Q2 2020 Update

For bulls, TSLA isn’t a car company. It’s the climate change company. They are the best bet right now to upend the entire power mix.

I’m not saying I agree with this. Even if achieved, the amount of future success being priced in today is extraordinary. Combine that with a stock that’s become “cool” to own with retail, and the huge short interest...and well it starts to make sense.

TSLA price action at the moment is really down to a lack of sellers. Shorts have been bent over in a way not seen at this scale since (ironically) VW. Simply put: everyone who has said TSLA is overbought has paid dearly. The bubble will burst, but it’s never shorts that pop bubbles.

VW has over $200 Billion in debt, and are spending $100B on the transition to electric. Buying VW at this point is crazy risky.

There are currently ~10 major automakers outside of China and India. In a decade, there will be less than 10. The only one I am confident that will be sticking around is Tesla. The others have a difficult transition to electric ahead of them and possibly a difficult transition to self-driving and will possibly have to deal with strong Chinese competition. Not everyone will successfully transition. Perhaps spending heavy on the electric transition like VW is the right approach. Perhaps letting everybody else take all the risks and swooping in late like Toyota is the right approach. I don't know.

The only manufacturer that I'm confident of being around in 10 years is Tesla. Some of them will transition well and will likely sell more cars than Tesla and have an enterprise value larger than Tesla in 10 years. And some of them will go bankrupt or be swallowed cheap like FCA-PSA.

That being said, I significantly reduced my holdings in Tesla this year. I'm pro-Tesla, but not at current prices.

It's speculation, and irrationality, neither of which is new to the stock market.

People think the stock will go up, because it's a hot company with a lot of press, so they buy it. More people buy it, and it becomes a self-fulfilling prophecy: the stock goes up.

Eventually Tesla will either find their groove and be a breakout success, or the stock price will fall. It's just a matter of time, and depends on when people get tired of waiting.

Remember also that VW is, comparatively, a super boring company.

These are all bad reasons for Tesla's stock price, but they are reasons.

VW is shrinking, its leaders are not innovative and their suppliers are dying while VW is scrambling to bring component development back in-house.

Estimates for Q2 2020 are around -3,2 € per share (EPS) for Volkswagen while Tesla posted a profit.

Everyone investing on Tesla is counting on it becoming a kind a Facebook for Cars, using the power of its stock to kill and buy competitors. That reasoning is not far from a possibility given the aggressiveness, bordering on the illegality, practiced by the company in its dealings with governments and the stock market.

Tesla is in a spot similar to where Apple was in 2009. The iPhone was a well established product that differentiated itself from a sea of similar looking androids. The world was coming out of a big recession and the iPhone catapulted Apple into a trillion dollar market share in the next 10 years.

This is what Tesla investors hope for Tesla’s future. That ten years from now, there would be Tesla and all other car manufactures looking to emulate Tesla by producing a couple of electric models that would lack the features or refine of Tesla .

Tesla has a first mover advantage similar to what AWS had for the first 5 or so years.

There's a difference between dominating a market by market share and dominating by profit margin. Apple certainly doesn't sell the majority of phones, but they do make more money than anyone else on phones by a lot. Similarly, Tesla looks to me like the only company positioned well to ever make large margins selling significant numbers of cars. If you buy that analogy, and realize that the automobile market is about 4x the smartphone market, Tesla could be worth 4x Apple, discounted by however likely you think that future is.

> It is beyond me why anyone would by this stock over VW, let alone pay 4x the price for it.

The better answer is that nobody should buy VW either. Their business has zero potential upside and a huge downside risk in the transition to EVs; along with the inevitable rise of China's domestic automakers, which will eat a very large amount of market and sales away from the old giants. VW's position is its weakness, it has everything to lose and nothing to gain from the peak they've reached.

Which also isn't the same as saying that Tesla should be bought at its present absurd valuation.

Tesla will probably own a good percentage of the $92B roofing market in a few years.

They’re likely to own a big chunk of the market for electricity generation and storage equipment.

Also, people hate dealerships and CO2 so much that I think the general assumption is that Tesla will be one of a very small number of car manufacturers left standing in a decade or so.

Finally, I think people assume Tesla will be like Amazon, and keep doubling down on their bets until they’ve run out of industries to take over.

Tesla doesn't just make cars. They are really a battery company that happens to make cars that use their batteries, but they also make whole home batteries, which include recycling the ones from the cars, as well as solar panels to charge those batteries and charging systems that can be deployed to charge those batteries.

I'm not saying the valuation makes sense, but to compare them to a car company doesn't make a ton of sense.

> Can you explain how their capex is decreasing

Capital efficiency. It should not be surprising that a greenfield factory built in China based on a spec you iterated on in Fremont, CA results in a much higher $/Cars/Day, a.k.a capital efficiency. Iterating on a live line in Fremont, CA is significantly more costly. It's like $/sq ft. for renovating your house versus buying new.

Also, look at the flow diagrams they've published on the floor layout and the path through a factory a car takes to go from start to finish in Fremont vs. GF3. This is also why they're moving to Austin.

> By the way, what's a "delivery"? I don't think I've ever seen them define it.

Of course they define it. In their Annual Report, under a section titled "Critical Accounting Policies and Estimates", under a sub-section titled "Automotive Segment - Automotive Sales Revenue";

We recognize revenue on automotive sales upon delivery to the customer, which is when the control of a vehicle transfers. Payments are typically received at the point control transfers or in accordance with payment terms customary to the business.

> and yet they build inventory. Very opaque.

I'm not sure what you're asking here.

>Can you explain how their capex is decreasing as they build out more factories and invest in new technology? Seems odd, doesn't it? Yet is sure makes that cash flow number look good. These are the kinda things that analysts consider red flags.

From 2017 to 2018, they were focused in ramping-up production at the Fremont factory [0]. And compared to Q2 2019 Capex is actually 118% * higher ! * (546m vs 250m), so I can't see how they are slowing investments.

>Do you think this is a reasonable comparison when Toyota builds as many cars in a few days as Tesla does in a quarter? Tesla can futz a few thousand cars with a fleet sale or inventory build and drastically change their growth trajectory.

I do believe they did a tremendous job in ramping-up deliveries (page 18) in such a short period of time). It is 2x the number from just 3 years ago.

>By the way, what's a "delivery"? I don't think I've ever seen them define it. I would assume it means "car delivered to customer", and yet they build inventory. Very opaque.

By delivery Tesla probably needs to recognize revenue according to ASC 606, or when the product is delivered instead of paid. I'm sure theirs auditors must pay close attention to this number.

[0] https://en.wikipedia.org/wiki/Tesla_Factory

>capex is decreasing

Could you give more detail on that? The last big capex increase was due to Model Y rollout. Now that most of the lines are completed, it's just replicating what Fermont's Y production line has in Shanghai's.

I do, however, agree that Tesla's definition of 'delivery' is suspect.

“Regulatory credits” are getting paid for making electric cars other automakers won’t make.

Fiat alone must pay Tesla $2B for credits to keep selling internal combustion vehicles in Europe.

There's nothing mysterious about them. Car companies are required to produce clean vehicles, or they can instead buy credits from companies who do. Companies are paying right now rather than producing, and Tesla is there to benefit from it. There's nothing shady or mysterious here.

May be easier, but it means something. Growing in a down market is a thing.

An alternate hypothesis is that they are trying to justify the inflated share price by gutting all other EV makers and gobbling up marketshare.

Tesla already has better margins on EV sales than any other automaker. If Tesla price their cars at a level that forces everyone else to lose money on EVs, it makes everyone else's transition from ICE to EV that much harder.

The much-lauded ID.3 (which is a bet-the-company project for VW) was supposed to undercut the Model 3, but the price has been slowly creeping up (and VW has had to massively de-content the base model to hit their price targets). If Tesla forces VW to take a loss on every ID.3, VAG's shares are going to start looking over-valued pretty quickly.

There are many contexts where that's not a good market strategy. Movie theaters don't charge double for the opening night of Avengers movies, for example.

They are betting on market growth driven by climate change as well as technology advancements that will drive battery prices down. Both are coming, imho.

Companies that raise prices in exceptional situations take a major reputational hit.

The canonical example is snow shovels after a blizzard.

For traditional car makers that would be true. There are times where a civic is more expensive than an accord for example. But Tesla is not trying to maximize revenue in the short term. They are trying to convert the world to sustainable transportation.

Just to make it more clear what bqe is saying: they are selling the ~same amount of cars as 2 years ago. Both in terms of $ and in terms of #. Growth is completely flat.

Yea, if they are adding product lines without an increase in revenue that seems (possibly) concerning, though obviously the current economic situation makes it hard to know how to value year over year comparisons.

I think they have taken share recently, but total volumes are down.

That said, I think tesla is WILDLY overpriced (and I used to own tesla stock).

Factory construction expenses aren't explicitly broken out in the financials. But cutting R&D could more than double their net income this quarter, if they wanted. What's your point? Do you believe that doubling their number of vehicle factories along with significant expansions at both existing factories isn't having a material impact on their expenses?

They are doing it because they need more capacity to increase revenue, because their ASP is lower in the new markets they've entered. And because they need local factories to reduce tariffs. And do you really think that comparing this quarter YoY is a good way to evaluate their revenue growth?

What specifically do you mean? On page 6 it shows that global inventory is currently lower than it has been in 3 of the last 4 quarters.

That would not wipe Tesla out. The credits are nice bonus, specially in COVID times, but not having them would not get them near bankruptcy. They would maybe had to raise some more money and not invest as much.

Tesla's first car was the Roadster, and it was released in 2008. How do you get "almost 20 years" when the first car they released was 12 years ago? Tesla was founded in 2003, but even that is not 20 years.

Gross margin on cars is 25% this quarter, 17% after removing regulatory credits. What "financial data" are you using to come to the conclusion that they don't have good margins?

The margins on the car are actually very good, this is evident in the official data and confirmed by expert breakdowns.

They don't make money because they are investing lots of money all the time. People seem to miss that they only launched their first large production cars a few years ago.

Its insanely difficult to start a car company and to scale it to the level Tesla is now with a product that basically nobody else can do profitable is a gigantic achievement.

They are currently building 3 huge new factories.

Some browsers and apps auto download the pdf.

The potential upside for Tesla is huge. If they can become the Apple of electric cars and if electric cars become standard, they could be worth trillions. The reason their valuation was not in the trillions is because there is a risk that they will go bankrupt, that other companies will take the lead in EVs, or that EVs will not be where the market is headed in the foreseeable future. The reason for the jump in valuation is that those risks are being steadily reduced. EV competition is scarce, Tesla's cash reserves and consistent free cash flow hugely reduce the risk of bankruptcy, and the market is continuing to demonstrate that it wants electric cars (at least Tesla electric cars, that is), even during a pandemic. There is certainly an element of speculation and retail investor FOMO, but if Tesla's institutional investors didn't think this valuation could be justified at all they probably would have sold by now. Time will tell how reasonable the valuation really is, but betting against Tesla has not worked out very well so far.

Before that 8X rise, though, stock price was basically unchanged since 2014. While revenue in that period has grown 10X.

So you could make a reasonable argument that the huge stock price appreciation in the last 12 months was in fact a re-pricing to reflect that the stock market now believes Tesla has a decent shot at becoming one of the world's leading tech companies.

It doesn't reflect that something magical has happened in the last two years; something good has happened in the last 6 years and the stock market at large has only recently realized this.

stock price is always speculation, it just depends if its short term or long term.

About half of the quarter under discussion.

and yet their costs never went up after adding a second factory

Future-looking means considering both upside and downside. A company like VW and GM is all downside. Back when TSLA stock was at $200, TSLA had a lot of perceived downside as well. The "word on the street" was...

- That Tesla would be going bankrupt any day now. That they were insolvent. That they were "structurally unprofitable".

- That Elon was personally broke and was about to get margin called on his lavish lifestyle and multiple mansions.

- That no one would buy a Model 3 without the tax credits.

- That the factory in China was just a mudfield and a marketing campaign.

Today TSLA has now cleared hurdles for becoming ~0.8% of the S&P500, which opens up ETF demand for an estimated 25 million shares, and is uniquely showing growth in the most challenging auto market in history.

The price was artificially low due to abuse from short sellers who have finally given up over the last few months. You can see based on the chart of short interest vs. stock price. Now it may have swung in the opposite direction, the stock seems to be crashing up due to gamma squeeze. But in my opinion if you are a long term investor (5-10) years the stock is still undervalued.

But now they have a factory in China, the one in Germany is going ahead quickly, and they just announced the one in Texas.

Before they promised very rapid growth, now they're actually doing it.

I'm pretty sure musk had literally said this is not your theory. that's why there was there patent stunt. It not some plot rather being the change you want to see, a even if Tesla collapses they moved the EV needle.

Musk's only compensation for Tesla is related to share price. He is therefore doing everything he can to take a large market share from the incumbents - they have had 8 years to respond to the Model S, and have done nothing.

I really need to get better at getting into these asset bubbles. I'm too late for Tesla, and it doesn't look like BTC has been going anywhere lately. Anyone got any tips for me?

Yeah it’s an awesome system! Similar ideas exist for controlling carbon emissions (like a cap and trade system, where, to oversimplify it, everyone gets an equal amount of “greenhouse gas points” which you can either spend on polluting or sell to others)

No, according to other commenters they would be paying it to the government anyway, if they weren't paying it to Tesla.

I don't think they disagree with this, but that Tesla now has the 3/Y that get you all of the benefits of an electric car, with interiors that aren't too far off of the S/X for a fraction of the cost. If they want to continue to sell the S/X for a big premium they now need to offer a differentiated product (whereas pre 3/Y you were paying the premium to get a fully electric car)

> You can now spend 100k to get a car that never emits a single toxic chemical while being used.

Yes, but if the EV part is most important to me, why would I spend $100k on a Model S, when I can spend way less on a Model 3?

And if the luxury is most important to me, why would I spend $100k on a Model S, when I can spend the same amount of money on a Porsche Taycan, get a similarly performing EV, but with a luxury interior that blows Tesla completely out of the water?

The Model S has very little going for it right now, which is why the price has dropped considerably in the last year. It finally has competition, and it's simply not holding up very well.

The Model 3 and Y make that (mostly) moot (size aside).

We've got a Model 3, I've had S loaners and my dad's got an S, and I've driven the S as far back as maybe 2013?

There are things I like about both. It's not at all clear to me that if you made me choose a free car to receive, that I'd choose the S over the 3.

If you're making me spend my own dollars, 3 all day. I just don't like the S twice as much.

All those reasons apply to buying a 38k Model 3 instead. Tesla is agreeing with grandparent as they are planning to next-gen the S and X. As a customer, what compelling reason is there to spend on the S and X over the 3 and Y? Sales and production are strongly reflecting that.

True, I still use it to designate the short-TSLA/anti-TSLA crowd which tirelessly uses this argument despite the evidence that it is false. As for the chances of Tesla going under being slim to none at this point, which I agree with and believe explains (partly) the stock's repricing, I think it's still a popular argument for the die-hard Tesla shorts à la Einhorn.

Then, suddenly, the day arrives when battery tech has advanced to the point where it's obvious even to casual observers that battery tech is the future. Hell, it's the present by then. We're almost there. Battery tech is still following an exponential decline in price/performance.

Problem is, now the rest of the industry is 10 years behind. They were hoping to just buy this tech from their suppliers, but so is everyone else. All profit gone in a bidding war. Making your own requires double-digit billions of investments (OK, plausible) and 10 years lead time. Let's be super charitable and say 5 due to the existence proof and leaky personnel. Now they've got to catch up while their newly equal-sized competitor eats their lunch.

Classic innovator's dilemma, and it's as obvious today as it was in 2013. Probably more.

Not if you have 2 cars (or are willing to rent) and a short commute (covid? why buy a car at all?). I rarely drive more than like 25 miles in a day. Even most of the close hikes I do are within about 30 miles of my house.

> Assume they stay there

Hopefully that assumption doesn't hold. Quoting from the earnings call:

"Our cars are not affordable enough—we need to fix that. We are making progress in that regard. We need to not go bankrupt, obviously, but we're not trying to be too profitable. One or 2 percent, it's not too crazy. Slightly profitable and maximize growth, making the cars as affordable as possible"

Assuming no great growth isn't entirely reasonable when analyzing a company that has had a CAGR of greater than 50% for the last 8 years, and intends to continue.

If you think that's the reality, you should go short in a big way. Stock would be overvalued by 90%.

Meanwhile, a 50% CAGR on an annual revenue of $25 billion is exactly what you want when interest rates will be zero indefinitely. Not at any cost, of course, but if you were so smart that you saw this in 2015, you would have bought then.

It does, but the rebalancing occurs in September I think.

Eventually, but it doesn't necessarily need to happen right away.

That was not a funding going to the company, only to the customers. It made the cars a bit more affordable, that certainly helped. But it didn't fund the company. Also, they have long expired for Tesla, the only companies benefitting from the tax credits are the competing companies.

Well, EV tax credits are subsidies for a "category" -- electric vehicles -- not specific companies. Every EV customer gets them, and their intention is incentivize the transition to electric transportation, so they're working as they should.