Tesla Cybertruck: Source Tesla via The Driven
I've been watching a series of short videos by Andrew Hollo, a Melbourne (Australia) based strategist who has been putting out 5 minute musings on various aspects of how being in lockdown with COVID-19 is impacting him and his clients. I recently watched his episode 9 (Focus during lockdown), which by coincidence followed shortly after I watched an hour long session on Tesla which included an extended interview with Elon Musk. Both videos were fascinating and got me thinking about why Tesla (NASDAQ:NASDAQ:TSLA) is powering on notwithstanding COVID-19 lockdowns, while GM (NYSE:GM) and Ford (NYSE:F) seem to be in survival mode. The numbers are confronting for GM and F, with 1 year stock performance up 361.1% for Tesla, and down 22.1% and 34.9% for GM and Ford respectively. I think there is an interesting story here, which might help investors understand why an investment in Tesla is on my radar, but GM and Ford are evoking sympathy and concern rather than thoughts of investment; so here goes.
We live in challenging times, no better shown than in recent share price movements all over the place. The standout positive result has been Tesla share price closing at $1,025.05 on 10 June (today $990.90). The case can be made that this is all about a qualitative shift in how the market views legacy ICE (Internal Combustion Engine) car makers in comparison with Tesla, which has a narrow focus on electrification (not only of transport but also stationary power markets). This reinforces why the traditional auto companies (and the related infrastructure) are risky investments today. Tesla is not yet bulletproof, but its future is looking stronger than almost at any time in its turbulent history. Tesla was almost alone in the automotive industry in producing a profitable Q1, and the recent shenanigans with restoring production in California one of few manufacturers chomping at the bit to get production singing again. Nick Cox has recently summarized Tesla's sales strength in Asia this year notwithstanding the COVID-19 crisis, and supply constraints for European sales pending construction of its Berlin factory. Nick's data suggests that Tesla may achieve its 500,000 vehicle sales target in 2020 notwithstanding COVID-19 knocking out sales progressively from China, to Europe to the US in the early months of the year. He suggests that 2021 looks very interesting for Tesla sales.
Two qualitative aspects of the Tesla story that are of interest to investors
There is a lot of number crunching by both bulls and bears concerning Tesla's performance and I'll leave readers to decide about the immediate meaning of those figures, noting that COVID-19 has played havoc with the beginning of 2020.
I focus on qualitative aspects of Tesla's business. Here I separate the qualitative view of Tesla into hard results (key outcomes that will directly impact share price) and "softer" information that helps understand why Tesla shares get an inflated valuation compared with their earnings and also point to future upside.
Upcoming key achievements that will impact Tesla share price
Tesla has an impressive set of upcoming production upgrades (new plants) and product releases across its whole business. This is a company that knows how to "walk and chew gum" at the same time. Elon Musk is a controversial leader, but the companies he leads have runs on the board and are creating expectations of commercial achievement as well as technical innovation.
Here are eight significant events on the horizon:
1. Upgrading the Shanghai Gigafactory: Work is well advanced on a production line for the Model Y and also battery assembly. For Tesla skeptics, here is a YouTube video showing the state of development of the second assembly building which is mostly enclosed. Quickly finishing the construction of the facility that is central to Model Y release in China is of vital importance to Tesla's overall business performance.
2. Berlin Gigafactory construction: After gaining approval for foundation work in May, work is already proceeding apace. The goal is to commence production of the Model Y in July, which is an ambitious goal considering the time of COVID-19. First deliveries are expected in 2021. This facility will advance European supply of the Model Y. The plant will include some innovations (e.g. paint facility, see below). The plan is to employ 12,000 people to build 500,000 cars annually. Just as is true for the expansion of the Shanghai facility, the Berlin manufacturing site will have a major impact on short-term revenues from Model Y manufacture and sale in Europe.
3. Model Y production firmly established : There is little doubt that COVID-19 has slowed the establishment of scale manufacture of the Model Y, which some think could be Tesla's most successful model (although it might be in competition with the Cybertruck). Initial international deliveries were made this week for an official launch in Canada. Of note to the success of the Model Y as an SUV, is that its shape is sleeker than most SUVs (Model Y 0.23 drag coefficient; Toyota RAV4 0.31 drag coefficient). A recent article addressed first (it's not a SUV) and second (it is) impressions of the Model Y as an SUV. I suspect that the details about the Model Y will help cement a major position for this vehicle in the SUV landscape, which is a huge money spinner.
4. Launch of Tesla Semi: The concept was unveiled in November 2017 with production planned for 2019, then 2020 and then 2021. In a recent interview Elon Musk indicated that massive scale up of battery production is needed and almost there. I suspect provision of charging facilities for the big trucks will also be a bit of a challenge. The latest news suggests that the Semi is ready for mass production, with the power train and battery to be produced in the Nevada Gigafactory. Launch date is still not clear. I have little doubt that the Semi is going to transform long haul heavy trucking and this is a big market (Motley Fool estimates the big rig market at $240 billion annually). There are so many positive things about this vehicle that I'm convinced it will become a major revenue source for Tesla.
5. Launch of Cybertruck: It isn't clear when this will occur as the Semi launch seems to be prioritized and the Cybertruck needs a factory (see above). A report that a smaller version of the Cybertruck than what was initially displayed has been corrected. The final launch vehicle will not be smaller. However, Elon Musk has indicated that Tesla may produce a smaller world truck at some stage. With a starting price of $39,900 and a host of advantages over conventional pickups, it is hard to see how this won't be in huge demand, with some indications of 500,000+ preorders already.
6. Launch of the Roadster: The Roadster is an insane vehicle, but it will be a very small production model and one would have to think that getting the Model Y, Cybertruck and Semi launches bedded down might mean that this one will have a slow lane release. However, expect to be surprised by Tesla. Stories surrounding this crazy car go as far as providing it with booster rockets! Here is a mellow yellow comparison of the Cybertruck, Semi and Roadster.
7. Battery day(s): Elon Musk likes to have launch events that involve an audience. This may have delayed the launch of the Battery Day and it may be that there will be an online launch followed by formal launch. There is a wide expectation that significant new developments in battery technology will be detailed. A Battery Day might happen this month, but it is still unclear. CATL, Chinese new battery supplier for Tesla has indicated that it has a 1.24 million mile battery ready for production. There is a lot of anticipation about the Battery Day(s). There seems to be some credence to the claim that the Battery Day is likely to be a significant positive for share price increase.
8. Formal appearance of the Megapack battery: The Megapack battery was launched last July, but substantial facilities based on Megapack batteries are now being installed around the world. A proposal for 1.7 GWh of battery storage in California, based on the Megapack, is the biggest proposal yet under consideration. For more on stationary storage see Nick Cox's article.
"Soft" information about Tesla
There is a lot of attention to the upcoming launches described above, but sometimes the background to these achievements gets overlooked. I think it is also important to consider this "softer" view of what Tesla is up to, because here one finds pointers to the next big commercial developments.
Recent interview with Elon Musk
I took some flak in a recent article where I indicated that the heat pump in the Model Y seemed to be transformational. It turns out that the heat pump is one of a number of very interesting innovations in the Model Y, which will no doubt be seen on other Tesla vehicles, as was discussed in recent extended interview with Elon Musk.
1. Heat Pump: The interview provided a "from the horse's mouth" comment on why the heat pump in the Model Y is a big deal. Elon Musk talked about how they managed to build the Model Y, which is 10% heavier and 10% bigger in profile, and yet achieve the same range as the Model 3 (same battery configuration). A significant part of this is due to innovations in the heat pump and heat management within the vehicle.
2. Innovation in Model Y rear body casting: This came from a suggestion from Sandy Munro, who pulls new Tesla models apart and comments on them. He thought the rear of the Model 3 was more complicated than it needed to be. Tesla took the comments on board and delivered a major simplification of the rear of the Model Y compared with the Model 3. It is all about having a big casting machine. Musk said that customers won't notice the difference between the rear of the Model 3 and the Model Y, but there is a huge simplification in manufacture. It is interesting that the improvement in body casting came from an outside critic, which suggests that Tesla is responsive to external inputs.
3. Cybertruck exoskeleton: No paint to scratch. The exoskeleton makes for easy manufacture. Stylists don't like exoskeletons as they constrain the exterior appearance, but Musk said what he liked about the Cybertruck exoskeleton is i) less tooling, ii) easier build and iii) more interior space. Musk's comment about the look of the Cybertruck was "it's not a truck it's a frigging tank from the future"…. and I suspect he is correct. If the ICE manufacturers of pickup trucks aren't concerned about the Cybertruck, then they aren't paying attention.
4. Lessons from high volume production (Model 3): Fewer robots is better. Model 3 production line has 1000 robots, all of which are subject to faults. So fewer robots is good. Could you cast a whole car? Tesla is implementing gigantic casting shops that provide huge simplification of body manufacture (e.g. no C&C milling). The size of the two planned huge body casting instruments is 6000 tons and they are the "size of a small house". Musk indicates that customers won't care about these details of manufacture, but it is very relevant for investors as the manufacturing process is dramatically simplified.
Fewer parts is best (because this means less robots and less manual labor). Musk indicated that a major fault of some engineers is to optimize parts that shouldn't be there.
5. European Gigafactory and paintwork: Look for innovation at every new development with Tesla. The European Gigafactory will have a new generation paint shop which incorporates dimensionality in paintwork by subtly changing the paint layers according to, for example, curvature of body panels. This system will first be implemented in Berlin, but the Fremont and Shanghai facilities will eventually be upgraded. The first Model to have the new paintwork incorporated will be the Model Y. Musk indicates that the additional cost of the new generation paintwork is ~$55, but he says it adds ~$550 to the value of the vehicle.
The above all came largely from a 1hr investor interview with Elon Musk. I strongly urge investors interested in Tesla (or hostile to Tesla) to listen to this interview as one gets a sense of the understanding that Elon Musk has of his business, even at the finest detail. I appreciate that to some of Musk's public announcements can be perceived negatively, but investment is about making money and at the end of the day this speaks to the quality of the products. It helps to have a CEO who is really on top on the game.
6. Another US Gigafactory: Consistent with Tesla needing more room to build the Cybertruck and expand Model Y production in the US, Elon Musk has indicated he wants a new Gigafactory in the middle of the country. There is a rumor that Tesla is negotiating to place a factory in Austin, Texas which will be bigger than the battery factory in Nevada and the Fremont, California facilities. The Fremont, California facility has 10,000 employees.
What are Ford and GM doing?
The above commentary about Tesla is all about a company that is confident and knows where it is going. It has a vibrant portfolio of new product developments and global expansion in both China and Europe. Tesla has a market capitalization of $183.7 billion.
Ford and GM make a huge contrast to Tesla.
Ford is in survival mode, with its dividend suspended and it has taken on an additional $15.4 billion of debt to bolster the balance sheet. It has announced cuts in all areas of the business. Ford's current story is all about deferred executive pay, overtime cuts and indefinite production shutdowns. Most concerning is reduced capital expenditures. It is all about survival, with no real attention paid to its transition plans to exit ICE vehicles, and success seems to be having enough cash to get through Q3. Survival beyond Q3, given COVID-19 still being a problem in Q4, has been suggested to be available as Ford has a major part of its manufacturing in Michigan, which is a swing state… i.e. survival based on political largesse at election time!
Nothing about the Ford story suggests a bright future and its market capitalization is now just $26 billion. Instead the focus is on cost cutting and focus on its most profitable (ICE, Internal Combustion Engine) vehicles. This is not a company that is excited about the future.
GM is trying to put on a brave face and even had a recent announcement about plans for an electrified future. In a defensive move to try to convince the market that GM is serious about taking on Tesla in electrification, GM announced a number of developments to solidify its position in vehicle electrification. This involved announcing a family of BEV products under development based on a modular electric platform and new battery pack called Ultium based on a partnership with LG Chem (LGCLF). The GM platform follows a similar design concept to Volkswagen's (OTCPK:VWAGY) MEB platform. GM plans for batteries sized from 50 - 200 kWh.
The above is fine, but there are mixed messages. Firstly GM (along with Toyota (NYSE:TM) and Fiat Chrysler (NYSE:FCAU) is supporting President Trump's attempts to block new emissions requirements in California. And when GM talks about 2025 it is still largely an ICE story.
It has been argued that GM is in a slightly better position than Ford due to entering 2020 with lower than normal inventory in the US. Overall GM's situation seems not a lot different to that of Ford although its market capitalization is greater at $39.7 billion.
In the light of the above it is confronting, but not entirely surprising, that Tesla now has a market capitalization 2.8 times that of Ford and GM combined.
Tesla's Risks/challenges
In the above commentary I've indicated why I think that Tesla is in such good shape and legacy car makers are struggling. Clearly all companies (including Tesla) have challenges with global economic shutdowns due to the COVID-19 pandemic.
What additional challenges confront Tesla? Perhaps the greatest risk is also Tesla's greatest strength: Elon Musk. There is no doubt that Elon Musk attracts polarized views, with some being in awe of his attention to detail and ability to focus on key issues. Others find his sometimes intemperate comments unacceptable. However, just as Steve Jobs proved a crucial asset as Apple (NASDAQ:AAPL) matured, I suspect that Elon Musk is similarly essential at this stage of Tesla's development. He is a risk that investors either accept (or don't).
On technical risks, there are clearly many risks in the scale and diversity of the technological challenges which Tesla faces with all kinds of product developments. And these are evident in recent complaints https://electrek.co/2020/06/16/tesla-model-y-quality-issues/ about finish quality in the first Model Y vehicles. While this is a concern, this seems to be a short-term issue that might be related to seeking to achieve sales targets by June 30. Tesla's domination of the luxury vehicle segment in the US is a significant achievement which goes to Tesla's technical skills.
Perhaps another significant risk is negotiating establishment of operations in international segments. Rapidly establishing manufacturing in China and Germany must not be without significant political and bureaucratic hurdles. So far Tesla seems to be successfully navigating these new and complicated waters.
Conclusion
The current investment climate highlights the importance of qualitative analysis in times of great structural change. Tesla has a pipeline of products that together make a compelling case that it will be one of a small number of survivors who thrive in times of change. Even setting aside its dominance in the luxury vehicle market (Model S, Model X), the bets that Tesla has made in conventional motoring (Model 3), cross-over vehicles (Model Y) and upcoming transformational change in the Cybertruck and big trucks (Semi), along with stationary energy storage (both home batteries and Megapack) all point to success. So I think that Tesla is on track to become a major global player as its share price reflects.
Tesla is now the most valuable car company at $183.7 billion, against Toyota market capitalization of $172.4 billion. Of course there is a huge amount of execution risk, but Tesla's record of bringing novel products successfully to market demands respect.
However, I'm with Regarded Solutions regarding calling a pause while we see where the pandemic (and consequences flowing from it) is taking us. COVID-19 has a way to run before it is over. I have little confidence that a rapid bounce for the economy is going to happen, as the highly infectious SARS-CoV-2 virus remains in charge. Attempts to return to "business-as-usual" will probably mean a number of scary reversals (including in China?) until a vaccine or effective treatment becomes available (12-24 months away… or longer?). So while I am enthusiastic about Tesla, I'm staying on the sides to see how this plays out.
I am not a financial advisor, but I do follow closely the dramatic changes as the world electrifies transport and power in response to the climate emergency. If my commentary helps you and your financial advisor to think about how to benefit from investment in transport stocks in general and Tesla in particular, please consider following me.
