'Big Short' investor predicts Tesla stock will collapse like the housing bubble
markets.businessinsider.com
markets.businessinsider.com
1. Tesla Motors makes money on regulatory credits that conventional automakers must purchase in order to offset their ICE vehicle production. That's actually Tesla's only source of profit. Unfortunately for Tesla Motors, those regulatory credits aren't going to be in such high demand in a world where major automakers each produce hundreds of thousands of electric vehicles.
2. Tesla Motors doesn't currently compete on things like build quality and fit/finish, because the major factor determining whether you want to buy a Tesla is whether you want to buy an electric car. However, the time will come when you can get a mainstream electric car with the interior of an Audi, or the reliability of a Toyota, or the utility of a Ford truck. That competitive environment would be a wind shift for Tesla's business, not to mention the amount of pressure that other automakers will put on Tesla's autonomous driving features in court and with regulators.
Why is it that all of Musk's companies rely on government support in some significant way?
I wouldn’t exactly call tax credits “government support”. They are, no doubt, very beneficial to Tesla, and other recipients of these tax credits. They aren’t support though: it’s the rest of the companies that are more burdened by the taxes.
A pound of apples and a pound of lead may amount to the same thing for a counterweight, but that doesn't mean they are equally good for a pie.
Oh, you mean Tesla and SpaceX. SpaceX got a commercial contract from NASA to greatly reduce NASAs costs of delivering cargo to the ISS, and fully delivered, saving NASA billions. SpaceX would not have been able to build Falcon 9 without it, or likely survive. Then NASA gave SpaceX and Boeing contracts to fly crew members to the ISS, and SpaceX delivered well ahead of Boeing, and for billions less. Finally NASA has given SpaceX small contracts to gain access to new SpaceX technologies such as in-orbit refueling, which would save NASA tens of billions if it was ever allowed to use it.
And we provide tax credits to zero emission vehicles to make up for allowing ICE engines to omit CO2 indiscriminately. A better solution would be a limited market in carbon emissions, but most of the coal state politicians would lose their jobs if that passed.
https://www.reuters.com/article/autos-electric-norway/electr...
I'd note that in terms of market share for BEVs vs. ICE globally, the pie is still very large for BEVs. There is room for multiple winners.
So do they get hit 2x then, if not only will they stop getting the credits but the other automakers will start getting the subsidies that Tesla will no longer be getting? Right now it seems like Teslas are also artificially cheap, since they can't be repaired affordably or in any reasonable timeframe.
https://www.caranddriver.com/news/a32346670/other-automakers...
I will say that Ford has drastically improved in the last few years (I own a fairly new Explorer ST) but much of what they've done you can clearly see is copying what Tesla has done. Even still it is miles away from what Tesla has done.
Other car interiors from Kia or Toyota seem far too busy. I know it is a matter of taste, but the minimalism is appealing. The Ford Mach-E or VW ID take on the EV cockpit is fine too, but feels much less futuristic.
I think the Tesla aesthetic is driving other automakers to improve the in car experience and incorporate more intuitive software and screens.
The software for Tesla remains a highlight and a big reason why it would be hard to move to say an e-tron. But better competition is coming and I hope it pushes Tesla to do better.
As far as ICE companies competing, most of what we've seen so far is fairly limited and there is good reason for this. Their whole profit model is built on the dealership model and serious investment into electric cars is going to, essentially, nullify that model of doing business. Moving to electric cars is not just an incremental changes for current large automobile companies but an entire paradigm shift in how they do business.
Building factories is CapEx. CapEx does NOT affect profits, only cash flow.
Factories indirectly hurt profits through depreciation. But its a very round-about way of doing things. The important thing is that profits / loss is a forward looking statement implicitly.
Yeah, yeah, and paying a mortgage doesn't affect my savings rate.
"Savings rate" is defined as monthly disposable income. Your mortgage absolutely lowers your savings rate.
Your mortgage would also affect your cash flow. If we're talking about profit/loss, the interest-portion of your mortgage absolutely affects your profit/loss.
Only the principle portion of your mortgage statement is "free" from a profit/loss perspective. Which it is: you can always leverage the principle into a HELOC or other financial instrument if you need emergency cash.
The US is not the only country that makes cars, and auto manufacturers in other countries often have many different models on how to sell cars. The European companies have been producing many compelling EV models, which is why Tesla has been declining in market share in Europe for more than a year.
Yes, they also have mobile service, but that is also spotty depending on where you live and is only appropriate for minor issues.
The service center growth is really slow compared to number of sales...something like only 10% a year when they are now trying to add almost 1M cars/year to the road. Combined with spotty quality of new cars and aging vehicles approaching 5-10+ years old that will need more frequent maintenance the quality of service has rapidly deteriorated in real time. I don't see how they fix or address that at all without serious investment in building new service centers or changing the service model to allow 3rd party repairs.
I honestly don't understand how the technologist crowd, with its ties to hacker culture, open source, etc, is not at the forefront of a backlash against this model.
Third party repair is critical at keeping the manufacturers honest. This might not matter for a disposable $60 kitchen appliance, but is critical for a $60,000 car.
But what Tesla does well is the UX. While I'm not a huge fan of fully touch controls for essentials like AC, wipers and so on, the software feels really polished including their navigation, mobile integration, OTA software updates to improve them. It feels like software coming out of a Silicon Valley software company as opposed to clunky stuff you are used to seeing in cars. Until other manufacturers catch up with this aspect, it's hard to compete with Tesla because the full experience is superior.
Tesla has a 20% gross margin, which is significantly better than most competitors. So they make lots of profit per car, lots more than they make from regulatory credits.
On a free cash flow basis, Tesla is profitable.
On a GAAP basis, Tesla is profitable.
If you remove all non-recurring revenue & expenses, Tesla is profitable.
Removing non-recurring revenue (aka regulatory credits) from their income statement is a useful exercise when trying to predict their future revenue. But if you do, you also should be removing non-recurring expenses too (mostly Musk's stock grant).
Free cash flow is not profit though, nor should it be considered equivalent.
> Removing non-recurring revenue (aka regulatory credits) from their income statement is a useful exercise when trying to predict their future revenue. But if you do, you also should be removing non-recurring expenses too (mostly Musk's stock grant).
Dilution still matters if you think about the value of the company. If you think the stock is going to go up, Musk's stock grant is going to be a part of that dilution.
Maybe there's some accounting subtlety I am missing here (or is "gross margin" != "gross profit margin"?).
https://www.thestreet.com/tesla/articles/could-tesla-be-prof...
Historic sales growth is somewhat behind capacity growth. 2017 ended at about $12B. 2020 is tracking to maybe $32B. That's around 40% annual sales growth. Let's call 2.5 million cars $125B in sales. At 40%, Tesla needs around 4 years to get to the $125B level. Essentially, the back of my envelope says long buyers today will need to hold for 4 years to see a profit based on some semblance of fundamentals.
Stock prices for high-growth companies can be fluffy for a long time. I absolutely agree that current levels are in the realm of absurdly ridiculous, but as long as the underlying economy doesn't crater, the exuberants can be irrational for quite a long time. Can they hold out for 4 years?
I'm not sure what exactly you mean by "infrastructure put in place", but I can't imagine running charge stations to be hugely profitable business: gas stations most certainly aren't. They might still be pretty good business, but they clearly are not so good to account for hundreds of billions in valuation.
Panasonic will now manufacture TSLA designed batteries, but TSLA will also be contracting other firms and build manufacturing facilities itself.
https://electrek.co/2020/12/27/tesla-tsla-4680-battery-cell-...
My bad for seeming like I was contradicting your argument, I have no opinion on that. I was just clarifying some of the facts.
Also, Tesla sales growth is 40% annually over the last 3 years and will likely continue for 5-10 years. GM's might be 1%. Keep in mind, GM is fighting to retain market share. Tesla is taking it away from the incumbents. They really cannot be compared in this analysis. Apple is the closest as a proxy for future P/E.
If the legacy autos spun out their BEV business, that would be the closest comparable.
They have an awesome software experience, but they buy off the shelf parts and assemble them into cars, just like everyone else. Nothing about that makes it a supercomputer on wheels.
>Tesla is taking it away from the incumbents
Competitors are already taking EV share back in some markets. Won't be as easy as you seem to think.
https://heartbeat.fritz.ai/computer-vision-at-tesla-cd5e8807...
Moreover, the market cap of the biggest car companies have been relatively stable over last 10 years, as the market cap of Tesla was soaring. If the expectation is that the Tesla will eat the automotive market (as it well might), wouldn't you expect the market cap of other companies fall accordingly? As of right now, it seems like the market expects insane increase in revenues of entire industry, not just Tesla, which doesn't seem likely to me: Tesla's growth is almost certainly mostly predicated upon cannibalizing sales of its competitors.
I think Tesla is great company, and I think Elon Musk is exactly the kind of person we need more of, if we want to have bright future instead of stagnation or degeneration. My only point is that Tesla's market cap seems to be greatly inflated, by factor of at least 5x, and possibly even 20x.
The Enterprise Value of GM is $150B. There's <4X difference between the two, not >10X.
If Company A borrows $10 from the bank and then loans $10 to Joe, it's got $10 in assets and $10 in liabilities on its balance sheet.
A fair price for Company B to acquire Company A is $0 in cash changing hands. That's the market cap.
But on the books for Company B it will show a cost of $10 to acquire Company A. It had to assume a debt of $10 to gain assets worth $10. To company B, assuming a debt of $10 has no material difference from paying out $10 in cash. So $10 is the true value of the transaction.
Yes, it's equity hasn't changed. However, the debt on its balance sheet has, so the enterprise value formula of EV = market cap + debt - cash now has, because the loan asset won't be counted as cash, but the loan liability will be counted as debt.
That's why no one calculates enterprise value for bank/insurance companies. It doesn't provide any insight or meaning.
Yes, this is a large element of the reason that Tesla's stock price has grown quickly (though from here, who knows) while the incumbents have not.
A notable difference that plays into the discussion is the profitability of the business itself. Tesla should be able to achieve a ~30% gross margin. The legacy companies come in around 15%, once you expense their R&D spend (it's hard to find, I did it once. They amortize it over car sales on their P&L.). A significantly higher gross margin is a significant competitive advantage, but also enables higher net earnings. In principle, P/E is founded on 'anticipated net earnings'. Clearly, buyers today (whether they are aware of it or now) are anticipating Tesla to be greatly profitable in the future.
In my mind, there is no rational thesis that justifies the current trading levels. Buyers today couldn't possibly be thinking through the risk they are taking, unless they know they can hold for many years, and through stomach-churning gyrations. That said, if any NHers have a thesis that they've penciled out and which determines, 'yes, buy TSLA at $860 (1:40PM EST 1/8/21)'. I'd be very interested in seeing it.
Right. To justify the current trading levels, the expectations must be that it will capture significantly bigger part of its market than any of its competitor, and it will have better profit margins than them. I simply can't see that happening over long-terem horizon. I can definitely believe that Tesla will capture large part of the market, and in fact that it becomes number one automaker. I can also believe they will significantly enjoy higher profit margin than their competition. I just can't see any path to both at the same time: this would imply having some enormous advantage that none of its competitors can get even close to. Since the competitors are not bumbling morons, I think it's unlikely.
If e.g. only two companies in the world achieve it in a reasonable timeframe, those companies will be able to price it such as to capture a large portion of the value. This is a huge market, and Tesla would already have millions of vehicles deployed.
Tesla is worth like 700/share in 4 years if everything works out with their factories and expansion. If they hit the lottery and magically figure out self driving, then they will 2x-3x, because they can have better than software company margins.
I don't fault the crowd for thinking they will have self driving cars in a few years. I don't see it really happening outside of a few really well managed cities.
I don't think the bull case is very strong. But I do think the previous bear cases of "they cant run a factory", "they cant scale production", etc are all mostly disproven.
I would describe myself as bearish on their self-driving future as something I could trust to sleep or do work in. The recent videos are impressive and exciting. I hope they succeed.
Anyone can offer 10k aftermarket upgrade, but the real question is how many will buy it.
> But I do think the previous bear cases of "they cant run a factory", "they cant scale production", etc are all mostly disproven.
Yes, I'm very bullish on Tesla, mostly because I have great trust in Musk's ability to run business. However, my bullishness doesn't extend to valuing Tesla today more than next five of biggest auto makers combined.
Maybe, depending on what those features do. But all you are doing is moving the car into a higher market segment, with fewer potential buyers. Other manufacturers do this, too.
Your model assumes a profit margin 3-4x the most profitable auto companies in the world? You do realize Tesla's best ever profit margin was less than 2%, and that didn't come from selling cars, right?
>Essentially, the back of my envelope says long buyers today will need to hold for 4 years to see a profit based on some semblance of fundamentals.
A profit how, by selling their shares to other people? Why would those people buy at that valuation?
AMZN had almost no Net Profit their entire existence, because they were reinvesting in growth. Once their growth slows, you can expect them to show higher Net Margins.
The key for high growth companies is Gross Margins. The higher the gross, the more they can reinvest. And, the higher their net margins will be once the growth slows.
Tesla is vertically integrated. That means they don't need to share profit with a supply chain to the same extent as the incumbents. Hence, I split the difference between the incumbents and Apple's net profit.
Feel free to adjust the numbers to what you speculate the future holds. You'll get a different time horizon that will likely be even more ridiculous.
Apple is not in the auto industry. Their margins are not comparable to auto companies.
> AMZN had almost no Net Profit their entire existence, because they were reinvesting in growth. Once their growth slows, you can expect them to show higher Net Margins.
Amazon did not need nearly as many capital injections as Tesla has over its existence, and acting as though the Amazon story was slowing growth rather than AWS is missing alot.
Tesla market cap as of January 07, 2021 is $696.81B. It's well over 700B today.
Market Cap as of Jan 7, 2021
Toyota is $214.45B.
General Motors is $59.63B.
Ford Motor is $35.17B.
Fiat Chrysler Automobiles is $36.13B.
VW is 89.23B.
Porsche is 21B.
Audi is 83B.
Nissan is 20B.
Honda 49B.
company on earth put together. Just a few more x10 away.
He says this himself in the SolarCity lawsuit deposition, I believe.
I feel like Toyota will release EV Corolla and stop this whole nonsense with Tesla. Hell, even VW took a huge chunk from Tesla in Europe with just couple models.
The problem with Ford is they have a ton of debt and they are in a capital-intensive, highly competitive industry and they are one the first industries hit in the event of a recession.
All car manufactures are essentially in the same situation. There's a reason this industry is rife with bankruptcies, mergers, and government ownership. Car companies all need so much capital to survive that they tend to starve very quickly. If Microsoft revenue went to $0 tomorrow, they could float on reserves for several years while they correct course. If the same situation occurred to Ford, they'd be gone by in a few months.
https://twitter.com/fly4dat/status/1347490490564931594?s=20 https://twitter.com/fly4dat/status/1347331694915956736?s=20 https://twitter.com/fly4dat/status/1347193345714630656?s=20
The share price is already reflecting that people thought it would have collapsed last year.
Because when the tide turns all that money will go into whichever competitors are still standing and have the best e-car portfolios. Best to diversify.
If you could time it right, sure shortsell, but that's a HUGE risk, this one not so much...again I'm NOT a financial guru, my negative bank account could prove that, but it's just a hunch I have, a similar one I had in 2013 about bitcoin and kick myself daily for every day.
Then Tesla released its 3rd quarter earnings (which moderately surpassed Wall Street's expectations) and the stock has since risen dramatically. Burry's argument that TSLA is overvalued appears cogent based on Sep 22 data and more so today.
Burry deleted hundreds of his tweets from 2020.[2] He should stick to picking stocks. His #FauciFraud nonsense was irresponsible.[3]
[1] http://web.archive.org/web/20200924024110/https://twitter.co... [2] http://web.archive.org/web/20200523143011if_/https://twitter... [3] http://web.archive.org/web/20200410021906if_/https://twitter...
Instead of collecting a payment upfront, and paying back a potentially unlimited amount (or zero) as we do with the current instrument, you should pay in any amount you choose, and the higher the stock goes before it collapses, the more you get back when it does (maybe by the square root of the difference), though the value falls off slowly over time. If it doesn't burst, you get nothing. If it bursts too soon, you get back only what you paid in.
That said, I would not bet against SpaceX/Starlink.
You mean...like a https://en.wikipedia.org/wiki/Put_option?
TSLA is at 1,671 LOL!!!
The market right now is around 40. Obviously technically we are in a recession but the stock market is going up. So where's the crash?
What are your typical measures that we have a massive market crash coming? If people believe this they will move their money to something that shouldnt crash or at least are isolated. Amazon is sky high as well.
Bitcoin is at $40,000. Ethereum is way up as well.
Gold is way up.
Bond market is way down(implying people are buying bonds in droves) Germany, Belgium, Netherlands, France, Switzerland are all negative interest rates.
The thing about the summer and covid lockdowns. People got out to spend money in the summer due to lockdown being over. We are now back to lockdown. Which means earnings calls are going to be bad.
Late spring we will be seeing the crash. People are moving their money now to safer places. Tesla, Amazon, Gold, Bitcoin, Bonds is how they are doing it.
When the crash comes, it will likely not be Tesla.
One of the best metrics to see this: https://tradingeconomics.com/united-states/central-bank-bala...
Basically in a fiat currency the very last place for debt to go. You can clearly see when the financial crisis happened and how the USA never really recovered from it. Then you can see when the covid recession hit.
https://tradingeconomics.com/venezuela/central-bank-balance-...
There's only 2 ways to see where this goes. It means bankruptcy OR major inflation.
Biden government will decide which they choose.
Tesla is still richly priced by these, but within the realm of plausibility if you make the right assumptions.
If just one or two hit the electric bandwagon hard and start eating into TSLA's lead, then you hit pay dirt. Less payout, but less risk as well.
Unpopular views are always attacked/ridiculed, so keep this in check.