Long-Term Fundamentals of Tesla Motors (TSLA)

[AudubonB]

Rob:

You have a pattern of posting statements wherein it is impossible to distinguish what are facts and able to be confirmed through outside references, and what are suppositions of your own. The above #3418 is one such post.

* Are you making that "dark" statement as a known fact, with references, or is it your own surmise?

Thanks for any answer, and for considering how you create posts.

 

[wdolson]

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.

If the factory has no lights, I can see why they are placing it where they are. Kodak's main factory was in Rochester and they probably still make some film there, but they employed blind people to make the film. With Kodak having to downsize, I would expect the area has a pool of skilled blind factory workers who are unemployed. Even if the production line is mostly automated, they will need some workers to be on the line to deal with any issues that come up.

I'm glad to hear that Solar City is innovating and the tax break has been extended. I was sure it would die with this Congress. I might be able to get solar on this house before the incentive runs out after all. This time of year we'd get almost nothing, but in the summer we get blasted by the sun with a large SW exposure.

 

[Rarity]

Interesting conversation.

The gigafactory seems like a terrible idea, since Tesla has zero experience manufacturing batteries, and others (LG Chem, Panasonic) have massive economies of scale and minimal margins.

To be clear, Tesla has the most experience in manufacturing batteries. However, they have never manufactured cells. Not to be confused with their highly sophisticated understanding of the current state of the art in cell manufacturing.

I don't rate the current scale of cell manufacturers as particularly impressive. We are looking at a two order of magnitude+ increase in production going forward. Certainly, their must be vast economies still available.

I don't rate the current scale of solar panel manufacturers as particularly impressive either.

 

[GoTslaGo]

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.

I was wondering if you have a way of valuing the SuperCharger network that Tesla has developed and is developing. Does it have a value? I know right now it is probably a liability, but in the future the company would theoretically monetize the network; rent it out to non-Tesla vehicles, start charging for Model 3, etc... Does that affect your valuation of the stock as well? And if it does, how?

 

[TSLAopt]

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.

Goodluck being short TSLA, you could have been short anything in this market and make a killing, especially oil companies.

 

[valuationmatters]

Question. Why have there been no in-depth reviews of Model X by independent expert car magazines such as Road & Track, Car & Driver, Motor Trend, Edmunds, Consumer Reports, etc.? Just seems weird. Not sure whether this is a positive or negative?

 

[Fallenone]

They're waiting for their Model X to be delivered.

Question. Why have there been no in-depth reviews of Model X by independent expert car magazines such as Road & Track, Car & Driver, Motor Trend, Edmunds, Consumer Reports, etc.? Just seems weird. Not sure whether this is a positive or negative?

 

[ecarfan]

Tesla has many months of X production ahead of them to work through the order backlog. No need to provide cars to reviewers when order wait times are so long. No need to stimulate demand yet. Based on how great the S is, the X sells itself.

 

[JRP3]

Just seems weird.

Not even a little.

 

[30seconds]

Plus the X may not quite be ready for prime time. Ramp is not rapid, seems like a decent amount of delivery fixes needed, lots of owners waiting. Would be better to wait a few more weeks until these issues are sorted and do not become part of any review.

 

[valuationmatters]

Plus the X may not quite be ready for prime time. Ramp is not rapid, seems like a decent amount of delivery fixes needed, lots of owners waiting. Would be better to wait a few more weeks until these issues are sorted and do not become part of any review.

Thank you for stating the obvious truth, 30seconds.

 

[valuationmatters]

Perhaps I should have posted this here since it deals indirectly with valuation.

Interesting analysis I looked at. Note the 17% decline in Model S average selling price (ASP) in the first 9 months of 2015 compared to the same 9 months of 2014. And the corresponding drop in overall gross profit. This excludes leases which are an increasing percentage of revenue -- but that is a separate issue and not particularly bullish for Tesla.

Whether you are short or long, it will be fascinating interesting to see the ASP in Q4 FY15. Remember that the Model X had minimal deliveries (sales) in Q4 and thus will have almost no impact on revenue. So Q4 revenue will really be all about Model S pricing. If the company did it by discounting, it will be immediately obvious by simply doing the same math I have done above. Or if the company just did an amazing job selling more vehicles, then that will be apparent as well.

 

[trils0n]

Question. Why have there been no in-depth reviews of Model X by independent expert car magazines such as Road & Track, Car & Driver, Motor Trend, Edmunds, Consumer Reports, etc.? Just seems weird. Not sure whether this is a positive or negative?

Standard procedure for Tesla -- they did the same thing for the Model S. Magazine review cars are essentially advertisements, and Tesla has tons of waiting customers so not much need to spend money to advertise. I get the sense Tesla doesn't have a team of people that handle getting cars to magazines to promote like the established automakers, they simply haven't spent the effort to do that type of stuff.

Perhaps I should have posted this here since it deals indirectly with valuation.

Interesting analysis I looked at. Note the 17% decline in Model S average selling price (ASP) in the first 9 months of 2015 compared to the same 9 months of 2014. And the corresponding drop in overall gross profit. This excludes leases which are an increasing percentage of revenue -- but that is a separate issue and not particularly bullish for Tesla.

Whether you are short or long, it will be fascinating interesting to see the ASP in Q4 FY15. Remember that the Model X had minimal deliveries (sales) in Q4 and thus will have almost no impact on revenue. So Q4 revenue will really be all about Model S pricing. If the company did it by discounting, it will be immediately obvious by simply doing the same math I have done above. Or if the company just did an amazing job selling more vehicles, then that will be apparent as well.

ASP decline is mostly due to the introduction of the 70. The 60 wasn't very popular and was around 10% of sales if I remember correctly. 70 is a much better vehicle, and customers are embracing it, with sales composing around 30% of Model S last I heard. Naturally ASP goes down when you switch to a mix that includes more, cheaper vehicles. Tesla was clear this would happen in their conference calls and letters.

 

[valuationmatters]

Thanks trilson for your responses. I think you're correct on the reason for the mix shift. But it does not change the reality that for the first 9 months of 2015, gross profit grew a paltry 15%. Now admittedly, Q4 was a big quarter for deliveries. But it will be interesting to see the pricing when they release Q4 financial data.

 

[30seconds]

Thanks trilson for your responses. I think you're correct on the reason for the mix shift. But it does not change the reality that for the first 9 months of 2015, gross profit grew a paltry 15%. Now admittedly, Q4 was a big quarter for deliveries. But it will be interesting to see the pricing when they release Q4 financial data.

So what are your revenue and gross margin forecasts for the company for FY 2016, 2017, 2018, 2019 and 2020?

 

[valuationmatters]

So what are your revenue and gross margin forecasts for the company for FY 2016, 2017, 2018, 2019 and 2020?

I assume 2020 revenue hits $20.2 billion and gross margin of 19.8%. I assume in 2020 they sell:

75K Model S @ASP of $88K and gross margin of 25%
74K Model X @ASP of $88K and gross margin of 25%
150K Model 3 @ASP of $47K and gross margin of 10%

Most importantly I assume overall profit margin of 5.0% (after R&D, sales, admin, other overhead). Remember that is what F and GM can achieve with their economies of scale. I doubt Tesla has more economies of scale. But if you think Tesla can achieve 10% or 15% overall profit margins, that makes a huge difference in the valuation. I just think it is far more likely they struggle to ever get to breakeven.

Remember Tesla only sold 50K vehicles in 2015 and perhaps 75K in 2016. A lot of work just to get to the 300K I assume in 2020. Nevermind the Herculean task to get to overall profitability.

 

[dha]

Most importantly I assume overall profit margin of 5.0% (after R&D, sales, admin, other overhead). Remember that is what F and GM can achieve with their economies of scale.

...and their $150 billion in pension obligations--the elephant in the room. One of the many reasons valuing Tesla by analogy to the non-luxury American incumbents falls apart. You could just as easily model BMW's operating margin of 10%.

Now add dealer overhead to that vs. Tesla direct sales. Now consider that Tesla will be the most vertically integrated automaker once Gigafactory is online while Ford and GM continue to outsource drivetrain development and you can see why there is no inherent economy of scale advantage.

Your projection of 35% annual sales growth is also firmly on the pessimistic side but that's utlimately a matter of faith.

It is better to reason from first principles and model Tesla's cost structure at scale, rather than argue by analogy and say that their margins must ultimately be X% based on the margins of companies with completely different business models.

 

[valuationmatters]

...and their $150 billion in pension obligations--the elephant in the room. One of the many reasons valuing Tesla by analogy to the non-luxury American incumbents falls apart. You could just as easily model BMW's operating margin of 10%.

Now add dealer overhead to that vs. Tesla direct sales. Now consider that Tesla will be the most vertically integrated automaker once Gigafactory is online while Ford and GM continue to outsource drivetrain development and you can see why there is no inherent economy of scale advantage.

Your projection of 35% annual sales growth is also firmly on the pessimistic side but that's utlimately a matter of faith.

It is better to reason from first principles and model Tesla's cost structure at scale, rather than argue by analogy and say that their margins must ultimately be X% based on the margins of companies with completely different business models.

dha you make reasonable arguments. I don't disagree on the pension obligations. I just think it's going to be really tough to get from where they are today (major losses) to even come close to 10% overall profit margins. Yes Tesla will capture the "dealer margin" due to its direct sales model. But to date Tesla's sales spend is extremely inefficient measured by sales expense per vehicle sold (or leased). Now you could correctly counterargue that Tesla's sales will scale to support a massively higher sales volume. Yes and no. I have a feeling that sales costs will explode as revenue increases, and the jury is out as to how much their sales/R&D/admin overhead will need to increase. Again this is the crux of the question. Will this company ultimately produce 10% operating margins or 0% or 5%. Implications are huge for valuation.

 

[dha]

Fair enough, but I think you may underestimate the extent to which current costs reflect development and anticipation of the 75% of the company's products that are not yet shipping in real volume.

 

[TSLAopt]

dha you make reasonable arguments. I don't disagree on the pension obligations. I just think it's going to be really tough to get from where they are today (major losses) to even come close to 10% overall profit margins. Yes Tesla will capture the "dealer margin" due to its direct sales model. But to date Tesla's sales spend is extremely inefficient measured by sales expense per vehicle sold (or leased). Now you could correctly counterargue that Tesla's sales will scale to support a massively higher sales volume. Yes and no. I have a feeling that sales costs will explode as revenue increases, and the jury is out as to how much their sales/R&D/admin overhead will need to increase. Again this is the crux of the question. Will this company ultimately produce 10% operating margins or 0% or 5%. Implications are huge for valuation.

Even if you think Tesla will only grow 35% per year between now and 2020, how do you think the market will value Tesla as a 'still disruptive' automaker (not even counting Tesla Energy or potential self driving Uber-like service offering) growing production/revenues at or near 35% per year still for years 2021-2025+ while the other car companies all struggle to grow 5-10% per year?