Thoughts on Tesla and SolarCity

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.

Tesla

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.

SolarCity

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.

Saul

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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.

Hi Saul,

Good thinking, as usual.

Let me counter only one of your points on SCTY, but not on your conclusion (though I’m not there yet since I can’t completely understand the future of their business model either.)

But regarding the company they bought…I don’t think they intend to sell those panels to anyone else, only use them to lower their cost of installation. And since this company had the lowest cost and best designs for converting electricity, can we assume they will continue on with R&D and stay ahead of the evolutionary changes?

Further,I can’t see why old solar panels, sitting in the sun, collecting power and sending it down a wire to a battery somewhere (think solar farm) would not have value (other than the the dirt it sits on).

So those two points of yours seem weak to me. How that fits into the SCTY formula I haven’t figured out yet. I’d be more worried about sky high valuations here. Unlike TSLA, I don’t see why these guys can’t continue to be successful. They are the largest installer cum financier in the solar business and they have just lowered their costs but probably won’t lower their profit equation as much.

TO be fair, I haven’t even thought about exiting SCTY due to their stock price being in the basement until just recently (and I now have some put options finally looking to expire as income). So don’t kill me if I"m off track.
Mykie

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Sual;

Just some thoughts on SCTY’s purchase, I think they mentioned in the press that they foresee a shortage of quality panels down the road. Additionally, with the brilliance of Musk, I think they must have thought through the panel manufacturing business - low margin, commodity-nature, and fast technology advances. I would think that they have confidence in staying at or near the top of the quality and at or near the bottom of the cost with high volume production to supply their OWN installation business. On the panel manufacturing side, they do not need sales or marketing expenses and that would help lowering the cost further.

Yes this is just what I think. But Musk has so far been nothing but brilliant.

Regards

-M

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These two are so tough.
I have been looking at them thinking of pulling the rip cord each day for a week. I just love the stories, and love being a shareholder. The problem is that it is hard to make the numbers make sense at these valuations.

SCTY- so hard to look at the numbers. The valuations are all off the charts. The model makes it hard to follow since they use debt to finance the “residual value”. Is there a moat? I think the business model in new and unique but I don’t see how it is not copy-able. For companies like this sometimes I just go back to market cap and think whether I can envision this being a much bigger company. 6.6 Billion here, so not that huge. I can see it being bigger for sure. I am always torn on this one. I would be surprised if we don’t get a crack at this one cheaper again.

TSLA- I agree with everything Saul said. They make cars. The rest is fantasizing about a future that could very well come true, but will not be without competitors. The iPhone was like the Tesla and now it is hard to tell the difference between one phone and another. Others will come, and as there are more TSLA’s on the road will they be as popular for people liking the hot thing? It sure is a nice car, I would kill to have one. Market Cap of 30 billion here so hard to see this one growing in market cap the same way SCTY might. It is already very big. That being said, Toyota has market cap of 193 B but they sell exponentially more cars and have something for everyone.

My gut is telling me to sell my shares and that we will get a better price. But I am very bad at this part of it, and partly why I love reading Saul’s posts. He has the knack. I don’t remember him being wrong. You have already traded TSLA from the high to the low in last cycle right?

Gator

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M,

I just took a quick look at the Reuters info for SolarCity, and they have Musk listed as Chairman of the Board. Assuming this is accurate, do you believe he is still making driving decisions like this? I’m not familiar with the day to day of that position, so I’m asking genuinely.

I think it’s a great acquisition, personally, but I don’t know how much of the credit should go to Musk, vs the other leadership at SC. I’d be much happier to hear Musk had little influence in the decision, because it would bolster my confidence in the team below him.

I invest in companies, not individuals.

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A few recs on the Tesla board has my confidence up, so I’ll repost here.

“(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.”

Why does it have to be one or the other? Option A makes Musk look like a starry-eyed dreamer. Option B makes him look like a desperate capitalist. When the story of open sourcing battery technology first broke, NPR did a piece on it. They brought up the point that having a small share of a giant market (what he could have) is more valuable than having a large share of a tiny market (what he has now). Maybe Musk is an idealist AND a shrewd capitalist.

Historically, great thinkers like Musk have been divisive figures, not so much for what they do but because of how we view them.

Brad
Long on Musk

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Slips;

… do you believe he is still making driving decisions like this?

I have no insider info on this but I would say with high confidence YES. To SCTY, this acquisition is not trivial. It is a business model change. It is strategic. This is what the board of director is for and Musk is the chairman. He surely is a part of the decision.

In addition to Musk, the Rive brothers are also capable leaders. David Kretzmann had some very good write up about SCTY and the Rive brothers on his board Penciles Palace.

I invest in companies, not individuals.

The caliber of the leaders are one of the most important success factors for a business in my opinion.

Regards.
-M

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M,

Thanks for the insight.

The caliber of the leaderS are one of the most important success factors for a business in my opinion.

I agree 100%, but the plurality is important to me.

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For me passing on TSLA is a very easy call. I have also never owned the shares.

  1. Valuation is high.

  2. There is a lot of hype and much of the future success is based on a lot of things going right and working out.

  3. The will likely be dilution. If yes, this means if the current value of $30B going to $60B will not mean a doubling of your investment. A capital intensive business that cannot fund growth through CFFO must raise money somehow.

  4. There are many other investments out there that have better clarity, better valuation, and better business models.

There are no called strikes in investing so why risk a strike on TLSA when you can buy better value (with growth) in so many other companies.

Chris

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I recently picked up a newspaper at a coffee shop that had an article about someone trying to sell a house with a solar lease. The seller had trouble selling because the buyers didn’t understand the value and didn’t want to take on a long term contract. The seller dropped the price in order to complete the sale.

Something to consider. As housing improves there could be more stories like this, and scare people away from solar leases.

Escrow is hard enough without getting buyers to take over a solar lease.

Sorry, I couldn’t find the article online. I think it was either sf gate or my times from last weekend.

Iain

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