Thoughts on Tesla and SolarCity
Let me start off by saying that I think Elon Musk is great, which is why I initially invested in both of these companies. I still think he’s great. But let’s look at the companies.
The chief problem is that this is the automobile industry, with very high Capex expenses, very little scalability, and, for Tesla at least, high R&D expenses. I read somewhere recently that Warren Buffet said (I’m paraphrasing because I don’t remember exactly) when brilliant management takes over a company with a bad business model, the bad business model will win out 90% of the time.
Tesla is capacity limited, not demand limited. If they were a software company they’d just sell gobs more of their software and make a bundle. But for Tesla it’s a question of building more factories, tooling up, building more recharging stations, etc etc, all very expensive. You want to build right hand drive cars? You can’t just tweak your software, it’s a whole new production line. Want to build roomier back seats for Chinese millionaires who have chauffeurs? It’s another whole new production line (after lots of planning).
And then there’s the battery problem. Megafactories are incredibly expensive. Tesla doesn’t have the money. And when it’s built only a small part would be used at first. A conundrum.
Giving away the patents can be seen as either (a) Elon is an idealist, and cares more about electrifying cars than he does about Tesla, the company. This means giving up the idea of Tesla eventually ruling the world of electric cars and cars in general. or (b) that Tesla is desperately trying to get customers for the megafactory batteries and for the supercharger stations to try to monetize them. This also means giving up the idea of Tesla eventually ruling the automobile world with their own cars. Any way you look at it, this is a tough way to make a living.
I’ve been getting out of my position in SCTY, not because I find any fault with their rate of growth of installations, but because I don’t see how the whole thing works. It’s like a black box. Installations go in and “residual value” comes out the end, but what are the assumptions, how do they calculate that? Who says their will be any residual value considering how fast the technology is improving and changing. What value will there be in 10 or 20 year old solar panels.
And they have profited from the constant improvements in solar panels at lower and lower prices and margins. Now they bought a business in which they will be competing in this low margin, price-dropping business. By the time they get their factories built they may be out of date already. What were they thinking? I’d rather redeploy my money in companies I can understand like SYNA, UBNT, AIOCF, CELG, PFIE, BOFI, etc.
Please disagree with me if you wish.
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