Looking at Seeking Alpha articles negative on Tesla (TSLA) over the last few weeks and the intense commentary generated has been entertaining to say the least. I will not argue that for the current state of affairs Tesla is not overvalued. What I will try to do is present a take-down of most arguments from bears about why Tesla's growth story will fail.
I will first start with the battery supply shortage concerns presented by John Peterson. Tesla uses a battery cell form factor called 18650, which is a cylindrical format battery not very different looking from a regular AA cell but with dimensions of 18mm x 65mm. These batteries are commonly used in laptops. John's argument is simple, there is simply not enough production of 18650 cells to satisfy Tesla's growth in the long term. Also, if the growth has to expand to meet Tesla's need, battery cost will go up to pay for the cost of new factories.
But some simple facts along with some simple math will show that neither is this problem insurmountable and John's own article referred to the fact that Elon Musk knows about the problem and has publicly stated it. In fact Elon Musk's words were that current battery supply "limits us to a few hundred thousand cars a year."
Now if that is a problem, it is far in the future (>100,000 cars is unlikely before 2018) and several solutions exist which I'm sure Tesla is thinking of already. Amongst those solutions are
- Get Suppliers to Increase Production
- Create your own production
- Use a different kind of battery
Here we go with the math to get batteries for 100,000 cars by 2017. The top of the line Tesla Model S uses 7000 of the 18650 cells. For simplicity let's just assume that all Model S and X versions use 7000 cells, which is a worse case assumption than reality. Out of the 100,000 let's assume that half are Model S + X so they need 350M cells.
According to The New York Times, Panasonic is committed to supplying Tesla with 300M cells by next year.
The remaining 50,000 on our assumption are Gen III vehicles, which will require fewer cells. Just for the sake of simplicity, let's assume they need 5000 cells (an overestimation). That would mean another 250M cells. By this time it is safe to assume that Panasonic will produce more than 300M cells. Tesla also has in the works a deal with Samsung to supply batteries. And it is safe to assume that Samsung can supply the rest.
The tricky part comes when expanding beyond that at which point Tesla will be the consumer of a majority of the 18650 cells made worldwide and will eventually need more. There are several promising developments.
- First is Panasonic has stated that they will produce a better 4ah cell (already available from other manufacturers). The current Panasonic cell is 3.4ah., which is a 17% improvement and would directly translate to using fewer cells.
- This is problem the world has faced before. The world battery output growth for smartphones outgrew the requirements that Tesla will face and there is little reason to doubt that it is not possible with 18650 sized cells.
- Global laptop sales are being replaced by tablets and thinner laptops that can no longer use the 18650 cells. 100M is a reasonable estimate of available supply in 4 years (25 million laptops using something other than 18650 cells).
- Tesla is the only consumer of 18650 cells in the automotive industry. There is no reason for them not to have alternate battery options in future cars.
Next is a negative article at Seeking Alpha by Adam Smith which presents the "intense" competition that Tesla faces. I will present you with what the real competition for Tesla is as someone who is intently following the electric car industry and a Tesla Investor, a Nissan LEAF owner and someone who has auto blogs and news subscribed to on his phone and can rattle off most of the current and upcoming electric cars at the top off his head. Not someone who needs to ask "What exactly is a Gen III?" while writing about Tesla's competition.
I will look at Tesla's competition in two ways. One is Electric car competitors and the second is price range competitors.
If I wanted to buy an electric car today, I have few real choices
The Nissan Leaf and Focus Electric are comparable cars. They are compact cars with decent in-city range of 75ish miles. They have great lease options making them affordable, the LEAF more so than the Focus. The Mitsubishi i is a bare-bones vehicle to reach a cheap price point and is no longer competitive.
The Tesla on the other hand is a marvel. Not only does it offer a gas car like range, it is the best reviewed car ever and apparently one of the safest cars ever. This is from a new entrant to the industry. It makes one wonder what the car companies have been doing all this time. If I could afford the Tesla, that would have been the choice instead of the LEAF.
As for upcoming competition, the only promising electric is the BMW i3. But the BMW i3 is also a compact approximately the same size as the LEAF. The Chevy Spark EV, mini EV, SMART EV are more of the same - very compact electrics.
In fact Nissan even delayed their Infiniti Electric, Audi cancelled their electric and BMW only has the i8 in the works, which is more of a roadster competitor than a Model S competitor and it is not even fully electric. So as far as a large sedan competitor, there are none and there seem to be none in the works for the near future.
There are zero competitive electric vehicles regardless of price.
Here is an analysis of their non-electric competition. Tesla is completely destroying the closest competition (the Porsche Panamera) and starting to put a dent in other luxury vehicle sales. If you frequent the Tesla forums, you will find many converts from other luxury brands that now feel that driving a gas car feels like old dated technology.
Here is the rest of the competition listed in Adam Smith's article
- BYD - BYD is a Chinese manufacturer with zero US presence. They have a promising affordable electric car. But as far as being a competitor to Tesla, that road is a long one even if they do manage to make it to this side of the pond in time to compete with the Gen III. They will compete with Tesla as much as Kia competes with BMW.
- Porsche 918 Spyder - This is an $850K car and not even in the same market as Tesla. It is a hybrid. It is a very cool car, potentially will be the fastest street legal car ever, but a Tesla competitor it is not.
The author even goes on to argue that the company that makes the safest car on the road with nothing but glowing reviews about every aspect is a technology company and not a car company. Maybe it is a technology company but calling it "not a car company" is hilarious.
Next, let's move on to Jonathan Luu's article about why we should short Tesla. His total auto market number was 14 million per year - which is only the US market. Based on his numbers he assumes all Tesla sales will be in the US so they can be safely ignored. His other arguments seem to hinge on the fact that Tesla has grown too fast and a misunderstanding about the fact that the cost of the superchargers is baked into the price of the cars.
Adding the supercharger option to a Tesla costs $2000 for models where it is not included. Assuming that Tesla builds that $2000 into the price of the models that do include it we have easy cost coverage of the superchargers.
Additional disclosure: I potentially plan to take partial profits in TSLA at $200 or accumulate more if the stock hits $100