In his latest video, YouTuber and very early Tesla investor Dave Lee asked the question as to whether or not Tesla can deliver 1.5 million Model Y vehicles in 2023 and how to value this as a Tesla investor. Short disclaimer: I, too, hold a few shares in Tesla’s stock [NASDAQ: TSLA].
What inspired this video was a “huge clue” that Elon Musk gave regarding Tesla’s ambitious plans for the future. Dave included a reply from Elon to one of his tweets about it, also.
First up, Dave shared the tweet he shared that Elon replied to. Dave said, “If you missed Tesla’s earnings, the highlight was Elon Musk sharing in the call that he thinks Tesla’s Model Y will become the top-selling vehicle of any kind in 2022 or 2023.” Dave also pointed out the world’s current top-selling car, which is the Toyota Corolla, selling at around 1.5 million units per year. For Tesla to beat that, it will have to sell 1.5 million units in 2022 or 2023. Elon replied that it was quite likely at least based on revenue in 2022, and possibly based on total units in 2023.
Before we dive in further, just think about this for a moment. Imagine an electric vehicle being the top-selling vehicle of any kind — beating out gas-powered vehicles at last.
Seems quite likely at least based on revenue in 2022 & possibly total units in 2023
— Elon Musk (@elonmusk) April 26, 2021
Dave pointed out that Elon kind of tapered down the expectations and that maybe in 2023 Tesla will achieve this milestone. After this, Dave pointed out that one of his favorite things about both Zachary Kirkhorn and Elon Musk is the fact that both tend to under-promise. They don’t give lofty expectations that often.
“On the flip side, I kind of like it when Elon gives these really tasty clues as to the super ambitious crazy plans that Tesla holds.” And Tesla would need one such plan to make over 1.5 million electric vehicles in 2022 or 2023. I say “over” because that number doesn’t include Tesla’s other models.
Dave’s tweet that Elon replied to was the first in a thread where he pointed out that if Tesla was able to sell 1.5 million Model Ys and 500,000 Model 3 vehicles, this would be 2 million electric vehicles being produced in 2022 or 2023. The most likely outcome would be Tesla achieving these numbers in 2023. Dave pointed out what 500,000 vehicles per quarter could look like in terms of earnings.
Dave explained that he presented some “napkin math” and pointed out that “the four things you just need to know [with regards to the] napkin math are revenue, gross profit, operating expenses, and operating income,” and then he quickly breaks down each one.
Revenue. This is the money Tesla is bringing in. You multiply the vehicles in either that quarter or year by the average sales price (ASP) per vehicle. This is the money Tesla is getting from selling its products and services.
Gross Profit. This is calculated by subtracting all of the costs from the revenue. The costs include the cost of building factories, making the vehicles, overhead such as employees and leasing, parts.
“In Tesla’s case, they could get perhaps a $5.6 billion gross profit if they sell 500,000 vehicles per year,” Dave explained.
Then you would subtract the operating expenses. “Let’s say that’s $2 billion. Tesla is left with $2.6 billion in operating income. I don’t think people are understanding the magnitude of how much cash or how much profit Tesla is about to generate with their vehicles just ramping tremendously.”
Mapping Out The Magnitude
To help one understand this magnitude, Dave created a simple spreadsheet that maps out how this would work year over year (YoY). For example, if Tesla was to sell 500,000 Model 3 vehicles in 2021, 350,000 Model Y vehicles this year, and 50,000 each of the Models S and X, this is 900,000 vehicles.
Dave takes it even further to next year — again, hypothetically speaking.
“Let’s say Model 3 is still 500,000. So I’m just saying hypothetically if the Model 3 stays the same. Let’s be conservative. Model Y ramps to 750,000. With Austin, Berlin, and Shanghai expanding, that seems doable. The only question is can 4680 cells really provide that, but also Tesla’s ramping suppliers as they noted. So, you have Model S and X at 100,000 vehicles, Cybertruck and Semi at 150,000. I think that’s pretty reasonable — over 1.5 million units.”
For 2023, Dave pointed out that this is the year that Tesla could sell 1.5 million Model Ys and 500,000 Model 3s and, hypothetically speaking, Tesla could sell 100,000 Model S vehicles, 300,000 Cybertrucks, and Tesla Semis. “That’s 2.4 million cars in 2023. So, what does this look like? How can we value this overall?”
To make this easier to digest, Dave assumes that Tesla keeps its average revenue to $45,000 per car (this will fluctuate in reality considering some of the vehicles are lower or higher priced and this depends on whether or not customers add upgrades).
“As Tesla increases and ramps their production, the average sales price might go down for the car, but they might be able to make it up off of Full Self Driving. So, let’s say hypothetically it stays the same at $45,000. Gross profit — let’s say it stays at $25,000/25% and then operating expenses will increase a bit every year and then we’ll get operating income.”
What This Looks Like For 2021 & 2022
Keeping these numbers in mind, for 2021, Dave points out that Tesla hypothetically has $40 billion in revenue with a gross profit of $10 billion and operating expenses of around $6 billion with an operating income of $4 billion. You do have to take out taxes and interest income to get the net profit figures, Dave noted, but wanted to just go with operating income to paint a quick picture. After this, he shares what it could look like for Tesla in 2022 if it sells 1.5 million vehicles.
“You get $67.5 billion in revenue.”
Although Dave also breaks down just how much operating expense and gross profits come out of that, just think about that number for a moment.
What Just Happened Here?
Dave explained that with all of these hypothetical numbers, in the two-year period from 2021 to 2023, Tesla could go from $4 billion of operating income to $18 billion of operating income.
“If you go with these figures, that’s a 4x jump in operating income just within two years.” Dave pointed out that this wasn’t investment advice but just his stream of consciousness. This a possibility for Tesla and it could grow to these numbers that he used in the video or grow to numbers that are either more or less than what he used.
“I don’t think that people are fully understanding the operating leverage that Tesla has. What that means is that as as the revenue increases, their expenses don’t increase as much and therefore their operating income increases faster than their revenue growth.”
You can watch Dave’s full video here.
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