8/21/17

"There is much to admire in the Tesla story but there is one aspect of the story that I find puzzling, and if I were an equity investor, troubling. It is the way in which Tesla has chosen to, and continues to, finance itself. Over the last decade, as Tesla has grown, it has needed substantial capital to finance its growth. That is neither surprising nor unexpected, since cash burn is part of the pathway to glory for companies like Tesla. However, Tesla has chosen to fund its growth with large debt issues, and burn cash"

FCFF predicted negative for the next 6 years.

Reading the new valuation update about Tesla of the professor Damodaran: your thoughts?

This is the link: http://aswathdamodaran.blogspot.it/2017/08/a-tesla...(Musings+on+Markets)

This is the valuation statement of the prof:

Honestly I can only echo what the prof said.

Comments (50)

8/13/17

They're clearly expecting major cash flows in the future to cover all this, and I think they may be right if they can really get other companies to buy batteries from them. If the industry keeps up the way it is, the demand for the batteries they build is going to skyrocket, and manufacturers would certainly rather buy them ready-made from the leader in the field than figure it out themselves, then build their own giant factory.

In addition, the passenger car market is just the start for them, and hasn't even hit full swing. Once the model 3 starts to sell in volume, that will help. They also have yet another model coming. And they look poised to make a big entry into the trucking market.

Finally, they've made big moves towards electrifying the home, and I think this has potential as well. Solar tech is getting better and better all the time, and they seem to be taking advantage of this. I think having the ability to generate most or all of your electricity usage without relying on the power grid (which is in dismal shape in many places) is going to be a big deal in the near future. In addition, their home battery negates fears about reliability.

So far, everything is going according to plan for them, as far as I can tell.

"When you stop striving for perfection, you might as well be dead."

Financial Modeling

8/14/17

Interesting point. But as investor honestly I would doubt, a company that burn that quantity of cash could face with problems asap. Good ideas can change the world, btw

Nicest haircut than Bateman

8/19/17

To be sure their burn rate is concerning....the Model 3 will, I think, be a major make-or-break factor, but they seem to have far more orders than they can even handle at this point, which may or may not be a good thing.

I'd say they are very similar to Amazon in that the company is always playing catchup to its share price.

"When you stop striving for perfection, you might as well be dead."

8/22/17

TBH -Tesla only has the first mover advantage. Once other big competitors flood the market, Tesla is not going to survive because of their manufacturing is so poor compared to well established auto-maker. automotive supplier market is another issue Tesla is going to deal with. Electric cars are very easy to build. Easier than gasoline combustion engine. Even the Chinese know how to build electric cars! Yet Chinese can not design their own gasoline engine. Only reason big automakers are not seriously in the game is because of the infrastructure needed to layout through out the city for charging stations.

8/14/17

Damodaran is brilliant, you're on the right path by reading him.

as far as Tesla goes, if Musk's operations and production can match his ego and promises to the marketplace, the company will win. however, if they make missteps, capital will dry up for them and they will shrink (probably not fail, just shrink). it's a wonderful concept but I wonder how long capital will be available to them at this burn rate without a history of efficient operations.

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

8/14/17

Hit the sign. btw they issued junk bonds few days ago.. what a flawed growth

Nicest haircut than Bateman

8/14/17

TESLA stock will never go DOWN!

8/14/17

Maybe yes, maybe not. But they are absolutely overpriced

Nicest haircut than Bateman

8/14/17

Your mom's overpriced.

8/14/17

I know bro but this is good for me, more money for contact the your one

Nicest haircut than Bateman

8/22/17

ARSENE WENGER?

8/14/17

I promise this company will be in bankruptcy.

8/15/17

Explain, please?

8/15/17

It will never make money and once investors stop being batshit crazy and giving it money it will burn what money it has left and can't afford to pay back debt, residual value guaranties, and payables and thus will go bk. Major losses for banks coming.

8/15/17

I love commercial bankers

8/19/17

Short it then, put your money where your mouth is.

"When you stop striving for perfection, you might as well be dead."

Financial Modeling

8/15/17

A stock's price is a function of supply and demand, and non-dividend stocks don't necessarily trade in relation to their underlying intrinsic economics. So if I'm a Tesla investor, I'm less concerned about the 10-year outlook and more concerned with when I'm going to sell to realize my maximum capital gain.

8/22/17

removed: replied to wrong post.

When I pull a deal off the table, I leave Nagasaki behind

8/22/17

So it's a trading sardine. That works out great until people remember that sardines are for eating, not trading.

"Successful investing is anticipating the anticipation of others". - John Maynard Keynes

8/22/17
SvenS:

So it's a trading sardine. That works out great until people remember that sardines are for eating, not trading.

Hey, I don't make the rules.

8/22/17

I know. I'm just saying that the logic of your hypothetical Tesla investor is highly flawed. Speculator would be a better description. Maybe Tesla will be different, and I hope they are, but it rarely turns out well when a company loses more money as they spend more money. Similar companies were often heralded as amazing innovators and game-changers, before they went bust. Enron is obviously the classic example, but SunEdison is a more recent one.

"Successful investing is anticipating the anticipation of others". - John Maynard Keynes

8/22/17

True, it is speculation, but thus far, a lot of speculators have done quite well on Tesla.

Best Response
8/15/17

Personally, I feel as soon as big market players like Mercedes, BMW, Volkswagen, Etc start creating proper mass market electric cars...Tesla is more or less done. They'll create cars that are less expensive with better build quality.

Brand recognition wise, I feel people will be more inclined to spend 60-70k on a Mercedes Benz rather than a Tesla. The car itself is extremely overpriced. Let's take a look at Tesla's top of the line model, the P100D. Why would someone spend about $150,000 on a poorly built car with a promise to drive itself one day? "Technology and speed" most Tesla fans would say, if you mean slapping an iPad in the middle of the car is good enough for you and you live on the drag-strip...by all means, go ahead. If you don't mind a car that's 0.8 seconds slower, for the same price, you could get an S63 AMG. Look up some images of Google and compare the interiors.

Tesla is valued higher than BMW, Ford, etc...Although BMW delivered over 2 million cars last year and Ford delivered over 2.6 million while Tesla delivered less than 80,000 vehicles during the same period. That's about 29x more. Yet, as of today, investors value BMW at $61.2 billion, Ford at $43.49 billion and Tesla at just over $61.6 billion. I know Tesla does more than just cars, but this isn't the first time in the world a company's making solar panels and storage batteries.

PeteMullersKeyboard:

...and I think they may be right if they can really get other companies to buy batteries from them. If the industry keeps up the way it is, the demand for the batteries they build is going to skyrocket, and manufacturers would certainly rather buy them ready-made from the leader in the field than figure it out themselves, then build their own giant factory.

These kinds of market players do not have to buy batteries from Tesla. They have R&D budgets that are 10x bigger than Tesla's. Volkswagen is going to spend $22 billion over the next 5 years solely on the development of electric vehicles. Compared to Tesla with an annual budget of about $718 million. Daimler spent $7.6 billion on R&D in 2015 and VW had the largest R&D budget of $15.3 billion. Short and sweet, Volkswagen spends 21 years worth of Tesla's R&D budget in 1 year.

Tesla's Gigafactory is estimated to cost around $5 billion. Linking with their R&D budget, all they have to do is build a factory to make the batteries and develop their cars. With a big R&D budget like that, they won't spend a long time figuring it out. Good ideas can indeed change the world but you need resources to make it happen.

When I pull a deal off the table, I leave Nagasaki behind

8/15/17

I don't think comparing R&D budgets of these companies is a correct way to judge their abilities in R&D. They are all different in size, Tesla has 7% R&D/LTM Sales, Daimler has 4.7% and VW 6.9%. While Daimler and VW need to split that budget among a large amount of models Tesla focuses only on three, which may lead to building a quality vehicle more faster. Their lack of beta tests and purchase of SolarCity is a totally different story, though.

You killed the Greece spread goes up, spread goes down, from Wall Street they all play like a freak, Goldman Sachs 'o beat.

8/15/17

True the overall budget has to be split among a lot of models but as I said before VW is pledging $5 billion to develop their line of electric cars. R&D budgets are somewhat helpful in knowing how far a company can go and develop a product. Smart people won't work for free right? I don't know how relevant this is...but German car manufacturers are known for their inventions and technology.

When I pull a deal off the table, I leave Nagasaki behind

8/15/17
Aech:

Tesla is valued higher than BMW, Ford, etc...Although BMW delivered over 2 million cars last year and Ford delivered over 2.6 million while Tesla delivered less than 80,000 vehicles during the same period. That's about 29x more. Yet, as of today, investors value BMW at $61.2 billion, Ford at $43.49 billion and Tesla at just over $61.6 billion. I know Tesla does more than just cars, but this isn't the first time in the world a company's making solar panels and storage batteries.

This is completely irrelevant information. A stock price's intrinsic value is the present value of future cash flows. Tesla only delivering 80,000 cars in 2016 is almost as irrelevant as what I had for lunch last Tuesday. Now, I'm not saying Tesla's investors are correct, but what is essentially a start-up company (although it's 16-years-old, technically) isn't being valued by investors using P/E ratios.

8/15/17

I get what you mean but the rate at which it would have to grow and the market share it would have to eventually get to in order to justify that stock price is outrageous. If I had balls as far as timing I'd short the stock.

8/15/17

Yeah, personally, I think it's a pretty crazy valuation. Although, I'm pulling hard for Musk to succeed.

8/16/17

I'm not being a smartass, but I remember hearing very similar sentiments when GOOG ipo'd.

This isn't just another auto manufacturer. They're the Apple of the auto industry; more concerned with controlling the cutting edge, than selling the most cars.

8/21/17

So you just pulled a random tech company out of the bunch to compare to TSLA and thought that would drive your point? I mean why not just compare it to FB while you're at it? Or twitter? Or blue apron? Or Pets.com? Or snap chat? What market does TSLA even dominate similar to FB when it IPO'd with social media and GOOG with search? Fact of the matter is those business models have zero to do with each other.

8/24/17

Au contraire, mon capitaine

Comparing Tesla 2017 to Google 2006 is very much the way Tesla investors and stock holders are thinking. At hand is a company with the potential to create a new industry and be the centerpiece of it. The perception of Tesla is that they may be the GE of this coming era in history. Investors are willing to look past the current crummy returns and buy a piece of the future.

Now whether they're right is another story :D

Get busy living

8/15/17

agree that the market cap argument is a silly one

I think the more concerning thing here is that the company is still being valued like a startup when it's clearly not. every founder knows that you have that dip in the J curve when you'll have negative cash flow and earnings so traditional valuation metrics don't work. what then happens is within 2-5 years, you cross over and begin turning a profit. I think the product itself is decent, but from a business standpoint, when can we see some bottom line? even if you pull a Bezos and invest earnings back into R&D, what about cash flow? the company is priced to perfection, unlike AMZN & GOOG which were highly valued companies but had positive and growing cash flows early on.

I think Tesla will survive, but I think investors will get burned. maybe I'm biased cause I can't fucking stand Musk

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

8/15/17
thebrofessor:

I think the more concerning thing here is that the company is still being valued like a startup when it's clearly not.

What you're saying is objectively true, but I think a lot of people see it as a start-up because the youngest successful car company pre-dates World War II, right? In that context, Tesla is quite young. And the first decade or so of Tesla basically consisted of a few concept cars sold to some car aficionados.

So yeah, valuation is crazy. My main point is that looking backwards isn't how people are valuing Tesla.

8/22/17

Aech, I think you're correct on the battery issue. I don't think Tesla produces all its batteries either. I believe Phillips also produces them (correct me if I'm wrong though). Batteries are basically a commodity as well. It's not particularly challenging to make a battery or fiddle with the chemistry. It's all about price. Otherwise Tesla could use Formula 1 style batteries. I don't think there's any competitive advantage when it comes to battery manufacturing. No reason other players can't enter the market and kill returns. The Chinese will probably do that at some point, if they aren't already. They've already done the same in wafers and solar panels.

"Successful investing is anticipating the anticipation of others". - John Maynard Keynes

8/15/17

If WSB is bullish, I'm bullish

8/15/17

long tesla, long musk

What is the answer to 99 out of 100 questions?

8/16/17

Tesla uses laptop batteries. Ever had to buy one? Laptop batteries usually drop dead after 3 years, and they're so expensive it's easier to buy a new computer. That "logic" won't work for cars. Are you prepared to junk your new Tesla after 3 or 4 years? Wait till you discover how much the batteries cost. Tesla is doomed, once the facts dawn on people. Reality is a mean teacher.

8/16/17

just visited their forum. replacement batteries are $45k but the stock battery comes with an 8 year warranty.

I wonder if you can get a car loan for just a battery!

"The four most dangerous words in investing are: 'this time it's different.'" - Sir John Templeton

"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham

8/21/17

$45k for the battery for the tesla is ridiculous. Absolutely ridiculous that's way more than commercial batteries for underground mining equipment costs and that equipment hauls tons of materials all shift long.

8/22/17

It's really the pack cost (batteries + wiring and other components). Tesla's packs are very expensive not just because lithium ion batteries are expensive to begin with, but also because of the design and size of the packs. Tesla uses thousands of small cells that get bundled into modules that make up the cell portion of the battery pack. Other manufactures have mostly gone the cheaper route and used a smaller number of bigger cells. For example, the Chevy Bolt's pack costs just under $16k and has 288 Li cells (I think). Other designs are similar, like the Nissan Leaf and BMW i3. Those may or may not hold up as well. Time will tell.

And yes, you can get a loan for replacement packs. I don't know about Tesla specifically but Nissan offers loans for replacement packs for the Leaf ($5500 before labor). Great money maker for them on the financing side, but they likely lose money on every pack. And it's stupid for an owner to do that. But then again, it's stupid to buy a Leaf brand new. (Leaf's have notably bad battery degradation. Although the 2015+ model years shouldn't be quite as bad, maybe...)

"Successful investing is anticipating the anticipation of others". - John Maynard Keynes

8/24/17

Yes and on top of that it's like that battery technology will be substantially enhanced and better priced in 8 years.

Get busy living

8/22/17

You need to do a lot more reading about their batteries. They don't just use "laptop batteries"

"When you stop striving for perfection, you might as well be dead."

8/21/17

Tesla CANNOT be compared to Apple, Google, or even Amazon. The auto industry is a very capital intensive and low margin industry. It is also a consumer business and therefore more cyclical than tech. To say a cyclical business with high operating leverage deserves a tech multiple is insane because it harbors much more risk.

I also don't think the threat of other auto makers entering into the EV market is fully baked into the valuation at this time. It makes much more sense to pay an auto multiple for the companies 2nd or 3rd best positioned to enter the EV market than it does to buy Tesla at startup multiples. (The other players have EV plans more under wraps because they don't aren't dependent on selling the story to raise capital to stay alive)

A good company and good product don't necessarily make a good stock. With scale this company can be profitable by 2020, but it boils down to three questions.
1. Can they decrease cash burn enough to get them to profitability without majorly diluting shareholders or overleveraging?
2. Can reach the lofty production goals they have without delays or hiccups?
3. Will consumer demand be sustained through 2020 despite increased competition from other players?

The bottomline is that this company has a high amount of risk and much more risk than the FANGS due to the auto industry being highly capital intensive and a consumer cyclical. If a recession/market crash were to happen, consumers would stop buying cars (especially premium Teslas, valuations would contract, and Tesla would not be able to raise capital enough to mitigate cash burn without absolutely raping shareholders or choking itself in debt.

8/21/17

But isn't Tesla kind of a tech company?

Tesla is a leader (not necessarily the leader) in autonomous car technology. What if in 5-10 years Tesla launches an autonomous ride sharing business? I've seen the business model on that and it absolutely prints cash. The first trillion dollar company valuation will be in the autonomous ridesharing business. What if Tesla successfully launches its autonomous truck? There's a multimillion person labor shortage in the trucking industry and the human aspect is the single most expensive aspect of shipping. Every trucking company in the world will want a piece of that.

Tesla is a leader in car battery technology and is building I believe the largest and most advanced battery manufacturing plant in the world. It could license out its technology and/or manufacture it for other car companies and print money. I'd also argue--for better or worse--that Elon Musk is a fantastic crony capitalist. I'd imagine a scenario where he finagles city/town contracts for transportation needs from countless municipalities (especially across the blue states, and especially California).

I don't necessarily believe Tesla's valuation is justified, but to reach a $100 billion valuation, it really only needs to make--what?--$5-7 billion per year to legitimately justify the valuation. There were 88.1 million cars sold globally in 2016. Imagine a scenario in 5-10 years where Tesla licensed its car battery technology to 5 million annual car sales at $1,000 profit per sale. That would throw off $5 billion in operating income by itself. That's the kind of stuff investors are betting on in Tesla.

8/21/17
Rags to Hermes:

If a recession/market crash were to happen, consumers would stop buying cars (especially premium Teslas, valuations would contract, and Tesla would not be able to raise capital enough to mitigate cash burn without absolutely raping shareholders or choking itself in debt.

https://www.theguardian.com/business/2013/feb/15/r...

Maybe. The recession was a boon for the wealthy, with incredible wealth created among the wealthiest and with little dropoff in luxury good purchases. There's a global wealthy elite now that is always doing well no matter the economic circumstances in a particular country.

8/21/17

But Tesla is looking to build itself to be a high volume mass producer with the Model 3 right? Am I right? They have to build massive scale to reach profitabilty. There is a reason why we had to bailout automakers last recession. Cyclical industry, high capital intensity, and low margin.

On the battery point, Tesla plans the gigafactory to be able to produce 500,000 batteries, and they also have the plan to produce 500,000 cars. They may be successful producing batteries, but I don't know if they plan to license batteries at any time in the midterm. They need that production just to keep pace with their own production ambitions.

If Tesla makes it to year 10 and is able to fulfill father Elon's dreams then you will be right. I just don't see upside-downside scenario being strong enough to justify the immense risk at this time. If the model 3 ramp goes successfully, they grow into their multiple a bit, and they can make some progress on autonomy then maybe we are talking about looking.

I wish I still had the Tesla model I built (lost somewhere on old employers computer). Basically they were trading at like 30X 2020 earnings.

8/21/17

I'm not necessarily disagreeing with anything you're saying. I'm just adding on to the discussion.

You make a solid point about the gigafactory, but you could also straight-up license the technology on a per-unit basis to other car manufacturers. Even at $500/unit on 1 million units, you're talking about creating a healthy profit out of that stream (if I'm, say, Mazda, maybe I'd rather pay a licensing fee than spend the R&D on potentially inferior battery design). Tesla is a bit unique in that there could be legitimately a half-dozen different revenue streams that get them to the $5 billion in operating profits that they need to justify their admittedly crazy valuation.

I think at the end of the day, Tesla/its investors are betting on being the leader in autonomous technology and being the "cool kid" that everyone wants to ride with and advertise with (some ride-sharing models are predicated on an advertising model), or having the best software that they can license to larger users. In other words, I don't think investors see Tesla as an alternative to Ford--I think they see Tesla as an AI company that also designs attractive cars. (As an aside, it's amazing how poorly designed for aesthetics most cars are--I bet you 25% of Tesla's value is solely in its desire to build attractive cars.)

8/21/17
8/21/17
8/21/17
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