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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  1. I’ve never investigated Tesla’s financials, but here are some factoids that would make them my last choice for investment (not that I play the markets):

    1. Elon Musk seems more like a hippy Evel Kneivel than a businessman. He’s good at stunts and publicity, and he’s prone to dumping money on over-the-top projects like SpaceX that he can’t actually fund and that have no chance of producing worthwhile results even if someone did fund them.

    2. In 2014 he gave away Tesla’s patents. Either he’s a complete idiot at business, or he thinks the patents are worthless. Or both.

    3. The failure of the Tesla autopilot has exposed Tesla to the potential of both lawsuits and bad publicity, in spite of their disclaimers saying in effect that it’s for entertainment purposes only (like a Psychic Drivers Network).

    4. None of Musk’s projects are likely to have sustainable profitability in the near future. Electric automobiles are a dead end – there are just so many wealthy tech freaks willing to pay triple for a car just to have one that no one knows how to work on and that they can’t get parts for or even refuel at a gas station. The solar panel business is viable exactly to the extent that it is subsidized by taxpayers.

    If I understand your article correctly, Mr. Musk is receiving generous compensation in the form of cash (beyond the reach of a Tesla bankruptcy). I wonder how much of his “salary” is used to buy Tesla stock? Does he drive a Tesla? With the Autopilot on?

  2. Fun article. This is precisely why I’ve given up on fundamental analysis. All it takes is minor tweaking of assumptions and one can get any results one chooses. If you want to be a bull, bear or neutral you can make an equally convincing sales pitch to your investors.

    With my money I look at charts. Not because of 1960’s *patterns* nonsense. But because momentum is what players play. I also look at the macro environment. Central banks are raising rates and tesla needs either profit or more credit very soon. I’m not sure how long credit markets will keep them going.

  3. I think the problem is TSLA is too “obvious” a short and there’s too much risk of getting squeezed and having your ass handed to you. At the same time though I don’t see how they make it without issuing a lot more equity.

    • Often the best shorts as well as longs are the blaringly obvious ones. Remember contrarians are wrong most of the time.

      • People who are contrarians just for the sake of being contrarian, or faux contrarian – for example, devoting themselves to electric cars because they want to Save The World and think they are Screwing The Establishment – are ALWAYS wrong.

  4. Good analysis! I think though Tesla has become a ”too big to fail” case…

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