Long-Term Fundamentals of Tesla Motors (TSLA)

[ItsNotAboutTheMoney]

Regarding margins, 3 things to keep in mind:

1) Margins will undoubtedly increase with economies of scale. TSLA will have significantly higher margins building 500k cars per year than currently. Perhaps not AAPL margins, but certainly much, much higher than Toyota or Ford.

2) Battery technology in 10-15 years will greatly improve, reducing TSLA's largest expense, enhancing margins.

3) Once EVs go mainstream (I believe that they will, especially when #2 happens), competition will be stiffer. Although that will cut into margins somewhat, AAPL (since they are the market leader) is able to maintain higher margins than its competitors, and I believe the same will be the case for TSLA.

No. Tesla has already stated a target _gross_ margin of 10 to 11% on Model 3. Even with cheaoer batteries, the price can't fall that low, and Power electronics are expensive and in his storge keynote JB Straubel talked prices _forecast_ to _fall_ to $0.10/W, meaning $10k for a 100kW system. With a $10k battery and $10k inverter and other eldctronics, the base price minimum is constrained, so they'll have narrow margins to be able to be price competitive. (Note hat Tesla makes its own power electronics, since its aims require improvements in that area. Power electronics have been ignored in cost discussions, but fortunately we're now at the poi t where battery and panel prices have dropped enough that he electronics are a gorwing perce tage of cost. Prices continue to fall, which means there's still room for system prices to drop and with JB Straubel saying that storage only needs C/2 electronics, it suggests that a 10kW/20kWh system could end up costing $5 - 6k with Gigafactory battery pricing, which would mean adding 1c/W, asuming a conservative 10 year battery life. Given that PV plus storage would then lower grid integration costs dramatically, I am not surprised that JB Straubel says we're not thinking big enough and that Barclays cut ratings on utilities.)

 

[DaveT]

Regarding margins, 3 things to keep in mind:

1) Margins will undoubtedly increase with economies of scale. TSLA will have significantly higher margins building 500k cars per year than currently. Perhaps not AAPL margins, but certainly much, much higher than Toyota or Ford.

Tesla has a choice with Gen3 - either sell low quantity and high margin, or high quantity and lower margin. According to Elon (last year I believe at Teslive), Tesla is choosing for high quantity of Gen3 and lower margin. What "lower margin" is unclear although Elon has mentioned that in the long-term they expect to have mid-teen operating margin. In order to have mid-teen operating margin, it's likely they are going to need need gross margin to be somewhere between 25-30%.

So just because Tesla will have more economies of scale later, doesn't mean their gross margin will improve much, if any.

2) Battery technology in 10-15 years will greatly improve, reducing TSLA's largest expense, enhancing margins.

You're assuming that Tesla will translate battery tech improvements into margin improvements, but this isn't necessarily the case. Battery improvements can translate into higher range and higher demand, and not necessarily margin improvements.

Model S/X will likely have high gross margin since they're large premium/luxury cars, so probably 30-35% (maybe even a bit higher than 35%).

However, Gen3 will have a lower gross margin since the competition will be fiercer in the entry level luxury sports sedan market, so expect Gen3 gross margin to be 20-25% to start out (after 1-2 years of production) and then gradually rising over time to 25-30%.

3) Once EVs go mainstream (I believe that they will, especially when #2 happens), competition will be stiffer. Although that will cut into margins somewhat, AAPL (since they are the market leader) is able to maintain higher margins than its competitors, and I believe the same will be the case for TSLA.

I agree with this. But typically the auto industry is a low margin business. And that's what's appealing to Tesla - they have potentially to have larger margin than their competitors while selling a ton of cars.

But overall I'd caution against the thinking that Tesla's gross margins are always going to go up. Gen3 will place immense downward pressure on gross margin, especially during the first few years of production.

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No. Tesla has already stated a target _gross_ margin of 10 to 11% on Model 3.

I think you're confusing gross margin with operating margin.

By 2020, Tesla is projecting mid-20% gross margin and mid-teen EBIT margins.

From http://www.valuewalk.com/2014/05/tesla-motors-inc-tsla-worries-overdone/:

"The analyst noted that by 2018 or 2020 and with higher volumes, Tesla Motors Inc expects to have operating expenditures at around 10% to 11% of sales, with gross margins in the mid-20% range. The automaker is predicting EBIT margins in the mid-teens and earnings per share in the $20 range before receiving any benefits from adjacent businesses not in the auto industry."

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Even with cheaoer batteries, the price can't fall that low, and Power electronics are expensive and in his storge keynote JB Straubel talked prices _forecast_ to _fall_ to $0.10/W, meaning $10k for a 100kW system. With a $10k battery and $10k inverter, the base price minimum is constrained, so they'll have narrow margins to be able to be price competitive. (Nore that Tesla makes its own power electronics).

$10k for an inverter in the long-term? I think that's way too much, especially with economies of scale that Gen3 will bring. Also, Gen3 will likely have a battery pack around 50 kWh.

 

[JRP3]

You can buy hand built 100kW inverters in single quantities right now for $8k, I'm sure Tesla's costs are far lower.

 

[ItsNotAboutTheMoney]

You can buy hand built 100kW inverters in single quantities right now for $8k, I'm sure Tesla's costs are far lower.

At the end of his keynote, JB Straubel talked about all the power electronics and said "it'll be sub 10 cents per watt in the not too distant future." He was talking about the grid storage, but I wouldn't expect the Model S, with harsher performance requirements, to be cheaper than the number he gave. Inverter pricing might be like battery pricing, where all is not equal.

 

[JRP3]

I can't imagine what would be in an inverter that is so expensive. I'd think the most expensive parts would be the IGBTs, which might be around $100-$200 each in bulk, and you'd need 6 of them.

 

[FredTMC]

Tesla's cells should not drop 10% of capacity after only 365 cycles, more like 1000+ cycles.

one be guy presented charts at TMC Connect last weekend. He had 75k miles on Odo and had lost 12% of capacity. He used an accurate method of measuring loss. He did a range charge and then drove down to zero miles. His car only put out 70kwh now and it used to put out 80 kWh. That being the case, he did say he doesn't baby the battery. He does a lot of range charges and drives down to low SOC a lot.

 

[JRP3]

The only problem with that is we've seen the car's reported capacity can be less than actual capacity, and can sometimes be recovered by leaving the car plugged in for long periods when fully charged. Do you know if he made any attempts to recover the capacity?

 

[kenliles]

Nice bit of a breakthrough at Stanford looks like. Not saying anything imminent of course, but these are important steps to keep in mind for 2-3 years down the road, painting a strong forward picture for EV and Solar-storage

Phys.Org Mobile: Researchers achieve 'holy grail' of battery design: A stable lithium anode

 

[ecarfan]

He had 75k miles on Odo and had lost 12% of capacity. He used an accurate method of measuring loss. He did a range charge and then drove down to zero miles. His car only put out 70kwh now and it used to put out 80 kWh.

I assume you meant to type "85" instead of "80"? Or was he factoring in a estimate of the amount of battery capacity that the firmware keeps "hidden" in reserve?

I also question the accuracy of his current battery capacity measurement of 70kWh. I suspect it's a difficult thing to measure unless you are a Tesla engineer who has access to firmware functions that we as owners do not have access to.

 

[hockeythug]

Assuming the cost of the battery comes down with the gigafactory will Tesla lower the price on say the 2020 Model S or will they include features standard that are currently options to keep the same price point? Or just make a like a 120kWh version the base Model S?

 

[32no]

I wrote an article on Seeking Alpha and I'm having a field day with the comments section.

Why Tesla Stock Is Undervalued, Not Overvalued - Tesla Motors (NASDAQ:TSLA) | Seeking Alpha

 

[abasile]

one be guy presented charts at TMC Connect last weekend. He had 75k miles on Odo and had lost 12% of capacity. He used an accurate method of measuring loss. He did a range charge and then drove down to zero miles.

The trouble with this is that the size of the "reserve" below "zero miles" was not necessarily constant. Wasn't there at least one firmware update that increased the size of the reserve? Driving until the car actually runs out of charge would seem to enable a more accurate measurement of total battery capacity (not that I'd want to do it).

In any case, 12% loss after 75K miles isn't that great, but it's not terrible, and is probably significantly worse than average. Even at that rate of loss, the original battery pack should continue to be quite useful at 200K miles and beyond.

 

[Bgarret]

Shout out to Joel aka MichiganmodelS - Mobileye IPO this week. Important partner with Tesla for autonomous driving car.

http://www.siliconbeat.com/2014/07/28/tesla-watchers-eye-mobileyes-500-million-ipo/

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I wrote an article on Seeking Alpha and I'm having a field day with the comments section.

Why Tesla Stock Is Undervalued, Not Overvalued - Tesla Motors (NASDAQ:TSLA) | Seeking Alpha

Nice Article....have you thought about the potential valuation if they recognized the same or 2x (because of Model X sales) ZEV revenue going forward. The ZEV revenue for 2013 was about $140 million. That is approximately an extra $1 Billion of revenue at 100% margins over the next 6 years. The California CARB rules haven't changed, they will get more stringent later this year - not sure about the exchange and if ZEV credits are still actively traded. Would be an interesting exercise, increasing your current profit model by 30%, with a requisite current valuation of about $300.

Just a thought.

 

[SteveG3]

Assuming the cost of the battery comes down with the gigafactory will Tesla lower the price on say the 2020 Model S or will they include features standard that are currently options to keep the same price point? Or just make a like a 120kWh version the base Model S?

My gut is that they would lean more towards increasing range vs. lowering price on the S & X, though it may well be a combination.

I see this happening earlier, in 2017-2018.

In fact, I think we might see a mini version of this in 2015. Even if they use the same cells and haven't yet really rolled out lower battery costs next year, they may offer more attractive ranges by sharing some of the cost savings they are seeing in improved production methods (production is currently shut down as part of an investment in improved efficiency on the line) and economies of scale as they go from ~30K vehicle run rate to ~75K run rate.

I've thought about this some, and as an investor and consumer, I'd love to see them ring out about $3.5K in reduced production costs, and come out with something like this in 2015:

$70K, 70 kWh Model S, ~235 mile epa range, replacing 60 kWh without a price increase

$77K, 85 kWh Model S, $2-3K reduction in price, maintaining 265 mile epa range

$84K, 100 kWh Model S, ~305 mile epa range,


if the cost to Tesla per kWh at the pack level is $200-250, they could pull this off by finding ~$3.5K in cost savings elsewhere to compensate for the improved value they are offering the customer on the battery. $3.5K in production cost savings is basically a 3.5% improvement in gross margins, and Elon has already suggested 25% gross margins would go up, I believe he said to 28% and possibly more. I realize as an investor near term it would seem better to keep the profits and not pass on value to customers as they are supply constrained. But, long term, I think the "wow" factor of offering better value pricing will do a lot for the brand and drive home to more people that EVs have a far brighter future than ICE vehicles.


We have had various hints that there will be a bigger battery for the X, and even some hints of a bigger S battery next year (IIRC, Elon in Norway).

 

[RobStark]

Price reductions for a luxury brand is bad news.

They should simply not raise prices and let inflation effectively reduce prices over time if that is the goal.

Better yet let the reduced cost pay for things many potential owners really want like adaptive cruise control(and other electronic nannies) and luxury items like heated/cooled seats. Add those items without increasing price.

 

[SteveG3]

Price reductions for a luxury brand is bad news.

They should simply not raise prices and let inflation effectively reduce prices over time if that is the goal.

Better yet let the reduced cost pay for things many potential owners really want like adaptive cruise control(and other electronic nannies) and luxury items like heated/cooled seats. Add those items without increasing price.

If the package on those features is ready and matches the cost reduction that could be a good route as well.

I do disagree with applying your general statement about luxury brands and price reductions being bad to Tesla.

Tesla is Tesla. They do what is smart and offers the most value, not what some received wisdom about branding says. I think it's smart and offers value to customers to show that the cost of EVs are coming down, and show that Tesla will pass on much of that improvement to it's customers.

Conventional wisdom was you add 30-50% to your pricing in China because you can. In Elon's blog, he said Tesla was taking some risk it could be perceived as Tesla's having lower value because of the lower pricing relative to other Western luxury auto brands, but it's what he thought was right. I think this move was a significant part of the enthusiasm and affection Elon and Tesla received when he went to China... not a mistake that lost them "status."

 

[RobStark]

If the package on those features is ready and matches the cost reduction that could be a good route as well.

I do disagree with applying your general statement about luxury brands and price reductions being bad to Tesla.

Tesla is Tesla. They do what is smart and offers the most value, not what some received wisdom about branding says. I think it's smart and offers value to customers to show that the cost of EVs are coming down, and show that Tesla will pass on much of that improvement to it's customers.

Conventional wisdom was you add 30-50% to your pricing in China because you can. In Elon's blog, he said Tesla was taking some risk it could be perceived as Tesla's having lower value because of the lower pricing relative to other Western luxury auto brands, but it's what he thought was right. I think this move was a significant part of the enthusiasm and affection Elon and Tesla received when he went to China... not a mistake that lost them "status."

Tesla has been very successful at breaking conventional wisdom, so far.

But it does not exist in a unique universe unto itself.

Conventional wisdom exist for a reason,it is usually right. Though not always.

Reducing prices is a bridge too far IMO, particularly when comparably priced Teslas are not comparably equipped.

It made a pitch to Chinese consumers about "fair universal pricing." Many/most Chinese consumers bought this. This is a rather unique situation.

If Tesla starts universal price cuts the pitch is " we are passing on savings to you" is a mass market - low end market pitch.

The headlines all over the world will be distressed merchandise being discounted to boost demand.

I think Tesla needs to pick its fights when taking on conventional wisdom,the financial/mass media, and Tesla/BEV haters. And this isn't one of them.

Even if the new features don't perfectly align, if lower price is the goal then new features/value added is how relative lower price adjustments should be done.

Tesla's "mass market car" is entry level luxury to everyone else.

Early adopters and 2nd wave adopters are not the same as conventional buyers.

Tesla wants to move from selling to people that "think differently" to to people that think "conventionally."

That is the only way to electrify the automobile.

 

[green1]

I'm fairly certain that the Model S will stay in the same ballpark for price, I suspect we'll see a bunch of new features though:
- Automatic Cruise control, probably bundled in the tech package if I had to guess
- longer range, likely replace the 60 with the 85 and add something larger in place of the 85
- ventilated seats
- probably a lot of "minor" improvements, better seats, LTE data connection, better quality floor coverings, etc.
My hope is that most new features to the S will be done without major cost increases because of the savings happening elsewhere.

We're also likely to see that whenever they do their re-design of the S it will probably include more interior features (coat hooks, storage compartments, all the stuff everyone takes for granted, but Tesla doesn't currently provide)

The end result will be that not only will Tesla have the best drivetrain out there, but the best of EVERYTHING eventually. (so that reporters can't complain about the missing disco-ball that some other company thinks you need)

 

[JRP3]

I expect the S to get more range and more features, not a price drop. The Model 3 will meet the needs of those concerned with price.

 

[kenliles]

I expect the S to get more range and more features, not a price drop. The Model 3 will meet the needs of those concerned with price.

agree 100%-