Tesla: Words, Words, Words - But No Details

| About: Tesla Motors (TSLA)

Summary

Master Plan Part Deux has no mention of time frames or capital required.

All plans are highly speculative.

Many statements are not supported by Tesla’s historical results.

Introduction

The eagerly awaited "Top Secret Master Plan II" was posted today on the Tesla (NASDAQ: TSLA) blog page. But there are really no details that provide anything useful to investors.

Reading the plan actually reminded me most of "futuristic" comic strips that I read when I was a kid where possible future innovations sounded cool at the time but even now, 45 years later, many ideas have still never been achieved (the Apple Watch was finally released almost 50 years after its "prototype" was shown in a Dick Tracy comic strip).

Maybe I 'm just too focused on fundamentals and financial capabilities to blindly accept such ideas and visions given that I also can start estimating the development capital and huge increases in R&D spending that will be required to pursue such visions. One other thought also struck me when reading Tesla's plan to save the human race which was that Musk supposedly pulled an "all nighter" to prepare such a vision, I felt like I was actually reading something similar to what might have been written by Melania Trump's speechwriter.

Filling in the Details

Since a public company that has both a very large shareholder base and an extremely expensive stock valuation is unwilling to provide more details about the ideas in Master Plan Part II, I'll go through the blog post and provide some of my thoughts about the costs and time frame for the visions presented.

First, however, are some comments about the results of Master Plan I as I believe that some details have been omitted about how well that plan worked:

"Create a low volume car, which would necessarily be expensive."

The Roadster was introduced at low volume but is no longer being produced.

"Use that money to develop a medium volume car at a lower price."

The Roadster never produced profits or positive cash flow for the company and so a huge amount of additional investor and creditor money was needed to develop a "medium volume" car. The price of that medium volume car was not much lower in price, however, as a typical Model S is priced at $90K to $100K. By the way, the first medium volume car was nine months late, the second medium volume car was essentially 27 months late (18 months late for the first delivery and then another nine months before it reached volume production) and so I tend to discount Tesla statements about its visions or what it can achieve.

"Use that money to create an affordable, high volume car."

The Model S and Model X haven't provided any positive cash flow to create the Model 3. Instead, over $5 billion of equity has been raised, $2.7 billion of direct debt has been issued, and $1.4 billion of indirect external financial partner debt has been originated to support Tesla's operations which now have a cumulative operating loss of over $2.6 billion.

"Provide solar power. No kidding, this has literally been on our website for 10 years."

And…ten years later, Tesla's new scheme to provide solar power is to merge with a company that will need $2 billion of additional capital over the next two years. That company also has had its own "Gigafactory" vision that has been in development for over three years at this point but there is unfortunately no vision as to when that Gigafactory will be in volume production or what the actual yields or unit costs may be.

Additional comments are as follows about what I consider significant statements in the rest of the blog post:

"I thought our chances of success were so low that I didn't want to risk anyone's funds in the beginning but my own."

But, at this point, as described above, over $8 billion of external capital is now at risk in a company that provides no visibility or details about its possible future financial results. In addition, given the current market value, $32 billion of shareholder value is now at risk based on Musk's visions of the future. Any capital originally invested by Musk has now been dwarfed by around $1 billion of free stock given to Musk in the "2012 CEO Grant" to achieve "milestones" that were essentially easy to achieve as nine of the ten milestones had nothing to do with profitability but could be achieved by rapidly burning through cash contributed by subsequent equity investors and creditors. My own financial projections presented in another article also indicate that another $13 billion of financing will be required through 2019 to follow the previous growth plan. Such projections are also before the additional spending that will occur to pursue the ideas in today's blog post.

"The main reason (for Master Plan I) was to explain how our actions fit into a larger picture, so that they would seem less random."

The problem with this statement is that everything that has happened since then has been completely random such as:

  • missed model introduction dates
  • extremely inconsistent vehicle production performance
  • volatile and unpredictable vehicle delivery history
  • ever increasing amounts of capital needed to support the next stage of Tesla's activities

"The point of all this was, and remains, accelerating the advent of sustainable energy."

Although Tesla is a leader in electric vehicles, its activities over the last ten years have not had any impact on accelerating the advent of sustainable energy as most electricity is generated by fossil fuels.

"We must at some point achieve a sustainable energy economy or we will run out of fossil fuels to burn and civilization will collapse."

Duh! - and this required an "all nighter." And no one else will also be pursuing solutions to such issues?

"Here is what we plan to do to make that day come sooner - Integrate Energy Generation and Storage: 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."

Sounds great but the SolarCity "Gigafactory" has been under development for three years and there is still no visibility as to yields, production costs, or panel pricing. Just trust Elon for all this!

"Now that Tesla is ready to scale Powerwall and SolarCity is ready to provide highly differentiated solar, the time has come to bring them together."

How do we know Tesla is ready to scale Powerwall (whatever that may mean anyway) and I've already commented on the lack of visibility at SolarCity. But, bringing these two companies together will create almost completely incomprehensible financial statements which would then make the combined operations the biggest "story" stock ever (driven by tweets - an endless source of energy!) which is maybe the actual "Master Plan" here!

"Expand to Cover the Major Forms of Terrestrial Transport - With the Model 3."

Which will require around another $4 billion of capital spending before it reaches volume production.

"A future compact SUV."

Which will require probably $500 million in development costs and at least another $1 billion in additional capex and tooling costs. Introduction also probably couldn't take place until at least 2019 given the Model 3 ramp (but at least the company hasn't yet started accepting deposits).

"And a new kind of pickup truck."

Which will also require probably $500 million in development costs and up to $1 billion in capex and tooling costs. Timing would also probably be at least 2019 at the earliest and more likely to be no earlier than 2020.

"What really matters to accelerate a sustainable future is being able to scale up production volume as quickly as possible. That is why Tesla engineering has transitioned to focus heavily on designing the machine that makes the machine - turning the factory itself into a product."

Sounds cool but there is the practical problem that the Model 3 is supposed to be in volume production in 15 months. I think that is a really short time frame for a new manufacturing paradigm - particularly given the recent history of the appallingly botched Model X launch.

"A first principles physics analysis of automotive production suggests that somewhere between a 5 to 10 fold improvement is achievable by version 3 on a roughly 2 year iteration cycle."

Tesla has now had four "2 year iteration cycles" and has displayed no notable aptitude for achieving any breakthroughs in vehicle production capabilities. Vehicle production and components, which are essentially just a large collection of metal parts, also are not similar to integrated circuits with their proven history of shrinking and reconfiguring transistor designs and so I don't see any comparable "physics" principles that may be applicable. The overall statement itself is probably also the most arrogant and unsupportable comment I have ever heard from a public company CEO (and I have experience listening to and interacting with probably 3,000 public company CEOs at this point).

"There are two other types of electric vehicle needed - heavy-duty trucks."

Development costs would be at least $500 million and possibly as high as $1 billion. Additional capex and tooling would be between $1 billion and $2 billion. Introduction probably could not occur before 2022.

"And high passenger-density urban transport."

Probably at least $1 billion in development costs and another $1 billion to $2 billion in capex and tooling. Introduction would probably be between 2022 and 2025, which essentially means such an announcement at this point is irresponsible.

"Both are in the early stages of development at Tesla and should be ready for unveiling next year."

Whatever this is supposed to mean! The "unveiling" will probably provide another convenient excuse for another capital raise.

"We believe the Tesla Semi will deliver a substantial reduction in the cost of cargo transport while increasing safety and making it really fun to operate."

On the safety front, I hope they will make it visible against "brightly lit skies." As for making it "really fun to operate," if Tesla is currently having trouble with its current highly educated and affluent owners apparently misunderstanding the capabilities of Autopilot, I hope that Tesla would do a lot more "human engineering" before creating a system that they think what are typically very fatigued and bored truck drivers will find fun to operate.

"With the advent of autonomy, it will probably make sense to shrink the size of buses and transition the role of bus driver to that of fleet manager."

It would be at least ten years before such vehicles could be deployable (so it should have been saved for Master Plan 3).

"Traffic congestion would improve due to increased passenger areal density by eliminating the center aisle and putting seats where there are currently entryways."

I guess the Falcon Wing door team is now free for new brainstorms (those "no brainer" sorts of things).

"And matching acceleration and braking to other vehicles, thus avoiding the inertial impedance to smooth traffic flow of traditional heavy buses."

Except that passenger loading and unloading are random functions and are unlikely to have distributions that would promote a "smooth traffic flow".

"It would also take people all the way to their destination."

Really? Everyone will have their own individual bus?

" Autonomy - As the technology matures, all Tesla vehicles will have the hardware necessary to be fully self-driving with fail-operational capability."

Just the testing of such features would take at least five years and probably another three to five years of development before testing could start (probably another item for Master Plan 3!). Development and testing costs of such functionality would probably also be at least $2 billion. My comment is also pretty much confirmed by:

"It is important to emphasize that refinement and validation of the software will take much longer than putting in place the cameras, radar, sonar and computing hardware."

And then:

"Even once the software is highly refined and far better than the average human driver."

Ohh, now I'm really confused…as I thought Autopilot was already better than the average human driver. Which then also seems to be claimed below:

"It is already significantly safer than a person driving by themselves."

And then another completely indeterminate statement:

"There will still be a significant time gap, varying widely by jurisdiction, before true self-driving is approved by regulators. We expect that worldwide regulatory approval will require something on the order of 6 billion miles (10 billion km). Current fleet learning is happening at just over 3 million miles (5 million km) per day."

Give us an actual time frame instead of more gibberish that can be disclaimed in the future.

"Some mercantile calculation of legal liability."

Those mercantile things are very inconvenient to the overall story of saving the universe - especially when the additional capital needed for the Master Plan Part 2 visions will increase future capital requirements by probably at least $15 billion (in addition to the $13 billion of capital projected to be needed through 2019 by my model).

"Sharing - When true self-driving is approved by regulators."

At least ten years - especially given the problems with brightly lit skies.

"You will also be able to add your car to the Tesla shared fleet just by tapping a button on the Tesla phone app and have it generate income for you while you're at work or on vacation, significantly offsetting and at times potentially exceeding the monthly loan or lease cost. This dramatically lowers the true cost of ownership to the point where almost anyone could own a Tesla. Since most cars are only in use by their owner for 5% to 10% of the day, the fundamental economic utility of a true self-driving car is likely to be several times that of a car which is not."

Uber drivers are already testing such a theory - but their minimum wage earnings don't seem to be proving such a point.

"In cities where demand exceeds the supply of customer-owned cars, Tesla will operate its own fleet, ensuring you can always hail a ride from us no matter where you are."

Cool - but that will require at least another $3 billion to $5 billion for such a fleet. But such an opinion could be labeled as "mercantile" and I guess that isn't cool.

So, in short, Master Plan, Part Deux is:

  • Throwing a whole bunch of stuff at the wall without any details about costs, overall economics of any of the ideas or any timeframes.
  • Egregiously irresponsible from a fiduciary responsibility perspective that is incumbent on any executive officers of a publicly traded company.
  • Probably completely unachievable given the additional capital required.

From a broader perspective, however, based on my own cumulative experience doing in-depth research on at least 3,000 publicly traded companies over a 20-year career managing small-cap growth stock portfolios and also a long/short hedge fund for nine years during that period, the Master Plan Part Deux is the most irresponsible set of "plans" I have ever seen communicated by a public company. Every aspect of the things mentioned are:

  • Highly speculative
  • Have a high risk of not being able to be achieved by what is still a very unproven organization
  • Probably very misleading to investors given the lack of transparency about the capital requirements of the ideas described

In summary, over a completely undefined time period, the company claims that it will:

  • Integrate a very different business organization to create a "seamless" delivery system for solar energy and backup power storage
  • Develop four completely new vehicle platforms where all four have very different operating characteristics and prototype testing requirements
  • Develop what will be probably at least 50-times the current code in Autopilot to enable autonomous driving capability

Just testing all of the new software created could take at least three to five years before it could possibly be approved for volume deployment.

As such, Tesla is just pushing out any way to actually monitor what it is doing by five to ten years. Given its success to date in keeping its stock levitated through huge operating losses, botched vehicle introductions, continual misses in projected deliveries, I guess Tesla thinks that such a strategy may continue to work!

My opinion, however, is that the plans described will increase Tesla's risk profile in line with the 5 to 10 fold change predicted in its "first principles of physics" statement.

Disclosure: I am/we are short TSLA.

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.

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