TSLA Market Action: 2018 Investor Roundtable

[Fact Checking]

Some argue that ICE automakers will go bankrupt and Tesla will take their sales. Okay, but bankruptcies have happened before. I can see the U.S., Germany, and Japan bailing out their automakers. China is supporting its electric automakers. Governments will bankroll these competitors even if private investors won’t.

Note that ICE car bankruptcies isn't the key gating event, but "ICE carmakers being in enough EV transition trouble trying to stay afloat to not have enough funds to invest into the EV transition sufficiently". That's probably the minimum event required to allow Tesla to grow to about 10% of the world automotive market (by revenue) unopposed - which is the ~1 trillion dollar valuation boundary of their automotive business alone.

It’s also possible that private investors will turn over a new leaf and fund electrification / tolerate a temporary transition phase of losses and negative free cash flow.

I find that unlikely for various reasons and lack of historical precedent. When your product cycle is ~3-5 years and hugely capital intensive, then the last thing private investors want to hear is the cessation of profits for 3-4 years for maybe more profits after that time, perhaps. They'll just jump ship, shares are transferable, let others 'foot the bill'.

Changing investors’ mind is kind of the point of Tesla, isn’t it?

No, the point of Tesla was always to attract investors who want to build a disruptive EV company from scratch.

Let me phrase it a bit differently:

• The value of the ICE making business will go to almost zero, relative to today's value. We might quibble about the time frame: 5, 10, 20 or 50 years - but I think everyone rational agrees that it's going to be near zero relative to today's value.
• The only long term value of ICE carmakers have is basically brand value (as long as they manage to maintain it), sales channels, and using their ICE expertise to build EVs.
• The problem is, most of their assets are factories, and there's a lot of negative value from shrinking their ICE business, and their EVs will cannibalize their own ICE sales. As Volkswagen CEO Herbert Diess recently commented: "ICE carmakers are a lot more vulnerable than the public assumes" (paraphrased). Or a key BMW executive recently commented: "We don't want to idle our ICE factories with EV production" (paraphrased). They knew it all along, and they feared it, and 2018 is the year it became obvious to a broader range of investors.
  
• EV carmakers built from scratch are in a fundamental economic advantage: they are building their business from scratch, with no 3-5 year ICE product plans to disrupt, with no 10-20 years life-time ICE factories to change, with no ICE sales to cannibalize.
• Share prices of traditional car companies will have to drop a lot more from current levels to bring them into the 'build EVs from scratch' risk capital territory that built Tesla.

Also, I think I touched a nerve via my 'Toyota bankruptcy' hyperbole, and I'll take that back: there are other, more vulnerable ICE carmakers that ignored the EV future and Toyota will possibly be among the few that will survive.

But I think the majority won't survive, or only in much smaller form, just like Studebaker is the only company still in business today who 100 years ago was in the carriage making business.

 

[EVNow]

But resistance levels don’t exist. That’s the whole point of the academic research I cited.

That is not what the paper says. It says, a synthetic market also seems to develop patterns that look like typical resistance levels.

Besides it doesn't address the observation that - there seems to be some price levels that are repeatedly tested.

BTW, I'm well aware of the random walk hypothesis (Random walk hypothesis - Wikipedia). Afterall its more than 100 years old.

There are other theories as well. For eg : A Non-Random Walk Down Wall Street.

 

[Remus]

Didn’t I just do that in the post you quoted from? E.g. governments are more likely to bail out ICE automakers post-bankruptcy than just let them die.

And they can hold on to their market share while going through bankruptcy restructuring? While trying to start building their EVs? And selling ICEs at the same time?

If the whole world is going EV who in their right mind would buy their ICE cars so that they would worry about getting gas down the road?

If I know Tesla batteries last 200k miles based on years of data, and have no idea those new batteries would last, whose car I am gonna buy?

And your so called fact is no different from Mark BS's pipe dream of tons of Tesla killers coming online, that it is easy for others to copy what Tesla did and compete, suppress the margin. And you don't understand why others here are annoyed?!

 

[TradingInvest]

So it isn't even all "index funds" but S&P 500 indexed funds - which should be about ~40% of all passive index funds. (The "total market" funds, the large-cap funds and the tech funds already include TSLA.)

S&P 500 funds are I think about 5% of shares of high tech firms, which on TSLA would be about 7% of the float: a substantial (and temporary) pop of $50-$100 but probably not "technical short squeeze" material.

(BTW., the smartest index fund arbitrageurs are probably already buying, S&P 500 inclusion next year is probable at this point.)



I'm unsure what you find crazy about what I wrote, the 2013 TSLA short squeeze is a simple historic fact:

Shorts often try to argue that 2013 was different in that "days to cover" was higher. What their argument is missing is that today Tesla is a large-cap tech company and about ~80% of the TSLA intraday volume is HFT/algo trading that doesn't offer liquidity to 30 million shares shorts covering. In 2013 was a small-cap/low-mid-cap company with less HFT liquidity skewing the daily volume figures, so 'days to cover' metrics were a lot more representative of true free short-covering liquidity available on the market.

I.e. the true "days to cover" is in reality 5 times larger than listed: instead of the ~3 "days to short cover" listed by NASDAQ, the real number is closer to 15 days - and even that is using up 100% of true liquidity to cover, while in reality any such sustained momentum would attract a lot of momentum traders with which shorts would have to compete.

The real time it will take for shorts to cover at naturally available liquidity is closer to 30-60 days. Anything beyond that rate of flow will bid up the price rather significantly - i.e. a short squeeze.

Also, there are several types of short squeezers:

• A "technical short squeeze" similar to the VW short squeeze of 2008 which was violent and over in 2-3 days is unlikely for TSLA, unless a big investor is really bullish and ties up a significant part of the Tesla float.
• A "fundamentals driven short squeeze" is highly probable after Q3 results: the fundamentals of Tesla just improved immensely (cash generation ability close to Apple's and twice that of Amazon, in a much bigger market with a lot of space to grow), which is unlocking a much broader base of investors. The 2013 Tesla short squeeze was such a fundamentals driven short squeeze.

These estimates of mine roughly match what Ihor Dusaniwsky's daily short interest report is showing:

Shorts covered about ~1 million shares since their peak, while the price was bid up by about ~$60. If we naively assume that a third of the price action was shorts covering and extrapolate that to say 30 million short shares covered, that's a price effect of +$600, quite some rocket fuel which would bring the stock to near $1,000 levels if longs didn't change behavior as prices increase - but in reality longs and even long term investors will probably jump in sooner than that to take profits or to swing-trade once they think the short squeeze has been exhausted, or if they think the price levels are irresistible.

Even without a technical short squeeze some nice intraday price action is also possible at around key price levels of short capitulation: I'd not be surprised to see a massive cascade of stop orders once $390 is breached, to well above $400.

There's also some key upcoming events that will unlock even more tiers of investors, such as the Moody's upgrade and the S&P 500 inclusion next year as @neroden suggested, and of course the upcoming "profitable 18'Q4" event, the "profitable 19'Q1" event, the "profitable 19'Q2" event, etc. The "but will Tesla ever be able to post five profitable quarters in a row!!" short thesis won't have nearly as much followers.

The time frame of the 2013 re-pricing of TSLA was 6-9 months, with the most violent short squeeze portion taking about 2-3 months to play out.

Anyway, all the data suggests that it's pretty probable at this point that there's a lot of pain waiting for shorts and the price levels at which they will be allowed out of their positions will be determined by Tesla shareholders, not by anti-shareholders.

That's exactly true. This is a simpler example: company ABC has 100 million shares. I own 90%, I lend out some shares, they trade it. Day traders and trading programs can trade the shares many times everyday, daily trading volume 5 million. Total short shares 15 million. On the surface, the "days to cover" is 3. Not bad, they can cover. In reality, how can they cover if I don't sell? There are a max of 10 million shares they can cover from.

TSLA's trading volume was around 100 million shares this past week. When shorts really are forced to cover, they will find most of that volume was robots day trading against each other. Most Tesla long holders will not sell. Think about all the Tesla shareholders, what percentage of investors hold the stock as a long term investment? In stead of selling, a lot of investors will continue to buy more shares as it goes higher.

I'm not a big fan of short squeeze, but at this time I think short squeeze is very likely. Ellison's involvement really changed the situation. More and more shorts will bail instead of shorting more. As Ellison commented, Tesla has a lot of upside. My opinion is that this is the time to hold your shares really tight and add more when you get new cash. This is very likely to be a repeat of the 2013 rally. Even without short squeeze, I think the stock should reach 4 digits in a few years based on fundamentals.

 

[SW2Fiddler]

Lodger you'll get more........just made it to post 53501 while flipping back/forth to new posts. If everyone could just freeze for an hour please.

To save you some pages, here’s apparently what happened.

 

[Fact Checking]

Even large investment firms / wealthy investors may decide on this strategy. Buy at $x and sell at $y.

That's also what human broker/dealers used in the past and are using even today even if helped by computers. Forget HFTs who will only match your order if it's a loss for you: levels of resistance are where a lot of the real liquidity is hiding.

 

[⚡️ELECTROMAN⚡️]

This is exactly why alot of us dislike Petty, pissy Fred which a very few on this board still didn’t get. In any case I think we discussed Fred more than he deserves, time for next topic. Here’s one:
Introducing Navigate on Autopilot

NOA looks pretty good. I can see being helpful soon with auto mad max mode while being late for work...this will help sell more EAP and FSD.

I think it's time to replace my electrek bookmark with something else. Is there another site that is comparable or better?

 

[strangecosmos]

Note that ICE bankruptcy isn't the key gating event, but "ICE carmakers being in enough EV transition trouble trying to stay afloat to not have enough funds to invest into the EV transition sufficiently". That's the minimum event required to allow Tesla to grow to about 10% of the world automotive market (by revenue) unopposed - which is the ~1 trillion dollar valuation boundary of their automotive business alone.

Suppose Tesla tops out at 10%. At that point its P/E, P/S, P/OCF, P/FCF, EV/EBITDA, or whatever multiple you want to use should be similar to its peers in the auto sector. (Assuming it’s valued solely on the basis of selling cars, and not autonomy or the energy business.)

McKinsey says vehicle sales are $2.75 trillion in annual revenue globally. By 2030 it predicts $4 trillion. 10% percent is $400 billion. Let’s say Tesla converts 25% of revenue to operating cash flow, more than it did in Q3. That’s $100 billion in OCF. At Honda’s P/OCF of 5.1 (the highest I found after a quick look on finbox.io), that would put Tesla at a market cap of $510 billion. Pretty cool.

I wonder if Tesla can keep up that 20% revenue to OCF rate, let alone increase it, especially if as it starts making cars in the ~$25,000 price range.

 

[strangecosmos]

Besides it doesn't address the observation that - there seems to be some price levels that are repeatedly tested..

What research has found that to be the case?

 

[strangecosmos]

I think it's time to replace my electrek bookmark with something else. Is there another site that is comparable or better?

twitter.com/elonmusk

 

[ThereAre4Cars]

Thanks for the reply.

At Toyota’s current P/E of 7.6, $15B in profit would be $114B in market cap or $671 per share.

Not a fan of that approach since valuation has to include growth of course.

And here’s the income statement for whenever Tesla has 10 million autonomous Model 3s on the road: Tesla Network annual net profit (projected)

I'll check that out. Assumptions tend to be the most important part.

But I eventually gave up on that because it started to feel pointless to tweak and tweak and tweak when the end result was the same no matter what. If Tesla deploys autonomous robotaxis at scale, it will make a bajillion dollars. For me there is no actionable difference whether its market cap in 2030 is $500 billion or $5 trillion. That won’t affect my investment decision. So why spend another six hours just to chip around the margins? Maybe I’ll finish them and publish them someday but I just haven’t felt like doing it.

The way I approach it is. If everything is fine, I'm rich whatever happens. I have been saying all year Tesla is 20% chance of bankruptcy and then the remaining 80% includes 20x+ scenarios, so it's an asymmetric pot odds bet. I'd say this last earnings cut that BK chance in half.

But a side effect of this is my main focus is actually on the downside scenarios to try to evade that 10% BK situation rather than locating the maximum upside between 4000 and 10000/share. So I worry more about competition, tax credit expiration, gross margins, cobalt, recessions, autopilot liabilities, etc. more than most.

After making those spreadsheets I started to focus a lot more on autonomous car technology because that became the actionable information. Whether Tesla will or won’t deploy autonomous vehicles is now the question, not what will happen *if* it does so. So that’s what it makes sense to think about. Plus I love technology and have a love-hate relationship with accounting.

I do find it far more interesting to try to predict the general flow of the future than specific accounting work. Accountants (if that's mostly all they are) tend to make for lousy investors because it's a more rule-based than probabilistic discipline. Investing is about reasoning in probabilities and also trying to develop powerful and simple models. I literally try to boil valuation down to, although often sum of parts, nothing more than a reasonable P/S range that properly captures likely terminal net margin as well as some decent model for a growth multiple. Tesla for me is ~3x-3.5x forward P/S so ~100B$ is about what I'm aiming for in a more rosy market environs. I think the stock might be worth more than that of course, but the market itself will never grant what I actually think.

This is something more recent I wrote where I looked at net present value: The value of autonomous car companies Not a model or a prediction, just a brief exploration. What if you make it a coin toss: heads, Tesla launches the Tesla Network, tails, Tesla goes bankrupt? Is Tesla still a good bet? I find that, yes, the net present value of Tesla is $100 billion with those probabilities.

there's that 100B$ again coincidentally.

I think autonomous is farther away than I used to. Some of that is Tesla simply demonstrating slow progression but its also more time thinking about the complexity of the long tail. In reality it's going to be an interesting and difficult progression of chipping off the problem around the corners. I vaguely expect in about ~5 years we'll start to see something less than a hand-wavy solution to actual steering wheel less autonomy and at that point the opportunity is going to absolutely smoke the actual EV business value and it will become the AWS/Amazon scenario. In between, the EAP adds to margin and demand nicely. But I like how that plays out with 5 years of auto growth first and then a natural handoff. Fundamentally I don't see anyone else outcompeting them even though I don't know how it plays out exactly. It's a bit too far away. TaaS will be THE story when it happens though. Could be the biggest thing in the 2020s.

I don't give a rip about TE and voted against SolarCity.

I actually looked into Tesla in 2013 right at the beginning of that faux short-squeeze because I was thinking about robotaxis, but I thought the batteries were too expensive and I couldn't pull the trigger on chasing the stock (I hate buying on upswings). So then I actually looked at ZipCar because it was shared transpo but that wasn't going anywhere. In between I might have bought Uber if I could, but probably not now.

Bring on Monday..weekends suck.

 

[TradingInvest]

I think it's time to replace my electrek bookmark with something else. Is there another site that is comparable or better?

Cleantechnica and Teslarati. Even before this episode I felt those two sites have much higher quality articles. Their screen layout could be improved, the content is good, need to add quick news type of short articles everyday. One of them need to improve the comment section. I will contact them to make a few suggestions.

I used to go to electrek mainly to read/write comments and because of habit. Not anymore.

 

[strangecosmos]

And your so called fact is no different from Mark BS's pipe dream of tons of Tesla killers coming online, that it is easy for others to copy what Tesla did and compete, suppress the margin. And you don't understand why others here are annoyed?!

1. I think Tesla has probably a 3ish year lead. Maybe more.

2. I think Tesla can comfortably take maybe 10% of global market share eventually, but probably not like 30%.

3. I’m thinking on a 20-year timescale, not a 5-year timescale.

 

[Remus]

Pretty sure phone OEMs don’t pay Google to install Android on their phones. Amazon and Samsung failing is exactly the network effect I’m talking about with iOS and Android. If there were 10 different phone OSes with all the same apps as iOS and Android, would Apple be as profitable? Probably not.

Why does that matter? Almost all apps you can find on Apple's app store you can also find them on Google's app store, which means apps are not preventing people from switching from iPhone to Android.

Google service is not free, developers pay when posting their apps. Android WAS open source, but now nobody can sell phones running non-google version of Android, it has lost the meaning of open source long time ago.

again, get your fact straight!

 

[ThereAre4Cars]

Even without short squeeze, I think the stock should reach 4 digits in a few years based on fundamentals.

That really is all that matters.

 

[UnknownSoldier]

I think it's time to replace my electrek bookmark with something else. Is there another site that is comparable or better?

CleanTechnica is also good, and opinionated like Electrek is if you like that sort of thing.

InsideEVs is the best unbiased source I have found, and they also post some really interesting technical deep dives that are lacking elsewhere.

Either way, I'm done with Electrek. If anyone here still links to that site, just be aware that many of us will not be clicking those links going forward. It's time to wean ourselves off of Fred "Free Roadster" Lambert.

 

[ThereAre4Cars]

2. I think Tesla can comfortably take maybe 10% of global market share eventually, but probably not like 30%.

I think it's possible some very strange scenario happens. As time goes on most of the value for Tesla will be in the autopilot platform technology and then even more than that potentially the actual customer-facing service revenue model (i.e. all money for riding goes through Tesla). In this scenario Tesla itself doesn't much care about building the cars any more. That falls to the bottom of the stack. Other OEMs could theoretically become Magna and Tesla become fabless so to speak. That's just an idea..

There's still going to be 30+ types of form factors that make a lot of sense in the future. Tesla may not want to have to build and design them all. It won't be the valuable part of the chain.

 

[mongo]

I wonder if Tesla can keep up that 20% revenue to OCF rate, let alone increase it, especially if as it starts making cars in the ~$25,000 price range.

Sure, as volume increases, amortized operations cost per car goes down. So even with 25k cars, the ICF from the more expensive ones will go up. Throw in part commonization and the GMs go up too. Then cars will be out of warranty and the service side will get revenue positive (plus body repair at nominal mark up for insurance savings). Superchargers will be a self reinforcing revenue stream, maybe not much net profit, but the fees will pay for more installations and they won't be an expense.

1. I think Tesla has probably a 3ish year lead. Maybe more.

2. I think Tesla can comfortably take maybe 10% of global market share eventually, but probably not like 30%.

3. I’m thinking on a 20-year timescale, not a 5-year timescale.

1. If the have a 3 year lead now, the competitors need to innovate faster than Tesla to reduce it. If they can't they will never catch up (Tesla will not be sitting still those 3 years pickup, semi, roadster)...

2. Ties in with 1. Tesla has 3 segments now, those are not going away. As they add more types, and more capacity they'll grow. Will kids of Tesla owners ever drive anything else? (hand me down and parents get newer car). Plus the longevity cuts into other's sales.

3. I'm happy in the 5-10 (Elon's compensation plan) range

 

[Fact Checking]

Suppose Tesla tops out at 10%. At that point its P/E, P/S, P/OCF, P/FCF, EV/EBITDA, or whatever multiple you want to use should be similar to its peers in the auto sector. (Assuming it’s valued solely on the basis of selling cars, and not autonomy or the energy business.)

McKinsey says vehicle sales are $2.75 trillion in annual revenue globally. By 2030 it predicts $4 trillion. 10% percent is $400 billion. Let’s say Tesla converts 25% of revenue to operating cash flow, more than it did in Q3. That’s $100 billion in OCF. At Honda’s P/OCF of 5.1 (the highest I found after a quick look on finbox.io), that would put Tesla at a market cap of $510 billion. Pretty cool.

I wonder if Tesla can keep up that 20% revenue to OCF rate, let alone increase it, especially if as it starts making cars in the ~$25,000 price range.

Couple of points:

• Q3 was still burdened by ramp-up inefficiencies and lack of economies of scale. At 25% cash generation, which I think is very viable even at lower ASPs now that Model S/X generates in excess of 30%, the valuation should be closer to Apple's (27% cash generation), which Apple valuation has a number of (high-tech) premiums included: the robustness of the franchise moats, its resilience in recessions, the high grade intangible assets, the explosive growth potential with new disruptive products whenever they happen, the buffered up hoard of cash, etc., etc. But whether it's $500 billion or $1.5 trillion at that stage is really a small detail IMO: we shouldn't pretend we know the future to such a degree, we have trouble predicting previous quarters, on the day before the earnings report, let alone future quarters.
• Global automotive has average cash generation in the 10% range - and a fair chunk of that is via their captured financing arms which Tesla has yet to grow. In short, I don't think it's valid to value Tesla with automotive sector valuation metrics.
  
• At the $25k compact car price range I believe Tesla will be able to capture significantly more than just 10% of global automotive revenue. I won't pretend to know the answer here either: to what extent high quality Tesla cars will be able to woo buyers of lower quality, mass-produced and marginally cheaper cars I don't know. If it was up to my preferences of quality TESCO and Walmart wouldn't exist.

In fact I think Tesla should at this stage be valued as an unopposed franchise/monopoly owner which adds yet more valuation premiums: price setting power, inflexibility of demand advantages, product uniqueness advantages, product and service bundling advantages, etc. etc.

Very hard to put good figures on those factors - but that doesn't make those factors any less real.

 

[strangecosmos]

Not a fan of that approach since valuation has to include growth of course.

Good point. I guess that P/E is conservative. Hard to include growth because then you have to make another model for the next 5 years.

I have been saying all year Tesla is 20% chance of bankruptcy and then the remaining 80% includes 20x+ scenarios, so it's an asymmetric pot odds bet. I'd say this last earnings cut that BK chance in half.

Yes, thank you. Asymmetric risk is the concept I have been trying to get at. Just see if the expected value is good, and then try to be zen if it’s bad luck and bankruptcy or low valuation happens.

But a side effect of this is my main focus is actually on the downside scenarios to try to evade that 10% BK situation rather than locating the maximum upside between 4000 and 10000/share. So I worry more about competition, tax credit expiration, gross margins, cobalt, recessions, autopilot liabilities, etc. more than most.

Are you some kind of hater bro??

I do find it far more interesting to try to predict the general flow of the future than specific accounting work. Accountants (if that's mostly all they are) tend to make for lousy investors because it's a more rule-based than probabilistic discipline. Investing is about reasoning in probabilities and also trying to develop powerful and simple models.

I don’t know if I exactly agree. Accounting is the formal language that describes business. Sometimes subtle details matter a lot. Making spreadsheet models has made me realize some kinda big stuff. Like... whither the capital for Tesla Network cars? Oh, yeah... customers. Hm. But I think if all you’re doing is refining and refining so your model gets incrementally more accurate, then yeah that has diminishing returns. Just accept a 20% margin of error and call it a day.

I think autonomous is farther away than I used to. Some of that is Tesla simply demonstrating slow progression but its also more time thinking about the complexity of the long tail. In reality it's going to be an interesting and difficult progression of chipping off the problem around the corners. I vaguely expect in about ~5 years we'll start to see something less than a hand-wavy solution to actual steering wheel less autonomy

It could be 1 year or 10 years. I have no idea. I do think there are three exponential trends in autonomy (neural network size, training data, and compute) that might mean overall progress is exponential too. In which case extrapolating past progress forward is impossible.

I don't give a rip about TE and voted against SolarCity.

Worth the $2 billion so I have an easy answer to “But doesn’t electricity come from coal?”

I actually looked into Tesla in 2013 right at the beginning of that faux short-squeeze because I was thinking about robotaxis, but I thought the batteries were too expensive and I couldn't pull the trigger on chasing the stock (I hate buying on upswings).

Bring on Monday..weekends suck.

Do you actually check the stock price every day?