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The chart of Reward vs Risk, probably sums it up for Elon Musk and Tesla (notice that i put Musk in front of Tesla)

I'm going to try to explain Elon Musk’s behavior.

What kind of 32-year-old thinks they can take on GM, Ford, and NASA at the same time? A freakin’ maniac. The kind of person who thinks normal constraints don’t apply to them – not in an egotistical way, but in a genuine, believe-it-in-your-bones way. Which is also the kind of person who doesn’t worry about, say, Twitter etiquette.

http://www.collaborativefund.com/blog/natural-maniacs/
Tesla is a ‘hope stock’ that is ‘just not real,’ fund manager says

Ryan Browne
August 29, 2018

Tesla is a "hope stock" with little chance of success in the car-manufacturing industry, a fund manager told CNBC on Tuesday.

"Are we living in the real world?" Tesla is just another one of those hope stocks," Peter Toogood, chief investment officer at The Embark Group, said on CNBC's "Squawk Box Europe."

Tesla's share price took a nosedive Monday after the company's Chief Executive Elon Musk abruptly halted plans to take the firm private.

Musk had shocked investors on August 7 by announcing his aim to remove Tesla from the stock market at $420 per share. The firm's shares have shed almost 16 percent off their value since.

Days after that initial announcement, Musk said that Saudi Arabia's sovereign wealth fund had approached him "multiple times" about taking the firm off the public market, lifting hopes that Tesla could raise some much-needed cash to help its drive toward profitability. Such hopes of a Saudi deal have waned since Musk's U-turn on taking Tesla private.

Despite Toogood's bearish thoughts on Tesla's auto manufacturing abilities, the analyst said there was "hope" for the firm in its self-driving technology.

"The only bit that has got hope is the autonomous driving," Toogood said, adding, "(but) the idea to compete on a platform basis with cars; it's losing money every time it sells one."

The investment manager said that the lack of a network for servicing Tesla cars was also a point of concern. Some international customers, for instance, have bemoaned repair waiting times, as parts need to be shipped from overseas.

"He's losing money every time he sells a car today, and he can't service them," Toogood said. "Ask Norway, they can't actually get the car serviced because there's no network to service them. It's just not real."
...
Musk is the largest investor in Tesla, owning almost a fifth of the company's shares. Market observers have expressed worries over his leadership, citing the executive's presence on Twitter, involvement in public issues and general disdain for the media as causes for concern.

More details in https://www.cnbc.com/2018/08/28/tesla-is...-says.html
(29-08-2018, 07:56 PM)Wildreamz Wrote: [ -> ]Many venture capitalists, and other investors of lost making tech companies, like Chamath Palihapitiya, Larry Page, and Jeff Bezos himself, cites Warren Buffett as a source of their inspiration. 

IMO, traditional value investors and investors in "lost making" growth companies operate with very similar principals: they invest in companies that could potentially make much more money in the future, discount the potential cash flow from the far future back to the present, then buy companies that are selling below their intrinsic value. 

The difference is, traditional value investors are more inclined to buy mature companies with proven business models, but lower growth potential (usually more concentrated portfolio of high quality companies with low risk, and moderate returns). And venture capitalists tries to buy companies with potential of very high returns (the next big thing; they usually have a very diversified portfolio of high risk companies; max lost is 100%, max return could be 100x).

Both strategies tries to achieve asymmetric risk-reward, with odds tilted in their own favor.

Everyone claims they buy stocks this way. And I think it is clear that not everyone is a value investor.

A value investor is an investor who insists on a margin of safety. In other words, he has concrete, rational proof that even in a sudden or unforeseen decline in the business, his capital is still preserved, i.e. he still owns a business that for the price he paid has reasonably earnings/returns. This is clearly not the case with these companies. You could say it is value investing if you use worst-case inputs for your discounted cash flows, which is not the case here. I don't think the worst case in a loss making company is ever that it starts making loads of money, except in exceptional cases like it closes down a highly unprofitable segment. Here you even have the opposite of a margin of safety, where even in a large and substantial rise in the business, your capital is not preserved. 


In the case of Tesla, you have a company valued as high as 60 billion this year. It has 12 billion a year in revenue, and makes no money. Now let's assume it stops bleeding cash and starts becoming profitable. Let's assume it has the profit margins of the Japanese carmakers at 6.2% - many times higher than American or European margins. Let's give it a 15x P/E ratio, more than 50% that of other car companies. Let's ignore it's debt and convertibles. It would be making 744 million and be worth 11.6 billion. We still haven't reached it's market value.

But lets go further and assume its revenue goes up five times and its earnings follow. That would mean it has 60 billion in revenue, and 3.7 billion in earnings. If you assume a P/E ratio of 16, then you would have reached its market value. So quantitatively it is clearly not a value investment.


But what about qualitatively? It's a good product for sure, but its manufacturing is a mess. By cars per employee, it is very inefficient, despite its claim of using robots extensively. It competes in very specific parts of the car market - specifically the mid priced sedan and luxury SUV markets. It has a price advantage as of now - if you believe what Musk says. At best you could say if it sorts out all its manufacturing issues, and the more optimistic margin predictions are true, and that the ten other carmakers trying to make EVs with ten times the R&D/manufacturing budgets don't interfere with the necessary meteoric rise needed to justify it - you would have a good company, even if the terms of investment are aboslute horrific.
Tesla's TTM Revenue is $13.68B (+36% y-o-y), last year was $10.07B (+120% y-o-y), last last year was 4.568B (https://ycharts.com/companies/TSLA/revenues_ttm).

In 2017, Tesla delivered 103k EVs (https://seekingalpha.com/article/4141634...nuary-2018), in 1st half 2018 Tesla delivered 70.6k EVs (https://seekingalpha.com/article/4192478...-july-2018).

Assuming that Tesla just made the same number of cars in 2H2018 as they did 1H2018, they would have increased unit output by 40%, but this number would likely be much higher, since they have only hit weekly run rate of 5-6k consistently quite recently (https://www.bloomberg.com/graphics/2018-tesla-tracker/). 5k Model 3 per week would translate to an annual production rate of 262k per year or +250% increase in unit production rate compared to 2017.

The thesis of investing in Tesla is quite simple actually, they would continue to grow revenues about ~50% per year every year for the next 10 years. They would be making 350b in year 8 and assigning a 20 P/E multiple with a 10% profit margin, they would be worth 700b (the same Apple was worth in 2015). Elon made this prediction in 2015-2016, they seem on track.

Then there is another venture capitalist with even more bullish prediction: $4000 (700b market cap) in the next 5 years. You can read her full model in this open letter: https://ark-invest.com/research/tesla-private.

For me, I think both are pretty blue sky scenario. But I think Tesla will continue to outperform the rest of the auto industry in terms of growth rates, and gross margins due to brand name, operating efficiency ($0 marketing cost, vertical integration), and expands into more horizontal industries (luxury solar roofs, grid storage solutions, power walls, autonomous vehicles). And eventually they will be worth more than they are in the future than today. 

Even if they simply double or triple or 4x in 10 years (instead of the 10+x as predicted by the more blue sky scenario), I win. At most, I lose a small percentage of my portfolio, at best, it may be a significant boost to my returns. YMMV

(vested in Tesla)

PS: I notice you assumed a net margin of 6.2% as the best case scenario, the assumption here is: EVs, due to the effect of technological advancement, battery price will keep falling at the same pace they did the last few decade (https://www.ucsusa.org/clean-vehicles/el...4d-4egzbcs). Adding Tesla's brand value, vertical integration, Tesla mobility as a service etc. etc. A higher margin is a possibility.

PS2: More in-depth discussion can be found in many places on the web, there are many Tesla bulls and bears alike who have contributed very sophisticated analysis. I simply did a back of the envelope calculation of the most common thesis presented by Tesla bulls.
(30-08-2018, 01:26 PM)Wildreamz Wrote: [ -> ]Tesla's TTM Revenue is $13.68B (+36% y-o-y), last year was $10.07B (+120% y-o-y), last last year was 4.568B (https://ycharts.com/companies/TSLA/revenues_ttm).

In 2017, Tesla delivered 103k EVs (https://seekingalpha.com/article/4141634...nuary-2018), in 1st half 2018 Tesla delivered 70.6k EVs (https://seekingalpha.com/article/4192478...-july-2018).

Assuming that Tesla just made the same number of cars in 2H2018 as they did 1H2018, they would have increased unit output by 40%, but this number would likely be much higher, since they have only hit weekly run rate of 5-6k consistently quite recently (https://www.bloomberg.com/graphics/2018-tesla-tracker/). 5k Model 3 per week would translate to an annual production rate of 262k per year or +250% increase in unit production rate compared to 2017.

The thesis of investing in Tesla is quite simple actually, they would continue to grow revenues about ~50% per year every year for the next 10 years. They would be making 350b in year 8 and assigning a 20 P/E multiple with a 10% profit margin, they would be worth 700b (the same Apple was worth in 2015). Elon made this prediction in 2015-2016, they seem on track.

Then there is another venture capitalist with even more bullish prediction: $4000 (700b market cap) in the next 5 years. You can read her full model in this open letter: https://ark-invest.com/research/tesla-private.

For me, I think both are pretty blue sky scenario. But I think Tesla will continue to outperform the rest of the auto industry in terms of growth rates, and gross margins due to brand name, operating efficiency ($0 marketing cost, vertical integration), and expands into more horizontal industries (luxury solar roofs, grid storage solutions, power walls, autonomous vehicles). And eventually they will be worth more than they are in the future than today. 

Even if they simply double or triple or 4x in 10 years (instead of the 10+x as predicted by the more blue sky scenario), I win. At most, I lose a small percentage of my portfolio, at best, it may be a significant boost to my returns. YMMV

(vested in Tesla)

PS: I notice you assumed a net margin of 6.2% as the best case scenario, the assumption here is: EVs, due to the effect of technological advancement, battery price will keep falling at the same pace they did the last few decade (https://www.ucsusa.org/clean-vehicles/el...4d-4egzbcs). Adding Tesla's brand value, vertical integration, Tesla mobility as a service etc. etc. A higher margin is a possibility.

PS2: More in-depth discussion can be found in many places on the web, there are many Tesla bulls and bears alike who have contributed very sophisticated analysis. I simply did a back of the envelope calculation of the most common thesis presented by Tesla bulls.

Grow at 50% every year for ten years? By the end of it, using your 262k estimate, they would be making 15 million cars a year. That's 5 times more cars than the US produced in 2017, and 20% of cars produced in 2017 in the entire world. And the huge increases in production it's making now is not organic growth but gradually improving its horribly inefficient factory (40% part scrap rate, 10 cars annually per employee and so on). 

Those industries are not horizontal, or profitable. Tesla's batteries for its cars are manufactured by Panasonic. And solar panels are a notoriously low margin and cyclical industry.

Your risk reward calculation is off. Even assuming a the 4x case in ten years, that's a return of 14% per year at risk of significant loss, if not complete loss. The S&P would return risk free 10%.

On the qualitative side, Tesla is limited by it's return on capital. If it wants to compete in the common consumer car market, instead of the more niche luxury electric car market, it has to produce cheaply, in the ~35k range in the US. To beat manufacturers like Toyota it needs to excel more at production efficiency than car technology. And here Tesla is very far behind.

Having to use wildly optimistic predictions (I think 50%,40% growth a year is wildly optimistic by anyone's standards) is not value investing. It may work out - certainly a few companies in the past have - but it's not value investing.
Elon actually meant grow revenues per year by 50% every year for the next 10 years. In the 8th year they will be making $350B.

Tesla model S starts around $94k, Model X around $75k, Model 3 around $35k, the new model Y is rumored to start around $25K. And then there are other configurations and upgrades, and revenues sources like the Tesla pickup and Semis.

Assuming an average selling price of about $42k, and they are only selling cars and nothing else, at a revenue of $350B, they would be making and selling around 8m cars per year. For reference, GM and Ford sold 9.6m and 6.6m cars in 2017. The number still checks out.

Was Elon wildly optimistic (after all the 50% revenue growth was his prediction)? For sure. And as I said, even if Tesla do half or 1 third of that, at a much higher margin than conventional internal combustion engine car manufacturers. This investment would be worthwhile.
https://seekingalpha.com/article/4203609...ugust-2018
EV Company News For The Month Of August 2018
Sep. 2, 2018 Matt Bohlsen
Quote:Global electric car sales - US electric car market share hits a record 2.2% in July. Q2, 2018 EV sales up 77% YoY. Tesla moves to be number 1 globally.



As predicted. Expecting them to keep widening the gap as Model 3 continues to ramp. This is despite the much higher average selling price (ASP) of Tesla vehicles, and this is including competitions operating in the largest and fastest growing EV market: China.
https://cleantechnica.com/2018/08/27/tes...ca-report/
August 27th, 2018 by Zachary Shahan
Tesla Model 3 Sales Dwarf Other US Electric Car Sales — #CleanTechnica Report



Remember the "Tesla Killer" Chevy Bolt?
https://money.cnn.com/2018/02/22/technol...index.html
https://www.businessinsider.sg/chevy-bol...?r=US&IR=T

[Image: 2HzSvsR.png]
(31-08-2018, 09:39 AM)Wildreamz Wrote: [ -> ]Elon actually meant grow revenues per year by 50% every year for the next 10 years. In the 8th year they will be making $350B.

Tesla model S starts around $94k, Model X around $75k, Model 3 around $35k, the new model Y is rumored to start around $25K. And then there are other configurations and upgrades, and revenues sources like the Tesla pickup and Semis.

Assuming an average selling price of about $42k, and they are only selling cars and nothing else, at a revenue of $350B, they would be making and selling around 8m cars per year. For reference, GM and Ford sold 9.6m and 6.6m cars in 2017. The number still checks out.

Was Elon wildly optimistic (after all the 50% revenue growth was his prediction)? For sure. And as I said, even if Tesla do half or 1 third of that, at a much higher margin than conventional internal combustion engine car manufacturers. This investment would be worthwhile.

hi kaimin/wildreamz,
These are good discussions on Tesla. I have moved them to Tesla's individual thread.
A good read to think about the implications of the whole car ecosystem - from batteries to suppliers, from sales support to ramping up production and of course the future of driving - autonomous self driving.

Tesla, software and disruption

This post began as a much shorter piece about Tesla and Netflix, comparing two companies that are using software to change other industries. But the fascinating things about Tesla is that there are so many different things going on, and so many different kinds of innovation. I’m sure I’ve missed plenty of things. One of the issues that recurs in thinking about Tesla is that tech people don’t really know enough about cars, and car people don’t really know enough about software.

But the history of the tech industry is full of companies where having a lovely product, or being the first to see or build the future, were not enough. Indeed, the car industry is the same - a great, innovative car and a great car company are not the same thing. Tesla owners love their cars. I loved my Palm V, and my Nokia Lumia, and my father loved his Saab 9000. But being first isn’t enough and having a great product isn’t enough - you have to try to think about how this fits into all the broader systems.

https://www.ben-evans.com/benedictevans/...disruption
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