Legacy autos vs EVs

Investment Analysis Clubs Macro Economic Trends and Risks
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How does this sound to you? Replace “Auto” with “horse carriage” and “ICE production to EV production” with “horses to motors”. I’m sure people then said all the same things about how customers would still have to sit on seats.

Except there’s now lots of evidence that this won’t be analogous to horse-drawn carriages. By the time 20% of the horse-drawn carriage market had been replaced with automobiles, it was pretty obvious that the carpenters who made carriages wouldn’t be making the transition to making automobiles. But that’s not what’s happening today. Most of the EV’s being made today are being made by Legacy automobile companies - not start-ups.

So it’s not replacing “auto” with “horse carriage.” It’s replacing “auto” with “dot-matrix printers” or “CRT televisions,” and substituting in “laser printers” and “flat-screen TV’s.” Products where incumbent companies had no problems retooling their manufacturing processes - even though the guts of their machines were now completely different - in order to shift to new technology. Your analogy is simply not borne out by the production figures.

We’ve passed through the phase where it was remotely possible that this transition would end up being like horse-drawn carriages. There’s literally millions more EV’s that will be made this year by Legacy Auto than by start-ups (depending on how you want to categorize new companies that are partnerships of Legacy manufacturers like SGMW). The Legacy manufacturers have been increasing their share of global production of EV’s for the last several years, and that’s likely to keep going forward.

Albaby

**I know you’re making it up for rhetorical purposes, so I won’t ask for a link - but I’d actually be surprised if anyone back in the day argued that the horse-drawn carriage manufacturers were going to end up making automobiles.

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82

I don’t think that matters. With a 12 month forward PE north of 100, the current market price has gotten way ahead of any reasonable value, no matter how you are looking at the company.

There are companies losing money and their P/E ratio is beyond infinity. How come people buy them?

The Captain
wonders why people get married to magic numbers…

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83

There are dozens which are cheaper to buy.

Not for anything vaguely equivalent.

more expensive and difficult to maintain,

That is not true, but I’m sure you have documentation that proves it. You do, don’t you?

Well, Tesla’s maintenance schedule is pretty minimal (see https://www.tesla.com/support/car-maintenance). I certainly haven’t looked at all other EV’s, but the ones I have seem to have a bunch of other stuff to help keep their dealers busy. So, longer lists of stuff and visits to the dealer seem to indicate more difficult and expensive.

And, of course, there are recalls. Tesla has fewer recalls than anybody else (https://graphics.reuters.com/TESLA-RECALLS/byprjxgqnpe/index…). Not sure about EVs in particular. And almost all of Tesla’s have been handled with over-the-air updates, which almost nobody else does. I’m sure I got many of these, but I didn’t even notice. So yes, less expensive and easier to maintain.

And note that even if you need free warranty service, Tesla can often provide it with mobile service, where they come to your home or workplace and take care of the problem. Often without you even having to notice if you don’t want to, at least beyond scheduling the appointment and responding to a text message to two. Way easier than a visit to a service facility. Works for scheduled maintenance as well – no extra charge.

less capable,

Some are, some aren’t.

Surprisingly, all are. I mean, who else has as many games and other entertainment available? Not to mention Dog Mode. And do we include Fart Mode under entertainment?

Is safety, as in not dying when some idiot runs into you, a mark of being “capable”? Well, I’ll consider it so, and say that Teslas are the safest vehicles available. Mine has avoided accidents entirely by dodging an errant vehicle before I could even react. And Tesla’s basic autopilot, which comes with every car, is second to none.

more expensive to operate,

Another claim which should be demonstrated with evidence.

Well, it’s about efficiency. I haven’t looked up the numbers lately, but all you have to do is check out the MPGe numbers to see how many electrons you’ll have to put in the vehicle for a given distance (normalized for various things). Here’s one such recent collection of numbers (https://www.solarreviews.com/blog/tesla-mpge).

Then you have to consider what it costs to charge. That can vary quite a bit. But Tesla home charging and on-the-road supercharging is consistently the best around. Convenience, price, availability. The numbers are volatile, but the ordering is consistent. Lots of reviews out there. You can decide who to believe.

etc. Admittedly, some people prefer the styling, and some form factors are available that Tesla doesn’t yet make.

Sure, like SUV’s, the dominant platform, and pickups, the second most popular platform in the ICE world, both of which are now available as EVs, while Tesla continues to make sedans.

Not really sure what an SUV is. Seems as though sometimes the Model X and Model Y are classified as SUVs, or crossovers, or something like that. But yes, Tesla has a lot of opportunity ahead of it as it moves into supplying new form factors.

-IGU-

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84

Exactly. Half of all vehicle sales in TX are trucks. Rivian, Ford, GM have EV pickups

Yeah, should be interesting to see what happens when Tesla starts producing the Cybertruck in 2023. I’m not a truck guy, so I really have no useful personal opinion on the subject.

But, I’ll predict, given what I’ve seen of Tesla, and what I’ve read from truck guys, that Tesla will be production constrained on Cybertrucks for the foreseeable future. And they will outsell all other trucks as soon as Tesla can make more than other trucks sell. When that will be will depend on how fast the sales of other trucks crash.

It’s pretty remarkable how tastes change. When the Cybertruck proves to provide truck owners with more and better of what they want, they’ll quickly decide it’s great looking and what currently looks like a truck will look horribly dated. Think Blackberry.

And, no, none of this is arguable. It’s all opinion and we’ll see what we see when we see it.

-IGU-

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“It’s pretty remarkable how tastes change. When the Cybertruck proves to provide truck owners with more and better of what they want, they’ll quickly decide it’s great looking and what currently looks like a truck will look horribly dated. Think Blackberry.”

Detroit has spun out dozens of variants on trucks. From the half trucks that look like a car in front and a truck bed in back…to mini-trucks like the Ford Ranger.

The mini-trucks are still around and still being pumped out.

Somehow I’m not sure that those that buy trucks will be in love with the sloping panels of the Cybertruck. Most want a truck that they can pound to death on horrible farm roads, one that can haul windows and glass on side frames, haul lawn equipment and tractors in the back bed, or ATVs, etc. Workhorses.

Some with basic engines. Some with monster engines for hauling 10,000 lb trailers/mobile homes/5th wheelers.

Maybe a winch on the front…light bar on top…winch on the back…

Tesla has YET to produce the CyberTruck.

Meanwhile, a Model Y doesn’t have high ground clearance. Likely won’t do well on rutted roads or through mud/snow. Plus it’s 60K to start…and it’s not really a ‘hatch back’…

Other than Tesla fanatics, I’m not sure how much, if any, of the pickup market they will get.

https://www.youtube.com/watch?v=a7RWJu7RNWU

THe F-150 Lightning drives ‘like a truck’ and isn’t moving from a regular ‘cockpit’ to a ‘truck’ with all electronics, big computer screen instead of dashboard…an easy transition for truck drivers of all sorts. You think Joe contractor lawn service, Harry Farm worker, Jake the Plumber, want to go from a regular truck to a CyberTruck, needed five hours of instructions to figure out how to turn on the lights, set the heater, find the parking brake, etc?

t.

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86

wonders why people get married to magic numbers…

I’m not married to any magic number. It’s just one of many tools to evaluate a company for investment. But you already know that.

Tesla is profitable now. So the straw man you posit is irrelevant.

I do agree with IGU that Tesla is a growth play. That’s fine. I’m just pointing out that an awful lot of sales and earnings growth is already included in the stock price. Any miss to that expected growth will likely get punished in the stock price.

If they finally roll out the Cybertruck and it doesn’t live up to the high expectations, that will be a problem. If the self driving never pans out, that will be a problem. If their CEO makes another faux pas with the SEC and starts costing the company some actual fines, that will be a problem.

In short, the stock is priced for a very rosy future. For the price to go up further, (beyond just inflation), that future needs to get rosy-er. It might do that, sure. But I’d hazard a guess that there are a few very promising companies out there at better prices and more room to grow.

As Kenny Rogers said, you gotta know when to hold ‘em, know when to fold ‘em.

I suggest it may be time to fold ‘em. The current price is pretty good, and there are probably better places to get your next 10 bagger.

—Peter

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Most want a truck that they can pound to death on horrible farm roads, one that can haul windows and glass on side frames, haul lawn equipment and tractors in the back bed, or ATVs, etc.

Actually, I suspect that the majority of pick up owners buy pickups because they think it fits their image. Once a year they might help a friend move a couch, but if they owned a vehicle that wouldn’t do that, they would just not volunteer or be asked.

And, if you actually look into the design of the CyberTruck, you will find that it is a whole lot more practical than you might expect.

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“Actually, I suspect that the majority of pick up owners buy pickups because they think it fits their image. Once a year they might help a friend move a couch, but if they owned a vehicle that wouldn’t do that, they would just not volunteer or be asked.”

Wrong. A small segment buys a big truck…but go to any rural town in TX and half the vehicles are work vehicles and are trucks. Maybe 80% in some places. Come evening, and the bar parking lot/area is 90% trucks on weekends.

Sure, around the suburbs, you got a few ‘urban cowboys’… but most have a trailer hitch on the back to tow the boat or ATV trailer… and are a pain to park. Maybe 5% of vehicles in my suburb are trucks at commuting time. Most of them work trucks.

There are zillions of hatch backs and SUVs… and occasional Teslas… one in 200 cars maybe…

t.

89

https://www.tesla.com/cybertruck

You’ll note that it really doesn’t haul much in the bed…

And they show it towing a big trailer …but where are the side mirrors extended you see to see BEHIND the trailer or along side the trailer to figure out how to lane change, duh! or even a boat or ATV trailer…or horse trailer…

It’s a toy…

It’s not going to replace the work truck or the farm truck which is half the market in Texas where more pickups sold than any other state.

And…you think Joe Six Pack or Peter the Plumber or Terry the tree trimmer is going to want a tinker toy steering half wheel and lack of dashboard? and half size bed? hmmm…guess again…

Stakes in the sidewall to allow higher sides? Don’t think so.

Spare tire? Nope. But the F-150 lightning comes standard with one. What the rural folks want/need.

It will fit maybe 5% of the actual truck market - and at 60K…not be all that competitive probably.

camper version - gimme a break… a small camper van will outdo it…maybe good for a tailgate at the ballgame but not much more.

t.

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90

With a 12 month forward PE north of 100, the current market price has gotten way ahead of any reasonable value, no matter how you are looking at the company.

Do you have a link for that?
I think that number is closer to the trailing PE. Last I looked the forward PE was about 70 or 75.

But it probably makes no difference because fast growing companies tend to never have a PE ratio that makes sense to anyone who invests by looking at the PE ratio.
This is one of TMF’s recurring themes in the Rule Breaker portfolio which you can hear about for free on their podcasts. By the time the PE ratio makes sense the companies (like Amazon, Netflix, Tesla, etc) have already gained 10x or 25x in value.

Mike

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And…you think Joe Six Pack or Peter the Plumber

I’m having trouble following you. Last time it was Jake the Plumber wasn’t it?

Mike

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Harris Ranch is a weird place. Good steaks, but do you really want to smell the manure of 50,000 cattle before you enter the restaurant?

The meat processing plant is about 3.5 miles north of Harris Ranch restaurant so you don’t even notice it.
I think a decade or two ago it was closer but they must have moved it.

Mike

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Do you have a link for that?
I think that number is closer to the trailing PE. Last I looked the forward PE was about 70 or 75.

You are correct. It is the trailing PE that’s just over 100. The forward PE is more in line with your figures.

But it probably makes no difference

Quite correct.

because fast growing companies tend to never have a PE ratio that makes sense to anyone who invests by looking at the PE ratio.

It’s not that they don’t make sense. PE ratios usually do make sense. When a PE ratio gets outside of a fairly narrow “normal” range (let’s call it 10-30, knowing that we could argue about what “normal” is until the cows come home without actually learning anything), it’s a sign that you need to dig into the company further. You need to know why the PE ratio is what it is. Heck, you should probably know why it is what it is for any given ratio.

Is it a company that had an exceptionally good or bad year/quarter, making the very recent E part of the ratio significantly different from near or long term future expectations? Is it a growth company where the E is growing rapidly, driving the ratio up? Are earnings pretty much in line and its the P that has gotten out of line?

In my tax work, I often talk with my clients about investments. I am not licensed to advise them, but I can discuss things. So I try to understand many different ways of investing, even if I’m not inclined to use them for myself.

There’s nothing wrong with growth investing. It takes a certain amount of work, including good discipline about paying attention to the stocks you own to make sure the expected growth is still on track. If that growth gets off track, the price of the stock can fall quite quickly.

In the case of Tesla, there are some risks which the more rabid fans tend to dismiss. I see it as important to discuss those risks when the topic comes up. And one of those risks is that Tesla is currently priced for an awful lot of growth. Anything that puts that growth off track will very quickly be reflected in the stock price.

My point is not that any particular PE is good or bad. It is just an indicator that helps you figure out what risks you are taking on when buying a stock. The risks in a high PE company are different from the risks in a low PE company. The risks in one high PE company can be different from the risks in another high PE company. If you aren’t aware of those risks and don’t understand them, you can easily get results that are significantly different from your expectations. PE is just a tool to help you figure out what things to look for so you can understand the risks of investing in the company.

Earlier in the thread someone asked which company I’d prefer, Tesla or a legacy automaker. Since I’m not a high risk investor, I answered quite truthfully that I’d take the company with a PE ratio under 100 (having checked to make sure that Tesla was still over 100 and that a few of the obvious alternatives were comfortably under 100). Perhaps now you understand why I said that. Of course, it was a little dig at Tesla investors. Nothing wrong with that. But it also correctly states which company I’d prefer for myself.

–Peter

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94

With a 12 month forward PE north of 100, the current market price has gotten way ahead of any reasonable value, no matter how you are looking at the company.

Not necessarily. Tesla in 2021-2022 showed an automotive gross profit margin of about 30%. In comparison, VW and Toyota had gross margins of between 17-20%. That is an enormous business advantage that has been increasing with time. It suggests that the Tesla business model for EVs is substantially better than that of the largest legacy automakers.

Now consider that EVs currently make up 3% of US auto sales, which is expected to grow to 30% in 10 years.

The combination of a superior business model in a rapidly expanding market justifies a very high PE. It is Amazon all over again.

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95

The combination of a superior business model in a rapidly expanding market justifies a very high PE.

I agree. But how much higher?

Let’s compare to the world’s biggest auto maker, Toyota.

Toyota’s recent TTM profits are $2.6 Trillion. (Yes, I’m being careful to the the units right.)

For Tesla, that number is $9.5 Billion.

On the other hand, Tesla’s market cap is is in the neighborhood of $890 Billion. Toyota’s market cap is $207 Billion.

(All these numbers are from Yahoo finance. Yes, I know their data isn’t the greatest. But it’s good enough for this)

Tesla needs to grow their profits by orders of magnitude to get to Toyota’s profits. Let’s say Tesla can grow their annual profits by 50% per year for the next 10 years. That’s a lot of growth. It gets them to $547 billion of profits 10 years from now. Let’s assume their growth slows somewhat at that point, to 25% per year. That would take another 7 years to get to Toyota’s profits today. That’s 17 years of pretty big growth just to catch up to the world’s largest auto maker.

But let’s not forget that Tesla is valued at 4+ times Toyota. So using this simplistic method, after 17 years of very large growth, Tesla has caught up to Toyota’s profits. But today’s value is 4 times that of Toyota.

What? That growth rate is too slow? OK. How about Tesla doubles profits for the next 5 years, then slows to 50% annual growth. That’s still 10 years to get to Toyota’s profits. But the price today is still 4 times the price for Toyota.

Even that’s too slow? OK. Double profits each year for the next 8 years. That gets you to roughly Toyota’s profits today. And the price today is still 4 times that of Toyota.

This is what I mean when I say that Tesla stock price has gotten way ahead of any reasonable value. Even when stipulating that Tesla has some pretty good magic sauce that gives it significant advantages over the competition.

So, yes, Tesla has business advantages. Yes, Tesla should have a high PE. Yes, Tesla is going to grow a lot. But no, Tesla is not worth the current price. The current price is based on perfect execution by Tesla for the next decade (give or take a bit), plus inaction by the competition during that time. I think the odds of both of those things happening is pretty darn low.

–Peter

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In the case of Tesla, there are some risks which the more rabid fans tend to dismiss. I see it as important to discuss those risks when the topic comes up. And one of those risks is that Tesla is currently priced for an awful lot of growth. Anything that puts that growth off track will very quickly be reflected in the stock price.

Tesla has been growing at around their stated goal of increasing car sales about 50%+ per year. With a year long backlog on many models and two new factories ramping up and a coming expansion in China they can relatively easily make that goal. 50% growth for just two years is 2.25x top line sales. If the stock price were to not change and margins remain the same that 75 fwd PE comes down to a very reasonable 33.
This only requires minimal new expenditures relative to what is in place. But they also have the Cybertruck launch and ramp and the semi truck launch and ramp. These could be delayed or flop but don’t really factor in the Model 3 and Y production expansion.

Tesla could also get hit with supply chain issues. But the past 2 years have shown how nimble Tesla has been in this regard compared to the legacy guys growing by a lot.
They could also fail to get battery supplies. But long time battery partner Panasonic was going to pick between Kansas and Oklahoma for a $4b factory to supply the Austin Tesla factory. It now appears that they will build both. They must know something.
One thing is certain…EV sales worldwide is increasing and can grow and grow to whoever has the capacity to make and deliver them.

All the other stuff Tesla is working on I consider noise or possible upside…AutoPilot, solar, grid batteries, AI, robots.

But a PE of (fwd) 75 - (trailing) 100 ish is not big deal…it was 200 or 300 I think back when Covid started.

Mike

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97

“Toyota’s recent TTM profits are $2.6 Trillion. (Yes, I’m being careful to the the units right.)”

2.6 trillion Yen, not $… be more careful?

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Ptheland:

“ Toyota’s recent TTM profits are $2.6 Trillion…”

No company in the world has annual profits anywhere close to that. All the numbers in your Tesla comparison are off.

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2.6 trillion Yen, not $… be more careful?

Stupid yahoo. Top of page says US$. Which I noted. Middle of page changes to JP¥. Which I missed.

I’ll run corrected numbers in the AM.

Stupid, stupid, stupid.

—Peter <== feeling very stupid himself

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My point is not that any particular PE is good or bad. It is just an indicator that helps you figure out what risks you are taking on when buying a stock. The risks in a high PE company are different from the risks in a low PE company. The risks in one high PE company can be different from the risks in another high PE company. If you aren’t aware of those risks and don’t understand them, you can easily get results that are significantly different from your expectations. PE is just a tool to help you figure out what things to look for so you can understand the risks of investing in the company.

To sum up the above, “Invest in what you know and understand” which is time honored advice except you couch it in negative terms, “You can get burned if you don’t now what you are doing.”

I have been looking at P/E ratios for a very long time and they tend to fall into patterns. Low growth, low profitability companies tend to have low P/E ratios, i.e. auto makers under 15. Fast growing retail clusters between 30 and 50. Fast growth, high tech can have P/E ratios to infinity, some make it many don’t. The question is, “Does Tesla’s P/E make sense?”

The first question to answer is whether Tesla can survive. Before 2019/2020 it was questionable and TSLA was not a stock I would have bought as a long term investment. In fact I only started buying in late September 2020 after Tesla’s Battery Day when I became convinced that EVs had Crossed the Chasm. This is not a company event, it is a technology wide event, while Tesla was leading the real clincher was the number of incumbents trying to catch up. They certified that Tesla was on the right track! Up to this time P/E or no P/E was irrelevant.

Once Tesla became earnings positive the question about P/E was not as a static number but as a decreasing number, how fast is it dropping? What is often overlooked is the high growth is usually measured by revenue and if the company is well run the Net Margin grows much faster than Gross Margin. Tesla car sales have been growing upward of 50% and Net Margin by 100%. Can this be sustained? Tesla is production constrained as evidenced by the long delivery times and they just brought online two new Giga-Factories in Texas and Berlin, expanded Shanghai, and the Fremont factory became the largest car producer in North America. Elon Musk said a new Giga factory would be announced later this year – beware Elon Time!

Non of the above takes into account the other products and services in Tesla’s pipeline, facilities making SuperChargers, PowerWalls, MegaPacks, SunRoofTiles, Dojo computer, AI neural network training, insurance, personal robots… but Mr. Market takes notice and prices the stock accordingly.

Instead of fixating on a magic number take out your spreadsheet and model an “S” curve growth, the bottom at 15% market penetration (of all motor vehicles) and the top at around 85%. The total worldwide car market is around some 85 million vehicles. 85% is 72 million. Tesla’s aim of 20 million by 2030 is a market share of 28%, high but doable. Technology companies have been known to control well over 50% market share but I think in autos it is a stretch. This spreadsheet should tell you how the P/E compression is likely to play out. Now you can decide if a TTM P/E of 100 is a buy or a sell for you. The yardstick is not the P/E ratio buy your future CAGR.

BTW, which of the other Tesla initiatives is likely to generate “S” curves? Robots? Grid storage? Autonomous driving?

There’s nothing wrong with growth investing.

There is a lot right, it beats value investing…

NASDAQ vs. S&P 500: https://bigcharts.marketwatch.com/advchart/frames/frames.asp…

…if you can stand the volatility!

The Captain

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