TSLA Market Action: 2018 Investor Roundtable

[The Blue Owl]

We think that current US demand for mid--size luxury vehicles is about 300,000 cars pa and falling. Assuming Tesla continues to sell about 50% of cars outside the US, this would imply that the M3 would take 5/6 of that entire (EV & ICE) market. We think that is unlikely.

The world is (much) bigger than the U.S. Also, what we call today mid-size luxury market will be redefined by Tesla, in the sense that it will suck a lot of buyers from the lower-priced segments. Before the iPhone there was no market for $600 phones. How limited did that super-high-end market turn out to be? Even today, Apple still manages to raise prices. Not to mention that when we take the TCO into account, the Model 3 price is significantly lower than the nominal price.

Finally, there will be nothing stopping Tesla to sell new models for less than the Model 3.

 

[CuriousSunbird]

As a long time watcher of the auto industry, I'm not going out on a limb to say that this is normal for any new model. When the new S/X comes out in 3 years (guess) with the new batteries, features, etc. demand could spike again just like any car model does. Some from previous buyers. I rather doubt this, but buying into your bear argument with the tariffs going away couldn't they just shift deliveries to China for a couple of years where demand will almost undoubtedly increase? They're foolish to not start growing that market as soon as possible, and with mature models so much the better.

Why expand production on the last generation's battery? From the numbers the Model 3 is putting out this wouldn't make sense, and if for no other reason they would need to increase their "cash burn" that is so awful wouldn't they. I guess we disagree in that you think other manufacturers will be competing with Tesla's current models in a couple years, I think it will be their next generation. On one thing we do agree though if Tesla stays static they will be in trouble in a couple of years, as will any car company.

Even assuming liberalization of the China market, I think the domestic manufacturers have a big head start there and I think it will take Tesla more time than they have to catch up. I am with Buffett on this one.

 

[CuriousSunbird]

The world is (much) bigger than the U.S. Also, what we call today mid-size luxury market will be redefined by Tesla, in the sense that it will suck a lot of buyers from the lower-priced segments. Before the iPhone there was no market for $600 phones. How limited did that super-high-end market turn out to be? Even today, Apple still manages to raise prices. Not to mention that when we take the TCO into account, the Model 3 price is significantly lower than the nominal price.

Possible, but I think unlikely. As with any investment, you have to weigh the arguments on both sides and assign a probability. At this stage, I still think the short side has the better balance.

 

[The Blue Owl]

Even assuming liberalization of the China market, I think the domestic manufacturers have a big head start there and I think it will take Tesla more time than they have to catch up. I am with Buffett on this one.

They may have a big head start in terms of presence. They are nowhere near Tesla in terms of technology.

 

[The Blue Owl]

Possible, but I think unlikely. As with any investment, you have to weigh the arguments on both sides and assign a probability. At this stage, I still think the short side has the better balance.

Right. And this, right here, is the only reasonable conversation an honest short can have with an honest long. All the brouhaha on Twitter and the FUD in the press is noise meant to confuse people. It comes down to probabilities, and that's what makes a market. We can only agree to disagree, pending more information and subsequent re-evaluation. I wish you good luck (not really -- I'm in this, too).

 

[shrspeedblade]

Even assuming liberalization of the China market, I think the domestic manufacturers have a big head start there and I think it will take Tesla more time than they have to catch up. I am with Buffett on this one.

Do you mean Chinese domestic manufacturers or American, I'm not sure?

Tesla would be foolhardy to go downmarket below the base Model 3, and they probably won't in the foreseeable future. If they stay a premium product they'll never be constrained by demand in China. They are better off letting other manufacturers serve that market and selling those people a Tesla when they can afford it. That exclusivity only helps them in an Asian market.

BTW, I really appreciate your input, even if I don't often agree with it.

 

[neroden]

We think S/X demand has plateaued and has started a slow decline. And we think Tesla thinks so too (which is why they decided not to expand the S/X battery production capacity).

This is absurd. X demand keeps rising. There is evidence that S demand plateaued twice but this was amidst repeated price increases. Tesla cannot expand S/X production capacity without a major redesign, which they will do, but they can't do it now because they are working on too many other capex projects right now.

Every time I read a bear thesis I conclude the bear has not done his research.

 

[CuriousSunbird]

Do you mean Chinese domestic manufacturers or American, I'm not sure?

Tesla would be foolhardy to go downmarket below the base Model 3, and they probably won't in the foreseeable future. If they stay a premium product they'll never be constrained by demand in China. They are better off letting other manufacturers serve that market and selling those people a Tesla when they can afford it. That exclusivity only helps them in an Asian market.

BTW, I really appreciate your input, even if I don't often agree with it.

Thanks. And yes, I was talking about Chinese domestic and about Buffett's investment in BYD.

 

[Unpilot]

Do you mean Chinese domestic manufacturers or American, I'm not sure?

Tesla would be foolhardy to go downmarket below the base Model 3, and they probably won't in the foreseeable future. If they stay a premium product they'll never be constrained by demand in China. They are better off letting other manufacturers serve that market and selling those people a Tesla when they can afford it. That exclusivity only helps them in an Asian market.

BTW, I really appreciate your input, even if I don't often agree with it.

Just to hijack a little.....I also enjoy the post's from CS at least he does not post nonsense like some others (model 3 is being hand built...only 100,000 cars total from Tesla so far)

 

[neroden]

We think that current US demand for mid--size luxury vehicles is about 300,000 cars pa and falling. Assuming Tesla continues to sell about 50% of cars outside the US, this would imply that the M3 would take 5/6 of that entire (EV & ICE) market. We think that is unlikely.

You should know that something like half of Model S buyers came from cheaper cars. Same is happening with Model 3. So your market size estimate is wrong.

 

[CuriousSunbird]

You should know that something like half of Model S buyers came from cheaper cars. Same is happening with Model 3. So your market size estimate is wrong.

I think a lot of mid-size luxury buyers, in all models/brands, are trading up.

 

[Big Earl]

I think a lot of mid-size luxury buyers, in all models/brands, are trading up.

A lot of mid-size non-lux buyers are trading up, myself included.

 

[Tslynk67]

Just to hijack a little.....I also enjoy the post's from CS at least he does not post nonsense like some others (model 3 is being hand built...only 100,000 cars total from Tesla so far)

Agreed, @YasB also brings thoughtful points to bear (pun intended)

 

[kingjamez]

I don't think so. The price of gas factors into auto demand for lower socio-economic groups. For buyers of mid-size luxury, the market is more driven by consumer income, the stock market (capital gains) and tax effects.

I respectfully disagree. Just because you are buying a mid-level luxury car doesn't mean you don't take into account the cost of ownership. I do, and many of my friends do and we have S's and X's.

Also don't discount the "I want a Tesla" factor. When I bought my S, I had been shopping for and had previously owned SUV's, however I changed what I wanted to buy so I could buy a Tesla. The advantages of a Tesla were greater than the advantages of an SUV.

My previous average vehicle cost before buying the Model S was 1/8th the price of the Model S. I'm not alone. In my 4 owner friends, 3 of us drove cheap used cars before moving to S or X's. Previous purchasers of Civics, Accords, Corollas, Camry's etc. are going to stretch to own a Model 3.

Just like with the S, people will stretch their budgets and change their desires so that they can drive a Tesla. If it happened at $80K, you can bet it'll happen at $40K at a much larger scale.

-Jim

 

[neroden]

Not sure what you mean by "good" company but shorts don't seek to attack well-run companies with good business plans. That would be a quick way to lose money.

Not always quick, but you, as a group, do lose a lot of money. Have you looked at the biggest dollar value short positions worldwide? All booming well-run companies with decent business plans. Apple. Alibaba. Tesla. Alphabet. Facebook. Netflix. Amazon.

The companies with highest percentage of float short are a more plausible list... Marginal oil and gas companies, coal miners, speculative biotech pharma companies.... but the big $$$ is shorting in situations where you need to be crazy to short.

 

[slipnslider]

The world is (much) bigger than the U.S. Also, what we call today mid-size luxury market will be redefined by Tesla, in the sense that it will suck a lot of buyers from the lower-priced segments. Before the iPhone there was no market for $600 phones. How limited did that super-high-end market turn out to be?

Middle class people stretching an additional $500 for a phone doesn't mean they can stretch an additional $30k for a car does it?

Also we're in an overinflated boom market right now that is overdue for a downturn. When it hits, middle class spending on unnecessary luxury items is the first thing to go. I don't think it will kill tesla, but I think it tesla will be particularly vulnerable to the next recession.

 

[jbcarioca]

We think S/X demand has plateaued and has started a slow decline. And we think Tesla thinks so too (which is why they decided not to expand the S/X battery production capacity).

Funny! Take a look at vehicle product life cycle, including specific parts and you'll see a slowing of sales and parts ordering volumes as a model ages followed by a sharp upslope when the successive model is introduced.

I don't know who your 'we' are but I imagine some might be aware of that pattern.

We have not seen this this far with Tesla because they've always been supply constrained. Anyway, Panasonic will soon replace most of it's 18650 production to other formats, just as the Tesla Model S and X will change formats within the foreseeable future. Nobody talks much about that, or Tesla Energy, because almost all the shorts can talk about is Model 3.

 

[The Blue Owl]

Middle class people stretching an additional $500 for a phone doesn't mean they can stretch an additional $30k for a car does it?

In abstract, you're right, but in practice, buyers moving up-market has been observed to happen in significant numbers for the Model S and Model X already. The Model S outsells all similarly-priced cars in the U.S. not only because it took sales from the ICE competition, but also because it actually expanded the segment.

And it's not an additional $30k, not even close.

Also we're in an overinflated boom market right now that is overdue for a downturn. When it hits, middle class spending on unnecessary luxury items is the first thing to go. I don't think it will kill tesla, but I think it tesla will be particularly vulnerable to the next recession.

Yes, they are vulnerable, particularly because they live on the edge with respect to cash.

 

[Esme Es Mejor]

This is absurd. X demand keeps rising. There is evidence that S demand plateaued twice but this was amidst repeated price increases. Tesla cannot expand S/X production capacity without a major redesign, which they will do, but they can't do it now because they are working on too many other capex projects right now.

Every time I read a bear thesis I conclude the bear has not done his research.

I assume Tesla would like to keep the S/X numbers flattish, with X taking a larger portion of the ~100k sales. I also assume they’d like the remaining Model S sales to be almost entirely 100D and P100D. I don’t think they’re getting rid of the 75D—at least, not anytime soon— but minimizing its numbers. They’d prefer sales in that price range to be a high-end Model 3 rather than a low-end Model S.

 

[neroden]

Even assuming liberalization of the China market, I think the domestic manufacturers have a big head start there and I think it will take Tesla more time than they have to catch up. I am with Buffett on this one.

They do not have to catch up. The market is big enough for everyone and Tesla has brand cachet. Apple v. Android.

Seems obvious to me but so many seem to miss it. There is simply no possible demand issue until 90% of all new cars are electric... Then there may be a demand issue.

FWIW I figure that date is 2025-2030. Gives Tesla a few years before worrying about demand, I would say.