TSLA - Tesla Motors

[Jurgis]

Anecdotally: I would bet that Model 3 will be delayed or rolled out slower than expected. There can be price raises as we've seen with Model S. IMO significant percentage of people will buy even with price raise and delay. I might not, but then I'm a cheapskate.  8)

 

I'm also concerned about SCTY, but I'd rather not revisit this discussion since I don't have any new info or arguments. ;)

 

I'll be very happy if Elon manages to navigate this successfully. I'd not advise anyone to invest in TSLA expecting great return.

[awindenberger]

Anecdotally: I would bet that Model 3 will be delayed or rolled out slower than expected. There can be price raises as we've seen with Model S. IMO significant percentage of people will buy even with price raise and delay. I might not, but then I'm a cheapskate.  8)

 

I'm also concerned about SCTY, but I'd rather not revisit this discussion since I don't have any new info or arguments. ;)

 

I'll be very happy if Elon manages to navigate this successfully. I'd not advise anyone to invest in TSLA expecting great return.

 

Tesla got a good deal on SCTY, potentially a very good deal.

[Guest Schwab711]

I get that the cars are nice, and Musk is innovative and all, but I'm surprised(new here obviously) to see a thread on this on a value investing forum. Is there a rational bull case for this stock here?

 

I think you can make a bull argument on tesla.  It all comes down to Tesla's forecast of 500k cars per year in 2018.  If you believe that they can achieve that number then:

 

Sales: $30B (currently $9B), assuming an extra 400k cars (currently 100k cars) at $50k rev avg.

Gross Margin: 27.5%, $8.25B

Operating Expense: $4B

Taxes/Interest: $0.75B

 

Net Profit in 2018/2019: $3.5B, $22/share

 

 

If you apply a 25 PE then you have a $550 / share TSLA.

 

If gross margin can get to the 30% target it would put the share price at around $625.

 

This gives zero value to the gigafactory other than the effect it should have on margins.

 

Also assigning zero value for solar city.

 

I think it's very compelling at these prices.

 

First, TSLA basically need to deliver at least 500k cars a year for 25 straight years just to make your money back. That's a lot of Teslas in driveways. This can't be just a CA thing at that scale, so the charger network needs to be more dense and spread out. They also have the buyback promise. If you increase supply by the above estimates, the buyback could become a serious risk. Beyond simple supply/demand triggering buybacks, if there are any engineering issues that would cause vehicles to lose value than you could have an overnight $0.

 

You are also assuming substantial operating leverage, despite there only being 1-2 quarters of this. We already know that the charger network needs to be built out (@ $275k/station). They are going to charge to use them going forward, which hints at how much cash these things burn. There was also significant incentive to show 'green shoots' in the most recent Q given that the merger was on-going at the time. I don't think extrapolating it out indefinitely makes much sense. Historically, their SG&A + R&D outpaces sales growth (especially during expansion periods). Now we are estimating a 400% expansion of production (and 200%-400% after that - similar to prior growth periods) and yet SG&A + R&D is declining on a relative basis? I don't see how it's possible. Your gross margin assumption is based on scaled production of ultra-high-end models. Odds are, a mass-produced vehicle will have lower margins. Given the discount rate on a company like Tesla, a 1-2 year delay can also severely impact PV (or as others mentioned, cause a liquidity/solvency problem).

 

I also don't see any dilution built into the estimate. We know they will need capital. Historically, they have sold shares. I imagine they will be selling shares again. How much additional capital will they need to produce the 500k Model 3's a year? How are they going to finance that? It looks like they need roughly $2 in assets to generate a $1 in annual sales. If that holds true, they are going to need a lot of capital.

 

Finally, I've read a few things about scaling their production chain and the legal barriers. Especially being in CA, I don't see how they meet their 2018 goal. For example, if everything goes perfect, they might be able to paint 500k cars in 2018. Currently, they can only paint less than half of that in 2017. There are many other production issues like this that could present obstacles to meeting their goals that are outside of their control.

 

Just wanted to mention some risks I see that you may not have considered. I have not spent much time on company-specific research. It's also worth noting that TSLA has had a host of accounting issues and was recently cited for highlighting a non-purposeful and misleading non-GAAP metric. That's not really a CEO that is looking out for your best interests imo.

[no_free_lunch]

Some good points here. 

 

On the valuation, I think 25x would be reasonable given the growth rate they are on.  When they get to 500k, they will be talking about 1m, they already kind of are.  I don't think 25x fcf is unreasonable at all if they are growing 50-100% per year.

 

I see what you are saying with the R&G and SG&A.  I think what they were doing this quarter was showing what the numbers would look like if they weren't investing so much in growth.  Amazon has used that technique in the past as well.  They are forecasting 30% growth in operating expenses this year, so we will see.

 

I agree on the dilution.  You need to adjust for that.  I don't think it will be that high though.  Musk is claiming he can get production on model 3 going without a capital raise.  Probably an exagerrated claim but I am not sure how big of a dilution there will be.  In Q3 they had like $3B+ cash, $320M operating cash flow and as the model 3 comes online that number should grow significantly.  Historically, they have about $7B capex versus $9B in sales, and a substantial portion of that was for the gigafactory which is a prepayment for the model 3 at this point.  I think if you look at the capes for the current sales, perhaps it's only $5B or 55% of sales, not 200%.

 

They also will have some cashflow benefits due to more favorable terms with their suppliers.  There is talk that they will go from having to prepay to longer and longer repayment terms.  That doesn't go against capex but it will reduce upfront expenditures.

 

If you look around the tesla forums, there are articles on the model 3 development.  People are looking at the various components and there is room to cut costs.  It will be 20% lighter, have a much smaller battery, possibly much simpler suspension (up to 75% less cost), accelerate slower so smaller and only one motor, more use of steel, simpler interior, etc.  I could see them selling the upgraded $50-60k models in the 25-30% margin range once they get going.  They have stated that they will prioritize sales based on upgrades so the expensive sales come first.  On the more base models they will probably need to scale up even higher to get their margins going.

 

The thing is, I am not concerned about the 500k target.  They will likely miss that.  I do think they will have production going in 2017 early 2018 based on the simpler model 3 design.  If their numbers are lower than forecast I am not sure the stock will tank.  If they miss their targets investors will just have to wait a year, 6 months longer but as long as they are producing there will be cash generated for capex and hopefully it will continue to support the share price.

 

Definitely not without risks but you have to look at who you are investing with here.

[AzCactus]

I have no horse in this race, but an interesting presentation on Valuwalk:

 

http://www.valuewalk.com/2016/12/mark-spiegel-tesla-motors-inc-tsla-zero-slides/

 

Some interesting points for the bears to examine. 

[Jurgis]

I have no horse in this race, but an interesting presentation on Valuwalk:

 

http://www.valuewalk.com/2016/12/mark-spiegel-tesla-motors-inc-tsla-zero-slides/

 

Some interesting points for the bears to examine.

 

This already has been posted upthread (2 pages up).

[AzCactus]

I have no horse in this race, but an interesting presentation on Valuwalk:

 

http://www.valuewalk.com/2016/12/mark-spiegel-tesla-motors-inc-tsla-zero-slides/

 

Some interesting points for the bears to examine.

 

This already has been posted upthread (2 pages up).

 

My bad...

[TwoCitiesCapital]

Some good points here. 

 

On the valuation, I think 25x would be reasonable given the growth rate they are on.  When they get to 500k, they will be talking about 1m, they already kind of are.  I don't think 25x fcf is unreasonable at all if they are growing 50-100% per year.

 

I see what you are saying with the R&G and SG&A.  I think what they were doing this quarter was showing what the numbers would look like if they weren't investing so much in growth.  Amazon has used that technique in the past as well.  They are forecasting 30% growth in operating expenses this year, so we will see.

 

I agree on the dilution.  You need to adjust for that.  I don't think it will be that high though.  Musk is claiming he can get production on model 3 going without a capital raise.  Probably an exagerrated claim but I am not sure how big of a dilution there will be.  In Q3 they had like $3B+ cash, $320M operating cash flow and as the model 3 comes online that number should grow significantly.  Historically, they have about $7B capex versus $9B in sales, and a substantial portion of that was for the gigafactory which is a prepayment for the model 3 at this point.  I think if you look at the capes for the current sales, perhaps it's only $5B or 55% of sales, not 200%.

 

They also will have some cashflow benefits due to more favorable terms with their suppliers.  There is talk that they will go from having to prepay to longer and longer repayment terms.  That doesn't go against capex but it will reduce upfront expenditures.

 

If you look around the tesla forums, there are articles on the model 3 development.  People are looking at the various components and there is room to cut costs.  It will be 20% lighter, have a much smaller battery, possibly much simpler suspension (up to 75% less cost), accelerate slower so smaller and only one motor, more use of steel, simpler interior, etc.  I could see them selling the upgraded $50-60k models in the 25-30% margin range once they get going.  They have stated that they will prioritize sales based on upgrades so the expensive sales come first.  On the more base models they will probably need to scale up even higher to get their margins going.

 

The thing is, I am not concerned about the 500k target.  They will likely miss that.  I do think they will have production going in 2017 early 2018 based on the simpler model 3 design.  If their numbers are lower than forecast I am not sure the stock will tank.  If they miss their targets investors will just have to wait a year, 6 months longer but as long as they are producing there will be cash generated for capex and hopefully it will continue to support the share price.

 

Definitely not without risks but you have to look at who you are investing with here.

 

Seems like all this is considering is the car company though - now you have to adjust all of this for the money-losing company solar company they just purchased and however they intend to finance that. I haven't looked into Solar City, but if their growth/margins/etc. are lower than TSLAs then get ready to adjust those multiples downwards. Especially if it keeps burning cash the way it does.

[fareastwarriors]

The Tesla Advantage: 1.3 Billion Miles of Data

 

Silicon Valley and Detroit can’t keep up with Elon Musk’s trove of real-world metrics

https://www.bloomberg.com/news/articles/2016-12-20/the-tesla-advantage-1-3-billion-miles-of-data

[randomep]

I just  have a feeling 2-3 years from now we will have  a lot of soul-searching on this thread about what went wrong in the thought process, like Horsehead and Theranos.

 

Why?

 

There's one person (no_free_lunch) invested in this based on some kind of fundamental analysis.

There are couple people (myself included) who bought the stock to support Elon.

 

If Tesla fails, I won't have to do any soul searching or examine my thought process. I know very well what I got into. I don't expect any return on the money I put in.

 

Hi,

 

For those people invest to support the CEO and not primarily to make money, well ok I don't understand your rationale and therefore cannot comment.  My comment is only for those whose purpose is to make money.

 

The Horsehead parallel's are obvious to me. People did fundamental analysis on both companies. I read a 30 page write up  on Horsehead with pictures and everything.  Both companies have not proven their ability to make a profit yet are asking money for huge plant(s).  Both are promising wonderful things once these plants come online. But wait, they are late....... and of course with the lateness comes the excuses and need for more cash.

 

Someone said Tesla is worth X because they will produce 500k cars in 2018.  Now in 2016 they can't BS any longer and will have to revise down.  When will they ramp up to 500k? maybe 2020? In that case you are putting down money today for a car that you will get 4yrs from now.  Tesla's competitors aren't going to stay still and will have produced something competitive or better......... anyway its not that long a time we shall see.... but I am really curious how many people invested in both Horsehead and Tesla?

 

 

[no_free_lunch]

Tesla produced 5500 cars q3 2013.  They prduced 25000 q3 2016.  There are many variables here but their track record is pretty good.  I think comparing them to horsehead is random.

 

Also the 500k was originally for 2020 but pulled forward to 2018 this year.  They might miss that a little but the 2020 forecast is still solid.

[Gregmal]

As a fund manager I spoke with the other week stated "Musk damn well better come through on all of these promises, otherwise he should end up in jail". This whole thing is pretty wild to me. I guess there are still some whom believe the story but this guy just keeps kicking the can down the road and every time he kicks it there is an even bigger fable told as to why you should continue to believe. The SCTY deal was one of the most disgusting cases of self dealing I've seen in a while, and now he's made all these grand promises of SCTY being a positive cash contributor and sworn TSLA wont need to raise cash and it's looking like the whole thing is on the verge of collapsing now that it seems the market is beginning to realize they wont produce 500k cars even if you combine the next several years. What they will do in 2017, 2018, and 2019... lose massive amounts of money and dilute shareholders.

[rkbabang]

As a fund manager I spoke with the other week stated "Musk damn well better come through on all of these promises, otherwise he should end up in jail". This whole thing is pretty wild to me. I guess there are still some whom believe the story but this guy just keeps kicking the can down the road and every time he kicks it there is an even bigger fable told as to why you should continue to believe. The SCTY deal was one of the most disgusting cases of self dealing I've seen in a while, and now he's made all these grand promises of SCTY being a positive cash contributor and sworn TSLA wont need to raise cash and it's looking like the whole thing is on the verge of collapsing now that it seems the market is beginning to realize they wont produce 500k cars even if you combine the next several years. What they will do in 2017, 2018, and 2019... lose massive amounts of money and dilute shareholders.

 

What will they do?  Did tunnels ...

 

"Traffic is driving me nuts. Am going to build a tunnel boring machine and just start digging... It shall be called 'The Boring Company.' Boring, it's what we do... I am actually going to do this"

--Elon Musk

 

http://arstechnica.com/cars/2016/12/elon-musk-hates-sitting-in-traffic-so-now-hes-going-to-build-tunnels/

 

Maybe after the boring company loses a certain amount and is $Billions in debt Tesla can buy it out so that it can be another positive cash contributor to the company.

 

[Jurgis]

Funny, so now this is an Elon hate thread.

 

/yawn.

[no_free_lunch]

The comments regarding solar city raise legitimate concerns.

 

I think the comments along the lines "Musk never delivers!" are junk.  He is building 100k cars a year when they were doing 1k a year 4 years ago.  Please.

[rkbabang]

Funny, so now this is an Elon hate thread.

 

/yawn.

 

Not so much Musk, but I do hate the Solar City acquisition. 

 

[DooDiligence]

I'm about 4 chapters into the biography of Musk.

 

Amazing guy who's done a lot of things (more than many people will do in multiple lifetimes...)

 

He's bound to get a lot of haters...

[awindenberger]

Funny, so now this is an Elon hate thread.

 

/yawn.

 

Not so much Musk, but I do hate the Solar City acquisition.

 

I'm curious, does anyone else that reads this thread not hate the SolarCity deal? I'm I really the only person bullish on the current and future value of SolarCity?

 

Elon waited for the perfect time to buy SCTY. He didn't try to do a merger back in 2014 when SCTY was trading at $80/share and had deployed less than 1GW of solar leases. Instead, he was able to buy the company for about $20/share this year, when it has over 2.3GW of leases, paid fully with stock (which many people think is drastically overvalued, so a pretty good use of currency if you ask me).

 

 

[no_free_lunch]

I am neutral on solar city.  Somehow I think he will turn it around but I haven't figured out exactly how.

 

I view pure tesla as less risky than tesla + solar city.

[Gregmal]

The comments regarding solar city raise legitimate concerns.

 

I think the comments along the lines "Musk never delivers!" are junk.  He is building 100k cars a year when they were doing 1k a year 4 years ago.  Please.

 

Musk's ability to "deliver" is questionable at best. Metaphorically, Musk is the older guy with the fake ID in school. All the freshman love him because he has this aura about him. He's more popular than they, and is the guy they turn to when they need something they can't get. They forget that they are wildly overpaying for a case of beer bc they are too enamored by the end carrot. They willingly hand over their money to this guy. The first day(when I was in school there were no cell phones but pretend anyway) he's supposed to get the booz his phone is off. The second day he has some grand story of adventure, but still no case of beer. The third day he comes by with a 12 pack of Busch even though you gave him $30 for a case of Budweiser(no change for you either but you do notice another case of beer in his car). Generally everyone is ok, but over time those people wise up (learn how to financially analyze a company) and realize they are getting a raw deal, but for the time being its exciting and entertaining.

 

[boilermaker75]

The comments regarding solar city raise legitimate concerns.

 

I think the comments along the lines "Musk never delivers!" are junk.  He is building 100k cars a year when they were doing 1k a year 4 years ago.  Please.

 

Musk's ability to "deliver" is questionable at best. Metaphorically, Musk is the older guy with the fake ID in school. All the freshman love him because he has this aura about him. He's more popular than they, and is the guy they turn to when they need something they can't get. They forget that they are wildly overpaying for a case of beer bc they are too enamored by the end carrot. They willingly hand over their money to this guy. The first day(when I was in school there were no cell phones but pretend anyway) he's supposed to get the booz his phone is off. The second day he has some grand story of adventure, but still no case of beer. The third day he comes by with a 12 pack of Busch even though you gave him $30 for a case of Budweiser(no change for you either but you do notice another case of beer in his car). Generally everyone is ok, but over time those people wise up (learn how to financially analyze a company) and realize they are getting a raw deal, but for the time being its exciting and entertaining.

 

Musk's ability to deliver is unbelievable.

 

SpaceX is the first private company to deliver payloads to space. They do it much cheaper than anyone else and they developed their own engines rather than relying on the Russians. Musk bet everything he had on SpaceX. If not successful he would have been starting from scratch.

 

Tesla is the safest car ever manufactured and it is currently the fastest car in production.

 

I could go on and on, but I think it is obvious that Musk delivers.

 

[Gregmal]

The comments regarding solar city raise legitimate concerns.

 

I think the comments along the lines "Musk never delivers!" are junk.  He is building 100k cars a year when they were doing 1k a year 4 years ago.  Please.

 

Musk's ability to "deliver" is questionable at best. Metaphorically, Musk is the older guy with the fake ID in school. All the freshman love him because he has this aura about him. He's more popular than they, and is the guy they turn to when they need something they can't get. They forget that they are wildly overpaying for a case of beer bc they are too enamored by the end carrot. They willingly hand over their money to this guy. The first day(when I was in school there were no cell phones but pretend anyway) he's supposed to get the booz his phone is off. The second day he has some grand story of adventure, but still no case of beer. The third day he comes by with a 12 pack of Busch even though you gave him $30 for a case of Budweiser(no change for you either but you do notice another case of beer in his car). Generally everyone is ok, but over time those people wise up (learn how to financially analyze a company) and realize they are getting a raw deal, but for the time being its exciting and entertaining.

 

Musk's ability to deliver is unbelievable.

 

SpaceX is the first private company to deliver payloads to space. They do it much cheaper than anyone else and they developed their own engines rather than relying on the Russians. Musk bet everything he had on SpaceX. If not successful he would have been starting from scratch.

 

Tesla is the safest car ever manufactured and it is currently the fastest car in production.

 

I could go on and on, but I think it is obvious that Musk delivers.

 

Like I said, he delivers, but when you adjust for the value you are getting for the price you are paying, its hard not to laugh at the entire situation. Yes, he's done some impressive things. He's built some beautiful cars. He was first to market with a real product rich folks really wanted. But the truth is there's plenty of products out there that could be built, refined, and sold at massive losses. Most don't do it because it isnt economical. Whereas Elon's empire has been fueled by government subsidies and easy money. I'm sure plenty of folks could build absolutely stunning vehicles if they had no problem losing money on them.

 

For a variety of reasons, the biggest being government investment, raging bull market, and ZIRP, the stars have aligned and Musk through his ownership of company stock has been able to pursue an uneconomical venture while enriching himself. He has consistently made wildly outrageous claims, he has been reprimanded by the SEC for misleading investors, and regularly distorts the details most sane investors would find useful. IE, tax credits that accounted for their "profit" last Q were about 150mm. He called these "mouse nuts". Yet continuously touted Tesla's GAAP proft, which by the same token, was a fractional mouse nut, at sub $25mm.

 

If people want to assign a 45B+ EV to "faith in Elon" thats their prerogative. As a value investor, I look at a company that is on the verge of a death spiral, fueled by a take over of a company that couldnt even float an IPO at $10 a share several years ago, and laugh. I may be wrong, plenty of times valuations can remain insane for eternity, such as AMZN, or grow into them, ala GOOG, but if you read much of the more in depth analysis out there, its all negative. There really is not one single, well put together bull case made for Tesla by anyone with credibility, using any realistic numbers. Its all "close your eyes and cross your fingers". To each their own though.

[no_free_lunch]

Well it is hard to value with conventional approaches I will give you that.  I am certainly aware of how expensive the stock is.  However, if he can get to that 500k per year I think it will all be good.

 

It does remind me of amazon in that TSLA may or may not show GAAP earnings for a long while but there are investors willing to ride along if their is consistent growth.  This is the only bubbly tech company I own so we will see if I can predict these things.

[Liberty]

Such cool, lifesaving tech:

 

https://electrek.co/2016/12/27/tesla-autopilot-radar-technology-predict-accident-dashcam/

[DooDiligence]

Just finished the chapter in Musk's biography on the beginnings of Tesla (this guy's gonna make something happen if it kills everyone...)

 

Hard to reconcile the man in the book with the interview I saw recently (he stammered so much it was painful to watch...)