Tesla

[izam]

Looking at the stock price run up recently; wondering if anybody here has invested in this company? Would love to hear your views.

[AndrewHW]

Happy New Year.

I'm vested in Tesla and. My guess is the investor base attracts mostly long term investors who believes in the Chairman/CEO Elon Musk's leadership and execution, who owns the largest stake in the company (27%). And for the people who hold the opposite view, short sellers are also actively participating.

I am interested to discuss further on the company, it's car (Model S, Model X, and Model E), giga factory, electrification of the automobile industry with the forum members here.

Here are some information that might be useful to the people here:

IR
http://ir.teslamotors.com/

SEC proxy of the beneficial ownership %, http://ir.teslamotors.com/secfiling.cfm?...IK=1318605

Tesla Master Plan (2008)
http://www.teslamotors.com/blog/secret-t...you-and-me

Mission of Tesla (Nov 2013)
http://www.teslamotors.com/blog/mission-tesla

[grubb]

I am not vested in Tesla although I hope for it to be successful.

On the other hand, I think that the odds are against Tesla. Citron Research has published a couple of letters highlighting their difficulties.

http://www.citronresearch.com/wp-content...-final.pdf

What do you think?

[AndrewHW]

Nice to hear from a fellow member here who hopes for Tesla to succeed (maybe there are other people here). Appreciate if you could elaborate more of your view on the company or the Citron report you cite?

Citron Research is a short-only newsletter, Tesla is a prime target since the stock ran up almost 500% last year from 1 Jan to 1 Oct'13. . The letter quoted was published in Sep'13, around the time when Tesla share price was at it's historical high around 190 so it was a good call as the share price has since came down and is now around 140-150. However, the current price were more driven from fire events that happened during that period rather than Citron's report. Before investing in Tesla one has to look at the probability of the company to realise expectations built into the stock price.

It's difficult to predict the future with 100% certainly, but this is true as with all high-growth companies staking claim on market share in new industry (e.g. Apple, Amazon, Starbucks). For these companies, there is always a chance of great success or failure.

Today, Tesla 's share price is highly priced if you look at it in terms of conventional value metrics (2013 9M revenue is $1.4M vs market cap of $18M around 10X annualised P/S ). There is high expectation for the upcoming 3rd gen Model E (US$35k model in 2017) to be a huge success and bring EV market to a tipping point.

However, Elon Musk, the Tesla Motors team, and their customers are anything but conventional. (1) Elon Musk has been compared to that of the late Steve Jobs, and he has already made a huge significant impact in the world (look no further than Space X) (2) The people working for the company are the best in their field (3) Technological leadership in EV, battery and charging (3) It's customers and fans are one of the most enthusiastic you could ever find in any industry (similar to Apple).

[grubb]

Hi AndrewHW,

I don't intend to be vested in Tesla long or short, but I welcome the discussion anyway.

Just my $0.02 on the business.

Like you and Citron both indicated, we need to assess the probability that Tesla can meet the expectations built into its stock price. At $30 it was a good buy, but at current price of $145 I think investors may be in for some pain ahead.

In order to justify 10x P/S, Tesla has to grow A LOT. Unfortunately, this means moving down towards the mass market. Tesla has promised a new $35,000 model which brings it into direct competition with the auto majors i.e. GM, VW, Ford etc. Citron has pointed out that this will cannibalize the sales of its previous higher end models which I agree. All these add up to lower margins which means even more growth.

The auto majors also have a profitable traditional petroleum cars division to subsidize their electric/hybrid cars for as long as possible. Their R&D budget and spending is way larger than Tesla. To say that Tesla is innovative is very fair, but can they out-innovate their competitors with much less resources?

To meet the higher demand at a lower price point, Tesla will need to ramp up production significantly. Remember that Tesla does not have a profitable division to subsidize itself. Tesla will need to make big capex. Perhaps taking up more debt or raising more capital?

And back to the 10x P/S, I quote this from Whitney Tilson's Q4 letter:

==================================================
Think about the implications of this. I used to think that it's mathematically impossible for a company with a $10B market cap and more than 10x sales (much less 21x) to ever be a good investment, but a few companies have proved me wrong. They all have three characteristics:

1) They serve rapidly growing global markets;
2) They have winner-take-all (or at least most) business models; and
3) They have extremely "light" business models -- meaning they can scale globally with very little capital required.

The stocks of such companies can actually be cheap – even with big market caps and P/S multiples. Examples of stocks that have done well subsequent to periods at which they were trading above 10x TTM sales and had market caps in excess of $10B include Microsoft and Yahoo in the late 1990s (and Yahoo again in 2003-04), Amgen and Biogen prior to around 2003-05, Adobe in 2000, Google, priceline.com and Infosys in the few years after their IPOs, Qualcomm from 2001-2006, Salesforce.com at various points, as well as LinkedIn, Facebook, Baidu, Tencent, Gilead Sciences for their entire existences. (Incidentally, Netflix, which I still own, has all of these characteristics I believe – and trades at “only” 5.2x revenues; it was 1x revenues when I pitched it at the Value Investing Congress 15 months – and a 7-bagger – ago.)

Note that every one of these 15 companies falls into two categories:

1) 11 are software/internet companies that don’t deliver a physical product – the lightest business models imaginable; or
2) Four have intellectual property (three have patented drugs) that allows them to earn supersize profits (gross margin in the 70-90% range and net margin of 20-30%).

===================================================

An auto company hardly fits into these criteria.

Welcome your comments

[AndrewHW]

Hi grubb,

I welcome a friendly discussion on Tesla. Just to state openly, I'm not here to convince anyone to invest in Tesla. But, I have been regularly following the company and Elon Musk so what I would like to do is to share what I know about the company, it's plans, while doing that to try and see if I could answer some of your concerns. Anyway it's just my views, i'm no automotive industry expert too.

My guess is most of the people do not know the company so i'll do a brief introduction first. Tesla Motor is a Silicon Valley startup founded in 2003 by Elon Musk, it's mission is to accelerate the world's transition to electric mobility. They currently have two production EV: Tesla Roadster (2008-2012), and Tesla Model S (2012-). Both are highly acclaimed and is the industry leading EV which are far ahead of the competitors' EV or traditional gasoline car (in the same category). Model X (SUV) will be introduced in 2015 based on the same platform as the Model S. In 2017, Gen III (Model E) will be the affordable EV that Tesla will introduce to the general public. At that time, the giga battery factory and Supercharging infrastructure would have been established.

Tesla not only makes electric cars but also the eco-system around it (think "Apple"). They are also building out a network of the world fastest charging infrastructure: "Supercharger". Today, there are 80 Superchargers in the world (USA: 66, Europe: 14) and many more are under construction, and there have been discussion in China to enable long distance travel between Beijing and Shanghai. They hold IP around batteries (cooling, balancing, longevity, safety), and drivetrain (motor). In fact, certain EV of Daimler and Toyota are using Tesla battery and drivetrain. And in order to reach their goal (read back on the mission of Tesla), battery supply will need to be greatly increased. In a 2008 Tesla's report on battery market, each 1% global auto market transition to EV requires 10X the world battery supply capacity. Next month, in Q4'13 earnings call, Elon Musk (Tesla) will announce details on "giga factory" as it will double the world battery supply of all lithium-ion production. There are much to say but I will stop for now. You could go to http://www.teslamotors.com/about.

Now back to your statement. Tesla at 10x P/S makes sense as well. The company is expected to double it's sales of Model S in 2014 about 40,000 units from over 21,000 in 2013. Sales of Model S has been growing exponentially since it's available and all cars are ordered about 2-3 months in advance before it is produced because there is a mismatch of supply-demand today ("the other way around"). They are production constraint.

Tesla's internal vehicle sales figure targets for 2017, 2018 and 2019 are 200k, 400k, 700k. Reference: JB Straubel | Energy@Stanford SLAC 2013 - YouTube (minute 22:09).

700K in 2019 is 35x 2013 sales or 17x 2014. So 10X P/S could somewhat be justified although it is not a certainty.

All other major automakers are depended on traditional internal combustion engine running on oil. History tells us rich and established does not always win when the market has changed (in this case to EV). Think traditional retail vs online store (Amazon, Taobao). It is unlikely they will be able to come up with something that will challenge Tesla. There are a few reasons (1) organisational/incentive problem (2) technology/innovative issue (3) too late to establish charging infrastructure leading to Supercharger becoming the de-facto standard. For a case on (1) you can refer to model EV1 built by General Motors in late 1990s but was pulled from the market and destroyed despite the fact the popularity of EV1 at that time.

Most people also pointed to a major problem of Tesla scaling up production to the level they are projecting, first to ~500k (<0.5% of WW annual auto sales). I'll see if this could be overcome in another post.

[CityFarmer]

The electric car industrial has been supported by policies and tax breaks, both in US and China...

Nevada Governor signs $1.3 billion tax break package for electric car maker Tesla

CARSON CITY Nevada - Nevada Governor Brian Sandoval signed a package of bills on Thursday to provide $1.3 billion in tax breaks and other incentives for Tesla Motors, putting a bow on the deal for the electric car company to build a massive factory in the state.

Sandoval said the agreement has "changed the trajectory of our state forever" during the signing ceremony late on Thursday, shortly after the four bills were unanimously passed by both legislative chambers.

"Nevada has announced to the world - not to the country, but to the world - that we are ready to lead," Sandoval said, to applause.

The biggest chunk of the deal won support in day two of a special session called by Sandoval to implement an agreement for Tesla to locate its planned $5 billion lithium-ion battery factory in an industrial park 20 miles east of Reno along Interstate 80.

Tesla, founded by entrepreneur Elon Musk, decided to locate its factory in Nevada after negotiating with several states, including Texas, Arizona, New Mexico and the company's home state of California.
...
http://www.todayonline.com/business/neva...-car-maker

[valuebuddies]

Tesla $1,900?

http://www.marketwatch.com/story/tesla-1900-2015-03-12

The stock is at $190 right now, with a market cap of about $24 billion. Despite some recent weakness, shares have already doubled since mid 2013 and are up almost 500% over the past three years. By Morgan Stanley’s estimates, we could see $1,900 and $240 billion, good enough to make Tesla one of the top 15 biggest companies in the U.S.

[BlueKelah]

The deciding factor will probably be the mass market. However i am pessimistic, unless oil price at 200, hard to beat durability and reliability of combustion engine. Power wise electric car is joke.

sent from my Galaxy Tab S

[white collar]

The deciding factor will probably be the mass market. However i am pessimistic, unless oil price at 200, hard to beat durability and reliability of combustion engine. Power wise electric car is joke.

sent from my Galaxy Tab S

Tesla is a company of the future. It may not make much economic sense now this is where the world is heading to in the next few decades. The idea of saving-the-planet is becoming increasing believable. This is effectively a lifestyle change. With regards to renewable energy, many countries have tax incentive grant schemes and subsidies to encourage the take up of renewable energy to meet their countries' 2020 renewable energy targets. The take up of solar,hydro power and biomass have increased tremendously the last three years. USA is experiencing an all time up in solar installations. UK and Germany are still betting big on this sector. The currently depressed oil prices may not be as lucrative for people to switch to renewable energy but it certainly makes sense with strong govt backing over the long term. Elon Musk is also the founder of SolarCity. The biggest (and perhaps most successful) solar company in the world. Kudos to him, he is indeed a visionary.