Long-Term Fundamentals of Tesla Motors (TSLA)

[neroden]

My financial model is a long-term discounted cash flow analysis assuming an 8% discount rate.

Well, there's your problem. Where the hell are you getting 8% risk-free bonds? Sure, if I could get 8% interest in government bonds, Tesla *would* be overvalued.
Try it again with a 1% or 2% discount rate.

And I'd honestly like to see your results. I want to hear any reasonable bear case, because I might tend to be optimistic.

 

[The Blue Owl]

Well, there's your problem. Where the hell are you getting 8% risk-free bonds? Sure, if I could get 8% interest in government bonds, Tesla *would* be overvalued.
Try it again with a 1% or 2% discount rate.

And I'd honestly like to see your results. I want to hear any reasonable bear case, because I might tend to be optimistic.

He's dead, Jim.

(I spotted his reincarnation the other day, though, so you'll have a chance to reengage the zombie if you really want to.)

 

[HiTech]

I made a comment yesterday on a thread that I started in July last year, Long TSLA, but bearish next six months. The title of that thread is now outdated and there's not much traffic on the thread either so I'm moving the comment here. Per below, the key question for me in the next 6-12 months is the durability of Model S demand. Any feedback on thoughts below appreciated.


@uselesslogin -- Good timing! I was just considering updating this post. Because of valuation, my bias for the next six months and beyond is now positive (though I would not say that I'm loading up, but I'm interested in feedback from others on this thread per my questions below). Assuming the company was profitable so that stock option dilution would be calculated into the fully diluted count, I think Tesla has about 147-148 million shares out. At $176, that's a $26 billion cap. If the stock fell another 30% from here, it would be valued at $18 billion. I think $18 billion would be a very compelling value for Tesla right now. Even with a scary, unanticipated hiccup on S sales, the company should get to $8-$10 billion revenue run rate in the next couple of years with lots of growth potential thereafter. Less than 2x sales for a company with very good prospects for profitable growth long term certainly seems like a compelling value. In short, there is still potentially downside from here near term, but I think that downside is in the 30% range (not 50%+ which is where I think we were six months ago).

Per @uselesslogin's comments above, I certainly did not get the reasons exactly right six months ago, but I don't think I was entirely off either. Together with a high valuation, my biggest concern was a temporary flattening or softening of model S sales in the shadow of the model X promotion and introduction (particularly given that even a successful X launched would result in low margins on those sales temporarily). This obviously did not happen as Model S sales were extremely robust in the second half of the year. At the same time, I don't think the concern was entirely unfounded as I think this is the reason that the company launched its very successful referral program in the fall -- it decided it needed to pull a demand lever and I think it's reasonable to guess that concern the X launch might negatively impact S sales had something to do with it.

From a fundamental standpoint, I think S sales growth in the next six months is still the key variable. The delay in the X ramp means that we are only somewhat farther along than where we were six months ago, just with a better valuation on the stock. Tesla needs continued robust S sales to support the profitability and cash flow of the company in the next six months. On demand outlook for Model S near term, I simply don't have a lot of conviction, but I'm curious as to the opinions of others on this forum. On the one hand, the response to the summer/fall referral program was pretty awesome (as was demand in Europe). On the other hand, the fact that Tesla came out with an enhanced financing deal recently seems like they are still pulling levers to ensure consistent demand and I'd rather see evidence of strong demand without the need to pull levers. We'll know more after the conference call next week for sure. But again, I'm curious as to what others think about the demand picture for the model S (next 6 months to a year).

I'm not sure I'd consider the referral program last year the same way you did. From my understanding, they are looking at ways to lower the cost to sell a car, as their current way could be fairly expensive (retail space, hired employees, etc.). This is not to compare it to traditional model, but just to look for ways to reduce the costs further.

Also, with the growth of sales in Q4, and the future potential of newer markets (like China), I'm not worried about the demand for Model S just yet.

In the short term, I think the biggest risk is being able to ramp up Model X quickly. They had difficulties with Model S in the beginning, and repeating it with Model X provides a poor expectation for management and execution capabilities... even with so many successes under their belt.

As for my expectations, I believe they will have about $8b in sales in 2016, leading to a $40b market value (assuming 5 times price/sale). With about 130m shares, that puts the price of stocks a year from now at about $308. Not a bad bump up from now. But, those are my guesstimates.

 

[ChrisA]

With about 130m shares, that puts the price of stocks a year from now at about $308. Not a bad bump up from now. But, those are my guesstimates.

For fully diluted shares out, see the third quarter press release. For the three months 9/30/15, the diluted shares out are 142,747 on the column that shows profitability. However, that calculation is made without the full weighting of the new shares from the offering, which took place in the middle of the third quarter. Including all of the new shares from the offering, recent stock options issuance, and a higher stock price consistent with your 40 billion cap target, the fully diluted count should be more like 148-149 million, not 130 million. Assuming your $40 billion cap estimate is correct, the stock price would be $268 rather than $308 -- still a nice move from here, but a difference nonetheless.

On the more important issues, the bad news on the X roll-out is already baked into the current stock price. I guess it could get worse, but I'm assuming the incremental news there will be positive rather than negative. I do think the timing of the referral program was intentional, but regardless of the reason they got a sales lift, which they will be comping against fall 2016. Also, why offer a better deal on financed cars recently if there is no need to try to increase S demand? If I had more confidence on the durability of S demand over the next two years, I would be very bullish rather than simply positive on the stock at these levels.

 

[EV_Future]

I'm sorry, but that made me laugh out loud. No one can answer that question, only predictions based on a future yet to occur. This thread along with the blind faith price targets thread is a good place to start. A lot of long-term scenarios are discussed in the short-term thread as well.

Blind Faith Price Targets
Short-Term TSLA Price Movements - 2016

You can also search for the 2015 short-term thread. I would recommend reading the quarterly shareholder letters and listening to the quarterly conference calls, as well as watching some of Elon Musk's and JB Straubel's videos on youtube. Long-term, Tesla has the potential to be the world's most valuable company or go bankrupt.

Welcome.

OK thank you from a newbie.

 

[Fallenone]

I think both the referral and the recent discount on lease are methods employed trying to compensate for the slow ramp of X. Ideally, X would have picked up the growth last year but it turned out needed another quarter or two. To make up the growth, they had to push for more S sales, thus all those incentives. I don't think the natural demand for S is 17k per quarter right now. It will get there, but may be next year. It's just because they're missing probably 4 or 5 k of X per quarter for the last and maybe 1 or 2k this quarter so that they have to give some steroid to S.

For fully diluted shares out, see the third quarter press release. For the three months 9/30/15, the diluted shares out are 142,747 on the column that shows profitability. However, that calculation is made without the full weighting of the new shares from the offering, which took place in the middle of the third quarter. Including all of the new shares from the offering, recent stock options issuance, and a higher stock price consistent with your 40 billion cap target, the fully diluted count should be more like 148-149 million, not 130 million. Assuming your $40 billion cap estimate is correct, the stock price would be $268 rather than $308 -- still a nice move from here, but a difference nonetheless.

On the more important issues, the bad news on the X roll-out is already baked into the current stock price. I guess it could get worse, but I'm assuming the incremental news there will be positive rather than negative. I do think the timing of the referral program was intentional, but regardless of the reason they got a sales lift, which they will be comping against fall 2016. Also, why offer a better deal on financed cars recently if there is no need to try to increase S demand? If I had more confidence on the durability of S demand over the next two years, I would be very bullish rather than simply positive on the stock at these levels.

 

[Matias]

Is it Okay to look what I wrote less than I year ago, when TSLA was a little below 200

Long-Term Fundamentals of Tesla Motors (TSLA) - Page 250

 

[uselesslogin]

Is it Okay to look what I wrote less than I year ago, when TSLA was a little below 200

Long-Term Fundamentals of Tesla Motors (TSLA) - Page 250

I don't understand what you are saying. 4 months after that post we were around $280. So buy now and sell in June? Or are you concluding that you were right in the long term? I mean I would argue the jury is still out on that one. You have to wait at least until the end of the decade there. Or just telling people not to buy in? I mean heck, it has only underperformed the S&P by 4% since that post and only 2.5% behind the NASDAQ. So certainly that was not a particularly great time to sell. I mean I guess one would have theoretically been better off selling then and buying now but not by much.

 

[Matias]

My point is the same as it was in that post. Don't fall in love with some stock. They are all the same. Don't putt all the eggs in one basket.

Btw now that I started to dig my old posts I also found this which was posted almost two years ago

2014 1 QTR predictions/results - Page 18

 

[uselesslogin]

My point is the same as it was in that post. Don't fall in love with some stock. They are all the same. Don't putt all the eggs in one basket.

Btw now that I started to dig my old posts I also found this which was posted almost two years ago

2014 1 QTR predictions/results - Page 18

Well that is fine - that makes sense. Of course you could have repeated that at the highs as well.

 

[graphix25]

As a new buyer of Tesla stock ($180, $170 and $160) and a future Model 3 owner. I would like to share my sales forecast for 2016-2030 and general thoughts. Tesla is a tiny company, expensive based on today's revenue and free cash flow (FCF) or lack thereof. However Tesla has entered into a very, very large market of ~100m cars/trucks globally not to mention the power side of the business which could be even bigger total market opportunity. I believe one day it will be one of the greats. Should be an interesting ride. Load up if the stock gets to $120-$130 range and close your eyes till 2025. It is so tempting to go very aggressive into this stock at $150-160 but I fear the current market conditions it's going lower before it can stabilize and resume an uptrend. The slow ramp of the Model X may be the only excuse needed to drop substantially after earnings. As is well known Tesla is in risky period where they need access to large amounts of capital to build a base to be self sustaining. It is important in 2016 they transition into being self supporting through FCF once the Model X get's into volume production.

Long term Tesla should be a winner. Short term looks a bit dicey.

To give an idea what it will take factory wise to rival someone like Toyota who topped 2015 sales at 10.15m cars and trucks. Kind of humbling to see Tesla with only one primary factory in contrast to Toyota's global operations. They are just a baby just learning to walk among lumbering giants.
http://newsroom.toyota.co.jp/en/corporate/companyinformation/worldwide

 

[RobStark]

From an interesting SA article How Will We Fuel All Those EVs? The Coming Energy And Transportation Disruption

http://seekingalpha.com/article/3870626-will-fuel-evs-coming-energy-transportation-disruption

 

[hershey101]

I was wondering what the fair price of TSLA is, and whether I should be worried about my investments or be confident that it's a good time to buy. With that in mind:

What happens if TSLA never grows out of the small niche player it is? Suppose they stop the high amount of CapEx associated with the Gigafactory, Model 3 etc. If they only manufacture 100K cars/year (something that is easily achievable in the next 18 months).
Say 50K Model X/S split @ ASP of 100K going forward and a 10% net margins... That would mean a yearly profit of 1B, or an EPS of ~$7... If they weren't ramping up aggressively there would be no need for additional capital, and therefore no more dilution. Even with a conservative 15x-20x multiple for TSLA, we get $105-$140/share.... That means we are quickly getting to the point where the stock is no longer pricing in the success of the gigafactory, model 3, energy storage and any new business that Tesla comes up with.... It's a great time to buy if we fall another $40... But at the same time, it doesn't give me a lot of confidence that my calls will recover any time soon.

 

[AudubonB]

There were some recent postings suggesting the recent decline of TSLA has not been significantly out of line with that of more-or-less comparable firms. I spent a little time thinking about this, and the most easily-manipulated - innocently or insidiously - datum for such would be the start date.

In my opinion, the most appropriate date should be that of TM's most recent capital raise. Shares are, of course, fungible but for sake of investor sentiment we can posit that these "newest" shares differ from more "battle-hardened" ones - certainly the specific investors who were the ones to pick up the new shares all bought in at one specific price.

TM sold 3.099mm shares in mid-August at $242; (net $238 and change to TM for a total capital injection of $738.3mm).

I compared the fortunes of those shares against those of other tech firms - not auto stocks. For the period ending Friday, 5 Feb 2016 we have, in rounded numbers:

TSLA -33%

overall market:
S&P 500 -5%

large-cap NASDAQ:
NSDQ 100 -10%

overall NASDAQ:
NSDQ Composite -15%

Top tech stocks...plus one other....
GOOGL +5%
AAPL -17.5
LNKD -33%

Again - this is from a specific start point but it is, I would argue, an extremely important start date. Ouch!
Six months is not a long holding period for many investors but not only is it for others but most of the fund world takes two quarters' worth of performance very seriously. And that large an underperformance from a secondary issue is very, very serious indeed.

 

[dalalsid]

From an interesting SA article How Will We Fuel All Those EVs? The Coming Energy And Transportation Disruption

http://seekingalpha.com/article/3870626-will-fuel-evs-coming-energy-transportation-disruption

Thanks for the link to my article! I had another article submitted to SA about Tesla's Model X ramp but unfortunately the editor is very picky about positive articles. I'll post it to my blog at some point today.

 

[SBenson]

Thanks for the link to my article! I had another article submitted to SA about Tesla's Model X ramp but unfortunately the editor is very picky about positive articles. I'll post it to my blog at some point today.

Dalal, Where is your blog? I'd be very interested in detailed analysis of X ramp. Thanks

 

[lango]

I was wondering what the fair price of TSLA is, and whether I should be worried about my investments or be confident that it's a good time to buy. With that in mind:

What happens if TSLA never grows out of the small niche player it is? Suppose they stop the high amount of CapEx associated with the Gigafactory, Model 3 etc. If they only manufacture 100K cars/year (something that is easily achievable in the next 18 months).
Say 50K Model X/S split @ ASP of 100K going forward and a 10% net margins... That would mean a yearly profit of 1B, or an EPS of ~$7... If they weren't ramping up aggressively there would be no need for additional capital, and therefore no more dilution. Even with a conservative 15x-20x multiple for TSLA, we get $105-$140/share.... That means we are quickly getting to the point where the stock is no longer pricing in the success of the gigafactory, model 3, energy storage and any new business that Tesla comes up with.... It's a great time to buy if we fall another $40... But at the same time, it doesn't give me a lot of confidence that my calls will recover any time soon.

They will try very hard to not become a nice manufacturer. And if they fail I suspect they will go bankrupt and be worth only what another manufacturer wants to pay for the assets they have. But they will have massive debts at that point. I don't think it makes sense to find a floor for the stock based on that. To some degree Tesla is dependent on the stock price too to be successful.

 

[dalalsid]

Dalal, Where is your blog? I'd be very interested in detailed analysis of X ramp. Thanks

It is at S1dd.com | My Blog About Finance, Renewable Energy, Technology, Food and everything else - though that is not a detailed analysis. More of a its a no big deal long term.

 

[ckessel]

Here's something that's been bugging me for a while, maybe folks here can explain. Elon's/Tesla's stated goal is to advance the transition to EVs by making compelling electric cars.

Ok, so how does autopilot advance this? Autopilot and it's sensors and software has almost nothing inherently to do with EVs. Computerized ICE throttle control is pretty advanced, there's not much EV advantage there to be had from the autopilot point of view. Everything else, brakes, sensors, steering, etc has nothing EV specific. Autopilot research projects have been done fairly extensively over years on non-EV cars.

Regardless, let's assume Elon thinks autopilot is the next huge differentiator in auto transport. Let's say Tesla succeeds and creates a really compelling autopilot in a way that moves the market. Doesn't that encourage other manufacturers to pursue autopilot? And if so, isn't that taking focus away from their transitioning to EVs?

If the goal is to push EVs, then Tesla should be taking all that money on autopilot and instead pushing the R&D on batteries and manufacturing even further, driving costs down, expanding their product line down market (e.g. 3 and Y either faster and/or released closer together) and creating completely dominant EVs. Push the market to understand that EVs are the dominant must-have feature. Make the market follow into the EV category.

I get autopilot is really nice and will, someday, be a key feature of every car, but I can't understand how Tesla's push for it now can possibly help their EV mission statement. If it wildly succeeds, it takes away the impetus for other manufacturers to get on the EV bandwagon and instead focuses them on autopilot. If it fails, it's an anchor or money pit holding Tesla back. If it's only a partial success, its payback time is measured in what, a decade? And what's the opportunity cost, the money that didn't go towards advancing EV-specific technology? There's no scenario with autopilot I see that advances the EV transition. I suppose from a purely financial viewpoint, a wild success at least gives Tesla a leading position in a future autopilot-focused market, keeping them alive to hopefully eventually get back to advancing EV adoption.

Any ability for autopilot to advance the EV cause seems tangential at best. If Elon wants to advance it, form a startup spin-off that has it's own VC funding. Hell, he could even be on the board...wouldn't be any different burden on his time than now since he's supposedly having autopilot report directly to him now.

So...what am I missing? Can someone make the link that pushing the market's adoption of autopilot somehow pushes EV adoption?

 

[Ohms Andwatts]

Here's something that's been bugging me for a while, maybe folks here can explain. Elon's/Tesla's stated goal is to advance the transition to EVs by making compelling electric cars.

.....

Any ability for autopilot to advance the EV cause seems tangential at best. If Elon wants to advance it, form a startup spin-off that has it's own VC funding. Hell, he could even be on the board...wouldn't be any different burden on his time than now since he's supposedly having autopilot report directly to him now.

So...what am I missing? Can someone make the link that pushing the market's adoption of autopilot somehow pushes EV adoption?

When the model S came out, a big criticism of a premium car at that price was that it lacked features less expensive cars had. Elon always wants to be a leader in technology and he sees that doing that forces the rest to go along. This is especially true with the electrification of cars, but all aspects of building a superior car are included.

So the state of autopilot is now defined by what Tesla offers and it is no longer lagging any other auto company. I think that makes it a very significant feature that must be constantly leading edge when compared to the others. If someone wants a car with the latest safety and technology features, they have to buy Tesla. To me, that is a pretty compelling reason to advance autopilot. And if it is included in model 3, it puts Tesla so far ahead of the competition that comparing at equivalent prices makes any other wannabe a joke.