Reading about new technologies was always a passion of mine. I am interested in how the future will look and which companies will form it. Since 2016 I started following Tesla very closely and started investing in it by 2017. It has always been one of my most extensive holdings. Hence the focus of my research lies there. I always felt I could not shed new light on Tesla (TSLA) and the overall bull thesis; therefore, I took a step back from writing about it for a while.

Nevertheless, I needed to revalue Tesla and its growth story. The assumptions of so-called "Tesla enthusiasts" like Hyperchangetv, Tesla Daily, and Steven Mark Ryan are sky-high. However, they match Elon's statements concerning Tesla's growth rate, and in the past, Elon could not always fulfill his stated timelines. Due to this, Elon lost credibility. It has gone so far that the term "Elon-Time" got introduced. Consequently, leading to a multitude of analysts questioning Elon strongly since today.

To value Tesla as precise as possible, it is of utmost importance that growth rates are as close to reality as possible. This article will answer if Tesla's and specifically Elon's statements regarding growth are realistic and if they might come to fruition. Finally, a DCF valuation will be derived based on my estimation of Tesla's future revenues.

During the conference call in the first quarter of 2020, "Tesla daily" asked the following question:

"Elon has mentioned a 50% compound annual growth target for Tesla in the past. Is this still in line with Tesla's ambitions for the next five to 10 years? This would be 4 million vehicles in 2025 and more than 20 million vehicles in 2030. Is 40% a more realistic target?"

Elon answered as follows: "So I think in the absence of something, some massive force majeure event, but quite massive, I think, 50% is the likely number. It's possible that it is 40%. I would be very shocked, if it's less than 40%, even with force majeure, short of World War III."

The current TTM revenue of Tesla's vehicle revenue stream is $22.03bn. Assuming a similar average selling price per vehicle and given the CAGR of 50%, revenue will be at $167.29bn in 5 years. It represents 7.59x of the current revenue. However, this relatively simple estimation only accounts for Tesla's EV business. To achieve such growth, significant expansions in the form of additional Gigafactories are necessary.

Revenue stream: EV

To get an idea of how fast Tesla can scale its vehicle production, I will use Gigafactory 3 in China as a case study. It will set the framework for the timeline from groundbreaking to full production capacity. However, future Gigafactories will have a significantly bigger production capacity. This fact is manifested in the size of land purchased for new Gigafactories. Tesla's sites in Fremont and Shanghai with respectively 370 and 210 acres seem relatively small in comparison to the two most recently announced locations. Tesla bought 740 and 2100 acres of land for its Gigafactory in Berlin and Austin.

Further hints were dropped during the conference call of the Q1 2020 earnings. Tesla's CFO Zachary J. Kirkhorn answered the question of how many Gigafactories Tesla plans to build during the upcoming five years:

"And so the absolute number of Gigafactories we may ultimately build might be less, but each one is larger. And that's under our belief that just significant efficiencies by having as much as possible, and similar product lines under the same roof, and as much vertical integration as possible all in one facility."

Another proof for this statement are rumors regarding the capacity of Tesla's Gigafactory in Berlin. The German newspaper Focus claimed that the targeted capacity is two million cars per year.

Tesla will probably announce at least one Gigafactory per year to meet the massive demand and to offer new Tesla models like the Cybertruck or the Model Y in large quantities. In my assumption, each of these Gigafactories will eventually have a maximum capacity of 1,000,000 vehicles per year. For the production ramp-up, I will use the timeline achieved by the Gigafactory in China. Its current yearly production rate is approximately 200,000. Only 20 months have passed since the groundbreaking. Even though production was temporarily halted due to Covid-19, Tesla was able to implement this impressive ramp-up. Moreover, they are already building a production line for Model Y, and the first deliveries are expected in early 2021. One made in China Model Y was already spotted on the Chinese highway, it indicates that Tesla is on schedule. Another sign for this is the quick expansion of Tesla's delivery centers in China. According to the Chinese newspaper, Yiou Automobile September will open one site with a capacity of 100,000 vehicles per year in early September.

I will make the case that this also hints a quick ramp-up for Model Y. Tesla will need approximately one year since the first delivered Model 3 to attain a production rate of 250,000 vehicles. I suspect that this will also be the case with the Model Y, which leads us to a yearly production rate of 500,000 cars by January 2022.

           Figure 1: Development of the yearly production capacity of Gigafactory 3

Source: created by author

I will use this timeline as a blueprint for future sites, except for the targeted capacity.

Firstly, I collected all available information on the two production sites in action, namely Fremont and Gigafactory 3, and on the factories under construction, Berlin and Aust.

Figure 2: Current and future production capacity of Tesla's Gigafactories

Source: created by author

Until June 2024, I expect four new Gigafactories to have begun groundbreaking already.

Figure 3: Assumed production capacity of future Gigafactories

Source: created by author

Consequently, I added up the yearly production rate of all sites per month and logically divided the obtained number by twelve to estimate a monthly production rate. I repeated this process for all months up to June 2020. The derived results are as follows:

Figure 4: Estimation of delivered cars and corresponding revenue

Source: created by author

For 2020 Tesla set the guidance of 500,000 vehicles delivered. In Q1 and Q2, combined 179,387 cars were delivered. To achieve the target, 320,613 vehicles need to be delivered. Therefore, I expect Tesla to achieve this target, given the current production capacity and no further lockdowns.

The revenue for their vehicle business will be approximately $167bn by July 2025. To calculate it, I have reduced the average price per car gradually over the next five years. Tesla's long-term goal is to electrify the transport industry. Hence it is necessary to make electric vehicles affordable. Despite the lower sales price, I conclude that Elon's estimate is likely to materialize.

I expect the revenue stream "Services and other" to grow at a similar pace like the vehicle business. The current TTM revenue of $2.18bn will therefore rise to $16.52bn in 5 years.

Revenue stream: Energy & Solar

So far, Tesla's primary focus has not been on its energy business, but Elon's statements suggest that this might change soon. He expects Tesla Energy to grow even faster than Tesla's vehicle business, and it will eventually be bigger. It would translate into a growth rate higher than 50%. However, this is not true for the past. 2017 energy revenue was $1117M, compared with $1531M in 2019, this is only a CAGR of 17%. In Q2 of 2020, energy revenue amounted to $370M, YoY revenue is more or less flat. Due to this, I used a growth rate of 15% for the next two years, before increasing it to 40% for the following three years.

Revenue stream: Robo Taxi

Forbes has given an accurate account of Tesla's calculations for robotaxis. The price per mile should be about $1, and 90,000 miles per car should be driven annually. In my estimate, I have lowered this value significantly because many Teslas are not exclusively used as cabs, so I assume 20,000 miles per year. Tesla will take a fee of about 30%. Hence the revenue is the miles driven multiplied by $1 and 30%.

The size of the fleet will initially be pretty small because Robo Taxis are not going to get immediate permissions in all parts of the world. Especially in highly regulated regions, it will take time to obtain permission. Moreover, not everybody will use his or her vehicle as a taxi. To this day, approximately 1,150,000 Teslas were produced. I estimate about 850,000 of these are capable of being used as Robo Taxi. By adding the cars produced until the end of June 2022, the number of capable vehicles is 2.88M.

Figure 5: Estimation of the Robo Taxi network and corresponding revenue

Source: created by author

Adding everything up

In my calculations, Tesla will have a combined turnover of about $197bn in 5 years. The corresponding CAGR is, therefore, around 50%. Finally, when putting the derived revenues into my DCF model, I end up with a fair value of $490 per share. It reflects an undervaluation of 20%, given the current share price of $390 (after-hours as of 09/05/2020)

Figure 6: Estimation of Tesla's future revenues

Source: created by author

This is an exceptionally high value, but it can be achieved under certain conditions. There must be no production stoppages, no exceeding of the time frame for ramping up factories, and the Robo Taxi network must be up and running within two years. The biggest limiting factor is probably the raw materials used to make batteries, so Tesla must find a way to get enough materials. In the past, it has been speculated that Tesla will enter the mining business itself, so this could be a possible solution to speed up resource extraction.