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FluxCap, Like your analysis but I think you are confusing Gross Margins with Operating Margin. These are very different animals. Guidance is for Gross Margins where as model is on Operating Margins. Musk never provided any guidance on Operating Margins as far as I know. Damodaran's assumptions look quite conservative on this but I'm not sure what would be applicable numbers for Tesla. Any experts care to comment?
wcalvin
Member
Valuation numbers are not going to change what is driving TSLA buyers
It's hard to judge moving targets and some of the things easy to calculate turn out to be irrelevant because other left-out effects are quicker and preempt the slow track. That's a conclusion I draw regarding our climate problem (my book GLOBAL FEVER). Reading all this about TSLA valuation rang some bells. No direct comparisons, but....
For unique cases, the methods employed for slow-moving competitive situations may yield "false precision" and not much more.
Tesla Motors is standard in most respects (makes a luxury sedan, etc.) but is unique among manufacturers in being a startup, unique in redesigning from the bottom up rather than modifying old designs, unique in having an EV range about 3x greater than its commuter-car competition, unique in bundling in fueling stations for long haul driving (superchargers), and stands out because of breaking the rating scales (CU, crash tests etc) the first year out.
None of the attempts at quantitative valuation are going to capture such things, and they are now determining TSLA price. The lack of a numbers-based "valuation" is not going to stop a lot of long-term fund managers from wanting a 5% position in TSLA. As the monthly cash comes in, they will keep buying TSLA for quite a while, just as they bought Amazon without prospects for a dividend.
As with quantifying our climate problem, traditional estimators look increasingly irrelevant. They miss the action.
It's hard to judge moving targets and some of the things easy to calculate turn out to be irrelevant because other left-out effects are quicker and preempt the slow track. That's a conclusion I draw regarding our climate problem (my book GLOBAL FEVER). Reading all this about TSLA valuation rang some bells. No direct comparisons, but....
For unique cases, the methods employed for slow-moving competitive situations may yield "false precision" and not much more.
Tesla Motors is standard in most respects (makes a luxury sedan, etc.) but is unique among manufacturers in being a startup, unique in redesigning from the bottom up rather than modifying old designs, unique in having an EV range about 3x greater than its commuter-car competition, unique in bundling in fueling stations for long haul driving (superchargers), and stands out because of breaking the rating scales (CU, crash tests etc) the first year out.
- The Model S shows really good design, and that brings to mind earlier examples of such--say, Apple's touch-screen products since 2007--that took over an enormous slice of market share.
- TSLA is a pure play, undiluted by the lesser performance of divisions making more standard products.
- As a start up with only a few products, TSLA is less encumbered by institutional inertia (say, once a year product changes). It has hired a lot of people who wanted to be part of something new. For ambitious designers frustrated by standard add-on product cycles, the chance to help redesign a sedan from the bottom up must have been dizzying.
- First-mover advantage. Tesla looks to have a few years lead time over its competitors. By the time they catch up to where Tesla is now, it's old news. Tesla will have all of those superchargers, setting a high standard for me-too (even for better ones--remember VHS vs Beta).
- Tesla is now admired for reasons that go beyond the product. Never mind Elon hero-worship. I'm thinking of all those people who cheer on Tesla for an American success in design AND manufacturing. All of those people who thought that Detroit just didn't get it and bought cars from overseas for forty years. Entrepreneurs that succeed are widely admired. Tesla has achieved enormous visibility without buying full-page ads.
- New paradigms opening up, "new industrial revolutions," etc. People are excited at seeing something really start to happen, especially if it gets rid of highway fumes and a good chunk of the invisible CO2 emissions. At the moment, Tesla is the poster child.
None of the attempts at quantitative valuation are going to capture such things, and they are now determining TSLA price. The lack of a numbers-based "valuation" is not going to stop a lot of long-term fund managers from wanting a 5% position in TSLA. As the monthly cash comes in, they will keep buying TSLA for quite a while, just as they bought Amazon without prospects for a dividend.
As with quantifying our climate problem, traditional estimators look increasingly irrelevant. They miss the action.
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I do know the difference, but perhaps I didn't describe it very well here. I was using the terms margin and profit loosely for simplicity's sake in answering PeterJA's questions. It wouldn't be that difficult to back out SG&A and dig harder into GM, but I chose to keep it simple. The input on the front page I suggested changing (EBIT) is the easiest way to alter margins in this model. So sure, operating margin is obviously going to be a subset of gross margins, but it's not a giant leap to throw 10% in there as a hypothetical input to observe the changes downstream in the model. Again, this was for illustrative purposes.
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I was about to reply but while doing so I realized I'm not sure what you intended to say here. I'm honestly not trying to nitpick the grammar, but rather trying to confirm I understand your intent.
Are you saying "attempts at quantitative valuation are determining TSLA price" or "such things (the numbered observations) are determining TSLA price"?
Thanks.
Norbert
TSLA will win
I'm getting the impression that the discussion of DCF models emphasizes all sorts of abstract compound interest calculations, to the future and back to the present, while the discussion of real-world costs appears to get lost a bit.
According to a previous post in another thread, by ModelS8794, Damodaran's assumptions result in implying that an investment of $47 billion, over 10 years, would be required to reach Audi-level production numbers. That sounds like a lot, even more so given that Tesla is often able to buy equipment (and the Fremont factory) at bargain prices, in general being very cost-effective. And $47 billion sounds like a lot compared to the number I keep hearing (link?) about Gen-III manufacturing, that it should cost about $1 billion (initially?). 10x that would still be just $10 billion.
According to a previous post in another thread, by ModelS8794, Damodaran's assumptions result in implying that an investment of $47 billion, over 10 years, would be required to reach Audi-level production numbers. That sounds like a lot, even more so given that Tesla is often able to buy equipment (and the Fremont factory) at bargain prices, in general being very cost-effective. And $47 billion sounds like a lot compared to the number I keep hearing (link?) about Gen-III manufacturing, that it should cost about $1 billion (initially?). 10x that would still be just $10 billion.
I agree - the most important discussions are on the business assumptions.
What we could really use were some figures on what the real capital cost is of increasing production capacity. For instance: How much did it cost to take NUMMI from empty shell to the facility it is today? Then we can start modelling how much free cash flow will be each year, how much more production capacity that can buy, what that means for next year's free cash flow and so forth.
(We also need to look at working capital - what will be the balance of accounts payable and receivable, and how much cash will they need to hold.)
Cash flow is negative. And thats the only numbers that really matters. With a negative cash flow you are burning money.
Gross margin of 14% or even 25% is nothing for a product like the Model S. Porsche's operating margin is 25%.
Tiny difference.
Chickenlittle
Banned
Why use last qtr numbers. That is as realistic as using last years. Why not use last year to make your point. Just wondering what makes you a tesla enthusiast? Can you point me in the direction of one of your posts that indicates that. I don't care about alternative view points, just wonder whether your should be on this board or perhaps the tesla haters board?
+1
Not to change topics, but this must be addressed... Realist, are you seriously comparing the BMW i3 with the Model S? There is a good read out there that compares the two, I suggest you read it:
BMW i3 review: Electric car is a cheap, ugly Tesla Model S with an SUV on the side.
Can you point out how the cash flow from Model S is negative? Yes, Tesla has been cash negative (guided positive starting July), but that is the whole company. The company is building up its global operations, which consumes a lot of cash. Doesn't make the Model S less profitable.
Also, since we are throwing numbers around: Tesla improved GM on the Model S by 17 percentage points the past two quarters. How well did your fossil friends do on that metric?
There are plenty of threads (and forums) you could visit to express your opinions other than this one. We would appreciate it if you would look elsewhere. This thread is for discussion of a specific piece of analysis primarily of, by and for this community.
Folks, I'm going to disengage from the troll, I suggest we all do likewise.
bsd
Member
I think wcalvin is saying the latter: quantitative models don't account for the qualitative factors that are, in this case, driving the price.
wcalvin
Member
Before all pro Tesla guys jump on him. Yes, cash flow is 100% important, but it's also relative to company stage. More importantly though is how the cash is deployed. Right now Tesla is maturing so it's 100% natural to burn cash, it just needs to be burned in the right areas. The auto industry is extremely capitally intensive. Anybody who runs a business that makes tangible goods. That's the problem with purely technical analysis and financial analysis. It isn't enough to strictly look at numbers.
The more important thing to look at is trend and progress. It's absolutely going in the right direction. We need to see this continue to happen. They will burn cash for the necessary infrastructure to make the model S and future vehicles more viable.
Yes Posrche has high margins in the industry, but look at their business and who their parent company is: Volkswagon. What they make it margins VW probably takes a hot elsewhere and Porsche is a mature niche company. That is not what Tesla is. Tesla's goal in having Porsche like margins but ultimately ending up to VW volume is what matters. And the model S is all Tesla has right now... You can't say the margin is nothing. That's what matters, it's the platform for the rest of the business future.
Do you honestly believe that Tesla has any chance to become a volume producer with a 25% operating margin?
The major cost component of all Tesla models is the battery pack. Right now these battery cells are in tight supply and there is no real reason to believe prices will come down. Tesla has no comparative advantage here, its all in the hands of Samsung and Panasonic.
To get real compare Tesla's numbers with other niche players like Maserati. They expect healthy positive cash flow rates right now while still running high R&D in relation to revenue. Tesla's R&D numbers are very low, the first Gen III prototype is expected to become reality in 2015 which is in my opinion very late in fact too late.
I see zero chance for Tesla to generate any significant cash. The key success to make profit in the car industry is quality and therefore reduce any kind of warranty claims. This is not an easy task and the Model S has major flaws. The Model s is a very young car, most problems arise after the first winter period. I expect Tesla to be run over by warranty claims thererfore further eating into cash flows.
OK. I like contrarian views/honest debate. How do you see the TESLA story unfolding and the price of TSLA stock just after Q3, in 6 months, 2 years?
PS....I know asking these questions/offering to have you post further will not sit well with some forum members but I would like to hear this contrarian's view as this forum is open to all. I believe in the TESLA story moving forward.
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