most part its Gigafactory Shanghai was able to offset domestic production losses as Tesla’s Freemont facility went offline in late-March and did not restart until May. Operations at its Gigafactory in Reno slowed to a crawl in late-March before ramping back up in May.

Though Tesla’s vehicle production dropped sequentially in the second quarter of 2020, many investors and the market at-large are likely expecting the company’s production to quickly ramp up over the coming quarters. Tesla’s vehicle deliveries actually rose during the second quarter versus the first, which is impressive.

Shares of Tesla have surged this year and as of this writing have more than tripled year-to-date. We like the long-term outlook for Tesla’s free cash flows, though its valuation has run far above the top end of our fair value estimate range. As Tesla ramps its production back up in the US and continues to expand its overseas production capabilities, the electric vehicle and battery maker’s outlook will likely continue to improve, though the pandemic will remain a major concern until a COVID-19 vaccine becomes available. To read more about ongoing changes in the automobile industry, check out our June 2020 piece (link here) covering Nikola Corporation (NKLA), which seeks to revolutionize the space by offering vehicles powered by hydrogen fuel cell technology.

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Auto Making Industry – F GM HMC HOG TM TSLA

Auto Parts Supplier Industry – ALSN APTV JCI LEA MGA

Related: CNHI, MZDAY, NKLA, NSANY, SPCE, VLKAF, VLKPF, VWAGY

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Callum Turcan does not own shares in any of the companies mentioned above. Both the Best Ideas Newsletter and Dividend Growth Newsletter portfolios include a SPDR S&P 500 ETF Trust (SPY) put option holding with a $295 per share strike price that expire on August 21, 2020. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.