 Five or six years ago, Tesla was in a life-or-death situation. But fast forward today and the company has industry-leading margins and consistent free cash flows. But the stock price performance stalled for the past three years. In this video, I will look at different tailwinds that can help Tesla. By the way, this is part two in a video series on Tesla. In my previous video, I compared Tesla to BYD, a Chinese car maker that is taking the world of EVs by storm. I linked it here. In my future videos, I will look at risks for Tesla and put everything together. It is impossible to talk about Tesla without triggering some strong emotions. The investment community is very polarized. So in this video series, my goal is to show different sides to the story in a as much unbiased manner as humanly possible. Before we begin, I want to point out that Tesla has been free cash flow positive for the past five years. This has changed its narrative in a big way. Now, Tesla can self-sufficiently fund its capital expenditures with operating cash flows. Moreover, the company sits on a big pile of cash, which stands at a staggering $29 billion. Tesla earned a whopping $1.1 billion in interest income on it in 2023. With that much dry power, Tesla can undertake many projects and survive a slowdown. The first new term catalyst is not a cyber truck. Actually, it's a Tesla's lithium refinery that is being built in Corpus Christi, Texas. The factory is expected to reach full production capacity of battery-grade lithium hydroxide by 2025. The expected capacity is 50 gigawatt hours per year. This production volume can support up to 1 million EV passenger cars. In comparison, Tesla produced 1.8 million cars in 2023. So this refinery will support roughly 40-50% of the current production volume. Why is this important? It is important because refined lithium is the biggest chalk point in EV production. Mining lithium is not really a problem. The mineral is widely available around the world with the biggest proven deposits in Chile and Australia. But refining lithium into lithium hydroxide or lithium carbonate is a completely different matter. The process is much more involved and costly. China controls over 70% of lithium refining and many EV makers rely on Chinese imports. Here's what Musk had to say about this. So it's basically like minting money right now. There's like software margins in lithium processing right now. So I would really like to encourage once again entrepreneurs to enter the lithium refining business. You can't lose. It's licensed to print money. Because of constrained supply, Tesla decided to enter lithium refining on its own. Such step will allow it to ramp up its production even faster. Heck, they even can expand their lithium refining capacity even more if it turns out success. Of course, it's not clear if refining will cost more or less compared to buying. How will refining its own lithium help Tesla? Actually in many ways. First, they will be able to ramp up their production, so more sales. Second, if refining lithium will generate lower costs, so their cost savings, so potentially higher margin. Of course, Tesla, if it has more cost savings, it will have a desire to pass on those savings to consumers in the form of lower prices. So this will make its cars more competitive and perhaps generate higher sales, but maybe at the same or slightly higher margins. So there's that. But there's another benefit. If, say, there is a dispute between China and the US, Tesla will have its own supply of refined lithium, so there is a security advantage of going in that direction. The second bullish development for Tesla is its own 4680 batteries. Almost all car makers in the US and around the world rely on foreign companies to supply battery cells for them. So it's impressive that Tesla figured out its own competitive design of EV batteries. Moreover, 4680 batteries may cost 50% less, have higher driving range, charge faster, and be safer. The batteries are already in production ramp in Texas. So what kind of financial impact these 4680 batteries will have on Tesla? First, their potential savings, so higher margin. Going this way, Tesla will have to invest, of course, but the payoff is the margin that Tesla saves by not having to buy batteries from its suppliers, such as CATL. And of course, having its own battery supplies, it can ramp up production faster and increase its sales. Moreover, the 4680 batteries can be used in many other products, not only cars. For instance, these include energy storage solutions, such as mega packs or power walls. They can also be used in Tesla semi-trucks as well as other models of passenger cars. Before that, Tesla had to choose where to put its efforts and not to spread out its efforts into many other products, because the battery cell supply was the biggest constraint on them. Asked why Tesla is not producing other car models, here's what Elon Musk said. Well, it doesn't really help if all you're doing is shuffling around the batteries from one car to another. In fact, it hurts because you add complexity but you don't add incremental volume. So it's sort of pointless, in fact, like counterproductive to add model complexity without solving the availability of lithium-ion batteries. I think Musk is onto something here with this vertical integration. It allows Tesla to shed its dependence on others and not to be volume constrained as much as it was in the past. As of now, the 4680 battery production and cost savings are not really reflected in the financial statements. But they, coupled with lithium refining, will be a big payoff potentially for the Tesla in the next 2 or 3 years. The other positive factor is Tesla's next-generation platform. Tesla will use it to produce its new inexpensive cars that should cost around $25,000. The new platform will use everything that Tesla learned before and more. Tesla is known for its car manufacturing innovations. These include single-unit castings and 48-volt architecture. These innovations allow Tesla to reduce its robotic human and factory footprint. For instance, producing vehicles in 2022 required 70% less welding robots than in 2016. Of course, the farther we go, the rate of improvement may slow down. So the next-generation platform will be a leap forward. As you may know, Tesla achieves its cost reductions through economies of scale and better tech. While achieving economies of scale is often a function of time and volume, tech is what matters most. While details are scarce, here's what to know about the next-generation platform. First, car power trains will not use rare earth materials without performance compromises. This is important because rare earth minerals are very expensive. Moreover, Chinese companies control over 60% of rare earth refining. China used export quotas for rare earth minerals before, causing supply shortages. Second, Tesla will use the so-called unboxed process in its next-generation platform. The unboxed process uses sub-assembly lines that run in parallel. Then workers and robots put everything together into a finished product at the end. This is big because of substantial cost savings. Tesla was able to generate 50% cost reduction from its previous platform iteration. Here's a graph showing cost of cars sold per unit. It was over $65,000 in 2017, fast forward to 2023, and this number stands at around $36,000 in Q4 of 2023. Of course, some of this reduction is due to lower prices for minerals such as lithium or cobalt or nickel. Tesla is aiming for another 50% cost reduction, and they may be able to achieve it. Such production improvements can carry over to other products such as cyber truck and semi-trucks. The financial effect could be profound, especially on the profit margins. Tesla can capture these savings or lower its prices depending on the competition. This will make its cars more affordable and more competitive. Another tailwind is the upcoming production ramp in Gigafactory Nevada for semi-trucks. The company is aiming for the production of 50,000 of semi-trucks in North America in the next year or two. The semi-trucks they have their own demand, mostly coming from industrial or retail companies. Tesla has already delivered some of these trucks back in December 2022 to Pepsi-Cola. Here's what to know about Tesla semi-trucks. The semi should be three times more powerful than a diesel truck with a range of 500 miles on an even surface with a full load. Of course, charging these trucks will remain an issue for some time. So at the beginning, application of semi-trucks will be somewhat limited in nature. As for the price, the semi will cost from 150,000 to 250,000 depending on specs. The jury is still out there on the value of Tesla semi's. They may or may not have a lower cost of ownership compared to diesel trucks. It all will depend on the performance of the 4680 batteries, cost of electricity and repairs and maintenance. For now, the drive to go green is what compels companies such as Pepsi-Cola to buy into EV semi-trucks. But judging from Tesla's passenger cars, Tesla semi's may at least match diesel trucks. And this will be especially true if the cost of batteries comes down. But again, the jury is still out. For now, there are likely a few of them on the roads. Tesla has been testing grounds with a few pilot programs, such as the one with Pepsi-Cola. So once they get the real-life data, they will likely ramp up the production of Tesla semi's in the next several years. The final near-term bullish factor is the take-off of Tesla's energy storage business. Tesla produces mega-packs that utility and industrial clients buy for energy storage. These mega-packs are about the size of a cargo container and can store over three megawatt hours of energy. This can be enough to power 3,600 homes for an hour according to Tesla. Tesla's storage solutions also include smaller power walls for home use too. Tesla delivered 14.7 gigawatt hours of batteries in 2023. That was 125% growth in comparison to 6.5 gigawatt hours a year before. Here's what Elon Musk had to say about this. We'll continue to see very strong growth in storage as predicted. I said for many years that the storage business would grow much faster than the car business and it's doing that. The energy storage revenues grew from $3.9 billion in 2022 to $6 billion in 2023. The gross margin improved substantially too from 7% to almost 19% in 2023. So this line of business not only grew but also contributed $1.1 billion in gross profit. To put things in perspective, $1.1 billion accounted for 6% of Tesla's total gross margin. This may not seem like much, but if the sale of mega-packs scales up, the margin contribution can explode. Of course, these revenues are lumpy. This means that some years may not see much while others will produce large growth. As of now, Tesla is using primarily battery cells from Chinese CATL for its mega-packs. This adds extra cost and lowers its margin. Elon Musk said that Tesla plans to use 4680 batteries instead of CATL at some point. If 4680 batteries turn out to be cheaper, Tesla can improve its margins even further. There is another honorable mention. Other car makers will start to use Tesla's supercharging network beginning in 2024 and beyond. Tesla may generate revenues in the realm of $10-20 billion by 2030. This is according to forecasts from Dan Ives from VetBush Securities. According to Mr. Ives, these numbers will represent 3-6% of Tesla's total revenue by that time. I have not seen his calculations and it's difficult to comment on this. But at the end of the day, what matters is margin. Who cares if they break even or earn zero? It's very unlikely that Tesla will earn excess profits on its supercharging network. And this is all because there are other companies that are in the charging business. So competition is likely to be high. There is likely another reason behind Tesla's opening its supercharging networks and that is to increase the appeal of EV adoption among consumers. Maybe Tesla in the future can earn some profits from its supercharging network, but it's very likely it will be much. So these were the near-term catalysts. But what about Tesla's moonshots? There are many. And this could be the reason why the market prices Tesla more as a software company rather than a car maker. And let me stress here that these moonshots are high-risk, high-reward projects that can either flop or cause an explosion in Tesla's valuation in the future. Probably a very distant future. The first moonshot is full self-driving software. The goal here is to achieve level 5 autonomous driving. And once this level 5 gets achieved, Elon Musk envisions many users for this software. First, consumers will want to license FSD from Tesla to drive them around. Second, this software can transform any car into a robot taxi that can drive itself around and earn money for its owners. And finally, Tesla can license this software to other car makers and earn money that way. Of course, there are many hurdles to this moonshot. For starters, it needs to be approved by regulatory authorities, and this has been a challenge for now. But the main question is at what point FSD will be considered safe and reliable? Elon Musk calls this a March of Nines, meaning what should be the level of reliability and safety for FSD, that it deems to be safe and reliable? Is it 99.999% or is it 99.99999%, so it's not clear. The second moonshot is the robot called Optimus. Tesla unveiled it in 2021 and there was some progress since then. Optimus is a general-purpose robot that Tesla will likely use in its own factories first. This humanoid robot will replace humans for repetitive and mundane tasks. Later, Musk envisions that Optimus can replace humans entirely for certain industrial tasks. Imagine a future where robots produce robots and do much of manufacturing and more. It may sound far-fetched and perhaps funny, but it looks more possible than ever. Many other companies are moving in that direction with automated robots. Take Amazon, for instance. Amazon is already using robots for many hauling tasks in its warehouses. For now, most of these robots look like boxes on wheels with limited limb capacity. But consider this. In 2024 BMW signed an agreement with a company that you may never heard of, which is Figure AI. Figure is also in the production of humanoid robots, which it will supply to BMW's factory in South Carolina. First, these robots today will perform some specialized tasks and BMW will later expand their usefulness to other more generalized tasks. So, as you can see, even other car makers see usefulness in humanoid robots today, not in some distant future. And this is the testament to the progress that has been made in AI and robotics in the last five or so years. The advantage of humanoid robots is that they can perform a much wider range of tasks. And their application can be not necessarily only in car making, but other general manufacturing too. This was possible thanks to progress in AI algorithms and AI infrastructure. And maybe we are getting very close to having a humanoid robot that can self-correct in certain complex tasks. Elon Musk once said that Optimus has the potential to be more significant than Tesla's vehicle business over time. First, Tesla will be able to use it in its own manufacturing. Second, it could produce and sell them to other companies too. The third moonshot is Dojo. Dojo is a supercomputer that Tesla developed in-house for AI video processing and object recognition. Dojo is primarily used for Tesla's full self-driving software and its training. But it can also be used for Optimus robot. Elon Musk said that Tesla cars are just robots on four wheels, so the same applies to Optimus. The core of Dojo is D1 chip, which is a general purpose CPUs. But Tesla designed D1 with only one purpose in mind, and that is to process video information at very fast speeds. Of course NVIDIA is viking when it comes to AI training with its GPU chips. Tesla hopes that Dojo not only will operate as fast, but also be energy efficient and cost less. After all, NVIDIA has a 70% gross margin that its customers pay, so there are cost savings there. Also Tesla thinks that it can potentially license the Dojo's computing power to others. Of course, this is a high- uncertainty project that even Elon Musk acknowledged himself. So it remains a pure speculation in a money-burning pit. And for now, Tesla still continues relying on NVIDIA's GPU chips to train its full self-driving software. In conclusion, Tesla continues chugging along as a car maker and an energy storage solution company. But the market prices Tesla as a software or technology company for the reasons as you just saw. Many other companies such as Google or Amazon started with one line of business. It could be bookselling or advertising. Later they had their own internal problems and they found their own internal solutions to these problems. For example, take Amazon's AWS. And later these companies realized that these solutions to their internal problems can be in demand by other customers. And the rest is just history. Or take NVIDIA for instance, they started as a pure play on GPUs used for gaming. Later they realized that their GPU chips can be used for AI training. And I don't know, this was known probably for like 10 years or so. But the adoption rate did not explode until 2022 or 2023. Certain tech needs time to get to certain level of development and usefulness before it takes off. But once it takes off, the stock market repricing turns dramatic and takes everyone by surprise. The same applies to Tesla. It could well be like Apple or Amazon in its early stages. Tesla will likely still be in the EV car making business. But its other moonshots such as Dojo, FSD or Optimus could overtake everything else. Of course, this is not guaranteed. In my next video I will talk about risks for Tesla, especially the near-term ones. So stay tuned for that. If you learned something useful today, please give this video a like and subscribe to my channel for more content on investing and personal finance. Thanks for watching.