TSLA Market Action: 2018 Investor Roundtable

[strangecosmos]

Toyota's P/OCF ratio is 4.91. That would put Tesla at $17.3 billion or $102 per share. To justify a $60 billion valuation / $353 share price, Tesla would need $12.2 billion in annual free cash flow. To justify its current $54 billion valuation / $315 share price, Tesla would need $11 billion in annual free cash flow. So the market appears to be pricing in 3.1x FCF growth.

Let's assume Tesla can grow FCF at 50% a year. That would mean the market is pricing in 3 years of growth. That seems reasonable.

 

[bhtooefr]

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.

The other thing is that Tesla is de-emphasizing AC induction motors as well, only using one on the front of the Model 3.

What about Davidson?

In reality, though, I don't feel like launching a budget brand is actually necessary here, given the way automakers are going lately, even in the US, it'd just confuse people to try to launch another brand, and I feel like it's easier for a luxury brand to move downmarket (Mercedes hasn't diluted their American brand by having Mercedes-branded Sprinters, like they were afraid of, as an example), than it is for a mainstream brand to move upmarket (the Volkswagen Phaeton was a total failure in the US, and not an amazing success in Europe).

 

[Thekiwi]

Slight correction: revenue was $6.82 billion, and operating cash flow was $1.39 billion. So that's 20%, not 23%.

I’m guessing he was using automotive revenue only, which is what you would use to compare to other car companies.

 

[mrdoubleb]

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.

I think it is more likely that Ford would put some of its small and mid sized cars outside of NA on VW's platform. Possibly even MEB for future EVs. I don't think Ford has a compelling EV roadmap (or any) right now and if they scrap everything but the trucks, their future European lien-up will now be alone, having to invest in new platforms, architectures, engines for a relatively low volume business. It's Opel all over again. Probably with the same outcome down the line.

 

[strangecosmos]

What they're doing is post-hoc smoothing of their own past prediction history, and presenting it on the same chart as their wildly gyrating future predictions.

I've seen calmer rave parties, and with better likely future outcomes.

Bloomberg was accurate to within 5%, 2%, and 0.4% for the past three quarters, respectively. Their quarterly estimates have been extremely accurate. But their weekly estimates are too volatile. So they are now producing weekly estimates by averaging their last 13 weeks of estimates (one quarter = 13 weeks). This seems to me like a good solution. Better, anyway, than leaving the weekly forecast as volatile or removing it altogether.

How would you do it instead?

 

[gora321]

VW CEO says they’ll have ‘EVs as good as Tesla’s for half the price by 2020’

I think herr Herbert forgot to convert from kilometers to miles.

With capacity of 10.000pcs daily, ee...monthly, ee...quarterly, ee...annually?

 

[Buckminster]

VW CEO says they’ll have ‘EVs as good as Tesla’s for half the price by 2020’

I think herr Herbert forgot to convert from kilometers to miles.

At commoditised prices, he will need to convert dollar profits to Euro cents also...

 

[shlokavica22]

At this point I genuinely don't see a single viable path forward for most ICE carmakers at this point. (!)

If I was an ICE carmaker executive I'd tell the board to liquidate all assets and buy Tesla shares, because the most profitable way forward is to start from scratch - which suggestion would get me fired.

To state that VW will bring a car on the road that can do everything a Tesla can do would mean you know what Tesla will offer in 2020 which is a detachment from reality or they compare it to today.

I am also surprised about the lack of vision. If you want to get on paar with Tesla you need to surprise the industry with vehicles that are either better in functionality or on paar with lower costs. Obviously they gave up on the first already but try to be the costs leader.

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.

I only imagine the face of F & BMW executives when Elon was talking during the call.

The Big Auto are bleeding already, while TSLA is just starting to bite their cake.

The talk is EV vs ICE, but the fact is- TSLA completely changed the business model of the Automotive industry. There is no way back from that. It might be a very hard realization (for many that feed a family thanks to the Big Auto and the related industries)- the fight now is not about who dominates the market, but rather fight for survival.

 

[gora321]

Problems in oil world:
GM breaks with Trump in call for national electric car mandate

 

[Fact Checking]

Slight correction: revenue was $6.82 billion, and operating cash flow was $1.39 billion. So that's 20%, not 23%.

True, $6.1b was automotive only: 20.4% is the cash generation.

The long-term average operating cash flow yield of S&P 500 companies is 9.4%. In other words, the long-term average price/operating cash flow ratio or P/OCF ratio is 10.6 (100% / 9.4%). So, on $5.56 billion in annual operating cash flow ($1.39 billion * 4), Tesla should be valued at $58.9 billion or around $346 per share.

The long-term average free cash flow yield is 4.0%. So the P/FCF ratio is 25. On $3.52 billion in annual free cash flow, Tesla should be valued at $88 billion or around $518 per share.

However, on the S&P 500's long-term average P/E ratio of 15.7, on $1.25 in annual net profit, Tesla should be valued at $19.6 billion or around $115 per share.

Your third paragraph is the usual Seeking Alpha nonsense:

Tesla GAAP income and EPS is artificially depressed by three factors:

• GAAP diluted shares accounting rules mandate the inclusion of convertible debt as if it was converted - while Tesla guided they won't dilute and pay back the convertible notes in cash. So a big chunk of that dilution is an accounting fiction that goes away as Tesla pays back debt.
• GAAP mandates stock compensation to be expensed, while in reality it has very little effect on future cash flows (i.e. valuation),
• GAAP income is also burdened by amortization and depreciation costs of around -$500m currently, which will gradually phase out in the coming quarters. True equilibrium analysis and valuation accounts for that.

So you creatively invented a fantasy $1.25b annual net profit by naively multiplying Q3 income of $311m by 4 and not taking into account any of the above factors...

The real equilibrium figure with no growth premium whatsoever is closer to $5b annual income and valuation of ~$460 per share.

The growth premium from the remaining low capex Fremont ramp-up alone should be 150%-200% of that valuation ...

 

[HG Wells]

Right now we have trucks that carry batteries from GF1 to Fremont.
They return to GF1 empty. Why not set up a second model 3 line at GF1?
The trucks (that are now empty) could carry stampings back to GF1.

What are sales tax requirements for picking up your car in Nevada ?

 

[strangecosmos]

The real figure with no growth premium whatsoever is closer to $5b annual income and valuation of $460 per share.

$5 billion in net profit * S&P 500 average P/E ratio of 15.7 = $78.2 billion market cap or $460 per share

But $5 billion in net profit * Toyota P/E ratio of 7.8 (the highest P/E of any of the top ten largest automakers) = $39 billion market cap or $229 per share

So there is indeed a growth premium inherent in assigning Tesla a 2x higher P/E ratio than the highest among its peers.

 

[j6Lpi429@3j]

My broker in the UK (Hargreaves Lansdowne) just sent out there first (AFAIK) research note about Tesla today. I probably got the email because they know I hold the stock, but in any case, its a good sign, and was framed as a 'this is now a safe stock you should consider'.
HL are the broker of choice for middle aged people in the UK saving for a pension, so the fact that they are talking to their client base now about TSLA is interesting.

 

[KarenRei]

Problems in oil world:
GM breaks with Trump in call for national electric car mandate

Funny what they say in public, when they're also part of the Alliance of Automobile Manufacturers which is lobbying to kill the CARB ZEV mandate (and successfully lobbied to rollback EPA standards).

 

[Compton]

$5 billion in net profit * S&P 500 average P/E ratio of 15.7 = $78.2 billion market cap or $460 per share

But $5 billion in net profit * Toyota P/E ratio of 7.8 (the highest P/E of any of the top ten largest automakers) = $39 billion market cap or $229 per share

So there is indeed a growth premium inherent in assigning Tesla a 2x higher P/E ratio than the highest among its peers.

Isn't this somewhat similar to comparing P/E ratios between Apple and Nokia in 2008 when the iPhone started to emerge?

 

[Buckminster]

$5 billion in net profit * S&P 500 average P/E ratio of 15.7 = $78.2 billion market cap or $460 per share

But $5 billion in net profit * Toyota P/E ratio of 7.8 (the highest P/E of any of the top ten largest automakers) = $39 billion market cap or $229 per share

So there is indeed a growth premium inherent in assigning Tesla a 2x higher P/E ratio than the highest among its peers.

PE ratio of 15 = no real growth expected
PE ratio of 8 = dead (making stuff that burns fish oil from fish that died millions of years ago)

 

[Fact Checking]

But $5 billion in net profit * Toyota P/E ratio of 7.8 (the highest P/E of any of the top ten largest automakers) = $39 billion market cap or $229 per share

So there is indeed a growth premium inherent in assigning Tesla a 2x higher P/E ratio than the highest among its peers.

You are essentially comparing the iPhone (Tesla) to a BlackBerry (Toyota).

What you are missing is that:

• Toyota might be out of business in 5-10 years, they almost completely ignored the EV market and are in a poor competitive position for the EV transition.
• Also Toyota's margins are much lower, which makes them much more vulnerable to drop in demand or recessions.

So it's not that Tesla has a "growth premium" in the valuation, but that Toyota (and most other ICE carmakers) have a significant "going out of business or shrinkage penalty" priced in.

The two main core corporate competencies of many ICE OEMs is the ICE powertrain (they are outsourcing almost everything else) and the uncanny talent to commit fraud in emissions tests to poison millions of people for profit.

Neither quality has any value in the post-ICE EV economy.

 

[SO16]

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

Agreed. Also he could get the PlugShare app to see all the other chargers in Ohio. There are many.

 

[W84M3]

Amazon has a P/E of 141 TTM, is more mature (lower growth %) than Tesla and yet it didn't stop them from being a $1 trillion company earlier this year.

Tesla only just started turning a profit; as revenues keep growing, EPS will grow exponentially.

The whole P/E discussion is IMO not relevant for Tesla for the next 3-4 years.

Nobody wants them to sacrifice growth just to get a P/E ratio that looks somewhat acceptable.

 

[SO16]

$5 billion in net profit * S&P 500 average P/E ratio of 15.7 = $78.2 billion market cap or $460 per share

But $5 billion in net profit * Toyota P/E ratio of 7.8 (the highest P/E of any of the top ten largest automakers) = $39 billion market cap or $229 per share

So there is indeed a growth premium inherent in assigning Tesla a 2x higher P/E ratio than the highest among its peers.

Amazing how many people see Tesla as just a car company while many others see it as an energy and tech company.