The sprezza bull case for Tesla

Topic: the bull case for Tesla

Conclusion: It’s a free option at prices below 700 dollars per share (or not)


OK, so Tesla missed its production target slightly. No, matter, they are making 2000 M3 a week and aiming for 5k/wk by the end of Q2. Musk has talked about stabilizing production at 5k for profitability so let’s run with those numbers. The other models were at 25k/month for Q1 and 100k for the year, thus giving us the following table for 2018:

TESLA: conservative revenue and value case for 2018

So, conservatively calculated, Tesla warrants a share price of 700 dollars. Even at half that (which means a ridiculously low EV/Sales multiple of just 3.0x this year’s revenues) the stock is still undervalued at its current once-in-a-generation buying opportunity level of  below 300 dollars per share. In addition you get the optionality of having access to Musk (about a quarter of him, considering his other assignments, but 25% is plenty in His case) and his future plans for Tesla for free. And at this point we haven’t even mentioned the huge potential in taking over the truck market.

700 dollars

Now, is that something you might be interested in?

A target price of 700 dollars per share is thus truly a rare give-away. And it’s not like Tesla shares grow on trees or can be printed willy nilly. (not anymore they can’t, but more about that later)


What the bears are saying

I know, I know, I know. Trust me, I know. There are no Tesla bears, and if there were they would be utterly and irrecoverably stupid so why bother?

But, bear with me for a minute (yp, I said bear with me; that’s how old I am #dadjokes)

Let’s just assume that the prospect of being ridiculed for being on the wrong side of history, for exposing oneself (uh, gross!) to potentially unlimited losses (aha, ok..), for actually reading and understanding Tesla’s convoluted and long-winding reports full of marvelous non-detailed information and made-up numbers, isn’t the pure unadultered fun it’s made up to be.

Let’s play with the idea for a while, that the bears have actually made an effort before punting their and their clients’ hard earned money on the foolish venture of shorting stocks in the bull market of a century in a company where the founder and CEO sends cars to outer space, and posts “bankwupt” pictures of himself while claiming the company is in “production hell”.


Here are some ideas of what they might be thinking:

First mover disadvantage: Competition is heating up. It seems more and more as if Tesla has wasted years and billions blazing the trail for electrical vehicles, only to create a huge first mover disadvantage in terms of a potentially fatally heavy balance sheet, and a bloated vertically integrated and all but impossible to overview company. Porsche, Jaguar, BMW and many more all know what it takes to build and test a new product and streamline its production and quality management. They waited on the sidelines until the market was ready, and now they come armed with doors that actually close, knobs that stay in place and engines that don’t need half an hour of cooling down after one single INSANE MODE 0-60 mph in 2 seconds blast of juvenile idiocy.

Musk is overextended having too many companies to keep track of — one large tech company is usually more than enough to manage. Waking up at 3 am in the morning doesn’t cut it in this case (especially since that means having to go to bed by 8 pm at the latest or he’ll be punch-drunk at the job and getting worse by the day). You have to stay sharp and focused to be at your A-game in the tech industry, not a scatter brain like so many Twitter jockeys (and coincidentally Tesla fans… makes you go hmmm)

Vertical integration is rarely a good idea — in particular not in mature and highly specialized industries like car manufacturing. Nota Bene that just because the engine is electrical doesn’t mean you have to string the batteries and solar panels together yourself. That tactic reeks of mirrors and smoke screens. If the core business is sound, you’re better off focusing there, and let your subsuppliers work on the details for everything else. Management 101.

Lack of focus: There might be a certain place in hell for vertical integrators, but just next to it you’ll find serial acquirers that keep buying stuff instead of focusing on the task at hand. Musk and Tesla have enough to do, but I guess all the new CFOs need new numbers to fudge, and what better base to work with for your creative accounting measures than oh-so-malleable goodwill and adjusted this and adjusted that?

Introducing new products like the semi and the roadster with impossible specifications that takes many years of innovation to pull off, when the company still has trouble delivering their current models with satisfactory build quality, is just yet another example of sleight of hand. It has worked before when Tesla needed to sell bonds or stock, but at one point or another event the most fervent bull must ask himself when Tesla is going to make a profit. These are of course just distractions, which is all fine and dandy in the world of finance, not to mention saving-the-world-business. What’s surprising is that some allegedly smart investors are actually buying it.

All the cool 1999 dotcom style vocabulary smacks of, well, … the dotcom mania: supercharger, gigafactory? Really? The fans might like it, but investors shouldn’t fall for it. Again. Oh, they already did? My mistake.

The world’s largest compensation package, albeit given a 10-fold increase in market cap, is yet another genius-level (i.e., so moronic that people assume it’s ingenious) anchoring trick. If I say 10x, then 2x just has to be within reach. 700/share here we come!

Misplaced humor: I actually appreciate Musk’s antics and Twitter humor. It’s hilarious and gutsy, but guess again what happens once his “easter eggs” come home to roost when Tesla runs out of money, without having fully functional cars to sell at anything but losses and finally clients come asking for their 4bn dollars in deposits back.

Unfortunately Musk’s antics and humor are nothing but more smokescreens, desperate ones — and if they fail he’s running out of options (including that 60bn dollar pay package). I like his “save the world and humanity” agenda as well. Although, one might wonder why we need to go to Mars if his electrical vehicles and solar panels can save Earth in the first place :D.

Anyway, it’s cool and altruistic, but his God complex and ‘world peace before profits’ agenda is in fact being altruistic with other people’s money — namely Tesla’s shareholders’ money. Do you like being food for the immortals (i.e., Musk)?

Exodus much: A few other things are troubling too: why are so many senior executives, “insiders” if you will, putting Moses to shame in their exodus from Tesla? Why leave millions behind if not for the fact that your boss is turning more and more erratic by the day, not to mention the numbers can only be fudged so much before the authorities come knocking (although I wouldn’t hold my breath for the latter; the SEC won’t see what’s coming even 5 years after the fact, and by then they’ll probably start interrogating some of the very investors that shorted the stock in an attempt to get the truth out).

Interest costs, margins, you know, “financials” are in shambles: Oh, ok, so the above is just what’s most pressing about Tesla’s operations. Looking more into detail in Tesla’s accounts you could argue that rising interest rates (the interest cost is already 4% of sales), very high opex (34% of sales, excluding interest rate costs, 38% including the latter and thus 15-20 points higher than the company’s gross margins, so whatever profit multiple you’re looking for, there are no profits to go forth and multiply on).

I almost forgot… how long can Tesla shaft it’s suppliers with longer and longer time to get paid? Suck on that one for a while.


The Sprezzaturian sober not-superbullish-case for Tesla

So, disregarding the bankwuptcy case (which is salient enough but nowhere near necessary to contemplate shorting Tesla), here is a slightly more sober view of Tesla’s immediate prospects, albeit probably still way to bullish and not even taking quite pressing financing needs into account:

The production pace of 2000 M3/wk for two weeks took an inhuman effort and is taking its toll on production of S and X models. Missing 2500/wk so soon after stating it tells me Tesla won’t be making more than 3500/wk by the end of Q2 and maybe reach 5000 by the end of Q3 and hold that level for Q4 — IF I’m optimistic. However production and sales of S+X will probably taper off due to the focus on M3, both in production and for prospective Tesla buyers.

Also, 2x growth for energy is more than optimistic (vs guidance for 3x), not to mention a positive cash flow of 15% of sales. I’m turning cash flow down to a negative 15% instead.

As for valuation, at this point with share issues looming, losses, production misses etc, I think I’m being generous at EV/S=1.5x.

I can’t stress generous enough because this really isn’t a bear case, it’s just not terribly bullish.

So, 100 dollars per share… is that something you might be interested in? Or are you still hoping for those semis?

Please note my disclaimer on this site, and know that I never recommend any investments of any kind on this site. It’s all just for entertainment and provoking thought.


Did you like this article? Bookmark it, share it. And by all means, check out my podcast Future Skills where you get all the tricks you need to stay relevant and prosper on a world of accelerating change.

Do you want 20 per cent annual returns without risk?

Topic: optimal investing

Conclusion: to decide on how to invest, first you must ask “for what?”


Low risk, high return, please

I often get questions about what to invest in. What’s missing is “why?”, “for what?” and “at what potential cost?”. People want as high returns as possible, and preferably with high liquidity (the option to cash in at any point) and low risk of loss.

That’s not how investing works. Investing means taking risk and betting on an uncertain future. Anything that’s obvious and certain has already been bid up to a price promising zero returns. Actually these days, many investments that aren’t even perfectly certain promise negative returns — government bonds for example.

If you have nest egg of a year’s worth of income that you want to invest, you must first decide on at least two things:

  1. What you want to get out of the investment — becoming rich, getting a decent return to live off, or preserving your capital
  2. What you’re willing to risk for having a shot at that — risk having to start over from zero, risk getting a sub-par or zero return

My own portfolio consists of the following main 9 elements:

  1. Lemuria (physical gold, silver): insurance in case of a financial re-set
  2. Polskenet and Agerus, small private companies in mid and north Sweden: middle of the road value plays with reasonable growth, exposure to my homeland economy
  3. ESURF (electrical jet motor surfboards) : exposure to increasing demand for expensive toys, in effect a bet on continued growth and monetary madness
  4. Private loans and Lendify: interest income, a bet on the status quo with muted growth and low interest rates but not a depression
  5. Apartment (no mortgage): inflation hedge, safety — a place to stay
  6. Listed stocks and Svahn portfolio management: public equity risk, economic growth
  7. Creditsafe, Bofink: exposure to increasing focus on the credit economy
  8. Apstec: exposure to increased demand for safety from terrorism
  9. Fimbulvetr (private business, including two podcasts): staying agile and relevant, honing my future skills

All bases covered

It’s a mix of exposure to growth, inflation, deflation, monetary madness continuation, monetary re-set, debt management, terrorism and personal development. I think I’ve covered most outcomes, but I definitely have much more to gain from a strong economy than a weak. Sure, I would still welcome a stock market melt down, but I’m not so sure I would be able to profit that much from it since I would have too little liquid assets to put to use.

I’m not really geared for a stronger economy either — well, I’m not geared at all — but for me it’s much more important to preserve my capital (with some upside) than to multiply it. I have almost nothing to gain from doubling my net worth, whereas halving it or worse would put me at risk of not being and feeling rich anymore.


What’s your investment equation?

Who are you? What do you want? Why do you want it? What are you willing to risk to get it?

What are you not willing to risk?

Do you want to live comfortably? Do you want to be rich (and dont care if you become poor, as long as you’re not average)? Do you just want to fit in, actually be average? Is your focus on yourself and your family (absolute level) or on comparing and competing (relative riches), or on something else altogether (e.g., being admired for your investment performance)

Whether you should buy physical gold, government bonds, P2P lending like Lendify, public or private equity, gamble on derivatives with or without leverage, or focus on your own education, skills and business is a question of what the returns are for, when, and with what certainty. There is no such thing as an optimal investment or optimal investment strategy.

I can say this much though, most people should be invested in equites for the long run, while maintaining more or less liquid reserves (depending on where we are in the stock market cycle) in uncorrelated assets (such as commodities, currencies or precious metals), in order to take advantage of the quite regular large drawbacks that occur on the stock market.

Please note that right now (April 11, 2018) seems to be a very special period for both stocks and fixed income instruments like government bonds. Plainly stated: they are extremely expensive and due for severe pullbacks. That’s especially true for story stocks like Tesla (I’ll write about that one pretty soon) that is all but sure to fall by at least three quarters unless Musk pulls off something truly remarkable. Hope is not a strategy though. Remember that.


Now, today’s homework is to write down what you own and why.

Your second homework is to start taking responsibility for your future, by taking regular walks while listening to my podcast Future Skills. Start with the conversation with hedge fund billionaire Martin Sandquist (episode 3) or this one (episode 6) with futurologist and philosopher Alexander Bard.

 

Without precise definitions you end up in forecast hell

Topic: Imprecise definitions lead to useless models and conclusions

Discussion: If you’re performing macroeconomic research, which inflation are you talking about, which growth, which interest rate? The answers to those questions can be of crucial importance for your eventual investment outcome.

Length: Short — maybe 5 minutes reading time

Teaser: It’s easy to predict the weather. Not to mention stock market returns

PODCAST TIP: listen to my latest podcast episode (#6) on Future Skills with philosopher Alexander Bard. We talk about definitions of infantile grown-ups and much much more. Check it out on iTunes here, or your favorite Android app here.


Dream Warriors

Are you dreaming about making perfect economic forecasts, and using them for producing amazing equity investment returns? How does this sound to you:

Weather and production bottlenecks in combination with monetary policy induced growth are starting to cause higher commodity prices. Inflation is already showing in their wake. People worry about rising interest rates, just take a look at OIS spreads. Some central banks are turning less dovish. Higher interest rates means less funds for investments, lower growth, lower profits and lower share prices. Higher interest rates mean lower bond prices, higher borrowing costs, lower real estate prices among other things. Higher inflation means money loses its value. And this time it’s at a time you can’t hide in stocks or bonds. You could hide in gold. One bar of gold is always one bar of gold. Maybe that’s why the gold price in dollars is rising (despite obvious manipulations and jaw-boning from various authorities).

Does the above fit your view? Higher commodity prices => higher interest rates => sell stocks, bonds and real estate and use cash to buy gold and soft commodities, until the cycle turns again?

Well, hold your horses for just a little while.


What’s your definition of a boombastic jazz style?

Which commodity prices are you talking about exactly, when you say their prices are rising? Wheat, hogs, orange juice? Iron ore, coffee, cacao? Silver, cobalt? Platinum, palladium?

Similarly, which interest rates are you referring to? The Fed funds rate? Treasury bills, longer term bond market rates? Corporate bond rates, bank lending rates (to consumers, to corporate clients, to house builders?), peer to peer lendning rates? Intrabank market swap rates?

Oh, I almost forgot, “inflation” you said. Would that be the (ever manipulated and ever changing) CPI measure? Or the PPI gauge? Input our output PPI? How about house price inflation numbers? Or energy price inflation? Avocado prices?

My point in this post is that if you don’t clearly define exactly what variable you are talking about it becomes exteremly difficult to make any kind of coherent analysis, not to mention draw any practical conclusions whatsoever from the exercise. Macroeconomic research is difficult enough as it is without averaging everything together, whether it be “the inflation”, “the interest rate”, “the oil price”, “the stock market” or “GDP”.

Take that last one, e.g., GDP. What does Gross Domestic Product really tell you? What conclusions can you draw from it even if you knew its exact trajectory going forward a few quarters? How about nominal GDP vs. real GDP (using which deflator measure?), or GDP per capita? Then there are data series for wages, wage growth, hours worked, hourly wages, lost jobs, added jobs, seasonal adjustments (many orders of size larger than the actual net number), employment (measured in at  least three different ways depending on, e.g., how to define somebody without a job, based on whether he’s searching for a job or doesn’t care).

And what’s so special about GDP growth by the way? There’s zero useful correlation between real GDP growth and stock market returns. How about a house price recession like the one that began in 2006, several years before the ‘actual’ recession. Don’t even let me begin to talk about the NBER’s definition of a recession (no it’s not “two quarters of contracting real GDP”

 

“a significant decline in economic activity

spread across the economy, lasting more than a few months,

normally visible in real GDP, real income, employment, industrial production,

and wholesale-retail sales.”

 

No matter the problems of making macroeconomic models work at all, you don’t want to make it even harder by using impractical and vague definitions. My message in this post is that you need to make sure your definitions are practical and at least theoretically can lead to better decisions.

After that we can talk about the ephemeral character of macroeconomic causations and correlations, not to mention their flimsy associations with actual stock market behavior.

For now take this with you: Knowing what you know and knowing what you don’t know, is paramount in uncertain environments. And the financial markets are as uncertain and stochastic as they come.

Thus, make sure you do define all concepts and ideas about their connections precisely. That’s your only chance of keeping track of what you know and what you don’t. In addition, it’s your only fair chance of creating a feedback loop of increasing knowledge and strategy adaption.

Such directed or deliberate practice is in similar fashion your only chance of coming out on top in the arguably most competitive sport known to man (and yet untrained newbies gladly step into the ring and bet their life saving’s on themselves).

Today’s advice holds true for everyday life as well. I don’t know how many arguments with friends I could have saved, had we only defined the concepts and words precisely at the outset…


Stock market forecasts coming up

I’ll soon write a follow up on this article, where I’ll explain how stock market returns can be reliably forecast in much the same way as the weather can be accurately forecast. For now this teaser will suffice:

Just as I know there’ll be snow in the middle of Sweden on quite a few days every year between December and February, and almost completely certainly no snow 99 per cent of the time between June and August; a highly priced market will produce very low rates of return, and a lowly priced will produce high rates of return over the coming decade or so. But more detailed notes about next time and the exact implications for the current situation. Stay tuned.


FUTURE SKILLS: Don’t forget to check out the super energetic conversation with Alexander Bard on Future Skills Ep. #6! You’ll find it on iTunes here, or your favorite Android app here.