TSLA - Tesla Motors

[rkbabang]

I plan on purchasing a Model 3 as soon as possible without putting down the deposit.  I reason that by the time you can just order one outright without having put the deposit down enough time will have passed for the bugs in the software to have been worked out and enough will have been written about it that I will have a good idea if people are happy with their purchases.  I don't like the SCTY acquisition either. Like you I think they should remain separate entities where each can sink or swim on their own.  No reason to tie two insanely risky endeavors together so that one has the ability to sink the other.

 

rkbabang - you do realize that is most likely going to be around 2019 right? so you have a long wait ahead of you...

 

I do realize that, although I was thinking more like 2020.  I just put new tires, brakes, and struts, on my commuting car (2007 Elantra w/ 175K miles), I'm hoping to make it last another 4 years.

 

[awindenberger]

From another thread: Chanos' thinks SCTY is gonna be the end of TSLA: http://video.cnbc.com/gallery/?video=3000554841&play=1

 

I'm all for Elon, but IMO buying SCTY in current situation is rather irresponsible. As a separate company SCTY can sink just itself. As a part of TSLA it could sink both companies. I understand the big visions and everything, but IMO at this point it would be more important for TSLA to get through Model 3 launch without having to deal with SCTY financing issues...

 

How carefully have you guys looked into SCTY? Is your negativity towards the company due to deep research, or based on what Chanos and the rest of the media is saying?

 

 

[Jurgis]

From another thread: Chanos' thinks SCTY is gonna be the end of TSLA: http://video.cnbc.com/gallery/?video=3000554841&play=1

 

I'm all for Elon, but IMO buying SCTY in current situation is rather irresponsible. As a separate company SCTY can sink just itself. As a part of TSLA it could sink both companies. I understand the big visions and everything, but IMO at this point it would be more important for TSLA to get through Model 3 launch without having to deal with SCTY financing issues...

 

How carefully have you guys looked into SCTY? Is your negativity towards the company due to deep research, or based on what Chanos and the rest of the media is saying?

 

I've looked at their reports. It looks bad from cursory review. I understand that leasing accounting complicates things. No, I have not done deep DD into it and I won't do it. It is possible that there are ways to cut the red ink, but I'm gonna be quite skeptical about bullish side of things with solar co results being what they are. Bulls are welcome to make their case though. :)

[benhacker]

How carefully have you guys looked into SCTY? Is your negativity towards the company due to deep research, or based on what Chanos and the rest of the media is saying?

 

I shorted SCTY and formed my opinion before I knew Chanos was short (I think there were rumors, but I don't think he had said anything publicly at the time).  I feel like my research was pretty decent, but as always I might have missed something.  I did close at a big gain after borrow fees so I feel like I was right, but stock at $60+ vs. <$20 is a different game I guess.

 

Not sure who else you are talking to as I don't think there are any others on this board who was short, at least that said so (I could be mis-remembering).  The current negative view, and I think Jurgis' comment was more in this vein, is that SCTY is a reasonably highly indebted loss making company (on a GAAP basis) and prior to the TSLA deal their (corporate, not asset backed) bonds were trading >20% YTM.  In my book, those 3 items together kind of don't need any media attention to amplify the opinion of the market.  I think the proof of whether a company is a POS or not is definitely guilty till proven innocent when bonds are yielding >20%.  Shit, the SHLD thread has about every 3rd post on SHLD's imminent demise and it's bonds yield <12%.  Coincidentally, it's also a heavily indebted firm with loss-making GAAP financials, so somewhat comparable.

 

No position in SCTY at this time.

[Spekulatius]

If the balance sheet looks like a POS and the income statement looks like a POS, I assume it is a POS. I don't really short much, so I just move onto something else. I sure would not want to have anything I own, merge with this entity either.

I think the Bulls would have to prove that the balance sheet is Ok, that it is Ok to show huge GASP losses in the income statement and have bonds trading at 20% yield.

 

If anything, I would buy the bonds and hedge by shorting the stock.

[TwoCitiesCapital]

In the event something were to happen to Tesla, are those $1,000 deposits considered trade receivables that would be paid out before creditors?

 

 

[awindenberger]

If the balance sheet looks like a POS and the income statement looks like a POS, I assume it is a POS. I don't really short much, so I just move onto something else. I sure would not want to have anything I own, merge with this entity either.

I think the Bulls would have to prove that the balance sheet is Ok, that it is Ok to show huge GASP losses in the income statement and have bonds trading at 20% yield.

 

If anything, I would buy the bonds and hedge by shorting the stock.

 

I don't understand bonds as well as stocks, and particularly want to understand more about how convertible issues should trade.

 

The only SCTY bonds that reached 20% yields were the two convertible issues. The regular bonds did get into the low teens, but not close to 20%. It feels like the convertible bonds trade more based on the value of the stock than anything else, given that these issues is particular are now way out of the money.

 

SCTY was definitely a short at $60. At <$20, I don't think so anymore.

[Jurgis]

SCTY: I don't short, so I can't say if it's a short. The merger may go through, so you'd have to wait until the vote clears at least. (Chanos might be waiting for merger to go through to short - more? - TSLA).

 

It might be possible to run SCTY profitably as runoff - someone would have to do DD if this would work. You probably would not get back the purchase price though. I think Musk won't run it as runoff.

 

There might be a way to run SCTY cash neutral without going into runoff, but this is harder to envision.

 

Anyway, I probably don't have more to contribute on this. :)

[benhacker]

Awindenberger,

 

On the "bond" and "convertible bond" discussion.

 

I think it's simple at the first level (which is really what is needed to grasp in most cases, if you aren't actually buying bonds, and just looking to interpret prices).

 

Bonds almost always have a contractural set of cash flows.  You can put these in a spreadsheet, and discount them as you choose.  you can value them as some set rate, or discount them based on risk, etc.  Convertibles in general (if you ignore the stock value / option and just set it zero) only differ in that for any given company, the converts will have lower coupon payments than a traditional / straight bond.  This means that you as a buyer if you want to get equivalent yield, you need to pay a discount for the convertible relative to straight debt.

 

The only time this starts to *seem* like converts are different, is when the bond is very long term, or if the company is in a high level of distress.  The reason for this is simple... if you want to go back to the spreadsheet model of the cash flows, the market is saying the apparent risk of cash flows (as an example) 2-3 years out, is much greater than cash flows 1-2 years out.  Thus a bond that pays a high coupon *today* (straight bond) will be more attractive because the market is assuming that soon the coupons will stop.  A straight bond gets your cost out of a position faster than a convert at the same YTM, so generally in distressed situations, converts have higher YTMs, because effectively, further out coupons are being discounted at much higher rates than near term coupons.

 

Here's the thing... this only really matters if the market is pricing in substantial BK risk (aka, there is a huge dispersion of discount rates / risk across the bond term).

 

So it's kind of like a detail that is nice to know, but only really if you are a buyer of credit.  If you look at *any* bond of *any* company, and it has a 20% YTM, you have a lot of information.  You can then buy the 20% yielder and achieve a 20% yield (at a minimum) *if* the company doesn't file within that timeframe.  This is a potent statement to anyone bullish on the equity of the same company, and I think it implies buyers need a much higher level of DD than would normally be ok for many.

 

Comparing bonds in this way you just need to ensure they have the same backing.  General unsecured issues for example...  Comparing secured yields is a non-trivial process when distress hits, the security behind the bond may dominate the corporate security to pay (SCTY also has this feature which is why you see some bonds yielding 5% and others yielding much more) and thus make certain issues non-comparable.

 

By the way, the above should be pretty basic to security analysis.  Details of bonds and trading of them is more complex, but I often don't get what people mean when they say they get stocks but not bonds.  Bonds are Checkers, stocks are Chess.

 

Hope that helps.

[awindenberger]

Thanks Ben,

 

I probably understated my knowledge of bonds a bit. The mechanics I understand, its more why certain bonds might trade where they do.

 

You did a great job covering that here. The key, as you point out, is that for the converts, almost all of the YTM is based on simply getting repaid, given that the coupon payments are smaller, or non-existent. Thus these will trade at higher YTM than a normal issue where you're collecting 10-12% of your outlay each year (assuming they start to become distressed).

 

Would it be fair to say that convertibles yielding 20% show a lower level of distress than if the regular bonds were yielding 20%? In SCTY's case, the bonds were showing distress, but maybe not quite as much as one might assume, given that it was only the converts that hit 20%?

[benhacker]

Hey AW,

 

Would it be fair to say that convertibles yielding 20% show a lower level of distress than if the regular bonds were yielding 20%? In SCTY's case, the bonds were showing distress, but maybe not quite as much as one might assume, given that it was only the converts that hit 20%?

 

It's all shades of grey, but yes.  The SCTY bonds in question were only 2-3 year maturity.  When a 2-3 yr maturity bond trades at $55 there is only one way to interpret the market sentiment... regardless of coupon:  There is a high chance of default within 2-3 years.

 

There have been a few threads on this board over the years about why running DCF spreadsheets isn't helpful or a good idea.  I have the opposite view in that I find it very helpful to reverse engineer what the implied present value of a future cash flow stream is being valued at... or alternatively (for equities) what the cash flow stream is implied at being.

 

Bonds are interesting, because they are basically binary (if you assume some standard recovery).  You can model them very exactly and determine what premium the market is demanding for credit risk (and liquidity) above the Treasury bond of similar tenor.

 

I think the delta between convert and non-convert is less important, but if it's something you are interested in, it's pretty easy to spreadsheet it up with some assumptions about what the market is thinking.

 

Thanks for the discussion.

[awindenberger]

Same to you Ben.

 

I'm of the opinion that SolarCity is being miss-analyzed by most people, and that the current price represents reasonable value. I took a small position at $17, and would have probably take a larger one, except that I see TSLA as overvalued and thus am not super excited to be getting their stock (although my net price would be about $155/share if the SCTY deal goes through).

 

SolarCity's costs have been too high in 2016, but this is something they can fix, and that I expect will be fixed, in 2017. Their business model has a large amount of leverage built in if they can get their costs down.

 

Its far from being the cheapest stock in my portfolio, but right now its been the most interesting to analyze.

 

Of course their biggest issue is that they do need to continue raising capital, which can be a problem if you lose market confidence. Thankfully, the amount of capital that actually need to raise is much lower than people think.

[benhacker]

AW, would love if you take your SCTY analysis over to the SCTY board to share!

 

TIA,

 

Ben

[Liberty]

Was catching up with this interview with Musk from the fall of 2015.

 

Some interesting stuff in it, though some others here might be interested:

 

https://www.youtube.com/watch?v=sTIH6ncIXYc

[LongHaul]

This survey suggests the Tesla drivetrains have a short life on average from 2012 and 2013 model years.

"Two-Thirds of Earliest Tesla Drivetrains To Need Replacement In 60,000 Miles, Owner Data Suggests"

http://www.greencarreports.com/news/1101153_two-thirds-of-earliest-tesla-drive-trains-to-fail-in-60000-miles-owner-data-suggests

 

I don't own a Tesla but I do own a Prius.  I have really liked the Prius but just had the big high voltage battery fail and had to spend $900 to replace it with a rebuilt one.  It was 11 yrs old, 81k miles and I live in a hot climate which apparently hurts battery life.  The Prius was not a plug in and has a rather small Nickel Metal Hydride battery.

I have recently switched my thinking on the Prius because the batteries have a limited life which are expensive to replace.

 

Tesla - I don't know what happens to Tesla but I sure wouldn't be long it.  I think electric cars and their batteries are still untested. 

 

We will see....

 

 

(edited for correction that Drivetrain failure was not the battery)

[Picasso]

That's the drivetrain, not the actual battery.

[awindenberger]

LongHaul,

 

you have to be careful conflating your experience with what is actually average. The avg Prius battery should last to 160-180k miles or so. You happened to be unlucky, but $900 is not even that much in the grand scheme of owning a car. I happen to own a Prius as well and (knock on wood) have been lucky enough to have no major expenses in 55k+ miles driven over 5+ years.

 

As Picasso pointed out, Tesla's drivetrain is not the battery. Their batteries are actually performing very well, with limited max distance declines over time.

[rkbabang]

LongHaul,

 

you have to be careful conflating your experience with what is actually average. The avg Prius battery should last to 160-180k miles or so. You happened to be unlucky, but $900 is not even that much in the grand scheme of owning a car. I happen to own a Prius as well and (knock on wood) have been lucky enough to have no major expenses in 55k+ miles driven over 5+ years.

 

As Picasso pointed out, Tesla's drivetrain is not the battery. Their batteries are actually performing very well, with limited max distance declines over time.

 

I was thinking the same thing myself.  At $900 for a new battery I wouldn't give it a second thought even if it needed to be replaced every 5 years.  Compared to the maintenance expenses of your average ICE vehicle that is nothing.  Unfortunately the Tesla batteries are much more expensive.

 

[Liberty]

When things are new, they get extra scrutiny and are faced with double standards. ICE cars have all kinds of problems all the time. Engines fail early, are less fuel efficient as they age, maintenance can be super expensive over time, they catch on fire (just search for car fires on Youtube), etc.

 

I think that to keep things in perspective, we have to consider that EVs can be safer (more crumple zone, better weight distribution with battery in floorpan, etc), cleaner, quietier, have better acceleration and real-world performance (instant torque transfer in AWD models, etc), have lower maintenance costs (fewer moving parts and fluids, no combustion gunk that builds up), and batteries are still falling in prices (while ICE parts aren't).

 

By the time most EV need a new battery pack, chances are the replacement parts will be a lot cheaper than an equivalent pack today.

[LongHaul]

Whoops!  My mistake.  Thanks for the correction.

Forget the battery comments that was totally wrong.

 

If it is just the motor then that should be a fixable problem.  I do still wonder how the battery will perform with more years and miles on it. 

[boilermaker75]

When things are new, they get extra scrutiny and are faced with double standards. ICE cars have all kinds of problems all the time. Engines fail early, are less fuel efficient as they age, maintenance can be super expensive over time, they catch on fire (just search for car fires on Youtube), etc.

 

I think that to keep things in perspective, we have to consider that EVs can be safer (more crumple zone, better weight distribution with battery in floorpan, etc), cleaner, quietier, have better acceleration and real-world performance (instant torque transfer in AWD models, etc), have lower maintenance costs (fewer moving parts and fluids, no combustion gunk that builds up), and batteries are still falling in prices (while ICE parts aren't).

 

By the time most EV need a new battery pack, chances are the replacement parts will be a lot cheaper than an equivalent pack today.

 

For these reasons I do not foresee ever buying another ICE. As long as my 14 year old Passat lasts till I get my model 3!

[arcube]

+1. It amazes me how everyone expects a new revolutionary product early in its life line to be perfect.

When things are new, they get extra scrutiny and are faced with double standards. ICE cars have all kinds of problems all the time. Engines fail early, are less fuel efficient as they age, maintenance can be super expensive over time, they catch on fire (just search for car fires on Youtube), etc.

 

I think that to keep things in perspective, we have to consider that EVs can be safer (more crumple zone, better weight distribution with battery in floorpan, etc), cleaner, quietier, have better acceleration and real-world performance (instant torque transfer in AWD models, etc), have lower maintenance costs (fewer moving parts and fluids, no combustion gunk that builds up), and batteries are still falling in prices (while ICE parts aren't).

 

By the time most EV need a new battery pack, chances are the replacement parts will be a lot cheaper than an equivalent pack today.

[Picasso]

Whoops!  My mistake.  Thanks for the correction.

Forget the battery comments that was totally wrong.

 

If it is just the motor then that should be a fixable problem.  I do still wonder how the battery will perform with more years and miles on it.

 

The batteries have surpassed the expectations of many.  Most Tesla's with over 100k miles still have about 90-92% capacity. 

 

But to your point the drivetrain's have been a big headache for Tesla and many owners.  Mine was replaced once.  I think it's gotten a bit better but it's sort of hard to say.  One of my friends had a drivetrain failure a couple days ago on a super busy highway.  The car just dies on you.  I think it's fixable over time, but maybe it's a part of all the strain they take from 0-60 launches.  The P85D that failed on my friend was a loaner from Tesla while his other car was getting serviced, and those are usually the ones that get a lot of strain on the motors.  Someone with an S60 gets the P85D loaner and goes nuts with it. 

[Liberty]

Ashlee Vance has a new feature piece on Musk and Tesla, SpaceX, and SolarCity:

 

https://www.bloomberg.com/features/2016-elon-musk-companies/

 

Also, an update from Tesla on the SolarCity proposed merger, which includes this:

 

On October 28th, Tesla and SolarCity will unveil a solar roof product, which along with Powerwall 2.0, will show the kinds of products that the combined company will be able to create.

 

https://www.tesla.com/en_CA/blog/update-teslas-combination-solarcity

[Picasso]

Ashlee Vance has a new feature piece on Musk and Tesla, SpaceX, and SolarCity:

 

https://www.bloomberg.com/features/2016-elon-musk-companies/

 

Also, an update from Tesla on the SolarCity proposed merger, which includes this:

 

On October 28th, Tesla and SolarCity will unveil a solar roof product, which along with Powerwall 2.0, will show the kinds of products that the combined company will be able to create.

 

https://www.tesla.com/en_CA/blog/update-teslas-combination-solarcity

 

Good summary by Ashlee Vance.