|Shares Out. (in M):||3,468||P/E||0||0|
|Market Cap (in $M):||426||P/FCF||0||0|
|Net Debt (in $M):||-15||EBIT||0||0|
|TEV (in $M):||410||TEV/EBIT||0||0|
|Borrow Cost:||General Collateral|
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Hi, all --
I've decided to try something new: Closing out an old idea and submitting a new one with the same ticker but a very different thesis. VIC Gods, if this is a problem, let me know, I have another name I'd like to discuss. For you cavillers in the peanut gallery -- STFU! This is between me and the VIC Gods. The reason I'm doing this is I'd much rather get feedback on this idea than the other one.
Tesla is one of the greatest successes in automotive history and one of the greatest bubbles in stock market history. They're facing short-term challenges. Valuing Tesla is difficult, and forecasting market valuation harder still. Should things evolve as I hope, the next justifiable price for the stock is much lower than the last close.
Here is a table of contents that I hope will keep me from veering too far off track:
I: History and background.
II: Caveats, disclaimers, limitations and apologies.
III: Why valuing Tesla is hard.
IV: Why guessing market prices for Tesla is hard.
V: The thesis in brief.
VI: Short-term challenges/market developments
A: It's the margins, stupid
C: Procrustean Capacity Growth
VII: General noodling about shareholder psychology + casting slurs and aspersions toward the Tesla shareholders.
I: History and Background
I trust the name is well-known to us all.
II: Caveats, Disclaimers, Limitations and Apologies.
Tesla can be divided into two businesses: Automotive and what Google calls, "Other Bets". I'm steering away from discussion of "Other Bets," it's too rabbit-holey and divisive and time consuming, although I guess it's hard to avoid Full Self Driving. I'd love to have a further discussion in the comments, though!
i'm also trying as hard as I can to avoid discussion of the CEO and ex-chairman for similar reasons.
I don't trust my judgement here, I've been too closely involved for too long, which is why I'd love to get feedback from the club.
Apologies to any who feel slighted or slighted by association. One of my many, many problems is that I enjoy the sound of my own voice, and can be insensitive to others feelings, If I say anything that sounds harsh, I didn't mean it like that! Or about you! I was just seduced by what seemed at the moment like a neat turn of phrase.
A problem I face in discussing or thinking about Tesla is the retail shareholder base. Please correct me if I'm wrong, because I've got the impression that the shareholders here are indexers, closet indexers, a couple of growth funds and retail. Talking about "retail" can sound dismissive or unkind, or even worse from my point of view, arrogant. But I think you have to, because I think retail flows will be the main driver of short term stock price movements for a while. The problem I face is that it's going to sound from time to time like I'm arguing with some chucklehead from a Reddit thread, which is ... yeah, I think that's where we're at here.
I'm going to be lifting material from my prior recommendation's discussion, hope that's OK.
III: Why Valuing Tesla Is Hard.
Because it's f*cking impossible, that's why. The chain for earnings here is: Light Vehicle sales * ev share * bev share * TSLA share * ASP * margin. You can't forecast that over a long enugh horizon to value Tesla. You can do some smoothing for 10 year forward LV saves and probably get close enough, but the rest is???
IV: Why Guessing Market Prices For Tesla Is Hard.
Because valuing Telsa is hard + retail investors + growth/momentum investors. I think of the company as an EV bubble with a bunch of OTCBB story stocks attached. The market has in the past been willing to assign enormous valuations to these "Other Bets", might do so again, and, who knows, maybe one of those moonshots will actually pan out. I haven't checked on his work lately, but Adam Jonas was famous for assigning $100Bs of valuation to business that didn't exist yet or in some cases hadn't even been discussed by the company.
Trying to do a DCF here is pretty pointless. I mean, sure, you could, it's just math. The reality is that the market has been valuing this by analogy. "The next Apple" was the anchoring theme for a while.
V: The Thesis In Brief.
The last few years of Tesla valuation have always assumed that the end state auto market will not be competitve, that Tesla will, to use the bulls term, "dominate" it. Recent developments, which I'll discuss in the next section, should, over the next six months, show that that assumption is just wrong. (As a side note, I think the reason that retail bulls are so fascinated with the looming bankruptcy of "legacy auto" is because that's pretty much necessary for Tesla to dominate the industry to the required extent.)
If it's unlikely that Tesla will dominate the 100% pure BEV market of the future, then what's it worth? As mentioned above, people have been valuing Tesla by analogy. The auto industry happens to have a clear leader, which is Toyota. It's one of the great manufacturing companies of all time. It's an exemplar of excellence. It is the mass market margin and (sometimes) volume leader. The next logical valuation anchoring point for Tesla is Toyota. Note here that I'm not suggesting using actual Toyota as a comp, for all I know they'll get wiped off the face of the earth due to be being EV laggards, I'm using them as the Platonic ideal of, "What valuation does the world's leading auto manufacturer get?" Over the next six months, people are going to be asking themselves, "Why is this worth more than Toyota?", or say $60/share. And once you anchor to an auto industry comp, it's game over, because the next question is, "So if this is worth a lot because it might turn into Toyota some day, why is it worth as miuch as Toyota *now*?"
These are pretty obvious questions, which I've been asking myself every day for the last 3 years.
I do not think that sub-$50 *valuation* for Tesla is just a TSLAQ fever dream. And if the bottom falls out, the *stock* ... well, who knows, maybe it'll drop to a point where I start trying to figure out what's worth instead of just saying, "Less."
VI: Short-Term Challenges/Market Developments
Two things that happened over the last six months cast doubt on the "dominance" forecast that underpins Tesla's valuation: Collapsing orders and the astonishing rise of BYD.
A: It's The Margins Stupid
Personally, I'm more worried about margins than volume at this stage of the short. Just for some industry background, here are net income margins for TSLA, TM and BMW, a highly regarded manufacturer of expensive cars:
On the same basis, here's Telsa's last 5 quarters:
Here's how this plays out in bulls' long-term forecasts:
This is from Gary Black (https://twitter.com/garyblack00), who has an equity background, runs a (vanishingly) small ETF, and is an important Twitter influencer. You'll see that Gary has Tesla's already industry leading margins increasing >40% over the next 8 years, resulting in Tesla earning ~40% more than my estimate the entire auto industry's 2019 profits. Those are Apple margins,but in autos. That's the definition of "non-competitive". But, given prior margins, it's not wholly implausible, throw in some operating leverage, some purchasing efficencies, sure, why not.
Margins have to come down for the short to work, and fortunately they are. Tesla's orders started declining globally in Q3, leading to a wave of price cuts and plant idlings. I don't want to call this a "guess", but the straightforward interpretation of the best data I have is that, prior to price cuts, orders were at about 1MM/year, vs. 1.7MM Q4 sales annualized. Instead of copying and pasting, I'll link to a message from my other writeup that gets into some of the details:
I don't have a good theory to explain the nearly simultaneous global collapse in orders. The best I can come up with is, if you say, "Stale, limited and overpriced line up with atrocious quality, service and support encountering increasing competition from better and cheaper cars," enough times, it will come true.
Here's a table of Tesla's sales by region, followed by some quick guesses as to the impact of their price cuts:
NA: Tesla offered a $7500 discount (call that 10%) + 10,000 free supercharger miles to clear inventory (+ maybe some free software?). I think this worked, but note that this is substantially more demand stimulative than the IRA incentives (cash vs. tax deduction, no income limits, there are questions about which models & batteries will qualify for the IRA, etc.), so it's not clear that those incentives will lead to the boom in US sales the bulls are hoping for. Note also that the decline in US orders started while Musk was making a jackass out of himself trying to weasel out of buying Twitter, not when he'd made himself anathema to a good chunk of his customer base after buying Twitter.
EU: There has been some discounting here. Tesla entered the quarter with a decent EU backlog, which I think will get waxed because they're sending every single car there they can. I take the schedule at Tesla Shanghai as a read-through to current European orders: The plant will be closed for 3 of the next 5 weeks, a period in which in past years, it would be humming making 3s and Ys for the EU.
China: I don't think 10% price cuts quite aligned demand with production there, and some incentives are expiring and won't be renewed next year. I'll have more to say about this when discussing BYD.
ROW: Who cares, but I'll have more to say about this when discussing BYD.
Let's assume that 10% cuts align production with demand. Tesla doesn't pay much income tax, and I don't think has much sales/profitability based compensation. You'd think that, if they started with 15% net and dropped price by 10%, you'd wind up with 5%, or let's say Toyotaish margins. As a short, I'm fine if they wind up in 10 years selling 10MM cars at Toyota margins, I think the stock would wind up down from here, and would collapse if the bulls ever concluded that was the upside.
One could argue that many of the pressures Tesla is facing are, to use FedSpeak, transitory. Perhaps so. I'd counter that I believe Tesla's current margins are flattered by chronic underspending on service, support and (non-moonshot) R&D. In any event, the company will face tough sledding in the near future.
Let's move on to:
B: The Rise Of BYD
BYD is a huge competitive threat and a total narrative changer. I'm not here to pump BYD, so I'll try to be brief. BYD is a pure-play balls-to-the-wall EV and battery manufacturer that sells more cars and is growing faster than Tesla. This isn't Mary Barra talking about GM's 2026 goals, they're run-rating 3MM EVs right now, vs. ~1.7MM for Tesla. They're growing so fast I suspect fraud. Here's a chart of their Chinese sales:
Exports have been minimal until lately, but the company has global ambitions. Maybe I'll be overbrief. Tesla's auto valuation requires that the industry not be competitive post-EV transition. But BYD is a fierce competitor now.
This isn't required for the thesis, which needs only that the automotive market remain competitive, but it looks to me, right now, unless something changes, which it might, the Tesla is f*cked in China and the rest of the world, or anyplace that doesn't care about U.S. The BYD Seal -- and they have many other models -- is no worse than 90% of the quality of the Model 3 at 80% of the post-cut price.
BYD's consumer sales (they also make commercial vehicles) are roughly 51% BEV/49% PHEV. Tesla bulls, in an astonishing display of sophistry, insist that only BEV sales be included when making league tables. This just stupid. BYD offers many models in BEV or PHEV configurations. They sell a lot PHEVs. I bet if they didn't offer PHEVs their BEV sales would be higher. Tesla, on the other hand ... maybe if they had PHEV models they wouldn't need to shutter their export hub due to lack of orders.
C: Procrustean Capacity Growth
This is maybe a side point, but worth keeping an eye on -- Tesla needs to announce multiple new plants, soon, if they hope to keep the growth story alive. Roughly they can double sales from existing plant capacity, so they should be good for another couple of years, but the *next* doubling requires them to double their capacity. Since plants take something like 3 years from announcemnt to full ramp, they need to do something soon or they'll have this pretty glaring gap. On the other hand, if things play out as I hope, I'm not sure that massive and capital intensive expansion plans will be well received.
VII: General noodling about shareholder psychology + casting slurs and aspersions toward the Tesla shareholders.
I'm feeling worn out and charitable so I'll just skip this part.
VIII: QED, down.
Yep, the stock is down a lot, but I think has further to go. The reason it's down 70% instead of 80%-90% is because recent results have been phenomenally good. I think that Tesla was just another Covid beneficiary that will in the short term, at least, look like just another Covid beneficiary, while facing real longer-term threats to its leadership status. I don't see why valuation discussions should start any higher than the price of TM, the current market leader, or some 40% down from here.
PS: The price in the writeup is a bit stale, the stock has been going to so fast I haven't bothered to keep up.
Declining margins, rising margin calls.
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