An Investment Opportunity
Issue #8 Tesla Q3 earnings, Nio in depth, Evaluating EV auto industries...
Hey Shakers, A big week for some EV market's last week. This week we are looking into Tesla Q3's earnings report, Nio and their partnerships, how to study the automotive industry in the years to come, and so much more.
Tesla Q3, Major Progress
Tesla has again had another profitable quarter their 5th one in a row to be exact and over exceeded Wall Street's Q3 expectations. Tesla's cash balance increased to $14.5 billion, supported by the sustainability of their core operations which stems from the benefits of building and producing cars locally, increasing from 50% last year to 70% as of recent.
"Automotive growth margin, including regulatory credits increased materially from 18.7% to 23.7% with some of our programs achieving greater than 25% gross margins." stated CFO Zach Kirkhorn on the call Wednesday evening.
Kirkhorn also mentioned "For previous investments in Model 3 Shanghai and Model Y in Fremont, we're expectingthese programs to already have fully paid for their respective investments by the end of this year." But he noted that the implementation of the new tech (referring to 4680 cell construction and new casting implementation) within the next few years will take longer to pay back. This is a good example of the company's profitability being re-invested back into the company's growth.
For Q4 Tesla is on target to meet the 500,000 deliveries promised for 2020 despite earlier setbacks, and expects over a billion dollars in early convert pay down associated with 2021 and 2022 conversions.
Tesla's strategy has been very clear in increasing production to meet demand, reducing costs, including localization driving higher efficiency across the business while tightening the cash conversion cycle.
Read more details in Vincent Y'sArticle on Tesmanian's site.
And check out Dave Lee's 12 minute video on the Q3 earnings.
My key takeaways from the earnings call:
Full Self Driving can be operated without any cell or wifi service in places no Tesla has ever been before.
Austin and Berlin will begin manufacturing next year but at a slower start of 12-18 months (still fast for new tech) due to the new tech implementation.
RJ Johnson head of Tesla Energy Operations mentioned the rise in Megapack and Powerpack orders well beyond 2023 along with Solar Roof demand. CEO of Tesla, Elon Musk commented "Solar Roof is a killer product, this will become obvious next year" meaning this could be another major profitability stream for the company.
The future of Robotaxi network another revenue stream coupled with FSD technology.
Ability to sell power back to power grid with Tesla Powerpack and Megapack hardware.
What is a Regulatory Credit?
Photo Courtesy of Inside EV's
A regulatory credit is given out by government environmental emissions programs (Like ZEV in the US) to auto manufacturers to produce vehicles that reduce global warming emissions. The auto company must produce enough to fulfill the credits or else face punishment from state government regulators.
*"The ZEV program assigns each automaker “ZEV credits.” Automakers are required to maintain ZEV credits equal to a set percentage of non-electric sales. Each car sold earns a number of credits based on the type of ZEV and its battery range. The credit requirement is 7 percent in 2019, which will require about 3 percent of sales to be ZEVs. The credit requirement rises to 22 percent in 2025, which will likely require less than 8 percent of sales to be ZEVs."
We can see this in play from what Tesla's CFO Zach Kirkhorn was saying. Tesla had a lot of extra credits and sold several of those regulatory credits at 100% profit, boosting the company's overall profitability by $397 million. This is something that is allowed and helps manufacturers avoid like Tesla avoid the penalty.
*Cited from "What is ZEV?" Published by Union of Concerned Scientists Published Aug 7, 2012 Updated Sep 12, 2019
Nio in Depth
Nio is China's version of Tesla, Nio shares similar capabilities such as autonomous driving, its not for no reason they call William Li, "China's Elon Musk". However one of the major differences in Nio compared to Tesla is they don't have a vertically integrated supply line (I'll discuss more on this later), so it is important to look at who they are partnering with to build their products.
Let's take a look at who Nio is working with:
Nio's smart software system is compatible with a smart watch app, to display things like the car's battery life, giving the owners ability to give the car commands, and so forth. To build this they have partnered with Xiamoi. Check out the article here and Xiamoi's products here.
Nio like Tesla is aiming to build an electric car with with autonomous capabilities (We discussed L5 autonomy in issue #4 of EV shakeout. To do this requires advanced fast computer processing (like shown in last week's issue about Tesla's FSD tech). Nio is utilizing the Israeli subsidiary of Intel, Mobileye, to build vision-based technology for self driving capabilities. Read more about their technology here.
A network of battery swap centers is being constructed by Nio, according to them a battery can be swapped out in 7 minutes or less at one of these stations, equal to the amount of time it would take to pump fuel. Nio partnered with CATL (Contemporary Amperex Technology Co. Limited) earlier this year to construct their Battery Swap Unit a concept that seems to be working out well.
It is also important to look at other companies that believe in Nio's mission. Xpeng is a Chinese auto manufacturer started 5 years ago (also known as Xiaopeng Motors), founded by He Xiaopeng who previously founded UC Web Inc which was acquired by e-commerce giant Ali Baba in 2014. It is important to note all this because Xpeng recently entered an agreement with Nio to use Nio's charging network. It will be interesting to see how this symbiotic relationship will pan out.
Studying the EV Auto Maker's Future
When we look at EV manufacturers today, we not only look to gain information on their products but also study them for other purposes such as business and investment opportunities. A phrase I mentioned above was "vertical integration." Vertical integration applied in a company such as Tesla means that they build nearly all their products and systems in house, this is something other competitor in the market have not done yet.
By identifying other manufacturers and their lack of integration, we see that they depend on other resources to construct their products. We are looking at a race of manufacturers trying to produce the safest and most cost effective EV's at the moment which will require demand from other companies. An example would be Nio's relationship with Mobileye (Intel) for self driving capabilities.
An EV auto manufacturer will require several key components:
Motors, cells, computer tech.
Software services for over air updates.
Sales and service centers.
Point of sale and service software.
Distribution contracts.
Charging networks.
The list could continue on for a long time. Each of these needs will be filled by a company, a lot of them are already public companies that can be invested in. I'm not only studying the manufacturer but also all of their supplier relationships as I continue to build my investment portfolio. Hopefully this stimulates some thought in regard to the massive wave of opportunity EV's will bring to the economy.
I am not a professional in investment matters, do not take this as investment advice but rather as food for thought.
Top 10 Global Lithium Mining Companies
In continuation of studying markets and lithium is continuing to become more valuable to cell construction in EV manufacturing. It's important to take note of contracts and agreements being made with manufacturers, as they provide good potential investment opportunities. Check out the top 10 lithium mining companies world wide in the list below:
FMC Rebranded as Livent
By keeping an eye on these companies, we can identify who they are signing agreements with and focus on those connected to EV markets. It is also important to pay attention to how long a supplier will sign a contract for, by understanding 2 factors such as 1) assuming the manufacturer has major demand over the term of the contract, and 2) how long the contract term is set for, we can speculate whether it may be a sign of growth for the supplier or not.
These are just some thoughts I've been mulling over the past few weeks, regarding my investment strategies in the EV world. Again I'm not a professional in investment matters, consider this as food for thought.
👁 Eye on The Market
Here's the breakdown for the 3rd week of October. Several markets as a whole took a dip, the same went for EV markets and suppliers. Some took a harder fall than others, but it looks like VW is continuing to climb despite hesitant feelings regarding the upcoming US election. If you notice I have added Xpeng to my watch list, now we have China's 3 major EV manufacturers on the same chart, Nio, Li Auto, and Xpeng.
An idea... Would you use a tool that allows you input stock tickers of choice to produce end of the week market results? I'm looking for one and am open to recommendations.
For newer investors, do you understand what volume indicates on this chart? How about market cap? These are two important pieces of information to consider when looking at stocks.
Check out this article on Investopedia for 6 things to look out for regarding a company's volume.
Merrill Edge has a nice write-up to help you understand why market capitalization matters.
What I'm Reading
I'm studying up more on investing in Albermarle's mining corporation.
Simon Alvarez'sarticle on Tesla's Q3 earnings summary at Teslarati.
A "cheat sheet" to China's "big 3" by Shen Yushan Jill written for Technode.
That's a wrap for this week, a lot of exciting things happening in the EV markets and this issue would be too long if we continued on. Stay tuned for more inside next weeks issue, if you have any feedback, please comment or shoot me an email, I'd love to hear it! Have a great week!
your titles are the 💣