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Discussion in 'TSLA Investor Discussions' started by FS_FRA, Nov 6, 2018.
This margin difference between traditional auto and Tesla is increasingly becoming a part of my 10+ year investment horizon and thesis.
Tesla is fighting for market share with high and increasing margins.
Traditional auto is fighting back with bad products and low margins, on decreasing volume. Where will traditional auto get the money to do the R&D to out-compete Tesla? Or even match?
I see here a reinforcing feedback loop here - Tesla has it running positively (more sales improves margins and cash, increasing the ability to invest and produce even more), while traditional auto has it running negatively (decreasing sales hurts margins, decreasing cash, and decreasing the ability to invest in R&D and to produce something competitive).
I think we're 1-2 years away from beginning to see bankruptcy(s) in traditional auto
Easy. Show the reversal of position by longtime TSLA bear Andrew Left of Citron Research. Here's their recent paper:
Then show her the Bloomberg Interview with Andrew:
I'm certain the governments will bail them out. And French people will buy inferior French cars, Germans will buy inferior German cars etc. So I think they still have some time to catch up and sell cars even if they are a few years behind.
I expect both of these dynamics as well.
Just some ideas of markets Tesla is in. It kind of gives an idea of where Tesla's market cap can go.
Auto manufacturer: Toyota Motor Corp. $174.2 billion.
Auto retail sales (dealerships): Penske Motor Group market cap $3.8 Billion
Gas station (supercharger network): QuikTrip has grown to a more than $11 billion company with 750+ stores in eleven state
Auto self driving tech: While GM did not disclose the financial details of the Cruise acquisition, reports estimated the purchase to be in the $1 billion range.
Solar (standard panels) and storage: First Solar $4.49 billion
Roofing materials manufacturer (solar roof): GAF has become one of the largest roofing manufacturers in North America, with sales approaching $3 billion.
It would be an interesting scenario if part of the bail out package was real commitments towards battery investment and charging infrastructure thus catalyzing the long established automakers further into electric. This would have the effect of normalizing the idea across the country and different populations that electric is the next car. The broadening geographic, political, and social diversity in car buying base would thus benefit Tesla while saving the longer established car industry. Transitioning the world to electric is huge and Tesla will not be able to do it alone. I still do not see it as an us vs. them. They are just going to have a much more difficult time and need a lot more assistance.
Waymo valued at $175B.
Per request, this excellent thread has been bestowed with "Stickiness". However, the extent to which posts diverge from its valuable topic will determine whether it maintains such a nod.
I just wrote this article, which I think gives a synoptic view: Tesla Turns Up The Heat On Autonomy
There are a couple different questions every Tesla investor has to answer:
How will Tesla avoid commoditization of its vehicles, and maintain popularity and pricing power in the long term?
On a similar note, how will new electric vehicle models from incumbent automakers affect Tesla's demand?
What structural advantages (if any) does Tesla have over incumbent auto manufacturers, suppliers like Mobileye, and tech companies like Waymo and Zoox? What structural disadvantages does it have?
What is a conservative/plausible risk-adjusted, discounted valuation for Tesla if it remains competitive?
I address those four questions in my article, with a focus on partial autonomy and full autonomy. I focused more on non-autonomous electric vehicle sales in a previous article.
I think Tesla is a very uncertain, high-risk investment that requires a very long time horizon. The uncertainty and risk comes from the unpredictability of technological progress. Also from the precarity of the auto business. Elon has reiterated again and again how hard it is for an auto company to avoid bankruptcy. He recently said that until around September, Tesla was staring death in the face.
The long time horizon comes from 1) the fact that a significant amount of growth is already priced in to Tesla's market cap and 2) the uncertainty of technological progress and the growth rates of Tesla's businesses means that it's near-impossible to exactly time or predict when the upside potential for Tesla could materialize.
If you want to hear the opposing view, read this excellent essay by Andreessen Horowitz partner Benedict Evans: Tesla, software and disruption
I think it's important to avoid over-exposure to Tesla investor exuberance. Of course people on the TMC investor sub-forum think Tesla is going to the Moon. That's some selection bias right there. Also, there are a lot of accounting errors and other financial mistakes posted on TMC. It's just a forum. You can't trust what you read here. In my experience, people also get angry and abusive even if you are optimistic about Tesla, but less optimistic than they are. There is group polarization happening here. You will have a hard time hearing anything other than what you already want to hear.
I think it's also important to avoid over-exposure to low-quality criticism of the Tesla investment case. Reading too much nonsense on Seeking Alpha, Business Insider, or on Twitter can make you over-confident because it tricks you into thinking that all there is on the other side of the argument is nonsense. You should seek out the strongest critics and the strongest criticisms, and try to ignore the other stuff. (I should probably follow my own advice on this point. )
If you listen too much to people who are exuberant about making money off Tesla stock, or if you listen to too much nonsense that is negative about Tesla, I think you will end up being over-confident and will not think enough about the real problem space.
On that note: what is the best, smartest criticism of the investment case for Tesla that everyone has read? What articles, videos, etc. would you recommend to understand a rational, intelligent, informed opposing view?
Necessary disclaimer that this is not investment advice and you should understand the risk and consider consulting a professional financial advisor before staking a lot of money on any particular investment.
True. Here are my answers, because they're quick:
(1) Tesla has branding advantages and range advantages and Supercharger advantages. But once all cars sold are electric, Tesla will face reduction in pricing power.
(2) They will not affect Tesla's demand until all cars sold are electric. Then they will.
Accordingly my investment thesis on Tesla requires re-evaluation shortly before the last ICE car is sold. That might be the time to sell TSLA, unless there is a new investment thesis for investing in it at that time. This should get me through another 10 years, though.
Why did you ignore Elon’s take on what Tesla’s long term advantage will be? Manufacturing prowess.
I believe Tesla will do to heavy manufacturing what Amazon did to traditional retail.
There's an article I wrote 3 years ago that outlined at the time how Tesla would become an American behemoth of a company. After giving it a read thru it's pretty evident that the points are still relevant today.
Tesla Motors - America's Next Behemoth
The last conference call he actually talked more about having the best and cheapest and largest battery supply as well as the most efficient use of those batteries creating a gap hard for other companies to bridge. Although in past conference calls he has talked about Tesla's sheer pace of innovation being the "moat" or competitive advantage he saw Tesla having over competitors.
Long term, I believe cars will become more and more about software innovation which is already in Tesla's DNA unlike other car manufacturers. I believe if the established car companies are going to survive, they are more and more going to need to partner in significant ways with companies like Google and Apple. Medium term is a whole host of things not least of which is battery supply and charging infrastructure. Why invest in Tesla? It is the only company making all the right moves. If the incumbents think Tesla is struggling hard now, I wish they could see in the crystal ball the struggle they are all headed for.
I am not a Short.
But, I am a healthy skeptic.
Does Tesla deserve to be one of the most highly valued carmakers in the world, based on market-cap and EPS?
Why do you say that Tesla does not offer leases? Do you mean with factory financing? I was certainly offered one (from an independent bank) when I bought my 2017, Model S100d. If you are talking about direct leases, you are talking about a whole can of worms. Isn't Tesla better off just picking up the spiff money on out-placed leases, instead of trying to build another new business that they know nothing about? Also, where would Tesla get the capitol to finance their own leasing company?
Another point is that Tesla needs to learn more about operating a car business. The recent story about the Model 3 tear-down was not overall, a compliment to Tesla's skills as engineers of the manufacturing processes. Over 150 recommended improvements in manufacturing processes. That's a lot.
Another facet: I have several latent problems with my car that had to do with manufacturing choices. No permanent solutions have been offered.
But these efforts by Tesla to fix my car have made me very familiar with their local service department. Over-worked, trouble returning phone calls. This is an actual conversation about a appointment at 10:00 AM: "Well no, you can't bring your car in at 8:30 or 9." Me: Why not? Tesla service: "Because we get really busy when people come in like that and we can't do that any more." Huh? Are you really a car dealer? One thing car dealers (my recent cars anyway...BMW, MB, even Mazda) have learned is how to deal with drop-off rushes without inconveniencing their customers.
One last point:
Tesla is a disrupter, no doubt, and MB, BMW, VW, Volvo and many others get that they must change. The idea that you will be able to go into a BMW dealer, and choose your chassis (3, 5 or 7 Series, let's say) and then choose your drive-train (ICE, ICE-PlugIn Hybrid, or Plug-In EV) is how they see the near-term transition to EV worldwide and company-wide.
That doesn't mean that TSLA won't prosper, but it does mean that fierce competitors will emerge in the EV markets.
I'm sure somebody else will come up with a more complete and "point by point" response. But just from reading your last point, it's clear you simply don't get it with respect to competition. You seem to acknowledge that the EV market is one which is growing and will continue to grow (at a phenomenal pace). So why, then, do you see these as "fierce competitors" to Tesla rather than the ICE vehicles that they're actually displacing? True there will be some cross-shopping, but we're talking about a situation where the addressable market is far too massive for Tesla alone to sweep up. In other words, regardless of "competition", they'll sell everything they can make.
I also think you're massively underestimating the huge advantages Tesla have built up with respect to their battery technology, charging network, integration of systems. And also underestimating how difficult it will be for the other manufacturers to catch up. And that's assuming Tesla remain stationary, which they will not.
We are now a two Tesla family, Model X and Model 3. The main reason we were able to that is not the great quality or OTA updates (They are also considerations), but the supercharger network. It does not matter if a Bolt has a range of 300 Miles. You will not take a Bolt from San Francisco to Los Angeles. Yes, there are companies (EVGo etc) providing charge capability, but at 50KW/h, you will not be going too far.
The key difficulty in valuing Tesla as an investment—or even discussing it with friends—is what business gurus call "dislocation." People suck at forecasts and predictions whenever a market makes a sudden shift from recent history and starts to go a different direction.
It's natural. Whenever you read or watch or listen to someone predicting how TSLA will perform, pay attention to how often they use recent market data or comparisons to existing auto manufacturers to add credibility to their opinions. Recent, hard data ("sales of midsize sedans in the US are declining") always seems to carry great weight, but it is usually accompanied by a casual assumption: this is how consumers will behave in the future. For instance, in sizing up Tesla's addressable market for the $50Kish Model 3, estimates are modest. "This is how many sedans Mercedes and BMW sell each year at that price point." Or "demand for electric cars has always been modest." The casual assumption: the demand for Model 3 will be rather limited, since that has been the case for other $50Kish sedans or electric cars recently.
As if that were all that were happening right now: someone is introducing a $50K car. Or another electric car. Yawn. Seen that before.
Were that the case.
The phrase "iPhone moment" is shorthand for "consumers suddenly defy the conventional wisdom in a category, in a very dramatic and market-upsetting way."
Nokia, the dominant market leader in 2007 with a 50% global market share, suddenly (well, in the course of a few years) became largely irrelevant (today Nokia has less than 3% of the market). Apple became (after a while) the most valuable company of any kind in the world. In a category where $99 was widely considered the price point that any new entrant would need to meet. "Who would spend $499 [iPhone's introductory price in 2007] for a phone? Ha ha, the market for that expensive a phone is TINY." There were a number of business luminaries (like Steve Balmer) who went on record disdainfully mocking Apple's chances.
They should have been buying stock.
Sound familiar? We have Accord and Civic buyers suddenly lining up to pay more than they have ever paid for a car.
Here's my perspective as someone who has analyzed markets for a living at one point.
The single most valuable thing in business is high customer demand. It solves a host of the most critical business problems (commitments from suppliers, funding from investors, cost-effective marketing, goodwill when things go wrong, recruiting top talent, ability to commit to business decisions). People think it's technology, brand strength, cash-on-hand, advertising budget, production facilities or current market share.
Nope, it's people lining up. Nothing else in business is more valuable than that. Even if your cost position sucks, even if you have quality issues, even if you have larger competitors, even if you need more capital. Those things can be fixed if you have demand. Without demand, none of those matter.
If GM had an electric car that people were clamoring for, things would get much, much simpler for them. The board would quickly approve investment, people would be excited to come to work at GM to help them do it, GM would get aggressive with its dealers, who would actually be anxious to have a product that consumers were clamoring for. GM could invest to make them in a much more cost-effective manner than they do currently, at a much higher production rate. Funding a charging infrastructure would be a no-brainer.
If you follow this line of thinking it would surprise you—as it has me—that short sellers would make fun of people lining up and paying money years in advance to reserve a Model 3, or volunteering to help at packed delivery centers. This is hard data of the most important kind: evidence of enthusiastic demand.
The reservation count for Model 3 was an earth-shaking (well, in the automobile industry) event. Angela Merkel called the German CEOs onto the carpet and said (I'm translating), "Holy ****, dudes. This is our most important employment sector in Germany. Do we have a plan for competing with this?" She didn't say, "Look at this tiny company. We need to crack out some spiffy PowerPoint concepts to combat this." The Chancellor of Germany, a country known for automotive engineering talent, heard one statistic (473,000) involving a tiny California company and she was shook. She didn't need market analysis—she had tangible data of something very important. It almost didn't matter whether 473,000 cars would matter in a global market where over the course of a few years an order of magnitude more cars than that would be purchased.
473,000 meant: this is an iPhone moment. Times are a-changin'. Strap in for a bumpy ride.