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Logical Thought

 
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  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    Panasonic is initially only spending $200 million on the Gigfactory... You don't think that if a bunch of orders come in from BMW it won't spend several hundred million more elsewhere? Nissan has plenty of capacity, and LG, Samsung and the Chinese are dead serious about this too and all of them have far deeper pockets than Tesla.

    As for the S vs X: there's a limited crowd for $100,000 electric cars and most new buyers will just choose the X instead.

    Okay, clearly this is another case of someone thinking Tesla is "very special" and my thinking that it's a bug that will slam into the auto industry windshield (or will have to remain just a high-end niche), so if you don't believe the commitment of Tesla's competitors (easily found with a quick Google search) then we may as well end the conversation.
    Aug 28 07:34 PM | 2 Likes Like |Link to Comment
  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    The auto industry is vastly more capital intensive and competitive than the smartphone industry. For example, Apple spends approximately 3% of revenues on R&D while BMW (despite being over 20x Tesla's size in revenue) spends over 6% while Tesla is currently spending over 15%. To put this another way, BMW *alone* spent almost $6 billion last year on R&D and it's just ONE car company-- THAT'S the kind of thing Tesla will have to compete with. For capex Apple spends around 4% of revenue while BMW spends almost 9% and Tesla is currently spending around 25%. Again, to put that into context, BMW *alone* spent almost $9 billion last year on cap-ex. And according to Wikipedia there are over 150 car brands in the world while I doubt there are more than 20 smartphone brands.
    Aug 28 06:45 PM | 1 Like Like |Link to Comment
  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    David,

    >>Tesla already has a huge moat...<<

    No, I don't think it does. Panasonic will sell to anyone, as will LG, Samsung, BASF and the Chinese. Nissan will have a 150-mile Leaf out in 2016 (probably for $35,000) and at the same time GM will have a 200-mile car and Audi will have a couple of 250-mile cars, while BMW will have the i5 and possibly the i7. Meanwhile, conventional & plug-in hybrids get better and better and provide a real alternative to range (and charge-time) limited electric cars. And, oh yeah, Tesla has open-sourced all of its patents. So where's Tesla's moat for, say, the year 2017 and beyond? (It doesn't exist.)

    >>...X will not steal from S. It will effectively double the sales potential for Tesla. Most people who want SUVs don't want sedans...<<

    A vast number of people (I'd say the vast majority) bought the "S" because it was the only 200-mile electric car available and the coolest new thing at the country club. Once they can have the "X" (which is more practical for the local and regional travel for which an electric car is almost exclusively used) they'll dump the "S" like a hot potato.
    Aug 28 04:51 PM | 3 Likes Like |Link to Comment
  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    >>But the Amazon stock has been up for years!<<

    Do you realize that AMZN actually has vastly better gross margins than Tesla's (adjusted for Tesla's model-specific engineering costs, which it pretends aren't part of COGS) and yet AMZN sells for 2x revenue while TSLA now sells for around 12x? Yes, TSLA has managed the previously impossible task of making AMZN look cheap. In fact, Bezos is probably quite jealous, as Musk has relegated him to the position of now being only the world's number *2* stock promoter!
    Aug 28 03:42 PM | 6 Likes Like |Link to Comment
  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    >>There's no reason not to expect another near-doubling in 2016 to at least 100K.<<

    Sure there is: a limited market for $100,000 electric cars combined with "good enough" near-term competition to steal away the "stretch buyers" as is already happening now with the i3, especially in Europe (and let's see how US sales pick up with BMW's new $350/month lease deal). And solucky is right: the "X" will steal the bulk of the "S" sales and they'll thus be "so lucky" to do 55-60,000/year combined.
    Aug 28 01:37 PM | 4 Likes Like |Link to Comment
  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    >> The company is expected to report a 4-5% operating margin in FY14. Admittedly, this is a non-GAAP margin. But this would be a pretty good performance for such a young business.<<

    All of the other auto makers report GAAP margins so you're making an apples-to-oranges comparison. Tesla's GAAP operating margins for the first half of this year were around negative 8% and that includes a chunk of 100% gross margin tax credit revenue that's going away.

    P.S. I think the business is ten years old... Is that "young"?
    Aug 28 12:04 PM | 3 Likes Like |Link to Comment
  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    >> the business model is viable not to say highly profitable.<<

    Are we reading the same financial statements? If so, kindly point me to the "profits."
    Aug 28 11:34 AM | 12 Likes Like |Link to Comment
  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    How have you modeled dilution for your bull case? I see an equity value of $53,354,000,000 and a per-share value of $420.80, which implies only 127 million shares... The CURRENT diluted share count is 142 million and I guarantee you that will increase at a compounded rate of 3% a year, which means that ten years from now the count will be 191 million shares which puts your "bull case" valuation at $280/share.
    Aug 28 11:30 AM | 10 Likes Like |Link to Comment
  • Tesla: $421 Or $36? Pick Your Scenario [View article]
    In addition to the Water Brothers comments above (with which I agree 100%), I think your discount rate is way too low considering the risk. I don't think there's a single Tesla long who believes his stock is going to appreciate just 10% a year-- I'll bet you most of them are around 20%, so at the very least I'd use 15%. Also, BMW generates its margins on the "scaling power" of 2 million cars a year while Audi shares a number of components with the 10 million cars/year VW Group, while Porsche's margins are created with an ASP of $117,000. Finally, all of those companies (properly) capitalize a substantial portion of their engineering costs; if they didn't (as Tesla doesn't) their operating margins would be substantially lower, so you need to lower your benchmarks.
    Aug 28 11:20 AM | 3 Likes Like |Link to Comment
  • Tesla: A Valuation Model For A High Gross Profit Automaker [View article]
    @John Bingham,

    I don't mean for this to sound pejorative (honestly) but clearly you're not up-to-date on how the car industry works these days. All modern cars get occasional mid-year software flash updates when needed (albeit, not "over the air" but on the production line and when you bring it in for any warranty work or for an annual oil change or to swap from winter to summer tires, etc.) as well as parts & feature modifications when needed or available. Also, keep in mind that many of the needed Model S changes resulted from inadequate testing in the first place-- no other major automaker would sell a vehicle after only three months of testing with the "beta" version, which is apparently what Tesla plans to do with the Model X.
    Aug 28 08:26 AM | 5 Likes Like |Link to Comment
  • Tesla: A Valuation Model For A High Gross Profit Automaker [View article]
    >>It's best to understand Tesla on its own terms, or in comparison with other high tech Silicon Valley companies that happen to have huge capex and R&D costs like Intel.<<

    If you're going to make that argument then it's best to understand ALL car makers that way, because nowadays they all use three or four powertrains across a broad array of models and do the same with brakes, switchgear, etc. (If you don't believe me, look at how many Mercedes models end in "350"-- I'm sure you know what that means.) In other words, there's absolutely NOTHING special about Tesla's business model vs. those of other car makers except that its dealership costs show up on the op-ex line rather than the COGS line (which makes "operating margins" and not "gross margins" the applicable comparator).
    Aug 27 02:03 PM | 3 Likes Like |Link to Comment
  • Tesla: A Valuation Model For A High Gross Profit Automaker [View article]
    >>It's not a static target like other automaker's models, that get replaced with sweeping changes every few years...<<

    New software and options and systems are integrated annually into almost every car made today while the "sweeping changes" you reference typically only occur every four to six years these days (exactly the same as Tesla will be forced to do in order to remain competitive).
    Aug 27 01:59 PM | 2 Likes Like |Link to Comment
  • Economist: Stocks No Longer Risky, Will Go Up 'Steadily' [View article]
    I mostly agree with the author's perspective, but one concept to keep in mind is that of "dollar volume" as opposed to just "share volume." To use the author's comparison date, in October 2006 the SPX was at around 1350 and now it's roughly 50% higher, so yesterday's SPY volume of 47 million shares would have been equivalent to around 70 million shares in October 2006, while eyeballing an old daily chart it appears to have typically been just 50-60 million back then.
    Aug 27 08:28 AM | 3 Likes Like |Link to Comment
  • Tesla: A Valuation Model For A High Gross Profit Automaker [View article]
    >>...your assumption that Tesla will completely redesign Model S in 4 years is unfounded. The car was specifically engineered for safety and low coefficient of drag. The engineers scored bullseyes on both counts.<<

    Do you really know so little about the car business? (Yes, sorry-- despite the best ministrations of the sell-side analysts, Tesla does make "cars" and not "Unidentified Technology Objects.") Do you really think that today's Model S will be able to compete unchanged with the long-range electric Audis, BMWs, Cadillacs, etc. of model year 2019? Don't you realize that most buyers of the Model S were rich guys who wanted what they considered to be "the latest and greatest" and that there's no faster-aging metric than a six year-old model for those buyers? And the other buyers were tech-heads or electric car hobbyists who ALSO want whatever is most "cutting edge"?

    This comes back to the biggest flaw in the bull case for Tesla: a failure to grasp how viciously competitive and capital intensive the car business is (despite Tesla's best effort to hide that via its COGS line) and how those other guys will be able to cross subsidize extremely aggressive (i.e., cut rate) pricing on their electric cars with the higher-volume profits from their conventional, diesel and hybrid models, something that will either keep Tesla perpetually almost profitless or force it into a very low-volume high-end niche, neither one of which is supportive of more than a fraction of the current $35+billion market cap. Did you see this out just yesterday about a new 150-mile Leaf coming in 2016, realistically 18 months before Tesla can have a Model 3 in mass production? http://bit.ly/1lvFEgb

    But you keep thinking that Tesla isn't in "the car business" and I'll assume that it is, and let's see how it all shakes out.
    Aug 27 07:01 AM | 6 Likes Like |Link to Comment
  • Tesla: A Valuation Model For A High Gross Profit Automaker [View article]
    @surferbroadband,

    Yours is flawed reasoning. When you design and engineer a new car model you expect it to have a specific lifetime, after which it will need to be redesigned with huge new engineering costs (in order to stay competitive). It's fine to segment "general R&D" from these costs and put them on the op-ex line (which some automakers do, while others include ALL R&D as part of COGS) but it's NOT fine to exclude the huge model specific costs from COGS. For instance, the next Model S (perhaps in four years, when it's six years old?) will have a completely new interior, dashboard, suspension, body style, drive unit, battery pack, etc., etc., etc., so all of those costs that went into the current model (or the pro-rata share of them, if some are shared with the Model X) should be amortized as part of COGS. Tesla is dead wrong (and unique among all public automakers) in not doing this and then having the audacity to brag about "25%+ gross margins." In fact, it's straight out deceptive.

    Re. the distribution costs, Tesla has plenty of high-rent showrooms & salespeople and it's fine to put those costs on the opex line because that's its business model, but for all of the other car makers those costs are on the COGS line (via the dealer discounts). So again, it's deceptive to compare Tesla's self-defined "gross margins" to those of the rest of the industry when a much more accurate comparison would be via "operating margins" (which are negative for Tesla).

    In fact, if you make an apples-to-apples comparison to the rest of the auto makers, Tesla has among the worst gross margins of any of them. And if you want to focus on the operating margins instead, well they're negative because all those costs that Tesla pretends don't exist as part of COGS (as well as the costs of its distribution model) have to show up SOMEWHERE.
    Aug 26 09:40 PM | 10 Likes Like |Link to Comment
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