
Tesla Says Model 3 on Track as Quarterly Loss Beats Estimates - justin66
https://www.bloomberg.com/news/articles/2017-02-22/tesla-says-model-3-on-track-as-quarterly-loss-beats-estimates
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paulpauper
People who lose money shorting Tesla are losing their shirts for the same
reason as those who shorted Amazon: cash flow + growth matters more than
profitability, PE ratios, or EPS. Tesla's car business is cash flow positive
but the quarterly losses are due to infrastructure investments. This is how
finance can be more subtle than meets the eye.

Tesla's car business is very profitable:

 _Tesla also reported an automotive gross margin excluding SBC and ZEV credit
(non-GAAP), of 22.2% in the quarter, up from 19.7% a year ago, but down from
25.0% in Q3..._

huge growth:

 _Looking at the future, Tesla said it expects to deliver 47,000 to 50,000
Model S and Model X vehicles combined in the first half of 2017, representing
vehicle delivery growth of 61% to 71% compared with the same period last
year._

reinvesting operating profits into investments:

 _The company also expects to invest between $2 billion and $2.5 billion in
capex ahead of the start of Model 3 production and continues "to focus on
capital efficiency while also investing in battery cell, pack and energy
storage production at Gigafactory 1. It also forecast that both Model 3 and
solar roof launches are on track for the second half of the year._

This company is firing (no pun intended) on all cylinders

~~~
mdasen
Shorting seems to often be about the short-term prospects of the stock.

Long term, Tesla looks like it will be a reasonable company. But will it
justify its stock price?

Tesla is a $45B company right now. Toyota is $188B (4.1x more valuable), VW is
$78B (1.7x), GM is $58B (1.3x), Ford is $51B (1.1x), Nissan is $42B (0.9x),
Fiat Chrysler is $17B (0.4x), Honda is $58B (1.3x), BMW is $56B (1.2x),
Daimler is $79B (1.8x), and Mazda is $9B (0.2x). Tesla, right now, is still
risky. Toyota's profits are real. GM's profits are real. BMW's profits are
real. Tesla's profits might be great in the future - and that risk means the
potential profits are worth less than actual profits. So, given that there's a
good amount of risk and it's going to be a while before those profits come
rolling in, it seems like Tesla would have to be the next Toyota to justify a
$45B price tag. Let's say that in 20 years it becomes the next VW or Daimler.
Would that justify a $45B price tag today? Probably not. It wouldn't be a high
return and the likelihood that Tesla is going to become the next VW or Daimler
is low. That's not a dig at Tesla so much as realism. No matter how great you
are, it's hard to become one of the top 3 companies in an industry.

You note Tesla's non-GAAP margins of 22.2%. "During the past 13 years, the
highest Gross Margin of Honda Motor Co Ltd was 29.06%. The lowest was 22.39%.
And the median was 25.58%." 22.2% isn't bad, but selling more vehicles will
put downward pressure on that. Gross margin doesn't include things like R&D so
spreading that over more sales won't impact gross margins. Can they drive down
COGS? Maybe, but serving a less enthusiastic audience also bings costs and
challenges. It's easy for Tesla to lean on the enthusiasm and good will of
early-adopters right now.

But Tesla also faces existential threats. Musk has said that they should have
full self-driving capabilities by the end of 2017. For some people, owning a
car will still make sense, but for many getting on-demand transportation means
not having to deal with car ownership. Car sharing rates are going to drop to
the floor. A self-driving cab can easily handle the load of multiple people
that might own cars today. Even if the self-driving cab has a margin of 40%,
if you're only paying for 1/5th of the vehicle, well, 140% * 20% = 28%. Given
that cars are a major expense for many people, being able to cut 70% off that
expense will be attractive to many - and will mean that the demand for cars
will become smaller.

Similarly, Tesla has opened up all its electric patents to competitors. Musk
has said that making electric cars is easier than making internal combustion
ones. So, if Musk shows that electric cars can be profitable, won't everyone
else add a huge amount of competition? I mean, Tesla is really cool for
opening up its patents to competitors, but that indicates to me that Tesla is
more about pushing the human race forward than it is about making money.

Tesla is certainly a cool company. I love that they're pushing us forward -
and in cool ways. I love that Teslas don't look ridiculous like a BMW i3. I
love that the solar roof they announced is something my parents would be cool
with because it looks normal. But I'm also kinda glad that they're doing this
with money that isn't mine. Musk is on a mission and it's a cool one. Self-
driving electric vehicles with solar power and all sorts of coolness. I think
there's a decent chance Tesla will become profitable. But the bet at its
current market valuation is that it will become the next Toyota. Nothing short
of that would justify the valuation. Eventually, automobiles just don't have
the economics or growth of software and the PE ratios are generally in the
6-10 range. I mean, if Tesla becomes as big as Toyota, it won't likely be able
to become 10x as big as Toyota. I mean, Toyota sells around 10M automobiles
annually. The top 15 auto makers sell around 73M. So, if Tesla becomes Toyota,
there's not a lot of growth past that. And based on its current price, if it
only becomes GM or Ford or BMW in the next decade, it will have seen basically
no growth in its value.

What's the likelihood that Tesla is the next BMW? It's low. Not because Tesla
isn't cool. Not because I don't want them to succeed. It's because it's hard
to go from 100k niche cars per year to 2.3M. Even if you think the chance if
50% 10 years from now, that means you're saying there's a 50% chance that
Tesla should be worth 20% more than it's worth now in 10 years time.

The world would be better if Tesla became the next BMW. We'd have a lot of
lower-polluting vehicles on the road and other manufactures would follow
Tesla. But I think it's very far from a sure thing and a lot of investors are
pricing Tesla like it's a sure thing that Tesla will be the next Toyota. Tesla
is so cool and they're pushing us toward a better world. They're making great
strides. At the same time, looking at their current valuation, it's hard to
see the upside. Maybe the vertical integration will be wonderful. Maybe people
won't want self-driving cabs (though that seems unlikely). Maybe other
manufacturers won't compete effectively with electrics. But that's a lot of
"maybes" in the path of becoming one of the most valuable car companies out
there. I hope they do it because I'll have a better world, but I wouldn't bet
my money on it.

~~~
crabasa
> Toyota's profits are real. GM's profits are real. BMW's profits are real.
> Tesla's profits might be great in the future - and that risk means the
> potential profits are worth less than actual profits.

You have this exactly backwards. For instance, you could have made the exact
same argument about Walmart versus Amazon. What you're missing is that the
investments that Tesla is making, which hurt short-term profitability,
literally create new lines of business that power future revenue streams. The
fact that car manufacturers are hoarding profits and failing to invest in the
future is precisely why _they_ are overvalued.

~~~
j7ake
You're still making a bet that Tesla will become a top 3 car company in the
world. At the moment people there are people who think the price to risk is
worth it. Some do not think it's worth it.

I would say there are better ways to make money than a 50 percent chance to
make 20 percent more.

Also these predictions are 10+ years in the future. How often have people
actually predicted that far from the future? Almost none. The only ones I can
think of are bets on fragility: more downsides than upsides as time
progresses.

~~~
arijun
Remember though that Tesla will no longer be just a car company. The battery
market is huge and will only get bigger as utility scale projects boost demand
(like the 80MW one in Southern California Tesla just installed), and if
residential solar takes off, solar city stands to make a decent amount of
money.

~~~
ckastner
The larger the battery market becomes, the more competition it will attract.
Tesla is certainly starting off with a nice lead, but it would be foolish to
underestimate the capabilities of other players who might just not be
interested enough in this market yet, and who'll -- for the moment -- happily
have Tesla serve as a canary.

~~~
dragontamer
I'm not entirely sure if Tesla's battery tech is a sufficient differentiator.

Tesla is a slave to the Lithium Ion process of Panasonic. If a new chemistry
breakthrough comes out tomorrow (ie: Redox Flow has huge potential in the
utility space, even if it has little potential in the retail space)...
Panasonic will be able to switch to the new chemistry but Tesla's battery tech
is basically Lithium Ion only.

Tesla's battery technology is literally the battery electronics. Not the
chemical cells. Tesla seems to employ chemical experts so that their battery-
electronics can better predict the effects of the chemistry... but really...
they're only putting together cells. Tesla doesn't make the 18650, Panasonic
does. Tesla just puts a bunch of 18650 together, as well as have some sort of
algorithm to make them charge / discharge at high efficiency.

Tesla is completely dependent on Panasonic's chemistry. The speed at which LG
was able to build a "Silicon-Lithium Ion" battery pack of GM's Bolt only
demonstrates how "easy" the battery-pack problem is.

------
mabbo
People get upset by the 'superhero' status of Elon Musk. Nerds everywhere
worship the guy, buy his cars, watch his SpaceX launches.

But honestly, let him _have_ it, I say. He's earning it. He's taking huge
risks and succeeding where others weren't willing to try.

~~~
applecore
Elon Musk's businesses have benefited from billions in federal and state
government subsidies and low-interest loan programs over the years.

He's taking huge risks because other people are footing the bill.

~~~
__jal
And the legacy energy companies are still raking billions in subsidies every
year, even before you get to things that aren't counted that way. And the
industrial farmers are still subsidized to grow various things.

And FedEx has a huge implicit subsidy via road maintenance. And Walmart, via
various welfare policies. And insurance companies heavily benefit from various
government policies.

I can think of these all day.

------
SaintGhurka
Is it just me reading too much financial news or does "beats estimates" sound
like it was better than estimates?

Loss was 69 cents vs 53 cents expected.

Revenues beat estimates, though.

~~~
TrainedMonkey
They beat loss estimates because they spent $500m [0] on capex instead of
$1000m [1].

Not sure if I buy "got better deals from suppliers" story, but it would be
awesome if it was true. Most likely they've hit delays with suppliers.

[0] Q4 2016 update from shareholder letter on
[http://ir.tesla.com/](http://ir.tesla.com/)

[1] [http://www.businessinsider.com/tesla-capex-goal-
means-1-bill...](http://www.businessinsider.com/tesla-capex-goal-
means-1-billion-of-spending-in-q4-2016-10)

~~~
taneq
I don't understand why capital expenditure is viewed as a loss. You spend
$1mil on infrastructure, afterwards you have $1mil of infrastructure (which
now should start earning you money) instead of $1mil of cash. H ow is that a
loss?

~~~
cowsandmilk
> How is that a loss?

It isn't. If you look at their 8-K, it shows that like 99% of publicly traded
companies, cap-ex does not show up on the P&L statement.

------
aerovistae
It's fun to read Mark Spiegel's twitter feed. I've never seen someone so
desperately try to force a theory. I wonder why some people want to see Tesla
fail so badly.

~~~
bluehawk
I can sorta understand how he got there. Historically, making a car company is
very, very hard. It's a tough industry to crack into. So when you see a
startup car company with a hugely inflated stock that has a (based on
historical data) very low chance of success, it makes a lot of sense to bet
against it. But as it succeeds, you have to keep doubling down on the idea
that it can't possibly deliver on it's promises and will fall on it's face
eventually. At some point he slipped from making a reasonable bet to frothing
at the mouth a bit.

~~~
johngalt
The market can stay irrational longer than you can stay solvent. -Keynes

------
erikpukinskis
The reason so many people think Tesla is expensive is because some are valuing
the company relative to Ford and GM, but others are looking at Tesla Energy
and valuing the company not just in automotive but in GE's business, and even
in Exxon's business.

GM + GE + Exxon = $765 billion

Tesla at $45 billion is still just 6% of that market. There's a lot of
uncertainty there, so only a small slice of that $765 billion is getting
priced into Tesla's stock, but it's enough to make the people comparing to
Ford wonder what the heck is going on.

~~~
cowsandmilk
Why do you believe GE is relevant here? GE is a conglomerate that has major
businesses like aviation and healthcare that are wholly unreleated to Tesla
Energy. For 2016, those made up $9.2B of GE's $17.6B industrial segment
profit, so over 50%.

------
simonsarris
From their letter (link to below if you want to read)

> Later this year, we expect to finalize locations for Gigafactories 3, 4 and
> possibly 5 (Gigafactory 2 is the Tesla solar plant in New York).

Should be an exciting conference call. (5:30pm EST)

[http://files.shareholder.com/downloads/ABEA-4CW8X0/394401180...](http://files.shareholder.com/downloads/ABEA-4CW8X0/3944011801x0x929284/22C29259-6C19-41AC-9CAB-899D148F323D/TSLA_Update_Letter_2016-4Q.pdf)

~~~
oska
Gigafactory 3: Europe

Gigafactory 4: Asia

Gigafactory 5: Where? Another one in the US?

~~~
D_Alex
Australia. Please.

We have the land, we have the lithium, we have the sunshine and we have a
massive car market - 1.2 million cars sold in 2016.

We also have a good automotive manufacturing base... about to go into idle
mode. Aussie federal and state governments have been very willing to support
local manufacturing, and I'm sure they'd love to hear from Tesla.

~~~
oska
I was going to suggest Australia as a possible contender for the 5th factory
however while we have some supportive state governments we also have an
incredibly _unsupportive_ federal government that is hostile to electric
vehicles and renewable energy and storage. And I think that's obvious to
anyone looking on from outside. So while this current federal government is in
power it's one more opportunity we're going to miss (and be left behind on).

~~~
taneq
We also have an absolute ton of solar power on very cheap land, and our power
grid is in a death spiral to the point where going off-grid is going to be a
clear financial win in the next 10 years. By the time a new factory is up and
running, this is gonna be a really good market for battery storage.

------
kgwgk
For a negative look at the results:
[http://www.zerohedge.com/news/2017-02-22/tesla-beats-it-
burn...](http://www.zerohedge.com/news/2017-02-22/tesla-beats-it-burns-
record-1-billion-cash-flow-delivers-10-fewer-cars)

------
Wizardgold
It seems the financial side of a company have to make a guess at position they
expect to be in when they report to the shareholders. So long as they beat the
estimates then everyone is happy. The guess does have to be with enough
forward movement to show the company is worth investing into. It's all a bit
of a tightrope to get it right enough the money stays in play so the company
can continue doing what they want to do.

------
mtgx
I hope Model 3 can beat the Bolt in range. That would be a nice surprise. I
wouldn't say it's _necessary_ , but the Bolt has already gotten a lot of
press, with some even saying it's what's making EVs "mainstream", even though
they're only selling like hundreds of them at a time right now, and that
probably won't change anytime soon considering GM _loses_ $9,000 for each unit
sold. Plus, I hear all the time how the dealerships try to dissuade people
from buying a Bolt and turn them towards buying an ICE car instead.

I also hope Musk reconsiders his strategy of not making much cheaper EVs
"because everyone will pay to be driven by an autonomous vehicle soon".

I think he's way overestimating how soon that will happen. I don't think most
people, even in the U.S., where a "Tesla Network" may actually be viable, let
alone in the rest of the world, will do that by 2025, if not 2030. That leaves
a _lot_ of wasted opportunities for Tesla to become a "market leader" in EVs -
or rather to _maintain_ its EV leadership in the market.

By 2025, there will definitely be EVs from Renault and others that cost less
than $20,000 and have 200-mile ranges. At half the price of a Model 3, those
cars are going to gain a lot of market share, fast, even if Tesla's numbers
continue to grow as well.

I know Musk has already mentioned that Model Y will be cheaper, but we don't
know just how much cheaper. Hopefully, it will be like $25,000. That would be
a nice price-point for an EV by 2020. But I think Tesla needs to go down to
$15,000 or at least 18,000 by 2025, as well, _even_ if for that price point
and by that moment in time, those cars can't be "Level 5" \- although if Model
3 will have that hardware, I think so will the $15,000-18,000 car by 2025 (it
will probably need to be more like 2023, and announced in 2021, though, as a
lot of EVs will start to come out in 2021-2022).

~~~
ZeroGravitas
_" GM loses $9,000 for each unit sold."_

I'd be careful with figures like this. It's possible they are investing with
the idea to ramp up production and get to profitability with scale, or with
predicted reductions in battery price. It's also possible that the way CAFE
rules calculate an average over a manufacturers entire fleet mean that by
taking a loss in one place they can earn or save money in another.

~~~
JoeAltmaier
Right, its important to calculate profit/loss differently from 'marginal
profit' or the money made by each unit over cost of manufacture. Sell enough
units, you can cover the fixed (development) costs. Sell too few, and you can
claim "They lost money on every unit" which is sort-of correct.

------
oli5679
The trade I'm interesting is simultaneously shorting Tesla and Daimler.

Sceptics emphasise the difference between Tesla's market cap (£40 bn) vs its
current sales (75,000) and profits (close to -$1bn). I can imagine a state of
the world where they grow dramatically and justify this price tag, but in that
case I see serious problems for Daimler.

Similarly, if Daimler flatlines and doesn't see a crash in sales of Mercedez,
I'm seriously pessimistic about Tesla.

------
refurb
Looks like the stock is down 2.4% from yesterday. Folks are taking a closer
look at the numbers.

 _One analyst specifically took aim at the fourth quarter results, calling out
the beat as "phantom" given the exclusion of the SolarCity acquisition from
consensus estimates._[1]

[1][http://www.zerohedge.com/news/2017-02-23/market-sours-
teslas...](http://www.zerohedge.com/news/2017-02-23/market-sours-teslas-
phantom-beat-stock-slides)

------
brilliantcode
Was about to buy near expiry put options for a very cheap price...I'll be
staying away from TSLA and looking at macroeconomic trends instead.

Timing earnings without informational edge, it's gambling.

~~~
brilliantcode
Update: Seeing the TSLA tank yesterday, I decided I will never self doubt
myself again and resume gambling.

