To The Moon

Thesis

What brought Tesla, Inc. ($TSLA) to my attention was a common characteristic that it shares with the midstream sector in the oil and gas industry, the midstream sector being the pipeline companies that transport hydrocarbons from the wellhead to downstream users. It's an area about which I have written a lot and currently favor. And similar to midstream operators, Tesla faces an extremely strong demand environment whereby everything it produces it can sell. There's currently no demand constraint to the company's growth, meaning that the company's primary obstacle is not demand creation but rather the speed at which it can add supply capacity to meet that demand.

In analyzing Tesla's stock and growth prospects, that means the emphasis needs to be on Operating Cash Flow ("OCF"), not Free Cash Flow ("FCF"), and management's ability to deploy internally generated funds in a manner that will maximize the rate of return on those funds. Tesla has wisely chosen to strike a balance between using part of its OCF on growth capex and part on debt repayment. Unfortunately for investors though, the market seems to be well-aware of this and is the reason why Tesla trades at such a lofty valuation relative to its peers. That means that the stock is neither a buy nor a sell at current levels as it appears to be well-priced.

Strong Demand

There's no question that demand for Tesla's automotive products is extremely strong. The company manages to sell every vehicle it produces and year-end vehicle inventories have fallen every year since at least 2017. Going from 28 days of sales in 2017 to 6 days at the end of last year and that's in spite of the company's production increasing over nine-fold during that time.

An added benefit of these high levels of demand is that Tesla also has no need to advertise. Advertising is a cash cost that subtracts directly from the bottom line as every dollar spent on an ad campaign is one dollar less in net income. It's an expense for which the effectiveness is very difficult to measure and
marketing budgets in many companies are often wastefully spent. That's not to mention the internal allocation of resources as marketing departments must be maintained to coordinate media buys and work with advertising agencies.

The ability to drive demand so effectively using a mix of free media and publicity from news outlets is itself worth a certain premium on Tesla's stock. Given
this demand picture, the question then becomes how fast can Tesla add productive capacity, how will it be financed, and what will be the rate of return on that financing?

Financing

The answer to the second part of that question, concerning the source of financing became much clearer in 2021. That's because last year, Tesla's Operating Cash Flow finally began throwing off enough cash to cover the costs of building new factories. In 2021 OCF increased to a level of $11.5 billion from just under $6 billion in 2020 and $2.4 billion in 2019.

Twenty-twenty's $6 billion of OCF had forced the company to do a $12.3 billion cap raise during that year as it was building 2 facilities at the time, in Austin and Berlin. That's not to mention the maintenance capex required by existing locations. However, the firm's ability to now generate $11.5 billion per year in OCF, a figure that will grow over time, means that Tesla can cover the costs of building at least one factory per year, if not more.

SOURCE: SEEKING ALPHA