Tesla: Ready To Re-Enter The Fast Lane
Summary
- TSLA has been churning for 2 1/2 years above and below its $330 current price, but technicals and fundamentals suggest it's poised to rejoin and lead the renewed bull market.
- TSLA surged during QE 3, and now the Fed is encouraging risk-on speculation. TSLA is a major beneficiary of extra liquidity, and has re-entered an uptrend.
- Global public opinion is continuing to swing toward TSLA's vision of our energy future, which opens up huge growth potential for its products.
- Operationally, it has gotten its act together much more than 1-2 years ago, while EV competitors falter.
- TSLA's growth potential is so large that during this "not-QE" policy of Fed money printing, new highs in the stock price can still leave the stock with lots of upside potential.
Background
I've moved from neutral on Tesla (NASDAQ:TSLA) at $317 two years ago, in Thinking Differently About Tesla, to long-term bullish at $300 in October 2018 (but cautious due to Fed tightening), in Yesla! Now I'm looking for the stock to perform bullishly, rejoining the S&P 500 (SPY) at new highs.
The reasons are both fundamental and technical. Beginning with the latter...
The Fed's last risk-on period coincided with almost all of TSLA's alpha
Here's TSLA's stock chart since it has been a public company, showing the surge during QE 3, notably during the acceleration phase when QE 3 was young, in late 2012 and 2013.
Data by YCharts
The Fed is back in QE mode, though the Fed says it will not push excess reserves especially high this time. Whether this "not-QE" or QE-lite will be brief as in QE 2 or lengthy as in QE 3 is to be determined by the Fed's assessment of the economy over time.
On Oct. 1, 2012, when QE 3 began, TSLA was around $30 and had gone nowhere for two years. It then went up more than 6X to August 2013. Of course, I'm not projecting such a move this time, but I think there's enough monetary juice that will flow long enough to allow TSLA to move well into all-time high territory within one year.
I'm only giving this analogy because:
The stock chart is now constructive on all major time points
The recent momentum thrust on Q3 earnings and the resumption of "not-QE" is a technical positive. The big picture chart is now pointing up again. This price surge has turned the 50, 150 and 200-day/week/month EMAs all positive or turning positive again.
TSLA stock is therefore reasonably "in gear" but attractive in that it's at a price it first reached 2 1/2 years ago.
Also important:
Renewable energy peers are technically in gear
The renewable energy space has been a tough place to make a buck. An Invesco Solar ETF (TAN) made a bearish-to-bullish transition this year, and TSLA has outperformed it on a 5-year stack. Owning an outperforming name in a sector that is on upswing tends to work in my experience.
In comparison, a hydro-carbon-based ETF (XLE) has made a bullish-to-bearish chart transition (XLE acted bullishly up to 2014). I think the following chart suggests who the upcoming winner is:
Data by YCharts
Also in gear is the chart of mega-cap renewable superstar NextEra Energy (NEE). NEE's premium valuation compared to other utilities (XLU) is a positive for TSLA's own valuation.
Summary of technicals
TSLA is a risk-on stock that is responding strongly to risk-on behavior from the Fed. It still has lots of shorts to force to cover, is in good technical shape suddenly, and its renewable energy peer group is acting better while the major oil and gas ETF is crumbling.
Now, let's go to the major fundamentals that I believe drive alpha. I am going to stay out of "the weeds" of all the many details that cumulatively affect the TSLA story, as I think they are largely discounted given the intense interest in TSLA and every product introduction.
However, my experience is that mega-trends and other big picture matters relevant to TSLA - such as an operational turnaround - tend to not be fully discounted. The following three sections delineate the main fundamental reasons I am long TSLA, looking for big gains.
First:
TSLA is winning the crucial arguments on energy policy
I discussed the emerging victory of the TSLA mission in US public opinion in a Sept. 16 article, NextEra Energy: Trends And News Flow Keep Going Its Way. NEE and TSLA have similar business missions: help the world move toward renewable sources of energy.
As the first mover in its niches, TSLA's biggest battle is against the incumbent energy industry rather than other EV manufacturers or storage/rooftop solar companies.
The rising waters due to atmospheric CO2 levels argument is gaining sway, while the basic economics of renewable energy versus burning hydrocarbons improve.
NEE and TSLA are seeing their key "hearts and minds" argument sweeping large-scale dissent away, paving the way for a renewables revolution in which TSLA, NEE and other early movers stand to profit greatly.
Note, I am not proselytizing, simply observing. My money wants to be on the winning side, and I believe that TSLA is on the winning side (at least as far out in the future as I can see) in the most important battle, that of ideas.
Moving on to two company-specific big picture points...
TSLA has accomplished a great deal in a short time
To win big in a revolution, as Apple (AAPL) did with mobility computing/communication products, a company needs a suite of products that meet the needs of the new paradigm and ideally are distinctive and appealing.
TSLA has the distinctive vehicles that are purchased en masse in the US and internationally, with no advertising and no dealer network. This is quite a 'wow' achievement in my view and could only happen if TSLA has done quite a lot very right, beginning with product design and moving all the way to fulfillment and support. As shown later, TSLA has a learning curve lead over most of its wanna-be rivals, complementing its iconic brand name and generally satisfied customer base.
Next, TSLA has battery-driven energy storage products. While not especially sexy, if it continues to execute, they address immense markets.
Finally, TSLA has its solar energy production products, most notably the improved solarglass roof. Per the latest conference call on this reportedly easy-to-install, cost-effective next-gen version, the product will address a North American market of 5 million roofs per year. When paired with a Powerwall, this might involve a $60,000 purchase. Even a 5-10% share of the 5 million roof market would represent huge profit potential, and one that could be recurring, go international, and have horizontal and vertical expansion possibilities.
Elon Musk is saying the energy business may be larger than the vehicle business.
Later, I review some of the profit possibilities just from vehicles.
This is not all. While short sellers salivate, TSLA already has the Smart Summon feature that has been used a million times. Its iterative approach to its full self-driving goal is unique and may be on the verge of significant real world success. So there's much more that TSLA has done, including powertrain development, which could provide further profits if it licenses those technologies out or produces them for the EV industry at large.
Thus, TSLA has a unique and comprehensive product line in many key areas required for a carbon-neutral future. No other company does. And as with AAPL, TSLA's products are classy and undergo continual improvement.
This is the stuff of which a liquidity-driven bull market and short squeeze could be made. It also may allow more institutions to scale into TSLA.
Finally, and crucially...
TSLA is doing much better operationally
Without this point, I'd still be mostly on the fence regarding TSLA. But TSLA is finally getting several things done properly. Model 3 production is ramping globally. Gigafactory 3 went up very rapidly in China. The Model Y is said to be on or ahead of schedule. The Semi is rumored to be ahead of schedule as well.
And, TSLA's important progress in the solar roof while doing all the above is impressive.
Next, a few additional points. The first is that...
It's not easy for an ICE auto manufacturer to enter the EV world
In going long TSLA, I also focus on how strong or inept the competition may be. Current news on Daimler-Benz (DDAIF) is relevant.
From Autoblog.com, some quotes with my comments:
Manager Magazin also said Daimler plans to become a carbon neutral company by 2040, ensuring that all new cars, production methods and suppliers work in ways which do not produce carbon dioxide emissions.
My comment: Is Daimler serious? 2040?
This suggests to me that Daimler has an insufficient understanding of what's going on in the world of public opinion.
Back to the article for the blog's lead point:
FRANKFURT, Germany — Daimler is looking to make 6 billion euros ($6.75 billion) in cost cuts and efficiency gains by 2021 at Mercedes-Benz passenger cars and a further 2 billion euros at its Daimler Trucks division, Manager Magazin said on Thursday.
Around 10,000 jobs will be cut at Daimler...
So that's the headline, but look at another line in the blog (emphasis added):
Daimler said in February it would pursue cost saving measures after fourth-quarter operating profit plunged 22 percent, hit by trade wars, rising costs for developing electric cars and an industry downturn.
Rising costs related in (large?) part due to Daimler finding out (my interpretation) that developing and manufacturing a competitive electric vehicle is really, really hard. People who blame Elon Musk for this or that issue at TSLA may wish to reflect on Daimler's struggles and that of Porsche (OTCPK:POAHY).
For that, see this recent news item:
Porsche (OTCPK:POAHY) told customers recently regarding Taycan shipments:
... as a result of the enormous complexity surrounding the production of Taycan, we must report that unfortunately the delivery dates are somewhat delayed.
My big picture interpretation: Competition to TSLA's EVs may be less fierce than thought, and delayed. It's good to be the king of the EV road...
With that thought in mind, some profit projections would be helpful.
What TSLA might earn and be worth 10 years from now
Per the Amazon (AMZN) and Netflix (NFLX) examples, I'm not too concerned with what TSLA will earn next year or the year after. I'm mostly concerned about the trend favoring renewable energy, TSLA's growing product suite and technological capabilities regarding self-driving vehicles, the solar roof, and general revenue growth. If costs are higher to build for faster growth, then current-period profits will be depressed, but long term, value may be created.
That said, a forecast is helpful, speculative though it is.
Bloomberg New Energy Finance forecasts 28 MM EVs produced in 2030. If TSLA produces 6 MM of them at $40,000 per car, that's $240 B in sales and perhaps $36 B in after-tax profits.
The energy business is extra in this analysis and could be very large. Also, revenue from licensing powertrain or self-driving technology (or producing modules for competitors) could be significant and is not included in this calculation.
As BNEF is forecasting 56 MM EVs in 2040, TSLA would still be a growth stock in 2030 at the 28 MM EV production level. Thus, if TSLA were to trade at today's S&P 500 level of about 20X forward GAAP EPS, TSLA would be a $720 B market cap stock from vehicles alone. Assuming some dilution, that would be a 10X return in 10 years (26% CAGR).
With Elon Musk saying that the energy business may exceed the vehicle business, TSLA might just deliver the 35%+ CAGR to shareholders that it has done since its IPO.
Clearly, it is not necessary to project so much success for TSLA to generate enough alpha on a 10-year basis to be very rewarding to patient shareholders.
Risks
TSLA stock is volatile on its own, and the company's business prospects are highly uncertain. Please see the 10-K, 10-Q and other documents for TSLA's recitation of the many risks involved in owning its shares. The following are several of the most important risks I think about regarding TSLA:
1. General market tolerance for speculative stocks
The Fed began easing (encouraging risk-on behavior) early in 2001, but investors nonetheless let highly-valued tech stocks crash for the next two years even as the Fed got increasingly aggressive.
2. Elon Musk
Probably TSLA's greatest asset and simultaneously a significant risk. One more wayward tweet or oral statement and who knows how hard the SEC could come down on TSLA?
3. China - Gigafactory 3 and sales from it
If US-China relations truly sour, TSLA's vehicle production and sales in China could be harmed significantly. China has a nearly infinite number of tools with which it could impede TSLA, some more subtle than others.
4. China and other potential low-cost competition
The flip side of some old-line ICE vehicle manufacturers having growing pains in the EV industry is that some newbie out of China, India or elsewhere might be able to make a big dent in EV sales with aggressive pricing, thus harming TSLA in several ways down the road. This is not a "tomorrow" thing, but since all TSLA projections I have seen involve long term success, even a post-2025 arrival of a price-cutting competitor would damage my bullish thesis.
5. Slower uptake of EVs than projected
Since we do not know the future, we cannot be sure how the cause of renewable energy in general and EVs in specific will fare in 2025-30.
6. TSLA-specific mishaps
Just because TSLA is doing better on some projects this year does not mean that it will keep up the pace. If so, TSLA could end up just another innovator that did not quite make the grade.
As stated above, there are many more specific and general risk factors to owning TSLA shares. Probably even TSLA's 10-K cannot name them all.
My judgment right now is that the upside potential, both short term and long term, outweighs the downside risk. Only the passage of time will reveal the ongoing outcome of this classic dynamic common to all growth stocks.
Conclusions - TSLA as a timely new money stock with very large sustained potential upside
In summary, TSLA is technically in good shape and fundamentals are moving its way, including the overarching fundamentals of the world's future energy supply and utilization. The company is addressing large, new markets with innovative, first-/best-in-class products and technologies. These products are not easy to match by competitors. Thus, TSLA appears to me to be well-positioned to continue to move up during the Fed's current "not-QE" money printing phase, and potentially reach a sort of lift-off phase as AAPL did some years ago and AMZN did more recently. That lift-off would take TSLA out of the realm of highly speculative and turn it into a stock that institutions could consider more easily as a prudent investment.
I look forward to commenting on TSLA after some months have passed.
Thanks for reading and sharing any comments you wish to contribute.
Submitted Sunday; futures not open. TSLA closed Friday $329.94, SPY $314.31.
This article was written by
Analyst’s Disclosure: I am/we are long TSLA, NEE, SPY. 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.
Not investment advice. I am not an investment adviser.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (239)
Can you feel the landslide coming...'Pedo guy' might be the combustion of the delusion
Now which CEO would exacerbate his idiocy:
Musk On Trial, Day 1: "He Didn't Literally Mean To Sodomize Me With A Submarine"
www.zerohedge.com/...MORE IMPORTANTLY NOW IS THE POINT OF MAXIMUM PAIN FOR MUSKRAT
Muskrat you are about to be brought back to planet Earth
If I were a conspiracy theorist, I would say the crescendo of arrogant, unprofessional Muskrat conduct of recent creates the IDEAL OPPORTUNITY TO HUMBLE THE EGOMANIAC...
How?
Easy
By shorting his submarine and his shares AGGRESSIVELY right NOW, where/when it really hurts.
'Musk Tells Jury He’s Worth $20 Billion, But Is Short on Cash'
finance.yahoo.com/...
He’s pledged about 40% of his Tesla shares to unlock some of the wealth without shrinking his stake. A May filing revealed that he had access to about $500 million of credit lines from affiliates of Morgan Stanley, Goldman Sachs and Bank of America as of April 30. Still, that’s a fraction of his $26.6 billion overall fortune on the Bloomberg Billionaires Index and it’s unclear how much of those credit lines remain unused.the links above are from "unreliable ZeroH..
Are there errors.
BTW I know a lot of Muskrat's past in South Africa, I live here
And theres a lot more to explain his persona, but I will wait for the US market to glean.
"A May filing revealed that he had access to about $500 million of credit lines from affiliates of Morgan Stanley, Goldman Sachs and Bank of America"
And these guys are ALSO market makers in the stock.
#jointhedots
"You don't compete when you have the lead"
The "lead" on what, precisely?
Battery powered s--t boxes?
Most folks grew out of playing with toys like that in elementary school.
- 60% less fuel cost vs. my old ICE
- No maintenance needed so far (1.5 years)
- 270 Wh/mi (250 Wh/mi SR+ leads industry)
- 10% more powerful than when I took delivery (5% power increase ^2)
- Built-in Dashcam/Sentry Mode (making vandals pay)
- Connects directly to Spotify, Netflix, Youtube, etc.
- Free games
And on.
And on.If this is a "s--t box", man I dunno what kids nowadays would think of whatever car you drive. Best not ask. All they talk about is Tesla. Who the heck is "most folks"?
Muskrat you are about to be brought back to planet EarthIf I were a conspiracy theorist, I would say the crescendo of arrogant, unprofessional Muskrat conduct of recent creates the IDEAL OPPORTUNITY TO HUMBLE THE EGOMANIAC...How?
Easy
By shorting his submarine and his shares AGGRESSIVELY right NOW, where/when it really hurts.
'Musk Tells Jury He’s Worth $20 Billion, But Is Short on Cash'
finance.yahoo.com/...
He’s pledged about 40% of his Tesla shares to unlock some of the wealth without shrinking his stake. A May filing revealed that he had access to about $500 million of credit lines from affiliates of Morgan Stanley, Goldman Sachs and Bank of America as of April 30. Still, that’s a fraction of his $26.6 billion overall fortune on the Bloomberg Billionaires Index and it’s unclear how much of those credit lines remain unused.
It's nothing personal against Musk, but I don't care to see liars, frauds and bullies succeed.
Let me say at the outset that I hope TSLA finds its way to sustained profitability and success. It's an innovative, disruptive company. That said, I get a little hinky on TSLA for a variety of reasons:
1. "bad" Elon; lose the hyperbole, stick to execution; better, cheaper, faster
2. poor history of execution (tho that may be changing; Shanghai and MY as examples)
3. valuationI like TSLA for a variety of reasons:
1. "good" Elon; at the end of the day, the man is an innovator and disruptor
2. first mover in the luxury BEV space, achieving scale
3. I think its power train tech is topsIt seems to me most bullish articles on TSLA rely on the notion that the market for BEVs will continue to grow, and TSLA, as a successful first mover, will capture the lion's share of that growth. Overall, I'd feel better about that story if the cost to produce a battery went from, what, $10,000-$12,000 to half that; if it did, I think you'd have a shot at a $30,000 car. But, in any case, while I think the traditional OEMs are having their difficulties in producing decent BEVs to compete with TSLA, it does not make sense to me that, over the next 3-5 years, the traditional guys will all fail to make decent BEV offerings. If memory serves, VW's CEO said, about a year or so ago, that there was a 50% chance German auto makers would fail, due to all of the disruption (led by firms like TSLA) that the industry faces. Facing an existential risk, my bet is that the traditional guys get their act together. Plus, there are a "bevy of BEV" makers in China TSLA must go up against.I have also never understood the urge to cast TSLA as a technology company. This is, at the end of the day, a car company. I know, I know, power walls and solar roofs. When that business becomes a material part of TSLA's business mix, I'll take note. Until then, there's nothing TSLA does that traditional OEMs aren't also doing; it's just that TSLA has been doing a better job of it. And, that's no small thing. I just question how durable TSLA's current advantages are, and whether it'll have the balance sheet to compete in the car market of 3-5 years from now. A recession will come sooner or later, and it would be a good idea to clean the balance sheet up before then; hope they do.Best of luck to all.
thehill.com/...Tesla’s plan to leave the auto industry behind on in-car infotainment
www.cnbc.com/...“As the driver becomes less necessary, there will be more options for in-car purchases and partnering with outside vendors so that you can buy stuff from inside the car, probably even buy stuff for the car from inside the car,” said Brian Moody, executive editor for Autotrader."“It gives [Tesla] more control over their vehicle as a platform for other services, for things like Netflix,” said Kaufman. “If you can make your vehicle a platform for other services and for other companies, there’s a lot of money for you."
this would explain why Tesla stock defies gravity, notwithstanding the abysmal
losses
quality
functionality
looks
service
refueling times
etc
I doubt it once the 4 qtr, deliveries number come out and especially when the 10k come out
TWO REAL SPEED BUMPS.
I'm ever so thankful for the FUDsters wearing shorts, hadn't it been for you, I would have had to pay for our cars myself. Please keep the good work up, so the Model Y and the Cybertruck will be payed in full after taxes + leave a nice profit in addition in the end. From where I stand, I see TSLA reaching $ 540 when China is running 3000 TM3 a week and starting production of the TMY at 1000 cars a week. When Fremont makes 5000 TM3's a week and 5000 TMY and also deliver the TMS & TMX in Raven and plaid versions in addition to the 'modernized' LR at about 2000 a week. That might be already at Q3 2020, but I expect some Mr. Musk timing, so let's say Q4 2020.By Q4 2021 the TMY should have a weekly production of at least 15 000 a week, the TM3 at least 10 000 a week, the TMS & TMX at least 2500 a week, the Cybertruck at a minimum of a 1000 a week, the Semi a minimum of 200 a week and the roadster at a minimum 250 a week and that's when the fun really starts. After the Q4 2021 I guess the FUDsters in shorts will have lost their shorts, but they hopefully will be so angre that they will continue their great work for people like me. If and when Tesla gets to where I am confident that they will and that only 4-5 years from now, Mr.Elon Musk will get his 50 B worth of additional TSLA shares and I'll be 'stinking rich'!And it is all to the great work of the FUDsters. So thanks!!!