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I am not so sure Tesla is overvalued. Oil prices are not going to be this low forever, and I expect a massive increase in demand for electric vehicles once gas

I am not so sure Tesla is overvalued. Oil prices are not going to be this low forever, and I expect a massive increase in demand for electric vehicles once gas goes above $4/gallon again. Plus, millennials seem to greatly prefer the Tesla buying experience over traditional dealerships.

wegs2 6y ago
My hypothesis is different. Margins. GM, Ford, Honda, Toyota, etc. are competing with a commodity product in a commodity market. There's no big difference between a Toyota Yaris, a Honda Fit, a Kia Rio, a Ford Fiesta, and similar cars from every other brand. They're all within a few hundred bucks of $15k. They all cost do the same thing, cost the same to produce, and I imagine the margins are razor-thin. If any of the brand could lower prices by $500, they'd own the market. Tesla sells a unique product, with unique technologies. If Tesla has 5% of the market, but 10x the margins of its competitors, which doesn't seem an unlikely outcome: 1) Its profits will be roughly 1/3 of the total profits of the whole market 2) It will be much more stable. Razor-thin margins mean companies go bankrupt with even minor instability. If Ford's costs rise by 5%, it's dead. If Tesla's costs go up 5%, it's a almost a rounding error. I think the key question is whether Tesla can execute, but right now, things look promising, although far from certain.
- DrJokepu 6y ago
  That’s not really how it is though, these are very different companies with very different products. For example, Ford makes its money on trucks. An F-150 has very healthy profit margins. It’s believed that Ford’s truck business is in fact worth more than Ford as a whole [1]. The Fiesta hasn’t been sold in the US since 2019. [1] https://www.cnbc.com/2018/03/14/fords-f-150-truck-franchise-alone-is-worth-more-than-the-whole-company-morgan-stanley.html https://www.cnbc.com/2018/03/14/fords-f-150-truck-franchise-...
  - stickfigure 6y ago
    That is likely due to the Chicken Tax: https://en.wikipedia.org/wiki/Chicken_tax https://en.wikipedia.org/wiki/Chicken_tax With a little sanity, luck, and changing political winds, it could disappear in an instant.
  - colinmhayes 6y ago
    Ford's truck business is so important they recategorized every single car they sell as a truck in order to utilize a fuel efficiency regulatory loophole that lets them sell more pickups. https://www.reddit.com/r/badeconomics/comments/ep4wza/corporate_average_fuel_economy_cafe_is_bad_policy/ https://www.reddit.com/r/badeconomics/comments/ep4wza/corpor...
- 55555 6y ago
  Makes sense. They could be the Apple of cars.
- marticode 6y ago
  Tesla has about 26% of the world's EV market share so their products aren't that unique. Making an EV isn't that hard - it's in fact a simpler product than an ICE vehicle.
  - wegs2 6y ago
    Making an EV is easy. I can buy a Power Wheels EV for $400. Making a good EV is hard. The set of technologies required is still unknown -- bear with me for a little bit. In the early days of the PC; anyone competent could make a perfectly competitive computer in their own garage in a few months, buying chips, etching PCBs, and coding up a basic operating system. Wozniak did that, as did a few others. It seemed like it'd be simple forever, but it wasn't. Today, the tech tree to make something like a MacBook is long, wide, and extensive. There's a massive engineering team for the mechanical design alone, let alone the OS or the CPU. I can still make a computer, but it won't be competitive. Same thing happened with airplanes; shortly after the Wright Brothers, all sorts of amateurs made basic planes on their farms. It's still possible to do that, but you won't be competitive with an Airbus jetliner. Early radios were a few vacuum tubes. Compare that to making a modern cell phone. Part of the reason ICE vehicles are complex are the same process. The first mass-produced ICE vehicle, the Benz Patent-Motorwagen, was pretty simple. It cost under $5000 in today's dollars ($150 at the time), and looked like a glorified tricycle with an engine. If you throw engineers at tech, it goes up in sophistication. People figure out how to do things better. Anyone can make an EV. I'm confident, though, that we'll see the same progression as we did in every other fields. If Tesla has enough of a head start making things cheaper and better -- and they seem to -- it's unlikely the established players will be able to compete.
- 0xy 6y ago
  GM has higher operating margin than Tesla by a substantial number, and is expanding into electric cars.
  - wegs2 6y ago
    The question isn't about current margin; the question is about long-term margin. Running at a loss to build out market share, technology, branding and economies-of-scale is a standard startup strategy. Tesla is still in that stage. The key question is whether things like the Gigafactory provide Tesla with unique economics and competitive advantage. If they do, Tesla will be able to have lower costs or more expensive products than GM. If not, it's overvalued.
    - 0xy 6y ago
      GM has more manufacturing prowess. Higher scale, over double the margins, more automation experience etc. That's just GM. Ford and others are the same. The Ford F truck line is practically a money printing operation. A fancy UI on a screen is not a defensible moat, not when you suck at manufacturing (QA is still bush league).
bryanlarsen 6y ago
> Oil prices are not going to be this low forever Yes they will. I'd bet that the price of oil is not going to go above $80 or so in the next twenty years. Two major reasons, and a bunch of minor ones. 1: massive quantities of non-OPEC oil are available in shale and tar sands. Right now these are only barely profitable, but if the price of oil increases production there will increase, stabilizing prices. 2: renewable energy is now just barely cheaper than other forms of energy, but they're projected to drop dramatically over the next years, radically transforming the energy market. Some uses of hydrocarbon cannot be easily replaced by renewable electricity but most can. When a cheaper substitute is available, demand and price drop. The only way the consumer price of oil is going to go up over the next few years is if governments come their senses and put in place a carbon tax or equivalent. (And that's reason #3 -- the environmental movement will demand that the world use fewer hydrocarbons, forcing less demand, forcing prices before the carbon tax to go down.)
- flukus 6y ago
  > Some uses of hydrocarbon cannot be easily replaced by renewable electricity but most can. When a cheaper substitute is available, demand and price drop. Assuming they can maintain that level of supply as demand drops. Some the economies of scale they operate with will be lost as demand slows and then the logistics that requires large and ongoing investment may slow considerably, although much of the latter is probably outside the 20 year horizon. It could play out very differently on the consumer side though. If electric vehicles became 50% (or some arbitrary significant percentage) of the market then a lot of local gas stations will close, the ones that remain may have to start charging higher prices (again losing the logistics and scale advantages of today). There may be some tipping point where the whole retail side of the industry finds itself in a death spiral where gas stations are charging more and in less locations, making oil powered cars less convenient and driving more people to electric vehicles.
  - selimthegrim 6y ago
    Do you actually think gas stations make most profit off of gas? (The Shell down the street from me takes a cut of the drug deals in its parking lot but hardly the usual case...)
throwaway201103 6y ago
> Plus, millennials seem to greatly prefer the Tesla buying experience over traditional dealerships. You can get this at any dealer, just pay sticker price. They'll love you.
- Zanni 6y ago
  You really can't. Even then you're going to have to endure all the after-market sales pitches: financing, floor mats, weatherproofing, etc. The last non-Tesla car I bought took me hours to complete after finalizing the price. Infuriating. If anything, the buying superior buying experience is being underestimated.
aphextron 6y ago
> Oil prices are not going to be this low forever, and I expect a massive increase in demand for electric vehicles once gas goes above $4/gallon again. This really has nothing to do with it. An optioned out Model X costs as much as a house. The type of person who can afford that couldn't care less if gasoline were $10/gallon. It's a status symbol, on top of just being a great car. It wont be until they are competing in the sub $30k market that an EV purchase will ever be driven by economics.
colinmhayes 6y ago
Every car company has electric cars now. Unless Tesla gets self driving they will not be able to keep margins high.

wegs2 6y ago

My hypothesis is different. Margins. GM, Ford, Honda, Toyota, etc. are competing with a commodity product in a commodity market. There's no big difference between a Toyota Yaris, a Honda Fit, a Kia Rio, a Ford Fiesta, and similar cars from every other brand. They're all within a few hundred bucks of $15k. They all cost do the same thing, cost the same to produce, and I imagine the margins are razor-thin. If any of the brand could lower prices by $500, they'd own the market. Tesla sells a unique product, with unique technologies. If Tesla has 5% of the market, but 10x the margins of its competitors, which doesn't seem an unlikely outcome: 1) Its profits will be roughly 1/3 of the total profits of the whole market 2) It will be much more stable. Razor-thin margins mean companies go bankrupt with even minor instability. If Ford's costs rise by 5%, it's dead. If Tesla's costs go up 5%, it's a almost a rounding error. I think the key question is whether Tesla can execute, but right now, things look promising, although far from certain.

DrJokepu 6y ago
That’s not really how it is though, these are very different companies with very different products. For example, Ford makes its money on trucks. An F-150 has very healthy profit margins. It’s believed that Ford’s truck business is in fact worth more than Ford as a whole [1]. The Fiesta hasn’t been sold in the US since 2019. [1] https://www.cnbc.com/2018/03/14/fords-f-150-truck-franchise-alone-is-worth-more-than-the-whole-company-morgan-stanley.html https://www.cnbc.com/2018/03/14/fords-f-150-truck-franchise-...
- stickfigure 6y ago
  That is likely due to the Chicken Tax: https://en.wikipedia.org/wiki/Chicken_tax https://en.wikipedia.org/wiki/Chicken_tax With a little sanity, luck, and changing political winds, it could disappear in an instant.
- colinmhayes 6y ago
  Ford's truck business is so important they recategorized every single car they sell as a truck in order to utilize a fuel efficiency regulatory loophole that lets them sell more pickups. https://www.reddit.com/r/badeconomics/comments/ep4wza/corporate_average_fuel_economy_cafe_is_bad_policy/ https://www.reddit.com/r/badeconomics/comments/ep4wza/corpor...
55555 6y ago
Makes sense. They could be the Apple of cars.
marticode 6y ago
Tesla has about 26% of the world's EV market share so their products aren't that unique. Making an EV isn't that hard - it's in fact a simpler product than an ICE vehicle.
- wegs2 6y ago
  Making an EV is easy. I can buy a Power Wheels EV for $400. Making a good EV is hard. The set of technologies required is still unknown -- bear with me for a little bit. In the early days of the PC; anyone competent could make a perfectly competitive computer in their own garage in a few months, buying chips, etching PCBs, and coding up a basic operating system. Wozniak did that, as did a few others. It seemed like it'd be simple forever, but it wasn't. Today, the tech tree to make something like a MacBook is long, wide, and extensive. There's a massive engineering team for the mechanical design alone, let alone the OS or the CPU. I can still make a computer, but it won't be competitive. Same thing happened with airplanes; shortly after the Wright Brothers, all sorts of amateurs made basic planes on their farms. It's still possible to do that, but you won't be competitive with an Airbus jetliner. Early radios were a few vacuum tubes. Compare that to making a modern cell phone. Part of the reason ICE vehicles are complex are the same process. The first mass-produced ICE vehicle, the Benz Patent-Motorwagen, was pretty simple. It cost under $5000 in today's dollars ($150 at the time), and looked like a glorified tricycle with an engine. If you throw engineers at tech, it goes up in sophistication. People figure out how to do things better. Anyone can make an EV. I'm confident, though, that we'll see the same progression as we did in every other fields. If Tesla has enough of a head start making things cheaper and better -- and they seem to -- it's unlikely the established players will be able to compete.
0xy 6y ago
GM has higher operating margin than Tesla by a substantial number, and is expanding into electric cars.
- wegs2 6y ago
  The question isn't about current margin; the question is about long-term margin. Running at a loss to build out market share, technology, branding and economies-of-scale is a standard startup strategy. Tesla is still in that stage. The key question is whether things like the Gigafactory provide Tesla with unique economics and competitive advantage. If they do, Tesla will be able to have lower costs or more expensive products than GM. If not, it's overvalued.
  - 0xy 6y ago
    GM has more manufacturing prowess. Higher scale, over double the margins, more automation experience etc. That's just GM. Ford and others are the same. The Ford F truck line is practically a money printing operation. A fancy UI on a screen is not a defensible moat, not when you suck at manufacturing (QA is still bush league).

bryanlarsen 6y ago

> Oil prices are not going to be this low forever Yes they will. I'd bet that the price of oil is not going to go above $80 or so in the next twenty years. Two major reasons, and a bunch of minor ones. 1: massive quantities of non-OPEC oil are available in shale and tar sands. Right now these are only barely profitable, but if the price of oil increases production there will increase, stabilizing prices. 2: renewable energy is now just barely cheaper than other forms of energy, but they're projected to drop dramatically over the next years, radically transforming the energy market. Some uses of hydrocarbon cannot be easily replaced by renewable electricity but most can. When a cheaper substitute is available, demand and price drop. The only way the consumer price of oil is going to go up over the next few years is if governments come their senses and put in place a carbon tax or equivalent. (And that's reason #3 -- the environmental movement will demand that the world use fewer hydrocarbons, forcing less demand, forcing prices before the carbon tax to go down.)

flukus 6y ago
> Some uses of hydrocarbon cannot be easily replaced by renewable electricity but most can. When a cheaper substitute is available, demand and price drop. Assuming they can maintain that level of supply as demand drops. Some the economies of scale they operate with will be lost as demand slows and then the logistics that requires large and ongoing investment may slow considerably, although much of the latter is probably outside the 20 year horizon. It could play out very differently on the consumer side though. If electric vehicles became 50% (or some arbitrary significant percentage) of the market then a lot of local gas stations will close, the ones that remain may have to start charging higher prices (again losing the logistics and scale advantages of today). There may be some tipping point where the whole retail side of the industry finds itself in a death spiral where gas stations are charging more and in less locations, making oil powered cars less convenient and driving more people to electric vehicles.
- selimthegrim 6y ago
  Do you actually think gas stations make most profit off of gas? (The Shell down the street from me takes a cut of the drug deals in its parking lot but hardly the usual case...)

throwaway201103 6y ago

> Plus, millennials seem to greatly prefer the Tesla buying experience over traditional dealerships. You can get this at any dealer, just pay sticker price. They'll love you.

Zanni 6y ago
You really can't. Even then you're going to have to endure all the after-market sales pitches: financing, floor mats, weatherproofing, etc. The last non-Tesla car I bought took me hours to complete after finalizing the price. Infuriating. If anything, the buying superior buying experience is being underestimated.

aphextron 6y ago

> Oil prices are not going to be this low forever, and I expect a massive increase in demand for electric vehicles once gas goes above $4/gallon again. This really has nothing to do with it. An optioned out Model X costs as much as a house. The type of person who can afford that couldn't care less if gasoline were $10/gallon. It's a status symbol, on top of just being a great car. It wont be until they are competing in the sub $30k market that an EV purchase will ever be driven by economics.

colinmhayes 6y ago

Every car company has electric cars now. Unless Tesla gets self driving they will not be able to keep margins high.