Long-Term Fundamentals of Tesla Motors (TSLA)

[JRP3]

Thank you for stating the obvious truth, 30seconds.

It's not obvious and it may not be accurate. Why would Tesla provide a vehicle for review when actual customers have literally been waiting years for their cars? Any vehicle provided for review means another customer is delayed. What's the purpose of providing vehicles for review? To increase demand. Tesla has more demand than they can handle. So what is obvious is there are no good reasons and only bad reasons to provide a vehicle for review. Those of us following Tesla for a while know this and saw the same with the S release. We've also seen every bear attempt at negative spin, so please don't think you're going to fool any of us by doing the same. If you're going to be contrarian you'll have to try harder.

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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%

Why would you assume the higher priced Model X would have the same ASP and gross margin as the lower priced S?

 

[AudubonB]

...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%.

Every once in a while, I like to take a little stab at fact checking. If something I read checks out, there's no reason to report it, but when it seems not to, I tend to post.

I thought the $150bn of pension fund obligations seemed a little high, even for a legacy like GM. I couldn't come up with any citations mentioning pension exposure of that size; here is the most recent article I found, which lays out $66bn in pension assets and $77bn in liabilities, for an unfunded obligation of $10.9bn. Certainly an uncomfortably large amount, but nothing like the $150bn.

Link here:

GM pension plan funding down in 2014 | Business Insurance

 

[hcsharp]

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.

I went back and dusted off my old Tesla spreadsheet and got a 2016 valuation of $350. I used a discount rate of 8% from 2020, and valuation multiplier of 30x earnings. I assumed the following sales of each model in 2020:

50k Model S @ASP of 88k, gross margin of 25%, net profit 9% (Model 3 will cannibalize S and X sales)
50k Model X @ASP of 95k, gross margin of 25%, net profit 9%
300k Model 3 @ASP of 44k, gross margin of 15%, net profit 5%. (assumed sales expenses will be much lower per car than S/X)

Included in my valuation was $30 for Tesla Energy. I would have given that a higher value but they have to build another Giga Factory to do it which will require more dilution. I also assumed continued rapid growth and spending on R&D beyond 2020.

Not sure why we each came up with vastly different valuations. I'm long TSLA so naturally I appreciate your contributions in this thread.

 

[JRP3]

50k Model S @ASP of 88k, gross margin of 25%, net profit 9% (Model 3 will cannibalize S and X sales)

I can see it taking some S sales, (not sure if it will be a significant amount), but I don't see the 3 taking any X sales. They would seem to be completely different market segments.

 

[hcsharp]

I can see it taking some S sales, (not sure if it will be a significant amount), but I don't see the 3 taking any X sales. They would seem to be completely different market segments.

You're probably right. That only adds to the valuation. I think demand will be very strong for all their cars. I have no doubt about that. The 64 dollar question for me is how much dilution will be necessary. I've seen models that project Tesla's rapid expansion can be financed almost entirely with current profits for another 3 - 4 years. But they're manufacturing cars which requires a lot of R&D and capex to expand.

 

[Fallenone]

Am I the only one feeling the assumption of GM at 25% for S and X, 10-15% for 3 are too low? You guys do remember the CXOs will get a big bonus for having GM over 30% for a 12 trailing months period right? I think 30% GM is doable if they came with this bonus in the first place. Other bonus milestones include production of Model X, production of Model 3, and total production of 200k vehicles (or some other number, can't remember).

Edit:

I looked up the precise wording of these milestones set in 2014 and they are:
1. Completion of the first Model X Production Vehicle (marked as achieved in their last quarterly filing).
2. Aggregate vehicle production of 100k vehicles in a trailing 12-month period.
3. Completion of the first Gen III Production vehicle.
4. Achieve annualized gross margin of greater than 30.0% in any three years.

 

[Investor1234]

View attachment 109134

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.

After seeing the above calculation, I went and looked at Q3 report trying to validate the calculation. I got a different conclusion regarding ASP. Here is the paragraph in Q3 report: “Automotive revenue was $1.16 billion on a non-GAAP basis, and comprises GAAP Automotive revenue of $853 million plus a net increase of $307 million in deferred revenue as a result of lease accounting.” The $307 M deferred revenue can be roughly estimated as the full price of the leased cars to be collected in the future. Assuming the full price to be roughly $100K, it implied 3070 leased cars for the Q. Assuming similar numbers of leased cars for Q1 and Q2, you end up with around 9k leased cars. This implies ASP ~= $2596M/2400 = $108k. I am long TSLA and I would be worried if indeed ASP dropped to 82K so if someone can validate the math here I would appreciate it.

 

[lango]

valuationmatters:
If Tesla grows 30% a year up to and including 2020 then the market will not value them based on the bottom line. It would be valued from growth rate, gross margin and an estimate what profit they could make if they optimized for that. Compare with Amazon.

I don't expect them to post a significant profit for a long time. So your models are not worth much if anything unless you state your assumptions about other metrics like P/S, FCF, gross margin etc.
IMO, you are approaching this with the wrong tools.

Tesla Energy is not worth 0. For example, a 10% probability of it becoming a $200B business is worth $20B.
Similar with 20% probability for $100B.

You have to pick your numbers and motivate them. Right now you are at 0% for TE which is clearly wrong.

 

[Model 3]

Why would Tesla provide a vehicle for review when actual customers have literally been waiting years for their cars? Any vehicle provided for review means another customer is delayed. ... Those of us following Tesla for a while know this and saw the same with the S release.

I think it is worth to mention here that the first Model S to be tested in the different magazines was Elons personal car, not a car "stealing" a production que slot from paying customers.

 

[MitchJi]

Am I the only one feeling the assumption of GM at 25% for S and X, 10-15% for 3 are too low? You guys do remember the CXOs will get a big bonus for having GM over 30% for a 12 trailing months period right? I think 30% GM is doable if they came with this bonus in the first place. Other bonus milestones include production of Model X, production of Model 3, and total production of 200k vehicles (or some other number, can't remember).

I think that everyone is missing the impact of the GF related cell cost reductions on the MS and MX.

 

[lango]

I think that everyone is missing the impact of the GF related cell cost reductions on the MS and MX.

Agree. As long as they don't have any competition in the premium BEV segment the ASP will stay high and cost go down.

 

[austinEV]

My 2016 future stock chart

For fun I drew a future stock chart of TSLA.

My basic premise is that there will be no big systemic, macro shock this year (even a 10% pullback wouldn't really change the story here). Also, Q4 ER will not be received well. We basically know the story now: 50k ish shipments. just a few Model X, still a fair amount of spending. EM/TM don't have a big incentive to punch this one up, so they have the option of downplaying Tesla Energy prospects or GF readiness. Better to tank the Q4 ER and set the trap for May. The good news they will telegraph is which qtr they are targeting for FCF, hopefully Q1!

Then the M3 reveal at the end of March will be a positive catalyst. Product announcements aren't usually big, but a non-ugly M3 will be a big relief/derisk. (For the record I expect some funkiness like an MX nose, but nothing too radical). Around the same time Q1 numbers will come out and they will be a beat, signalling a big market reaction that will start rolling into the expectation of a May financial beat and news about M3 reservation numbers. If so, it may be a May squeeze but I think it will be some warning earlier or something, with more Bull runs on good news in May and again for Q2 shipments. Around this time I expect a cap raise and the Q2 ER will be about resuming business as usual with capex on M3 tooling and possibly GF buildout. There will be a hard-to-trade top somewhere and a minor pullback in Q3.


After having drawn the above I realized I drew 2013 almost exactly. I think the parallels line up very well:

This is my plan for 2016. Not too crazy! Recall that in early 2013 they were coming off massive spend on the MS tooling, volumes were ramping, reviews had not come in yet, spending came down. EM seemingly bunched up positive news to burn shorts and raise capital on favorable terms. I see no reason the same could not play out here.

I know some people are thinking the Q2 ER will be the big pop, which may be depending on the speed of the MX ramp. I think they will hold down expenses and freeze most hiring for financial window dressing, and it will be for 1 quarter. My guess is it will be Q1 since that was their original goal, but it could be Q2 as well.

Thoughts? Where am I wrong?

 

[Fallenone]

I think this road map makes a lot of sense. Only things I want to add in are, following Q4 2015 ER, we may touch 180 again; I expect an announcement of partnership for a factory in China sometime this summer, may not be too relevant with price action though; the headwind from the general macro market that makes people more risk adverse and posing some difficulties in raising capital and limiting the ATH price (my guess is around 330-350, if we were in 2013, 2014, or even 2015, 400 is not too difficult, but we're in 2016).

For fun I drew a future stock chart of TSLA.


View attachment 109312


My basic premise is that there will be no big systemic, macro shock this year (even a 10% pullback wouldn't really change the story here). Also, Q4 ER will not be received well. We basically know the story now: 50k ish shipments. just a few Model X, still a fair amount of spending. EM/TM don't have a big incentive to punch this one up, so they have the option of downplaying Tesla Energy prospects or GF readiness. Better to tank the Q4 ER and set the trap for May. The good news they will telegraph is which qtr they are targeting for FCF, hopefully Q1!

Then the M3 reveal at the end of March will be a positive catalyst. Product announcements aren't usually big, but a non-ugly M3 will be a big relief/derisk. (For the record I expect some funkiness like an MX nose, but nothing too radical). Around the same time Q1 numbers will come out and they will be a beat, signalling a big market reaction that will start rolling into the expectation of a May financial beat and news about M3 reservation numbers. If so, it may be a May squeeze but I think it will be some warning earlier or something, with more Bull runs on good news in May and again for Q2 shipments. Around this time I expect a cap raise and the Q2 ER will be about resuming business as usual with capex on M3 tooling and possibly GF buildout. There will be a hard-to-trade top somewhere and a minor pullback in Q3.


After having drawn the above I realized I drew 2013 almost exactly. I think the parallels line up very well:

View attachment 109314

This is my plan for 2016. Not too crazy! Recall that in early 2013 they were coming off massive spend on the MS tooling, volumes were ramping, reviews had not come in yet, spending came down. EM seemingly bunched up positive news to burn shorts and raise capital on favorable terms. I see no reason the same could not play out here.

I know some people are thinking the Q2 ER will be the big pop, which may be depending on the speed of the MX ramp. I think they will hold down expenses and freeze most hiring for financial window dressing, and it will be for 1 quarter. My guess is it will be Q1 since that was their original goal, but it could be Q2 as well.

Thoughts? Where am I wrong?

 

[lango]

Good summary! I am uncertain about Q1. Model X is still not ramping up. Maybe they can keep selling a lot of Model S.

I have six major things that I think will influence the stock price 2016. i think all six needs to happen or atleast 5/6 for the stock to reach new highs.

Macro and general market
Not looking that good but not too bad either. I think China fear is overblown as they still grow their GDP. Remains to be seen how oil effect the rest of the economy.

X ramp up
Still problematic. There is not much good news here it seems. Annoying that we still don't have a steady state of production here.

S demand
Also remains to be seen how it will develop. But I am positive about it. I don't think it will surprise on the negative side.

TE and GF ramp up
Also looks like it is on track.

Model 3 reveal
This is really important. Especially number of reservations and that there will be no delay. No reason to think this would not work out well.

Cost/FCF
I think it is more likely it surprises negatively than positively.

 

[austinEV]

I think this road map makes a lot of sense. Only things I want to add in are, following Q4 2015 ER, we may touch 180 again; I expect an announcement of partnership for a factory in China sometime this summer, may not be too relevant with price action though; the headwind from the general macro market that makes people more risk adverse and posing some difficulties in raising capital and limiting the ATH price (my guess is around 330-350, if we were in 2013, 2014, or even 2015, 400 is not too difficult, but we're in 2016).

I agree. I was calling for 190, but 180 is not crazy especially if the general market is still dour.

 

[sunhelm]

This is the long term fundamentals thread right? Was hoping we'd see more exuberance here than dour since from a long term perspective, we have got ourselves a sale today folks! What am I missing?

 

[Fallenone]

A much lower appetite for risk in the general market.

This is the long term fundamentals thread right? Was hoping we'd see more exuberance here than dour since from a long term perspective, we have got ourselves a sale today folks! What am I missing?

 

[lango]

Apple in the earnings release conference call mentioned several times the general market and economy as being weak. This could be them blaming their own result on that, but it is still not a good sign for short term.

 

[sunhelm]

A much lower appetite for risk in the general market.

Putting my money where my mouth is, today I freed up more cash to take advantage of this dark cloud environment. Fully agree there is widespread fear in the markets currently but I strongly believe the fundamentals of this company is only getting stronger, it's moat growing ever wider in all aspects.

I welcome any counter arguments as to why this is a foolish journey I'm getting more deeply mired in.

 

[Fallenone]

I agree the fundamentals of TSLA is getting stronger. Say its a B getting to A and a year ago it was C getting to B. However, in a more bullish macro market environment, the C can have SP of 300 because people are looking at growth and don't care much about negative eps and cash burn. While in a more cautious environment, even with better fundamentals, people still get pickier at the bad and pay less attention to growth, therefore putting a lower SP on a fundamentally improved company. The forward PS of TSLA now is about 2.7, not high at all for a growth company. While the PB of TSLA is 26.2, astonishingly high. In a bull market, people will look at PS and the growth rate and think TSLA at sub 200 a huge steal. But in the bear market, people look at the 26.2 PB and think TSLA should shrink 10 times before they consider it a safe investment. That's the risk appetite I'm talking about.

So I think there are three prominent thing needs to happen to avoid a meltdown in SP:
1. We are not in a major bear market. Not hoping for a bull market, a pig market or even a minor bear market is fine.
2. Get free cash flow asap, I did some calculations and found 2016 Q1 is very hard but not impossible though. However, if they can't get the X ramp up figured out this quarter, we have to wait another quarter and missing the 2016 Q1 FCF will be a big blow I think.
3. Technically, don't lose the SP of 180. There's no telling how deep we can fall if we break below 180.

Putting my money where my mouth is, today I freed up more cash to take advantage of this dark cloud environment. Fully agree there is widespread fear in the markets currently but I strongly believe the fundamentals of this company is only getting stronger, it's moat growing ever wider in all aspects.

I welcome any counter arguments as to why this is a foolish journey I'm getting more deeply mired in.