Tales From The Future

Tech, long/short equity, growth at reasonable price, value
Tales From The Future
Tech, long/short equity, growth at reasonable price, value
Contributor since: 2014
* bull should say bulk.
This is a very good article, people need to remain realistic.
The smartphone business is historically unique in terms of global scale and short replacement cycles (so are Apple's margins and ASPs for iPhones on top of that).
The Apple Watch was the first victim of this as the author noted:
"the Watch was born into a world where early expectations were nearly impossible to meet."
Unless Apple indeed launches a car by around 2020, the iPhone and growth in Asia will have to carry the bull of Apple's revenue expectations.
As someone correctly noted in that link, a base Model3 will likely be a mirage with an endless list of options:
"Not to sound like a hater, but keep in mind at $35,000, this car will be stripped down, and minor upgrades will be tweaked such that you have to upgrade packages to get them. Think BMW.
"Go to BMW’s site and build out a 320i sedan, where keyless entry isn’t even standard and costs $3100. Want cold weather package? Ok that’s $800… but SURPRISE: You have to pay $1450 to upgrade to leather to qualify! Want Bluetooth? $350! Want your rear seats to fold (standard on a $11,000 Nissan Versa, but not on a BMW)? $475! Your $33,000 car has just become $41,000+..."
I see a usable Model3 config selling for at least $40-50k.
Same for "free forever" Supercharger access. I don't see the business model work out for the cheaper Model3 , it will likely become a paid option - or Tesla will anger its existing S and X customer base once these stations get hogged by Model3 owners.
Feb 2016 / Update: Tesla sticks to its Model3 forecast...

http://bit.ly/23ZUeiN

I will stick to mine, especially given the Model X production issues.

I don't see a base version of the Model3 (at the promised $35k) arrive until later in 2019-2020, if ever. I also continue to question the late 2017 launch promise for the higher-end options. 2018-2019 looks more realistic to me.
Darren, one of the key pillars of Tesla's story is that they will have a giant factory and therefore capacity before anyone else.
Of they only start expanding the pilot by 2019, there's no headstart at all. Established car makers with their Asian suppliers can spend billions per year to crank up battery supply (if so needed and EV demand rises above its current niche).
"I hope SA is right on this call."
Note that there is no "SA". Different authors at SA have very different opinions, also read bearish opinion on SUNE and other stocks.
Einhorn selling would be a (final) death kiss for SUNE stock prices
However, since he wants to take an active role there's at least some hope:
http://on.wsj.com/1QcrE9T
We will see. I think all bets are off after today's plunge.
I have a small position (well below 1% of portfolio at buy, now even less, LOL) at $3 and have written it off to zero after today. Worst long position besides SDRL in many years for me, at least I always keep such volatile positions very, very small. That kept me in the game for 2+ decades ;-)
Thank you, also enjoyed reading your latest TSLA article.
"Without sending me on a wild goose chase, how about you name a manufacturer, a basic outline of the car they propose to build and a price at which they'll be offering it. "
Sedans and SUVs form Audi, Volvo, BMW, Jaguar...the list is long and getting longer. Google.
EVfan wrote: "Your claims are a bit exaggerated,"
Actually, not. Since Tesla and Panasonic only invested $374 million so far (until Jan 2016) and total investment for the Gigafactory was projected at $ 5 billion, my estimate of
"invest an additional $3-4bn into the Gigafactory alone"
is conservative. Using these numbers it's a $ 4.5 billion gap between pilot plant and full GF (assuming additional $125 million in investments in 2016 to complete most of the pilot plant).
One more thing: The culture clash between Tesla and Panasonic (or Japanese suppliers in general) on expansion plans and timing isn't new.
See this article from March 2015:
"Tesla presses Japanese battery suppliers to innovate, take risks"
(...)
"Kelty said Japanese suppliers Tesla has worked with have shown strength in meeting commitments for parts delivery. At the same time, he said that moving too slowly has been a weakness among such companies.
"Decision-making often takes time," Kelty said. "For example, when the product is almost ready, they may want to do the test again.""
Source: http://bit.ly/1QbIrUh
Hmm, maybe Japanese suppliers don't want to see headlines with burning cars or other quality defects and their company logo attached?
Tesla's overly aggressive moves, such as
- battery floor with no shields attached, fix only came in late 2013 after a few fires or
- "beta" tests in the public of ADAS features with serious flaws (not recognizing babies or small children in "Summon" feature, highway features not disabled on other narrower roads or with no driver in the seat...)
are dangerous in the car industry given a long history of liability cases and huge recall costs.
PS: If Tesla isn't happy with Panasonic, why don't they produce their own cells? We will see how that goes...
"The model costs $35,000 and its production will start in 2017."
Do you actually believe this?
As with release dates and prices, Tesla has a funny way reporting financial data:
http://bloom.bg/1QbGtTW
They need to tangle these carrots in front of investors to get more capital - otherwise their growth story will falter in my opinion.
The problem is that their existing bonds are flashing caution and the stock is down. Raising more capital will get harder - especially in this cloudy economic environment in 2016 and beyond.
For example all the investors in the latest August 2015 round around $240 likely aren't very happy campers...
http://bloom.bg/1QbbCXI
I doubt they will come back for more capital rounds when Tesla stock was at $143 before the latest CC.
Paid $100 "premium" instead of getting a discount...
"There is that pesky little crossover version of model 3 (model y?)"
So do you think a small car company with execution problems should take on another project which will again require billions?
So far we have ideas for up to 5 or 6 cars (if one includes Tesla Truck and Roadster 2.0 dreams) plus Tesla Energy.
If you add battery plants for all these projects, Tesla would need to invest up to $ 50 billion over the coming 5-7 years.
Good luck getting that money given their debt and where their bonds and stock is trading (ask the people who participated in the last August 2015 capital round at $240 how happy they are...).
"Without any serious competition for either the S or X in view before 2020"
There will be lots of competition for S and X in 2018-2019 already, read any auto blog. Model3 competition (long-range EVs at mass-market prices) will come in 2017, some of them before Tesla's car is launched. And I continue to doubt Tesla's 2017 launch promise.
If you include S and X into the 500k planned units, Tesla will need even more battery capacity per car. As I outlined above, there's a battery limit of 80-100k cars per year coming from the Nevada pilot plant.
With their share price coming back to Earth it's not so simple to raise billions for battery expansion and then billions more for needed car factory expansions.
In case EV demand takes off, large car companies can raise/deploy more capital than Tesla to build battery capacity quicker with their (mostly Asian) suppliers.
It's not just about funding: Tesla will have to wait another 2-3 years until the "full" Gigafactory is done - from the date these additional investments (to complete the missing 86% of GF) are made.
"Last time tesla said they didn't need money, didn't they raise money?"
Yes, they turn around very quickly sometimes, we will see :)
But it couldn't be so easy this time. The investors who got "lucky" during the last capital round in 2015 around $240 will not be willing to jump in again around $150 (understandably so, not a good deal in retrospect).
On the demand side, Tesla will likely encounter an "Osborne effect" on low-end Model S sales in 2016-2017 while people are waiting for this 'Fata Morgana' (that's what I call it) edition Model 3 promised at just $35k.
More generally and on a macro level: We could be near the end of a long bull cycle in my opinion. If so, the top end of Tesla's offerings could suffer a lot.
If my scenario is correct, fancy cars like S and X at average transaction prices around $100k will suffer first in a downturn - and let's not even talk about access to credit markets in case Tesla figures out it needs a lot of fresh capital after all between 2016-2020.
I doubt many TSLA longs are aware that Tesla has a hard ceiling of Model3 cars it can produce without investing billions more (and waiting 2-3 years until the Gigafactory is expanded from the day these investments are made).
The CEO shot down these questions in the latest CC as he always does:
Elon Musk: "Basically, to the best of our knowledge, you shouldn't worry about the Gigafactory as a constraint in Model 3."
I will bookmark that bold statement.
There's a long way and fresh billions in capital needed to ever get to the promised 500k Model3 cars per year (2020 was the original goal for that output number).
Since they are only building a battery pilot plant (14% of total size) at the moment, they can probably only equip 80-100k or so Model 3 cars per year with these "cheaper" batteries. That's a huge gap to 500k.
To get to 500k cars/year they (Tesla and Panasonic) will need to invest an additional $4billion for batteries alone - let alone a few billions more for tooling etc. in their NUMMI car factory.
PS: Here's the quote on the current state of the "Gigafactory" and the 14% vs 100%, directly from Tesla executives:
"It’s the size of a major shopping mall, but, as I was told by a senior Tesla executive, it accounts for only 14% of the total planned floor space, which will reach 13.6 million square feet."
http://bit.ly/20fXulC
Tesla will one day have to answer why it's always talking about an elephant (Gigafactory at 35GWh (cell) and 50GWh (pack) capacity) while only building a mouse (pilot plant), especially regarding the financing gap.
Sadly, none of the analysts bothered to follow up the question the CS analyst asked in passing and Tesla execs evaded a clear answer in the latest conference call.
@Author: How do the above facts and figures check with your statement:
"Bottom line is that concerns about sizing of the Gigafactory have been red herrings in my view."
My bottom line is that there's no Gigafactory, only a pilot plant. The gap between the two factory sizes is about $4 billion.
Author wrote: "The data shows that the outcome is anything but cut and dry. It depends on many different factors which are hard to predict over a 20 to 30 year span."
And that's why all these companies are very hard to impossible to value over 2-3 decades, especially for retail investors who don't have time to study these models for hours, if not days.
The only way I will invest (more) in this sector is using an ETF like TAN at dirt-cheap prices (let's say around $10-15, currently around $20).
Single-pick solar stocks on the other hand can go to zero - some did since 2010 (remember Chinese giants like LDK, STP... ?!) and more will in this credit environment.
PS: SCTY is one of the most dangerous stocks because it had/has (?) its fair share of "believe in Elon Musk, buy SCTY at any price" retail investors in the past.
@Author: Will you come back to your previous statement/article that Tesla can equip 500k Model3 cars / year with the *current* size of the Gigafactory?
Tesla and Panasonic are only building a battery pilot plant (14% of total size) at the moment, they can probably only equip 100k or so Model3 cars per year with these "cheaper" batteries:
Full cell capacity at 35GWh / 70kWh per car would be a max output of 500k cars/year.
I'm being generous and use 20% instead of 14% (because 70 kWH might be a bit high, GM Bolt uses 60kWh - but Tesla might offer more than one battery option on the Model3) so that's 100k cars per year as a ceiling for the pilot plant.
To ever get to 500k cars/year they (Tesla and Panasonic) will need to invest an additional $3-4bn into the Gigfactory alone - let alone a few billions more for tooling etc. in their California car factory.
Summary: Tesla has a hard production ceiling of 80-100k Model3 cars, even if Mr. Musk states the contrary on the latest CC:
Elon Musk: "Basically, to the best of our knowledge, you shouldn't worry about the Gigafactory as a constraint in Model 3."
This statement doesn't add up with the state of the Gigafactory, Tesla not getting new capital (oh, except for drawing down an ABL line, there's a first caveat...) AND their current cash on hand AND $3-4bn in additional investments needed for the "full" Gigafactory (Panasonic will at most cover 40% of that).
Elon Musk: "Basically, to the best of our knowledge, you shouldn't worry about the Gigafactory as a constraint in Model 3."
I will bookmark that bold statement. This means there's a long way and fresh billions in capital needed to ever get to the promised 500k Model3 cars per year (2020 was the goal).
Since they are only building a battery pilot plant (14% of total size) at the moment, they can probably only equip 100k or Model3 cars per year with batteries:
Full cell capacity at 35GWh / 70kWh per car would be a max output of 500k cars/year.
I'm being generous and use 20% instead of 14% (because 70 kWH might be a bit high, GM Bolt uses 60kWh - but Tesla might offer more than one battery option on the Model3) so that's 100k cars per year as a ceiling for the pilot plant.
To get to 500k cars/year they (Tesla and Panasonic) will need to invest an additional $3-4bn for batteries alone - let alone a few billions more for tooling etc. in their NUMMI car factory.
"Now they will have two products. Soon 3, then 4. S3XY."
S3XY turning into reality likely means 2025, the car sector is very hard to ramp up in. And that's a best-case scenario for Tesla.
Another decade is not so sexy for fickly investors awaiting four car models and 2-3 new plants / battery factories for years...that is IF they don't run of fresh cash before, a big if in case stock and credit markets turn sour soon.
By 2018-2021 - and especially until 2025 - all major car brands will offer tons of competing long-range EVs and PHEVs in all price classes.
Thanks.
SUNE was one of the my worst ideas for years, even if $3 looks "cheap" on the long-term chart. The business model is hard to understand, there's now too much debt - plus a myriad of other reasons not to even look at it.
I feel it's important to talk about losers and mistakes as well.
The only upside is that I keep strict portfolio sizes in volatile sectors to control risks (troubled/volatile solar names TAN, FSLR and SUNE combined are a single-digit long position).
Finally, yes, I'm very skeptical about 2016 and beyond. It looks like a mixture of 2011 and 2008 so far to me in terms of stock returns.
I could very well be far too pessimistic, we will see...at two-thirds in cash, there is enough dry powder :)
SCTY stock is doing great this year...oh wait, I was holding the chart upside down :)
SCTY -65% YTD.
" ...ready to place my deposit on day 1"
Musk fans can basically make their Model3 deposits for free thanks to their huge gains in SCTY stock...oh, wait.
Sidarth, what about your old article from February 2014::
"When Is Tesla Going To $1000?"
http://seekingalpha.co...
Any price up to $900 must be a bargain for you, right?
PS: Same for SCTY, many 'Elon believers' are invested in both stocks. SCTY is down over 60% YTD.
The stock is currently trading where it was 24 hours ago, around $150. All the people who bought in the last two years are underwater.
What does this show? The guidance promises and Elon's Model3 tweets (pumps) don't work no longer.
Talk is cheap, cap-ex in the car sector to ramp up to millions of cars is not.
Some months ago, these pumps would have caused huge spikes. That is no longer the case.
Besides, Tesla management seems to under-estimate potential macro issues in 2016-2018. We are near the end of a long bull cycle imho. Fancy cars like S and X will suffer first in a downturn...
Don't bring facts and actual hard numbers to a discussion with TSLA perma-bulls :)
"...and online the following day".
That would be April Fool's Day. Date fits like a glove.
Both the promised base price of $35k before incentives (IF indeed Tesla wants to create a BMW 3 or Audi A4-like EV sedan) and the late 2017 shipping date promise.
I will say it one more time: Shipping a "cheaper" car in larger volumes is actually much harder than shipping a more expensive car in low volume (where you can hide inefficiencies thanks to large margins per unit).
You have to pinch every penny and keep assemby and supplier costs down while keeping QA at acceptable levels in the $30-50k range (BMW 3 and Audi A4 are very high benchmarks in this category).
I'm glad Tesla sticks to its earlier promises. They will likely anger many new (naive, not familiar with Tesla's constant delays) customers making reservations and then waiting and waiting.
In addition, Tesla will likely encounter an "Osborne effect" on low-end Model S sales in 2016-2017 while people are waiting for this 'Fata Morgana' edition Model3 at $35k.