Consumer Discretionary / Industrials

Henry Kwon

Equity Bottom-Up

<p>The Tesla Semi is slated for commercial production in 2019, and prices have been announced.  Walmart and J.B. Hunt have already placed advanced orders which had a positive effect on shares since the downturn resulting from a disappointing 3Q results and continuing expectations for the Model 3 production bottlenecks.</p><p>Taken at face value, the semi should provide $0.25 - 0.66 savings in operating costs, so if we assume an average driving distance of 100k per year, then the implied operating cost savings could come to $25-66k per unit, per year.  All of this looks great from a customer's perspective, which is mostly likely behind Walmart's decision to pre-order 15 units (out of Walmart's fleet of about 6,000 trucks) for short range hauls following the Semi's public unveiling.  JB Hunt also announced that it had pre-ordered "multiple" Semis.</p><p>Information on specs are sketchy at this point so there is a lot of speculations in the financial markets which is good for stock price but frustrating if one were to focus purely on fundamentals (for instance, what kind of braking system will the Semi use - and depending on what type, estimations on the benefit of regenerative braking could be made). If we narrow the argument down to battery, the math seems to work only if Tesla can lower its battery costs by an additional 20% in the next two years, but no changes have been announced on either chemistry or pack type, and it is extremely hard to argue operating leverage on car batteries.</p><div class="content-highlight"><p>In short, current investors win on promise, and Tesla's customers may win on lower operating costs.  Fundamentals will not show until 2019-2020, but that is still multiple investment horizons away for most investors.</p></div>

The Tesla Semi is slated for commercial production in 2019, and prices have been announced.  Walmart and J.B. Hunt have already placed advanced orders which had a positive effect on shares since the downturn resulting from a disappointing 3Q results and continuing expectations for the Model 3 production bottlenecks.Taken at face value, the semi should provide $0.25 - 0.66 savings in operating costs, so if we assume an average driving distance of 100k per year, then the implied operating cost savings could come to $25-66k per unit, per year.  All of this looks great from a customer's perspective, which is mostly likely behind Walmart's decision to pre-order 15 units (out of Walmart's fleet of about 6,000 trucks) for short range hauls following the Semi's public unveiling.  JB Hunt also announced that it had pre-ordered "multiple" Semis.Information on specs are sketchy at this point so there is a lot of speculations in the financial markets which is good for stock price but frustrating if one were to focus purely on fundamentals (for instance, what kind of braking system will the Semi use - and depending on what type, estimations on the benefit of regenerative braking could be made). If we narrow the argument down to battery, the math seems to work only if Tesla can lower its battery costs by an additional 20% in the next two years, but no changes have been announced on either chemistry or pack type, and it is extremely hard to argue operating leverage on car batteries.In short, current investors win on promise, and Tesla's customers may win on lower operating costs.  Fundamentals will not show until 2019-2020, but that is still multiple investment horizons away for most investors.

Tesla Semi:  BAMF for Customers, but BAMF for TSLA?