Long-Term Fundamentals of Tesla Motors (TSLA)

[hcsharp]

How do you calculate cost of sales? If you look at Ford's cost of sales alone sure it'll be lower. But in a competitive situation like we have here you have to compare vertically integrated Tesla's cost of sales vs. Ford+Dealer cost. And remember dealer won't be making most money on service anymore so they'll have to start making money on the sale itself. I don't think they stand a chance to vertically integrated model with online ordering system at its core (if it's run well enough).

Add to that that Teslas literally sell themselves for the most part (no advertising costs). Speaking of Model X and its delays and problems, how many Teslas do you think each of those doors opening in the parking lot would sell? That's probably hundreds of millions of advertising dollars right there.

Tesla has stated that its cost of sales is about $2,000 per car. That's much higher than your average franchise dealer network. Tesla has even stated themselves that their cars, in particular EVs, are harder to sell than gas cars. That's part of the reason dealers don't want to sell EVs. The situation will remain true until the public is educated. That will take much longer than 2020. Even if most customers would prefer to buy an EV by then, it will still take more time (more money) to sell one. Eventually the expense will come closer to Tesla's competition. For at least the next several years I see cost of sales to be a disadvantage for Tesla vs other automakers. Of course the legacy automakers have their own problems, but their cost of sales is lower.

A vertical sales model is not necessarily cheaper. Tesla will have to continue opening new stores and service centers when they are capital constrained.

 

[dalalsid]

Ford makes 1.4 billion in a quarter and 7.4 billion for the year with a market cap of 47B
Tesla market cap is now about 24B

I don't know what Tesla should be worth today, but overvalued arguments are at least as valid a bull arguments.

Walmart makes >3B/Q and has market cap of 200B. Amazon makes nothing and has market cap of 300B. There is more to valuation than net income.
More comparisons:
TWX vs NFLX
ManPower vs LinkedIn

 

[dakh]

Tesla has stated that its cost of sales is about $2,000 per car. That's much higher than your average franchise dealer network. Tesla has even stated themselves that their cars, in particular EVs, are harder to sell than gas cars. That's part of the reason dealers don't want to sell EVs. The situation will remain true until the public is educated. That will take much longer than 2020. Even if most customers would prefer to buy an EV by then, it will still take more time (more money) to sell one. Eventually the expense will come closer to Tesla's competition. For at least the next several years I see cost of sales to be a disadvantage for Tesla vs other automakers. Of course the legacy automakers have their own problems, but their cost of sales is lower.

A vertical sales model is not necessarily cheaper. Tesla will have to continue opening new stores and service centers when they are capital constrained.

So I did some looking up. Average dealer advertising cost per car sold seems to be around $600. Now say Ford sold ~2.5M vehicles in 2014 and spent ~$2.5B in advertising in the same year. We're up to about $1600 per vehicle in just advertising alone. Still wanna play?

 

[electracity]

Tesla has stated that its cost of sales is about $2,000 per car. That's much higher than your average franchise dealer network. Tesla has even stated themselves that their cars, in particular EVs, are harder to sell than gas cars. That's part of the reason dealers don't want to sell EVs. The situation will remain true until the public is educated. That will take much longer than 2020. Even if most customers would prefer to buy an EV by then, it will still take more time (more money) to sell one. Eventually the expense will come closer to Tesla's competition. For at least the next several years I see cost of sales to be a disadvantage for Tesla vs other automakers. Of course the legacy automakers have their own problems, but their cost of sales is lower.

A vertical sales model is not necessarily cheaper. Tesla will have to continue opening new stores and service centers when they are capital constrained.

But Tesla gets the full retail price of the car. That said, I don't think direct sales is mostly about cost savings, but rather control.

In a recession Tesla will have a hell of a lot of overhead to support. Dealerships have obvious drawbacks, but also a lot of upside in finance, management, and risk sharing.

 

[wdolson]

Ford makes 1.4 billion in a quarter and 7.4 billion for the year with a market cap of 47B
Tesla market cap is now about 24B

I don't know what Tesla should be worth today, but overvalued arguments are at least as valid a bull arguments.

I do agree with you that overvalued arguments can be made here and I think Tesla might be a bit overvalued. However I do take issue with valuationmatters reasons. They don't appear to have actually done their homework and instead pretty much calls Tesla the plaything of a crazy billionaire.

I think some sound arguments could be made that the Model 3 is a step too far and what succeeded at the high end of the market won't succeed in the middle, or Tesla is going to have some trouble scaling up from 50,000 cars a year to 500,000. I do think Tesla's goal of 500,000 cars a year by 2020 may be too ambitious. However, I haven't seen any convincing arguments in this part of the thread on why these things may come to pass. What arguments I have seen are easily refuted and the last post was heavily laden with negative emotions about Tesla and Elon Musk himself. I have tried to make the point to valuationmatters that they are likely going to lose money on Tesla if they continue to base their valuation on the factors they are basing it on.

I've said a number of times, Tesla may fail. I can think of a couple of scenarios: something may happen to Elon Musk and the company loses focus and flounders, the economy could crash again, some catastrophic flaw could be found in cars already out there that turns the public against Tesla, the Model 3 could be a failure and drag the company under, or Tesla energy will be an albatross around Tesla neck that will drag them under. The Model 3 failure and TE are the only cases that may have signs now. The others are more point events that can't be predicted.

So if the Model 3 is on track for failure, how is that going to happen? What specifically are they doing wrong that will lead to that failure? So far everything I see, from an engineering and manufacturing perspective, they are on a solid track to produce something in the quantities they have predicted. The Gigafactory, rather than a folly, is a critical component of that plan. valuationmatters seems to think that the GF is a massive miscalculation and can't see how Tesla is going to lower battery costs with it. Unlike valuationmatters, I have read the biography of Elon Musk and I understand his character to some degree. Musk doesn't commit to anything until he has done both the science and the financial calculations and he sees a clear advantage to the plan he's committed to. He has started 4 successful start up companies with a lot of hard work, a bit of luck, but the biggest factor is every risk he takes is calculated to the 10th decimal point before he commits. If he believes the GF is going to lower battery costs by 30%, the only way that isn't going to happen is if something drastic happens that throw his calculations out of whack. He's done the painstaking math, I doubt valuationmatters has. Musk probably knows the process and materials needed to make batteries as well as Panasonic does at this point. That would be part of his research before doing the calculations.

As far as Tesla Energy failing, that's possible too. Solyndra failed because they went with one technology and the market went with a cheaper one just after they committed to their technology. With TE Tesla is wading into a space that is open to many other competitors that can adapt much quicker than in the car business. Battery companies would be their natural competitors. There is some spare Li-ion production capacity and some potential competitors might be working on their own battery storage solutions. Tesla's strength is they have learned a tremendous amount of institutional knowledge about how to fast charge Li-ion batteries quickly and they are most likely leveraging that technology into their stationary storage solutions.

valuationmatters dismisses the whole thing as a folly, but again I have some understanding of Elon Musk. He has looked at the renewable energy industry and identified the worst problem which is storage. Wind is intermittent and sunlight varies and doesn't shine at all nearly half the day. To make renewables more usable, some kind of storage solution needs to be built. Tesla is marketing to both energy producers as well as end consumers with solar arrays. It's a massive potential market for the energy producers alone. Yet valuatoinmatters gives it zero value because Tesla hasn't produced any systems yet. IMO, that's very short sighted thinking and if you are trying to come up with a long range target price for investing, it's a good way to lose money. The investors who make the most money are ones who can predict what will happen in the future the best and part of that is just following the data where ever it leads rather than dismissing possible upsides out of hand because the upside doesn't exist today.

Tesla is valued as high as it is because the majority of investors who have put money into the company see a high likelihood of massive growth over the next decade. It's possible they are over optimistic which has led to the stock being over priced, but I'm left unconvinced by valuationmatters reasons for their assumptions that went into the calculations. Many of the factors are not well thought our or seem to be based on some bias that will likely lead to their losing money on the deal.

 

[lango]

valuationmatters is not interested in discussing the model he uses and the input to that model and what probability he assigns to events. He just repeats the same arguments and refuses to elaborate. It is interesting to hear the bear case but his model is not working.

I guess comparing valuation to other car manufacturers do have some value, but it has to be combined with other models. Tesla is a growth stock and not a value stock, which is different from almost all car manufacturers.

There is a not insignificant chance of them entering new markets, like the autonomous fleet service. Compare Amazon before AWS, Google with maps when it had no obvious commercial value, Apple before iPhone, Facebook before Instagram etc. You have to pay a premium for those unknowns that often comes from great management. valuationmatters puts all that at 0 in his model, including Tesla Energy. If you only value those companies conservatively with only the core business they will come out as overvalued.

From a valuation perspective you can definitely make a good case at this point that Tesla are fairly valued on the cars alone. Teslas valuation has gone down a lot with respect to certain metrics like P/S. It has been at 10 and now it is around 3. P/S and growth rate are the primary metrics I use for Tesla. This assumes though that they will not have a cash problem. I find their cash position and capital requirements hard to dig into (and also a bit boring ).

 

[ludicrousspeed]

I had a few accounting related questions for those who are knowledgable in the area when it comes to Tesla's finances.. I'm sure nobody knows these answers for certain but I'd like to gage opinions regarding these areas.. thank you in advance for any responses.

1) How variable are SGA costs going to be over time as Tesla expands and produces significantly higher volumes? SGA expenses were 18% of revenues in Q3'14 and have risen each following quarter, most recently accounting for 25% of revenues for Q3'15. Will these costs continue to be a bigger expense in relation to sales long-term or do you expect SGA expenses to decrease in proportion to sales (< 20%?) as Tesla continues to grow?

2) Is the market not factoring in Net Operating Losses (NOLs) that Tesla can carry forward into profitable years? I've never heard anybody claim Tesla's current quarterly losses as an advantage going forward in respect to the deferred tax assets that they represent for the company. These can come into play and help Tesla reduce their taxable income once they are consistently profitable on a GAAP basis down the line.

3) Do you suspect that there will be a huge discrepancy between the book value and actual/market value of some of Tesla's assets? For example, Nevada is estimating that the economic impact of the Gigafactory will be in excess of $100Billion over the next 20 years, but the GF will probably be valued ~$2.5B on their balance sheet upon completion, then be depreciated immediately after. I understand the "economic impact" not really related to the value it provides to Tesla because it relates to local job/wage increases. However, the GF is so valuable for Tesla in so many areas and gives the company significant competitive advantages that I feel are being extremely understated.. and the GF is just one example of such an asset (supercharger network, intangibles, etc.) that is being misrepresented IMO.

 

[Fallenone]

1. How did you come up with SGA being 24% since Q1'14 and 34% Q3'15? Based on the numbers in their reports, I got around 20% for 2014 and Q1, Q2 2015. Q3 2015 was 25%. And these are % of GAAP rev. If we account for leasing, the % should shrink by about 5%. For Q3 SGA, I'm not sure why it increased that much.

2. I don't think NOL will ever be considered as an advantage. But on non-GAAP basis, they are not NOL now.

3. Have no idea.

I had a few accounting related questions for those who are knowledgable in the area when it comes to Tesla's finances.. I'm sure nobody knows these answers for certain but I'd like to gage opinions regarding these areas.. thank you in advance for any responses.

1) How variable are SGA costs going to be over time as Tesla expands and produces significantly higher volumes? SGA expenses were 20% of revenues in Q2'13, have been above 24% since Q1'14, and most recently 34% of revenues in Q3'15. Will these costs continue to be a bigger expense in relation to sales long-term or do you expect SGA expenses to decrease in proportion to sales (maybe 25% range?) as Tesla continues to grow?

2) Is the market not factoring in Net Operating Losses (NOLs) that Tesla can carry forward into profitable years? I've never heard anybody claim Tesla's current quarterly losses as an advantage going forward in respect to the deferred tax assets that they represent for the company.

3) Do you suspect that there will be a huge discrepancy between the book value and actual/market value of some of Tesla's assets? For example, Nevada is estimating that the economic impact of the Gigafactory will be in excess of $100Billion over the next 20 years, but the GF will probably be valued ~$2.5B on their balance sheet upon completion, then be depreciated immediately after. I understand the "economic impact" not really related to the value it provides to Tesla because it relates to local job/wage increases. However, the GF is so valuable for Tesla in so many areas and gives the company significant competitive advantages that I feel are being extremely understated.. and the GF is just one example of such an asset (supercharger network, intangibles, etc.) that is being misrepresented IMO.

 

[lango]

I had a few accounting related questions for those who are knowledgable in the area when it comes to Tesla's finances.. I'm sure nobody knows these answers for certain but I'd like to gage opinions regarding these areas.. thank you in advance for any responses.

1) How variable are SGA costs going to be over time as Tesla expands and produces significantly higher volumes? SGA expenses were 20% of revenues in Q2'13, have been above 24% since Q1'14, and most recently 34% of revenues in Q3'15. Will these costs continue to be a bigger expense in relation to sales long-term or do you expect SGA expenses to decrease in proportion to sales (maybe 25% range?) as Tesla continues to grow?

2) Is the market not factoring in Net Operating Losses (NOLs) that Tesla can carry forward into profitable years? I've never heard anybody claim Tesla's current quarterly losses as an advantage going forward in respect to the deferred tax assets that they represent for the company.

3) Do you suspect that there will be a huge discrepancy between the book value and actual/market value of some of Tesla's assets? For example, Nevada is estimating that the economic impact of the Gigafactory will be in excess of $100Billion over the next 20 years, but the GF will probably be valued ~$2.5B on their balance sheet upon completion, then be depreciated immediately after. I understand the "economic impact" not really related to the value it provides to Tesla because it relates to local job/wage increases. However, the GF is so valuable for Tesla in so many areas and gives the company significant competitive advantages that I feel are being extremely understated.. and the GF is just one example of such an asset (supercharger network, intangibles, etc.) that is being misrepresented IMO.

1) I think they will decrease. However, what is SGA and what is R&D and what is COGS are murky and up to the company. Overall cost should decrease as percentage of revenue (otherwise they are in big trouble). You have to adjust for lease and deferred revenue also with respect to SGA. i don't know what is driving the SGA, I guess it is Service Centers, warranties, show stores and opening national offices?

2) I don't think taxes matter at all at this point. They are not valued based on expected profits and if they will be profitable it will be a small one. So the tax effect I think can be ignored. Now if they do turn a significant profit 6-8 years from now then it is different. In general though I think the market ignores temporary boost in earnings due to taxes.

3) You are not allowed to boost book value just because an investment is worth more to you. The book value is the purchase value/cost of the assets that you are allowed to depreciate. And yes, book value is not a good measure. There are many items that are worth a lot of money but are worthless according to the book value. For example for airlines or freight companies that owns some of their fleet.

 

[ludicrousspeed]

2) I don't think taxes matter at all at this point. They are not valued based on expected profits and if they will be profitable it will be a small one. So the tax effect I think can be ignored. Now if they do turn a significant profit 6-8 years from now then it is different. In general though I think the market ignores temporary boost in earnings due to taxes.

1. How did you come up with SGA being 24% since Q1'14 and 34% Q3'15? Based on the numbers in their reports, I got around 20% for 2014 and Q1, Q2 2015. Q3 2015 was 25%. And these are % of GAAP rev. If we account for leasing, the % should shrink by about 5%. For Q3 SGA, I'm not sure why it increased that much.

2. I don't think NOL will ever be considered as an advantage. But on non-GAAP basis, they are not NOL now.

For the NOLs, I was referring to future tax advantages once they are profitable on a GAAP basis. I know this will probably be at least five years but it is something beneficial to consider down the line.

As far as the SGA expenses, I made a mistake in my model. Thank you for pointing that out, I have edited the original post.

 

[Zhelko Dimic]

I do agree with you that overvalued arguments can be made here and I think Tesla might be a bit overvalued. However I do take issue with valuationmatters reasons. They don't appear to have actually done their homework and instead pretty much calls Tesla the plaything of a crazy billionaire.

I believe there are smart bears. But they seem to keep quiet.
The ones we hear most often are 1. paid shrills, 2. emotionally charged haters that repeat same arguments ad nausea, and 3. not too intelligent individuals

Smart bears(some hedge managers, Cody Willard), in my opinion are most likely to be combination of 1.righteous (Tesla spending government money), 2.driven by ego (I said that is too high valuation, and god damn, I must be right), and 3.opportunistic (even if I'm wrong, Tesla is high beta, there is money to be made on swings)

 

[wdolson]

I believe there are smart bears. But they seem to keep quiet.
The ones we hear most often are 1. paid shrills, 2. emotionally charged haters that repeat same arguments ad nausea, and 3. not too intelligent individuals

Smart bears(some hedge managers, Cody Willard), in my opinion are most likely to be combination of 1.righteous (Tesla spending government money), 2.driven by ego (I said that is too high valuation, and god damn, I must be right), and 3.opportunistic (even if I'm wrong, Tesla is high beta, there is money to be made on swings)

I wouldn't questions someone's intelligence. I've found that most silly behavior is driven by lack of wisdom or emotional thinking rather than lack of ability to learn.

I suppose some arguments could be made for Tesla taking government money. The state of Nevada made a deal for the Gigafactory, but it was primarily tax breaks which don't kick in until Tesla makes money and I think they practically gave away the land, but the land wasn't worth much to begin with. Tesla does benefit from tax breaks to end consumers (in the US and other countries too), but they get no money from the US government directly. The only money they did get was paid back a couple of years ago. Any argument that hinges on Tesla living on handouts from the feds is automatically discounted due to obvious lack of effort to get up on the facts.

 

[MitchJi]

I thought that most of the GF tax breaks are sales taxes.

 

[hcsharp]

I thought that most of the GF tax breaks are sales taxes.

Basically correct. They got a use tax exemption on equipment purchased for manufacturing. I never really considered it a tax break in the first place because most states already have a use tax exemption for manufacturing equipment.

 

[wdolson]

Here are the details of the deal:
http://insideevs.com/official-1-3-billion-incentives-brings-tesla-gigafactory-nevada/

Most of these are spread out over many years which does dilute the impact to Nevada and the benefit to Tesla. the referenced article from the RJG was written before the deal was approved by the legislature said that Nevada was going to buy the right of way in the industrial park for $43 million (which is money in the pockets of the industrial park owners) and extend the road to Highway 50. I don't know if the deal made it through the Nevada legislature unchanged.

 

[renim]

I believe there are smart bears. But they seem to keep quiet.
The ones we hear most often are 1. paid shrills, 2. emotionally charged haters that repeat same arguments ad nausea, and 3. not too intelligent individuals

Smart bears(some hedge managers, Cody Willard), in my opinion are most likely to be combination of 1.righteous (Tesla spending government money), 2.driven by ego (I said that is too high valuation, and god damn, I must be right), and 3.opportunistic (even if I'm wrong, Tesla is high beta, there is money to be made on swings)

I think you are missing the 2 more classes of bears

1, robo bears, or near robo bears (spreadsheet procedural driven)

2, Perma bears, like Chanos who tend to follow the following
Value Traps: Some Common Characteristics

• Cyclical and/or overly dependent on one product
• Hindsight drives expectations
• Marquis management and/or famous investor(s)
  
• Appears cheap using management’s metric
  
• Accounting issues

so whether it is a natural gas producer or Tesla or an education company, the unemotional bears will sniff it out. 9 out of 10 times they may be right, the other 1 out of 10 times can be very expensive for them.

 

[sundaymorning]

There are also bears who harp on demand issues when the macros are bearish only to flip the switch and turn bullish once TSLA hits $200. Suddenly in this scenario, they tend to think Elon is no longer lying about demand. But once the macros changes again, oh boy... Here they come. They're all over the short term thread and you know who they are. If I had listened to their BS in 2013 I wouldn't have been here with all my doughs today.

 

[wdolson]

Just something that came to mind pondering... I think some of the bears don't have enough imagination. If it doesn't exist today, they have a hard time conceiving that it may well exist in a year or two, so their inability to imagine the future clouds their analysis of the stock.

On the other hand some bulls for Tesla and/or other EVs have imaginations that aren't properly grounded in reality and seem to think that the entire world will be driving EVs by 2030 or something like that. Or they think that any car maker that can make a limited run of EVs can also produce millions if they just decide to turn on the spigot almost overnight.

Just observing how these threads whipsaw back and forth.

 

[austinEV]

Just something that came to mind pondering... I think some of the bears don't have enough imagination. If it doesn't exist today, they have a hard time conceiving that it may well exist in a year or two, so their inability to imagine the future clouds their analysis of the stock.

On the other hand some bulls for Tesla and/or other EVs have imaginations that aren't properly grounded in reality and seem to think that the entire world will be driving EVs by 2030 or something like that. Or they think that any car maker that can make a limited run of EVs can also produce millions if they just decide to turn on the spigot almost overnight.

Just observing how these threads whipsaw back and forth.

Tesla doesn't have to ramp to millions overnight (and I challenge you to find anyone who says that). They just have to ramp faster than anyone else. Given that the majors are doing everything they can to NOT ramp EV's quickly, it is a reasonably expectation that TM will get and keep a lead in EV market share, and EV market share will itself increase. It doesn't have to be binary all on, all perfect. Just a quickly growing company becoming a market leader in a quickly growing market space. That is a fine company and should be a fine investment in the long run. And yes, that is what Bear's don't imagine. If you think EV's have no future, TSLA is a pretty attractive short.

 

[wdolson]

Tesla doesn't have to ramp to millions overnight (and I challenge you to find anyone who says that). They just have to ramp faster than anyone else. Given that the majors are doing everything they can to NOT ramp EV's quickly, it is a reasonably expectation that TM will get and keep a lead in EV market share, and EV market share will itself increase. It doesn't have to be binary all on, all perfect. Just a quickly growing company becoming a market leader in a quickly growing market space. That is a fine company and should be a fine investment in the long run. And yes, that is what Bear's don't imagine. If you think EV's have no future, TSLA is a pretty attractive short.

There are many articles out there claiming the "Tesla killer" is coming from car maker x and it appears the authors just assume that because GM can make 10 million ICE a year it's a trivial thing to make 1 million BEVs a year. The same sorts of things are said about BMW, Mercedes, Audi, VW, insert the brand name who has claimed to be working on an EV. These are more the EV bulls than the Tesla bulls specifically and I've seen a lot of people here on the forum believing these people. Ironically many people tend to be more bearish about Tesla's claims that they can produce 500,000 cars a year by the early 2020s, despite the fact they are the only manufacturer securing enough battery production to do that.

The Tesla bulls don't usually talk too much about production numbers. There are threads on this forum where people believe the Model S is going to have a complete redesign this year, or some feature that requires a lot of engineering is going to be appearing on the Model S this year. The reality is Tesla doesn't have the engineering resources to do a major redesign of the Model S right now. All their resources are focused on the Model 3 which is a make or break project for the company. The Model S may not see any significant re-engineering for several years.

On this investment thread most of the Tesla bulls are fairly realistic, IMO.