Why Tesla Is Misunderstood By Wall Street

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Tsai discussed Why Tesla Is Misunderstood By Wall Street. Here’s an excerpt from the episode:

Tobias: I think one of the stocks that I know that you’ve held for a long time is Tesla. How long have you been in Tesla?

Christopher: We actually haven’t been in it for that long. We bought it in 2000 and studied it for maybe three, four years beforehand. I wasn’t smart enough to buy it earlier. But also–

Tobias: You said 2000?

Jake: I think you meant 2020, uh?

Christopher: 2020, sorry, 2020. And before 2020, I had studied it a lot, but it was not really that investable. It wasn’t a kind of business that we would go into. It had too many potential issues, one of them being it wasn’t profitable. We like profitable companies. And roughly around the beginning of 2020, the stock had really taken off and we missed our opportunity. I had wanted to buy it kind of like end of 2019 or so, and I missed that opportunity. And then, we had the COVID selloff. That was when we swung hard and we made it a top position. We paid around $41.66 on average, so we’re up 6X or so, but we think it’s pretty early on in that story. It has all the kind of characteristics that we like in businesses.

Tobias: Which are?

Christopher: Oh, one of them is that they can reinvest capital at very high rates of return. One of the things we look at is not just return on equity and return on capital but return on incremental capital. That’s really important because it kind of gets at the unit economics of the business. To give you an example, we think about if they put a factory up, how many cars are they going to make? What are the returns on that factory? What are the returns on individual cars? And while the return on incremental capital is coming down from where it was a couple of years ago, couple of years ago it was about 80%, like super, super high, 80% returns on incremental capital, something not really talked about a lot on the street, and that’s come down, but it’s still very, very high, around 50%. And returns on equity and capital consequently are also high. We figure around 30% in 2024. So, it has that kind of element that we look for. It has very strong competitive advantages that I think are still misunderstood by much of Wall Street. And it has a management team that is deeper than it appears, and a management team that, while might create a lot of noise, is actually pretty good at reinvesting that capital.

Jake: What do you think kind of steady state– Not that there’s ever a steady state in the world, but what do you think like EBIT margins might be someday?

Christopher: Yeah, that’s a great question. Steady state is super important to think about in terms of growth companies because they’re often reinvesting now to create a higher intrinsic value later, and that often depresses current margins and current profits. Margins are pretty good right now, actually. So, we think about 15% or so EBIT margins over the next couple of years going to 20% or a bit more, so pretty good margins, and that’s without the software piece. On the software piece, assuming FSD is profitable and it works well, the software margins are 70%, 80% there. So, that would bring up the total profit margins for the whole firm.

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