To The Moon

• Tesla has maintained its position as a market leader in electric vehicle sales with a 20% market share in Q2 2023.

• Catalysts for Tesla's growth include strong market share, improved profit margins, and growing EV demand.

• Analyst consensus underestimates the transition to green transportation and its impact on Tesla.

It's time for a revisit to $Tesla Motors(TSLA)$ since our last coverage of the stock. Tesla has increased production above our previous forecasts, which is great, and has managed to maintain its position as a market leader in terms of electric vehicle ("EV") Sales with an astonishing market share of 20% in Q2 2023, equivalent to 2021 years levels, only with a temporary dip in 2022.

Catalysts

So, what is needed to take Tesla to new highs? The green transition is the main catalyst, although we also expect Tesla to maintain a strong market share and improve profit margins. We believe all pieces are in place for Tesla shares to continue their positive path.

Tesla's ability to remain the market leader for the past years manifests as proof of its quality and brand recognition around the world. Tesla is also working towards efficiency on so many levels in order to improve profit margins and reduce risk. This serves to leverage the underlying value of the stock as revenues continue to rise. First, the company aims to improve profit margins by executing on innovations to reduce the cost of manufacturing and operations. Secondly, Tesla's hardware-related efforts are to be accompanied by an acceleration of AI, software, and fleet-based profits.

Global Passenger EV Market Share

However, the main catalyst for Tesla is the Paris Agreement and the legislative initiatives that stem from it. Based on those premises, the transition toward an electrified vehicle industry is mandatory, and Tesla is perfectly positioned to benefit from it.

Our Take on EV Deliveries

The company has seen an exponential growth rate since 2016, driven by a strong global demand, and Tesla has a bold goal to deliver 20 million vehicles per year. If Tesla manages to maintain its exponential growth rate of 50% per annum, this target may be reached in just a few years' time. However, we believe 20 million EVs is a bit of a stretch. To reach 15 million EV deliveries per annum in the next ten years is realistic.

Tesla EV deliveries in thousand units

Tesla is now planning a fifth factory, this time in Mexico, with production estimated to begin in late 2024 or Q1 2025 with an annual capacity of reportedly 1-2 million vehicles. This would take EV deliveries up to 3-4 million vehicles per year for Tesla. There's no doubt Tesla will keep announcing new factories as global demand continues to surge.

Global Demand

Continued demand for electric vehicles is a focal point for Tesla's ambitious growth plans. The fact is that the market for EVs is flourishing, with sales seeing exponential growth rates. In 2022, 10 million EVs were sold and its market share has more than tripled in the last three years, from around 4% in 2020 to 14% in 2022. The IEA expects EV sales to reach 14 million by the end of 2023, a 35% YoY increase. This trend should continue as country officials keep enacting on the Paris Agreement and take us toward a more sustainable society.

Furthermore, global car production for 2023 is expected to end at 70 million vehicles per year, and by 2030 we'll likely see a global production of 100 million cars per year. By 2035, all new cars and vans are planned to be electric in the EU and we expect 70-80% of global deliveries to be EVs by 2040. Hence, it's highly plausible that Tesla will reach 15+ million yearly EV deliveries in the next ten years.

EU Legislative stimulation

One important move towards net-zero emissions is the European Union's adoption of the new CO2 standards for cars and vans in March 2023, where carbon emissions are to be reduced by 55% and 50% for new cars and vans respectively by 2030 (compared to 2021), and 100% for both by 2035. This new legislation poses a strong growth catalyst for Tesla shares.

Tesla is well positioned to capture on this opportunity through its Berlin-based Gigafactory, and most likely one more factory will be announced soon as demand prospects within the EU remain strong. We also expect similar legislative initiatives to be adopted around the world in the near future, and as mentioned we anticipate 70-80% of global vehicle production to be EVs by 2040.

Tesla also offers geographical diversification in a time of geopolitical uncertainty, and when the U.S. EV market struggles with price cuts and rising inventories. With its geographically spread Gigafactories, Tesla ensures a steady and cost-efficient supply of its EVs by staying close to the end customer while at the same time capturing the rising trend for global EV demand.

Valuation

Revenue

Turning to valuation, total revenue has been growing by an average of 50% for the last three years (2019 to 2022), from $24.6 billion to $81.5 billion. Revenue growth is highly correlated with vehicle sales, which has had a similar growth rate for the same period, and we expect automotive sales to be the driving positive factor of future growth. Declining Average Sales Price (ASP) as competition tightens is the main negative contributing factor on revenue.

Free Cash Flow

Tesla posted free cash flow of $7.552 billion in 2022 compared to $3.483 billion in 2021. The Free Cash Flow CAGR for the past three years is 98%. In our discounted cash flow ("DCF") model, we anticipate a modest CAGR of 30% for the subsequent 10 years, yielding a Fair Value of $382 for the Tesla stock. This poses a major upside for Tesla, and we are strongly bullish on the stoc.

DCF Model

Summary

Tesla is by now a major enterprise which means it receives high coverage from analysts across the globe. Still, it seems that the overall consensus of analysts is underestimating future growth. As we all know, Tesla is a market-leading EV manufacturer, and the company will most likely continue to lead as the transition towards sustainable transportation evolves.

Taking into account current and upcoming legislative initiatives, in line with the Paris Agreement, the EV market is still to see a major expansion.Meanwhile, Tesla will reach 15+ million vehicles in sales per year by the early 2030s.

We believe it's only a matter of time before the market consensus aligns with our expectations, and that Tesla stock is bound for a major ride towards our target price.