Good morning! Today’s word count is 2,171 words, or a 10-minute read. Let’s get to it:
“U.S. stocks wavered, showing some further signs of stability after their recent run of declines,” WSJ writes.
- S&P 500: $3,307.95
- Nasdaq: $10,892.36
- Bitcoin: $10,487.58
- U.S. 10-Year: 0.681%
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Justin Oh’s Quick Read
Tesla stock ($TSLA) is trading down today because when expectations for announcements are high, many times stocks trade up in anticipation before the announcement and down afterward, something the industry refers to as “buy the rumor, sell the news.” But to me, Battery Day revealed an actual plan to make Tesla automobiles a better choice than any other car. I’ve run optimistic estimates through a quick DCF and am stamping a $450 Justin Oh “Fanboy” Target Price on $TSLA stock. So, if you are dead-set on investing behind clean energy vehicles, storage, and autonomous driving, then $TSLA is the one to buy, especially on today’s weakness. But at 12.5x optimistic estimates of 2025 gross profit, the stock is still extremely expensive. Compare $TSLA with Tattooed Chef ($FMCI), which has similar 30 percent gross margins but double the growth. $FMCI trades at 10x 2022 gross profit (if they continue their growth), so $FMCI will grow into its valuation 2.5x faster than $TSLA will.
Furthermore, I am concerned about Tesla’s sales over the next three years. I have no doubt they will continue strong growth, but they might not see transformational upside in sales growth until they deliver the cheaper batteries. As an anticipated buyer of a few Tesla vehicles myself, I find myself wanting to wait a few years to get the 500+ mile versions instead of buying in the next year. So, if you buy or own the stock, I would be ready for some whipsawing over the next couple of years as sales growth might taper off in the short-term but step up in the long-term once they deliver the vision.
Tesla “Shoots For The Moon” With Battery Day, Shareholder Meeting Promises
Elon Musk announced lofty production and sales goals and forthcoming advances to Tesla’s battery technology between Tesla’s annual shareholder meeting and ‘Battery Day’ on Tuesday. Here are the highlights:
Delivery Guidance and Production Goals
- Musk announced plans for Tesla to build an affordable electric car using significantly lower-cost batteries, priced at $25,000. He estimated it would be ready in around three years.
- Tesla aims to eventually hit an annual production level of 20 million vehicles, according to Musk, a steep rise after selling just 367,500 cars last year.
- By comparison, Volkswagen, the world’s bestselling individual auto company, sold around 10 million last year.
- Musk projects 30 percent to 40 percent in delivery growth this year, even amid pandemic conditions. The electric vehicle maker saw deliveries rise 50 percent last year.
- The electric automaker shipped 180,000 cars in the first half of 2020 and expects to push around 500,000 for the full year. Musk had previously promised to reach production levels of 500,000 in 2018 and one million in 2020.
Battery Tech Evolution
- Although Musk didn’t give exact price figures, Tesla’s cheaper batteries could be realized in about three years. Tesla showed off a new cell that “could allow the company to save money because they are faster to manufacture and use fewer materials while storing more energy.”
- It would improve vehicle range by 16 percent, while other changes — including the internal chemistry of the battery pack — will boost range by 54 percent.
- He projects to cut the cost around 56 percent, which would “suggest a price far below the $100 per [kilowatt-hour] threshold generally accepted for electric cars to reach price parity with gas-powered vehicles.”
- According to Benchmark Mineral Intelligence, Tesla’s battery costs for the Model 3 are roughly $100 per kWh.
- Tesla plans a massive volume spike in battery cell production in 2022, aiming to deliver triple the number of cells it made last year in its Nevada factory.
- Right now, Tesla sources 100 gigawatt-hours worth of cells from suppliers. By the end of this year, the company aims to produce 10 gigawatt-hours of new cells at its pilot plant.
- No announcement came for Tesla’s rumored “million mile” battery, which is expected to last one million miles over its lifespan.
Numbers To Consider
- Tesla stock closed at $424.23 Tuesday, with a market cap of $380.85 billion.
- Minutes after trading opened, it fell roughly 4.5 percent.
Justin Oh’s Two Cents
Let’s dissect a few things from Battery Day. A 56 percent reduction in battery cost per kWh achieved in the next three years is very impressive and shows a commanding lead in battery technology. This will allow for meaningful range boosts and the production of an economically-priced $25,000 sedan they can sell in significant volumes. They have finally shown me a path to comparative advantage over internal combustion engine (ICE) vehicles. If they achieve these battery goals, I have no hesitation believing they can hit $90 to $100 billion in revenues shortly after that. I do think the timeline is ambitious, and the more-optimistic equity research analysts are projecting $90 to 100 billion in revenue somewhere in the vicinity of 2025+. By that time, I’m confident that Tesla will have ample growth opportunities in trucks, autonomous vehicles, and energy storage. Assuming they can hold 30 percent gross margins, $TSLA trades at ~13.5x “optimistic” 2025 gross profit. I’ve also quickly run these potential cash flows through my Discounted Cash Flow (DCF) Model and am, for now, issuing a “fanboy” target price of $450 per share.
Read More: (WALL STREET JOURNAL)
Johnson & Johnson Begins Final-Stage Testing of Covid-19 Vaccine
Johnson & Johnson announced Wednesday it started a 60,000-person late-stage trial of its single-dose, experimental Covid-19 vaccine. The clinical study is testing volunteers on three continents — North America, South America and Africa — and is the fourth coronavirus vaccine candidate to enter “final-stage testing” in the U.S.
Why It Matters
J&J’s candidate has shown promising results in earlier trials.
- J&J Chief Scientific Officer Paul Stoffels said the candidate’s first study generated the expected immune responses and was generally well-tolerated (side-effects did include fever and flu-like symptoms, which are standard for vaccines).
- It’s known as a “viral vector shot because it uses a modified adenovirus—a virus that can cause the common cold—to deliver genetic instructions teaching the human immune system to build a defense against the coronavirus.”
- It’s an impressive timeline for the single-dose shot. J&J began developing the vaccine earlier this year, and “in July started the first study in humans in the U.S. and Belgium.”
With trials underway, an efficacy timeline comes into focus.
- The New Jersey-based company said it could glean “pivotal results” early next year.
- If the findings are positive, J&J could pursue emergency use approval from the government soon after.
- J&J is also working with the U.K. government on a separate late-stage study testing a two-dose version of the vaccine.
The U.S. government is invested in J&J’s success.
- Both the National Institutes of Health and the Department of Health and Human Services are helping fund the approximately $480 million study.
- J&J agreed to a $1 billion deal with the federal government to provide 100 million doses to the U.S. if regulators approve the vaccine.
- The budget of the government’s Warp Speed program, committing to hastening the vaccine development process, has grown to $18 billion from its original mark of $10 billion, according to Bloomberg.
The Covid-19 vaccine race looks to be in its final stretch.
- Moderna’s vaccine candidate, co-developed with the National Institute of Allergy and Infectious Diseases, started final-stage testing in July and has signed up 26,000 volunteers.
- The Pfizer-BioNTech candidate is also in the middle of late-stage trials, with 32,000 participants. Moderna and Pfizer could see preliminary results in October, but “possibly later.”
- AstraZeneca-Oxford had also begun a large-scale, but an unexpected safety issue has it on pause.
Numbers To Consider
- If all goes to plan, J&J expects to produce more than one billion doses worldwide during 2021.
- J&J stock opened at $144.69 Wednesday, with a market cap of $385.43 billion.
Justin Oh’s Two Cents
Going back to my analysis on Moderna ($MRNA), I loosely estimate the global COVID vaccine industry to be worth around $100 billion in an ongoing Endemic stage. At $146 per share, Johnson & Johnson ($JNJ) is trading at a $395 billion valuation. Even if they can take 25 percent of the Covid-19 vaccine industry, that would only represent a 6-7 percent upside potential in $JNJ stock. That being said, $JNJ is a dominant and stable business trading at a reasonable 12.5x 2021 estimated EBITDA. It carries an over 5 percent free cash flow yield and is a good choice as a “defensive” stock in a frothy market.
Read More: (WALL STREET JOURNAL)
Number Crunch: Nike’s Sales Bounce Back From Coronavirus Slide
“Nike Inc.’s sales rebounded in the summer quarter after slumping earlier during the coronavirus pandemic, as rising digital sales offset declining revenue at traditional stores,” WSJ writes.
- The sports apparel company announced a revenue of $10.6 billion for the quarter ending Aug. 31. While the total figure dropped 1 percent year-over-year, digital sales rose 82 percent.
- The latest numbers demonstrate a significant about-face from the pandemic-ravaged spring quarter, where Nike revenue sank 38 percent. Nike’s share price increased 9 percent on the news, bordering all-time highs.
- Nike saw higher profits because of less marketing dollars spent on postponed or canceled sporting events, even as gross margins fell. It posted a quarterly net income of $1.52 billion, surpassing its year-ago mark of $1.37 billion.
- Direct sales also played a more prominent role for Nike this year. The company’s stores, website and apps generated $3.7 billion in revenue in the quarter, a 12 percent increase from last year.
- During the summer, Nike announced plans to scale back its workforce, a move not related to the pandemic but to improve its agility. It’s unclear how many workers Nike intends to lay off, which employed 75,400 people as of May 31.
Read More: (WALL STREET JOURNAL)
Worth Your Time
Tour De Drama: On Monday, Echelon Fitness announced its “Prime Bike,” a $500 exercise bike created “in collaboration with Amazon” as a budget alternative to Peloton’s high-priced products. But a day later, Amazon denied having “any formal connection to the so-called Prime Bike.” It’s hard to determine what happened here — the bike has since been removed from the Amazon website and the accompanying press release deleted — but it raises questions about the Echelon-Amazon relationship and what went wrong. (THE VERGE)
Robot Future: Someday, robots might take over the world. But in the nearer future, they may start covering the news for us. Microsoft has agreed to license OpenAI’s cutting edge GPT-3 artificial intelligence program that “grasps the intricacies of human language and can generate realistic-sounding news articles, among other tasks.” It’s the latest sign of a burgeoning relationship between Microsoft and the Elon Musk-co-founded startup OpenAI, working toward the long-term aspiration of creating AI software that “can reason and make decisions as humans do.”
The Wild West: The Justice Department is proposing new legislation to curb legal immunity for internet companies, such as Facebook, Google and Twitter. The new laws would force these companies to bear more responsibility for managing illicit conduct and content on their sites. It’s unlikely to see the changes come in an election year. However, Congress could pursue it in 2021. (WALL STREET JOURNAL)
“Jack Ma’s Ant Group Co. is aiming to raise $17.5 billion in its Hong Kong share sale and won’t seek to lock in cornerstone investors, confident there will be plenty of demand for one of the largest equity deals in the financial hub.”
ViacomCBS demonstrated renewed faith in Showtime’s standalone power, as the company announced the premium network would not be included in the launch plans for Paramount+.
Amazon is giving its products an edge by restricting some of its competitors’ ability to advertise for their smart speakers, video doorbells, and other devices on the online platform.
“A resurgent stock market and fiscal stimulus propelled the net worth of U.S. households to the highest level ever in the second quarter, despite a record drop in the previous three months caused by an economic shock from the pandemic.”
State-backed media outlets in China continue to denounce the proposed U.S.-controlled, joint venture version of TikTok, “ratcheting up pressure” on ByteDance.
Mirakl, a French e-commerce marketplace startup, raised $300 million in its latest round of funding, valuing the company at $1.5 billion.
A star-studded list of investors, such as Mark Cuban, Robert Downey Jr., Gwyneth Paltrow and Ashton Kutcher, among others, are investing in Cloud Paper, a company trying to get consumers to switch to environmentally-friendly, bamboo-based toilet paper.
Mortgage demand from homebuyers has exploded to the tune of a 25 percent increase year-over-year.