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Comment by slg | Hacker News Reader

I have been a longtime bull, but their stock value is now up over 140% in the last 3 months and I can't say I fully understand why.

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Well, short interest in Tesla has decreased significantly over the past six months, from over 40% of the float in June 2019, to under 20% in December 2019. As more and more short sellers choose (or are forced) to close their positions, they drive the value of the stock higher and make it harder for other shorts to maintain their positions. With 20% of the float still sold short, I personally don’t think $TSLA has hit its peak yet, although the stock price will probably recede as short interest approaches normal levels (1-2% of the float)

If they are still a company still trading at the multiples they are, short interest is never going to be 1-2%

Yeah probably true, I did say “approaches” though! My guess is that short interest will eventually drop below 5% over the next couple years if Tesla continues to perform well and grow their revenue stream, but we’ll see.

I dunno. My bullish view has more to do with Tesla using the vehicle market as an entry point to the broader energy market.

If the Tesla cars start throwing off profit and make the company self-sustaining, their vertically-integrated energy thing opens the kind of insanely huge global energy market. They're not just going to eat Ford's lunch - but also Chevron, Saudi Aramco and your local energy company.

I wouldn't hold your breath on that.

I was actually expecting a pretty big drop today given the huge recent runup, so it's fair to say that my breath is not held.

But it's the long term I care about, and I'm fairly confident that Tesla is well-positioned for the direction things are headed.

Electricity (and solar in particular) - Continually reducing production costs on a resource that is unlimited, at least from the perspective of our planet.

Fossil fuels - Continually increasing costs as resources are depleted and externalities are accounted for.

I guess you can tell where my chips are. :-)

Tesla’s Solar deployments declined YoY as their recent report indicated

I'm curious how you see Tesla as "vertically integrated energy" company. You mean Tesla is going to run power plants and transmission lines? Both are highly regulated, including the price you can charge, with a very low profit margin in most cases, not sure Musk would be a fan.

I agree that Tesla is unlikely to be interested in playing directly in a tightly regulated market as a utility.

But they are happy to sell solar and storage to utilities, to the extent that power grids still provide useful services. (And I definitely believe they do...) See: https://www.tesla.com/utilities

I also think that consumer 'behind the meter' solar generation and battery (or other) storage tech will also capture a lot of value that goes to utilities right now.

Tesla's products allow for decentralized power. A Tesla solar panel feeds into a Tesla battery which powers your Tesla car and the rest of your house. That all works without Tesla building power plants or transmission lines.

> Tesla solar panel

It's actually Panasonic solar panel + SolarEdge inverter, that Tesla puts their sticker on. Tesla is just an installer of third party products, like majority of all other solar companies. That can possibly change with solar roof, but it's very early stage.

Solar Roof Deployments have started a few weeks ago: https://www.youtube.com/watch?v=LRPy8UZv9V0

And the product was announced 3.5 years ago and has been thorough 3 iterations. I’ll hold my breath this time too.

What else you got?

What else do you got?

Solar is generally moving away from decentralized consumer Solar to more industrial levels given the decreased maintenance burden. Why do we believe Tesla is on the right side of this?

I don't know if it's fair to say that it's moving away from decentralized installations. There were a lot of subsidies for home solar when solar wasn't competitive on its own. Now the subsidies are gone but the panels cost less.

In the new context a large solar installation connected to the grid is more cost effective if you need a grid for nighttime. The real question is whether batteries will make it so you don't need that. They're currently too expensive for that, but they're also declining in price. So if batteries get cheap enough that you can run your home from local panels and batteries without needing the grid, the cost of needing to keep the grid when you could otherwise not have it anymore makes the centralization lose its cost advantage.

In many nations solar power is subsidized, more often than not in an administratively burdening way (paperwork!), and subsidies/regulation were frequently modified, discouraging the average citizen. A prominent case is France. This is IMHO at least partly crony capitalism at work. However it is only temporary and doesn't magically suppress benefits tied to local production.

Industrial solar generally has much less maintenance costs than distributed. There’s some exceptions, Hawaii for instance, but it’s very expensive to have to constantly maintain solar panels in peoples homes in ways that industrial solar isn’t

Many setups I saw (PV) are mainly maintained by being washed by rain, and I fail to understand why the maintenance of a (non obsolete) home solar panel would be expensive (neglecting vandalism/theft)(?)

Moreover energy produced by solar panels in homes is locally consumed, therefore there is no maintenance (nor any non-neglectable cost or loss) related to distribution (they are non neglectable).

Solar panels and accompanying equipment break. It’s much easier to maintain a centralized installation than having people need to travel for service.

Home thermo solar (solar water heating) sometimes breaks (pump...) but a home setup is so simple many owners can repair it themselves, and nearly all can easily find a local serviceman, a competent plumber can tackle most problems.

As for photovoltaic a home system seems very robust to me, even serious hail cannot damage it (some windshields will break under it way before the panels!).

I completely fail to see even a single and most prominent problem.

In a sunny geographical zones there usually are many user, and a is local service offering.

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.

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.

>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.

> 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.

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.

They’re energy business (SolarCity) has declined every year since they bought it. They’ve lost significant market share in the rooftop Solar market, and the market has started to move away from rooftop solar in favor of large Solar farms in general. There is nothing to indicate any advantage in the energy space

Except if I want to lower my power bills

There are many other residential solar companies with more competitive products

Indeed.

At the very least Tesla (and any similar 'electricity' co) already benefits from policies geared toward limiting greenhouse gases (and various 'pollutants') emissions, and as those will probably ramp up, will benefit more and more from them.

But there may be more, maybe even much more.

The gorilla in the room is the fact that solar (nor wind) energy cannot deliver 100% of the time.

Any intermittent energy source has to be compensated. On a grid in order to provide the necessary 'baseload'. On most autonomous locations because people don't want or cannot wait for power, they want to switch it ON and immediately enjoy the ride.

At any moment delivering power to a non-producing geographical zone may be done thanks to power produced in other areas, or (this not a XOR!) by storing energy.

From a practical viewpoint a mix of sources (windfarms, geothermal...) and interconnecting grids (forming a continental-scale supergrid) are mandatory, and in many nations there are massive investments towards all this, boosting 'distributed generation' (mainly wind energy, various other forms of renewables, long-distance transmission (see high-voltage, direct current (HVDC)))...

Tesla ability to deploy supercharger networks in many countries ties them with local folks in charge of the gridpower. They know about local energy storage (batteries, which will not be only useful for the car). They also explore distributed generation (Solarglass roof). The necessary smartgrid is mainly tied to operational research and IT (Tesla knows about those)...

In summary Tesla knows about a fair part of many pertinent domains, at worse as an integrator.

Moreover Tesla stands nearby the consumer (mindshare).

Therefore Tesla may become the most prominent ultimate link to the customer when it comes to electric power (which will become more and more pervasive as policies geared toward limiting effects of climate change will phase out fossil fuel), enabling them to rack-up a fair part of the benefits from more and more massive infrastructure-oriented investments.

simple back of the envelope calculation: in 3 years time, they will have 3 giga factories (+1 in upstate new york), each of which should be scale to 500k cars. at an average resale price of $50k (might be a little lower, but let's keep it simple), that's $75B in revenue. at a 10% profit margin, that's $7.5B profit. let's presume a 20x factor as a growth stock, you have an evaluation of $150B, which it's currently trending to.

This is excluding any other growth opportunities (self driving, solar, battery storage, drive train). just plain car sales...

This also assumes that there's demand for all of these $50,000 cars, which isn't necessarily the case.

I'm sure there is, if you consider all the climate politics ramping up. Politicians, officials, other virtue signallers will prefer to be seen in EV soon.

So far, it seems that Teslas are so great that they sell themselves. The more Teslas on the road, the more demand gets created for Teslas as more and more people are exposed to them.

The base Model 3 costs $40k in the US, and even without any extra options at all, it’s a great car to drive IMO! (Although it IS a lot more expensive in foreign markets)

Currently, the demand is still strong enough that the wait time on a new TM3 is 4-8 weeks. That may decrease, but right now Tesla can't make them fast enough.

The Y will have more demand. Crossover rules the us market

Battery cost is plummeting, Tesla is at the forefront of that. They can collect all the extra margin, or drop prices as needed

As you mentioned that's marginal profit. You'd have to include estimates of their other costs/liabilities before estimating future market cap.

Why do you assume they can sell all those cars, when they can’t even sell all their current capacity of cars? They’ve been able to produce 500,000 cars for awhile, yet only delivering 367,000 this year.

They could sell a lot of semis and cybertrucks if they were ready.

And just think, they could put a dashboard on the model 3 and sales would probably double.

Neither of those cars exist.

The Tesla semi is a whole new game in battery production. 300kwhr packs? If tech gets good, Tesla could find buyers for 1000 kwhr packs.

In fact, Deliveries exceeded Production in Q4, Q3, and Q2, and fell short of production by 14,000 vehicles in Q1 2019.

[1] - https://ir.tesla.com/news-releases/news-release-details/tesl...

[2] - https://ir.tesla.com/news-releases/news-release-details/tesl...

[3] - https://ir.tesla.com/news-releases/news-release-details/tesl...

[4] - https://ir.tesla.com/news-releases/news-release-details/tesl...

Extraordinarily strange, given that inventories haven’t changed to near the same degree.

I’m sorry but that is also not true. Inventory is reported as Days of Sales, and was 30 days in Q1 and has decreased every quarter to now just 11 days of sales.

People shorted the stock expecting the company and Elon will go under. They didn't go under and this Q4 despite not being spectacular in any number is "beating the market expectations" because the market expected the company not to continue operations.

> because the market expected the company not to continue operations.

The market did not expect the company to cease operations and that was particularly not the expectations baked into this quarterly result (the bar Tesla had to jump over this quarter). A small group of agitator shorts pushed that narrative, which very little of the market actually believed as witnessed by Tesla's persistently outsized market value (pre rally it was still worth more than Ford).

Companies the size of Tesla don't trade with $40-$50 billion market caps when the market actually thinks they're going to stop operating soon.

No? The market expectations were a EPS if 1.76 this quarter. Tesla best that, but acting like the market expected them to go under is ridiculous. At the beginning of 2019, the Wall Street consensus was a profit of close to $400 million for the year. They lost $800 million.

I think the cybertruck announcement caught the attention of a lot of "normal" people.

I remember years ago reading that although the "please don't squeeze the charmin" commercials were annoying, people remembered the name. Maybe a really weird truck announcement works the same.

Or it could be that "normal" people are starting to see model 3s showing up (outside of california for once)

I'd never seen that before and it's brilliant. Advertising isn't meant to be unobtrusive and transparent like software. It needs to be attention-grabbing and memorable in order to work.

Stocks sometimes aren't rational. It's just speculation/hype.

I agree with your statement, but maybe it's more accurate to say its speculation/hype about future return on investment. I think the real question (for me at least) is whether that return on investment is in share price increase (like Amazon) or in dividends and the value of assets (like the majority of other public companies).

India and China have to go full electric or global warming will be insane.

You're talking 3 billion people that all want cars.

Most people are not very good at looking into the future. People are may be making rational decisions off of poor estimations (both up and down).

Same here. Perhaps it's Chinese investors getting on the bandwagon, perhaps the short squeeze, or even an attempt by someone to get a significant chunk of Tesla for strategic reasons. It's futile to try to come up with any scenario where this could be considered a reasonable valuation by traditional standards, I tried.

My understanding is the market's optimism when the Shanghai completed in record time and began assembling for the Chinese market. But then again, with the coronavirus fears in China, both production and sales could very well be negatively impacted, yet that's not really reflected in the market.

Short squeeze I think.

this. It's still one of the most, if not the most shorted stock. As long as people keep shorting, the squeezes will keep propelling the stock higher, regardless of fundamentals. 1 week ago you might think it's overvalued and the meltup's run its course, but look where it's at AH today.

There still is billions of dollars short this company. Not that much has changed

> Not that much has changed

The short interest has declined from a high of ~44 million shares in mid-May last year to about 25 million shares currently, which is currently 18.7% of float.

[1] - https://twitter.com/ihors3/status/1222630157535588352/photo/...

It’s inexplicable. They aren’t even beating the estimates they have put in front of them.

Shorts got squeezed?

cybertruck

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