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0 pointsmdasen6y ago0 comments

I think you've hit the nail on the head for the bullish Tesla case. I don't think there's enough profits in the automotive industry for Tesla to be worth $105-120B. Sure, Toyota is worth more, but basically no one else is and Tesla is a long time from being the next Toyota and I think the odds of them becoming the next Toyota have to be below 50% and are realistically probably more like 5-10%. That's not a dig at Tesla, just a recognition that there may never be another Toyota (just as no one has been dominant at anything like Microsoft was with Windows in the 90s) and even if there is another Toyota, it's a long shot that Tesla will be there.

I think Tesla might run into issues around energy regulation. They are working on energy storage and solar, but we'll have to wait and see how that turns out in the market. Energy companies are highly regulated and generally provide highly reliable service. This comes with costs like running higher than you can actually charge for so you don't get outages, employing a lot of people for emergency response and storms, etc. What happens when solar roofs get covered with snow and don't work as well? If the utility company is tasked with making sure they have enough generation power to cover that, then we'll still need to pay them for the investment even if we're using our solar roofs 90% of the time. We're already seeing net metering going out of fashion as the unpredictability of it doesn't help utility companies lower their costs enough.

Would Tesla be willing to also go into the generation and transmission side of things? It's definitely possible, but that's also difficult. Generation is easier since they could just set up solar arrays and batteries and sell into the grid. However, that still means customers paying the transmission company. It's possible that you're talking about the generation side and Tesla could tackle that a lot easier. In terms of the transmission side, they'd probably have to start buying utility companies which don't come cheap.

I think it's more likely that Tesla will sell tech to transmission companies and solar roofs and small batteries to individuals. I think there's still a lot of money and environmental benefit there, but I think transmission companies are going to stick around. It's a good business if you're just looking for standard return-on-investment, but it also requires dealing with a lot of regulation and communities that end up hating on you.

In terms of Tesla being up so much, it's a bit surprising. Automotive revenue is basically flat year-over-year. Total revenue is up only 2%. So, Tesla isn't really growing. By contrast, Apple's revenue was up 9% year-over-year and Apple is solidly profitable today. Assuming that Tesla continues having profitable quarters, their PE ratio would be around 250 which would be fine if they were growing revenue rapidly.

On the plus side, Model 3 production and sales are up over 40% YoY which is excellent, but it's clear why revenue is flat: Model S/X sales are down significantly and they carry a high price tag. For every three Model 3 sales, they lost a Model S/X sale. That's certainly to be expected. The Model 3 is really nice. However, it does mean that revenue is flat.

As a car offering, I like the Model 3. However, I don't know if demand will continue to increase. How many people want to spend $40k on a car - and specifically a Tesla Model 3? Will there be some hockey-stick like growth in revenue? Probably not. Profits? Maybe. Tesla's vertical integration might pay long-term dividends. Maybe they can spend less developing things they've already paid for or maybe they can keep spending on R&D and really outpace the industry.

Still, it seems unlikely that they will grow more than 10x their current size in the automotive industry. That's not a dig at Tesla. If they're pushing out around 600k cars this year, becoming 10x the size would put them in the same place as Ford and GM. A 17x increase would make them larger than Toyota. But that's going to take time. It looks like Tesla is looking to increase production capacity by 15.6% in 2020 (from their slides). At that rate, it would take 20 years to match Toyota's capacity (starting from 640k production capacity and compound expanding at 15.6% per year for 20 years).

Maybe Tesla can expand faster than that, but that would also likely require moving into lower cost/margin vehicles, many more types of vehicles, etc. Toyota has 17 US vehicles not including variants like hybrid vs non-hybrid not to mention many more for other markets and not including things like Lexus - Lexus adds another 12 models, not counting variations like hybrid vs non-hybrid.

And I'm not saying that Tesla isn't going to do that. However, I think it's going to take a long time and a 20-year horizon (and the risk involved in money that might materialize in 20 years) deserves a discount compared to money that's actually being earned today.

You might totally be right that Tesla will not only eat Ford and GM's lunch, but also energy companies. However, that future is likely 20 years away with a lot of risk between now and then. Musk has been very upfront that electric vehicles are easier to make than ICE cars. Other auto makers are creating good electric vehicles except they won't offer enough range because batteries are expensive. When batteries become cheaper, will competition limit Tesla's automotive expansion? I think they'll still be highly successful, but what happens when Toyota or Volkswagen puts their full weight behind battery-powered cars? Some people will surely buy them instead of Teslas. At some point, if battery-powered cars are our future, Tesla will clash head-on with Toyota. Toyota is so good at manufacturing. Even if Tesla is good, Toyota is likely to find ways to capture a lot of the market. Heck, if electric cars are more reliable as Musk touts, what happens when people double the lifespans of their cars? That's a much smaller customer base to be selling to.

Again, I want to emphasize that Tesla is doing well, but anything with a long time horizon has all sorts of things that can happen in the interim and Tesla is playing a long game and going up against a lot of established incumbents and that means risk. I don't think it means risk of bankruptcy or anything like that, but there's a big difference between Tesla's current market cap (around $115B in after-hours trading) and ending up as the next Mazda (a solid, profitable, and well-respected auto maker) that's only worth $6B. Even if they're the next VW (the second largest auto maker sitting just behind Toyota), VW is only a $95B company - and there's a lot of risk between now and Tesla selling 10M cars per year. Likewise, there's a lot of incumbents, competition, and risk between Tesla's current solar and storage deployments and eating energy companies' lunch.

0 comments

reitzensteinm6y ago

I have to say, thank you for this thoughtful post.

Tesla is one of the most compelling stories to follow in recent years, but it seems like moderates have been pushed out and discussions have devolved in to Tesla is a fraud vs Hodl to the moon, with both sides cherry picking facts so hard it's mildly impressive.

So the above is a breath of fresh air, and I'd love to read more in depth takes from others whether I agree with them or not.

electriclove6y ago

I agree with the other comment, great post! Tesla is doing amazing work (and I'm a fan, owner, shareholder, yada yada) but the stock price currently is disconnected from fundamentals. That said, it could definitely continue to stay disconnected from fundamentals for a very long time. I believe Tesla will only show modest profits for the near future. They are going to continue reinvesting to push out more product lines (Cybertruck, Semi, ??) and that will take time. Their mission is not to make the most money. Their mission is to accelerate the move to EVs and solar. They'll show some modest profits, hopefully get added to the S&P 500, and maybe the stock will become less volatile.

zaroth6y ago

> Automotive revenue is basically flat year-over-year. Total revenue is up only 2%. So, Tesla isn't really growing.... On the plus side, Model 3 production and sales are up over 40% YoY which is excellent, but it's clear why revenue is flat: Model S/X sales are down significantly and they carry a high price tag. For every three Model 3 sales, they lost a Model S/X sale. That's certainly to be expected. The Model 3 is really nice. However, it does mean that revenue is flat.

In Q4 2018 they sold 27,607 S/X, and in Q4 2019 they sold 19,475 (-8132, 29%). In Q4 2018 they sold 63,359 M3, and in Q4 2019 they sold 92,620 (+29,261, 46%). Vehicle production over the trailing 12 months increased from ~245k to 365k (~50%).

Why didn't revenue grow? It's not just the 8,000 fewer Model S/X, because S/X doesn't cost 3.6x a Model 3. Just as important was the ASP of the Model 3 fell... about $7,500 to be precise.

> If they're pushing out around 600k cars this year, becoming 10x the size would put them in the same place as Ford and GM. A 17x increase would make them larger than Toyota. But that's going to take time. It looks like Tesla is looking to increase production capacity by 15.6% in 2020 (from their slides).

Tesla says their current production capacity is 640k vehicles (I was surprised by this - it's well beyond the promised "500k run rate by the end of 2019", so I think we're seeing the full effect of Giga Shanghai turning on here).

By mid-2020 Tesla has said they will be running at a 740k annualized production rate based on added Fremont capacity for Model Y. They have said they intend to increase Model 3 capacity in Shanghai and have at least equivalent capacity for Model Y starting in 2021. That means Shanghai + Fremont will be producing nearly 1m annually in 2021. Now, at that point Berlin will be coming online, which is planned to produce 500k units/year. The upshot I think is that production capacity is increasing at a rate of 40-50% year-over-year -- I'm not sure where you got 15.6% from.

> Even if they're the next VW (the second largest auto maker sitting just behind Toyota), VW is only a $95B company - and there's a lot of risk between now and Tesla selling 10M cars per year.

Many people confuse market cap with enterprise value. VW enterprise value is $255B vs $110B for Tesla. You have to subtract the outstanding debt, of which Tesla has very little compared to most automakers, before you get down to Market Cap, which is the value remaining for the shareholders.

All that said, it is clear that the current valuation of Tesla has ceased to be based purely on fundamentals.

Rebelgecko6y ago

>This comes with costs like running higher than you can actually charge for so you don't get outages, employing a lot of people for emergency response and storms, etc.

That's an interesting point. During/after the worst of the recent California drought years, some water companies had to raise their rates because people were so good at saving water. Because so many of the utility company's expenses are fixed costs, their savings from not distributing as much water weren't proportional with their reduction in revenue.

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