Just Another Car Company

As-salamu alaykum everyone, I hope you are doing well. Tesla reported earnings yesterday and today we're going to cover the highlights from yesterday's report and their earnings call. The market's reaction to Tesla's earnings was quite positive. The stock is up close to 11% on a day when the market was pulling back for the most part. So let's talk about why this is, some of the highlights, and why I think Tesla remains a once-in-a-generation opportunity for investors. So without further ado, let's get started. As always, this is not financial advice, so be sure to do your own due diligence before making any investing decisions. So let's talk first about the overall backdrop and some of the reason behind the pessimism that surrounded the stock prior to the earnings, and that is the slowdown of the rate in EV adoption. Now, the adoption of electric vehicles is still growing, but the rate at which it is growing has seen a slowdown as of late, especially in the world excluding China. In China, the adoption rate is still healthier, and automakers have pulled back from even attempting to produce battery-powered electric vehicles and have focused on, you know, plug-ins and hybrids, which I don't think the future will remember them fondly for. The future is going to be battery electric vehicles, and the reason why automakers are pulling back from building what will be the vehicle of the future is because they haven't figured out how to build it in a profitable way like Tesla has. And so this pullback for these other automakers from battery electric vehicles, basically taking themselves out of the race, reducing their investments in this field, this will cause them to have an easier life over the short term, but a much harder life over the long term. So I really think that these automakers are putting themselves in a place for a rude awakening in the future. So let's talk about just the numbers for Tesla. So they reported $1.5 billion in net income, free cash flow of negative $2.5 billion in Q1. Now I'll give you some color on that. They reported $2.2 billion decrease in the cash and investments that they have. Now the reason for this negative cash flow was because they saw inventory rise $2.4 billion from Q4 to Q1, and capital expenditures increased by close to $500 million from $2.3 billion in Q4 to $2.8 billion in Q1. So if you were to take capital expenditures and the increase in inventory out, then you would end up with, or rather, if you just maintain them constant, you would have $2.9 billion in free cash flow, which would have made it Tesla's second best free cash generating quarter ever. So despite the backdrop that I mentioned, so tapering off in the growth rate of ED adoption, despite the higher than historical or recent historical average of interest rates, and obviously auto sales are very dependent on that. Despite the supply chain issues with the Red Sea blockade, despite the arson event that happened in Giga Berlin, despite all that, you had a company that basically had its second best quarter ever in terms of free cash flow. And I actually look favorably on additional CapEx expenditures. So increasing the investments in infrastructure for the company, I look favorably on those things and favorably on increases in expenditure on research and development, because those dollars that are spent today translate into when you have competent and capable management, like you have with Tesla, those translate into multiple dollars in profit in the future. And it means that the company is still eyeing growth and it is still being innovative. And it's not just resting on what it has achieved so far. Now, additional highlights from their Q1 report, they increased AI training compute by more than 130% just in Q1. They recorded energy storage deployment of 4.1 gigawatt hours in Q1, which was a record for the company. And they produced over 1000 Cybertrucks in a single week in April. So they're really ramping up their Cybertruck production. Their energy storage business, which is the most profitable line of business they have currently, has recorded record revenue. And it is expected that this line of business is going to grow 75% in 2024 compared to 2023. And the gross margins for this particular line of business is close to 25%. As I mentioned, by far the most profitable line of business that this company has. And this line of business is expected to grow 75% in this year. And all of this, again, against the backdrop of higher interest rate environment and an economy that really has a lot to grapple with. So saying that this is impressive would be an understatement. Now, the main, the crux of the thesis for Tesla relies in large part on these two graphs. And it relates to the advantage that Tesla has in artificial intelligence. So on the left, you can see Tesla's AI training capacity and how it's basically gone vertically upwards. And it has close to 40,000 H100 equivalent GPUs. And on the right, you can see the advantage that Tesla is building on as it relates to the data that it has to train its AI with. And most recently, it has been gathering additional data from users who are using their full self-driving V12 version. And that's represented in red. And again, you can see they, it's going vertically upwards. They have hundreds of millions of miles with their latest version of FSD. And total, they have more than a billion miles of data that they're using to train their full self-driving. And really with artificial intelligence, what you need is basically two things. You need really good data and you need a lot of it. And you also need, you also need compute. And Tesla has both of those things. And it is aggressively investing in order to increase its compute. And with the additional deliveries of more and more cars, its data is increasing as well. Now, what got investors particularly excited was the app. So now they could actually visualize how robotaxis would work. And on the earnings call, Elon Musk mentioned something that was, I found quite interesting. So you could actually, if you had a robotaxi, you may be able to limit it to serving your friends and family, for example, if you don't want a complete stranger riding in your car, or you could limit it to five-star riders, or you could have other limitations on exactly how you, how your robotaxi car was used. And something that he mentioned, which was also quite exciting was the fact that yes, the addition of autonomy to a car could probably take its usefulness from, you know, an average of 10 to 20 hours per week to something more like a hundred or more hours per week. So, you know, more than 5X in the usefulness of that vehicle. But also these cars are basically computers and they have some pretty, some pretty impressive compute power in them. And so when they are not being used as robotaxis, they could be used as nodes providing compute power to solve AI problems. So potentially you could have your car earning money for you either as a robotaxi or when it is idle and plugged in, it could be used as basically a node that is providing computational power. And this is something that turns the car for the first time in the history of cars from a financial liability to a financial asset that is generating cash for its owner. And really, I don't think that certainly Wall Street and many other investors are really not appreciating this point. And Elon Musk mentioned this, which I thought was quite profound. And I mentioned this in the earnings call. He said, the way to think of Tesla is almost entirely in terms of solving autonomy and being able to turn on that autonomy for a gigantic fleet. And I think it might be the biggest asset value appreciation in history when that day happens, when you can do unsupervised full self-driving. So you have a Tesla in your garage, you go to sleep and it doesn't have full self-driving capability. Finally, full self-driving capability is turned on. That car that you had sitting idly in your garage could 2, 3, 5x in value just with that software update because of the utility, the added utility that I just mentioned. And if their cars have that type of increase in value, then the share price will be very correlated to that increase in value as well. So the thesis for Tesla, and before I forget, something that Elon Musk mentioned that was also very exciting. And it was, as you can see, a lot that was mentioned that was quite exciting. But he mentioned that Tesla was in talks with a major automaker to license full self-driving to that major automaker. And I think that this will be the first of many automakers that full self-driving is licensed to, if Tesla is generous enough to license their technology to other car makers. Because ultimately, full self-driving, think of it like Google search. Other companies have tried to build other search engines, but because of the data flywheel that Google has, people are constantly searching and those searches improve the results of Google because it learns from those searches and its customers' behaviors. And so it becomes very hard to catch up with Google because their advantage is snowballing. And the same is true with Tesla and full self-driving and the data that they are collecting. Other companies may try to compete with Tesla, but because of their data advantage, and now because of their compute advantage, they just don't have a serious chance. And therefore, just like Apple uses Google search, other car companies are going to use Tesla's FSD in order to survive. Because the car of the future is not just electric, it's also autonomous. Cars that are not autonomous will be viewed like the horse and buggy was viewed after the internal combustion engine came out. They're just outdated and there will be phased out quicker than many people realize. The car of the future has to be autonomous. The other car companies cannot compete with Tesla in terms of autonomy. So they're either going to waste their time and waste their resources trying to create their own full self-driving and then go bust, or they're going to license Tesla's technology, pay Tesla, and try and survive until Tesla decides, okay, it's time to pull the plug and these companies will die off. It's exactly like when the iPhone came out, you had a bunch of other mobile phone companies, BlackBerrys and Nokias and whatnot, and they all got clobbered. They all essentially ceased to exist in that market. And they made way for the iPhone, for the smartphone, and really, you only had iPhones and Androids after that. And so, the same is going to happen with automobiles. It's going to be Tesla, maybe there's another company, maybe BYD or someone else, and then everyone else is, I mean, chances of making it are not something that I would invest money into, that's for sure. All right, so let's talk about the main crux of our thesis for Tesla, which is that it's not a car company. People who think that it is a car company value it based on it being a car company are missing the whole point. The fact of the matter is, cars is one component in many multi hundred billion dollar a year components for this company. It's a generational company that doesn't come by too often, whether it's humanoid robots, which I think will be their largest line of business by far, robo taxis, automobile sales, which will be a smaller line of business, even though now it's the lion's share of their revenue, energy storage, which I think will be much bigger than their car business, and other ancillary businesses like their insurance and lithium refining and solar, all of those other businesses, while they could be, you know, separate companies on their own, will be smaller compared to things like energy storage and humanoid robots. And so if I wanted to articulate the thesis, I would say, well, three main things. The first is that Tesla is going to solve full stop driving, or at least it has the best shot at it. And if you don't believe me, ride in a Tesla that has the latest version, 12.3 in it, and you'll get what I'm saying. And all future cars will be autonomous. The autonomous flywheel means winner takes most, if not all. And most automakers will license FSD from Tesla or die trying to do something else. Eventually they won't matter anyway. The technology of FSD, after all, you know, cars are basically robots with wheels. This is transferable to their humanoid project. And these humanoid robots, the demand for them is going to be unlimited, as much as can be produced, as much as there is need for, you know, manual labor, there will be need for these humanoid robots. Only Tesla has best in class, both AI and manufacturing capabilities has, you know, close to$50 billion in assets in terms of mass manufacturing assets. And nothing comes close to that. So it has the best chance of winning the humanoid race in my assessment. And then the vertically integrated energy storage production adds hundreds of billions of dollars to potential market cap on its own. And with that, I want to, I read this tweet, and I thought it was interesting to remind everyone, you know, for people who are thinking about Tesla as any other car company or just another company, this person is saying he purchased Apple, he purchased Apple, sold it when it doubled, missed a 10 bagger, purchased Amazon, sold it when it doubled, missed a 10 bagger. He already did a 10 bagger with Tesla, sold some to enjoy life. There may be another 10 bagger from here for Tesla. And I happen to agree with it. Before the earnings came out, people were at peak pessimism. And we were buying for our PIF growth portfolio, additional Tesla shares, and we will continue to buy. So for those who are asking if we are, if they're too late, I don't think it's too late. We're going to be continuing to buy in this generational company. And we're not going to try and pick up pennies in front of a steamroller. You know, some people were mentioning that, oh, hey, look, the charts look bearish, where the support is at 100, support is at 110. It's downhill from here. Pessim is through the roof. This was the time when I was urging PIF members to not listen to that. Focus on the signal and not the noise. The signal is clear for who knows what to listen to. And hopefully this live has helped you focus on the signal and not the noise. And with that, if you want to become part of our family, do consider becoming a PIF member. We'd love to have you as part of our family. And I'll take some questions. Salam alaikum. Too late to buy Tesla? Just answered that. No, I do not think it's too late to buy Tesla. And I will be updating our buy price for PIF members soon. I will be updating the sell price for Iris Energy inshallah for PIF members soon. To what extent do you agree with Zoya Shira compliance? They have NVIDIA and other AI related companies classified as compliant. Any advice for AI stocks? So regarding NVIDIA, we had this conversation with PIF members. We were actually very close to adding it. SubhanAllah, above where it is right now. We were actually very close to adding it. And we decided not to because it has some pretty major operations in Israel and we didn't want to be supporting those operations. So we decided not to invest. So I don't know if Zoya looks at that or not, but that was our assessment. But AI in and of itself, I don't think there's anything objectionable of AI in and of itself. It obviously can be used for good and can be used for bad, just like a lot of things. But I don't think there's anything inherently bad about artificial intelligence, but we have to be very careful with it and how we develop it and the regulations that we build around it. With that, do leave a like. I really appreciate the likes. The last live likes were kind of lacking. So if we can make up for that in this video, that would be great. Thank you all for tuning in and until next time, take care of yourself. Assalamualaikum and peace be upon you all.