When it comes to reading SA I must admit I'm drawn to articles about Apple (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA). They are unlike most any other article and fascinating in their diversity of views and the "love/hate" dialogue. I've written about Apple many times, so I thought I'd throw my hat in the ring and write about TSLA this time.
Now, if you're looking for all kinds of financial ratios or engineering principles, you'll be disappointed in this article. There is already enough "smoke" obscuring the pluses and minuses of TSLA. Instead, I'll try to present a straightforward look from someone trying to reach a rational assessment of the risk/reward.
TSLA is really three stories in one... it is the story of a car... a company... and a stock. These stories are remarkably intertwined and simultaneously disconnected. That's what makes TSLA so intriguing. I think the real picture requires looking at each component separately and together. So, here goes...
Tesla The Car: Let me start out by saying ... "I like the car". It is "state of the art" technology, meticulously thought out and very well executed in manufacture. I can appreciate why there is so much interest in the car, why so many are buying it and why they are so passionate about it.
That said, it is NOT the "car of the future" as so many keep espousing. First (some may consider this nit-picking), but by definition, future technology doesn't exist today. Furthermore, we can't even say that luxury EVs are the platform of the future. Even if EV is where the future is headed, the Renault Twizy may prove to be the platform.
Additionally, the power system is certainly not "of the future". Many auto companies, including TSLA, recognize the limitations of the current system and are feverishly trying to develop a more productive system. I think most people would agree that in three years' time, the power system on today's models will be outdated, antiquated and possibly even obsolete (Moore's Law). Hardly a characteristic "of the future".
However, TSLA's "state of the art" technology makes many traditional cars appear to be "yesterday".
So,Tesla may well be the best of today ... let's leave it at that.
Tesla the Company: Manufacturing an exceptional car does not mean a successful company. The past is littered with hundreds of car companies that have failed. I think many parallels can be drawn between Duisenberg and TSLA. So let's no forget that, over time, management of a company may well trump product design.
Tesla has great ideas and great people and they have as good a chance as anyone to make it. There are a few unique areas that I think are impediments to their success. Several of them may even give us clues to whether or not the company's management is on a par with its design.
First, the "guarantee buyback" in three years. This certainly assuages a big negative of buying the car today, but it also places into uncertainty the true profit margin of these same cars. For the margin depends upon the resale value three years hence.
If the resale value is greater than the projection, it will accrue to the benefit of the purchaser. If it is below projections... to the detriment of TSLA. Traditionally car companies have passed this buck to the leasing and financing company. TSLA has taken that risk onto itself.
I question why Tesla only makes this guarantee if the car is financed or leased through their "connections". If someone walks in "all cash" there is no guarantee.
Was this a concession that Tesla needed to make to entice leasing companies to get involved? I also wonder why Elon Musk pledged a personal guarantee. Is it a sign of his unwavering commitment to the car?... or is a lack of confidence by the leasing companies? And I certainly dismiss as "spin" the latest quips that it was a genius move to control the resale market. Only management knows for sure what the deal was but if I had to guess, I'd look to the lack of guarantee to those buying for cash as indicating it was necessity driven.
Maybe an enticement was necessary since Tesla is actively working to improve battery technology to become truly profitable. However, as older models become "battery antiquated" it depresses their resale value. After all, when you buy something for function and image, antiquation is a deal breaker. So there is the quandary... the better the technological advances, the greater the product saturation. At the same time this advancement accelerates the depreciation of older models, thereby reducing profits. A whole new example of legacy costs.
Hopefully, there can be a seamless battery upgrade to mitigate the effect. Even so, it will cut into margins.
Second, the Charging Station Plan worries me.
When Henry Ford changed the transportation industry, the infrastructure was non-existent. Yet infrastructure blossomed, on its own, as other companies saw profit opportunity. It was automobile demand that drove infrastructure, not the other way around. If Ford had to absorb the cost to build roads, gas stations and repair shops, we would still be in horse and buggies
I assume there would be no need to undertake this project unless it was seen necessary for the success of the company. Since this is a "no cost for life" offer for purchasers, it goes fully against the company's profit margins or increases the end-price to prospective purchasers.
What really concerns me the most about this project is that most buyers of the Tesla say that current battery capacity is adequate. So the cost of these stations will act like a tax on all Tesla buyers to benefit only those few that actually need it. Will future buyers be willing to subsidize the cost of these stations if they are not perceived to be of equivalent value?
Once again, the true profit margins become ambiguous, but even more so, is this a tacit admission of a conceptual flaw in the product, itself? Is Elon Musk's build-out a wild goose chase?
Third: The technology. Few really doubt that EVs need technological advance in the battery to be widely accepted. There are so many prospective purchasers waiting on the sidelines (count me in).
But if demand is sufficient, there are plenty of auto manufacturers that will try to take market share. Mercedes, BMW and AUDI, etc. are not about to cede the luxury market to anyone while the other manufacturers are closely following mid-priced demand.
Now, if Tesla makes a patentable breakthrough, the marketplace will belong to them and they will soar. But what if one of the many other manufacturers get there first? Or, what if the breakthrough isn't protected? This could present some real problems.
Consider that the "S" is marketed to the affluent for functionality and status/image. If it loses that, it loses all. Now, the "S" has only been out a short period of time. What if just one battery catches fire (Boeing 787)? TSLA will drop like a lead balloon. What if a second or third? TSLA is finished. Even if it turns out to be technically manageable, image is everything, especially to a small company. AUDI survived (just barely) its acceleration problem, TSLA may not.
Fourth: Dealership and repair facilities. A very simple question... how does Tesla expect to adequately service/repair their cars? Who is going to do this and what if one breaks down? The nearest facility could be 100+ miles away. There aren't many Model "S" car out there and they are young. I'm not just referring to battery or transmission issues, what about the little things that always go wrong? There will be more and more nightmare stories and this hasn't been adequately addressed either in convenience to the purchaser or cost to the company. Where is their "Mr. Goodwrench"?
Maybe building mini-repair facilities would be preferable to charging stations? Just a thought.
So, the company is not without challenges that would not be there, except for their unique vision. I hope they can navigate successfully through them, but I do question some of managements decisions.
Tesla The Stock: Is it overvalued, undervalued or fairly valued? I have no idea. The previous postulates suggest that no one can answer this question. Throwing out financial numbers or battery science is a waste of time. It's all about making a model work, getting and staying out front with the right product and right strategy. So, stop trying to figure it out, there aren't enough facts.
Does that mean it's not investable. Not by any means. What it means is that it is a speculative play.
Personally, I'm a disciplined investor. I'm concerned about building and maintaining a portfolio to last a lifetime. I've set my parameters, defined what is appropriate and execute according to my established guidelines. That is my formula, and it works for me. Tesla just can't squeeze into that. So, for now I pass on it, but I keep it on the radar. To me, maintaining a proven discipline is more important than worrying about a missed opportunity.
That said, for the trader/speculator, you can go long or short with equal conviction. For the trader/speculator is often looking for a quick buck or "bragging rights". This is more about gambling than investing and in this regard, TSLA lures bulls and bears in with a big payoff. It is as good as it gets... provided you get it right.
For those caught in-between, I offer this ... TSLA is currently a momentum play and this draws in speculators and manipulators. Until they're done "feeding" anything can happen. Financials, science, charts, etc. are simply chum luring you in or chasing you out. I wouldn't even consider being a buyer on a drop (catch a falling knife). That's a short-sharks gambit to lure in the unsuspecting so they can dump more and more.
But If Tesla starts behaving with some rationale, say staying at one particular level (+/- 5%) for three months or so, then the momentum players would likely be out. It might be worth a shot.
Disclosure: I am long AAPL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.