Long-Term Fundamentals of Tesla Motors (TSLA)

[sundaymorning]

Concerning the thread about sitting and not market timing, this article made the rounds on reddit. What if You Only Invested at Market Peaks? - A Wealth of Common SenseA Wealth of Common Sense It is about how holding on to your position is more important than correct timing. A person who chose only the worst possible times to enter the market over the last 40 years, but held through the crashes was still a millionaire. Advice I don't take myself, but whatever

Very nice read. Timing the market is impossible to me, especially with the short term capital gains and wash rule affecting our decisions. Others may feel differently but I'm very comfortable sitting for another 10 years depending on our growth prospects. So far, I'm liking the 50% growth. When it drops to 20-25% I'll need to rethink my strategy, I don't expect this to happen unless a catastrophe or recession hits the US and Europe or China. If the US economy continues to be strong for the next 2 years, it basically buys us enough time for Gen 3. By then, even a recession may not matter as much.

 

[Warrenbonz]

Another point is that I think Tesla should make optimal use of charging for its own marketing benefit. Obviously SC and DC programs are creating substantial marketing value for Tesla. But I think they can go further. In DC locations, they also like to place J1776 chargers for nonTesla vehicles. This is very smart hospitality. The EV owners who use these are potential Tesla conquests. If we take this further, such free charging could be provided at SC locations as well. Say you have 6 SC stalls, add two more J1776 stalls. (This also would provide some overflow for Tesla owners is needed.) Now if controlling the amount of charging at the hospitality stalls is an issue for Tesla, then let's consider a charger that requires authentication for use. The guest could simply register through a smartphone app and get a certain amount of free charging from that and any other Tesla hospitality charger. This is an excellent marketing value for Tesla, not only do they get to create a positive experience with the guest, but they get contact information useful for prospecting. Through the app they can provide marketing material to the prospect and direct them to the website or nearest store. Moreover, they can find out things like what vehicles does the prospect own and for how long, has the prospect ever test driven a Tesla, when might the prospect like to buy their next car, and how might Tesla contact them. When Tesla is trying to sell hundreds of thousands of cars this kind of interactive marketing and lead generation will be an invaluable tool. Automakers spend thousands of dollars per conquest. We really do want Leaf owners hanging out at SC locations dreaming about the day they'll upgrade to Supercharging and Tesla. We want to know when they are in the market and make sure they get a test drive before they buy their next car. And we absolutely want them to rub shoulders with happy Tesla owners because these are our best sales people. All this can happen around positive charging experiences.

BTW, as a statistician, I have worked in direct marketing for many years before going into finance. The interactive marketing opportunities that Tesla has are immense. They are a direct marketer's dream. If Tesla does interactive marketing well, they may need to spend very little on advertising for a very long time.

I think this is a great idea. Adding non Tesla exclusive chargers to the Supercharger location also has the added benefit of removing the complaint I have heard some people make that these locations shouldn't be allowed because they only service Tesla.

 

[Causalien]

Very nice read. Timing the market is impossible to me, especially with the short term capital gains and wash rule affecting our decisions. Others may feel differently but I'm very comfortable sitting for another 10 years depending on our growth prospects. So far, I'm liking the 50% growth. When it drops to 20-25% I'll need to rethink my strategy, I don't expect this to happen unless a catastrophe or recession hits the US and Europe or China. If the US economy continues to be strong for the next 2 years, it basically buys us enough time for Gen 3. By then, even a recession may not matter as much.

On long term investing.

I am a bit like George Soros in that I use introspection to look at my emotions. The question I ask is: "Is this feeling greed or fear?" Most of the time I am asking this at peaks and the answer is mostly greed. So I start with selling half and keep selling half of the remaining holdings until I don't feel the greed anymore. I believe that the invisible emotional damage from investing stocks is greater than the physical damage of losing the money in a person's life.

For trading. I just stick with the plan since it is usually short term.

 

[sundaymorning]

On long term investing.

I am a bit like George Soros in that I use introspection to look at my emotions. The question I ask is: "Is this feeling greed or fear?" Most of the time I am asking this at peaks and the answer is mostly greed. So I start with selling half and keep selling half of the remaining holdings until I don't feel the greed anymore. I believe that the invisible emotional damage from investing stocks is greater than the physical damage of losing the money in a person's life.

For trading. I just stick with the plan since it is usually short term.

Good strategy, fear & greed are the main drivers of our decision. Trust your instinct and gamble small while holding onto cores for long term play. When my position stresses me out, that's when I close it, this happens often when I try to time the market for short term gains. I've had gains of several 100%s in one month, where my plays were near perfect, only to lose it all in other months. The short term play can be quite addicting, and knowing myself, I'm better going long bc a few bad moves short term can ultimately change my behavior. In order to avoid loses, I buy long term leaps. If my bets and timing is miscalculated, I'll sit on it until things get better. The average cost for my rolling out an extra year is about $1k-$1.5k hardly anything to think about with Tesla going for the win by 2017-2018 timeframe.

 

[jhm]

Stock Option Incentive Program

Stock option employee incentive programs help us understand specific strategic objectives that Tesla has set for itself. In reading the 10-K, I was pleased to see a new incentive program approved in January 2014 which has the following vesting milestones:

1. Model X production vehicle.
2. Aggregate vehicle production of 100,000 vehicles in a trailing 12-month period.
3. Model 3 production vehicle.
4. Annualized gross margin of greater than 30.0% in any three years.

Milestone 1 is on track for this summer.
Milestone 2 seems to be a new ambition pushing the company past 100k in annual production. We could see this as soon as 2016.
Milestone 3 is no surprise, but I think the ambition is to realize this in 2017.
Milestone 4 is a big revelation to me. Three years of GM > 30% would indicate a clear intent to price all products, notably Model 3 and stationary storage, with a very high markup. All products have to be priced quite close to 30% GM. Since this involves a span of 3 years the earliest completion would be 2017, but would be realized perhaps in 2018 or later.

I think these goals tell us alot about Tesla's strategic plan for the next 4 years. Volume growth will not come as a sacrifice of profitability. Indeed, the only way to sustain high growth rates is to insist on a 30% GM because this is what produces enough cash flow to self-fund 50% annual revenue growth. Let's hope Tesla employees can pull this off with style.

 

[Drax7]

+1
Strategic focus on these objectives is the path to success

 

[jhm]

To illustrate the connection between GM and self-funded growth rates, let's talk about the Gigafactory. Battery pack production capacity is the backbone of growing an EV business. So whatever limits the longterm growth rate of your battery supply limits the growth rate of your entire franchise. Now, the Gigafactory JV will require an investment of about $5B for 50 GWh capacity. This is an investment rate of $100 per kWh/yr. Let's assume a price of $200 per kWh of finished battery packs with a markup of 30%. Thus, GM per kWh is $60. If we reinvest this GM back into building out more capacity, then we are able to grow capacity at a 60% = $60/$100 annualized rate. Thus, a 30% GM on battery packs implies a 60% limit to self-funded growth. To grow faster than 60% requires funding from another source be that external financing or cross-subsidization from other products.

Now many Tesla investors have supposed that batteries can't possibly be a high margin product. But suppose you could only get a 15% or $30/kWh GM on battery packs. This would limit your self-funded growth rate to no more than 30% per year. So if that were the case, then the only way Tesla could grow long-term at 50% per year would be through massive capital raises every year and getting 50% bigger each year. I don't see how that would be workable over the long run. So the thing that investors need to be able to wrap their heads around is the notion that a 30% GM is a requirement for sustained 50% annual revenue growth. This is why a commitment to 30% for all products is of strategic importance. It's not a matter of "nice to have;" it's "must have."

Notice also that this same argument applies to any competitor who may enter the EV battery space. Even Apple, if it were only to pursue a 15% GM, it would limit it's self-funded growth rate to 30%. Of course, it could fund from cash earned on other lines of business, but that is not sustainable growth model, even for Apple. So here's the rub, as Tesla and others build out capacity, the margin will compress over time. Thus, the self-funding rate of growth comes down. Early entrants, like Tesla will enjoy high self-funded rates of growth, but later entrants will not. The EV market can grow at 50% annually for the next 15 years. So I am not at all worried about margin compression anytime soon, but those who wait until 2023 to build their first gigafactory will be in sorry shape. They will need massive capital and will have very little to show for it. So Tesla gives itself a huge first mover advantage by adhering to a profit discipline of 30% GM. Until there is more than 1000 GWh capacity across the industry, Tesla harms itself by trying to grow any product line at a lower GM.

 

[Johan]

The explicit goal of at least 30% Gross margin on cars for three consecutive years is bold, unprecedented and to continue growing recklessly the profit is absolutely needed. Tesla is putting up this goal even in light of probable competition coming from other big auto makers on to the field in the next few years. Still Tesla seem confident they can (keep) selling S, X and Model 3 at margins only before achieved by Porsche. This signals great confidence in the company, products and infrastructure. I believe in that it's possible and I'm putting my money where my mouth is.

 

[FANGO]

Er...the 30% goal isn't new, it was laid out years ago in elons vesting milestones.

Personally I think it won't be achieved. Once model 3 comes out gm will be a bit lower. 30% will be hard to sustain and stay competitive once tesla moves past luxury vehicles. At this point I think it's just too late. 20-25% for three years or long term? Sure, probably. But 30%? That's really high. And I think it would be folly for tesla to price with that in mind just for ceo stock options, when they should be pricing based on demand and competitiveness and public perception, that sort of thing, instead.

 

[RobStark]

And I think it would be folly for tesla to price with that in mind just for ceo stock options, when they should be pricing based on demand and competitiveness and public perception, that sort of thing, instead.

Stock options are for management not just CEO.

I highly doubt they price product with stock options in mind.

Instead they price product based on company goals.

And when company goals are reached then stock options kick in.

 

[jhm]

Er...the 30% goal isn't new, it was laid out years ago in elons vesting milestones.

Personally I think it won't be achieved. Once model 3 comes out gm will be a bit lower. 30% will be hard to sustain and stay competitive once tesla moves past luxury vehicles. At this point I think it's just too late. 20-25% for three years or long term? Sure, probably. But 30%? That's really high. And I think it would be folly for tesla to price with that in mind just for ceo stock options, when they should be pricing based on demand and competitiveness and public perception, that sort of thing, instead.

IIRC, Musk's incentive GM milestone was only for 4 consecutive quarters, which left open the possibility of ringing the bell 4 quarters while only having Models S and X in play, then pulling back with Gen 3. So this new milestone for 3 years suggests to me a much longer term commitment to high margins.

 

[Jonathan Hewitt]

IIRC, Musk's incentive GM milestone was only for 4 consecutive quarters, which left open the possibility of ringing the bell 4 quarters while only having Models S and X in play, then pulling back with Gen 3. So this new milestone for 3 years suggests to me a much longer term commitment to high margins.

That's how I read it as well. They haven't achieved 30% gross margins yet so that means if they can get GM up to 30% this year the soonest 3 years they could count would be 2015, 2016, and 2017. Even with a low volume Model 3 introduction in 2017 they would need to either have much higher than 30% GM on the Model S/X or slightly higher on S/X and high GM on Model 3 as well. Both sound good to me.

The bear argument would be Model 3 delay but I trust Elon when he said they want to stick to their target date and not do anything crazy that will push the date back.

 

[jhm]

Stock options are for management not just CEO.

I highly doubt they price product with stock options in mind.

Instead they price product based on company goals.

And when company goals are reached then stock options kick in.

My read on a milestone like this is that reaching and maintaining a 30% GM is explicitly the company goal. Naturally if the competitive environment changes to the point that this is no longer a prudent company goal, then the plan can be amended. At least for the next four years or so this appears to be the intended goal.

It should also be said that merely grossing your cost up 30% is not the intelligent way to meet this goal. I think the challenge is to start with a target price of a product and work out how to bring the cost down to achieve the margin. This is what they've been doing with the Model S. No one has raised the price 5% just to push GM fro 25% to 30%. Rather, the company has been working very hard to drive the cost down over time. If you believe that this technology and manufacturing efficiency has the potential to improve and squeeze out cost, then this is the direction you always want to go.

 

[Hogfighter]

Stock option employee incentive programs help us understand specific strategic objectives that Tesla has set for itself. In reading the 10-K, I was pleased to see a new incentive program approved in January 2014 which has the following vesting milestones:

1. Model X production vehicle.
2. Aggregate vehicle production of 100,000 vehicles in a trailing 12-month period.
3. Model 3 production vehicle.
4. Annualized gross margin of greater than 30.0% in any three years.

Milestone 1 is on track for this summer.
Milestone 2 seems to be a new ambition pushing the company past 100k in annual production. We could see this as soon as 2016.
Milestone 3 is no surprise, but I think the ambition is to realize this in 2017.
Milestone 4 is a big revelation to me. Three years of GM > 30% would indicate a clear intent to price all products, notably Model 3 and stationary storage, with a very high markup. All products have to be priced quite close to 30% GM. Since this involves a span of 3 years the earliest completion would be 2017, but would be realized perhaps in 2018 or later.

I think these goals tell us alot about Tesla's strategic plan for the next 4 years. Volume growth will not come as a sacrifice of profitability. Indeed, the only way to sustain high growth rates is to insist on a 30% GM because this is what produces enough cash flow to self-fund 50% annual revenue growth. Let's hope Tesla employees can pull this off with style.

This seems to me the most important aspect of investing long-term in TSLA. Demand is clearly (to most, anyway) not an issue, and the company has a road-map to grow 50% per year. My one big worry as an investor has been that management is more concerned with saving the world than turning a profit. Stating an ambitious goal of 30% GM for 3 years implies that the Model 3 will be priced to have a similar GM. I will sleep better at night now.

 

[jhm]

This seems to me the most important aspect of investing long-term in TSLA. Demand is clearly (to most, anyway) not an issue, and the company has a road-map to grow 50% per year. My one big worry as an investor has been that management is more concerned with saving the world than turning a profit. Stating an ambitious goal of 30% GM for 3 years implies that the Model 3 will be priced to have a similar GM. I will sleep better at night now.

+1 I think it significant that these goals are heavy on the production side. There is no demand side goal beyond simply bringing two new models to market. Most corporations have to incent heavily for marketing and sales outcomes. Not Tesla, just build it, bring it to market and keep the cost down.

 

[RobStark]

My one big worry as an investor has been that management is more concerned with saving the world than turning a profit.

Saving the world is a very expensive proposition.

You need to generate a lot of free cash flow.

 

[jhm]

Saving the world is a very expensive proposition.

You need to generate a lot of free cash flow.

I think this is pretty much how Musk looks at the world. Cash flow is the life blood that empowers a company to keep growing into its mission. Profit is the means, not the end.

 

[doggusfluffy]

Which is actually great long term once your senior management is already richer than their wildest dreams.

 

[Drax7]

Those goals are not mutually exclusive, actually they reinforce each other.
People will love clean cars, which in turn increases demand, which allows for pricing
power and better margins.

Competition will not be much of an issue until battery supply increases dramatically .

 

[jhm]

Those goals are not mutually exclusive, actually they reinforce each other.
People will love clean cars, which in turn increases demand, which allows for pricing
power and better margins.

Competition will not be much of an issue until battery supply increases dramatically .

+1 Your last point is absolutely key to sizing up the competition. A competitor is only as big as the GWh they bring to market.

In 2014, Tesla brought about 2.5 GWh to market, which was about 35% of the EV battery market production. Battery production was 7.2 GWh in 2014, up 54% over prior year. Panasonic gained 3 points of market share.

EV Battery Makers Market Share 2014 vs 2013

So Tesla wants to bring 50GWh to market by 2020. Will competitors bring 100GWh in that same time, or will Tesla continue to have a 1/3 marketshare even in 2020? I'd be happy if Tesla just retained a 1/5 marketshare, but this could require competitors to build out 200GWh of capacity. So at this point I do not see what competitors have the ambition to scale even to 50GWh. If any do, we should be hearing about their own gigafactories soon.

Excluding Panasonic, if other battery makers advance 54% per year from 4.5GWh in 2014, that would lead to a mere capacity of 60GWh. So at this pace, the industry brings about 110GWh in 2020 and the Tesla Gigafactory has a 45% marketshare. So the competition really needs to pick up the pace.