On Thursday Tesla hosted what the company called “AI Day”. As is tradition with Elon Musk’s $700bn electric vehicle company, the event offered plenty of cud for both bulls and bears to chew on.
Believe Tesla is a visionary company that will simultaneously transform robotics, batteries, solar and transportation on a research and development budget that’s roughly a tenth of VW’s? For you, the event was a winner. Believe Elon’s empire of overpromises will eventually ignite into a 30-hour battery fire once the sparks of reality catch? As far as you’re concerned, AI Day provided ample evidence for all your scepticism.
FT Alphaville is not going to linger on either view too long (although we do note that our Elon called the company’s latest Full Self Driving beta “not that great” overnight), but we couldn’t resist sharing this titbit from the latest Tesla note from Morgan Stanley’s Adam Jonas.
It’s no secret that Jonas is an FT Alphaville favourite, and his latest bullish missive contained many highlights. There was the cursory comparison of Musk to Thomas Edison, discussion of “humanoid bots and exaflops” and, of course, a theory that the Tesla bot could help with the “initial exploration, preparation and construction of key assets on and below the Martian surface prior to any significant human exploration effort”.
Apart from that Total Recall-esque fantasy, we were particularly drawn to Jonas’s sum-of-the-parts breakdown of his Tesla valuation.
With our emphasis:
Our PT of $900 is comprised of 6 components: (1) $375/share for core Tesla Auto business on 5.6mm units in 2030, 8% WACC, 14x2030 exit EBITDA multiple, exit EBITDA margin of 20%. (2) Tesla Mobility at $75 on DCF with 500k cars at $1.7/mile by 2030. (3) Tesla as a 3rd party powertrain supplier at $88/share. 4) Energy at $78/share. 5) Insurance at $30/share. & 6) Network Services at $255, 17mm connected fleet, $100 ARPU by 2030,20% discount
Ignoring the fact that two of these business lines literally do not exist, we were drawn to the insurance segment. Although it seems relatively insignificant at just 3.3 per cent of the $900 price target, you might be surprised to know that 3.3 per cent of $700bn is actually quite a chunk of change.
As a quick reminder, Tesla’s own in-house insurance is currently only offered in California. And the car company doesn’t actually underwrite the risk itself. Instead, it simply acts as a broker for State National Insurance Corporation, a subsidiary of insurance giant Markel. So in all likelihood, the business segment is probably a rather low-margin broking business for a car brand that currently commands a 2 per cent market share in the US. We say “probably” because the disclosure around the insurance business is thin: it was only mentioned four times in the recent 10-Q filing.
So back to Jonas’s Tesla Insurance valuation. Take Tesla’s shares outstanding -- 990,015,158 -- and multiply those by $30, and what do you get? $29.7bn.
If that sounds like a lot, that’s because it is. In fact, it would make Tesla’s insurance business the 21st most valuable insurance company in the world. Worth more than Aviva, Arthur J Gallagher and Hannover Rück -- the third largest reinsurer globally. Indeed, at that valuation, Tesla Insurance would be worth roughly two-thirds of AIG, a company with an asset base of $395bn.
Upon hearing about yet another bonkers happening in markets today, it’s almost become a cliché to quip “you don’t see that in a bear market”. But, to paraphrase filmmaker Terence Davies, all clichés were once truisms.
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