The Business Of

Cars | Tesla | What Do They Do With Their Profits?

Morning All!

Yesterday we put together Tesla’s costs with their revenues. And we’ve covered a fair amount this week. So let’s have a quick recap…

• ~55% CAGR! The number of Tesla cars sold has grown an incredible ~55% CAGR from just ~22k in 2013 to ~1.8 million in 2023!

• 3 necessities: The EV giant’s main costs are the costs to actually make their cars. Raw materials, people, and factory machinery make up the majority!

• Margin reversal? Whilst Tesla’s profitability has increased nicely over the last decade, the strategy to sell cheaper cars may reverse some of the margin gains!

And speaking of margin. It is a Thursday morning. Which means it’s time to take a look at our famous TBO EBIT Margin ranking! Below, we can see our ranking updated to include Tesla. And it’s not the most flattering chart for Elon Musk’s gang…

Now, whilst ~9% really doesn’t seem that impressive when you compare Tesla to some of the banking and semiconductor companies we have in that chart. ~9% is actually pretty good in Tesla’s industry! We saw 2 weeks ago that AutoNation made a EBIT margin of ~5%. Ford’s average EBIT margin over the last decade has been just ~2%! And remember, Tesla’s EBIT margin in 2022 was actually as high as ~17%!

So, just a reminder. Whilst it’s interesting to see a variety of industries represented in our TBO EBIT Margin ranking. It’s so important to put a company’s margin in the context of their own industry. If in 5 years’ time, we see Tesla’s EBIT margin at 25% - that would be incredible. However, if in 5 years’ time, we see TSMC’s EBIT margin at 25% - that would also be incredible… but in the opposite way! Right, let’s dive in!

Want to Build More Cars? Need More Space? Invest In More Factories!

Okay so, to kick us off, let’s as always look at the waterfall chart below. Which shows us how Tesla have spent their cash from operations (CFO) since 2008. And we see something quite amazing.

Tesla made a load of cash from their operations ($49 billion). They raised a load of cash by giving investors their equity ($17 billion). And they used all that cash for mainly one thing - CAPEX ($37 billion)!

Now, that $37 billion is a huge figure by itself. But when we compare it to Tesla’s CFO ($49 billion), it becomes even more remarkable. As we can see in the table below, Tesla spent ~76% of their CFO on Capex… which is a higher proportion than even TSMC! And as we’ll see in a moment, a lot of Tesla’s capex is going into building car factories.

Oh and to be clear, Tesla spend a higher proportion of their cash on capex. But TSMC still spend ~3x more on capex per year than Tesla!

And I just want to make a little note about the table above. Because it actually makes a lot of sense! All of the top 3 there - Tesla, TSMC, and Maersk - are companies that need to reinvest in more space/capacity to grow their future revenues! And so it’s no surprise to see them spending the most on capital expenditures!

In order to make more cars in the future, Tesla need more space, and so they build more factories. In order to make more semiconductor chips in the future, TSMC need more space, and so they build more warehouses. And in order to transport more containers in the future, Maersk need more space, and so they build more ships!

California, Shanghai, Berlin, Texas… What Next?

Okay so, let’s dive into Tesla’s factories. And the first thing to say about this is that - when Tesla first started making and selling cars, they didn’t even have their own factory! The very first Tesla car - the Tesla Roadster - was actually made by Lotus Cars in their UK factory. And it was only in 2010 that Tesla bought their first factory - in Fremont, California.

This Fremont factory, by the way, was previously operated by Toyota and General Motors (GM). But when GM entered bankruptcy in 2009, Toyota was keen to get rid of the factory. And Tesla snapped it up at a huge discount! However, it wasn’t just the price that was great for Tesla - the Fremont factory had plenty of space! In 2010, Tesla was only producing a few hundred cars in the entire year. However, at their peak, Toyota and GM were churning out ~430k cars per year from that Fremont factory. Which meant that Tesla could stay in that one Fremont factory (pictured below) for quite a few years till they built up their production numbers.

And Tesla did stay in that one location for nearly a decade! It was only in 2019, when Tesla produced a whopping ~370k cars in the year, did Elon Musk think ‘right, we probably need some more space!’

And since 2019, Tesla have gone a bit factory-mad! First, in 2019, the company built a factory in Shanghai, China. And then in 2020, the company built out not just one new factory - but TWO! One in Berlin, Germany and the other in Texas, USA. The image below shows us Tesla’s 4 vehicle factories.

The company also has a factory in Nevada, USA which was built in 2014 - but that’s mainly used to produce EV batteries, not cars.

Now, these factories aren’t cheap. Whilst we said the first, Fremont factory was an absolute steal for Tesla. Building their own factories has cost the company a heck of a lot of company. The Shanghai factory is estimated to have cost Tesla a whopping ~$2bn to build. The Berlin factory is estimated to have cost ~$4bn! And Elon Musk himself said that the Austin factory would see an investment of ~$10 BILLION in total!

And it’s these factory-building activities - which have been absolutely necessary for Tesla to make and sell cars as quickly as they have - that have seen Tesla’s capex figures fly from just $264 million in 2013 to $8.9 billion 10 years later!

Now, will we see more factories in the future? Well, almost certainly. In their latest earnings presentation, Tesla stated that their 4 factories in total have a capacity to build ~2.5m cars per year. But as Tesla looks to become even more mass market and produce even more cars per year - they’ll need more space… and more factories!

Charging Ahead With Charging Stations!

Alrighty, let’s wrap up - a shorter email today! So, whilst the majority of capex over the last decade for Tesla has been building out their factories and buying machinery/equipment. There’s been another huge focus for Tesla’s capex - building their charging stations! What do I mean?

Well, let’s say you’re driving a car that runs on petrol. And you’re low on fuel. What do you do? You go to the petrol station, obviously! But what about if you’re driving an electric vehicle and your battery’s low? What do you do? Well, the answer is charging stations! But where did these charging stations come from? Who paid for them?

Well, the answer is Tesla! Before Tesla built these charging stations, EV drivers would have to charge their cars at home. But what if you forgot one night? And you had very little battery the next morning before you set off for work - you’d be panicking about your battery dying mid-journey! And so, since 2012, Tesla has spent an estimated ~$1.7bn to develop their charging infrastructure. And they now have a whopping ~6k charging stations and ~55k charging connectors around the world.

But they’re far from done here! In their latest earnings presentation, Tesla stated that they wanted to increase capex to >$10 billion in 2024 (from ~$8.9bn in 2023). And a large portion of that capex will be spent expanding their number of charger locations further!

Oh, and by the way - whilst more charging stations is great for Tesla because it means their car buyers have more places to charge their cars. There’s also another huge benefit for Tesla. Because what do other car manufacturers with electric vehicles also need? Charging stations! So their EV consumers can also charge their cars!

And that’s exactly what we see today. Pretty much every electric vehicle manufacturer pays Tesla so that their EVs can access Tesla’s charging stations! Now, some of these manufacturers like Mercedes-Benz are building out their own charging infrastructure for the future. But for those that don’t want to spend that capex, and are happy to use Tesla’s charging stations - that’s more revenue for Tesla!

1st Feb 2024

Nigel Jacob CFA