Tesla ($TSLA) - The Story Is Not Over

2nd Mar '20 by Graham Neary

38 comments 7326 reads

While markets fret over Coronavirus and the impending collapse of the global economy, focus on individual stocks has been taking a backseat.

But Tesla remains as fascinating as ever.

While I don’t currently have a short position in the stock, and have no immediate plans to open such a position (Charlie Munger would agree), it’s no secret that my sentiment is firmly with the bears. If you want a catch up, here’s the talk I gave at last year’s UK Investor Show.

I probably will short Tesla again, at some point in the future. But timing really matters, whenever you do anything on the short side.

Most recent earnings call – more broken promises

I understand that promises are hard to keep. In business, things crop up. Most businesses fail, and when you try to do extraordinary things, success can’t be guaranteed. I often find that my own projects are delayed, for one reason or another.

What makes Elon Musk special, however, is the size of the promises he makes, and the consistency with which he fails to keep them.

For example, let’s take the most recent Q4 Earnings Call.

At 1:00:12, Elon Musk is asked when the Tesla Full Self-Driving (FSD) product will be “feature complete”.

If you go back to February 2019, Musk said:

“I think we will be ‘feature-complete’ on full self-driving this year, meaning the car will be able to find you in a parking lot, pick you up, take you all the way to your destination without an intervention this year… I am certain of that. That is not a question mark.”

Musk has been collecting money from customers for “FSD” since all the way back in 2016. Here’s an example of someone who claims they’ve paid for FSD multiple times. Since FSD doesn’t exist yet, they’ve never received the product. FSD currently costs $7,000.

That is the real genius of Musk. He can whip up so much excitement about his future achievements that people will pay him cold hard cash in the present for products which don’t exist yet.

It was the same with the Model 3 vehicle. Tesla took in hundreds of thousands of orders (and deposits) for this vehicle in 2016. Buyers holding out for the cheaper trims of this vehicle then had to wait three years for…

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bluecurve

5th Mar '20

Hi Graham,

Like you, I've been more of a bear on Tesla purely based on the numbers. But my long term view is bullish, for the reasons I'll explain below. I have no position today, but if there's a pull-back to below the $500 level, I would now look to buy for the long-term.

I'll declare an interest here as I'll take delivery of a Tesla Model 3 Performance at the end of March, so will be a Tesla owner. I'm not impressed by Elon and his antics, but I do think they have a great product. Having gone through the process of researching EVs, test-driving EVs and finally deciding to move away from a Mercedes to a Tesla, here's what I've concluded on Tesla as a business investment.

Firstly, Sales Incentives. Tesla, and other EV makers, are currently benefiting from Government policy and the green lobby, to go "carbon neutral". As a result, there are great tax incentives available for moving to EVs. I wrote some comments on the SCVR recently about UK tax policy: https://www.stockopedia.com/content/small-cap-value-report-wed-5-feb-2020-tsla-look-tst-dom-rdw-bdev-fdev-556276/comments?order=createdAt&sort=desc&mode=threaded. Essentially, EVs are much lower cost to run than a traditional ICE car, and, much better value to buy and own if you're a company owner or company car driver. Most of these savings are due to tax policy.

There is evidence that the impact of government tax incentives can give a massive boost to sales :https://www.bloomberg.com/news/articles/2020-01-03/tesla-record-pushes-norway-s-share-of-electric-car-sales-to-42 . But they may be short term:

"The U.S. carmaker registered just 83 new cars in Norway last month, compared with 1,016 vehicles during the same period last year, according to data from the country’s transport authority. In the Netherlands, registrations plunged 68% to 155 units." Source: Bloomberg, March 2, 2020.

In Norway, it looks like new EV sales are now at saturation and in the Netherlands, the government tax incentive ended on December 31st. The Tesla Q1 sales figures should be interesting. However, there's no doubt that in the long-term EVs will become a bigger percentage of new car sales as governments withdraw support for ICE cars, and other alternatives, such as Hydrogen fuel cells, look even further away.

Secondly, Brand & Infrastructure. There's no doubt that Tesla has built an aspirational brand. Although quality is not in the same league as BMW/Merc, Tesla has created a desirable product, which, in my opinion, makes them natural competitors. On that score, Tesla is certainly above the likes of Nissan, Toyota etc.

Tesla's investment in their supercharger network will turn out to be a great decision I think. No other manufacturer has this, and it adds to the exclusivity of the brand when you're out on the road. Reminds me a bit of the way that Apple ties you in to their eco-system - they make you feel special. With other brands, you're on your own when it comes to charging during a journey and that will put a lot of buyers off.

Tesla has also created a product that is, frankly, quite boring. Traditional car makers have made the initial mistake of thinking that an EV/Hybrid needs to be different, so they go for wacky looks (BMW i8??). Teslas look like traditional saloons or people carriers, which means they appeal to a wide range of buyers. The likes of Audi, Jaguar and Mercedes have also tried to make their EVs quite futuristic with loads of screens and features, but this can make them feel complicated to many people. Tesla's, by contrast, are bare - some say "minimalist". I think complicated, wacky EVs turn off the buying public.

Teslas are also great value when you look at the direct competition. When you compare range, acceleration/performance and price Tesla's are at the top or near the top. https://ev-database.uk . When you compare a Tesla M3P with a Mercedes C63 or a BMW M3, it's much cheaper and quicker, especially when you spec up the traditional cars. The same is true if you compare the current EV offerings, which are slower, have less range and are more expensive.

Tesla has also introduced features that no-one else has, such as the idea of a car receiving software updates over-the-air. Contrast this with a typical car that can't even get satnav updates without paying a fortune to the dealer! They've also done away with the need for a Tracker and utilised the car's cameras as a theft deterrent ("Sentry Mode"). Big benefits to the customer, which influence the buying decision.

Finally, Costs. Tesla has focussed on the ability to control it's production costs, which will give it more flexibility on pricing in future. Tesla is an EV-only producer, and their whole operation has been geared up for this over the last 10 years or so. I think it's a bit of a stretch to think that other car manufacturers can suddenly switch to producing EVs quite so easily and quickly as some people say, and with greater efficiency.

Tesla has also focussed on taking things in-house where it could give them operational advantage. For example, they switched to producing their own seats in 2015, to reduce manufacturing bottlenecks and to give them more control over design and cost: https://www.reuters.com/article/us-tesla-seats/teslas-seat-strategy-goes-against-the-grain-for-now-idUSKBN1CV0DS. They are now rumoured to be doing this with battery cells as they reduce their reliance on Panasonic, who couldn't keep up with demand. This move will give them massive competitive advantage as they're also able to focus on improving battery design as a part of the whole EV product experience: https://electrek.co/2019/10/09/tesla-panasonic-relationship-hits-hard-times-tesla-make-own-batteries/.

According to this article, Tesla was one of the top 5 producers of Lithium batteries in 2019. https://seekingalpha.com/article/4289626-look-top-5-lithium-ion-battery-manufacturers-in-2019. The amazing thing is that Tesla is currently only producing batteries for it's own vehicles and it's Powerwall home battery solutions. If that's the case, where do other car manufacturers expect to get the quantity of batteries required for the millions of EVs they'll need to churn out within the next 10 years? And at what price? That's a huge question for the rest of the industry. I think the Gigafactory's alone will give Tesla a huge competitive advantage for the next 5 years at least. In fact, I wouldn't be surprised if Tesla starts supplying other car manufacturers with batteries! CNBC did a good piece on battery developments recently : https://www.cnbc.com/2019/12/30/battery-developments-in-the-last-decade-created-a-seismic-shift-that-will-play-out-in-the-next-10-years.html

My conclusion is that EVs are only going to become more and more common, and sales will increase. Tesla is well positioned to benefit from this trend over and above the traditional car manufacturers. But there's a bigger trend in electric power storage generally, which Tesla will also benefit from, but where there are also many interesting companies trading at much lower multiples. Will be interesting to watch how this plays out.

Cheers, Mark.

MiserableJacktPotato

3rd Mar '20

Record of innovation?

What record? Electric vehicles were around before him / Tesla, and other manufacturers have been compelled to create EVs, not because of Tesla and their paltry market share, but because of EU legislation. My understanding (happy to be corrected) is the LEAF is still the world’s best selling electric vehicle.

As for his impact on climate change, seriously? Wait what, he creates vehicles that generally rely on fossil fuels to power them, and then there’s SpaceX which is carbon negative how?

Solar roofs are money printers, Tesla cars will be appreciating assets, full self driving is nearly here, pigs are fed and ready to become airborne.

Let me know when the Robotaxis arrive.

https://twitter.com/TeslaCharts

Gnome2

4th Mar '20

Oh brother, where do I even start with that claptrap?

Cisk

Its well worth remembering that the skillset required to establish a new venture are completely different to those required to run an established venture. I suspect Musk falls into the former category - and personally I’m surprised that he hasn’t been made to pay a higher price for things like tweeting to take the company private, misleading statements to the market etc.

My biggest issue is separating the investment case from the product offering. Personally I’m a car fan so anything Tesla to me is like a washing machine on wheels - a white good that does it’s job well but isn’t styled attractively - inside or out, or built to handle well. But that’s a very subjective opinion.

I do like the fact that they have their own charging infrastructure- and when you read reviews and look into it you find that it’s far better than the competition. But that’s the whole point - and what I eluded to at the beginning - rarely do first movers end up dominating the field; just look at what Porsche are doing at the high end and BMW with the i4 in the middle - both manufactures are vastly more experienced at building a car well and profitability, and will catch and overtake Tesla.

So in the end you have a pioneering company - which is now being subject to more competition than it ever has before - and (let’s be kind here and describe him as a ‘maverick’) founder whose talents are better placed at starting businesses than running them. Even their batteries are not proprietary- I see that they are parting ways with Panasonic.

So given all this I’d rather be short than long, but in these crazy times I’d probably buy BMW instead (not that I’m a fan of their current look either!).

You can start by saying which bit is false.

shipoffrogs

I'm just guessing, but - "...pigs are fed and ready to become airborne."

Haha, got me.

jonbeck

The 'Shorts' are only valuing £TSLA as a car company. If you start to view the company for what it actually is - an energy stock - then you can start to realise its future earnings potential and the $7,000 price target doesn't sound so crazy after all.

Watchdog

6th Mar '20

As much as one has to admire what Elon Musk has achieved so far, my gut instinct tells me that Tesla is a fairytale that is too good to be true. That aside, let us look at some facts:

1. The range of Tesla vehicles before re-charging is required is considerably less than cars with conventional ICEs.
2. Re-charging takes far longer than re-fuelling a conventional ICE vehicle. Therefore, if making a long journey one has to factor-in considerable extra time.
3. The re-charging infrastructure across Europe and the US is far from being comprehensive enough to enable extended journeys.
4. Most people cannot afford to buy a Tesla. Therefore, unless prices of Tesla cars are reduced dramatically the hoped-for increase in sales is not going to materialise, and the hoped-for increase in profits will evaporate. And if the price of Tesla cars were to be reduced the hoped-for profit would still evaporate!
5. The quality build of Teslas is no match for similarly-priced cars produced by Audi/BMW/Mercedes etc.

The established car manufacturers are running to catch up with Tesla's head-start with EVs, and are now producing a variety of hybrids that offer increasing competition. Toyota also produces a hydrogen-powered vehicle that has yet to capture a significant market share; but if it does (and if the re-fuelling infrastructure can be expanded rapidly) it could sound the death-knell for EVs.

Campbell Crockatt

16th Jul '20

Agree totally.

We have owned a Tesla Model S for the past 3 years and a Model 3 Performance for over a year. And have experienced the amazing Tesla Supercharger network. Tesla is an incredible Energy stock.

All the “shorts” - don’t even own one or have never ever driven a Tesla.

“No skin in the game” - so to speak! Luddites!

Checkout Cathie Wood and her ARK Investment Company in NY on YouTube for goodness sake.

Look at the chart on Stockopedia!

mojomogoz

Transposed this from SCVR to a more rightful place here. Note, I'm a believer in the future...it just always needs to make compromise with the present...which tends to be the downfall for fantasies of an imminent brave new world...enjoy:

Reading comments today is like back to the future....

Its like 1999 all over again but actually even more bubblicious. In 99 most of the market cap wasn't in the TMT wonders....yeah they were on super high multiples of zero (haha)...but many were generally concept stocks or real tech business but with high endless capex spend (as they operated in a real world not virtual).

Blast from the past -> Amerindo https://en.wikipedia.org/wiki/Amerindo_Investment_Advisors

These guys were the genius asset management visionaries of the times. They were seeing the shapes that no one else could see. They were being drenched in $$$$....they went boom in hubris.

There were more mundane ones like Nordea's growth team. They created a 3 stage innovation discount model where the stage one was what you had today, stage 2 was what you were investing to create 3-7 years from now and stage 3 was the genius of innovation you earned and profited from due to your darn innate innovative soul...if you were right breed/culture/etc. That way they could justify infinity prices for Nokia. Alliance Capital were the US version of Nordea and bigger too...but the Scandis just did it with more panache...I actually loved them even though it was clear bs (they believed it of course)

Nordea and Amerindo where yesteryears version of ARK. I love ARK. They are darn smart and interesting....and its so their moment. They will be right about a lot of stuff but then fail to make money out of being right. By design they're not going to sell Tesla and buy US Bancorp when its time....and lots of their portfolio wont work out...zeroed capital. But they will be heroes whilst it runs.

But 1999 was a period of relative positivity about the broad future of western societies (particularly US obvs) and the mega multiple went into fairly mundane mega caps - Coke, GE, heck even some retailers and financials. Rates coming down and 'great moderation' also helping push up the multiple along with passive flows from mid 90s on and early quant-momentum strategies. Party, party, party!

2020 is more bubbly in the tech names. Not as they aren't real businesses (well some of them...is Uber a business or a p1ss take?)....its more bubbly as it posits an impossibility that the world is screwed except a few exulted futurist businesses. This is a mad narrative. It is an impossibility that our world collapses into these names. Mainly for financial and capital reasons...but also for social and political ones. The forces required to support that dimensional collapse into a handful of exulted names and those names to be stupendously dominant and valued would be like a societal forging and revolution like we've never seen before.

In my trading account I'm shorting mega tech. Not as I think its for sure peaked out but as I want to feel the burn as it goes up. I want to have the pain and lose some money (its small relative to proper portfolio). I want to feel the pain of resisting the 'inevitable' brave new world. I want to doubt my judgement and feel anxious about my views. If I capitulate I want it to be a hard won capitulation just so as I can feel even more disgusted remorse when the bubble breaks and I didn't stick with it.

Its really not about making money or being right. Its about pacing myself in the scream of the insanity.

I've got no idea when this ends....macro pimps the ride...up and down.

Yee-hah! Ride it boys and girls....or slip your Tesla into perpetual ludicrous mode....

Bubblicious baby! ...the tech can't accommodate the tech avant-garde trumpet...

5f10a0eb17561Screen_Shot_2020-07-16_at_1

Patrickmylnetrade

that's a fantastic result to hold over all the ups and downs. A a fellow investor , "it's never wrong to bank some profits" is a good strategy, even if thats just to get your investment stake back. or whatever your risk profile is. You're still on the ride , just for free. Good luck for the future

boothbym

12th Feb '21

Hi Graham, it would be interesting to see your view on Tesla now that they are trading at some 80k! is this sustainable? Will Tesla crash the markets at some point or do they make it through to the other side?

William K

Good question. Interesting to know what Graham thinks. My guess is that they're due a pullback but probably not much below $700, although you might be interested to read the Investopedia view below (from today's newsletter). They are somewhat more pessimistic than me.

Tesla on Thin Ice?

Elon Musk tied the fate of Tesla (TSLA) to the cryptocurrency world with the announcement that he had invested $1.5 billion of the company’s funds in Bitcoin (BTCUSD). So long as the price of bitcoin continues to rise, it will certainly help the company’s valuation in the minds of aggressive investors.

TSLA shares have long been the realm of speculators in the market, and how they react to the market’s current signs of resistance may well be a harbinger of things to come. The chart below shows the Price-at-Volume patterns since TSLA made its latest 100% surge. There isn’t a high volume of shares traded between $700 and $800 per share. That means that if the prices start falling below recent supportaround $800, they could fall rapidly.

The study in the lower panel seems to confirm this circumstance. Option traders on TSLA tend to generate a lower implied volatility for TSLA shares after an earnings announcement. The current trend seems to be poised to trend in the opposite direction, portending a potential fall.

It wouldn’t take much for Bitcoin to help with that kind of a pullback. A typical move lower to the former resistance line would likely contribute to a fall of TSLA shares below 700.

andrewdb

The £TSLA purchase of BTC was covered in FT alphaville a few days ago.
There was one comment that I thought was v.v. interesting

Dave1000 If I read this right, Tesla has just found a very convenient way to massage profit figures in the future. Bitcoin will at some point take a dive in value (because: Bitcoin) and Tesla will recognise a loss in that quarter. At this point expect lots of talk about how Bitcoin is undervalued, and it's likely that the Bitcoin value has recovered somewhat by the time they recognise the loss. So the Tesla shills and Bitcoin Bros all agree that the loss doesn't count. Note that this loss is going to be very much overstated on the balance sheet date, since they are marking to the "lowest price quoted...during the period" Then, whenever the underlying business (including selling cars, alongside the core business of selling carbon credits) is loss making in future quarters, they just sell some Bitcoin and recognise a gain on the booked value. Magic!

The other sort-of relevant quote I trot out sometimes is

Courtesy FT Alphaville 11/09/19:

We’ll leave you with this, a quote from Sun Microsystem’s founder Scott McNealy. Having watched the stock of his company appreciate nearly 14-fold during the dotcom bubble, and then collapse 95% during the bust, McNealy was bemused that investors ever considered paying what now looks like a rather diminutive 10 times sales for the computer hardware company’s stock at its peak in 2000.

Why? This is what he told Businessweek in 2002:

(https://www.bloomberg.com/news/articles/2002-03-31/a-talk-with-scott-mcnealy)

At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realise how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

Courtesy of Ycharts
Tesla PS Ratio:27.60 for Feb. 11, 2021

Rusty2

Just to let you know, Graham no longer posts on here, his last post was June 2020.

sam viskovic

15th Dec '22

Graham Neary has dropped off stockopedia but TSLA and Elon are still all hype/pump and dump with terrible execution.

$123bn market cap 3 years ago was insane - today's $500bn market cap is insane. The fact the stock price went up never invalidated legitimate criticisms.

TSLA may be worth $10 or $15bn but as the financial statements can't be relied upon and given the capacity expansion into a tiny luxury niche even as we enter a brutal recession I fear it may be less.

Graham is now back.

Tesla ($TSLA) - The Story Is Not Over

Most recent earnings call – more broken promises

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Graham Neary

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