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The Blue Owl
Endangerous Herbivore
I understand this thesis. However, Tesla is definitely hitting on all cylinders and is doing world changing, Elon sainthood while saving the mother earth kinds of things every quarter. Each and every car made in Q1, all 7,535 vehicles will be sold. Just not all of them were in Q1. Each and every car they make this year will be sold (unless it is wrecked before the sale). The disappointment of 6,457 delivered is a curious market reaction that is not grounded in reality. Each car made last year was sold, including those that were demo units. Each car made this year will be sold, including demo units. So whether the revenue is counted towards one quarter or next is, in the long term, immaterial. They beat on the number of vehicles produced over guidance even with the current cell constraints.
Remember, hitting even these production numbers of roughly 25,000 to 35,000 cars a year was deemed impossible by a significant number of "experts" this time last year. If you go back two years, it was considered laughable that a car company that sold a total of about 2,500 cars over 5 years would be able to make thousands of cars a year much less tens of thousands.
Now, the stock is definitely trading for the future, even at these lower prices. We are all familiar with "Tesla time" and the difficulties with getting projects out the door. Consider the scope of Tesla's global build out, including the homogenization of the Model S across many different automobile markets as well as the difficulty in navigating the global electric infrastructure. The car design itself has stood up to all sorts of weather, accidents, and the daily grind. This build out has to be done *before* Gen 3 rollout in order for the infrastructure to exist for Tesla to sell, service those cars and for the charging infrastructure to exist for that many cars. The entire rise of this global world transformation is being built on the backs of Model S sales. Both the Model S itself and Tesla's actions are building a global brand that has already proven to be far larger than their current sales would suggest. And Tesla is doing this while managing to make a non-GAAP profit in such a huge capital intensive industry.
With that, the question is ramping to new production levels, first with the Model S/X and then onto Gen 3. We know that there is a lot of room in the Fremont factory. We know that they are revising the production line, adding capacity, and hiring workers in Fremont. California gave Tesla a tax break last December on $417 million dollars of new to Tesla factory equipment. Tesla also just leased Lanthrop. We know that Panasonic has committed to a significant increase in cell production, agreeing to supply 2,000,000,000 cells over 4 years. That's roughly 300,000 cars worth of cells. They are investing money that is not easy for them to invest without some significant assurance that it would be worth it. In my mind, Panasonic's commitment to increase production last fall with their new cell supplier agreement is a huge vote of confidence. They were planning on spending $127 million USD in capex, but they are adding $220 million USD in capex going foward to expand their cell supply. That's roughly $350 million USD in expanding battery cell supply, not all for Tesla. This is all before the Gigafactory.
The Gigafactory is something Tesla has been planning for some time. I find it curious the level of doubt associated with this factory, as some people have to go through some significant contortions to create a higher level of doubt. Sure, one can doubt the timeline. Or the total nameplate capacity. But to doubt that Tesla is building this? They've already raised $2 billion dollars. The entire Suminoe Factory's expected cost for 600 million annual cell capacity with both phases was $1.31 billion (2010 dollars). As many have already stated, the cost reductions going past a certain size is unlikely, so the 30+% cost reduction is likely already factored in with just the $2 billion dollar investment. As we had talked about on the Google Hangout, it is likely that Panasonic's investment in this factory is not straight up cash - it's equipment, IP, and know-how. It is more than likely that Tesla has already secured the entire financing and commitment necessary for phase 1 of the Gigafactory and therefore they are confident enough to break ground. This ER's most pleasant surprise was that they are expecting to break ground next month on the first site. As opposed to lingering doubts about the Gigafactory, it appeared to me on the call that Tesla was desperate to have the factory up and running - they know when they want it running and producing cells for the Gen 3. They know the exact month they want it operational. Can it slip a little? Sure. But there should be little doubt that Tesla is going to make this factory and Panasonic's own profits rely on it too. Further, in this ER, it is clear that the Osaka plants will continue to provide cells as the Gigafactory is brought online. Separately, I am sure that Tesla is also working on lowering the pack integration costs of making assembling the cells into Tesla automotive packs.
As for Model X, I think some people are missing the fact that if it slips, they'll just make more Model S's. With roughly the same ASP's and likely ongoing demand, it is not the case that slippage of the Model X ship date means less sales for Tesla. If they don't make a Model X vehicle earlier, they'll make a Model S instead. Therefore, discounting the stock based on either delivery scheduling issues or Model X slippage is nuts. Again, if they had issues with homogenization in RHD markets causing a 1 month delay, it's not like those cars aren't being sold. Tesla has already pre-sold the quarter's production and does that every quarter. I think this point is where a lot of people misunderstand Tesla when comparing to traditional car manufacturers. For the Cadillac ELR, for instance, they made a production run and GM counts those cars as sold. There are quite a few of these "sold" ELR's sitting on dealer lots. If these do not sell in Q1, they sit into Q2. And then into Q3. They don't crank up the line to build more ELR's yet. On the other hand, each Model S rolling of the line has already been sold to the end customer (unless it is one of the few demo units). If it didn't make it to the end customer that quarter, it will next quarter. That one quarter delay does not impede the next quarter's sales. With this kind of production constraints and pre-order level, we have not probed the depths of demand in any way. And with the Supercharger network building out and people increasingly seeing Tesla Model S's in the wild, demand is likely going to increase. Tesla confirmed that NA order levels were up 10% quarter over quarter, even though early Q1 is likely a soft automotive sales quarter. Customer deposits quarter over quarter are also up.
I think the stock dropping like this reflects both subtle and large misunderstandings of Tesla's business by both retail and professional investors as well as a poor macro environment which will correct itself in due time. Not understanding how Tesla re-invests money into a dynamically growing business is very curious. In the short term, we have significant news coming with Gigafactory site selection and then ground breaking coming right up.
I'm saying that TSLA can be like AMZN in that it will grow very well while making very little earnings to show for it because it keeps making large capital investments. That would result in a very high P/E.
I'm saying very few companies have a "buy the stock after its grown" moment, especially those with skyhigh p/e. [FONT=Helvetica, Arial, sans-serif] The average life expectancy of a multinational corporation-Fortune 500 is between 40 and 50 years. and signifcantly lower for smaller/riskier companies with high P/e. [/FONT]
[FONT=Helvetica, Arial, sans-serif]Just saying... Hence you buy companies at/close to value. not expensive as defined by p/e. [/FONT]
[FONT=Helvetica, Arial, sans-serif]not saying tesla has a short life-span... just pointing out capitalist history over the last 500 years. [/FONT]
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I think tolerance for low earnings big investment is very low these days; may improve going forward. hey, that's what makes a market right? if you are right, amazon is a strong buy now.
The Blue Owl
Endangerous Herbivore
I prefer to buy them before the value is recognized by the market at large.
You are talking about agreed-upon value, or conforming-with-arbitrary-financial-metrics value. We are talking about real value which is as yet unrecognized, or misunderstood.
The Blue Owl
Endangerous Herbivore
you maybe right, and TSLA a bargain currently. I'd just caution against the us-against-the-world mentality that Tesla is misunderstood.
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at $170, maybe a 1 month slip for model x is okay.
at $210, 1 month slip not be tolerated.
To me, execution tolerance expands/tightens based on price.
The Blue Owl
Endangerous Herbivore
Fair enough, but it is entirely possible to believe that TSLA is misunderstood, without being beholden to an us-vs-them mentality. Again, reasonable people may and do disagree about TSLA. That's why there's money to be made in it.
Johan
Ex got M3 in the divorce, waiting for EU Model Y!
Whew that was a lot of interesting back-and-forth to plow through (and a tad of chest pumping too).
Anyway I too would say that what "the market" does not fully get is the extremely aggressive growth strategy Tesla are adhering to. Within just a few short years they are simultaneously creating a car line never seen before FROM SCRATCH and steadily building more with steady demand + raising billions that they INSTANTLY put to work in a factory that will maybe within one year take a +50% GLOBAL market share in batteries (from companies that have built their business over many years) and all this while AGGRESSIVELY building out the SC network not after selling loads of S/X or Gen III but IN ADVANCE to create a huge selling point and something that none of the competition have.
So guys if you look at all that has happened 2009-2014 and then what we KNOW will take place in the next 12 months I ask: are we not seeing an exponential growth curve forming for TSLA??? That's what I see. Now I honestly have no idea of if current valuation should be $50, $150 or $300 but I do know that in the coming years as this plays out more and more investors will recognize this exponential growth occurring and they will want in. There will be buying pressure at almost any price point.
Also did everyone suddenly forget the short interest and the potential for the 3rd squeeze as the GF plays out and (once again) new value investors come in and the shorts get caught (again) with their pants (shorts) down?
Anyway I too would say that what "the market" does not fully get is the extremely aggressive growth strategy Tesla are adhering to. Within just a few short years they are simultaneously creating a car line never seen before FROM SCRATCH and steadily building more with steady demand + raising billions that they INSTANTLY put to work in a factory that will maybe within one year take a +50% GLOBAL market share in batteries (from companies that have built their business over many years) and all this while AGGRESSIVELY building out the SC network not after selling loads of S/X or Gen III but IN ADVANCE to create a huge selling point and something that none of the competition have.
So guys if you look at all that has happened 2009-2014 and then what we KNOW will take place in the next 12 months I ask: are we not seeing an exponential growth curve forming for TSLA??? That's what I see. Now I honestly have no idea of if current valuation should be $50, $150 or $300 but I do know that in the coming years as this plays out more and more investors will recognize this exponential growth occurring and they will want in. There will be buying pressure at almost any price point.
Also did everyone suddenly forget the short interest and the potential for the 3rd squeeze as the GF plays out and (once again) new value investors come in and the shorts get caught (again) with their pants (shorts) down?
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The Blue Owl
Endangerous Herbivore
.It's perhaps worth noting that Tesla really doesn't intend to make profit for a very, very long time beyond what's necessary to stay afloat. Elon's goal is to accelerate EV adoption, not make money. Consequently, they'll be shoving every revenue penny back into Tesla for a long time.
Tesla guided to barely being cash flow neutral for the year in the ER as they spend for the X and the Gigafactory. But they could basically say they intend to stay relatively cash flow neutral for the next, what, 5 years?
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Someone please check my math.
Current Market Valuation $22,610,000,000 ($22.6 billion)
Sales for 2014 per latest guidance: 35,000 units.
Average Selling Price $110,000
Total Revenue for 2014 $4,400,000,000
Let's eliminate all the growth expenses and just assume it is a stand along car company with 15% net profit margin as guided by Deepak Q4 2013.
Gives us Profit of $660,000,000
Or a PE of 39
If Tesla hits 40,000 unit sales for 2014, the PE drops to 34.26
For 2015, if Tesla hits 80,000 units then the current PE is 17.13.
So I don't think the current Tesla valuation is out of line at all. In fact, 100% year / year growth is worth what PE? And what happens in 2017 when the unit count goes to 500,000?
There is execution risk, but the valuation is not based on some hypothetical monetization wish -- real profit is made on every car, and a 39X PE seems cheap to me for a company that will grow 100% into 2015.
Toyota has a 17 PE. It is growing 2.5% /year (Yahoo finance). So Tesla's 39 2014 PE is not unreasonable for 40X the growth rate of Toyota.
Current Market Valuation $22,610,000,000 ($22.6 billion)
Sales for 2014 per latest guidance: 35,000 units.
Average Selling Price $110,000
Total Revenue for 2014 $4,400,000,000
Let's eliminate all the growth expenses and just assume it is a stand along car company with 15% net profit margin as guided by Deepak Q4 2013.
Gives us Profit of $660,000,000
Or a PE of 39
If Tesla hits 40,000 unit sales for 2014, the PE drops to 34.26
For 2015, if Tesla hits 80,000 units then the current PE is 17.13.
So I don't think the current Tesla valuation is out of line at all. In fact, 100% year / year growth is worth what PE? And what happens in 2017 when the unit count goes to 500,000?
There is execution risk, but the valuation is not based on some hypothetical monetization wish -- real profit is made on every car, and a 39X PE seems cheap to me for a company that will grow 100% into 2015.
Toyota has a 17 PE. It is growing 2.5% /year (Yahoo finance). So Tesla's 39 2014 PE is not unreasonable for 40X the growth rate of Toyota.
Agreed. But this the biggest problem for the stock and what brings out, rightfully, the naysayers who complain about the high P/E. The only way to deal with this is to exceed revenue growth expectations every quarter to show a long-term future. Until you don't. Then what happened to AMZN happens to TSLA.
Johan
Ex got M3 in the divorce, waiting for EU Model Y!
There is one more point to be made (but I got tired of typing on my phone) that I have been thinking about a bit since after the ER, to come to an agreement with myself as to why I should still hold and hold and hold my shares. One of the most important reason I have come up with is maybe at first kind of counter intuitive but it's the fact that Elon and his crew do not really care about the stock price at all.
Why is this great you ask? Let me make an analogy: Think about professional sports. There are probably quite a few players who spend a lot of time thinking about how to look good on and off the field in order to get sponsor contracts. There are probably many players who think a lot about the bonuses they can get if they win a game or do good in a season and what to do with the money. And then you have the athletes who play the game to the fullest because they love it, who want nothing more than to win and to be the best - these guys practice the hardest, have to most focus and the most heart. Now guess who wins the most bonuses and get the biggest sponsor contracts? That's right, it's the one guy who doesn't really care about it. Elon and his team is that great athlete.
Another analogy: Let's say there's this dream girl, who all the guys want. She's beautiful as well as a really good person, she volunteers at a charity for children. A group of young guys all come to the charity. Some of them have put a lot of time in the their appearance, trying to win her over. Some are interacting with the children but are constantly looking over their shoulder to see if they get her attention and if they look good playing with the kids. But then there is this one guy who forgets about the girl and just gives his undivided attention to the children. Guess which of the guys catch her interest in the end?
OK I know kind of cheesy comparisons, but when you think about it there are so many companies out there who care too much about their stock price, their sales and the management care too much about their bonuses and options. With Tesla it's all technology, products, satisfied customers, growth and then more growth. It's not about protecting their lead against the competition but about extending it. It's not about playing it safe but they go all in, all the time. It's not about following others but about leading the way and doing things in a new way, the right way. The stock price just comes naturally. That's why I love it every time Elon says he doesn't care about the stock price, or that the high stock price is distracting.
Why is this great you ask? Let me make an analogy: Think about professional sports. There are probably quite a few players who spend a lot of time thinking about how to look good on and off the field in order to get sponsor contracts. There are probably many players who think a lot about the bonuses they can get if they win a game or do good in a season and what to do with the money. And then you have the athletes who play the game to the fullest because they love it, who want nothing more than to win and to be the best - these guys practice the hardest, have to most focus and the most heart. Now guess who wins the most bonuses and get the biggest sponsor contracts? That's right, it's the one guy who doesn't really care about it. Elon and his team is that great athlete.
Another analogy: Let's say there's this dream girl, who all the guys want. She's beautiful as well as a really good person, she volunteers at a charity for children. A group of young guys all come to the charity. Some of them have put a lot of time in the their appearance, trying to win her over. Some are interacting with the children but are constantly looking over their shoulder to see if they get her attention and if they look good playing with the kids. But then there is this one guy who forgets about the girl and just gives his undivided attention to the children. Guess which of the guys catch her interest in the end?
OK I know kind of cheesy comparisons, but when you think about it there are so many companies out there who care too much about their stock price, their sales and the management care too much about their bonuses and options. With Tesla it's all technology, products, satisfied customers, growth and then more growth. It's not about protecting their lead against the competition but about extending it. It's not about playing it safe but they go all in, all the time. It's not about following others but about leading the way and doing things in a new way, the right way. The stock price just comes naturally. That's why I love it every time Elon says he doesn't care about the stock price, or that the high stock price is distracting.
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