TSLA Market Action: 2018 Investor Roundtable

[BioSehnsucht]

Yeah, so I think Tesla's business model is counter-cyclical for the next ~10 years, i.e. they'll grow even faster during recessions.

I also think that starting in 2019 I think they'll start hoarding cash like Apple, because there's a limit to how fast they can expand on a natural trajectory. So there is going to be a de facto rainy day fund, in practice utilized to opportunistically snatch up somewhat aging but otherwise well equipped factory buildings from cash starved, downsizing competitors in liquidity crisis.

I think the idea that they start taking in more cash than they can spend in 2019 or 2020 is reasonable. In theory they could just keep pumping out more GF's and if nothing else TE even if they reach peak demand for their vehicle products. But in reality, no matter how much money you throw at it, you can only grow so fast your production without growing other parts (logistics, training, sales, service, etc) which aren't as simple as paying a bunch of contractors to follow blueprints.

Some might call for dividends or stock buybacks, and if it has to be one or the other, I'd rather it was the latter. But I think a sizable rainy day fund is good. And if I had to pick between building overcapacity in either vehicles or TE, I'd rather the latter again.

TE products are more easily used anywhere, and can be used together from singular devices to large utility scale installations, so there'll always be a buyer for them eventually. Since there's really only two TE storage products (powerwall, powerpack) with fairly separate markets, versus the far more numerous vehicles to balance demand of, switching production capacity between them is easier than it would be for vehicles when demand balance shifts. And if you do end up having to sit on product for a while, they take up less space per cell and have fewer suppliers to pay off (accounts payable) while waiting on sales.

 

[mrdoubleb]

Note that Tesla is not capital constrained.

In Q3 they generated $1.4b of cash on $6.1b of revenue, which is an insanely high 23% cash generation ability even at the ~4.1k/week of Model 3 production, with the ramp-up only 40% complete...

As a comparison, Amazon, at their peak in 2017, had a cash generation ability of 10%, Apple had 27%.

Tesla is literally a new Apple, growing into a 10-20 times larger market than Apple, competing against much weaker incumbents as Apple ever had to.

Assuming 23% cash generation and a standard 33%/66% skin/loan requirements for local bank loans Tesla can lever up their cash flow 3x with minimal risk, putting their investment ceiling at somewhere around 69% of revenue.

That's an insanely high growth potential, even if we reduce that with debt repayments.

Tesla won't have to go to Wall Street in 2019, and I argue they shouldn't. Their biggest problem is going to be to not grow too fast.

Another interesting comparison is Ford. I am going to do this very high level as you can really get into the weeds on how individual companies report certain costs, where they put them in the books, etc. But still, some things are very striking comparing the Q3 reports (issued the same day) for these companies. (Link to Ford Q3)

On the surface, Ford looks good. Those type of analyst and investors who have a short term view may actually like it a lot. Not too exciting, but chugging along nicely. But...

• Total revenue of $37.66Bn and net income of $0.99Bn vs Tesla's $6.82Bn / $0.31Bn shows that Ford had a revenue 5.5x Tesla's with a profit of 3x.
• Automotive revenue of $34.66Bn with cost of sales of $31.57Bn shows that they have a margin of around 9% on their core products. This is down from about 11% same time last year. Compared to Tesla's almost 26%
• If you add in automotive SGA for automotive, $2.88Bn, their cost goes up to $34.45Bn, leaving a razor thin ~200 million of gross profit. Not going to try to compare that to Tesla as they don't break out TE SGA... but this speaks volumes.
• The "only reason" they are sill making money is that they have a fairly successful Ford Credit business unit, which I assume deals with financing leases and loans for their customers. With revenues of a hair under $3Bn and cost of sales of $2.35Bn, this business, thrives with a 22% margin and made 2/3 of their profits even though it only makes up ~8% of their revenues.
• In North America they have a fairly stable market share of 13.3% with 644k units sold and made $2Bn EBIT.
• However outside of NA, they have 7-8% market share in EMEA and 2-3% elsewhere with their market share decreasing in every region.
• Also, outside of NA they made EBIT losses everywhere except Middle East & Africa, but that's a tiny business for them at $0.6Bn revenue. They lost market share and are suffering financial losses in Europe, Asia and South America coming in at a total loss of $0.56Bn outside of NA.
• So their car business, which only made ~200 million net profits globally, is being kept on life support by North America. In this region they have announced they will scrap almost every model but their trucks.
• So, essentially, their global core business is now a one trick pony, riding on the continued success of the F150 and its cousins in a single region.

God help them when Tesla announces the pick up.

The advantages of the electric drive train are even clearer in heavy duty applications where you need a lot of torque and having a 4x4 propulsion controlling each wheel down to the millisecond helps with off road commercial usage. There is a good chance Ford's car business will swim or sink depending on how quick Tesla can launch and ramp their truck.

PS: On the short run, Ford has much more cash in the bank than long-term debt and they have good operating cash flow. So in no danger of going under. I am more thinking about how sustainable their core car business is like this.

 

[gora321]

Dear together,

I am an Analyst working at Deloitte and I am a little bit disappointed by the fact that TSLA only reacted by a mere 20% upward when taking into consideration that they've completely vanished the bear thesis.

I am planning to sell at 400 USD but I am not quite sure if we get to that price within the next 3 months.

Deloitte pays you to do the analysis or to hang on to TMC?

 

[nursebee]

To tag on that, another anecdote... My friend in Ohio has an X and also was leasing a BMW X5 that his wife mostly drove. When the BMW lease was up... he suggested getting a 3... but she did not want an EV... she has range anxiety. So she got a Lexus.
She is from a rural area. He is a city boy.
They were driving the X once to visit her family out in the countryside and they ran out of power; had to get towed. Not enough superchargers in rural Ohio. But I imagine that scarred her and now she prob has PTSD about it. But it is interesting that he's more "green" minded that she is. I don't know if there's a correlation there with gender; I'm sure there's correlation w/ rural vs urban.

One more... another friend applied for a Model X (loves Tesla)... but was denied. Credit not good enough. Got a Range Rover

Runnign out of power was just stupid, every structure has an outlet...

 

[Ellec]

Dear together,

I am an Analyst working at Deloitte and I am a little bit disappointed by the fact that TSLA only reacted by a mere 20% upward when taking into consideration that they've completely vanished the bear thesis.

I am planning to sell at 400 USD but I am not quite sure if we get to that price within the next 3 months.

The market is a mess right now, also the real risk adverse will want to see another Quarter with similar or better results.

 

[Fact Checking]

"Auto shipments went up 70% compared to Q2, but depreciation only increased by 25%. What is the justification for that?"

The shorts you are quoting don't seem to understand manufacturing ramp-up math: most of the depreciation and amortization costs of Tesla (and of most other capital intensive manufacturers) are fixed, i.e. with time based straight line accounting.

For example if a $3b factory expansion gets accounted for 12 future quarters (3 years), -$250m cost gets accounted per quarter for 12 quarters straight, regardless of units produced.

I.e. when production doubles, the per unit proportion of these fixed costs gets halved.

Combine that with 30% lower per unit labor costs Tesla achieved in Q3 and other economies of scale improvements such as:

• better price tiers from parts and raw materials suppliers got unlocked due to twice the volume,
• lower per unit logistics overhead due to double the volume,
• better equipment and workforce utilization overall,
• continued assembly line optimizations,
• more sophisticated assembly lines able to make complex, higher priced options like AWD or Performance models,
• increasing skill levels of assembly line workers,

We get a "magic" jump from a negative Model 3 gross margin and "cash burn" in Q1 to a better than 20% Model 3 margin, a billion dollars cash flow and profitability in Q3.

 

[gora321]

Yeah, so I think Tesla's business model is counter-cyclical for the next ~10 years, i.e. they'll grow even faster during recessions.

I also think that starting in 2019 I think they'll start hoarding cash like Apple, because there's a limit to how fast they can expand on a natural trajectory. So there is going to be a de facto rainy day fund, in practice utilized to opportunistically snatch up somewhat aging but otherwise well equipped factory buildings from cash starved, downsizing competitors in liquidity crisis.

Cannot agree more. Buying season is prolonged.

 

[aubreymcfato]

FWIW, Elon tweets are gaining him *a lot* of followers lately:
elonmusk Monthly Twitter Statistics (Social Blade Twitter Statistics) - SocialBlade.com

He's the 83rd Twitter account in the world but he grows faster than some the higher accounts.
Find out who's not following you back on Twitter, Tumblr, & Pinterest.
He'll reach his first Kardashian soon enough.

 

[Leo9]

AMZN -11%, below $1600 premarket.
QQQ -4,1%.

Today could be a bloodbath for the market.
TSLA is doing better than the market.

 

[gora321]

Volvo's quarterly income drops 50% on higher tariffs, launch costs

 

[BioSehnsucht]

Before the Hydrogen folks in Utah, I wanted to create the Nikola brand for the sub Model 3 car.

BMW Group is Mini, BMW, Rolls Royce, and BMW Motorcycles. Plus the M Series Brand.

I think a Rolls Royce competitor is pointless. Neither EVs nor Tesla need more of a halo effect.

I would go for Musk mainstream cars. "Musk" already has a lot of brand equity.

Maybe an L Series for a high performance sub brand.

Toyota seems to do just fine with Toyota and Lexus. There isn't much brand awareness around the F Series performance brand.

Well, given a few years I wouldn't be surprised if Nikola goes out of business, if someone doesn't prop them up. Pick up the brand at auction (but not the liabilities) and recycle it?

Performance flavors already more or less cover the M series. I agree Rolls Royce is pointless. Tesla is about minimalism, not overstuffed luxury. Let Rolls Royce make the Rolls Royce of EVs.

I don't think Tesla needs to get into motorcycles any time soon. There's a number of them already out there, and being safety focused, they'd be really off-brand for Tesla / Elon.

As for a lower end brand, I'm not sure going with Musk for a brand is a good idea. Too easy to make fun of the name, and it would come off as egotistical to many to name the brand for yourself (vs naming it for someone else).

I think sticking to the names of deceased scientists in relevant fields is a better idea. Faraday is taken, Nikola is taken (for now, at least). Looking at related names in the field of electric motors and such, apparently Galileo Ferraris independently invented the AC induction motor at the same time as Nikola Tesla. Too bad getting a trademark on Ferraris would be so hard with Ferrari already being a brand, plus much for the same reason it sounds too upscale.

Perhaps the name 'Arago' which is vaguely interesting, a bit mysterious, and suggests movement, without sounding too fancy or being too hard for Americans to pronounce (probably - at least all us dumb Americans would be confident we knew how to say it - sadly most would probably mistake it for Spanish). François Arago seems to have done some early work in rotary magnetism, which Faraday went on to complete - so his name is still on theme. He also seems to have been a paragon of society, so that's nice too.

 

[gora321]

Ford, VW are in talks to broaden their alliance

They are buying some time.
I would expect alliance with new comers if they are serious to survive.

 

[Artful Dodger]

Also, the people running the model are separate from the people writing FUD-for-clicks at Bloomberg. Bloomberg is a big organization with sometimes competing agendas - the Tracker guys are honest and on the good side IMHO.

Hmm, I used to teach an Intermediate Statistics course at a large Canadian University. These Bloomberg guys are clowns at best, smoothing their own past estimates retroactively. I'd give them a D- and tell them to look for work in another field.

 

[kbM3]

My fellow SA contributor Paulo Santos articlulated the change in the short thesis very well, I thought: "Why I Won't Sell Tesla Short Going Forward" It's
no longer a bankruptcy thesis, it's an overvaluation thesis.

I actually don't think it's wildly unreasonable to believe that Tesla is overvalued. I think Benedict Evans (a partner at Andreessen Horowitz and a student of S-curves and disruptive technologies) makes a strong argument that in the long run (think 10-20 years) the EV business — without autonomy — will probably become just as commoditized as the ICE vehicle business. Without autonomy, there are no network effects and no other obvious ways to avoid commoditization. I actually think that Tesla fans are often too cavalier in their dismissal of this argument, and I respect Bendict's systematic thinking.

On a shorter time horizon — let's say within the next 5 years — it seems to me like there's a good chance Tesla will kick ass. Supercharging, battery costs, and U.S. direct sales are all hard competitive advantages on Tesla's side. Maybe also electric drivetrain engineering.

But even if it takes 10 years or more, I think other automakers will eventually catch up on all those things. It seems like Tesla's lead in EVs can't be sustained forever and ever.

Apple has a network effect: the app ecosystem. That's the barrier to entry that makes smartphone OSes an iOS/Android duopoly. Without autonomy, EVs have no network effect and a barrier to entry as low as ICE vehicles.

If you fundamentally accept this, it becomes harder to articulate why Tesla should be in any way exceptional 15 years from now — leaving aside autonomy, and talking only about EVs.

Which is why I wrote this article yesterday: "Tesla Is Now A Self-Funding AI Lab" Tesla can become a much larger company than any automaker ever has been by capturing a 10%+ global market share in autonomous ride-hailing. This is the only way I see Tesla getting to an Apple-like or Google-like valuation, as opposed to a Toyota-like or GM-like valuation.

It is not unreasonable to suggest that any high margin business can become commoditized over the long run.

The future is uncertain.

Tesla’s long term advantage will be the advancements they make in manufacturing.
GFs are very complex products!

 

[dqd88]

Runnign out of power was just stupid, every structure has an outlet...

Yeah I think it was when they were new to the X... newbie mistake.
I think she'll come around... esp after digesting the safety benefits; they have 2 kids.

 

[Analyst007]

Why are we down 5% in pre market?

 

[Yamantasdivar]

Did I miss news? Down 4 m% before open?

 

[Buckminster]

Tesla Q3 cash flow: +$1.4b from operations on $6.1b of revenue - a 23% rate, twice as high as Amazon's and only matched by Apple - and Tesla is growing into a 10-20x larger market than Apple if we count automotive only.

But let's ignore growth and the fact that the Fremont Model 3 ramp-up is only 40-50% complete, i.e. let's ignore that there's twice as much economies of scale benefits yet to realize.

Let's also assume that Tesla growth stops here and now and "only" reaches Q3-alike results every quarter going forward: +$1.4b cash per quarter going forward.

That's $5.6b of cash generated on a 12 months trailing basis, on $24.4b of revenue, which with 171m shares is $32.7 per share, which is 9.6x at the current $314 share price.

(Most of Tesla's debt is paid off by just 1 year of cash generation.)

As a comparison: the Apple P/E ratio on a cash basis was 19x in 2017, Amazon's 27x (and that was before the doubling of share price).

Tesla's cash P/E ratio of 9.6x makes Tesla objectively, extremely, mind-bogglingly undervalued even if we exclude all growth premium and ignore the EV market near-vacuum it is expanding into ...

Finally - thank you!
The right person has said the right thing the right (write) way!
So when does the world manage to catch up with our very own neural network?
My exoneration is still very much required ASAP.

 

[gora321]

Why are we down 5% in pre market?

Because you show up

 

[Artful Dodger]

The recent glut of VIN registrations, 51,910 so far in Q4 within first 4 weeks, seems not to have moved the needle that much on Troys or Bloomberg's tracker. If VIN registration continues at this pace we could see 150k in Q4, how that tranforms to actual cars produced is not clear, but it's a good indicator they are aiming high.

There has to be some connection between Production and US VIN registration. A car produced on Dec 31st legally must have a different VIN code than the same car producted on Jan 1st due to the Production Year encoding in the VIN.

So Telsa is unlikely to register dramatically more VINs than their production planning needs due to the requirement to refile incorrect VINs.