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On Tesla's viability, stock price and debt, I think there can't be better quote than this: Tesla’s current price is arguably fair if most cars are powered by e

On Tesla's viability, stock price and debt, I think there can't be better quote than this: Tesla’s current price is arguably fair if most cars are powered by electricity in 10 years, if most of these cars are made by Tesla, if Tesla can make those cars with sufficient margin and quality control and can service the cars properly, and if Tesla can raise additional capital sufficient to cover a $3 billion annual cash drain and another billion to service its debt. https://www.researchaffiliates.com/en_us/publications/articles/668-yes-its-a-bubble-so-what.html https://www.researchaffiliates.com/en_us/publications/articl...

Analemma_ 8y ago
I like this quote, because it seems to be something that TSLA bulls and bears can mostly agree on and thus gets to the heart of the actual empirical disagreements between them. For my part, I'm a Tesla skeptic because my evaluations on the likelihood of those clauses are: > "most cars are powered by electricity in 10 years" Unlikely. The average age of a car on the road is about 11.5 years (source: http://news.ihsmarkit.com/press-release/automotive/average-age-vehicles-road-remains-steady-114-years-according-ihs-automotive http://news.ihsmarkit.com/press-release/automotive/average-a...), so even if electric vehicle sales went to 100% tomorrow (and they won't), this wouldn't be true. It's possible fuel prices will skyrocket in the meantime and get people to scrap their ICEs, but with fracking and other deep extraction, I wouldn't bet on it. > "most of these cars are made by Tesla" Unlikely. Even if Tesla becomes a healthy and established carmarker, I can't imagine a situation where they are the only one selling electric cars in the late 2020's. Everyone else is getting their electric cars onto the road, and outside the HN bubble, most people are not so enamored with Tesla that they would refuse to even consider buying something else. > "if Tesla can make those cars with sufficient margin and quality control" Possible, but I think it's unlikely. Despite year after year of promises by Musk, Tesla still struggles with both margins and quality control, and I haven't seen any evidence that it's getting better (and there's every reason to believe it will get worse as they seem a bit desperate to scale up production) > " if Tesla can raise additional capital sufficient to cover a $3 billion annual cash drain and another billion to service its debt." I don't know enough about financial markets to make a solid guess here, but this seems iffy to me in light of all the other givens about Tesla, especially if markets tighten in the next few years (up until now, Tesla has had the good fortune to need cash-raising in an era of low interest rates, cheap money and bull markets. That may not be the case the next time they need capital) Hence, I'm a bear. I don't necessarily think Tesla will go out of business, but I think their current valuation is absurd.
- deleted 8y ago
  [deleted]
- simo7 8y ago
  > ...thus gets to the heart of the actual empirical disagreements between them. I'm not sure the disagreement (between bears and bulls) is necessarily to be found in a different outlook on the future. One can conclude all those conditions are likely to be met in the future and yet be bearish on the stock. I'm overall optimistic on Tesla as a business, yet it seems my optimism is already fully factored in...no real upside, which is surprising given the risks.
- durkie 8y ago
  >> "most cars are powered by electricity in 10 years" > Unlikely. The average age of a car on the road is about 11.5 years (source: http://news.ihsmarkit.com/press-release/automotive/average-a... http://news.ihsmarkit.com/press-release/automotive/average-a...), so even if electric vehicle sales went to 100% tomorrow (and they won't), this wouldn't be true. It's possible fuel prices will skyrocket in the meantime and get people to scrap their ICEs, but with fracking and other deep extraction, I wouldn't bet on it. I think this is extremely likely, but let's clarify: it might not be that most existing cars in 10 years will be powered by electricity, but I feel strongly that EVs will dominate new car sales. As a caveat, your 11.5 year number refers only to US cars. Oil price fluctuations are basically irrelevant at this point: EV battery pack prices are only decreasing, ranges are only increasing. Aside from that, EVs win on cost of ownership (maintenance, electricity costs), noise, and power. >> "if Tesla can make those cars with sufficient margin and quality control" >Possible, but I think it's unlikely. Despite year after year of promises by Musk, Tesla still struggles with both margins quality control, and I haven't seen any evidence that it's getting better (and there's every reason to believe it will get worse as they seem a bit desperate to scale up production) Tesla's margins from Models S and X are healthy (mid 20%s). Their spending is almost entirely from capex -- which would be expected from scaling up a battery plant and new model line. Operating costs Q12018 were 1.05B (model 3 at 2k/week), operating costs Q12017 were 925M (model 3 not in production). "Every reason to believe that [quality control] will get worse as they seem a bit desperate to scale up production" doesn't make sense?
- 8y ago
clomond 8y ago
Let me be devils advocate here for a second... Let's first assume that Tesla succeeds in their production volumes and positive gross margins in the next few quarters, and is able to solidify and stabilize their financial situation this year. What this article misses is the scope of upside that is what I believe the Tesla bulls are seeing (Disclaimer: I am a Tesla bull). In looking at the next 10 years I see: - Batteries being the primary constraint in progress in volumes of electric cars for automakers (which positions Tesla and vertically integrated companies like BYD well, but traditional automakers without a tight grip on battery production at this point not as much). - By looking at Tesla instead as a battery company, you can see how the vertical integration and scale (with the addition of plans for additional gigafactories in China and Europe) can be a unique competitive advantage against other auto companies. The more expertise Tesla gains by making better, cheaper batteries, the better. - The article you linked and many Tesla bears do not consider the opportunity with trucks, and different segments in the within logistics / transportation market (Tesla could release different truck sizes and modes). Again, we are looking 10 years out, right? - Tesla Energy, which is about grid storage (hint: requires batteries here too) will become a significantly larger market as certain grids around the world increase their share of intermittent energy sources. Grid scale battery systems are already becoming competitive alternatives to natural gas peaker plants. - And don't forget about SolarCity. They could do a lot with SolarCity, and make progress in various segments within rooftop solar, as costs of solar cells continue to decrease in the next decade. Not saying that Tesla is not without immense risk and that they do not have a very challenging few quarters ahead of them - but saying the upper bound of their upside is related to capturing the entire automobile market is not fully putting into account their long term plan and strategy.
- maxerickson 8y ago
  But why do you expect batteries to be anything other than a boring commodity business? Boring commodity businesses are a fine place to make money, but they aren't so likely to go to the moon.
  - deleted 8y ago
    [deleted]
twblalock 8y ago
I like Tesla and I want it to succeed, but I don't see how it can possibly be justifiable for Tesla to have a market cap anywhere near that of Ford and GM. They manufacture and sell several million cars a year and could easily start cranking out electric cars if the consumer demand is there. I'm sure they'll be grateful to Elon for creating consumer demand for electric cars, but they, not Tesla, will be the ones who sell millions of them.
- ericb 8y ago
  I think your prediction ignores the historical trend of incumbents ignoring incoming paradigm shifts to their peril.
  - twblalock 8y ago
    In this case the incumbents are investing heavily in electric cars and various forms of autonomous driving.
    - ericb 8y ago
      In terms of the electrification, in each case I keep seeing that the dealers are using it to check a box, but sales will push you away from them. They mostly seem to look like compliance cars. If you're seeing differently, I'm interested in links.
      - twblalock 8y ago
        Most compliance cars are made by taking an existing model and shoving an electric motor under the hood and a battery in the trunk, e.g. the Fiat 500e, or those electric Toyota RAV4s that are owned by pretty much every public university's maintenance department in California. They generally have poor range and very attractive monthly lease payments. The Chevy Bolt was designed from the ground up to be an electric car. It competes favorably with the Tesla Model 3 in most areas (except styling...) and you can go buy one today instead of joining a waiting list. The Honda Clarity and Nissan Leaf are other examples of cars specifically designed to be electric.
martythemaniak 8y ago
I don't think you'll find a financially literate person who'll agree with the statement "Tesla's current $50B market cap in 2018 is fair given their current financial situation". Of course it doesn't make sense, nobody, neither Musk, bulls or bears believe that statement. Tesla's current price has high expectations built into the price, so the game is that Musk and the bulls have to demonstrate that they're meeting those expectations, while the bears have to portray everything as a failure. Unlike normal companies though, there are A LOT of bears and they have a shit-ton of money riding on Tesla stumbling and they will go to absurd, surreal lengths. I mean, in what reality is "Mid-level Executive Takes Vacation" a major news story?![1] And no, there can in fact be a far better quote, because it doesn't even begin to describe the upside of Tesla, even though they have plainly stated their intentions to pursue those upsides. They're merely comparing them to Ford (same market cap), but Ford does not: - Intend to take on Uber - Intend to compete on price with rail cargo shipping - Intend to make and sell batteries. [1] https://www.wsj.com/articles/teslas-engineering-chief-takes-leave-of-absence-at-pivotal-moment-1526082594 https://www.wsj.com/articles/teslas-engineering-chief-takes-...
- davrosthedalek 8y ago
  How does "taking on Uber", which currently has problems by its own and is not profitable either, help?
  - martythemaniak 8y ago
    Well, Uber is worth something, or rather, "Ride Sharing Company" is worth something. We don't have to agree (or discuss) what that number is, as long as we agree that it's not trivial (say, in the 10s of billions). If Tesla executes on its plan and are successful, they will have some percentage of that business and their market cap will then become justified on financials, rather than expectations as it is today. So yeah, they have stated their intentions simply and plainly. If they succeed, they're price will be justified and could grow. Which side of the story you choose to believe is up to you, but that's true of any growing company.
    - 8y ago
nkoren 8y ago
That quote actually seems quite unfair to me. If "most" cars are to be electric in 10 years, and "most" of those are to be made by Tesla, then Tesla would have captured more than a quarter of the world's auto sales, and thus should be worth 25% as much as the entire auto industry. Less some appropriate discount rate, but plus the value of any suppliers that Tesla's greater degree of vertical integration has taken out of their supply chain, and plus the value of any non-automotive profits they make (grid storage etc.). If one truly believes that Tesla will capture 1/4 of the world's automotive market as well as find success in non-automotive applications, then the current stock price is woefully undervalued. To merely believe that their current price is justified requires much less bullishness than that.
- pwinnski 8y ago
  I think the point is that the chance of all of those IF conditionals being true is close to nil, which means that Tesla is currently over-valued.
  - nkoren 8y ago
    No, it says that for the present valuation to be fair, then all those conditions must be true. But if all those conditions were true, then Tesla would control at least a quarter of the global automotive market, and its valuation would be considerably higher. Obviously not all of those conditions will be true, however -- only the craziest Tesla bulls would argue that. Conversely, if none of them are true, then Tesla is definitely over-valued. But I think you'd have to be a pretty crazy Tesla bear to make that argument. Finally, if those conditionals are a mix of true and false... well, that doesn't really doesn't tell you much about Tesla's fair market value, which is why I don't think this is a particularly useful analysis.

Analemma_ 8y ago

I like this quote, because it seems to be something that TSLA bulls and bears can mostly agree on and thus gets to the heart of the actual empirical disagreements between them. For my part, I'm a Tesla skeptic because my evaluations on the likelihood of those clauses are: > "most cars are powered by electricity in 10 years" Unlikely. The average age of a car on the road is about 11.5 years (source: http://news.ihsmarkit.com/press-release/automotive/average-age-vehicles-road-remains-steady-114-years-according-ihs-automotive http://news.ihsmarkit.com/press-release/automotive/average-a...), so even if electric vehicle sales went to 100% tomorrow (and they won't), this wouldn't be true. It's possible fuel prices will skyrocket in the meantime and get people to scrap their ICEs, but with fracking and other deep extraction, I wouldn't bet on it. > "most of these cars are made by Tesla" Unlikely. Even if Tesla becomes a healthy and established carmarker, I can't imagine a situation where they are the only one selling electric cars in the late 2020's. Everyone else is getting their electric cars onto the road, and outside the HN bubble, most people are not so enamored with Tesla that they would refuse to even consider buying something else. > "if Tesla can make those cars with sufficient margin and quality control" Possible, but I think it's unlikely. Despite year after year of promises by Musk, Tesla still struggles with both margins and quality control, and I haven't seen any evidence that it's getting better (and there's every reason to believe it will get worse as they seem a bit desperate to scale up production) > " if Tesla can raise additional capital sufficient to cover a $3 billion annual cash drain and another billion to service its debt." I don't know enough about financial markets to make a solid guess here, but this seems iffy to me in light of all the other givens about Tesla, especially if markets tighten in the next few years (up until now, Tesla has had the good fortune to need cash-raising in an era of low interest rates, cheap money and bull markets. That may not be the case the next time they need capital) Hence, I'm a bear. I don't necessarily think Tesla will go out of business, but I think their current valuation is absurd.

deleted 8y ago
[deleted]
simo7 8y ago
> ...thus gets to the heart of the actual empirical disagreements between them. I'm not sure the disagreement (between bears and bulls) is necessarily to be found in a different outlook on the future. One can conclude all those conditions are likely to be met in the future and yet be bearish on the stock. I'm overall optimistic on Tesla as a business, yet it seems my optimism is already fully factored in...no real upside, which is surprising given the risks.
durkie 8y ago
>> "most cars are powered by electricity in 10 years" > Unlikely. The average age of a car on the road is about 11.5 years (source: http://news.ihsmarkit.com/press-release/automotive/average-a... http://news.ihsmarkit.com/press-release/automotive/average-a...), so even if electric vehicle sales went to 100% tomorrow (and they won't), this wouldn't be true. It's possible fuel prices will skyrocket in the meantime and get people to scrap their ICEs, but with fracking and other deep extraction, I wouldn't bet on it. I think this is extremely likely, but let's clarify: it might not be that most existing cars in 10 years will be powered by electricity, but I feel strongly that EVs will dominate new car sales. As a caveat, your 11.5 year number refers only to US cars. Oil price fluctuations are basically irrelevant at this point: EV battery pack prices are only decreasing, ranges are only increasing. Aside from that, EVs win on cost of ownership (maintenance, electricity costs), noise, and power. >> "if Tesla can make those cars with sufficient margin and quality control" >Possible, but I think it's unlikely. Despite year after year of promises by Musk, Tesla still struggles with both margins quality control, and I haven't seen any evidence that it's getting better (and there's every reason to believe it will get worse as they seem a bit desperate to scale up production) Tesla's margins from Models S and X are healthy (mid 20%s). Their spending is almost entirely from capex -- which would be expected from scaling up a battery plant and new model line. Operating costs Q12018 were 1.05B (model 3 at 2k/week), operating costs Q12017 were 925M (model 3 not in production). "Every reason to believe that [quality control] will get worse as they seem a bit desperate to scale up production" doesn't make sense?
8y ago

clomond 8y ago

Let me be devils advocate here for a second... Let's first assume that Tesla succeeds in their production volumes and positive gross margins in the next few quarters, and is able to solidify and stabilize their financial situation this year. What this article misses is the scope of upside that is what I believe the Tesla bulls are seeing (Disclaimer: I am a Tesla bull). In looking at the next 10 years I see: - Batteries being the primary constraint in progress in volumes of electric cars for automakers (which positions Tesla and vertically integrated companies like BYD well, but traditional automakers without a tight grip on battery production at this point not as much). - By looking at Tesla instead as a battery company, you can see how the vertical integration and scale (with the addition of plans for additional gigafactories in China and Europe) can be a unique competitive advantage against other auto companies. The more expertise Tesla gains by making better, cheaper batteries, the better. - The article you linked and many Tesla bears do not consider the opportunity with trucks, and different segments in the within logistics / transportation market (Tesla could release different truck sizes and modes). Again, we are looking 10 years out, right? - Tesla Energy, which is about grid storage (hint: requires batteries here too) will become a significantly larger market as certain grids around the world increase their share of intermittent energy sources. Grid scale battery systems are already becoming competitive alternatives to natural gas peaker plants. - And don't forget about SolarCity. They could do a lot with SolarCity, and make progress in various segments within rooftop solar, as costs of solar cells continue to decrease in the next decade. Not saying that Tesla is not without immense risk and that they do not have a very challenging few quarters ahead of them - but saying the upper bound of their upside is related to capturing the entire automobile market is not fully putting into account their long term plan and strategy.

maxerickson 8y ago
But why do you expect batteries to be anything other than a boring commodity business? Boring commodity businesses are a fine place to make money, but they aren't so likely to go to the moon.
- deleted 8y ago
  [deleted]

twblalock 8y ago

I like Tesla and I want it to succeed, but I don't see how it can possibly be justifiable for Tesla to have a market cap anywhere near that of Ford and GM. They manufacture and sell several million cars a year and could easily start cranking out electric cars if the consumer demand is there. I'm sure they'll be grateful to Elon for creating consumer demand for electric cars, but they, not Tesla, will be the ones who sell millions of them.

ericb 8y ago
I think your prediction ignores the historical trend of incumbents ignoring incoming paradigm shifts to their peril.
- twblalock 8y ago
  In this case the incumbents are investing heavily in electric cars and various forms of autonomous driving.
  - ericb 8y ago
    In terms of the electrification, in each case I keep seeing that the dealers are using it to check a box, but sales will push you away from them. They mostly seem to look like compliance cars. If you're seeing differently, I'm interested in links.
    - twblalock 8y ago
      Most compliance cars are made by taking an existing model and shoving an electric motor under the hood and a battery in the trunk, e.g. the Fiat 500e, or those electric Toyota RAV4s that are owned by pretty much every public university's maintenance department in California. They generally have poor range and very attractive monthly lease payments. The Chevy Bolt was designed from the ground up to be an electric car. It competes favorably with the Tesla Model 3 in most areas (except styling...) and you can go buy one today instead of joining a waiting list. The Honda Clarity and Nissan Leaf are other examples of cars specifically designed to be electric.

martythemaniak 8y ago

I don't think you'll find a financially literate person who'll agree with the statement "Tesla's current $50B market cap in 2018 is fair given their current financial situation". Of course it doesn't make sense, nobody, neither Musk, bulls or bears believe that statement. Tesla's current price has high expectations built into the price, so the game is that Musk and the bulls have to demonstrate that they're meeting those expectations, while the bears have to portray everything as a failure. Unlike normal companies though, there are A LOT of bears and they have a shit-ton of money riding on Tesla stumbling and they will go to absurd, surreal lengths. I mean, in what reality is "Mid-level Executive Takes Vacation" a major news story?![1] And no, there can in fact be a far better quote, because it doesn't even begin to describe the upside of Tesla, even though they have plainly stated their intentions to pursue those upsides. They're merely comparing them to Ford (same market cap), but Ford does not: - Intend to take on Uber - Intend to compete on price with rail cargo shipping - Intend to make and sell batteries. [1] https://www.wsj.com/articles/teslas-engineering-chief-takes-leave-of-absence-at-pivotal-moment-1526082594 https://www.wsj.com/articles/teslas-engineering-chief-takes-...

davrosthedalek 8y ago
How does "taking on Uber", which currently has problems by its own and is not profitable either, help?
- martythemaniak 8y ago
  Well, Uber is worth something, or rather, "Ride Sharing Company" is worth something. We don't have to agree (or discuss) what that number is, as long as we agree that it's not trivial (say, in the 10s of billions). If Tesla executes on its plan and are successful, they will have some percentage of that business and their market cap will then become justified on financials, rather than expectations as it is today. So yeah, they have stated their intentions simply and plainly. If they succeed, they're price will be justified and could grow. Which side of the story you choose to believe is up to you, but that's true of any growing company.
  - 8y ago

nkoren 8y ago

That quote actually seems quite unfair to me. If "most" cars are to be electric in 10 years, and "most" of those are to be made by Tesla, then Tesla would have captured more than a quarter of the world's auto sales, and thus should be worth 25% as much as the entire auto industry. Less some appropriate discount rate, but plus the value of any suppliers that Tesla's greater degree of vertical integration has taken out of their supply chain, and plus the value of any non-automotive profits they make (grid storage etc.). If one truly believes that Tesla will capture 1/4 of the world's automotive market as well as find success in non-automotive applications, then the current stock price is woefully undervalued. To merely believe that their current price is justified requires much less bullishness than that.

pwinnski 8y ago
I think the point is that the chance of all of those IF conditionals being true is close to nil, which means that Tesla is currently over-valued.
- nkoren 8y ago
  No, it says that for the present valuation to be fair, then all those conditions must be true. But if all those conditions were true, then Tesla would control at least a quarter of the global automotive market, and its valuation would be considerably higher. Obviously not all of those conditions will be true, however -- only the craziest Tesla bulls would argue that. Conversely, if none of them are true, then Tesla is definitely over-valued. But I think you'd have to be a pretty crazy Tesla bear to make that argument. Finally, if those conditionals are a mix of true and false... well, that doesn't really doesn't tell you much about Tesla's fair market value, which is why I don't think this is a particularly useful analysis.