Articles/megaposts by DaveT

[Fallenone]

Interesting article about people in LA starting to ditch their cars in favor of Uber/Lyft,
People in Los Angeles Are Getting Rid Of Their Cars

"Spiegelman had been studying the economics of riding Uber and Lyft versus a taxi or driving a personal vehicle when he decided to run the math for his own car. He made a spreadsheet outlining the cost of leasing his Volkswagen: $458 monthly for the lease itself, $158 for insurance, $70 for gas, and at least $72 for parking, for a total cost of about $758. Based on those calculations, he said he has saved more than $1,100 in the last three months, spending an average of $3.42 for each UberPool or Lyft Line ride to work in August."

This is why you can't compare the Uber's addressable market to the taxi industry. The taxi industry (due to high costs and high inconvenience) doesn't tempt people to ditch the cars in masse.

As more and more people ditch their cars, this increases Uber's addressable market considerably because now these people almost completely rely on Uber/Lyft for their transport needs (of course it depends where they live).

And the reason people ditch their cars is Uber is economically cheaper. Not because it's more convenient or has a network effect. This is why autonomous driving is so important, it can create a product that's a fraction of the cost of the current Uber and when that happens, if the Uber as we know now will collapse.

I always look at ICE OEM, oil companies and related infrastructure, parking, insurance, Tesla, Uber, etc. as different providers to supply the service of transportation to the society. The value of meeting the transportation need for the society at any given time is more or less constant. A few years ago, this demand is supplied almost solely by ICE OEM+big oil. But now we are seeing shared economy as represented by Uber is substituting the ICE OEM, oil companies, parking role in the equation. Tesla's potential here is to provide almost the whole solution to the transportation service: 1) it provides the car, substituting ICE OEM; 2) with supercharger and potentially integrating SCTY, it provides the energy and substituting oil companies and related infrastructure; 3) with autonomous driving and the part of ride-sharing in SMP2, it could substitute the current pre-autonomous Uber and also grab the value currently provided by parking and insurance. Of course, I don't think Tesla will be the one and only company in providing transportation services. But what Tesla is doing is really comprehensive and covers every corner of this multi-trillion dollar sector.

 

[MitchJi]

And the reason people ditch their cars is Uber is economically cheaper. Not because it's more convenient or has a network effect. This is why autonomous driving is so important, it can create a product that's a fraction of the cost of the current Uber and when that happens, if the Uber as we know now will collapse.

Bingo! Exactly! Why uber said that autonomous driver is existential.

 

[wdolson]

Agreed. Further, terms like "always" and it's counterpart "never" are trigger words to scientists and engineers. Always and Never represent longer timeframes than most people comprehend. Infinite time is implied, when 5-10 years is what's meant, and even then might not be accurate.

Simple computer controls have exceeded human capability for decades in wet/snowy conditions for both traction and braking. Further, radar can see through snow, unlike humans. Full autonomy is not only inevitable, but will ultimately be better than humans in all conditions.

An aside on comma.ai -- George Hotz has no plans to enter the Level 4 race. He's solely focused on Level 3 as an aftermarket product, and in fact, refuses to answer when he thinks Level 4 will be possible, generally shrugging his shoulders as if he doesn't care. So, he shouldn't be considered a competitor for any driverless technologies.

Lastly, back to Uber. Julian Cox had an interesting article a couple of months ago discussing the merits of driverless ICE cars Tesla Model 3 & The Economics Of Autonomy — Why An Autonomous ICE Vehicle Is Relatively Pointless where he concluded that the cost per mile would make them somewhat meaningless. It's hard to predict how all this will shake out, and whether L4 autonomy will be both ready and approved before Uber has access to 500,000 EVs, but if we reach approved L4 before that point, it would seem to grant Tesla an advantageous position and leave Uber with a decision of whether or not to deploy L4 ICE vehicles.

Julian Cox has some very interesting insights. This link has a video of a lecture given by him:
Charged EVs | How the Tesla Model 3 could trigger the collapse of the traditional auto industry

 

[DaveT]

This morning I sold my entire SCTY position (which I had purchased in January 2013 shortly after its IPO). The reason: I think there's a good chance SCTY goes bankrupt if the TSLA deal doesn't go through (and I think there's a decent chance the deal doesn't go through).

When I have some more time, I'll try to explain my thoughts in more detail.

 

[hpartsch]

Thanks Dave. I've been an avid follower of yours. I trust your reasoning. I just did the same.

 

[techmaven]

This morning I sold my entire SCTY position (which I had purchased in January 2013 shortly after its IPO). The reason: I think there's a good chance SCTY goes bankrupt if the TSLA deal doesn't go through (and I think there's a decent chance the deal doesn't go through).

When I have some more time, I'll try to explain my thoughts in more detail.

Wow.

 

[DaveT]

This morning I sold my entire SCTY position (which I had purchased in January 2013 shortly after its IPO). The reason: I think there's a good chance SCTY goes bankrupt if the TSLA deal doesn't go through (and I think there's a decent chance the deal doesn't go through).

When I have some more time, I'll try to explain my thoughts in more detail.

SCTY's business model is inherently flawed. This is something I missed until just a few weeks ago. SCTY's entire business model is dependent on securing new and continued financing at decent interest rates. If SCTY is unable to secure financing at decent interest rates, their entire (or most of it) halts to a stop since they can't finance new projects (w/the exception of cash and customer-loan projects). And if they can’t finance new projects, they can’t pay their bills and they’ll need to file for bankruptcy.

Everything is fine as long as SCTY can borrow money at decent rates. They've got a good business model ASSUMING that. They’ve got good margins on every solar project and they will make money in the long-run (assuming the big assumption). But where it falls apart is when things get tough. For example, when banks/institutions get scared of SCTY's prospects and they raise interest rates for loans to SCTY, this dramatically hurts SCTY. Then, in turn this makes SCTY's prospects less promising, and makes banks/institutions (lenders) even more scared and then they charge even higher rates. The higher rates hurt SCTY even more, and the lenders get even more scared and need to charge exorbitant rates in order to justify the risks (ie., poor future prospects of SCTY), and this hurts SCTY where they can no longer make money. And nobody will lend any money. And the company is forced to go bankrupt. This is called (or at least what I call) the death spiral.

In order words, SCTY's dependence on financing is their lifeline to their business, and is also their "deathline" as well. When things are going well, all is rosy. But if SCTY hits some hard times (like they have recently), then financing starts to dry up and the few lenders available charge higher and higher rates, which in turn make it even more difficult for SCTY to make money and to raise money in the future. The spiral of death is set into motion.

Now, Tesla can step in and try to stop this spiral of death by taking over the company, and since Tesla is a larger and more stable/secure company, Tesla can secure better long-term interest rates since lenders aren’t as concerned about Tesla going bankrupt. Then, after Tesla acquires SCTY they can try to revamp the business model (perhaps mostly loan/cash vs leasing of solar systems, and better products like solar roof) while restructuring the company by laying off a lot of workers and redirecting existing workers more to grid energy storage sales/install. But Tesla is still exposed to SCTY’s long-term debt (which is somewhat offset by the asset of long-term payments by customers). If Tesla is doing great, then it shouldn’t be too big of problem. Sure, it’ll be a drag on their book and restructuring costs will hurt them in the short-term. But if Tesla is growing and exceeding expectations, then lenders will refinance SCTY debt at good rates. But if Tesla isn’t doing well, then lenders won’t want to refinance SCTY debt or they’ll charge exorbitant rates, and this will hurt TSLA in very negative ways. How negative? Not sure. I don’t think it’ll cause Tesla to go bankrupt by any means, but in a recession it could cause TSLA stock price to go much lower than it would have without SCTY’s debt obligations.

In my opinion (at the moment), the best thing that can happen to TSLA is for the SCTY deal to fall through. SCTY will likely go bankrupt since they won’t be able to pay their bills and they won’t be able to get financing at the rates they need. Then, TSLA can pick up SCTY assets that they want at pennies to the dollar. And they’ll be free to get into solar panel systems without feeling like they’re stepping on SCTY’s toes. Tesla won’t be laden by SCTY’s debt and inherently flawed business model. And TSLA as a stock will be much more secure.

 

[SBenson]

Well, Dave I have been saying the same thing for many many months. With dry facts and figures. I'm glad people are realizing this at least now.

There is one problem with your observation (which doesn't change the final outcome as you perceived anyway). SCTY never made good margins on any of of their installs. They just made people believe that with a lot of number gimmickry. Only since the last two rounds of cash-equity sales it has become abundantly clear that it loses money on every install (even after accounting for all the future revenues from the install). Happy to prove it out if you care.

The death spiral is already on. It has been public info since the Silverlake deal in Nov 2015. SCTY going bankrupt without the merger is an absolute certainty.

Is TSLA better off with out the merger is highly debatable. Since it will be a big hit to Musk's credibility or track record, it could affect TSLA stock price in the short term. On the other hand since everyone now understands that SCTY is a failure anyway. Does it matter? Maybe it doesn't.

 

[FluxCap]

Thanks for sharing your thoughts as always, Dave. I personally think you are making a mistake as I'm virtually certain the deal will happen because both boards of directors and a majority of shareholders want it to happen, and I believe that the market has vastly overestimated the financial burdens of this merger while completely discounting the positives for both companies existing under one "roof."

SCTY is partially dependent on attractive interest rates like many similar companies - but not as much as I think you indicate. Absent global instability, I also think rates will stay exceedingly low for an exceedingly long time to come in this era of constant currency wars. Consumers may be tired earning nothing on savings with low interest rates, but it's the new normal and companies that benefit from this new normal include SCTY.

I increased my SCTY position yesterday because the arbitrage is just too good to ignore, and I remain confident that despite the negative press, this deal creates long-term value for shareholders. We have to have successful solar companies to make the original secret master plan work, and I for one want Elon at the helm.

 

[tlo]

@tlo It's a good exercise... here are some of my thoughts.

First, I think you're comparing the ride-sharing/Uber's market to the taxi market and I think that's incorrect. Uber is in a different market. In fact, I'd say Uber's addressable market is at least 10-50x as big as the current taxi market. The reason being is that Uber is causing people who normally wouldn't use taxis to use their service. One example, I'll drop off my car at a shop and take Uber home. Without Uber I wouldn't do that, I might wait around at the shop or do something else. Or another example, I might have my wife drop me off somewhere and tell her I'll take Uber and meet her in a couple hours. Taxis aren't prevalent where I live, so I wouldn't do this kind of behavior unless there was Uber (or a ride-sharing service). In cities, it's even more extreme. People are starting to ditch their cars and exclusively take Uber. They normally wouldn't even think or entertain that possibility in a world of just taxis. But Uber/Lyft are so reliable and convenient that it allows people to use ride-sharing service much more frequently than they would use a taxi. This is what is fueling the hyper-growth of Uber.

So if there are 250k taxis in the U.S. currently, then we'd need to calculate how big Uber's market would be by the time fully autonomous vehicles are approved by regulators. My guesstimate is 2022 (as I've shared in a previous post).

In that case, by 2022, how big will Uber be in the U.S.? I don't know. But I think it's safe to say they'll be a lot bigger than they are now. Especially since they're still growing at a 2-3x clip (although I'm not sure exactly what their growth rate in the U.S. is). I wouldn't be surprised if they're at least 10x as big as they are now in 6 years... They could be up to 20x as big. So, let's say current day Uber is equivalent to the taxi volume in the U.S. (even though I think it's already eclipsed it) at 250k cars. In 6 years, Uber could be at 2.5M to 5M cars (that's 10x-20x).

At 2.5M cars, it's going to take quite a bit to displace Uber.

Sure autonomous cars are going to be much more efficient than cars w/drivers. So, it's possible that 1M or less autonomous cars could replace 2.5M+ cars with drivers.

But even 1M autonomous cars is a lot, and that's just the U.S.

If Tesla were to own the 1M autonomous cars, they'd need to invest at least $30+ billion. That's a lot of money. I don't know where Tesla would get that (unless they have some crazy market cap by that time and can raise that money).

Another option would be for Tesla to have individuals purchase the autonomous cars and have the autonomous cars be placed in Tesla's sharing network.

Here's how I think Tesla has a chance to make this work.

Tesla could PRIORITIZE orders from people who agree to the following:
1. They must live in one of the cities that Tesla is targeting w/ride-sharing services.
2. They must agree to share their car to ONLY Tesla's ride-sharing network when they're not using it or planning to use it.

If demand is high for Tesla's autonomous cars, perhaps many people will agree to the two conditions listed above. Tesla also could give a discount for those who agree to the above conditions (or charge higher to those who don't agree to the above conditions).

If Tesla's production is high enough, and they get enough people who will agree to the above two conditions, then Tesla can deploy autonomous vehicles in high numbers in targeted cities. These autonomous vehicles would be owned by individuals and those individuals will have agreed to share ONLY to the Tesla network.

If Tesla can successfully pull this off, and if by 2022 they are making let's say 2M cars a year, then they have the chance to disrupt Uber. Perhaps Tesla can get at least 1M autonomous cars out in 2022 this way. And if Uber is 1 year late with autonomous cars (ie., by partnership with other manufacturers), then this gives Tesla a way in to compete with Uber. If Uber is head-to-head with Tesla and releases autonomous cars at the same time as Tesla, then Uber can release million(s) of autonomous cars at the same time or even faster than Tesla (since Uber would be partnering w/potentially many auto makers). In that case it'll be much more difficult for Tesla to beat Uber, since Uber has their existing network and they're only making it better.

Tesla would still have a chance though because perhaps their cars would be better (ie., safer, more comfortable, etc). And that could be a selling point for Tesla's network.

Another point to make is that by 2022, it could be a messy and ultra-competitive market. Especially if Google and Apple get into the game as well. It's hard to imagine what kind of crazy fight it would be if Google, Apple, Uber and Tesla all got into the same ring. And in other countries there are formidable companies as well.

Everyone (ie., Google, Apple, Tesla, Uber, etc) knows transport is a huge multi-trillion dollar market, and it's going to be disrupted. And they want a big piece of the pie.

@DaveT Your thoughts are valuable and I appreciate it. Not meaning to have a debate since no one knows how things will play out, but I’d just put out my views and predictions. It will be interesting to look back in a few of years and see how far off we are.

- There are about 250k taxi drivers in the US, not taxis. The number of taxis is maybe ~1/3 of that. Uber's market is certainly bigger, perhaps on the order of 2M, as you say. But Tesla does not have to start with 2M cars because ride-sharing is highly localized, as in Tesla can launch in NYC without launching in SF. Currently, big cities like NYC, LA, SF have the highest fares and this is also correlated to high driver wages. Since autonomous cars remove the driver, it creates the most value in a city like NYC. How many cars are needed to launch a ride-sharing service in NYC? Turns out there are only ~15K taxis in NYC, more if you include other for-hire vehicles. So with 10K cars, Tesla can launch a beta in NYC (realistically, they would probably test in a smaller city first), and with maybe 50K cars, they probably have a more compelling product than Uber because the driverless solution is going to undercut Uber prices.

- But Tesla can go beyond that. By the time cars become truly driverless, Tesla will be building on the order of 1M cars a year. They can basically devote say 200K cars a year to their ride-sharing fleet and flood cities one by one with cars, starting with the most lucrative markets like NYC and LA. For example, they can put 100K or however many cars are needed to win NYC, then any oversupply can be moved to the next city. This, of course, is assuming Tesla is first to achieve full autonomy, and that is a big assumption. But the point I’m making is that winning the race to full autonomy is a big deal, even if the lead is 1-2 years. That’s enough time to outcompete Uber in the most important markets and put them in serious trouble.

- I envision the first fleets of driverless cars will be company-owned because of: 1) the tight integration and logistics required (just as Uber is trying it out now), and 2) it is so lucrative that it makes sense financially for the company to own the cars. As Travis Kalanick famously said, he would buy all 500K Teslas in 2020 if they are autonomous. So after the race to achieve full autonomy, there will be a race to produce and launch a company-owned fleet of driverless cars to “seed” a market. It will take some time after that before individuals can add their driverless cars to the fleet to round out the network. When the moment comes that Model 3s become fully autonomous via an OTA update, I don’t think there will be an option to put it to work on either Tesla’s or Uber’s or Lyft’s network. I think an explicit software and logistical integration is required to make that work, so all those Model 3s can only be added to Tesla’s network. Similarly, if say Daimler releases a self-driving car, it will need to be explicitly include "Works with Uber” capability or something. I think the moment Tesla integrates their cars with Uber is when Tesla concedes the ride-sharing battle to Uber.

- As highly as I view Uber, I’m big on giving credit to companies for "shipping" real product vs. just announcing or testing it in a lab. Tesla has to be seen as the leader in autonomous tech for now because they actually have a product being used by customers. Other companies may have something baking, but most of the time this never translates into real product. Similarly, until Tesla launches a ride-sharing service, they do not deserve much credit for being able to compete with Uber on building such a service. However, in this case, Tesla’s technology is much more impressive than Uber’s. This is evident because of the number of other companies (Didi, Lyft, Grab, etc.) capable of replicating Uber’s tech. Besides autonomous tech, the fact that Tesla is leading in battery tech, manufacturing and charging infrastructure makes me very confident they can provide value one way or another in the transportation market even if they lose in ride-sharing.

- My prediction is that we’re actually approaching a peak in the hype cycle where driverless cars are seen as imminent and people are going to stop buying cars in favor of ride-sharing. Before that happens, I think there will be increased excitement over car-buying as the tech adoption curve for EVs hits the majority and many people will want to buy a Tesla or another compelling EV (if one exists). Tesla will have a significant manufacturing scale advantage and will be rounding out their lineup of EVs, while continuing to improve autopilot technology. I believe gigafactory-as-a-product and Elon’s step change in manufacturing efficiency will be hard for other car companies to overcome because they would not have the initial demand to make such large investments. In the mean time, Uber will grow very big, but all the self-driving tech would still be baking in companies’ labs. I’m bullish on Tesla, Uber and Amazon and think they can all win at solving different (albeit converging) parts of the transportation problem.

 

[neroden]

Dave, you have just discovered the "banking risk" which I described in my earliest comments about SolarCity, and which I've discussed repeatedly. It also concerned me greatly.

However, I'm now long SCTY. Here's why:

First, the fate of SCTY on its own. It's a turnaround stock, certainly:
-- management has stated a deliberate intent to get away from the lease/PPA business and into the direct sales / loan business
-- management has an explicit plan to switch to a differentiated product, with that free factory which hasn't opened yet
-- management has stated deliberate intent to "monetize" all the old lease/PPA income streams, getting out of the business, even if they have to do so at slight losses. So far it seems like there is an appetite for this. *This will supply cash flow needs for quite a while*.
-- management has stated intent to slash sales costs and seems to have schemes for doing so
-- anecdotal reports are that their price quotes are coming down to competitive levels

And then the reasons I think the merger is very likely:
-- SolarCity stockholders are almost certain to vote for the merger
-- Tesla stockholders are very likely to vote for the merger for several reasons:
---- Musk said he thought 2/3 would vote for the merger, after talking with institutional shareholders. He's an optimist, so probably it'll be less than that, but still likely to be more than half
---- The single biggest institutional investor is gung-ho in favor.
---- No institutional investors have specifically come out against.
---- Opponents of the merger will generally have sold their stock. Many did so the day it was first made public. Think about it: if you thought the merger was a terrible idea, would you have hung onto TSLA stock? Well, maybe you would have but many wouldn't.
---- New buyers of the stock are buying it with the existence of the merger in mind, and so are probably pro-merger. If you opposed the merger, would you load up on extra TSLA stock right now? Think about it, would you?
---- Opponents of the merger are fighting Elon Musk and the board of directors. But they are not in a position to oust Musk or the board. This makes them very unlikely to want to hang onto the stock -- do you hang on to a stock where you think management is making huge mistakes? Big investors generally don't, unless they think they can force management out.

 

[Fallenone]

Back to the discussion point on Uber. I now think they have a very descent chance of being the first to reach full autonomous. The reason again is data availability.

Retrofitting an ICE with the equipment in their recent debut in Pittsburgh costs about $50k, and as the price of LIDAR continues to drop, it would be cheaper in the future. To retrofit 50k of these cars costs $2.5B. A lot, yes, but not unthinkable for a $68B company. With 50k capable cars collecting data as taxi, the miles they gained could be on a similar scale of Tesla's 150k fleet for regular consumers. After the ramp up of Model 3 it could be a different story, but that gives Uber about 2 years of time to catch up with data accumulation. Also we need to keep in mind that the data Uber collects in this way would be primarily urban while Tesla's highway. Personally I think urban data is harder to get and more valuable to the development of autonomous driving because there are more "corner cases" in urban environment.

And then you need people. But I don't think Tesla has an obvious advantage over Uber on this one. People come and go.

Then there's the pressure. IMO Uber has a lot more pressure than Tesla on this front because it would be a make or break for them. Tesla, not that much. So Uber is more motivated to get this done.

All in all, if Uber has the determination to throw a few $B to get their fleet going, I think they have a very good chance in reaching the finish line first.

 

[wdolson]

On the Solar City purchase. I think the real reason Tesla is buying them is so they can charge for supercharging in every US state. Some US states don't allow you to charge for electricity unless you are registered as a utility, and it's probably easier for Tesla to buy a utility than register Tesla in every state.

 

[JRP3]

That may be one of the reasons but I doubt it's the only one.

 

[MitchJi]

Retrofitting an ICE with the equipment in their recent debut in Pittsburgh costs about $50k, and as the price of LIDAR continues to drop, it would be cheaper in the future. To retrofit 50k of these cars costs $2.5B. A lot, yes, but not unthinkable for a $68B company. With 50k capable cars collecting data as taxi, the miles they gained could be on a similar scale of Tesla's 150k fleet for regular consumers. After the ramp up of Model 3 it could be a different story, but that gives Uber about 2 years of time to catch up with data accumulation. Also we need to keep in mind that the data Uber collects in this way would be primarily urban while Tesla's highway. Personally I think urban data is harder to get and more valuable to the development of autonomous driving because there are more "corner cases" in urban environment.

You are assuming that Uber does this now, which is clearly impossible, but that Tesla is two years away. By the end of 2017 Tesla will have 150k more MS-MX on the road, plus any possible M3's.

 

[Fallenone]

You are assuming that Uber does this now, which is clearly impossible, but that Tesla is two years away. By the end of 2017 Tesla will have 150k more MS-MX on the road, plus any possible M3's.

Why isn't it possible? From a few dozen to a few thousands, the only barrier is money, which Uber does not seem to lack at this stage.

 

[MitchJi]

Retrofitting an ICE with the equipment in their recent debut in Pittsburgh costs about $50k, and as the price of LIDAR continues to drop, it would be cheaper in the future. To retrofit 50k of these cars costs $2.5B. A lot, yes, but not unthinkable for a $68B company. With 50k capable cars collecting data as taxi, the miles they gained could be on a similar scale of Tesla's 150k fleet for regular consumers. After the ramp up of Model 3 it could be a different story, but that gives Uber about 2 years of time to catch up with data accumulation. Also we need to keep in mind that the data Uber collects in this way would be primarily urban while Tesla's highway. Personally I think urban data is harder to get and more valuable to the development of autonomous driving because there are more "corner cases" in urban environment.

You are assuming that Uber does this now, which is clearly impossible, but that Tesla is two years away. By the end of 2017 Tesla will have 150k more MS-MX on the road, plus any possible M3's

Why isn't it possible? From a few dozen to a few thousands, the only barrier is money, which Uber does not seem to lack at this stage.

It's only possible for Uber to start doing that now (assuming that they are ready to start accumulating data on that scale now).

Also it's hard to compete when Uber needs to spend $50k per car, but Tesla makes money on their autopilot equipped cars.

 

[Fallenone]

It's only possible for Uber to start doing that now (assuming that they are ready to start collecting data on that scale now).

Yep, so I'm keeping an eye on this development.

 

[kenliles]

Also it's hard to compete when Uber needs to spend $50k per car, but Tesla makes money on their autopilot equipped cars.

solution:
Uber should just give Tesla the $50k and get the whole car....
Think I know where this ends up!@?

 

[adiggs]

solution:
Uber should just give Tesla the $50k and get the whole car....
Think I know where this ends up!@?

Heh - what price does Uber need to offer, to get you to vote yea on their buyout proposal?