My three previous articles, on production efficiency, the Model Y, and Gigafactory 3, all discussed what will be high-volume vehicles for Tesla (NASDAQ:TSLA) and the largest contributors to their future balance sheet. This article will instead focus on Tesla’s smaller-scale production vehicles and the financial impact that they will have. Through this article I will analyze the production and, although production is limited, how these vehicles will still play an important role in Tesla’s future.
When Tesla unveiled the Tesla Semi, they announced some pretty crazy specs, especially for a semi truck, the most absurd being a 0-60 time of 20 seconds — with a full load (five seconds with no load). This impressive feat came under fire as some alleged that no responsible truck driver would pull off a move like this. However, according to the Federal Motor Carrier Safety Administration (“FMCSA”), loads must be secured for a force up to .5g while an acceleration to 60 mph in 20 seconds is just .137 g. This acceleration can be helpful when entering highways, but this point was likely made only to show off the capabilities of the Tesla Semi. What’s important is its ability to travel 60 mph up a 5% grade, its range, and its ability to save its customers money. It’s no secret that the cost of ownership for an EV is significantly less than that of an ICE vehicle, or hybrid for that matter, but this cost differential is even greater with semi trucks, which run many hours a day, guzzling expensive diesel. Tesla also decided to throw in the enhanced autopilot package for the Semi, which can further increase the truck’s efficiencies and also dramatically reduce the likelihood of an accident.
According to Tesla, the Tesla Semi can save more than $200,000 in fuel costs, over 10 years, at a cost of $1.20 per mile, 29% lower than the national average, but will completely pay for itself within two years due lowered maintenance costs on top of fuel savings. Tesla’s dramatically-reduced drag coefficient (“CD”), .36 CD, over other trucks, averaging .6 CD, further adds to Tesla Semi’s efficiency and cost-saving effectiveness. While electric already is cheaper than diesel, saving on efficiency means that the Semi requires even less energy to travel just as far. Tesla’s two Models, the 300-mile and 500-mile trucks, are priced at $150,000 and $180,000, respectively, though there are rumors that the ranges may end up being even more impressive. Even though this is $32,570 and $62,570 above the national average, respectively, the above saving potential mitigates this disparity and actually makes the Tesla Semi the cheaper option. Combining these savings and performance, all signs point to the Tesla Semi being a hot item.
With production expected to begin at the end of 2020, Tesla is looking to gain as many customers as it can, and it has already lined up a few. While some may see the range as a problem, because charging a vehicle takes a lot longer than just refueling, it may not be nearly as bad as you could imagine. Truckers are required to rest for 30 minutes every eight hours that they drive and can only drive 11 hours each 14-hour duty period. Now it’s time for some quick math. Given the average speed of a semi truck on highways of 56.28 mph (author calculations with data from the Office of Energy Efficiency & Renewable Energy), there’s no way a trucker can deplete the 500-mile battery before eight hours is up and they have to take a break anyway. For the 300-mile range variant, a trucker will deplete a full battery in 5.33 hours, which may seem a bit problematic at first. But let’s look again at our trucker’s rules. They can only drive 11 hours per 14 hour duty period. This means that the driver will need to take multiple breaks anyway, providing ample time to recharge without infringing upon the trucker’s time schedule. In fact, even at a range of 310, which is likely possible based off of the previously mentioned range increase, the truck only needs to be charged twice before it has reached its daily driving limit.
It’s math like this that the trucking industry understands, while financiers may be turned off by this apparent shortcoming. With range as a non-issue, the Tesla Semi truck is poised to become an industry-leading truck that, while more expensive at first, will end up saving companies money the longer it’s on the road. Reservations have been open for some time now and, based off of data accumulated by Business Insider, Tesla had 495 reservations for the Tesla Semi by April 25, 2018, plus the undisclosed amount J.B. Hunt ordered. This number has likely stayed around the same since then as I haven’t seen any more recent orders in the news, though it’s very possible that new deals just haven’t been publicized.
The truck is likely to be produced in relatively lower numbers at a higher margin. According to Musk, Tesla will produce 100,000 Semis every year at peak output. When, this will happen is a different story. The production ramp of the Tesla Semi will likely be more challenging than that of the Model Y because the Tesla Semi is completely different than any other vehicle Tesla has ever produced. Therefore, Tesla can’t use all of the same knowledge it gained from the Model 3 as with the Tesla Semi. However, the ramp shouldn’t be as disastrous as the Model 3’s because they will be able to avoid the simple mistake of too much automation. Instead, assuming production starts at the beginning of 2020, Tesla will probably maintain a rate of 150 units per week for the first half 2020, hit 250 at the end of Q3, and break 400 by the end of 2020. 800 units will be reached at the end of Q2 2021 and 1,000 by the end of 2021. The final push to 2,000 per week may not be accomplished until sometime during the second half of 2023. This final push is similar to the Model 3’s prolonged extension from 5,000 to 7,000 per week. While this projected production ramp is conservative, a full year behind Musk’s estimates, it takes into account the delayed start of production and reduces room for error.
The class 8 semi truck market in America is at around 244,780, just under 1.5x Tesla’s expected peak output. To put this in perspective, the current leader of the American class 8 truck industry, is Freightliner with ~90,860 trucks delivered in 2018 and Tesla would have to sell almost 10,000 more trucks than them to fill their production goals. However, the market is growing with no signs of stopping, making the Semi’s proposed deliveries less extreme. Part of the benefit of a slow production ramp is that it allows Tesla to slowly gain market share and prove the supremacy of its trucks over its competitors, but Tesla’s other advantage is that it likely won’t only be selling in America. While it’s likely that Tesla will be able to satisfy most of its demand in America due to the overwhelming advantage their electric semi truck provides over and ICE truck, sales overseas will all but guarantee this target is met. With the ability for foreign markets to pick up the slack left behind in the American market, Tesla’s Semi will be able to exist in the same positive production vs. demand deficit that their other vehicles are in: production can’t keep up with demand.
With a 1.9 second 0-60 mph time, a range of 620 miles, and a top speed of over 250 mph, the Tesla Roadster is, in every sense of the word, a supercar. Additionally, according to analysis by Jason Fenske, the Roadster has 758 lb-ft of torque and nearly 1,000 horsepower, which is even more than Dodge’s Hellcat Challenger. You may notice that Tesla lists 10,000 nm, or 7,376 pound-feet, of wheel torque on their website, but this measurement of wheel torque isn’t the standard measurement when discussing torque and isn’t really the right measurement for torque. Nonetheless, this torque and horsepower is still insane and is what allows the Roadster to have a 0-60 time of just 1.9 seconds, the fastest of any production car in the world. Tesla’s Roadster has some pretty impressive specs, but because of its price is market is quite limited. Its greatest competition will likely be Porsche’s (OTCPK:OTCPK:POAHF) own high-performance EV, the Taycan. The Porsche Taycan starts at $150,900 and $185,000 for the Porsche Taycan Turbo and Taycan Turbo S, respectively. The Taycan also boasts a 0-60 mph time of 3 and 2.6 seconds for the standard Turbo and S respectively while both have a top speed of 161 mph. However, one of the largest blemishes for the Taycan is its range of just 220 miles. The Roadster’s 620 mile range blows this out of the water and makes it a prime choice for people looking for a high-performing sports car. Even with all of this in mind, the Taycan already has racked up 30,000 reservations and, as a result, will increase their annual production from 20,000 to an undisclosed amount. With the market for supercars quite limited, this is quite a high production number. It stands to reason that, if Porsche can capture this large of a market with the Taycan, the Roadster should be able to see a relatively large market as well.
With Tesla’s Fremont facility filled to the brim with production lines, the Model S, Model X, Model 3, and Model Y are all being produced there, it’s highly likely that the Roadster will end up being produced at Gigafactory 1 starting sometime in 2020 (likely toward the end). The Roadster is, admittedly, an even more niche product than the Semi, reaching just 10,000 units produced per year. Fortunately, 10,000 units annually is not an incredibly difficult production metric to hit, meaning that Tesla could likely reach this within their first year of producing the Roadster, which may end up being 2021. It’s also half of what Porsche was guiding for before they increased their own production estimates, meaning that demand shouldn’t be an issue for the electric supercar.
The Semi is priced at either $150,000, $180,000, or $200,000, making a reasonable average buy price around $172,000. Even though it’s more highly priced, it requires a lot more hardware to function than Tesla’s other vehicles, including a larger battery pack (for increased weight and range) and more motors. Thus, the margin will probably be around 25%, consistent with Tesla’s target for their other vehicles and with this evaluation, Tesla could be generating $531 million in 2020, $1.789 billion in 2021, $2.012 billion in 2022, $3.801 billion in 2023, and $4.472 billion in 2024 and beyond through gross profit.
The Tesla Roadster is the definition of a low-production, high-margin vehicle. But before I get too into margins, I want to discuss how much revenue this vehicle will generate. Take the base price of $200,000 and multiply that by 10,000 to get $2 billion. Now, there are other models such as the SpaceX package and the founder’s series, but the founders series is limited to just 1,000 models and the SpaceX package is more of a publicity stunt than anything. This puts $2 billion as the staple estimate for annual revenue for the Tesla Roadster. The cost to build the assembly line of the Tesla Roadster also will likely be quite low because of the low volume production. I would be surprised if it cost more than $300 million to build.
Now margins? Batteries are probably one of the biggest factors here. At Tesla’s 2018 Shareholder’s meeting, Musk discussed the likelihood of getting down to $100 per kWh even at the pack level by the end of the decade. Looking at the Model 3’s battery, the most advanced of Tesla’s batteries, they require 75 kWh for 310 miles of range with a dual motor variant, though the Roadster will have three motors and 620 miles of range. Tesla’s rear-wheel drive Model 3 got only 15 miles more than the AWD Model 3, so a battery of ~150 kWh seems quite reasonable for the Roadster, especially because of improved aerodynamics. A battery of this size would cost $15,000 at $100 per kWh, which does seem likely. The extra motor in a Model 3 also used to come at a $5,000 premium, which also accounts for the slightly higher margin of the vehicle. So far, we’re only at $30,000 for this vehicle and all that we have left is the body, interior, and production of the car. For the Performance Model 3, using the above calculations and an overall margin of 25%, that costs $24,500. Now we’re at $54,500 for the vehicle’s total cost. But there’s probably still a significant additional cost to build the body and interior of the Roadster compared to the Performance Model 3, a premium that’s likely around $35,000. The total cost of production for the Roadster is likely around $89,500, providing a margin of ~55.25%. Using these metrics, the Roadster would contribute $1.105 billion annually towards Tesla’s profitability, which makes it more than a mere side project. What we can learn here is that this project also will pay for itself completely, within just one full year of production. Overall, these vehicles, though their production may seem meager initially, are quite valuable projects and will make strong contributions to the overall profitability of Tesla.
While these projections are far from certain, they are, in my view, quite good guidelines for what to expect with these two new products. I believe that I’ve outlined demand and margins quite well, the latter actually may be a bit conservative, especially on the Semi. I also think that I’ve made a strong case for each vehicle’s production ramp, but what could be challenging for my projections are the specifics that will likely differ from my projections. This does lie mostly with the production ramp and margins. Although I believe that these projections are quite solid guidelines, I do believe that Tesla could see variation with my guidance of +/- $125 million in 2020, +/- $280 million in 2021 and 2022, and +/- $425 million in 2023 and beyond.
Disclosure: I am/we are long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.