Tesla, Inc (NASDAQ: TSLA) Cybertruck met with many objections from investors when it was first launched. CEO Elon Musk has announced that the electric vehicle (“EV”) will not be profitable until around 2025. Pilot production of vehicles he has begun at Tesla's Gigafactory, but there are concerns that the Cybertruck will generate positive cash flow in the short term due to the difficulty of scaling the manufacturing process despite high demand.
My thesis is that while the significant near-term issues are real and could hurt Tesla's stock price, the long-term strengths of the brand and the revenue that Cybertruck provides outweigh.
Cybertruck: Current operational image
Elon Musk he mentioned that the problem is not demand but production. As evidence of this, Ark Investment Management suggested on Seeking Alpha that 1.5 million had been reserved in the cybertruck May. The same report suggested the truck could be as popular as the Model Y based on earlier Google Trends data.
Characteristic production challenges they include a stainless steel body that is difficult to work with, a challenging new high-voltage architecture, delays in battery production, and an intense 12-18 month ramp-up. While 40 Cybertrucks were spotted at the Texas Gigafactory recently, it will take the company a long time to work through its backlog for the product.
One of the immediate operational benefits the Cybertruck provides is targeting a new market for Tesla. This market is particularly popular in the U.S. Pickups were 20.5% new car sales in the US in 2022 and 16.8% in 2016.
In the long run, Tesla's new truck could positively boost sales growth and provide product diversity. If the electric vehicle trend continues, the Cybertruck will likely be another boon for Tesla. The market is experiencing exponential growth; Sales of electric cars in 2022 exceeded 10 million.
However, significant competitors in the space already exist. Rivian's ( RIVN ) R1T has already hit the market, Ford ( F ) has made its F-Series electric, and General Motors ( GM ) has announced electric versions of its popular pickup trucks. I think these are significant competitors to Tesla, especially if many customers are looking for a more traditional aesthetic and driving experience.
General financial aspects
Tesla's overall financial picture looks strong to me, with the weakest component being the company's surface valuation. It has a forward P/E ratio of nearly 80, which is considerably low compared to historical levels, while revenue has been growing at a very healthy pace over the long term:
Considering the Quant Factor Grade of F for Tesla's valuation, it may initially seem logical to consider the company overvalued. However, based on previous higher multiples and future traffic margin expansion to potentially more than 50% thanks to autonomous taxis, as estimated by RBC Capital Markets, the current valuation may be justified in the long term. However, this remains somewhat speculative at this stage. As such, I am not heavily exposed to stocks in my portfolio, keeping them around 6.5% of assets from an optimistic view of future operations impacting the company's fundamentals with a long-term holding period.
With Tesla's potential future margin expansion and Cybertruck production success around 2025, the stock could be considered an opportunity right now based on the lower price, even at such a high P/E multiple and poor valuation relative to others. I say this mainly because if the company lives up to positive expectations for its autonomous driving plans over the next few years, I think the share price should rise significantly based on the associated significant margin expansion. This opinion is also shared by Cathie Wood of Ark Invest.
However, there are significant hurdles as autonomous technology enters the mainstream, including significant regulatory issues that could delay and limit revenue growth in these divisions, and recent driving technology issues. Delaying the implementation of these plans, or implementing them as such, is a real risk. In my estimation it could be a 5-10 year worst case delay in fully autonomous taxis.
Still, I'm more optimistic about it and see it happening sooner in the next few years. Concerns about delays are especially heightened when we consider the company's recent recall 2 million vehicles, announced on December 13, 2023, to install new safety features in its Autopilot ADAS system. This was due to concerns raised by the National Road Safety Authority.
Cybertruck production and sales estimates
With Cybertruck on the way, it is critical to understand how this product could affect the company's financial situation. This is especially prescient when I consider buying Tesla stock at a current lower price than historically.
In his Seeking Alpha analysis, Victor Dergunov outlined an estimate of Cybertruck production capacity of 170,000 in 2025 with an average price of $85,000. However, Goldman Sachs estimates In 2025, 150,000 Cybertrucks will be produced.
Wedbush estimates 230,000 will be sold that year. The Wedbush sales estimate contrasts sharply with Morgan Stanley ( MS ) projections of 78,000 units sold. Morgan Stanley's estimate seems to be largely factoring in the production issues, in my view, which is a real and very valid concern, but not an insurmountable one.
If production targets can be met, data published by Finbold is promising for Tesla. As of July 2023, 1,943,876 cybertrucks were reported on reserve, which depending on how the company can ramp up its production capacity, I believe could significantly beat Morgan Stanley's sales estimate and look a lot more like Wedbush's estimate.
Reservations data and popularity, as reported in ARK Investment Management's Google Trends analysis, indicate to me that future Cybertruck sales could potentially exceed all conservative Wall Street estimates if the company's medium-term production goals are met.
Elon Musk's own production capacity is 200,000 units produced per year, with 250,000 units produced per year in 2025. Q3 earnings reportTesla said it could produce 125,000 Cybertrucks a year — the only official number currently available. Based on this, if 125,000 Cybertrucks are produced per year and each sells for an average of $80,000, the annual Cybertruck revenue would be $10 billion (125,000 units x $80,000 per unit). This estimate is based on the following price listwhich could change:
- Rear-wheel drive Cybertruck: $60,990
- All-Wheel Cybertruck: $79,990
- Top-level “Cyberbeast”: $99,990.
Based on a conservative figure limited to official production data released by Tesla, my Cybertruck annual sales estimate looks strong based on price and demand. However, the main concern that I and many others will have with this is the production costs, which seem to be quite high initially as the company expands its production capacity for the model, but lower compared to similar ones that will follow.
MotorTrend estimate a cost of only $30 million for 50,000 units, which I consider too low. He mentioned that for 600,000 units, production costs could increase to around $125 million, which is less than conventional trucks, with an estimated cost of around $615 million. While these numbers seem speculative and overly optimistic to me, I believe that the assumption that the Cybertruck, once launched and fully scaled, will be significantly cheaper to manufacture than traditional pickup trucks makes sense, especially when considering the source cost-effectiveness of the stainless steel panels body.
Cybertruck Cash Flow & Profitability Risks
The most significant risk to Tesla's success with the Cybertruck is its short-term profitability. The main risks I've noticed are the cost of production, the expenses required to build a scaled production situation, and the short-term effect of high demand and supply issues on cash flow.
Very little has been released at this time about the official production costs of the various Cybertrucks. Still, Musk he mentioned the difficulty of achieving volume production, therefore I expect an increase in research and development costs and a short-term decrease in the operating margin.
I think this could hurt the stock price in the short term, so Cybertruck could be called a short-term liability, but my analysis shows that it is definitely a long-term asset and will generate high income for years to come.
The chart above nicely illustrates my concern, which is already evident in the reported financials. I think that as Tesla implements more of its autonomous driving strategies related to taxis and other higher margin opportunities, as well as stabilizing Cybertruck production, the upward trend in R&D and declining margins could reverse, making it the best time to be a shareholder that bought companies at current low prices.
Still, there is some unpredictability surrounding these operations due to the low level of disclosures, specifically related to production costs and research and development expenses directly related to the Cybertruck. While Musk's comments and guidance shed some light on the situation, I believe the situation remains somewhat speculative for outsiders, and the reality of slow production, high demand, and increased expenses associated with the project will take some time to price the stock accordingly. Still, I believe in business and management that Cybertruck and autonomous taxis will give Tesla a strong picture in the coming years.
I am a confident Tesla shareholder. While this analysis describes the current situation regarding the Cybertruck, Tesla, Inc. is multi-faceted and there are many strong revenue streams on which the company can continue to innovate.
While I think the company may struggle in the short-term, I strongly believe that the long-term future for Tesla, including the Cybertruck, is extremely positive. Therefore, I consider the current share price to be a unique opportunity even with a high P/E ratio. I wouldn't say this if future operations didn't look compelling, but I believe that if margins increase and operations stabilize over the long term in relation to the Cybertruck and autonomous driving plans, Tesla, Inc. stock. are currently attractive.