Topic: Tesla the company, Tesla the stock, and Elon Musk
Conclusion: More of a debate, but maybe some short term upside risk for a short seller
Inspiration: This great debate on Quoth The Raven’s podcast episode 50.
Elon Musk has pulled out all the stops on all fronts. He built a tent, he built a number of more or less crappy cars, but probably thousands that are more or less fine too. He’s on twitter all the time calling all kinds of people names I don’t care to repeat. Everybody can see Musk is panicking over something. The question is what.
Is he trying to get fired before a Chapter 11 or a SEC investigation? Is he just trying to burn a few shorts before the curtain falls? Is he really trying to save shorters before turning around his auto start-up? Well, if he’s really trying to save the world, maybe he wants to save shorters too.
Looking in the rear view mirror, Tesla has burned an insane amount of capital as a trail blazer for electrical vehicles; and it doesn’t seem nowhere near turning a profit anytime soon. Looking ahead Tesla might become and industry leader with several billion dollars in annual cash flow as it disrupts the legacy auto industry built around gas stations and combustion engines.
Recently (July 15, 2018), Quoth The Raven arranged an hour-long debate between pro-Tesla Galileo and Tesla skeptic Montana Skeptic. What follows is a truly sloppy transcript written in real time while listening to the debate. I only post it here as a kind of public notebook for the most relevant arguments on either side of the debate. It’s a very good natured debate and there’s lots to learn for bulls and bears alike.
I’m actually kind of blown away by Galileo’s confidence and arguments. It was the first time I’ve heard a coherent bull side of the Tesla story. On the other hand it’s no secret I think Galileo’s view of capex, profits and not least the “software moat” have nothing on Montana Skeptic’s “competition, loss-making, can’t afford capex for future models, M3 is last chance and it’s hugely loss making” argumentation.
Right after the transcript, I’ve added a little bit of short term speculation regarding the share price (Disclosure: I’m short Tesla. Disclaimer: nothing here is a recommendation; do your research elsewhere, I take no responsibility for any losses you may incur. More disclaimers.)
Loosely composed transcript
Feel free to point out mistakes, or why not improve on the document right here in this shared document: TESLA QTR DEBATE “TRANSCRIPT”. Create sentences out of words, paragraphs and narrative out of sentences, add charts, perhaps add own arguments (clearly marked as such) etc.
Please note that I haven’t secured any rights whatsoever to do this from Quoth The Raven. I’m hoping he’ll like the initiative, but if he doesn’t I’ll take it down immediately. A tweet or an e-mail is sufficient.
Tesla debate on QTR
Pro – Galileo
First and foremost the CEO, I’m betting on the jockey not the horse
Smartest leader in the world, incredible leader
Track record of zip2, paypal
Disruptor
Both incredible engineer and business person
Running Tesla as a start-up, CTO, technical founder and business person
Massive opportunity for electrical transport system AND autonomous vehicles
Tesla is in start-up mode
Building for millions of cars not a few 100k
Reaching 20bn in revenue faster than Amazon did; Tesla is one of fastest growing companies ever, 50% per year compounded growth
Clear strategy: High end cars => cheaper and cheaper cars => 10x number of cars in future
Leading battery technology
Big utility projects like in Australia
Autopilot big story for future
Apple-like perfectionism, focus on customer
Several 100bn mcap auto maker in future
Con – Montana Sceptic
Competition coming now, has been in monopoly for lux EV last 6 years
Lavish subsidies, still lost lot of money
Real losses, not due to capex, the capex comes from cap raises. Tesla has no money to reinvest.
Lost 700m Q1, probably 700m more in Q2
iPace has arrived, superior reviews. Next Audi, Mercedes, Porsche, Volvo
Model S sales already falling off. Their high margin car being cannibalized by M3.
Competition will gut margins further
Has lost aspirational image in Europe. Next year in US
M3 supposed to be money maker, but after one year with M3 Tesla has lost more than ever. Maybe break even on 60k priced M3, but addressable market for 60k sedan is limited. Running out of demand. 35k doesn’t exist, Tesla will die if tries. No tax credit in future and many pre-ordered because of that
Supercharger network still superior but coming CCS system in Europe is better.
Valuation: GM P/E 6, ford 7. If Tesla warrants 15x, needs 3.5bn profit to defend current market cap.
“Betting on Elon Musk”… Irrational person, calling rescue diver pedo. Not an engineer at all. Not a leader (look at exodus of managers)
EV revolution can’t survive without subsidies due to expensive batteries. Just a niche product without subsidies. Will be better in future but not yet.
Australia project at best break even. Overwhelming nothing. Not profitable.
Pro
Competition: could have said about Chevy Volt, but Tesla still much higher sales. Will only believe competition is relevant when it actually is outselling Tesla.
Ironic that EV revolution not coming if at the same time says competition coming now
Tesla had super backlog even before existed – like Apple iPhone
GM, Ford are tied to combustion engine. That’s why low PE
TOPIC: is Tesla’s capex sufficient for 3, Y, semi, roadster 2, solar roof tiles and all else?
Pro
Believe 2018 capex not addressing anything but M3
Investing capex in one project, then moving to next
Can’t expand >100% per year. Irresponsible to try for mfg.
Will have to raise capital to fund Y, Semi, Roadster, solar roof to build out factories and robots. Will see profitability for M3 in 2018 but need and will raise cap for future
Compare Netflix: Tesla should say that “wont be profitable, we are building for the future coming 5 years.”
15bn incremental capex coming 5 year. Vs 50-60bn market cap not too bad 3-4% dilution/year to fund capex. I want them to do capex, growing future earnings power
Con
Model Y, said should start in 2019, said in Fremont, said that had capacity, but Strauble (?) said “no, we are jammed to the gills, need new factory”.
Probably takes 3-5 years to build a factory. No 8K filed for China MOU so just a big nothing.
No room for semi in Fremont
Thus: No new products coming for several years
Takes lot of capital and time to develop new products; and exist no plans yet
Supercharger upgrades? Thought that was the moat. No, moats are “lame” said Musk.
Where will Tesla get money to expand or upgrade SC net?
Tesla is slashing its capex; not only underinvested for future, also for present
Only applied for permit for tent, fire damage, and bare bones maintenance, and robotic feather duster system. So, no real capex for mfg expansion being done
Goldman says needs 10.5bn minimum over 2.5 years, which is 5x what ever done before.
Invested billions in capital and have record losses. How convince Wall Street that future capex will create profits?
Pro
Need capital but spending too little capex. Cherry picking stats. Catch 22, spending too little and too much at the same time.
Adding more revenue and production capacity than any other car maker. Data shows Tesla knows how to expand capacity.
Cash flow is positive on every product after 2 years.
TOPIC 2: Market share, EV sales, how doing in US
Con
+90% EV sales in US 2018/2017. So what, losing money on them. Of course can get market share. Not eo for a new car co. to take share; especially when doing it at a loss. In particular before subsidies expire and competitor products come online.
If Tesla were expanding share and making money would be impressive, but now losing money faster than growing revenue. Tesla is now cherry picking highest margin M3 models in Q3, Q4. Finding clients paying for highest priced models M3 while cannibalizing S,X.
The more they sell the more they lose. Not a promising business model
Pro
Making it so easy for me. The other automakers are screwed because Tesla has leading battery cost. If Tesla is losing money the others lose more. Selling dollar at 85c vs the others at 50c? Think the others lose much more than Tesla. Tesla reports positive margins.
M3 best selling car in US, S and X nr 2 and 3. Tesla keeps expanding market share right when others like Chevy Volt should have taken share. Bulls keep saying the next competitor will kill Tesla, but Tesla keeps pulling ahead.
Takes time to build a profitable large car maker. When Tesla reaches scale they will be profitable and Tesla is using social media engagement, millions of followers, no spending on marketing. The others are dinosaurs that totally missed the EV trend.
“So what?”: EVs were a joke, a niche, but all autos are now investing billions after seeing Tesla being successful. 20bn orders, lining up like for an iPhone… THAT’s not a “so what”, that’s disruption
Con
Yes, fans lined up for a 35-7.5k car
Zero evidence for leading battery cost
Gross margin, profit: is higher than other cos because they have to have a dealership model. Teslas costs show up in sales and service centers instead. Need net profits.
The other cos have profitable combustion engines, and can afford subsidizing EVs; Tesla can’t
TOPIC 3: EMs behavior on social media, good or bad?
Pro
Not good calling somebody names. Not good people reporting on tweets rather than on business. Pathetic by Musk to be affected by tweets
Tesla is leveraging social media in strategic way. Direct megaphone, marketing machine, => millions or billions in free press
Presence on Twitter is incredibly valuable if used in right way
Coordinating Oz project, OTA brake update etc. over Twitter
Culture and brand that nobody else has
Only car maker that has figured out how to use social media for marketing. Doesn’t spend a single dollar on marketing.
Elon should stay on Twitter, stay involved, but grow up and not call somebody a pedophile
Con
As marriage counselors say: What you love will drive you crazy eventually. The Musk cult is discovering how boldness, iconoclasticness, promiscuous tweeting has a backside: reckless, narcissistic.
Not smart to lash out at short sellers as if responsible for poor manufacturing, or lash out at journalists personally, accusing/suing Martin Tripp for sabotage, and Lopez for bribery, accusing diver for being a pedophile. Not just absurd: sick and despicable. Should cause outcry and calls for Musk stepping down. No other CEO would last 24h after such an accusation. Puts board in a bind. Defamation suit? Why did Musk have to be the centre of attention? Deep seated insecurity. Narcissistic. Needs to be the great saver av all of us. That trait is incurable. reated cult of personality, investors embraced it. Both are stuck with it. This is just an. Charming, lovely exciting can turn into perception of Ugly, problematic damaging
Pro
Conference call was smart, giving a voice to retail investors
Accusing short sellers put focus on them so they don’t make synch attacks
FINAL
Con
Lives from cap raise to cap raise. But for a cap raise always on brink of BK
Neg curr assets several Bn dollars; need more capital this year
Other automakers have portfolio of profitable products = advantage
Interior of M3 “tired”, “never was that remarkable”, losing aspirational status
If Tesla can’t eke out a profit in Q3, Q4 they will never be. In coming years, will have nothing else to sell.
Very hard to pencil out a profitability that warrants more than 20-30 dollars/share
Pro
Incredible once in a century disruption of transportation: Electrification + Autonomy
Tesla had this vision before anybody else
Legacy for others is huge achilles heel: dealers, not own stores, combustion engines…
Misses entire story since misses how fast
Software: sold computer game at 12yo, SW is fundamentally different skill than combustion engine and analog devices. OTA upgrade, touch screen control. Tesla teardown says circuitboard is like an F35 fighter jet. Tesla has software in its DNA, also good at hiring s/w engineers. The others can’t attract s/w engineers. Battery management software, e.g., that Tesla has perfected with several 100k cars on the road will take five years for other cars to learn. This is the major differentiator.
Multi 100bn dollar company. Oz project showed proof of concept at unprecedented scale.
Software is at core, massive moat. Everything ties back to SW vs dinosaurs trying to pivot to a model Tesla invented
Con
“Computers with wheels…” — too bad Tesla can’t build wheels that don’t fall out
Crazy to think the other car manufacturers don’t have competent sw engineers, Over The Air updating capabilities ready or planned.
Speculation
As I said above, Musk is clearly coming off the hinges, and a cornered animal can do all kinds of crazy things. I’m guessing Musk could windowdress the company in a single quarter, showing a profit, positive cash flow, high sales numbers or high reported gross margins. I can’t see how any of that would be sustainable; but short term I can definitely see how it could push the share substantially higher short term.
(I can also imagine the market not falling for that trick again, but so far Tesla’s share price has had a tendency to rise on any little hint at potentially positive news)
Looking forward a year, I’m confident the Tesla growth story is over. Tesla doesn’t have a credible path to profitability, and any cash it manages to raise for capex would go to covering losses and maybe, just maybe to projects 3, 4, 5 years into the future. By then Tesla will have lost any lead it once had in roadsters, trucks, chargers, batteries and luxury EVs.
To summarize, I think Q2 is a lost cause. Tesla’s burst effort must have cost more than in Q1, and the cars it has sold are still loss making per unit despite under reserving for warranties. On the other hand, Tesla’s reports are never about earnings. In Q2 Musk can talk about record sales, record production rates, reaching the 5k/week production goal (although they really didn’t), maybe even record gross margins (since they are made up and irrelevant anyway). He can also make promises about profitability and positive cash flow in Q3 and Q4 and claim Tesla doesn’t need to raise capital anytime soon. He can say they’ve reached new highs for a one day production rate. He can more or less say anything, and probably will, in a last ditch effort to push the stock price upward.
Technically, I think the stock looks weak. I also think the real results for Q2 will show vulnerability and low cash levels. I’m sticking to my shorts over earnings, but I can definitely understand if you don’t. What if Musk is extremely upbeat and both promises and reaches profitability in Q3 (based on selling high-spec Model 3s at a positive margin to Tesla’s most hard-core fans)? Then the Tesla bull story could really grow some legs for several months.
Yes, I readily admit I’m a bit wary of what Elon Musk and his fans can accomplish short term. On the other hand, the allure of being short when this thing blows is just to great to risk missing. The doomsday clock is five to midnight, Tesla is out of money, out of products, out of a “cool” leader and out of time. All it has is a crazy cult following that might turn on the company in short order on missteps like PAC contributions or absurd and sick accusations directed at analysts, cave divers and journalists.
P.S. Follow Quoth The Raven and check out his weekly rants on his 2-drinks minimum Friday evening podcast
P.P.S. Please note (again) that I haven’t secured any rights whatsoever to do this from Quoth The Raven. I’m hoping he’ll like the initiative, but if he doesn’t I’ll take it down immediately. A tweet or an e-mail is sufficient.
