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"Tesla also expects to achieve full GAAP profitability in Q3" That would be a massive hit at skeptics as Q3 is almost around the corner (I wasn't even expectin

by caio1982 8y ago

"Tesla also expects to achieve full GAAP profitability in Q3" That would be a massive hit at skeptics as Q3 is almost around the corner (I wasn't even expecting it to happen this year), but even being a fanboy myself I still doubt such bold statement.

Jdam 8y ago
Does GAAP exclude one-time-effects? I can see them selling their grounds, offices and renting it again and the like.
mdasen 8y ago
I hope they do become profitable, but I'm skeptical they will. 1) Their losses are growing, not shrinking. From March 2017 to now, they lost $330M, $336M, $619M, $675M, and $785M. Maybe they hit a tipping point and there is an abrupt change, but it seems like the more natural trajectory would be for losses to become smaller and then turn into profits. 2) Tesla has said they'd be profitable before. https://www.reuters.com/article/us-tesla-results/tesla-expects-to-become-profitable-in-2016-shares-surge-idUSKCN0VJ2J6 https://www.reuters.com/article/us-tesla-results/tesla-expec... Tesla is a really cool company, but it's hard to see a future where they justify their share price. Let's say that Tesla becomes the next Toyota 15 years from now. Toyota is only worth $213B. So, the kinda max value for Tesla is around 4x their current price. So, under really rosy conditions, Tesla appreciates at 12% per year over the next 15 years. That's not bad, but the likelihood that Tesla is the next Toyota is very small. Let's say that Tesla is incredibly successful and becomes the next Volkswagen, Daimler, or BMW (the #2, 3, and 4 auto makers by market cap). They'd be a $106B, $85B, or $73B company. That doesn't leave much for price appreciation over their current $51B market cap. Maybe Tesla can make a company that's way more profitable per vehicle and sell so many vehicles. But that's a bit of a moon-shot. It seems more likely that Tesla will become a company like Subaru ($26B), Mazda ($8B), Nissan ($43B), Ford ($44B), Hyundai Motor ($40B), Fiat Chrysler ($34B), Renault ($32B), PSA Peugeot Citroën ($22B), Suzuki Motor ($26B), GM ($51B), or Honda ($60B). Those are all very successful auto companies. If Tesla becomes the next Mazda 15 years from now, that will be incredibly bad for investors. Basically, if Tesla doesn't become the next Toyota, it seems hard to believe Tesla won't underperform the market by a lot. It's possible that Tesla will become the next Toyota, but unlikely. Comparing Tesla's market cap with that of most auto manufacturers makes you realize that investing in Tesla isn't just betting that Tesla will become a great volume car company like Mazda. They have to become the car company. When investing, it's also important to note that money later is less valuable than money now and account for risk. Tesla is being priced like it's making $6B/year today and it's future is certain. Beyond that, is the automotive industry long for this world? People are re-urbanizing and city traffic is only getting worse. Self-driving vehicles will mean that being driven unlimited places might fall to $50-100/mo which is significantly less than the $400+/mo of car payments, insurance, gas, parking, maintenance, etc. Why should I spend $631/mo for a $35,000 car plus insurance, gas, parking, maintenance when I can just get driven around for a fraction of that cost? Today, Uber's help is more limited since the human driver costs a lot of money per mile. If that future comes to pass, there will be a lot fewer cars manufactured and bought which limits Tesla's value. If an autonomous car is serving 25 people a day, that's a lot fewer vehicles that need to be bought. World vehicle production is around 90M/year and Toyota and Volkswagen are 10M of that each. If the demand for vehicles falls to 4% of its current demand, that's only 3.6M vehicles per year. Even if Tesla makes 100% of those vehicles, they don't come close to being the next Toyota or Volkswagen. Even if an autonomous vehicle only serves 10 people a day, that cuts the vehicle market down to 9M. Even if an autonomous vehicle can only serve 4 people a day, that cuts the market to 22.5M. The future market for vehicles might be pretty small compared to the current one and so even if Tesla hits a Toyota or Volkswagen-like 10% of the market, it might not be a large market. And self-driving services are likely to have stiff price competition. Unlike an Uber competitor that has the network effects of having drivers already signed up, it's relatively cheap to blanket a city with self-driving vehicles. $20,000/mo isn't a huge run rate to to buy 50 vehicles at $400/mo and that will let you place a vehicle within a short distance of everyone in a city like San Francisco (47 square miles). You could position them so that they're usually less than half a mile away to pick you up. $20,000/mo isn't a huge run rate to get your service started and you can buy more vehicles as you get riders. So, even if you think that Tesla might be that self-driving network and will make profits that way, I think it's more likely that the space will have a lot of competition that will push margins down. Waymo and GM/Cruze are well on their way. Nissan and Toyota are expecting to enter the game in a few years. Uber wants to be in this space. It just seems like Tesla is more likely to become Mazda than Toyota and that the auto industry might be facing a large market-shrinking threat in self-driving cars. As such, it's hard (for me) to look at Tesla's market value and see the potential for a lot of appreciation over the long term. They're already worth more than most successful auto makers.
- yazr 8y ago
  Thanks for the useful comparison to existing valuation. One issue which I never see addressed is the established automaker liabilities (pensions & debt?)? Is it possible that once you take these into consideration the TSLA is (slightly) less unrealistic ?
- maxkwallace 8y ago
  I agree with most of your post, but here's where I disagree: Yes, new car consumption will likely decline in the USA and Europe, but in the coming decades, more folks in China and India (and elsewhere) will enter the middle class and start demanding car services. In addition, as the cost of car services falls (due to self-driving), the quantity demanded will increase. So I don't think the future market will be as small as you've projected. It might even increase.
  - dx034 8y ago
    China will want to manufacturer most of those cars themselves. India probably too but they're not as aggressive about it as China is. I doubt any of the large car manufacturers can make much more money in India/China than they're already making (unless via local subsidiaries).
- grecy 8y ago
  > It's possible that Tesla will become the next Toyota, but unlikely Keep in mind how broad Tesla's vehicle goals are. - World's fastest hypercar (by a VERY long margin) (new Roadster) - Heavy duty transport trucks (Semi) - luxury sedans (Model S) - affordable smaller sedans (Model 3) - luxury SUVs (Model X) - affordable smaller SUVs (Model Y) - possible pickup truck If they do well on most of those, I think they really do have the chance to become the next Toyota, maybe even bigger.
  - sveme 8y ago
    Which is still less than Volkswagen builds, just to put it in scope: - World's fastest hypercar (by a VERY long margin) (Bugatti Veyron) - Heavy duty transport trucks (MAN/Scania) - luxury sedans (Audi/Porsche) - affordable smaller sedans (Golf/Passat/Skoda/Seat...) - luxury SUVs (Porsche Cayenne/Audi Q7) - affordable smaller SUVs (T-Roc/Skoda/Seat) - possible pickup truck (Amarok)
adrianratnapala 8y ago
> Q3 is almost around the corner (I wasn't even expecting it to happen this year), Doesn't Q3 happen every year?
dharmon 8y ago
At around $1B negative cash flow a quarter, with a little over $3B in the bank, they _have_ to do this. I'm not a bond expert, but the debt markets seem tapped out for them, and another stock offering wouldn't look so good either (but is likely). The skeptics should be saying, "what a coincidence that they project to achieve profitability _just_ before they go bankrupt."
- Robotbeat 8y ago
  Tapping out capital is a "Musk equilibrium." If there's too much runway, he considers it inefficient use of available capital and invests that extra available capital in some new project. He operates close to the edge intentionally. It's a risky strategy that could easily blow up in his face, but it has also paid off very well in the past. If they somehow had a bunch of extra cash in the bank right now, you'd find Musk simultaneously pushing hard on, say, Model Y right now, too.
  - simonsarris 8y ago
    In other words, Elon Musk plays CEO like professional gamers play Starcraft. If you have resources, you should spend them. If you're flush with cash, you're losing.
    - adventured 8y ago
      Depending on how you want to view Musk's ambitions, he wants/needs to get Tesla big before the EV market is flooded with large scale competition and or he's looking to accelerate a switch to renewable energy and away from the murderous fossil fuel, gasoline burning nightmare we're currently living with. Regardless of what one believes about Musk, speed is critical here. Tesla needs to get very large if it's going to compete with GM, Ford, BMW, Mercedes, Toyota, etc. long term in EVs. They need a certain minimum scale to survive as a meaningful volume independent auto maker.
- dmode 8y ago
  I have no idea why people talk about Tesla going bankrupt. It will never happen in this liquid market. Even Uber raised $10bn from SoftBank. There is a ton of liquidity in the market and a lot of it is coming from middle East sovereign funds. It should be easy to do a stock sale with that kind of revenue and demand numbers.
gamblor956 8y ago
That would be amazing if they did achieve GAAP profitably, considering that GAAP earnings include stock-based compensation, non-operating expenses, and R&D expense. OTOH, GAAP because generally requires R&D to be expensed in the period incurred, Tesla may really be saying that R&D expenditures are expected to drop to near $0 in Q3 (R&D being their biggest non-operating expense). That should worry investors if that's really what's happening.
- empath75 8y ago
  I’m a Tesla skeptic but at this point they just need to put cars on the road. They can ramp up R&D later. They’re pretty far ahead of their competition right now so can afford a pause.
ucaetano 8y ago
"Tesla also expects to achieve full GAAP profitability in Q3" This is essentially saying "we don't expect to go insolvent". But no company would announce that they expect to go insolvent, so the statement is mostly meaningless.
- jacquesm 8y ago
  > But no company would announce that they expect to go insolvent, so the statement is mostly meaningless. Musk did just that. Which given this exact situation may come back to haunt him.
  - thesagan 8y ago
    Agreed. That he even said that at all really got my attention. Doesn't inspire confidence.

Jdam 8y ago

Does GAAP exclude one-time-effects? I can see them selling their grounds, offices and renting it again and the like.

mdasen 8y ago

I hope they do become profitable, but I'm skeptical they will. 1) Their losses are growing, not shrinking. From March 2017 to now, they lost $330M, $336M, $619M, $675M, and $785M. Maybe they hit a tipping point and there is an abrupt change, but it seems like the more natural trajectory would be for losses to become smaller and then turn into profits. 2) Tesla has said they'd be profitable before. https://www.reuters.com/article/us-tesla-results/tesla-expects-to-become-profitable-in-2016-shares-surge-idUSKCN0VJ2J6 https://www.reuters.com/article/us-tesla-results/tesla-expec... Tesla is a really cool company, but it's hard to see a future where they justify their share price. Let's say that Tesla becomes the next Toyota 15 years from now. Toyota is only worth $213B. So, the kinda max value for Tesla is around 4x their current price. So, under really rosy conditions, Tesla appreciates at 12% per year over the next 15 years. That's not bad, but the likelihood that Tesla is the next Toyota is very small. Let's say that Tesla is incredibly successful and becomes the next Volkswagen, Daimler, or BMW (the #2, 3, and 4 auto makers by market cap). They'd be a $106B, $85B, or $73B company. That doesn't leave much for price appreciation over their current $51B market cap. Maybe Tesla can make a company that's way more profitable per vehicle and sell so many vehicles. But that's a bit of a moon-shot. It seems more likely that Tesla will become a company like Subaru ($26B), Mazda ($8B), Nissan ($43B), Ford ($44B), Hyundai Motor ($40B), Fiat Chrysler ($34B), Renault ($32B), PSA Peugeot Citroën ($22B), Suzuki Motor ($26B), GM ($51B), or Honda ($60B). Those are all very successful auto companies. If Tesla becomes the next Mazda 15 years from now, that will be incredibly bad for investors. Basically, if Tesla doesn't become the next Toyota, it seems hard to believe Tesla won't underperform the market by a lot. It's possible that Tesla will become the next Toyota, but unlikely. Comparing Tesla's market cap with that of most auto manufacturers makes you realize that investing in Tesla isn't just betting that Tesla will become a great volume car company like Mazda. They have to become the car company. When investing, it's also important to note that money later is less valuable than money now and account for risk. Tesla is being priced like it's making $6B/year today and it's future is certain. Beyond that, is the automotive industry long for this world? People are re-urbanizing and city traffic is only getting worse. Self-driving vehicles will mean that being driven unlimited places might fall to $50-100/mo which is significantly less than the $400+/mo of car payments, insurance, gas, parking, maintenance, etc. Why should I spend $631/mo for a $35,000 car plus insurance, gas, parking, maintenance when I can just get driven around for a fraction of that cost? Today, Uber's help is more limited since the human driver costs a lot of money per mile. If that future comes to pass, there will be a lot fewer cars manufactured and bought which limits Tesla's value. If an autonomous car is serving 25 people a day, that's a lot fewer vehicles that need to be bought. World vehicle production is around 90M/year and Toyota and Volkswagen are 10M of that each. If the demand for vehicles falls to 4% of its current demand, that's only 3.6M vehicles per year. Even if Tesla makes 100% of those vehicles, they don't come close to being the next Toyota or Volkswagen. Even if an autonomous vehicle only serves 10 people a day, that cuts the vehicle market down to 9M. Even if an autonomous vehicle can only serve 4 people a day, that cuts the market to 22.5M. The future market for vehicles might be pretty small compared to the current one and so even if Tesla hits a Toyota or Volkswagen-like 10% of the market, it might not be a large market. And self-driving services are likely to have stiff price competition. Unlike an Uber competitor that has the network effects of having drivers already signed up, it's relatively cheap to blanket a city with self-driving vehicles. $20,000/mo isn't a huge run rate to to buy 50 vehicles at $400/mo and that will let you place a vehicle within a short distance of everyone in a city like San Francisco (47 square miles). You could position them so that they're usually less than half a mile away to pick you up. $20,000/mo isn't a huge run rate to get your service started and you can buy more vehicles as you get riders. So, even if you think that Tesla might be that self-driving network and will make profits that way, I think it's more likely that the space will have a lot of competition that will push margins down. Waymo and GM/Cruze are well on their way. Nissan and Toyota are expecting to enter the game in a few years. Uber wants to be in this space. It just seems like Tesla is more likely to become Mazda than Toyota and that the auto industry might be facing a large market-shrinking threat in self-driving cars. As such, it's hard (for me) to look at Tesla's market value and see the potential for a lot of appreciation over the long term. They're already worth more than most successful auto makers.

yazr 8y ago
Thanks for the useful comparison to existing valuation. One issue which I never see addressed is the established automaker liabilities (pensions & debt?)? Is it possible that once you take these into consideration the TSLA is (slightly) less unrealistic ?
maxkwallace 8y ago
I agree with most of your post, but here's where I disagree: Yes, new car consumption will likely decline in the USA and Europe, but in the coming decades, more folks in China and India (and elsewhere) will enter the middle class and start demanding car services. In addition, as the cost of car services falls (due to self-driving), the quantity demanded will increase. So I don't think the future market will be as small as you've projected. It might even increase.
- dx034 8y ago
  China will want to manufacturer most of those cars themselves. India probably too but they're not as aggressive about it as China is. I doubt any of the large car manufacturers can make much more money in India/China than they're already making (unless via local subsidiaries).
grecy 8y ago
> It's possible that Tesla will become the next Toyota, but unlikely Keep in mind how broad Tesla's vehicle goals are. - World's fastest hypercar (by a VERY long margin) (new Roadster) - Heavy duty transport trucks (Semi) - luxury sedans (Model S) - affordable smaller sedans (Model 3) - luxury SUVs (Model X) - affordable smaller SUVs (Model Y) - possible pickup truck If they do well on most of those, I think they really do have the chance to become the next Toyota, maybe even bigger.
- sveme 8y ago
  Which is still less than Volkswagen builds, just to put it in scope: - World's fastest hypercar (by a VERY long margin) (Bugatti Veyron) - Heavy duty transport trucks (MAN/Scania) - luxury sedans (Audi/Porsche) - affordable smaller sedans (Golf/Passat/Skoda/Seat...) - luxury SUVs (Porsche Cayenne/Audi Q7) - affordable smaller SUVs (T-Roc/Skoda/Seat) - possible pickup truck (Amarok)

adrianratnapala 8y ago

> Q3 is almost around the corner (I wasn't even expecting it to happen this year), Doesn't Q3 happen every year?

dharmon 8y ago

At around $1B negative cash flow a quarter, with a little over $3B in the bank, they _have_ to do this. I'm not a bond expert, but the debt markets seem tapped out for them, and another stock offering wouldn't look so good either (but is likely). The skeptics should be saying, "what a coincidence that they project to achieve profitability _just_ before they go bankrupt."

Robotbeat 8y ago
Tapping out capital is a "Musk equilibrium." If there's too much runway, he considers it inefficient use of available capital and invests that extra available capital in some new project. He operates close to the edge intentionally. It's a risky strategy that could easily blow up in his face, but it has also paid off very well in the past. If they somehow had a bunch of extra cash in the bank right now, you'd find Musk simultaneously pushing hard on, say, Model Y right now, too.
- simonsarris 8y ago
  In other words, Elon Musk plays CEO like professional gamers play Starcraft. If you have resources, you should spend them. If you're flush with cash, you're losing.
  - adventured 8y ago
    Depending on how you want to view Musk's ambitions, he wants/needs to get Tesla big before the EV market is flooded with large scale competition and or he's looking to accelerate a switch to renewable energy and away from the murderous fossil fuel, gasoline burning nightmare we're currently living with. Regardless of what one believes about Musk, speed is critical here. Tesla needs to get very large if it's going to compete with GM, Ford, BMW, Mercedes, Toyota, etc. long term in EVs. They need a certain minimum scale to survive as a meaningful volume independent auto maker.
dmode 8y ago
I have no idea why people talk about Tesla going bankrupt. It will never happen in this liquid market. Even Uber raised $10bn from SoftBank. There is a ton of liquidity in the market and a lot of it is coming from middle East sovereign funds. It should be easy to do a stock sale with that kind of revenue and demand numbers.

gamblor956 8y ago

That would be amazing if they did achieve GAAP profitably, considering that GAAP earnings include stock-based compensation, non-operating expenses, and R&D expense. OTOH, GAAP because generally requires R&D to be expensed in the period incurred, Tesla may really be saying that R&D expenditures are expected to drop to near $0 in Q3 (R&D being their biggest non-operating expense). That should worry investors if that's really what's happening.

empath75 8y ago
I’m a Tesla skeptic but at this point they just need to put cars on the road. They can ramp up R&D later. They’re pretty far ahead of their competition right now so can afford a pause.

ucaetano 8y ago

"Tesla also expects to achieve full GAAP profitability in Q3" This is essentially saying "we don't expect to go insolvent". But no company would announce that they expect to go insolvent, so the statement is mostly meaningless.

jacquesm 8y ago
> But no company would announce that they expect to go insolvent, so the statement is mostly meaningless. Musk did just that. Which given this exact situation may come back to haunt him.
- thesagan 8y ago
  Agreed. That he even said that at all really got my attention. Doesn't inspire confidence.