Long-Term Fundamentals of Tesla Motors (TSLA)

[RobStark]

any opinions on the Oil price in the influence on TSLA?
If WTI Crude drops to:
-80
-70
-60
-50?

Also the implications for the world economy of such prices.

Western oil production (North America, North Sea) average cost is over $60. If the price hits $70 supply will begin to contract.

The $1 Trillion annual wealth transfer from industrialized countries to non-industrialized countries will shrink significantly and boost economic growth in the industrialized countries.

In the industrialized world only Canada and Norway are net exporters of oil.

The UK became a net importer in 2013.

 

[kalikgod]

Limiting capacity to the Freemont plant has interesting implications. No capacity to grow in 2021. Moreover, gains in 3Y compete with capacity for SX. This implies declining revenue and declining profit. Basically, it's not sustainable. The only way to sustain growth is to get more factory space. If 3Y are not priced high enough to pay for the expanded capacity, then they probably not be worth doing at all. It certainly won't do anything to bring EVs to the masses.

So given this absurdity, you may want to consider two scenarios: one with expanded capacity and the other without. You also may want to build up your assumptions about revenue growth and unit growth in SX, then back into the implied volumes of 3Y to make this work. I might try out myself.

It seems I have not explained myself very well. I believe Tesla will expand to have vehicle factories and battery factories in Europe and Asia. One or both of these factory pairs will be set to come online around the time Tesla maxes out the Fremont factory and GigaFactory.

But for the purposes of taking stabs at the dark on stock prices 6 years in the future, I decided to bound the problem by limiting to the output of Fremont and the GigaFactory. These are the only two factories Tesla is currently expanding into. I think the proper way to look at the optimist/pessimist cases, is if Tesla reaches this capacity in 2019, 2020, or later. I believe they will attempt to maximize these facilities before expanding production to other continents.

The 2020 P/E in my rough guess baseline case was 50. That is still triple other automakers. I believe that represents the fact they will still be aggressively expanding, and a chance that they build a significant second business in stationary storage.

 

[jhm]

It seems I have not explained myself very well. I believe Tesla will expand to have vehicle factories and battery factories in Europe and Asia. One or both of these factory pairs will be set to come online around the time Tesla maxes out the Fremont factory and GigaFactory.

But for the purposes of taking stabs at the dark on stock prices 6 years in the future, I decided to bound the problem by limiting to the output of Fremont and the GigaFactory. These are the only two factories Tesla is currently expanding into. I think the proper way to look at the optimist/pessimist cases, is if Tesla reaches this capacity in 2019, 2020, or later. I believe they will attempt to maximize these facilities before expanding production to other continents.

The 2020 P/E in my rough guess baseline case was 50. That is still triple other automakers. I believe that represents the fact they will still be aggressively expanding, and a chance that they build a significant second business in stationary storage.

I get where you're going with this pessimistic scenario. I was just noting that this bound capacity assumption is in fact pessimistic. It basically means that M3 does not have the economics to support its expansion. Under that scenario, I think Tesla would be prudent to be a profitable niche player. So in that case, any growth it could muster in the high end vehicles would displace 3Y so as to maximize earnings under constrained factory capacity. (This is basically how the Model S 60 is treated right now. Always last in line.) So under this scenario, you could have SX take up the majority of capacity, perhaps 400k SX and 100k 3Y. This is still a very pessimistic scenario because it implies little growth opportunity beyond high end segments.

All the best, James.

 

[jhm]

A few more thoughts about this pessimistic scenario. What would make the economics of M3 not work? There are three basic elements: 1) compelling design, 2) low cost the battery pack / drive train, and 3) low cost glider. Clearly, Tesla has a grip on how to make a compelling drsign. The Gigafactory addresses achieving a low cost drive train. The weakest link in my mind is if Tesla can achieve enough manufacturing efficiency in making the gliders at scale needed to satisfy global demand. While Tesla may have a cost advantage on battery packs, it may not have the same competitive advantage on gliders. Moreover, the glider could easily be more than 2 times the cost of the drive train. So if cheap gliders prove to be the hold up, Tesla could easily contract with other manufacturers. This would also alieviate the need for more auto factory space.

 

[kalikgod]

I still think that I have not been clear about what I see as optimistic, baseline, and pessimistic. Stage 1 of Tesla would be to hit 500k vehicles per year, maxing out the Fremont factory and the GigaFactory.

Do you agree that they will max out Fremont before brining another vehicle assembly plant and battery plant online?

Optimistic would be hitting this number in 2019. Baseline would be hitting this number in 2020 (because of many public statements from Musk). Pessimistic would be reaching the production volume in, say, 2022.

I have no doubt that Model 3 is going to change the way people think of Tesla (and all vehicles in the $25k to $50k price range) forever. I have little doubt that Tesla has the engineering and design prowess to deliver on the expectations for Model 3.

I look at the engineering and financing difficulties of developing two more Fremont factories and two more GigaFactories. The risks are they will be on continents far away from their core engineering center, in places separated by 8 to 10 time zones with language barriers.

As of today, ~30% of the investment community does not believe Tesla can even build one GigaFactory that is located 4 hours from their factory. The descriptions of the factory are "biblical". 1 mile long, 70 ft tall building, packed full with high end automation equipment. These things don't drop out of the sky like a CVS does across the street from a Walgreens.

Tesla will build all of this, but these activities will be 4 - 8 years from now. Getting to Step 1 will massively reduce the risk of all this future growth. Step 1 is where I stopped my valuation table.

 

[30seconds]

Waiting until your only plant to max out before building another would be a disastrous business decision. For starters you will remain supply constrained as it takes a few years to get a plant of scale built and up and running. Plus you give competitions more room to catch up, continue to allow CO2 producing vehicles to sell more than they otherwise would, fail to capitalize on other governments who want to incentivize BEV, keep all production and therefore revenue generation tied to a single geographic risk point, and I'm sure a few other reasons.

 

[RobStark]

I think the smart thing to do is have Auto Plant #2 and GF #2 ready to start construction the day GF #1 makes its first battery cell.

By that time Gen II (Model S and X) should be selling in the 125k-150k units per year range and give confidence to partners,suppliers,and if needed capital markets that AP #2 and GF #2 is needed and will be successful.

Permits, incentives package, partners supplier agreements, architectural plans ready to go.

By the time Fremont and GF #1 hit full speed AP #2 and GF #2 is ready to start production.

 

[jhm]

It seems to me that if you are going to double your production every 2 years, you need to have very concrete plans for more factory space before you are using just half of your current space. I pretty much expect that Model 3 will need its own factory. The Fremont plant will be nearly half full in the first year of Model 3.

It seems reasonable to define different scenarios by the time it takes to hit 500,000 cars/year. Of course, a real bear would tell you, they'll never hit 500,000. But really, what you're contemplating is different growth rates. I wonder what would happen in your pessimistic scenario if Model 3 was a flop. It seems inconceivable to me given how much demand the is for it, but let's suppose there was just some change of heart and Tesla decides just to be comfortable in the high end niche. So their ASP and GM stay comfortable above $100,000 and 30%. By 2022 they hit 500,000 with Models S and X and Roadster 2. What would they be worth? Would they be worth more or less than an optimistic scenario with Model 3 making up over half of the cars sold? I have a hunch. So I'm curious where your approach might land.

PS, I like your description of the Gigafactory having biblical proportions. The inside acreage could be as much as 230 acres. In a way, it could be a modern day Noah's Ark.

 

[Krugerrand]

I wonder what would happen in your pessimistic scenario if Model 3 was a flop. It seems inconceivable to me given how much demand the is for it, but let's suppose there was just some change of heart and Tesla decides just to be comfortable in the high end niche.

Not going to happen as long as Elon has anything to say about it. You might want to read this article to get a better understanding of the man. Elon Musk: What is it like to work for the SpaceX, Tesla chief?

 

[chickensevil]

Given the cell production has a 1/3 buffer on the capacity, I think they should have enough breathing room on GF1 to allow them time to build a second AF without having to build the second GF right at the same time. They are going to have to prove to people the continued need for the demand in order to justify any new factories. Their suppliers are already taking on a very huge risk in the GF so building out another AF without some kind of justified demand is going to be a little tough... that is, unless they can fully self fund the second AF without needing any additional capital.

I could see a scenario where that is possible in 2017 because the cash flow should be pretty crazy at that point.

Also note that outside of the 1/3 capacity buffer on GF1, overtime this factories capacity is going to grow naturally as cell density improves. I think it was what, 8% average increase in density each year? So if the hypothetical output of the factory is 35GW (note the 15GW extra to hit 50 is coming from Panasonic's Japanese factories so I am not counting that, but in theory that production would also continue to rise) in 2020, then each year add on 8% and you have almost double the factory output by 2029.

 

[RobStark]

It seems to me that if you are going to double your production every 2 years, you need to have very concrete plans for more factory space before you are using just half of your current space.

I don't think anyone is contemplating doubling production every two years indefinitely.

but let's suppose there was just some change of heart and Tesla decides just to be comfortable in the high end niche. So their ASP and GM stay comfortable above $100,000 and 30%. By 2022 they hit 500,000 with Models S and X and Roadster 2. What would they be worth? Would they be worth more or less than an optimistic scenario with Model 3 making up over half of the cars sold? I have a hunch. So I'm curious where your approach might land.

On top it going against the inherent philosophy of Tesla it makes a flawed strategic business decision.

Eventually, at some point the legacy automakers will get a clue.

Tesla not only needs economies of scale with regards to batteries but the entire car.

Glass, tires, aluminum, seats,electronics, safety research etc. All of the independent automakers, and I don't include micro coach builders as automakers, under 1 Million units have been swallowed up outside of the protected Chinese market. Even in China,we will eventually see consolidation.

Porsche, Ferrari, Lamborghini, Volvo, Jaguar-Land Rover etc have been purchased by a conglomerate.

If Tesla wishes to remain independent and influence the global industry toward electrification it needs to grow fast. It needs to get to at least one million units before two legacy automakers make a compelling competitively priced BEV with the capacity of their mainstream compact or midsize ICE equivalents.

 

[MartinAustin]

One of Tesla's main ways they're going to double production every two years is to get rival manufacturers into the electric car game.

Halo cars like the "D" might help towards this goal, but pretty much it'll be the management of the other companies worried about Tesla eating their lunch that will cause them to dip their toes in the water.

Demand from customers will take care of things after that.

 

[Gerardf]

Not sure if ever brought up in this topic or other threads.

I have been thinking that maybe Tesla's mid- or long-term plan is to offer the complete S/X and Model-3 'skateboard' platforms to OEM's so these can produce and sell their own branded car's based on it.

So not ‘just’ battery-packs and powertrain as they did for Toyota and Daimler/Mercedes but a full package of 'skateboard' platform, proven & tested reference hardware and software platform for charging, HMI, remote upgrades etc, etc.. Sort of a licensed "EV reference design" for OEM branding, sales and production by others.

This could spin-off many Tesla-based car models sold under several (old and new) brands in many versions, and would result in a very quick build-up of EV mass production, much faster than could be financed and executed by Tesla themselves. Maybe that is what talks with Foxconn were about ?

It would also speed-up Tesla's long-term vision of moving a significant part of the market from ICE to EV's much quicker, while Tesla would be making (very) large but fair profits on Li-ION pack's, powertrain and of course reference design licenses that can be reinvested in further R&D and production resources. Would also be in-line with opening up patents to others who want to use them.

Same thing happened in other industries. For example there are a few Mobile phone 'hard- and software reference platforms' that very many commercial phones are based on. Same in the PC's and notebook market.

If I would be a traditional car manufacturer, I would be very scared of such a scenario playing out, but on the other hand consider it an interesting plan-B.

As a TSLA shareholder, I would certainly like such strategy . Tesla 4.0 ??

 

[30seconds]

Not sure if ever brought up in this topic or other threads.

I have been thinking that maybe Tesla's mid- or long-term plan is to offer the complete S/X and Model-3 'skateboard' platforms to OEM's so these can produce and sell their own branded car's based on it.

So not ‘just’ battery-packs and powertrain as they did for Toyota and Daimler/Mercedes but a full package of 'skateboard' platform, proven & tested reference hardware and software platform for charging, HMI, remote upgrades etc, etc.. Sort of a licensed "EV reference design" for OEM branding, sales and production by others.

This could spin-off many Tesla-based car models sold under several (old and new) brands in many versions, and would result in a very quick build-up of EV mass production, much faster than could be financed and executed by Tesla themselves. Maybe that is what talks with Foxconn were about ?

It would also speed-up Tesla's long-term vision of moving a significant part of the market from ICE to EV's much quicker, while Tesla would be making (very) large but fair profits on Li-ION pack's, powertrain and of course reference design licenses that can be reinvested in further R&D and production resources. Would also be in-line with opening up patents to others who want to use them.

Same thing happened in other industries. For example there are a few Mobile phone 'hard- and software reference platforms' that very many commercial phones are based on. Same in the PC's and notebook market.

If I would be a traditional car manufacturer, I would be very scared of such a scenario playing out, but on the other hand consider it an interesting plan-B.

As a TSLA shareholder, I would certainly like such strategy . Tesla 4.0 ??

Won't be easy. First battery supply issue, second the skateboard runs on some pretty sophisticated software... what happens when the car companies want design changes? Who is responsible for warranty? How about software changes? How does TSLA keep from platform fragmentation (think Android but much much worse)?

They could do it if it was an "as-is, no changes" offer and included fees for warranty, supercharger and software work. This might be a good deal for the Koreans to take them up on or even Chinese manufacturers for the China market.

I'm not sure why so many are worried about building the non-drivetrain components. We have seen more than a few companies scale over the last 20 years (Hyundai, KIA, Brilliance, etc.) and Tesla could also think about a takeover of an existing company (Mazda, Volvo?) with factories and other supply lines in place if needed.

 

[austinEV]

Is anyone else driven crazy by "researchers invent new battery that is 10x more dense, has no downsides!" articles? It seems like there is 1 a week and my reaction is always yeah right, but if just one of them hit the GF investment would be somewhere between near total waste or partial waste as they have to retool for the new product. Worse, if they cut the ribbon on the factory in 2017 and THEN the tech is discovered that allows a $100M factory to outproduce the GF.

It is exhausing evaluating them. Here is a recent crop:

http://inhabitat.com/ohio-scientists-invent-worlds-first-reachargeable-solar-battery/
http://www.extremetech.com/computin...y-could-triple-smartphone-and-ev-battery-life
http://www.extremetech.com/computin...hium-ion-battery-capacity-with-spongy-silicon
https://gigaom.com/2014/01/08/these...f-battery-using-the-same-molecule-in-rhubarb/

How do you all think on these as a long term risk? I know Elon has said something like "no one ever sends us a battery", which is a way of saying they aren't real or cannot be productized. But a few decades ago people must have thought the same about current Li Ion batteries.

 

[JRP3]

The factory will be able to adopt new technologies. Many of the machines don't care what chemistry you stick in them, so unless it's something really radical Tesla should be able to deal with it. Elon has said he expects the GF to be able to handle future changes. Also, new technologies will need time to prove themselves before they start going into vehicles.

 

[eepic]

Is anyone else driven crazy by "researchers invent new battery that is 10x more dense, has no downsides!" articles? It seems like there is 1 a week and my reaction is always yeah right, but if just one of them hit the GF investment would be somewhere between near total waste or partial waste as they have to retool for the new product. Worse, if they cut the ribbon on the factory in 2017 and THEN the tech is discovered that allows a $100M factory to outproduce the GF.

It is exhausing evaluating them. Here is a recent crop:

http://inhabitat.com/ohio-scientists-invent-worlds-first-reachargeable-solar-battery/
http://www.extremetech.com/computin...y-could-triple-smartphone-and-ev-battery-life
http://www.extremetech.com/computin...hium-ion-battery-capacity-with-spongy-silicon
https://gigaom.com/2014/01/08/these...f-battery-using-the-same-molecule-in-rhubarb/

How do you all think on these as a long term risk? I know Elon has said something like "no one ever sends us a battery", which is a way of saying they aren't real or cannot be productized. But a few decades ago people must have thought the same about current Li Ion batteries.

The way I see this is that it doesn't really matter in the short to medium term. If the Gigafactory can deliver batteries at a 30%+ cost reduction, the Model 3 will be a very compelling car relative to ICE vehicles in the same TCO price bracket (about $30k-$50k). My view is that consumers don't really differentiate ICE or EV, it's one vehicle market.

Let's say some battery breakthrough comes along that creates an even more compelling car. Even IF they can design and IF they ramp up production on this car, it's going to eat away at the entire vehicle market at the price point competes at. If the Model 3 is second most compelling for consumers, its sales are going to be far less affected than really bad cars at the same price point.

 

[Auzie]

Worse, if they cut the ribbon on the factory in 2017 and THEN the tech is discovered that allows a $100M factory to outproduce the GF.

How do you all think on these as a long term risk? I know Elon has said something like "no one ever sends us a battery", which is a way of saying they aren't real or cannot be productized. But a few decades ago people must have thought the same about current Li Ion batteries.

In my view GF is a big risk, due to high capital investment. How well and fast can GF adapt to new technologies? That depends on the details of emerging energy storage technologies.

The alternative scenario to building GF is to do nothing and hit a dead end with bevs, as no one wants to take the risk of sinking capital into a factory that has a chance to be obsolete before it even starts.

Lets say that a new storage technology is identified by someone sometime in the future. There will be a significant time gap between the 'discovery' and its practical application in devices, as someone will have to invest significant capital to produce this 'latest' storage technology. That someone will face similar risk that Tesla is facing now with GF, as the 'latest technology' is only the latest until new technology comes along.

This whole situation reminds me of my continual dilemma when buying new laptops or phones. There is always something new on the horizon, do I wait for new one in next few months or bite the bullet and buy the latest? Now I have become a collector, can't bear to miss the latest :biggrin:

 

[Curt Renz]

In my view GF is a big risk, due to high capital investment. How well and fast can GF adapt to new technologies? That depends on the details of emerging energy storage technologies.

The alternative scenario to building GF is to do nothing and hit a dead end with bevs, as no one wants to take the risk of sinking capital into a factory that has a chance to be obsolete before it even starts.

Lets say that a new storage technology is identified by someone sometime in the future. There will be a significant time gap between the 'discovery' and its practical application in devices, as someone will have to invest significant capital to produce this 'latest' storage technology. That someone will face similar risk that Tesla is facing now with GF, as the 'latest technology' is only the latest until new technology comes along.

This whole situation reminds me of my continual dilemma when buying new laptops or phones. There is always something new on the horizon, do I wait for new one in next few months or bite the bullet and buy the latest? Now I have become a collector, can't bear to miss the latest :biggrin:

I expect that Tesla Motors already has contingency plans to adapt to any new battery technologies. In the unusual situation for which a new type of battery could not be made in that building, then other car parts could produced there, along with additional lines for final car assembly.

 

[gym7rjm]

In my view GF is a big risk, due to high capital investment. How well and fast can GF adapt to new technologies? That depends on the details of emerging energy storage technologies.

The alternative scenario to building GF is to do nothing and hit a dead end with bevs, as no one wants to take the risk of sinking capital into a factory that has a chance to be obsolete before it even starts.

Lets say that a new storage technology is identified by someone sometime in the future. There will be a significant time gap between the 'discovery' and its practical application in devices, as someone will have to invest significant capital to produce this 'latest' storage technology. That someone will face similar risk that Tesla is facing now with GF, as the 'latest technology' is only the latest until new technology comes along.

This whole situation reminds me of my continual dilemma when buying new laptops or phones. There is always something new on the horizon, do I wait for new one in next few months or bite the bullet and buy the latest? Now I have become a collector, can't bear to miss the latest :biggrin:

No one is scared that some company will come along with a better search algorithm and dethrone Google...

People repeatedly get stuck on the point that some new battery will come out and make all of Tesla's progress irrelevant. I don't see that to be a threat at all.

I'm not a battery expert, but from what I have read, there isn't going to be a huge breakthrough in battery technology that is production capable for quite a while. By the time new battery technologies mature Tesla will be much larger and have way deeper pockets. My guess in the future - assuming Tesla isn't already the leading battery researching entity - is that there will be a team dedicated to finding any promising battery tech and acquiring that company.

Look at Google, they are buying up companies left and right and staying at the bleeding edge of new tech. I just don't see Tesla being blindsided by some tech breakthrough, Elon has them moving and iterating way too fast.

Furthermore, the Gigafactory has $5 Billion budgeted for equipment replacement after only 5 years. What if this money is not meant to replace equipment with old tech, but is a contingency for them to adapt any new battery technology that emerges? just a thought.