On Tesla

Investment Analysis Clubs Saul’s Investing Discussions
21

Please try not to make this about me and just stick to the 5 issues I raised…you have addressed none of them.

Unfortunately, you didn’t simply raise 5 issues to be discussed objectively. You presented what is obviously a skewed perspective.

As examples:

• You claimed: the present gigafactory was not designed to handle indefinite growth…and they are VERY expensive to construct.

When that’s clearly a SUCCESS issue, not a problem.

• You wrote: It also remains to be seen whether future purchasers of the 3 are still so enamored when they realize it isn’t an S.

Again, you’re looking at 500K reservations the wrong way. As I said before, this is totally and completely unprecedented in Automotive history. No other vehicle has ever had this kind of up front demand. Historically, what we saw with Model S was that the yearly run-rate was higher than the pre-order peak. You are wrong to look this at this as anything other than extremely positive.

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22

Duma,

With TSLA it seems folks either love it or think it’s over hyped. Good choice to move on and let the future unfold before us.

Thank you for your inputs to the discussion.

I’ve passed on this opportunity also and many others but somehow I’ve been able to find enough of other great companies to invest in over the years. My money, my choice to invest it. To each their own investment choices.

I think the TSLA discussion has been flogged sufficiently that we’re not seeing new facts being added.

Jim

BigOil1

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23

Duma, match your conviction and confidence about TSLA, and short it with everything you got!

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24

…the “Duma challenge” that no one yet has defeated…but maybe you will be the first:

Yawn. My opinion is you don’t want to hear the truth, but for those who might actually listening to you I provide these common sense answers:

  1. Tesla did not and is not making a profit on Model S and Model X.
    Fact: With gross margins above 18% since early 2013, Tesla has simply chosen to invest the money it’s made into the business.
    Opinion: What bothers me about this point is that it either shows laziness, a lack of understanding how a business invests in itself, or is an intentional mis-statement of the facts.

  2. TSLA has a market cap of $61 BILLION vs Ford at $46 BILLION…please explain that math in detail…

It’s called Growth. Ford is going to make about the same revenue next year as it did last year. Tesla next year is going to make 4X the revenue it made last year. And it’s going to continue to grow in future years. And we haven’t even gotten into Tesla’s future energy business!

And before you throw out the Clayton references, about Ford being old school, keep in mind that all of these established companies will go wherever the market is and right now…that ISNT’T with battery power.

You do yourself a disservice by intentionally ignoring Christensen and the effects of Disruption on established businesses. Christensen gives us example after example of successful businesses that failed precisely because they listened to their customers and gave them what they said they wanted - until the disruptive technology came along and then they switched to that. Remember Balmer laughing at the iPhone?

Want another contemporary example? Look at what upstart Arista is doing to Cisco. (ANET is my second favorite stock).

The competition doesn’t just lay down…they go wherever the market goes…and they are very well capitalized.

Even when you’re smart and savvy, surviving disruption is really hard (Christensen spends much of his time advising companies how to survive it). Look how Cisco is struggling to fight off Arista. And as I pointed out previously, the entrenched automakers are neither smart nor savvy (Cisco is, though). Again, back to my previous example of Mercedes. It’s going to cost money to switch to electric, due to a combination of engineering, retooling, and slow initial sales, and so Mercedes has warned that this transition will be a period of years with much lower profits. Do you think Mercedes shareholders will tolerate that? I don’t. But, that may be what Mercedes has to suffer in order to survive.

see yesterday’s announcement of BMW’s 400 mile per charge car…beautiful!

So, you fell for that?

As anyone who follows Automotive, even as a hobby, can tell you, the industry loves to present concept cars that are never built and make announcements of cars that will never be produced.

What BMW really announced was the “Urban Mini” for “local emission-free city traffic.” That’s clearly a low range vehicle. And it’s 2 years from now. The “electric X3” is three years from now, with no details provided.

Don’t believe me? Here’s an example: Back in 2012, Audi made announcements about BEVs, which they branded “e-tron.” There was an A3 e-Tron concept model that never was produced (https://www.engadget.com/2012/06/15/a3-e-tron-hands-on-video…), and there was a so-called “production” R8 e-tron that was built and raced (https://www.engadget.com/2012/07/01/audi-r8-e-tron-ev-lap-re…), but it was canceled before actually being produced in any volume (http://insideevs.com/audi-r8-e-tron-shelved-again-this-time-…) with Audi saying it “had no plans to sell its electric sports cars.” The “e-tron” label is now being applied to future hybrid models.

And finally, as for the “400 mile range” vehicle, what is that, exactly? It’s a garbage throw away line, and even if you believe it, it’s certainly 400 miles on the NEDC cycle, which is equivalent to about 310 miles on the EPA cycle, which is what Teslas are measured against. In essence, BMW is saying that someday they’ll have a car that does what Tesla’s Model 3 does today. Beautiful!

And even then, it won’t have a world-wide SuperCharger network, so it isn’t really suitable for road trips. Shall we talk about Tesla’s moat now?

  1. The margins on the 3 will be smaller…

If you listened to Tesla’s most recent conference all, they confirmed that they expect to reach 25% margins next year on Model 3. Model 3 was designed to be cost-effective to build. The entrenched automakers are happy to have 10%-15% margins, but then they’re letting their dealers take some of the profit.

  1. Need more giga-factories

As I posted earlier, this is actually an argument for Tesla’s success in needing to build more factories to satisfy demand for its vehicles. I guess you missed the recent Tesla shareholder letters in which Tesla talks about building more gigafactories.

  1. We are greater than 5 years away from price/cost of ownership parity of battery power automobiles to ICE.

Where’s your data on this? I believe that Model 3 already compares favorably in terms of TCO for what you get compared to BMW’s 3-series, Audi’s A4, Mercedes C300, Jag’s XE, Infiniti Q50, Caddy’s ATS, or Alfa’s Guila Quadrifoglio. Shall we start with the 5.6 second 0-60 or the 5.1 0-60 version?

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25

1) Tesla did not and is not making a profit on Model S and Model X.
Fact: With gross margins above 18% since early 2013, Tesla has simply chosen to invest the money it’s made into the business.
Opinion: What bothers me about this point is that it either shows laziness, a lack of understanding how a business invests in itself, or is an intentional mis-statement of the facts.

I have mentioned this before in my post, but will again reiterate. Tesla does not just have positive gross margins of 25+ %, but is cash flow positive at the operating level. This is excluding capex for future, but very much including the fact that it is staffed to support the model 3 rollout, and R&D for other future products. If those non capex expenses for future products are taken into context, Tesla is in fact handsomely profitable, not just cash flow positive at operating level.

If you dispute this fact, open up one of the investor update letters for past few quarters and go through the details. Go over earnings call transcript, at some point (This quarter or prior quarter) Musk remarks contribution of existing cash flow from operations to model 3 rollout and if more will be required.

The picture we have is of company which is profitable in its current business, but investing heavily in future. The depreciation from those capex investments in formal accounting is going to depress both GAAP and Non-GAAP profit for the foreseeable future, but the company itself will increase tremendously in value. We have seen this play out before in the last decade - that company is called Amazon.

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26

To me it makes no sense to invest in TLSA. Perhaps investing in TLSA has a touch of the following:

1) fear of missing out
2) a desire to be right about TLSA
3) a desire to see the world adopt more EVs and use more renewables
4) looking at the upside without equally considering the downside

Chris, I am surprised you see only these rationales for owning TSLA - I don’t see that much difference between it and the stocks in your porfolio that you posted. Those that you expect to triple in the next couple of years are valued at more than 10 times their revenue (SHOP might be at 30 P/S at this point). TSLA has a 12 month trailing P/S of about 7,5. Elon expects to sell 10,000 cars per week in one year. If that happens, TSLA revenue will have grown 100% YoY (assuming average sale price of $40K).

So here’s my question - what do you expect from SHOP next year? If you would be happy with them growing sales 100% YoY, why would you be skeptical about the valuation of TSLA? It’s not exactly apples to apples but remember that SHOP is priced way higher than TSLA right now (three times as much at least)!

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27

Hi stenlis,

I am surprised you see only these rationales for owning TSLA

Those reasons are just examples but I used them because I have noticed that some people seem to get extremely defensive when anyone says anything negative about TSLA. Now, why would someone bring up SHOP in comparison to TSLA…they couldn’t be more different companies. Seems that you might be “attacking” reasons not to own SHOP because I brought up reasons not to own TSLA??? Seems silly and not very useful to me to compare SHOPS’s sales multiple to TLSA sales multiple. If you want to discuss SHOP, start a new thread and I’m sure I’ll jump in.

Chris

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28

Smorgasbord1, that’s a pretty good description of some of the reasons to own TSLA. Another is to get really clear that Tesla isn’t a car company, it’s an energy company. They are leading the way through the painful transition that the world is going through as it is forced to abandon fossil fuels.

In the near future Tesla will be the leading company in the world for energy production, energy storage, and energy use in transportation. The total addressable market is truly stupendous.

And Tesla is committed to becoming the best manufacturer in the world, as key to becoming the price and margin leader in all categories (already achieved for storage). The result is going to be awesome. I expect over $400 by the end of 2017, and over $1000 within five years. I expect solid profitability and inclusion in the S&P 500 by the end of 2018. I expect Tesla has done its last capital raise.

Tesla’s competition is so pathetic, that if Tesla doesn’t meet their goals on time and their stock price languishes, it just means they’ll meet them a bit later and their stock price will go up then. Tesla is sprinting and nobody’s chasing any faster than a half-hearted walk.

-IGU-
About 87% of my portfolio is currently in TSLA and derivatives, fairly leveraged (not Saul style).
My portfolio is currently up 349% in this calendar year, mostly due to Tesla.

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29

How do you value TLSA?

Let’s pretend it’s not TSLA, but some company with the following ten attributes:

  1. Its main product set a new benchmark with Consumer Reports, literally breaking their 100 point scale with a score of 103 (https://www.consumerreports.org/cro/cars/tesla-model-s-p85d-…).

  2. The company is poised to quadruple its revenue within 18 months, with an level of gross profit per unit produced that no other company in the industry enjoys.

  3. The TAM (Total Addressable Market) for the company’s products is extremely large. Different models of the same product will increase sales with little adverse effect on the sales of current models. Sales come at the expense of less technologically adept competition.

  4. The current competition is years behind. After literally laughing at this company, the competition have belatedly come to realize that they are being Disrupted and are now scrambling to avoid being left behind, if not going out of business completely. In a classic Christensen situation, their past success and scale make it difficult for them to compete.

  5. Potential future competition, from no less than Apple, has recently given up trying to compete after spending billions of dollars on the project.

  6. The company has an innovative moat that expands the practical use of its products to use cases that customers really desire, but which no other equivalent technology product from any other company in the world can deliver. Yet, no other company has shown even the desire to replicate this moat.

  7. The company gets tons of free press and has never had to buy advertising to market its products, yet is setting demand records that are orders of magnitude higher than the industry has ever seen before. Owners of the company’s products are not only huge fans, but many actually spend their own time getting friends, family, and even strangers to buy the company’s products.

  8. The company is leveraging its consumer market technology into a commercial market that lives or dies based on costs, and the new product potentially reduces the number one cost (39% of the total cost) that market has to deal with (https://www.thetruckersreport.com/infographics/cost-of-truck…).

  9. The company’s current business is on the demand side of energy, but the company has announced new and unique products on the supply side as well. The TAM for these new products is even larger than the company’s original products.

  10. While the company’s current products benefit from government incentives, those will soon be reduced and then eliminated. Yet, the underlying technology behind the products is getting steadily cheaper and the incentives are no longer required to be competitive (https://cleantechnica.com/2017/08/06/tesla-model-3-vs-22-com…).

So, how do you value a company with those ten attributes?

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30

Chris,

It was not my intention to put SHOP down or even discuss it at length, just wanted to illustrate in what ballpark you could put TSLA, SHOP is probably the greatest outlier, but even disregarding that, TSLA would be one of the cheapest valued stocks in your portfolio (probably only second to LGIH). So if you (or anybode else) are interested to know why people invest in TSLA, here’s the case:

1, It has nearly doubled its revenue YoY
2, It has strong leadership that continues to make good on their promises for half a decade by now
3, It has proven that it can deal with the intricacies of the industry (regulation, safety, etc.)
4, It has built a strong recognizable brand
5, It can reasonably double the revenue next year
6, It is not as expensive as different growth stock that are expected to grow that fast
7, Even the planned production of 500k per year is a tiny fraction of the car market (under 1%) - it has room to grow.

It has risks of course - it has not shown yet it can mass produce (which is probably a big reason why it’s not as expensive as the stock you have in your portfolio) and it is perhaps too dependent on one person. But even with those downsides, it’s a reasonably priced company. If they really roll out 10.000 cars in a week off of their production floor in Q4 2018, the stock can easily double.

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31

Unfortunately, you didn’t simply raise 5 issues to be discussed objectively. You presented what is obviously a skewed perspective.

Smorgasboard:

Not true…I didn’t start the thread and they are all objective issues…nothing skewed about them at all.

TSLA has to be the most emotionally invested stock in history…this thread has become personal and I have received one threatening email already…crazy really…what about TSLA brings such militaristic behavior?

I get what several are saying about gross margins…but that is a fallacious argument IMO because if TSLA cut out all those operating costs, there would be no growth and the stock would still trade for peanuts. Furthermore, they still got a great deal of free revenue from selling credits.

Elon himself has warned (his own words) that the stock is way overvalued…as early as this year. He has also said in the WSJ that he does not expect to reach profitability until some time after 2020.

My point about the new gigafactories is that they are huge capital expenditures…that again will hit operating expenses with each successive build…and if your predictions are correct, there will be many required…and that will lower profitability. Its not like TSLA can ramp up 500,000 cars annually and that each car won’t add to operating expenses.

The “500 thousand” reservations is overblown BTW…the number is 373,000. I recognize that this exaggeration goes along with the emotion behind the man, the stock, the paradigm shift…but the excitement dwindled when the actual costs came out to buy one and in places where the government subsidy was dropped, so did sales of TSLA.

But I agree with you that the reservations for the 3 were still impressive but this is far from selling that number each year and having the infrastructure in place to do so.

While you claim that TSLA is something more than a car company, that iOS what it is (along with a solar panel company)…and should TSLA ramp its production and sales…all those operating issues and expenses will follow along with it.

As regards the TSLA vs. the auto industry…anyone who thinks that these big auto’s will stand down is fooling themselves mercilessly. These companies will compete and they will break away the peals of hype with the TSLA vs what they can produce…the market hasn’t been there to ramp their production…the customer hasn’t wanted it…that is just fact…so they continue to sell them the ICE.

Even as regards performance, yes their customers like their over $100,000 car but as recently as last month Consumer Reports has the Chevy Bolt beating out both TSLA S and X in mileage on a single charge…that is a $40,000 car vs a $100,000 car despite what they all tout as mileage per charge, real experience has revealed otherwise. Why do you then claim that Chevy has no expertise??? The Germans are well advanced and the whole autonomus push by TESLA and their likely LIDAR miscalculation also speak to their vulnerability.

But these companies are VERY sophisticated and spend multi-BILLIONS in R&D annually…far more than TSLA.

Cost parity with ICE does not favor TSLA…look it up…been well documented this past year.

The comparisons with SHOP are silly…I know Sterils sold SHOP back in Feb 2017 And I am not trying to pick on him but the argument he uses is the same argument he uses to buy TSLA:

http://discussion.fool.com/anybody-considering-selling-shop-3259…

SHOP is of course up 100% since he announced he sold in that post and far more than TSLA…but the point is that the same arguments were used…one to argue sell SHOP and the same to argue buy TSLA?

FWIW, I do think think ELON is a master of illusion and I have no doubt whatsoever that he does not want to hold his company to the same metric as any other business because then the rubber meets the road…and he becomes a car company with all the headaches that accompany that. Until then, he is a visionary and everyone (including myself) wants him to succeed.

But that shouldn’t get in the way of looking at this as an investment and ferreting out if justifies its present market cap…Elon says no…I say no…many of you say yes. That is what makes a market.

I will no longer post on this thread so I leave you with the last word.

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32

Good discussion.

I would invest in Tesla. I don’t trust Musk. I cannot put my finger on it. Just don’t.

That simple.

Qazulight

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33

NVDA wins every time TLSA sells a car. NVDA product is in TLSA cars.

NVDA is profitable.

NVDA pays a dividend and buys back shares.

NVDA is right in the middle of several secular growth trends.

Picks and shovels, baby! It’s a much more certain and low risk way to make money.

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34

The comparisons with SHOP are silly…I know Sterils sold SHOP back in Feb 2017 And I am not trying to pick on him but the argument he uses is the same argument he uses to buy TSLA:

I’m using the same argument to sell and buy? Like which one? Did I say you should buy TSLA because there is no moat in the business? Or that you should buy it because it has no profit? Or perhaps that TSLA has captured a lot of the car business quickly?

You are not making any sense!

But hey, if that’s the game you want to play, lets revisit this in a year and see where TSLA stands! All else is moot at this point.

35

NVDA wins every time TLSA sells a car. NVDA product is in TLSA cars.

NVDA is profitable.

NVDA pays a dividend and buys back shares.

NVDA is right in the middle of several secular growth trends.

Hmm, a couple of postst above you were ticked off by me bringing SHOP into the discussion and were only willing to discuss it in another thread, now you are happy to make a post solely about NVDA. What gives? (Not that I have something against NVDA - it’s a great company)

36

Elon himself has warned (his own words) that the stock is way overvalued…as early as this year. He has also said in the WSJ that he does not expect to reach profitability until some time after 2020.

Are you intentionally ignoring the actual truth? Both statements of yours are mischaracterizations.

  1. While Elon did say the stock was overvalued, he quickly clarified on Twitter: “I should clarify: Tesla stock is obviously high based on past & present, but low if you believe in Tesla’s future.”

  2. While Elon did say he didn’t expect to reach profitability until 2020, that was in Jan 2015. He has since accelerated production plans for Model 3 by a couple years.

The “500 thousand” reservations is overblown BTW…the number is 373,000.

Again, you get the facts wrong. The most recent number, which is from the Q2 earnings call, is 455,000 plus 1800 new ones each day.

I recognize that this exaggeration goes along with the emotion…

By your own logic, I guess we now recognize your own emotion against the stock. As if we couldn’t tell from your “master of illusion” comment.

The rest of your post is just more of the same. Claiming the lighter and smaller Bolt is better performing than Model S/X, claiming that the Germans are “well advanced,” or that TCO for Model 3 does favor it. The truth is that reported range is according to an EPA formula, so any real world data may differ (and differ from other real world experiences), that LG, not Chevy, engineered and built the Bolt drivetrain, that Mercedes had to use a Tesla drivetrain to get its only EV still today (Class B) to market, that BMW’s 2 i offerings are pretty lame and their plans 2 years from now include yet another lame city-only EV, and that any TCO you’ve found wasn’t against Model 3.

For a decade now, people have been emotionally bearish on Tesla, as if it this new technology and way of running a company threatens them personally. Will 2018 be the year most of the critics are finally silenced?

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37

now you are happy to make a post solely about NVDA. What gives?

Because Telsa is an Nvidia customer. But the bigger point is that NVDA has been derisked a lot while TLSA still has plenty of risk. What are these risks?

Financial risk: TLSA has been and continues to need to raise capital. NVDA is highly profitable, is paying dividends, and is buying back shares.

Execution risk: Risk to TLSA is huge. Aspects of execution including production, supply chain, battery supply (more gigafactories). NVDA’s execution has been nearly flawless and the risk has largely passed while much of TSLA’s risk is still in the future.

Market risk: NVDA dominates its markets with 90%+ market share. And most of its markets are exploding. TLSA has a tiny share and must take share from competitors that fight hard. It is still unclear what will happen while with NVDA we already know what has happened.

I’m not trying to compare TSLA and NVDA directly. But I wanted to point out that NVDA has a much more certain path to success than TSLA.

Chris

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38

but as recently as last month Consumer Reports has the Chevy Bolt beating out both TSLA S and X in mileage on a single charge…that is a $40,000 car vs a $100,000 car despite what they all tout as mileage per charge, real experience has revealed otherwise.

I’m usually a big fan of Consumer Reports, but they flubbed that test. They chose not one but two different settings on the Tesla that both reduce range. Doesn’t make any sense.

  1. If a Tesla owner is concerned about range being an issue on any given day, then he/she will charge it fully using the ‘range’ setting. Some owners do that all the time.

  2. The default mode for Tesla Model S is for regenerative braking to be ‘Normal’, which allows strong regeneration of braking energy back into the batteries using one pedal, just the accelerator, when you lift your foot the electric engine slows the car and creates electricity. The brake pedal on Model S operates only the traditional disc brakes, not any regeneration, a decision made to improve braking linearity and feel since the car is a sport-luxury vehicle. Consumer Reports decided that customers might not be used to one pedal driving and so switched the car to ‘Low’ regenerative braking, which kills efficiency on the car.

No, in real life the low end Model S 75D, has significantly more range than the Bolt. If you leave regenerative braking in its NORMAL mode (it’s truly inexplicable that CR changed the car away from that for a range test), that would be enough to beat the Bolt, I’m confident. And if you credit the customer with having the sense to charge using the “Range” mode, if they think there’s any chance they’ll need the cars full range the next day, then the 75D would truly crush the Bolt in that test.

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39

Sure, and I’d agree on most of what you wrote (except that I see TSLAs miniscule market share at the moment as a positive - it would not be able to double revenues in one year otherwise). And yes, I see NVDA as a less risky company. But it comes with two caviats - it’s priced higher than TSLA and it’s not going to double revenues next year. It’s a less risk, less gain kind of proposition. One that I’m happy to take. In fact I’ve got double the position in NVDA than I have in TSLA. This is because I prefer to keep my high risk positions small.

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40

Elon himself has warned (his own words) that the stock is way overvalued…as early as this year.

You know perfectly well that he clarified the statement very soon after.

The “500 thousand” reservations is overblown BTW…the number is 373,000.

Wrong, there was a period after 375,000 where they no longer kept making updates on the number, but it has passed 500,000.

https://electrek.co/2017/07/29/elon-musk-confirms-model-3-re…

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