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.


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Avoid market losses, and death, by understanding change

Change is good

-Yes, for the Greek too

Research of all kinds shows living an ever-changing “lateral life” improves happiness, general health, keeps brain diseases at bay, increases longevity, not to mention makes you smarter, better at learning (higher brain plasticity potential) and more experienced and skillful with the ability to connect the dots between diverse knowledge areas.

In short, change is good.

Keep changing preemptively and purposefully. You will anyway, just not in a beneficial way without some nudging (albeit not by the state).

 

This post is mirrored at the Swedish site for financial information, TradeVenue

 

Break out of homeostasis

In addition, change happens all around you. And, changing willfully primes you for identifying and embracing that change – makes it easier to break out of all sorts of homeostasis, rather than be broken down by it, as Ludvig at SGM might put it.

SGM

 

School induced homeostasis in me at an early age

The worst thing school did to me, apart from generally waste my time, was to fool me into believing in constant truths (not least in physics).

I learned that a planet was a planet, not just by a temporary definition. I learned that the four forces were just that, always were, always will be – rather than a temporary convention to describe certain phenomena within a quite wide but still limited range. I learned time flowed forward and more or less constantly, except for in relativistic experiments.

Not least I learned time in itself was indivisible and continuous, though possibly with a lower limit of Planck time (5*10^-44s). It was never proposed that time might be something else altogether that we only approximate with something called time, and that it was just convenient in our current paradigm to treat time as, … well the time as we know it today. It was quite preposterous really, to assume and teach that the approximately just 75-year old view of time was correct and would stay constant forever! 

It has taken me forever to relearn that everything changes, not just scientific paradigms – everything. Earth’s rotation changes (the leap second), the moon’s distance to earth changes, the discovery of dark matter and dark energy might in retrospect be just one small of thousands of discoveries over the coming thousand millennia and forward.

Moral and ethics change, maybe even the rules of logic (!).

You and I change – faster than you think, but we are protected by the narrative “I” that always claim everything is coherent and as it should be, and not least constant going forward. The “I” is lying. Actually, the I doesn’t even know the “me”, but more about that some other time (or read Nörretrander’s amazing book yourself. I recommend it highly!).

 

TED radio hour chimes in on time, change and happiness

time

The other day, I was listening to the (recommended) TED Radio hour’s pod cast on time (Shifting Time, 19 june 2015). As always several TED talks and aspects of change and time were discussed, but one topic regarding aging, personality change and happiness struck me particularly:

Almost all people have the experience of having grown into their real self.

We all [almost all – no spam or trolling please!] think we are finally the real me. We know we changed a lot growing up and aging, perhaps can hardly even stand for some of our earlier opinions and actions, but now finally have reached a stable self plateau.

And yet, research shows that we keep changing, morphing into somebody else over the course of 10 years, over and over again. It seems we know we could change in either direction along an infinite number of parameters (extroversion, e.g.) but since the potential changes even out, we instinctively expect status quo to reign. It’s like approaching a T-crossing expecting to stay there :)

 

So, expect change, and manage it

-That’s really all I’m saying.

That goes for companies and stocks too.

stocks change on the exchange

The current stock price will change, the price trend will change, sales and profits will change, valuation multiples of those fundamentals will change, competition will change, client preferences and demand will change, costs will change. All mentioned factors for the company’s peers/competitors will change.

If Apple could emerge from the grave and crush Nokia, Apple too can be Appled. Facebook, which crushed MySpace to oblivion, can be Facebooked. And Tesla can…, well Tesla hasn’t actually done anything yet, not at a profit anyway. Remember Kodak? Or when Dell, HP or IBM was all the rage?

My distillation of best practices in the market boils down to just two things to consider:

Distillation of best practices on the stock market SpreZZaturian

1. How is it now?

2. What will or must change? (fundamentals, perception…)

 

Expecto patronum! Or, rather, happiness

If that HP reference flew right over your head, never mind. It’s not important.

-You can expect time to save you, to make you happy (unless you get sick)

Research shows a trough in perceived well-being around the age of 50 (coincidentally not far from my age; 43), followed by a strong trend of improvement, leading to new all time highs just 20 years later. The risk of depression follows a similar (inverted) path.

One theory of why is that older people get happier with age because they are relieved of the burden of thinking about the future; relieved of change (despite the fact that they are facing the biggest change of them all… -on the other hand into a state of absolute stasis)

What about lateral living and homeostasis – is it good to become older and happier, or is that actually dying? I’m inclined to think the latter.

So keep changing and keep living – hopefully long enough to live forever (AI, genetics, nanotechnology, stem cells, robotics and all that. Huge changes are coming sooner than you think [WaitButWhy]).

Charts of happiness (and depression risk) show a trough around my age and then ever improving numbers into old age.

I’m thus more or less at my worst now, although I’ve never had it better, I think.

Either I’m just born that way, thinking every year is better than the last. Or, just maybe, my instinctive focus on incremental change and growth (just one more, always be investing etc.) rather than a point target (becoming financially independent, rich, the best, buying a particular item or any such thing) is key. 

happiness and depression happiness

 

Conclusion and summary

Just take this with you, no new practices, no new habits:

Be prepared for change, never status quo

Embrace it. Manage it. Master it. Don’t just sit on your favorite stock because it has done well. Analyze it; imagine things changing. Don’t hold on to your job or partner for dear life or by complacency. Proactively manage for change. Expect it. Perhaps even prevent undesired change by changing something else.

This post, and all my articles going forward, will be posted in parallel at the Swedish site for financial information TradeVenue