Quick and dirty Tesla update after Quoth The Raven debate and ahead of Q2 #s

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. 

admin

9 Comments

  1. Good summary, but really no new information. What is shocking to me is both sides are just guessing. What the company is actually doing comes from the crazy CEO, who has no credibility. This doesn’t seem like a healthy way to invest, either long or short.

    Something nobody else has thought of. Since it takes hours to charge an e-car, if market share ever approaches even 1% there will have to be 10x as many charge stations as there are gas stations. Why? Imagine waiting in line behind 3 people at a gas station. You are still on your way in 10 minutes. Now imagine waiting for 3 electric charges ahead of you. You could be stuck for 24 hours. The current infrastructure may be okay for a few random electrics. But if adoption takes off it will be a joke, with people stuck parking their cars everywhere.

    Before anyone suggests people will just charge at home. No. Very few people have the ability to plan ahead for every trip to start and end at home.

    Shorts got burned because Musk threatened them, then bought stock WITH HIS OWN MONEY. I don’t think the current rally is sustainable. But I wouldn’t want to be short when he reports earnings. Rather wait for the bounce he sets up with his fluff talk, or just be sitting with out of money puts.

  2. Also — what does this “software moat” refer to? The autopilot? That seems like the same thing every other car maker has. Adaptive cruise control plus a very superficial lane following camera system. Nothing special. And it is over marketed in a way that is dangerous to users.

    Computerized controls? Again, every auto maker now has drive by wire plus digital displays instead of analog instrument panels. This is more fluff talk with no real basis. Over the air update? Again, not very special. Every car maker has OTA telemetry, so software update is trivial to implement.

    Despite the hype, self driving is decades away. Except on specially prepared routes. No camera or radar system will be able to distinguish the rougher roads found in most cities. GPS is not accurate enough to distinguish the road from the sidewalk. Most likely it won’t work until sensors are place in the roads. This depends on gov’t getting off it’s fat asses.

    • Agree – except the part about “government” assuming responsibility for making self-driving cars work. Who is going to pony up the trillions of dollars so that makers of “self driving” cars can profit from vehicles that half-ass do something that most people already do for themselves?

  3. Some interesting comments but as the poster before me pointed out, no new information. Also I am not sure that the two debaters are really familiar with the auto industry. There were a few bizarre claims to say the least…

    >GM, Ford are tied to combustion engine. That’s why low PE

    This one is completely incorrect. In no way they are tied to the ICE, both have from hybrids to fully electric vehicles… also last time I checked the auto industry is a low growth, low margin business… e.g. Ford’s margins – 15%… and after more than a century of automobiles… everyone has one…

    >Incredible once in a century disruption of transportation: Electrification + Autonomy

    Every major manufacturer is working on that. A car is much more than it’s drive train… and if you look at the German companies (because I am more familiar with them)… most of them have tried every possible drive train… e.g. BMW had prototypes running on hydrogen, electric cars, natural gas, etc… so had Mercedes and Audi… also take the i3… the first BMW mass production electric car (they had a lot of prototypes during the years)… it’s the first fully carbon fiber car in serial production. Before that it was just exotic cars… Tesla still can’t properly press steel fenders… STEEL :) (or at least until recently when they bought an expensive German hydraulic press haha)

    >Autopilot
    I don’t think they are leading the pack on this one… Tesla went all in.. which is very irresponsible and already people died because of that. A major auto manufacturer can’t risk making their clients beta testers of unfinished software.
    All the big ones are slowly rolling similar systems… the Audi/NVDIA demo couple of years ago was very impressive.

    https://www.youtube.com/watch?v=FABftuXUOxE

  4. P.S. Major automakers are subsidizing their EVs just to stay in the game. They have no reason to want a large share of a money-losing market, but if an oil war makes EVs profitable, you can bet they will ramp right up and swamp Tesla.

  5. Tesla might fail but what they have done so far is very impressive and I believe they will continue to prove skeptics wrong in the future.

    * Batteries – the amount of money poured in to batteries will give technological breakthroughs. Batteries range will in a few years be substantially longer and cheaper to produce. Several breakthroughs already.

    * Charging – Charge for free at home with solar power. Charging with super charger takes 30 minutes. 85%. Of all car trips are within 50km.

    The more I have read about Tesla cars the more kickass I realize they are. I recommend this great summary on Tesla: https://waitbutwhy.com/2015/05/elon-musk-the-worlds-raddest-man.html

    • I’ve read the WBW post. Back then I drank Musk’s Kool-Aid too.

      However, the more I’ve researched, the more I’ve realized Musk and Tesla hasn’t really done anything but burn money in a market that wasn’t ready. Tesla hasn’t invented or catalyzed any battery inventions, Tesla and Solarcity haven’t invented or sped up progress in solar energy. Tesla hasn’t even produced any real EVs (as long as they are loss making, they are just hobbyist kit cars.

      Other car companies chose to not make EVs since they are impossible to manufacture at a profit for either the company, the buyer or the environment.

      One of the worst things Tesla has done is give EVs a bad name. Hopefully real car companies can take over once the tech and market is ready and clean up Tesla’s mess. The sooner Tesla files for Chapter 11, the better for the environment.

      Another thing, Teslas drain the battery 24/7 so you have to keep charging it even if it’s parked. Also, the batteries are so large and heavy that they have a range of 200 miles — all that weight needs to be carried around all the time which costs energy (most of which comes from coal – very few charge their cars mainly from solar energy)

      • Wow. I usually think your analyses are quite balanced, but with this one you are obviously way too biased by your short position.

        To break down your last comment, which is pretty much all opinions at best, untrue at worst.

        “However, the more I’ve researched, the more I’ve realized Musk and Tesla hasn’t really done anything but burn money in a market that wasn’t ready. Tesla hasn’t invented or catalyzed any battery inventions, Tesla and Solarcity haven’t invented or sped up progress in solar energy.”

        Well, they were the first to use serial connected lithium-ion laptop batteries in a car battery at a larger scale. I would say this for sure catalyzed the battery development in EVs, when other car makers took notice it is actually possible to build electric cars with decent range.

        Solarcity was the largest installer of solar panels in private homes during their existence, but let’s leave them out of this for now.

        “Tesla hasn’t even produced any real EVs (as long as they are loss making, they are just hobbyist kit cars.”

        Not true. Both the S and the X are profit making, and soon the 3. Tesla as a company is losing money yes, but that is because of expansion of operations and R&D.

        “Other car companies chose to not make EVs since they are impossible to manufacture at a profit for either the company, the buyer or the environment.”

        What do you base this on? All is untrue.

        “One of the worst things Tesla has done is give EVs a bad name. Hopefully real car companies can take over once the tech and market is ready and clean up Tesla’s mess.”

        Really? All Tesla’s models have got raving reviews. Model S even got named “Car of the decade”. Tesla has stirred up immense interest, name any other car maker that got such fanatical fans and supporters. Quite opposite of giving them a bad name, Tesla made EV’s sexy.

        “The sooner Tesla files for Chapter 11, the better for the environment.”
        How exactly would this be beneficial for the environment?

        “Another thing, Teslas drain the battery 24/7 so you have to keep charging it even if it’s parked.”

        True for all batteries, not just Teslas.

        “Also, the batteries are so large and heavy that they have a range of 200 miles — all that weight needs to be carried around all the time which costs energy (most of which comes from coal – very few charge their cars mainly from solar energy)”

        So what? This is more than offset by the efficiency of the electric motor. What is important is energy consumption per mile (or Km), and here EV’s beat gas cars by a landslide.

        It is still better to charge an EV by electricity from a coal plant than to use gasoline in a combustion engine. Besides, the world is moving away from coal so by the time EV’s take over the car market the energy mix will be cleaner than today.

    • Pumping gasoline = 3 minutes. The only way to get around the charging time is to make the battery swappable (which is how EVs work in industry). This requires batteries to be both very robust and very cheap (every charging station would have to keep a large stockpile of them).

      Charging a battery with the energy of a 15 gallon gasoline tank would take a week in Riyadh in the summer with 100 square meters of panel. In Stockholm in the winter… rather longer. Solar power is mostly a panacea for those who don’t know science and can’t do math.

      Battery capacity is limited by the laws of nature, they can only get so good and then no more breakthroughs are possible. Other means of energy storage must be used (almost certainly chemical).

      So you have a vehicle with onboard chemical energy storage – the only question is how that chemical energy is transformed into mechanical energy. With huge technological breakthroughs, fuel cells might be an option (AFAIK, this *is* theoretically possible). A hybrid using a high-efficiency turbine engine is more likely. But the simplest, cheapest, and by far most readily available solution is just a small single-occupant vehicle with a conventional engine and transmission, suitable for commuting.

Leave a Reply to Steve Cancel reply

Your email address will not be published.