Long-Term Fundamentals of Tesla Motors (TSLA)

[uselesslogin]

Sure enough, when I plugged in your assumptions, I got a valuation per share more like $288 than my $65. So it is all about the sales and profitability assumptions. I just think it is more likely it takes much longer, with more hiccups. Those differences produce a very different valuation.

Good discussion.

This is what I meant by valuation does not matter. The assumptions being made change the valuation drastically. Therefore the bigger question is whose assumptions are correct.

 

[lango]

Yeah, and using DCF with a high discount rate while at the same time use conservative numbers for growth will almost always come to the conclusion that a growth stock is overvalued.

 

[Model 3]

Yeah, I am aware of the 50k+50k+400k numbers they have mentioned for 2020. But I think a more likely outcome is 100k+100k+200k.

Funny, my expectation has always been 150k for the S+X combined (probably 75k+75k) and 350k (maybe "only" 300k) One unknown here is if we still are talking about just S+X+3, or if they have lunched the Y (probably) and/or the Roadster NG by 2020...

 

[lango]

Funny, my expectation has always been 150k for the S+X combined (probably 75k+75k) and 350k (maybe "only" 300k) One unknown here is if we still are talking about just S+X+3, or if they have lunched the Y (probably) and/or the Roadster NG by 2020...

Yeah, time will tell . I think Y is likely to be launched but maybe be at the same stage as the X is now. Roadster, I hope not if the Y is not ramped up as that seems the wrong way to use limited resources at that point. I think it should follow after Y.

If Model S sales grow 15% a year we are at 100k at the end of 2020 for S. X should have roughly the same type of demand if it follows the other premium car brands.

 

[Model 3]

Yeah, time will tell . I think Y is likely to be launched but maybe be at the same stage as the X is now. Roadster, I hope not if the Y is not ramped up as that seems the wrong way to use limited resources at that point. I think it should follow after Y.

Mostly agree, except I think Model Y will be one year ahead of where Model X is now (at the end of 2020). With Model 3 production start in 2017 it is likely that Model Y will have a production start in 2019, and then be where Model X is now in the start of 2020. But as I said, it is an unknown by now.

If Model S sales grow 15% a year we are at 100k at the end of 2020 for S. X should have roughly the same type of demand if it follows the other premium car brands.

At the current price/options I think it will be "roof" on the demand and/or production line for the Gen-II cars and/or battery cell production (available to the Gen-II line) at about 150k-200k if they do not build more giga/car factories. But that is unlikely in 2020 (but new giga/car factories will by then be under construction I guess). If the demand is the limit they may add some more options like more premium seats/interior, bigger batteries, quad motors etc on the Gen-II.

 

[Cattledog]

Mostly agree, except I think Model Y will be one year ahead of where Model X is now (at the end of 2020). With Model 3 production start in 2017 it is likely that Model Y will have a production start in 2019, and then be where Model X is now in the start of 2020. But as I said, it is an unknown by now.




At the current price/options I think it will be "roof" on the demand and/or production line for the Gen-II cars and/or battery cell production (available to the Gen-II line) at about 150k-200k if they do not build more giga/car factories. But that is unlikely in 2020 (but new giga/car factories will by then be under construction I guess). If the demand is the limit they may add some more options like more premium seats/interior, bigger batteries, quad motors etc on the Gen-II.

I'd like to see them develop the design and production of Model 3 and Model Y in parallel. Can't design sequentially forever (well you can but it will limit growth.) If they unveiled a Model 3 and Model Y together in two months, Katie bar the door. Can you imagine a 'just one more thing moment' where they reveal the 3, everyone's stoked, and then they roll a Y onstage? Blast off. They could go do a multi-billion $ capital raise after that for car factory 2 and GF2.

It's also practical - the two need to share more parts than S and X - they started with a soft goal of 60% commonality and ended around 30%. That's not going to cut it for the mass-produced 3 and Y - they need to be pushing economy of scale from the start.

 

[wdolson]

At the current price/options I think it will be "roof" on the demand and/or production line for the Gen-II cars and/or battery cell production (available to the Gen-II line) at about 150k-200k if they do not build more giga/car factories. But that is unlikely in 2020 (but new giga/car factories will by then be under construction I guess). If the demand is the limit they may add some more options like more premium seats/interior, bigger batteries, quad motors etc on the Gen-II.

By 2020 Faraday future might be out of business and their factory in Las Vegas might be up for grabs.

 

[JRP3]

I'd like to see them develop the design and production of Model 3 and Model Y in parallel. Can't design sequentially forever (well you can but it will limit growth.) If they unveiled a Model 3 and Model Y together in two months, Katie bar the door. Can you imagine a 'just one more thing moment' where they reveal the 3, everyone's stoked, and then they roll a Y onstage? Blast off. They could go do a multi-billion $ capital raise after that for car factory 2 and GF2.

I had the exact same thought :smile: I doubt it will happen, not even sure if it should, but it would be an awesome moment. We do have good reason to believe that the 3 and Y are both being worked on currently.

 

[Discoducky]

I do think there is a risk of poor guidance in Q1 2016. I have nothing to base this on, other than a hunch. I still have a tough time believing the massive ramp of sales that occurred in 4Q 2015. Something smells fishy. We shall see when the company releases its Q4 financials. Then we can see whether there was mass discounting (implying sales to resellers) in Q4. I just don't understand how Q4 sales increased so much more than Q3, Q2, or Q1. Based on nothing other than my gut. But I wonder if they stuffed the channel. I fully admit I could be suffering from confirmation bias.

I can see why your valuation is low and it is understandable for your position. However it is interesting to hear that you don't put a multiple on Tesla, but do on Amazon. I'd be much more inclined to see multiples with Tesla in the same regard as Amazon. I'm hoping Tesla has a much better stance on future profit margin due to Gigafactory model and Tesla Energy. But since both of these are not operational at the moment it might not be as apparent to investors.

We'll see how your hunch plays out and this 'resellers' theory. Hope you'll hang out and continue discussions.

I'm a bit more bullish in that I would contend that TM has the ability to keep their profit margin much higher than the competition, even in in significantly higher production flow. Maybe they are perfecting this now with Model X? I hope so. Will be interesting to hear the answer to the question "How much does Model 3 have in common with Model X in terms of production preparedness, supplier onboarding and flow as well as customized in-house part design?" if the question is asked of course.

 

[lango]

Model 3:
If the demand is there for 200k S and X in total then batteries won't be a problem. Or it should not be. Panasonic is a huge company and can add incremental capacity of 15% a year to their cell production. As far as I understand it they were not willing to commit to 500 000 a year at the low price needed for Model 3 being a mass market vehicle. So I think it was more of a risk vs reward thing for them. Also Tesla can buy from another manufacturer if needed. IIRC they are going to do that for the Roadster batteries?

I do think there is a not so small risk that Tesla will not add production capacity for S+X and still output less than demand. For example they might prioritize Model 3 because of their mission. But I don't think batteries will be the main reason for lack of capacity improvements for S+X, but it could be the case.

Discoducky:
He is using DCF and in his case I assumes it means the model stretches to infinity. So there is no growth multiple. Otherwise if he is only calculating to say 2020 and still has no multiple then he is making a serious error.

 

[valuationmatters]

Thanks Discoducky. I do enjoy these discussions and hope people understand that my decision to be short the stock is just a financial one. A healthy market has longs and shorts. I don't want to hear opinions just from those who agree with me. My short thesis is primarily based on my belief that it is far more likely than not that Tesla experiences delays getting to 500K (or even 300K) by 2020. Most bubble stocks eventually fall short of hyper expectations and settle back to a far more rational price. If/when this happens to Tesla, I hope it remains a viable car company because they have certainly accelerated the move toward EV. The world needs more options: ICE, EV, PHEV, Hydrogen, Mr. Fusion, whatever. Consumers need choices. And we need to reduce our pollution.

For similar reasons, I am pro-solar, just not Solarcity due to the leasing model. I own my large solar array outright. Solarcity is in a very thin margin business in which their return on investment is arguably not even equal to their cost of capital. Hence the massive accounting losses. If a company has to invent new accounting to justify itself, it usually (not always) indicates a big problem.

 

[dakh]

Tesla's prediction for max production of the S and X are 50K per year each.

AFAIR there was an interview where this question was asked, and the answer was that ultimately about 100K each (S and X) world wide once they enter all markets and the adoption curve flattens out. There's a big delay between entering a market and people actually considering buying a Tesla (see China). If we're talking 5 years out it's hard to tell, could be that Model 3 will actually help with the speed of adoption curve. Folks in the luxury segment tend to be more conservative, but if there are Model 3's rolling around everywhere that changes perspective.


As for valuation, there are other forward-looking aspects as well. If they'll figure out how to drastically shorten time to market (tooling etc.) for new models, which they stated they're looking into, that'd separate them from the crowd pretty cleanly. They're currently leading in bringing self-driving to market, and this lead can widen since they're in a perfect position to iterate on the solution. A million mile drivetrain? Look at competition, batteries deteriorating left and right when even earlier Teslas are still going good. If we're looking at it from the skeptical perspective, we should be skeptical about competition's ability to deliver as well, so far they've proven quite inept. Who else is going to deliver 1M mile drivetrain? Imagine the publicity of the first Model S that worked as a limo for example hitting that and people waking up to the fact that this is here, now, for real.

As far as share price and valuation, I think being a short one has to consider the irrational exuberance of the longs as well. How long can it last? As long as Musk is around, it isn't likely to go away. Can you put a value on that?

 

[lango]

AFAIR there was an interview where this question was asked, and the answer was that ultimately about 100K each (S and X) world wide once they enter all markets and the adoption curve flattens out. There's a big delay between entering a market and people actually considering buying a Tesla (see China). If we're talking 5 years out it's hard to tell, could be that Model 3 will actually help with the speed of adoption curve. Folks in the luxury segment tend to be more conservative, but if there are Model 3's rolling around everywhere that changes perspective.


As for valuation, there are other forward-looking aspects as well. If they'll figure out how to drastically shorten time to market (tooling etc.) for new models, which they stated they're looking into, that'd separate them from the crowd pretty cleanly. They're currently leading in bringing self-driving to market, and this lead can widen since they're in a perfect position to iterate on the solution. A million mile drivetrain? Look at competition, batteries deteriorating left and right when even earlier Teslas are still going good. If we're looking at it from the skeptical perspective, we should be skeptical about competition's ability to deliver as well, so far they've proven quite inept. Who else is going to deliver 1M mile drivetrain? Imagine the publicity of the first Model S that worked as a limo for example hitting that and people waking up to the fact that this is here, now, for real.

As far as share price and valuation, I think being a short one has to consider the irrational exuberance of the longs as well. How long can it last? As long as Musk is around, it isn't likely to go away. Can you put a value on that?

Yeah, I have also heard the 200k S+X mature demand prediction. Can't recall from were.

I agree with you that it is more likely to be further improvements with Tesla with respect to competition than competition catching up the coming five years. After 2020 I think things will be different as the ICE manufacturers will realize they have to be really serious about EV if they want to stay around. The valuation is low currently if things continue the same way as it has.

 

[Model 3]

I'd like to see them develop the design and production of Model 3 and Model Y in parallel. Can't design sequentially forever (well you can but it will limit growth.) If they unveiled a Model 3 and Model Y together in two months, Katie bar the door. Can you imagine a 'just one more thing moment' where they reveal the 3, everyone's stoked, and then they roll a Y onstage? Blast off. They could go do a multi-billion $ capital raise after that for car factory 2 and GF2.

It's also practical - the two need to share more parts than S and X - they started with a soft goal of 60% commonality and ended around 30%. That's not going to cut it for the mass-produced 3 and Y - they need to be pushing economy of scale from the start.

Yes, I've thought the same things myself And I really really hope they do, but trying to be realistic I can't believe they can... So I hope that they will manage to deliver the Model Y one year after the Model 3, and they really should. But they have yet to deliver a new model only one year after previous, so the most realistic scenario is Model 3 in 2017 and Model Y in 2019 (and that why that scenario was what I was talking about here...). But I hope they manage to deliver it earlier... If it's later I will be a bit worried. And if they do, we might see the RoadsterNG (or some other Tesla model) before the end of 2020.

- - - Updated - - -

Model 3:
If the demand is there for 200k S and X in total then batteries won't be a problem. Or it should not be. Panasonic is a huge company and can add incremental capacity of 15% a year to their cell production. As far as I understand it they were not willing to commit to 500 000 a year at the low price needed for Model 3 being a mass market vehicle. So I think it was more of a risk vs reward thing for them. Also Tesla can buy from another manufacturer if needed. IIRC they are going to do that for the Roadster batteries?

I do think there is a not so small risk that Tesla will not add production capacity for S+X and still output less than demand. For example they might prioritize Model 3 because of their mission. But I don't think batteries will be the main reason for lack of capacity improvements for S+X, but it could be the case.

You may very well be right here, I was just expressing my gut feeling based on a possible combination things that may hold back the expansion of Model S/X production/delivery. Nothing would be better then if I'm wrong and they do reach 100k+100k or higher

 

[dakh]

Looks to me reservation numbers on Model 3 are a substantial potential for an upside. It doesn't look probable that they'll demonstrably come up short unless there's some overwhelming macro event. But if reservations show very strong demand it'll be easy to make a case for raising capital and doing things like introducing an SUV equivalent right away, building a car factory and a battery factory in Europe and Asia etc. With how much money there is out there now chasing returns there will be no problem getting that funded.

 

[wdolson]

Thanks Discoducky. I do enjoy these discussions and hope people understand that my decision to be short the stock is just a financial one. A healthy market has longs and shorts. I don't want to hear opinions just from those who agree with me. My short thesis is primarily based on my belief that it is far more likely than not that Tesla experiences delays getting to 500K (or even 300K) by 2020. Most bubble stocks eventually fall short of hyper expectations and settle back to a far more rational price. If/when this happens to Tesla, I hope it remains a viable car company because they have certainly accelerated the move toward EV. The world needs more options: ICE, EV, PHEV, Hydrogen, Mr. Fusion, whatever. Consumers need choices. And we need to reduce our pollution.

For similar reasons, I am pro-solar, just not Solarcity due to the leasing model. I own my large solar array outright. Solarcity is in a very thin margin business in which their return on investment is arguably not even equal to their cost of capital. Hence the massive accounting losses. If a company has to invent new accounting to justify itself, it usually (not always) indicates a big problem.

Tesla has had a number of major schedule failures and the stock has remained strong. Both the S and X were late to market and the S had an even slower ramp to full production that it appears the X is having. I do agree that they probably won't hit 500K by 2020, but I think they will be in fairly good financial shape then.

I haven't looked much at SolarCity, but they aren't really doing anything cutting edge on the technology. They are in a crowded market of solar system sellers and leasers and there is bound to be some fallout in the near future. The end of this year is likely going to be grim for the solar industry as the federal tax credit in the US expires. The weaker players in that market are going to go out of business.

 

[lango]

Tesla has had a number of major schedule failures and the stock has remained strong. Both the S and X were late to market and the S had an even slower ramp to full production that it appears the X is having. I do agree that they probably won't hit 500K by 2020, but I think they will be in fairly good financial shape then.

I haven't looked much at SolarCity, but they aren't really doing anything cutting edge on the technology. They are in a crowded market of solar system sellers and leasers and there is bound to be some fallout in the near future. The end of this year is likely going to be grim for the solar industry as the federal tax credit in the US expires. The weaker players in that market are going to go out of business.

This thread is not about SolarCity or solar . There is one for that. The tax credit was extended recently for I think another five years.

 

[RobStark]

I haven't looked much at SolarCity, but they aren't really doing anything cutting edge on the technology.

SC is opening their own Gigafactory in Buffalo to manufacture a new high efficiency solar panel.

It will not be highest efficiency panel but cheaper than direct competitors.

It is a dark factory because it will be all automated requiring no light for human eyes.

Humans will be involved in shipping. Receiving parts and shipping out finished panels.

 

[theschnell]

I do think there is a risk of poor guidance in Q1 2016. I have nothing to base this on, other than a hunch. I still have a tough time believing the massive ramp of sales that occurred in 4Q 2015. Something smells fishy. We shall see when the company releases its Q4 financials. Then we can see whether there was mass discounting (implying sales to resellers) in Q4. I just don't understand how Q4 sales increased so much more than Q3, Q2, or Q1. Based on nothing other than my gut. But I wonder if they stuffed the channel. I fully admit I could be suffering from confirmation bias.

Tesla guided all year for the sales ramp up based on planned production ramp up. I am sure they sold some discounted inventory cars as well, but that was also part of the plan.

The increase, if any, from Q4 to Q1 will be minimal, but again that is typical.

On another topic you raised, I am surprised you give no value to Tesla Energy. Musk claimed a minimum of 30% reduction in cost. That's where their margin will come from.

I am not sure how familiar you are with Tesla's history, but they have come through on every major announcement they've made. Have they come through on time? Almost never, but they still came through soon enough.

All that being said, they clearly have a lot of future growth baked in to their valuation. I have been waiting since my first purchase in March of 2014 for a big drop in the price so I could lower my cost basis. Has not happened yet to the degree the bears predicted, but maybe now is the time.

 

[electracity]

I do think there is a risk of poor guidance in Q1 2016. I have nothing to base this on, other than a hunch.

I agree, but I think the reason is pushing Model S sales Q4 2015 to cover lack of Model X deliveries. One reason for the Model 3 reveal could be for Tesla to be taking pre orders during bad Q1 news.

No reason Tesla can't have a great 2016 overall, however.