Category Archives: Tesla

Tesla (TSLA) again, with fewer numbers plucked out of the air

July 13, 2020 By in Autos, Tesla, Uncategorized Tags: , , Leave a comment

I got a comment from Russ about my recent TSLA post, in which I concluded that a ton of future growth is already priced into the stock. The gist of his comment is that earnings could be a lot higher than I’ve been assuming. What powers a conventional car is an internal combustion engine–an expensive machine spewed out of large-scale factories that need to operate at close to capacity just to break even. The technology is also mature. In contrast, TSLA uses gigantic batteries, a technology in its infancy, i.e., one where costs are falling.

So I decided to abandon my back-of-the-envelope approach and take a look at TSLA’s 2019 financials. Call this my front-of-the-envelope analysis.

2019 sales and direct expenses

TSLA sold 367,500 cars in 2019, at an average price of $54,341 each. It made a gross profit from auto sales (I’ve ignored leases) of $4.0 billion, or $10,900 per car. Gross profit means after all direct cost of manufacture, including materials, labor and the cost of running the plant (including depreciation).

general expenses

The company spent about $4 billion on R&D + sales, general and administrative expenses (SG&A). This offset basically all the manufacturing profit. TSLA had interest expense + taxes, so it made a loss for the year.

where the operating leverage is

The essential point, which somehow eluded me last week, is that the general expenses laid out in the preceding paragraph have been steady for the past several years. Typically, an analyst would have them accelerate at some (low) trend rate of increase. Still, any increase in this expense number will be dwarfed in short order by the rise in gross income if TSLA continues to grow at the current high rate.

If we thought that TSLA could expand sales at 30%/year for the next half-decade, while retaining the same gross profit, then it would have gross profit in 2025 of about $15 billion. If general expenses increase at 5% yearly, they would be around $5 billion then. Net income would likely be about $7.5 billion, or close to $40/share.

new battery?

What about the battery? Let’s assume–I’m just making numbers up here–that the cost of parts is a third of total gross costs (three kinds of costs: materials, labor, factory) and that the battery is half of the cost of all parts. That would make the cost of today’s battery about $7000 per car. Say new technology cuts that figure in half. That would add $3500 to the gross profit per car for TSLA, assuming (unlikely, I think) it could retain the whole amount. TSLA’s unit sales in 2025 would be about 1.4 million at a 30% cagr, meaning $14/ share more in eps, if so.

As I’m writing this, the TSLA price is about $1700, implying a pe of just over 40x, assuming no changes in unit profits and 30+, on the same assumptions, if all the profits of new battery technology accrue to TSLA.

Tesla (TSLA): dreaming and reverse engineering

February 4, 2020 By in Tesla, Uncategorized Tags: Leave a comment

As I’m writing this, TSLA’s market cap is around $160 billion, with the stock up 50%+ over the past week and having more than doubled in a flat market over the past month.

I have no real idea what’s behind the move  …desperate short covering?  …glitchy trading AI feeding on positive price momentum?  It looks crazy, though.

My thoughts:

–conceptually at least, we’re now living in a post-fossil fuel world.  This is much more evident in, say, Europe than in the US.  (The current administration here is clueless.  It actually favors the most heavily polluting fuels and is fighting industry efforts to keep US-made auto relevant in world markets through increasing fuel efficiency.  If this were a century ago, we’d be backing firewood.)

–the trickiest part of a car to make and maintain is the internal combustion engine.  Substitute big batteries and suddenly building is easier, manufacturing costs go down and you don’t need an extensive dealer network for sales and service.

—Tesla is the leading brand name in electric cars.  There’s also some evidence that the manufacturing problems that plagued TSLA are now behind the company.

–we’re still in the “dream” or “concept” stage of TSLA’s development, so it’s very hard to gauge what the company is worth.  On the other hand, we can ask ourselves what the current share price implies must be already factored in, as follows:

—-let’s say that the market for automobiles is 100 million units/year, with 25% of those in China and 20% in the US.  Suppose TSLA can capture a 1% market share over the next few years.  That would mean manufacturing 1 million cars.  Let’s pluck numbers out of the air and say that they’ll sell for $40,000 each and have an after-tax margin of 20% (using margins is bad–never do it–but we’re just dreaming here).  That’s $8000 each, or $8 billion in total.

—-the point of this reverse-engineering is to see that the stock is now trading at 20x that annual earnings figure (market cap =$160 billion).  To buy/hold the stock at this point one would have to believe that the future for TSLA is better than I’ve just described.

—-how could that happen?:  the margin number I’m using is very high in conventional auto company history; there’s the issue of creating a network of charging stations to serve the cars; there’s also a (less important, I think) question of usability of electric cars in colder climates.  The biggest unknown, in my opinion, is how large a lead TSLA has on other would-be electric car makers.

Primary competition will likely come from Europe, where whose diesel emission cheating scandal has wrecked the market for conventional cars, thereby accelerating the move toward electric.   Their biggest impediment–ironically, a major point in favor of TSLA, is the backward-oriented posture of the administration in Washington.

On the other hand, given that TSLA has manufacturing operations in the two largest markets, maybe a 1% market share is too low.  Again, I have no idea.  But I think that’s the bet buyers today will be making, whether they realize it or not.

my $260 price target for Tesla (TSLA)

July 11, 2017 By in Autos, Tesla, Uncategorized Tags: , , , , Leave a comment

A regular reader recently asked how I arrived at $260 as a price target for selling TSLA, which many of you will know I have been trading alongside my younger son for a while.

 

To some degree, I’ve regarded TSLA in the way I would look at any growth stock.  That is to say, I look for signs that the company can grow faster than the market expects and/or would sustain an above-average expansion pace for longer than the market believes.

I then try to use the company’s financial information, plus government, trade association and individual competitors’ data to project an income statement and flow of funds statement for several years into the future.

In TSLA’s case, reliable data are scanty.  In addition, the company’s own projections of its production capacity and sales have not been anything to hang your hat on.

 

Typically, and for a stock I would consider as a core part of my portfolio, I would try to make a projection that I believe to be reasonable, or perhaps mildly aggressive, and would reassess as/when the stock reaches the future target price that projection would lead me to.

In the case of TSLA, however, I did something different.  I decided to make an extremely optimistic projection, one I thought would leave the shares at least temporarily overvalued–and which would serve as a sell signal.

 

This is what I did:

–I decided to make my projection based on 2018 earnings, since I don’t think anyone has the faintest idea of what earnings for years farther in the future will be

–I took the TSLA production forecast, which has proved consistently too optimistic, of 500,000 cars during 2018 as a given

–I decided that most of these cars would be Model 3s, where the average selling price indicated in preorders is about $42,000, as another given.  To account for a small portion of more expensive models, I rounded the average selling price up to $50,000

–I examined other publicly traded auto companies worldwide.  The highest pre-tax margin I found (yes, although this is a dangerous shortcut, I did use margins) was Porsche, at 15%.  I assumed that TSLA would achieve that margin in 2018, even though I think the figure is substantially too high

–I assigned a financial reporting tax rate of 25%, which is probably too low.  That gave me net financial reporting profits of $2.8 billion, and earnings per share of $17.10

–I decided to apply a price earnings multiple of 15x to the earnings number, even though auto companies typically trade at single digit valuations.  I don’t think TSLA should trade at the 20x+ multiple that an IT stock would merit, so 15x seemed about right.  That gave me a valuation, based on 2018 earnings of $257–which I rounded up to $260.

 

As we can clearly see from a TSLA chart, the stock blew through my $260 target in March-April as if it weren’t there.  It peaked, for now, at least, at $386–leaving an embarrassingly large gap between me and it.

 

Where did I go wrong?

The obvious place is in the PE multiple.  The prevailing market view would seem to be that 2019 earnings will be, say, $25/share, and that it’s safe to be factoring anticipated earnings for two years from now into today’s stock price.  Another way of saying the same thing, one which I think must be TSLA bulls’ belief, is that TSLA is this decade’s Amazon (AMZN)

That may well be correct.  Personally, I’m uncomfortable making the bet, though.  One thing experience does tell me, however, is that, barring a total corporate collapse, the stock is highly unlikely to get back to the $180 – $200 range that has marked the lows over the past couple of years.

a bad day for Tesla (TSLA) shares

July 6, 2017 By in Tesla, Uncategorized Tags: , , , 1 Comment

First, let’s put yesterday’s negative price action for TSLA–down by 7%+–in context.  Prior to yesterday, the stock had risen by 75%+ since the opening bell in January.  So a down day–or even a down few weeks–shouldn’t come as a shock.

What happened yesterday:

–TSLA reported 2Q17 results.  Profits were hurt by another production foulup–a shortage of batteries this time–that prevented the company from churning out cars at a higher rate.  The good news is that the problem was solved intra-quarter and shouldn’t affect results for the second half

–TSLA also said it intends to be churning out 20,000 Model 3s a month by the end of the year and 500,000 in total during 2018

–two negative analyst reports were released, arguing that TSLA is substantially overvalued.  Reasons:  plateauing demand for older models, increasing competition from other auto companies and TSLA’s less-than-perfect production experience.  Goldman Sachs says it now thinks the stock is worth $180 a share (down from $190 previously)

–Volvo announced it intends to become a exclusively a hybrid/electric car company in 2019; Baidu announced it will give its autonomous-driving car technology away for free in return for usage data.  Takers include a bunch of other Chinese carmakers + Ford and Daimler

my take

–I sold my last shares of TSLA at $260, based on the idea that this is the highest price I can reasonably conceive of TSLA trading at during 2018, assuming the company does indeed make and sell 500,000 cars.  I guess that’s my bottom line

–the negative reports are good news in the limited sense that they imply the authors’ firms see no possibility of future investment banking business from TSLA.  Maybe their negative analyst stance in the past has already ruled them out.  But emphatically underlining the fact suggests to me they think TSLA needs no further funding to carry out its production plans

–the possible turn to significant profits being earned in 2018 is a mixed blessing.  On the one hand, say, $5 a share in earnings for the company, with the promise of more to come in 2019 is better than the current situation.  On the other, the emergence of earnings–and of a more easily predictable future–means an end to the “dream” of unparalleled riches that many early-stage-company investors routinely harbor with any of their stocks.  For a certain percentage of “dream” stocks, the minute the earnings begin to arrive marks the peak in the stock price.  A minerals exploration company that owns a single orebody peaking the day the mine opens is the stock example.  Euro Disneyland is another.

Elon Musk’s master plan for Tesla (TSLA)

July 25, 2016 By in Tesla, Uncategorized Tags: , , , , , , , 1 Comment

Last week, Elon Musk issued his second master plan for TSLA as a blog post on the company website.

The plan has four parts:

—autonomous driving, with the goal of making self-driving cars 10x as safe as those operated by human drivers.  The main issue here is, according to Musk, compiling enough safety date to convince governments to allow autonomous driving on public roads

—expanding the product line, to include pickup trucks and compact SUVs, plus heavy trucks and urban buses.

Although what he writes on this topic is not 100% clear, one goal under this heading seems to be to reinvent the auto manufacturing process in a way that the new/improved factory is 5x – 10x as efficient as current ones.  One ambiguity I see is whether this means 10x the efficiency of, say, a Toyota plant, or 10x the efficiency of the current TSLA operation.  I presume he means the former.

Another is exactly what “efficiency” is.  I’m taking it to mean that Musk intends to create factories that, for the same capital investment, will produce 5x – 10x as many cars in a given time as current factories do.  My cursory inspection of auto 10Ks (other than TSLA, I don’t think I’ve owned an auto stock since the 1980s) tells me this won’t mean a huge jump in unit profits for any auto firm, including TSLA, since most of the costs of making a car are in materials and labor, not capital equipment.  Greater efficiency would boost overall profits, however, as well as allow TSLA to dramatically increase its vehicle output.

—sharing.  Musk thinks that in an era of autonomous driving, some people won’t own cars themselves anymore.  They’ll simply call for one from a sharing service when they need it.  Other people will own cars but will allow their vehicles to be used in a sharing service when they don’t need them.  TSLA intends to organize sharing services for its vehicles.

This is a much more revolutionary statement than it seems.

The average car is used only 10% – 15% of the day, according to Musk.  If sharing boosted that usage figure to, say, 30% in highly populated areas, then those regions would need only half the cars they do today   …maybe fewer.  At some point, this would mean an implosion in demand for new autos–and the end of the car manufacturing industry as we know it.

—merger of TSLA and SolarCity (SCTY).  In his Master Plan, part deux, Musk says he wants to create a “smoothly integrated and beautiful solar-roof-with-battery product that just works, empowering the individual as their own utility, and then scale that throughout the world. One ordering experience, one installation, one service contact, one phone app.”

He says this can’t happen while TSLA and SCTY are separate companies, something he describes as “an accident of history.”

I’m not sure I buy this.  I do think that Musk created clear economic superiority of TSLA over SCTY when he decided to place the Gigafactory for solar batteries inside TSLA.  To my mind, that makes SCTY radically dependent on TSLA today.  Merging the two companies would put SCTY back on an even footing.  For TSLA shareholders, arguably the main benefit of the combination is obtaining SCTY at a cheap price.