ERICOPOLY

By the time we get close to 2020, there will be more Tesla products on the horizon, with more pie in the sky thinking. So, will it really trade close to IV in 2020? It's quite possible that people at that point won't be evaluating the stock based on 500,000 unit volume anymore. They'll be looking at projections from the new plants they'll be opening for their pickup trucks, etc... There will be talk of 1,000,000 volume. How many models does BMW have in their lineup? Porsche? Just 3 models? Nooo..... This is no reason for me to buy it. It's just a reason for me to not want to short it.

So to me, the short-selling version of the value trap is one where the stock stays expensive long enough for the fundamentals to catch up to the price where you shorted it (adjusted for your cost of borrowing the stock). This is why I put forth the argument that today's price could be justified by 2020 (and that valuation is further adjusted for time value of money -- so you actually earn a satisfactory return, as opportunity cost is real). And risk factors to the short sellers are: excellent management industry beating product fanatical following "new era" potential ("new era" thinking keeps stocks inflated) You practically tick off all the boxes with TSLA (the reasons for leaving it alone). It's too dicey to go long, too dicey to go short. Too hard pile in both directions, IMO.

Well, really it comes down to a lot more than that. What's a value trap? Traditionally, I've thought of it as a stock where you think you are getting a big discount to your perceived (insert narrative) IV estimate. But then the earnings decline, the business declines, or the growth never materializes. This happens with "too hard pile" stuff. Ideally, you want to go long a stock that has stable (relative to your initial estimates) or growing earnings. You can be wrong on IV and yet still make money if you are patient enough. This is where it's wise to stick with "wonderful businesses" when you place bets on IV estimates. Okay, that was "value trap" discussion for long investors. How about for short investors? Okay, here you want to find businesses with poor management, declining earnings, decaying business, competitors trampling them, going obsolete etc... That way, you are more than likely not in a "value trap". The short sale of the stock will eventually pay off for you. Okay, so I think with TSLA I don't find those qualities. I had considered shorting it by writing out-of-the-money calls -- but I went through this thought process... I went over the "how to justify this price" narrative... and I'm a veteran of the DOT.COM bubble days. I remember a coworker who shorted YHOO in 1999. I mean, I've seen this movie before. I saw how it eventually ended too, of course -- but that's why I'm saying this is no EToys.com. Elon Musk and his team put together the best car ever made on their first try and people are questioning whether they can grow at high rates -- well, how about 1,000 cars per week by the end of this year with only one model in the lineup. Can't you at least find a short target that has lousy management? That can't execute? That isn't a cult/religion? That doesn't have Elon Musk? I mean, there are 50,000+ stocks to choose from, and you pick this one.

Well, I honestly am very bad at analyzing a business. I look for investments that don't rely on price movement of the stock to make money. Whereas you've found a short in TSLA that relies precisely on price movement. What dividends are you going to ever get paid shorting it while the company slowly increases IV? I mean, they just got $2b of really, really cheap capital -- believe it or not, the very existence of the sky high stock produces value in it's own right. So like when you buy BAC last year for $11, or $7 the year before, or $5 the year before that. And it's making $2 cash earnings this year. And it makes those earnings even if they are a very mediocre bank. That's the way to make some serious money IMO. But if you think TSLA is 2x overvalued, it's like spitting into the wind. You might as well try to go into a mosque and tell them that there is no proof of God. Their bible is exactly what I described to you -- it's easy to come up with a reasonable narrative that gets to 100,000-150,000 very high margin vehicles. And Musk is one hell of a visionary leader. It's like Steve Jobs on steroids.

The CC Q&A has a little bit of talk about the challenges of 100,000 vehicle production. The expectation is to be producing 1,000 Model S units per week by the end of this year. But then the "X" also comes into play around that time: Patrick Archambault - Goldman Sachs: If I can, just one more just on how you are going to configure your manufacturing sort of going into the end of this year? Does your current line have flexibility or will it have flexibility to build Model Ss and Xs, going through the same line or are you going to have to build a parallel one? Ultimately, I think the original expectations you put out was 40 to 50 global units of demand for S. So clearly, that would probably tax at some point the setup you have now but just kind of wondering when that additional capacity would go in and how it might be configured? Elon Musk - Co-Founder, CEO and Product Architect: We have a game plan on that front because, obviously, if we're doing 40 to 50 in Model S volume, if Model X turns out to have a comparable demand and we're on the order of 100,000 units then clearly our current production line is not going to do the trick. So we're going to need something else and we are looking at reconfiguring a part of the factory, maybe using one of the moving production lines that's still there from the (indiscernible) days. But I feel pretty confident. I mean it's not going to be – the production of vehicles is not going to be constraint. That's not a limiting factor. No doubt, I think we have got some sort of huge[man] capital, training thing that's going to need to happen. I think we've got a handle on how to get there.

Today's news: Tesla raises $2bn in convertible bond sale http://www.ft.com/intl/cms/s/0/2f2387a0-a00a-11e3-9c65-00144feab7de.html#axzz2ua7oZhIq Tesla sold $800m in five-year notes and $1.2bn in seven-year notes as part of the deal on Thursday, according to a person familiar with the matter. The five-year notes will carry a coupon payment of 25 basis points and the seven-year notes will pay 125 basis points. Both bonds have an equity conversion premium of 42.5 per cent. The company had originally sought to raise $1.6bn, but the deal was increased due to heavy demand from investors, according to a person familiar with the matter.

I got the following text from a friend yesterday: My friend just leased a Chevy Spark EV. He already has a Tesla S and Volt lease. Here's what he said: I dropped off my daughter at a practice Saturday morning. Had 1 1/2 hour to kill. Went to Chevy dealer, and left with it. I have a GM card, they did a top off bonus to $3,000 (I had around $1,800 in points, GM card is 5% back). Deal I got for Spark EV 2LT: $0 drive off 12k miles per year 36 months lease $152 per month plus tax for 35 months GM also will rebate $500 for a Bosch L2 EVSE (charger), making charger basically free So my cost for the Spark EV is $165 (with tax) x 35 months = $5,775 California will send me a $2,500 check and a carpool sticker for being a treehugger in about a month. So my cost for 3 years is $3,275 plus I get a free L2 charger.

Interesting comment from the latest conference call transcript Q&A: Elon Musk - Co-Founder, CEO and Product Architect: So, I think (indiscernible) we want to price the Gen 3 vehicle at around the $35,000 price point. When you consider the savings from gasoline, today when we consider gasoline to be at that point, I mean it's effectively like buying a gasoline car in U.S. for maybe $28,000 or a gasoline car in Europe for maybe $22,000. So that makes it pretty competitive. Then, as we – over time, we're going to get better and better at our lease offerings with lower interest rates and just better access to capital with a track record and more visibility into residual values. I mean I think our residual value is going to be very good. But to get loads of cost capital you have to come prove that. I think long-term, just like with Solar City, I see leasing as being overwhelmingly the path to go for electric cars, because it just brings the cost of transportation – it makes it immediate, because you have the lease and you look at your – the amount you are paying per month, you might plus you might pay for electricity versus your gasoline car lease plus gasoline cost, and I think gasoline cars also really inherently require more maintenance, there is that as well. With a lease, you don't have to worry about like capturing savings over some period of time or worry about the battery life or anything like that. You just experience the savings immediately. So, until I see leasing as being the main way that people buy our car, and then it's going to seem like a very compelling value proposition.

Much LARGER crumple zone. Engines don't crumple! However, that's just frontal impact. They also aced the rest of the crash tests, such as the pole side-impact test. And the heavy battery keeps it very bottom-heavy -- so it resists rolling over. Certainly, but what I meant was that the weight savings from the engine being gone could be used to beef up the construction of the rest of the frame. The car weighs about as much as a 7 series while being smaller. I think the battery is 700 lbs.

Much LARGER crumple zone. Engines don't crumple! However, that's just frontal impact. They also aced the rest of the crash tests, such as the pole side-impact test. And the heavy battery keeps it very bottom-heavy -- so it resists rolling over.

Keeping in mind that the most-optimistic projection is for just two $80,000+ luxury models -- the "S" and the "X". Just wait until the Gen III comes out -- the "E" (for "everyone"). Once we have "S" "E" "X" there will be Tesla cars everywhere!

They have experience with that. They already all sit there and let Porsche make Porsche-esque ROE. Don't they? Are they suddenly going to change their spots?

Yeah, the environmental thing is nice. But that's not really the draw for me. Aside from the instant 911-beating acceleration... (and yes, even the "X" minivan will do 0-60 in under 5) The challenge is how are they going to get me to switch from electric back to ICE -- I think they can't. I don't like to pump gas, or change oil, or take it to a service station. I don't have those hassles in my daily life anymore.

My high degree of confidence interval is more close to 80,000-90,000 cars sold. However 100,000 is a stretch goal that I believe they will hit. The Model X Performance is a dual-motor, AWD minivan/SUV that goes 0-60 in under 5. They are expecting to sell more "X" than "S"s, and they should be in the 40,000-50,000 volume range on the "S"s in two years. So, it will be a tight race. My chief risk is supplies -- I don't know if they will have the battery volume to do 100,000 vehicles that early. I believe the demand is there though.

Same as the Model S. I should know, I reserved one (paid the $40,000 deposit for a "Signature" model). I'm #1,239 in line -- I will get it sooner than that though, as some people will cancel.

Eric can correct me if I'm wrong, but I don't believe he has compounded capital by shorting wildly popular and successful companies with excellent and unique products, founded and run by some of the most successful CEOs on Earth. I'm pretty sure he uses a different formula. Take a look at Amazon.com. These types of companies can be overvalued for decades. And Amazon.com has never really been profitable. Exactly. Let's make a gentleman's bet though. I speculate that two years from now, they are looking forward at 100,000 unit vehicle volume. So, I expect them to sell 100,000+ vehicles in 2016. Now, that's more than 50% of Porsche's current volume, and somebody carefully pointed out that Porsche is a 70 year old company. So let's see how it works out :-) I will donate $100 to Sanjeev's honey pot (the board's "donations" link) if I'm wrong. This will be Model S and Model X sales combined.

I've been on the factory tour -- I've seen the vast, darkened corner of the building. The building is indeed capable. They will need more robots. You know, what are we talking about here relative to market cap? 5% dilution? 10% dilution? How much will robots cost to finish the job? That's not a short thesis. This is basically our disagreement in a nutshell. The short thesis is that Tesla is indeed a car company and a capital intensive and competitive one. The short thesis is that Tesla's long term earnings power will be constrained by the industry in which it operates. This is not toys.com, it is a very real, awesome company doing wonderful things for America (using its practically negative cost of capital and other people's money but nevertheless doing big things). But it is not microsoft either. It does not have 0 growth capex requirements, it is not creating a monopoly (it can be argued they have a monopoly on luxury EV's but surely a competitor with 10X the R+D budget can come up with something in 5 years. Batteries are a heavy industrial good also. This looks like capital intensity to me http://www.greencarreports.com/news/1089205_tesla-to-add-production-capacity-for-35000-more-electric-cars http://www.forbes.com/sites/hannahelliott/2013/11/05/tesla-up-9-as-production-hinders-growth/ So if we accepts Tesla is a car company and an asset intensive one, then we can evaluate what is implied by its current market cap of $40B (after options adjustment and 5/2013 convert note conversion, do you disagree with this adjustment?). The way I view it is there is a price/book, an expected long term ROE, and a required rate of return. Let's ignore all liabilities (because deducting liabilities is for people without vision). So TSLA has 2.4B of Assets as of 12/2013. Let's quadruple that to 10B assuming Tesla plays the sell ridiculous converts and equity at ridiculous prices game to get to 10B of assets immediately. So TSLA would be trading at 4X "book" (i use quotes as there are no liabilities in the land of Musk and no corresponding increase in market cap or shares). With a 0% payout ratio and 7% required rate of return and convergence to book value in 20 years, a 4X book company must make a 14.25% ROE in order to be "fairly valued". So TSLA is not overvalued if you give them $7.5B of free capital, deduct all liabilities and they can make an industry destroying ROE (admittedly not as high as Porsche's) for 20 consecutive years. What component of ROE will TSLA destroy its industry in (Asset Turnover, Net Margin, or Leverage?). Is 7% too high a discount rate? Or is 14% too low an ROE (ROA in this case actually)? Have you looked at Morgan Stanley's 15 year DCF that they use to justify Tesla's price? I'm reluctant to post a sell side report but i'll throw in some highlights. It goes without saying that the model ignores any notion of mean reversion, of economic cyclicality, of competition, of capital constraints, and all the other real world stuff that those who do not get paid to sit behind a computer and make promotional, downright Panglossian projections have to deal with. Can you provide me with an example of a company that has grown volume by 27X and revenue by 18X in 13 years? What industry was said company in? How much capital was involved? What was the company's ROE and did it make money while it grew? In 1990 MSFT did 1.1B of revenue. In 2004 the did about 33X that. So does TSLA have 50% of the growth story of Microsoft in 1990? Does it share its economics? I can't tell if you are serious or trolling when you throw out your 500K/year and profit number and ignore the nature of the business, what it will cost to get there and that that is about 20X what they did last year and 15X what they'll do next year on Musk's projections. I can't tell if you are serious when you use Porsche as a comp when Porsche is (using MS's numbers) 7-8 years ahead of Tesla in terms of production, capital, profitiability etc. completely proven in concept, has been around for 70 years or whatever and was being taken over by a long term strategic partner (strategics pay the mos, right?). So if TSLA kills it for 8 years it will be worth 20 billion euro?? $28B?? It trades for 1.4X that today. In terms of valuation (not that one should short on valuation, i've learned that here) isn't there an enormous margin of safety in saying that TSLA is worth less than $40B today? Unit volume: We expect Tesla’s unit volumes to grow at a CAGR 29% from 2013 through 2027. By 2015, we forecast unit volumes of almost 65k, expanding to over 1mm by 2027. Revenues: We expect auto revenue to grow at a 25% CAGR through 2027. As Tesla introduces more mainstream models such as the Model S, Model X, and eventually the Gen 3, we forecast average selling price (ASP including powertrain units) will drop from $93,000 in 2013 to roughly $60,000 by 2027. I think you are getting blinded by the growth projection and just saying "that's not possible, that's not possible, that's not possible". You reference Microsoft even. To me, I just see a window into the psychology of what's driving you to short it. So, instead, I'm trying to talk you through what looks reasonable to me from an execution standpoint. They're going to sell 35,000 this year, yet that's a lot of growth versus just two years ago. Then it will soon double again with the "X" sales. They will soon be at 100,000 in annual vehicle sales. When I talk about 500,000 in annual sales, 80% of the profit margin is coming from those first 100,000 -- 150,000 vehicles. That's the high-end price tag "S" and "X" cars. These two cars will not be the last of the luxury cars in their lineup. There will be new models. The Roadster for example is not in production. You are getting hung up on the cost of scaling out to 500,000, but that's only 20% of the picture. For now, just focus on getting to 150,000 for the Model S and Model X (and throw in new sporty "Roadster" models to help achieve this figure). I am not trolling. I am trying to help people understand that Tesla is a difficult short. You need to really cross your fingers. I think I got someone's attention when they looked at Porsche's margins and sales volume -- it was likely completely new information given the prior comments about how luxury car market can't support those kinds of numbers on average profit margin per vehicle. I don't think the articles on shorting Tesla like to dwell on it much because it begins to validate a good portion of the share price. The new mantra I'm now hearing is "but it's already worth more than 20 billion Euros" -- so now I've got your attention. 20 billion Euros is real money. That's what a car company can be worth on VW's books with less than 200,000 vehicles in sales. I believe that was in 2012 when the company was selling less than 150,000 vehicles. Meanwhile, it's a long road to wait. The stock can be optimistically valued for years and years as the company continues to grow and blow away expectations. Remember what the expectations were two years ago?

It's reflexivity. Plus, making a car isn't like making a reusable rocket... oh wait, he's doing that too.

It doubles as a safety feature -- enhanced crumple zone in the front. Those big internal combustion engines are hazardous to your health in a frontal impact crash. They just don't crumple. Even worse, I hate it when the entire car explodes like in Paul Walker's case.

I've been on the factory tour -- I've seen the vast, darkened corner of the building. The building is indeed capable. They will need more robots. You know, what are we talking about here relative to market cap? 5% dilution? 10% dilution? How much will robots cost to finish the job? That's not a short thesis.

So Tesla margins, without the Gigaplant, already exceed BMW, AUDI, DAIMLER. You're a smart guy though -- don't you think that's because the Model S is selling on average for $80k+ and Audi/Daimler/BMW don't average those kind of numbers? I mean, I know you know that already. I don't have to tell you that of course. So why the fuss? 50% gross margin is very aggressive, and 100,000 volume by 2020 is very conservative. Call it 150,000 volume and 33.5% gross margin. Much more realistic on both counts. They are hitting 27% later this year -- with battery cost optimization, they easily get to 33.5% and higher.

How did I prove it was overvalued? I talked about $10k average per car on 500,000 volume. And they only need 100,000 in volume to produce the numbers for the first 400,000. So if they come up 20% short (they never deliver the GenIII at a profit), then so be it. You get to 80% of my number from Model S and Model X alone if you get them to 50% gross margin on $80,000 average purchase price and 100,000 combined volume. Their existing plant, which they already own, is capable of 500,000 annual production volume. So, they can pull this off in their existing facility. They expect to ship 35,000 of their Model S sedans in 2014. The Model X is released next year, and they expect greater demand for that car. Remember, SUVs account for 50% of Porsche sales. The Model X is going to be in huge demand. That easily takes their sales to north of 70,000 vehicles. Then I merely assume they take that number up to 100,000 vehicles by 2020! That's where $40,000 per vehicle comes from. Then the rest of the 400,000 vehicles are assumed to earn just $2,500 each. But look, it's not as if the model lineup ends there: Boxster (Tesla has no similar offering) 911 (Tesla has no similar offering) Panamera -- The Model S is the similar offering Cayenne -- The Model X is the similar offering. Tesla can easily blow away my 2020 numbers. They could easily be producing more than 100,000 unit volume on "S" and "X" combined, six years from now. And they can augment that with a 911 equivalent, and a Boxster equivalent. There is just... I was being relatively conservative. I can't quite understand how it's not hard to see that I'm not putting out unreachable numbers. And if it seems relatively attainable, then why short it? This isn't Toys.com. The model S is outselling the Panamera by a country mile.

How much assets and equity does Porsche employ to build 200k cars? What's its ROE? Are you constructive going to short it? They are making more than $10k profit on each car, on volume of 200,000 next year. Seems like you "constructive" believe the market can't support that right? 150k is a lot different from 500k. And as far as I can tell, Porsche is the only brand selling even 150k cars at $10k profit per car. I would be much more likely to buy Porsche (now a holding company for VW) than short it. They have proven they can make huge amounts of money selling cars. Tesla hasn't. Okay, the math.... Model S and Model X sell for $80k+ on average. Gross margin to 27% later this year -- much higher when battery prices are halved -- let's say 50% margin at that time. $40k profit per vehicle, let's say roughly 100,000 vehicles between the X and the S. And I repeat, $40,000 per vehicle. Oh, but I said $10,000 per 500,000 on average, right? So I wonder how I got from $40,000 per vehicle down to just $10,000 on average? Oh yes, it's because I'm assuming less than $10,000 per vehicle for the mass-produced car. Aha! Presto magic -- $40,000 per first 100,000 cars is the same as $10,000 per 400,000 cars. Then you figure if they can make $2,500 on each mass-produced car then they can bring the average up to $10,000 per 500,000 cars. BTW: Porsche's gross margins were 50% -- so it's much more than $10,000 per car for them.

The car isn't homely? That's the only statement made here. BMW isn't going to lose 7 series sales to BYD. And nor will Tesla lose a customer to BYD.

VW values Porsche at more than 20 billion euros. http://www.bloomberg.com/news/2012-07-04/volkswagen-to-purchase-remaining-porsche-stake-for-5-6-billion.html And with volume of less than 200,000 vehicles at the time.