On Tesla: Products, CEO, Hardware, Valuation

Investment Analysis Clubs Saul’s Investing Discussions
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Moving this to its own thread to hopefully avoid clogging up Saul’s great End Of Month Summary thread.

While I have a large TSLA position, I don’t bang the table on it as an investment for most people. It can be a hard company to own. But, for those that have the stomach, here are some reasons to own TSLA:

  1. Tesla makes great products, as Saul’s comment about people who own the vehicle “giving up all rational thinking about the value of the company” shows. For years people have been pointing to eventual competition for Tesla, but today, with pretty decent EVs from Ford (Mach-e), VW (ID.4), Hyunday (Ioniq), Kia (EV6), and even BMW (i4, i5, i7 & iX) and Mercedes (EQE, EQS), Tesla still outsells everyone. Heck, in California, Tesla has the top two selling cars of any car. this year, and the 3rd place Camry is pretty far behind. But, it’s not just crazy California, Tesla’s Model Y was the best selling car of any kind in Europe for the first half of this year.

  2. I totally get concerns over the CEO’s tweets. But, I think it really is just his tweets. If you look at his Tesla decisions, many were controversial at the time (building its own charging network in 2011, building a “GigaFactory” in Nevada when Tesla was only selling 19k cars a year,, building another gigafactory on a muddy lot in Shanghai, buying Solar City, not using lidar for autonomy, designing its own AI chips, etc. etc. all turned out to be great decisions. Moreover, of all the CEOs I follow, Musk is the only one who doesn’t make any decisions just to placate short-terming thinking Wall St. analysts. We all say we want a CEO who is making the right long term decisions for the company, and I’ll put Musk up against anyone on that metric. And yeah, I totally get that running Twitter has been a distraction for him that hasn’t helped, there is a pretty great management team under him keeping things humming.

  3. Saying “Tesla is a hardware company” today is like saying Amazon was an eCommerce company in 2008. Investing in TSLA isn’t just about the company selling more than 10m vehicles in 2030 and associated charging revenues from most EVs in the US, it’s about recurring software subscription revenue from autonomous driving, a potential lower-cost, human-driverless competitor to Uber/Lyft, an affordable robotic company (Optimus/Tesla Bot), and who knows what else from its AI leadership.

  4. As for valuation, see all of the above. Ford is still selling vehicles it admits aren’t optimal, VW can’t get its software act together and keeps delaying its new architecture, GM can’t make enough Ultium battery packs, etc. Tesla’s Cybertruck will likely outsell Ford’s F-150L next year. Tesla is working on a more affordable vehicle. The solar and energy storage business still has potential, autonomy and off-shoot AI products, robots, licensing not just of tech but actual AI capacity (its Dojo installation), etc.

I totally understand if people doubt all or even just most of the above potential expansion areas for Tesla. For me, Musk’s and Tesla’s track record is very good and while all of those potentials probably will not come to pass, I believe it only takes one of these to hit to make TSLA a great investment.

I go back to an old baseball analogy. In 1956, Mantle won the Triple Crown - leading the league in batting average, home runs and RBIs. But, he quipped that he should have won the Quadruple Crown since he also led in strike-outs!

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Excellent summary, Smorg. I’d suggest a few additional points:

  • Tesla’s energy storage business is likely to grow to be comparable to the vehicle manufacturing business (not including FSD revenues). Not soon, but in coming years. I realize you mentioned energy storage. I just wanted to emphasize the expectations Tesla has laid out.

  • I think its hard to build a case for Solar City being a “great decision” per your description. There is no evidence for significant growth in revenues or profits there. In fact, Tesla has even reduced geographic coverage in the US at least once.

  • Ford is on track to sell 750,000-800,000 F-series trucks in 2023. I don’t remember even the Tesla Shanghai plant ramping up to 500k units in the first year and it seems wildly optimistic to expect a faster rampup of the Cybertruck given the manufacturing difficulties that Tesla has telegraphed… even saying it’ll be a slow ramp. Obviously, you have a different view, but keep this alternative view in mind as we go through 2024 and we all see reality play out. That being said, the Cybertruck could well be a home run for Tesla… just not immediately. Note: For what its worth, Tesla has told suppliers to plan on 375k base volume: Tesla plans for 375,000 Cybertrucks per year, will have release candidates by late August | Electrek.

Have a great day! :slight_smile:

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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I count the energy storage business in that. While the power wall was developed at Tesla before the acquisition, I don’t think Tesla would have gotten near the same traction without solar or installers. And you just pointed out that Tesla expects that to grow storage “comparable” to vehicle production.

Notice I specifically said “F-150L.” I was comparing 2024 Cybertruck volume to the EV version of the F-150, not all F-150s.

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OK. For those unfamiliar with Tesla energy storage, the primary activity is manufacturing/delivery/proveout of utility scale storage systems that are already being installed in 100MW+ locations, not only for backup power, but… more importantly… for load balancing. This saves utilities GOBS of money. The current factory is scaling up to provide 40GHW (note GIGA) per year. At over $2 million for a ~ 3MWH unit, this would mean over $13 Billion revenue from the one factory and current margins are ~18%, with expectations at least in the mid 20% range. Call it ~$2.5 Billion profit from this one factory. The second one is planned for Shanghai… and many more are planned.
https://www.tesla.com/blog/introducing-megapack-utility-scale-energy-storage

Ahhh! I missed the “L”. I presume you are meaning Lightning. Heck yeah! Seeing as Ford Lightning sales are a bit less than 2,300 !! units through June, that’s a pretty low bar! And I have no doubt Tesla will exceed that, short of a global calamity.

I suppose we both (at least I do) expect Cybertruck to perhaps be draining a bit of noticeable volume from ALL US pickup truck sales (GM, Ford, Toyota, Nissan, Honda) in 2024, despite the slow ramp. And the comment from Jim Farley (Ford CEO) that Cybertruck is fine for sitting in front of a hotel while Ford builds real work trucks will start to not be so amusing to Ford somewhere around 2025/2026 when Cybertruck is running full tilt.

Just imagine… Ford had a negative ~59% margin on EVs (per 2Q results), will be slowly ramping up those EVs and they count on their highly profitable regular pickups that will slowly be losing sales… and scale (ie, costs rising) to actually turn a profit. Not a pretty picture!

I’ll be attending a Ford Vehicle Engineering picnic in Michigan on Thursday… driving up in my Tesla (again). I’m determined to be more low key about Tesla and Ford’s future than I have been in the past. They took it very well last year, probably because a good number of them are planning to retire soon. Even so, the more “business minded” ones of them (which are few) may be a bit sensitive and there is no point in upsetting them further.

But I might talk about Tesla’s plans for the Gen 3 vehicle coming from Mexico. The output from that plant will be devastating to the non-Chinese firms as it ramps up.

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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I also have a large TSLA position and don’t bang the table but I have a more expansive view of the company and its CEO.

About Musk, no doubt he is controversial but his management and leadership skills have been exceptional and not just at Tesla. Note: during ten years I was a founding partner of a management consulting firm. I give Elon Musk slack.

My view of Tesla is much broader than a car company. It started as a car company but soon branched out to what Stuart Kauffman, my favorite Complexity scientist, calls “the adjacent possible.”

  • Lead acid batteries were never going to make the grade. Tesla leaped into unknown territory with lithium ion batteries.
  • Adoption without infrastructure was unlikely, Tesla created a charging network.
  • The tree solutions to wind and solar intermittency are storage, transmission (the grid), and alternative fuels. Forget net zero carbon, it ain’t happening. Tesla got into storage and Virtual Power Plants (VPP).
  • EV insurance was too expensive. Tesla got into insurance lowering premiums by having better information about individual drivers, not just actuarial data.
  • Full self driving requires AI. Tesla designed the purpose-built Dojo supercomputer to train the neural networks. As an add on, the same AI will be used in the Optimist robot as are actuators and other technologies used in EVs. I expect that the return on investment in humanoid robots replacing not too skilled labor will be an order of magnitude higher than from EVs.

Quite simply, if it doesn’t blow up in the process, Tesla is a conglomerate growing into many huge addressable markets in the style of Amazon and Apple. Based on this view, for me Tesla has become a buy and forget stock until further notice.

Channeling Steve Jobs, “One more thing,” Tesla is funding international growth with internal free cashflow while competitors lose money on their EVs. Not long ago Sandy Munro said that Ford and VW were the two serious EV competitors in addition to China. Both are faltering, Ford just announced that they will prioritize hybrids. The price wars are hurting Tesla’s competition.

Denny Schlesinger

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I didn’t look at the numbers myself, but someone I trust did and came up with these 5 year (2017-2022) Revenue CAGRs:

Tesla 47.3%
VW Group 2.4%
Toyota 1.7%
GM 1.5%
Ford .1%

Tesla’s 47.3% Average Revenue growth per year for 5 years is pretty darn good for any business.

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Another interesting, useful, and insightful post by the captain.

Despite CEO quality (i.e. capability to burn in role, executive acumen, and fiduciary obligations to SH as a front and center priority) being my dominant variable for investing in stocks, I kept my distance from TSLA until the David Faber interview wherein he said he planned to remain as CEO, he would begin advertising, and that TSLA would have its ChatGPT moment this year or next with FSD as he elaborated on the Uber type robots and the subscription model for 10s of millions for robots.

He acknowledged missing dates in the past but always delivering however late. Some say he is a charlatan or a con man. I have high conviction he wants his legacy to be one that contributes to humanity in a way commensurate with his considerable talent.

Companies tend to grow or shrink to the size of top leadership, almost regardless of products and markets

I see TSLA as a $5 trillion company in 9 years in the absence of all out conflict with China, a deep and prolonged recession, or some global black swan. Musk asserts TSLA is the absolute leader in AI data and #1 beneficiary, and whoever is second is far in the distance.

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Tesla owner here, so biased of course. I have owned the stock at times and currently do not. Recently I’ve been pondering a different question as I observe TSLA using it’s economic advantages to inflict pain into the traditional automakers plans to enter EVs.

Simply put, traditional automakers have no choice but to enter bloodied waters and they need to achieve much higher volumes (economy of scale). Many of TSLA competitors are bankrolled (actively, or as a backstop) by their countries’ deep pockets.

So I do wonder, how lucrative TSLA’s car portion of the business can become. But I have almost no such wonder about how damaging it will be to the Automotive industry in whole. No matter how I look at it, the industry as a whole is in for major challenges. Is the better play betting against GM & Ford?

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The California New Car Dealers Association released a report on vehicle sales for first half of 2023. The top vehicles of any kind:

  1. Tesla Model Y at 74,765
  2. Tesla Model 3 at 41,718
  3. Toyota Camry at 27,169
  4. Toyota RAV4 at 26,032
  5. Ford F-Series Pickups at 21,288

In addition 1 out of every 5 vehicles sold was fully electric (actually 21.1%), and better than 1 out of every 8 was a Tesla!

For vehicles, typically CA is a leading indicator, except for pickups.

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What you seem to be missing is Tesla’s relentless drive to DRIVE DOWN costs which is what is causing the pain for all other car makers.

Sandy Munro is a great source because of his many years in the industry, he knows the old ways by heart as well as the new. The kindest I can say for the old culture is sclerotic. My experience in the car industry beyond owning about a dozen cars over the years is having installed an IBM computer at GM’s Caracas assembly plant in 1963. This contact lets one see quite deeply into the corporate culture. After I left IBM in 1965 GM was looking for an IT manager, back then called Data Processing (DP) manager. I really didn’t want the job but I went to the hiring interview. By this time I had five years exposure to the Data Processing industry and had seen many businesses from the inside including Orinoco Mining, the US Steel mining subsidiary in Venezuela. Based on this experience I knew what was needed to operate a successful DP department. During the interview I asked what level of authority and responsibility I would have. The interviewer responded by saying that even people with a decade or more tenure at GM would not be arrogant enough to ask such questions. That ended the interview. I got a job as Assistant DP manager at Colgate-Palmolive where management practices were not much better. At IBM I had a lot of independence within the company rules maybe because my managers knew a lot less about the technology. Business computers were a novelty at the time, 1960-65.

In the old days GM was competing with other sclerotic car makers but suddenly incumbents are now competing with someone who threw tradition in the trash can and it’s going to take them a whole lot of effort to catchup with the new ways of building cars and doing business.

The Captain

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I’m not missing that Tesla will relentlessly continue to drive down costs. And I’m quite sure I will never be buying an ICE car again, so I get the whole demand part. But Hyundai, Kia, VW, BMW, Honda, Toyota, Ford, GM, all the Chinese automakers, Volvo etc - many have their entire government’s deep pockets behind them.

So your last paragraph states that GM will suffer. The simple question is will their shareholders suffer more from here than Tesla’s shareholders gain?

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When I worked at Boeing Alan Mullaly was passed over for the CEO position (an incredible act of stupidity by the Board). In any case, not long after that he was enticed to go to Ford to take the CEO position at that company.

I knew him at Boeing. He was a visionary. He was able to alter the corporate culture (at least for the 787). That’s no simple task. From what I read about his experience at Ford, it was one frustration after another. Virtually the entire management team held him in contempt as he had come from the airplane business and felt he knew nothing about the car business.

One anecdote I read was that another executive once told him he had no concept of how complicated an automobile was. Alan retorted (I paraphrase), I think I do. You have a product of about 3,000 parts that typical travels about 70 miles an hour on the ground while carrying maybe 4 passengers while an airplane has about 3 million parts and travels about 630 miles an hour in the air with well over 100 passengers. So what do you want to tell me about product complexity?

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That is mostly correct. I was at Ford at the time, in a position that occasionally had me in contact with those slightly below him. There were many types of people there… some who embraced “this is the way we do things” and some who were open to new things. Sometimes I’d be swatted down for proposing changes… or for telling truths that were unwelcome, sometimes new things were adopted as I gathered sufficient allies across the company to make the change irresistibly “the right thing”.

I can’t speak to management contempt, but I do know that one person in particular impressed him… Mark Fields… because Mark went along with Mullaly quickly, seemingly embracing change. In time, Mark Fields was given the reins of the company… and helped Ford turn to unproductive ways. He was terrible. A relentless focus on developing new, complex standard processes… and a relentless focus on cost reduction. Not cost reduction of the vehicle per se, but cost reduction… part by part… with a focus on each individual tree instead of the forest. So… a lot of really STUPID things were done.

I eventually left because my job gradually transitioned from one with great scope and ability to drive change… to following blindingly obtuse processes and amazingly stupid studies. It was with a great feeling of freedom when I filed my retirement papers and soon walked out the door. I still go to the annual picnic where retirees and current employees mingle.

What is the feeling there at Ford? There is a growing dismay, a growing realization that the company is in trouble. I don’t think anybody there realizes just HOW MUCH trouble. As for Jim Farley, the current CEO, he’s engendered some anger with the new $300k Mustang because it’s viewed as an ego project. And his BEV vision still isn’t what it should be for success… even if that is possible.

Where is Ford now? I’d describe it as being in disarray in terms of their product roadmap. Plans are made, modified, abandoned… re-instituted… chaos. They are making critical errors, trying to develop (for example) new vehicles able to be either BEV or ICE… making such vehicles sub-optimal for either. I think they have the potential to survive quite awhile, but they’ll have to somehow navigate their way to being a producer of heavy trucks only (an island of ICE is a world of BEV)… and perhaps contracting out BEVs to joint ventures with Chinese companies.

I’ve been telling my Ford colleagues to get out… to sell their stock… ever since I left in 2010. Some have been able to retire, nobody has moved to another, more promising company. I’m not sure their pensions are safe… I took a pension buyout shortly after retiring.

As for Alan Mullaly, he struck me as a very smart and gracious person. Even being pleasant to relatively little people like me. :slight_smile:

Rob
He is no fool who gives what he cannot keep to gain what he cannot lose.

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I fail to see how that would drive my investing decision to favor GM. I wouldn’t touch GM with a ten foot pole, a cyclical, legacy business whose paradigm is being disrupted. That’s three strikes. :wink:

Denny Schlesinger

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Exactly Sandy Munro’s beef!

But one should realize that being vertically integrated and in closer, tighter contact with fewer suppliers, Tesla’s cost cutting job is simpler than incumbents’ who rely heavily on supplier value chains.

Denny Schlesinger

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I’m talking about betting against GM. Short

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Then you are on the wrong TMF board. :frowning:

Denny Schlesinger

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I said it last month here, Full Self Driving V12 Alpha version was being driven by select drivers. Three weeks ago, Musk did a live stream for 45 minutes with end to end Neural Nets, meaning the input (sensors mostly cameras), out put (controllers: brake, gas, steering wheel etc) and the programmer (decision making) is full stack neural nets (no code based decision making).

And several times now Tesla management has said the bottleneck is presently compute So, Tesla is 10xing compute by the end of this year with Dojo, their supercomputer that just came online. So, Morgan Stanley just raised Tesla price target to $400 for the above reasoning, stating that “this is Tesla’s AWS moment” (I also said that last month; but, now it’s Morgan Stanley so Tesla got a 10% bump today.). Again, it’s the licensing of residual capacity from what Tesla is building out of necessity that is like what Amazon’s did with AWS. This licensing has yet to occur. But, it’s the formula we’ve seen before.

After Tesla has enough compute the type of training with full stack neural nets is different than before; but, it’s just feeding curated video clips (‘good driver’ decision making) that’s needed. Full self driving is happening much faster than I anticipated.

Best

Jason

Smorgasbord, at the begining of this thread

Saying “Tesla is a hardware company” today is like saying Amazon was an eCommerce company in 2008. Investing in TSLA isn’t just about the company selling more than 10m vehicles in 2030 and associated charging revenues from most EVs in the US, it’s about recurring software subscription revenue from autonomous driving, a potential lower-cost, human-driverless competitor to Uber/Lyft, an affordable robotic company (Optimus/Tesla Bot), and who knows what else from its AI leadership.

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It would be interesting to see the assumptions by MS on this “AWS moment”. While I have little doubt that FSD will be a needle-mover for TSLA, I do wonder how big an AWS moment this would be.

  1. Unlike AWS, Tesla would be selling FSD to direct competitors. This is akin to Amazon selling AWS to Microsoft and Google. Why would the major automakers want to bolster Tesla’s business advantage and provide them with all that driving data, all at their own expense? Most of the major car companies are developing their own self-driving technology: BMW, Toyota, Nio, BYD just to name a few among many others. They may be farther behind the development curve but it’s likely a matter of when they will do it rather than if. Tesla is not the only one that knows self-driving is gravy to profit margins. I can’t see why they would halt their self-driving efforts and purchase FSD from Tesla on a long-term basis.

  2. The universe of cars that can be fitted with FSD may not be that large outside of Tesla. Self driving requires a lot more sensors and integrated circuits fitted on cars. As such, that would rule out ICE vehicles, which still form the large majority of the global fleet. Within the EV population, Tesla vehicles comprise a large chunk and it will likely be so going forward.

Combining both points, Tesla vehicles may very likely be the largest customers of FSD by far in the next 1-3 years.

Beyond that, the more obvious use case would be autonomous taxi/bus/truck fleets. I don’t see that happening in the near term because of concerns over safety. Approval by local governments and large scale adoption seems years away, by which time you would think the competition would have something good enough to clear regulatory requirements.

My sense is that FSD would be hugely accretive to Tesla’s top and bottom lines but perhaps not to the extent of AWS’s impact on Amazon. I also see a possibility down the road where almost every automaker has self-driving capability and the price for FSD gets driven down just to be competitive.

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I know it’s hard having this discussion since Morgan Stanley’s 30 page report is proprietary to its customers, but that’s not all of what Jonas is saying. Tesla has built what is about the 7th largest supercomputer in the world with 10,000 or 14,000 Nvidia A100 chips. Amazon originally built AWS so that groups within Amazon could handle their internal compute needs, and scaled it so that it could handle the XMas rush, and then decided to sell excess capacity available during the other 11 months of the year to anyone, and then that became so popular Amazon decided to scale up even more to make that its own separate business. Tesla is building Dojo to handle its internal AI training needs, but could make compute time available to others, not just automotive OEMs, for their Ai training needs.

There are a couple interesting points to discuss here. First is that a similar argument was being made about OEMs licensing use of Tesla SuperChargers, yet that has happened. Why would other OEMs cede that charging business opportunity to Tesla and provide Tesla with data on car trips and charging usage? Second is that one of the biggest players in autonomous driving is Mobileye and their contracts (at least in the past) prohibited OEMs licensing Mobileye from developing their own autonomous solutions. So, the many OEMs using Mobileye have already ceded their own development efforts. This may have changed in recent years, but clearly no other OEM has the quantity nor quality of data needed to develop fully autonomous vehicles.

Tesla is now using cameras solely. No radar, no USS, no lidar. And cameras are actually pretty inexpensive. That means the potential for other OEMs, even those making ICE vehicles, to adopt Tesla’s FSD solution in the future is indeed there. There is the issue of camera coverage, and, of course, getting the Tesla vehicle computer into the vehicle and connecting it to acceleration, brakes and steering, but those are all do-able.

As to what the impact of Tesla becoming the AWS of AI (not just FSD) to Tesla’s bottom line, it’s all speculation right now. It’s taken years for Tesla to build its supercomputer, and most other companies do not have Tesla’s resources, even if they had the will and the expertise. What Tesla could make off of AI compute licensing is hard to say.

As for self-driving, it’ll be interesting to see if Tesla has a true lead or not. If they do, as some claim, then that could translate into major revenue all by itself for the company. It’s a stretch to say that because Tesla recognizes the value of autonomy that all OEMs recognize it, and it’s an even further stretch to think that all OEMs will want, much less be able, to develop it on their own. Chances are, many OEMs are depending on companies like Mobileye to provide them with automonous driving capabilities, and so the questions will become whether the Mobileyes of this world have a better/cheaper solution than Tesla, and whether the lack of differentiation between OEMs licensing the same autonomous solution hurts their ability to sell vehicles in the future.

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