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BlueStreak

(8,377 posts)
Mon Mar 3, 2014, 02:46 PM Mar 2014

Tesla: "BS to book ratio of 80"

This is not a commentary on the Tesla product. I agree it is a very impressive product, put together with very high quality, and a real challenge to the status quo of the auto industry.

And this is not a commentary on Elon Musk per se. I agree he is a very smart guy and a visionary.

This is a comment about the viability of Tesla's business model and the validity of its stock price. See
http://seekingalpha.com/article/2062263-3-billion-reasons-why-teslas-gigafactory-will-be-a-bloodbath

I don't know this analyst (John Peterson). There are lots of wackos blogging financial crap on the Internet. You can find no end to that at "The Motley Fool", for example. In general, I have found the SeekingAlpha writers to be very thoughtful and highly accurate in their analysis, whether or not one agrees with their opinions.

The issue here is that Tesla made two bold moves last week that look a lot like "Hail Mary" plays. As an investor, I want to know what the real value of a stock is, and in the case of stocks with big potential upsides, I want to know realistically what the upside is, once you strip away all the emotion and hype.

In my view, the Tesla price is overvalued about 400% right now. I believe that the moves of the past week may cause others to get out of the hype bubble and actually look at this company dispassionately. With that in mind, I bought puts last week, betting on a major price decline. That was after the gigafactory announcement and before the bond issue became public -- which reinforces my view that the stock will go down a lot. Some factual observations from this article are striking, even shocking:

"each share of Tesla's common stock represents $3 of hard net worth and $241 of hopes and dreams, encumbered by $24 in hard debt that must be paid come hell or high water"

The article goes on "If everything comes together perfectly, Tesla will ramp its EV sales from 22,500 units in 2013 to 500,000 units in 2020, the $660 million in 2018 notes will be converted into 5.3 million common shares, the $920 million in 2019 notes will be converted into 2.6 million common shares, and the $1,380 million in 2021 notes will be converted into 3.8 million common shares. In that scenario, stockholders will own 91% of a successful niche player in the global automotive market. If everything doesn't come together perfectly and Tesla doesn't have a big enough equity cushion to carry it through the glut phase, the note holders will force Tesla into Chapter 11 and stockholders will be lucky if they end up owning 5% of a viable niche player in the luxury car segment.

Here's something that people seem to ignore. The average selling price of a Tesla today is well over $100,000. (Take the total sales divided by the units sold and you get something like $125,000 a copy.) This is a product for status-seekers and those who have 4-car garages where they can leave this thing when they need to drive a vehicle with more range. There just aren't many common folk buying the car. And despite Musk's hype, his next generation car for the mass market -- while still having 200-mile range anxiety -- will cost north of $50,000. I don't see how you sell 500,000 of those per year.

One final observation, which is not in the article: Let's say Toyota, GM an Ford just disappeared and Tesla sold every one of the vehicles they make, and made the same profits of those three, and didn't have to dilute Tesla stock any further in the process, for 2013, they would have made a profit of $175 per Tesla share -- for a stock that is currently trading for $240. There ain't no way to get from here to there.

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rgbecker

(4,806 posts)
1. Last paragraph question.
Mon Mar 3, 2014, 03:26 PM
Mar 2014

Are you saying GM (Stock selling for $36/share) made a profit of $26 (36 times 175/240)????

Not sure why you think Tesla has to profit $175/share to equal GM etc.

You make some good points, but you might have a little wait until your shorting tesla pays.

http://finance.yahoo.com/q/bc?s=TSLA+Basic+Chart&t=1y

 

BlueStreak

(8,377 posts)
3. Further explanation
Mon Mar 3, 2014, 04:25 PM
Mar 2014

What I am saying is if Tesla were to make the profit that GM, Ford, and Toyota made COMBINED in 2013 -- and in a pretty good year for automotives -- That would be about $22 billion in net earnings. Cal we all agree that no matter how successful Tesla becomes, they can't sell enough vehicles to make $22 B in profits a year from auto sales? But if they did that without diluting their stock from its current position (which is an impossibility), then the TESLA earnings per share would be about $175. That would justify a stock price of over $1000 per share, but it is a completely fanciful idea just to illustrate the absurdity.

Let's do a more down-to-earth comparison. GM sold 9.7 million vehicles in 2013 for a net profit of $5.3 Bn -- or roughly $500 profit per vehicle. Let's say that Tesla is able to sell their vehicles for FOUR TIMES THE PROFIT of GM (ignoring that they haven't yet posted an annual profit.) That is $2000 profit per vehicle. And Musk says he plans to sell 500,000 vehicles a year. If he does that volume and quadruples GM's profit per vehicle, that would be net income of $1 Bn -- in an extraordinarily optimistic scenario. At today's capitalization, that would be net income per share of $8 per TSLA share, which would justify a stock price of $150 tops (if the stock is not further dilutes. But the article shows that the bond ffer is likely to seriously dilute the shares before they ever make anything like $1B in profits.)

My put option runs to January 2015, so I don't need the sell-off to happen immediately. I'm already in the money on that option and I think it will get a lot better before I sell it. I did straddle a little to have some protection is the market unwisely decides not to listen to me.

The author of that the OP article claims that the type of battery that Telsa uses (and proposes to build in the giga-factory) is already in an over-supply situation. I don't know if that is true, but somebody needs to ask Musk the hard questions, i.e. "Considering all these other battery companies have worked for 10 years, mostly unsuccessfully, to try to get the Li-Ion cost down and energy density up, how does the construction of a monstrously large plant achieve a cost or range breakthrough?" It just doesn't seem like a fabrication problem to me, and therefore isn't likely to be all that responsive to economies of scale. What it is sensitive to is lots of politicians throwing truckloads of money to have the prestige of this plant in their state, which I suspect is the game plan.

FBaggins

(26,697 posts)
4. I'll give you the benefit of the doubt...
Mon Mar 3, 2014, 04:58 PM
Mar 2014

... and assume that this isn't a pump-and-dump post.

Nevertheless... you're suffering from a common emotional connection to investment decisions that you make... trying to convince others that the stock just HAS to go down... because you need it to in order to make money.

Let's say that Tesla is able to sell their vehicles for FOUR TIMES THE PROFIT of GM

You sound as if you think you're being conservative on the numbers (that they couldn't possible make that much and it's an "extraordinarily optimistic scenario&quot ... but the reality is that they could make an incremental profit (price minus marginal cost) of much more than $2,000/vehicle. Investors aren't going to knock a young company for high startup capital costs as they expand if those costs aren't expected to happen every year.

You might make money since your investment is such a short-term gamble... but please don't assume that the price can't go up from here... or that the investment is in any way a safe bet.

 

BlueStreak

(8,377 posts)
5. I'm OK if it moves either direction
Mon Mar 3, 2014, 05:43 PM
Mar 2014

because I have a straddle on it. And I think it is a pretty safe bet that it will move enough up or down to cover me, and if it doesn't -- no biggie. So I don't have a big vested interest in it going down, although I shifted the straddle a little based on my belief that over the 9-month horizon, there will be more downside than upside potential.

But aside from that, the OP makes some interesting factual points that it seems many have glossed over. I just thought there might be some interest in that. Specifically, the impact of the convertible bonds could be 8 times larger than the current hard value of the company. That is an extraordinary dependence on goodwill. One notices that Musk hyped the Gigafactory for all it was worth the entire week, but quietly released the convertible bond stuff after the close on Friday. Call that good management of the news cycle if you will, but he did it that way for good reason.

kristopher

(29,798 posts)
6. I think your analysis suffers from a lack of understanding regarding what's happening in energy.
Mon Mar 3, 2014, 06:07 PM
Mar 2014

You've said some things about the role of grid tied storage that are simply not correct. Tesla's value is closely tied to those areas where you hold misconceptions.
Evaluating the entire gigafactory enterprise on the basis of the automotive segment of the market while ignoring the grid tied aspect is going to bite you in the a$$.

 

BlueStreak

(8,377 posts)
7. That's certainly possible.
Mon Mar 3, 2014, 07:24 PM
Mar 2014

I don't think it is the most likely scenario, obviously. But I have been wrong plenty of times before. There have been some crazy stock valuations lately (Facebook is among the most notorious). But by any traditional measurement, TSLA is over-valued by far more than FB ever was. You have to go back to 1999 to find stocks behaving like that (e.g. a fairly mature Cisco company trading for 100 year's worth of earnings.) It eventually crashed from 100 to 20 and has remained around $20 ever sense, which is a fair valuation by sane people. (I wish I understood options back then because I knew that Cicso's price was unsustainable, but I didn't know how to put my money where my mouth was back then.)

Facebook is still trading at 100 years' worth of earnings. Unlike Cisco, there is at least an argument that FB can grow into that stock price in 3 or 4 years. I doubt they will, but it isn't totally impossible. There is enough of a chance that I am not betting against it.

It is totally impossible, IMHO, for TSLA to ever grow into the stock valuation they have today based on the kind of automotive product they are inclined to build in the next 5 years. That is why I found the OP article interesting because it brings at least a little reality to the mega-factory hype, putting some objective measures around that. I am not feeling it. It looks like an "NFL stadium strategy" to me, where Musk is adroitly playing states off one another to fund a plant that might help him make some money along the way.

The nice thing is that if I am completely wrong, you will know that in another 12-18 months and this thread will still be in the DU archives. You can come back here and rub my nose in it. I don't mind. As I say, I have been wrong lots of times before.

kristopher

(29,798 posts)
8. Judging by your statements on grid tied storage and EVs...
Mon Mar 3, 2014, 07:31 PM
Mar 2014

...you should take the observations of FBaggins seriously. If you are shaping reality in two areas (as it appears) your entire analysis should worry you. It's your money; I don't have a bet down.

 

BlueStreak

(8,377 posts)
11. Let's just see where it goes.
Mon Mar 3, 2014, 11:48 PM
Mar 2014

The numbers don't come anywhere close to adding up for this company. All these over-valued stocks are "greater fools" scenarios. I don't have to buy a good stock. I just have to buy a stock that has great fools then me queuing up to buy it. When shorting of putting the stock, even if my evaluation is correct, I am still screwed if the greater fools don't come around. So basically it is a bet about how long people will continue to charmed by the hype. I think 10 months is enough time for the reality to start to take hold here. But I could be wrong. Musk is a world class hypester -- right up the with P.T. Barnum and Steve Jobs, so there is a definite possibility that he can hold this house of cards together for a longer time. or sell it outright while the price is high.

kristopher

(29,798 posts)
14. As I said, I don't have a dog in the race.
Tue Mar 4, 2014, 01:04 AM
Mar 2014

My point was that of the elements of your analysis you've shared, you have at least two significant things wrong. If that doesn't send you back to the drawing board, then your grasp of risk analysis makes it three things.

But I also said - it's your money. I'm not a stock analyst, I'm an energy policy analyst that specializes in the technologies and cultural elements involved in moving us away from carbon. Take it for what it's worth on an anonymous internet forum.

LouisvilleDem

(303 posts)
9. I follow Tesla posts at Seeking Alpha
Mon Mar 3, 2014, 10:04 PM
Mar 2014

John Peterson has always had it out for Tesla. I have no idea why, but he posts something negative about the company about once every other month. For over two years now he has been predicting the demise of Tesla, while over the same two years the stock has gone up something like 1000%. It's kind of fun plotting his "Tesla is Doomed" articles against the stock price:

Stock Price: $28.15
Jun. 3, 2012 - Tesla's Gift Box: Inefficiency Wrapped In Hype
http://seekingalpha.com/article/633361-teslas-gift-box-inefficiency-wrapped-in-hype

Stock Price: $29.51
Jul. 26, 2012 - Tesla's Balance Sheet Is Worse Than I Expected
http://seekingalpha.com/article/750951-teslas-balance-sheet-is-worse-than-i-expected

Stock Price: $51.20
Apr. 25, 2013 - Tesla's Q1 Earnings, An Epic April Fools Prank
http://seekingalpha.com/article/1370771-teslas-q1-earnings-an-epic-april-fools-prank

Stock Price: $161.84
Aug. 26, 2013 - Tesla's Crushing Battery Supply Constraints
http://seekingalpha.com/article/1657582-teslas-crushing-battery-supply-constraints

Stock Price: $162.17
Nov. 7, 2013 - Tesla's Painful Journey Into The Valley Of Death
http://seekingalpha.com/article/1817952-teslas-painful-journey-into-the-valley-of-death

Stock Price Today: $250.56

Now I happen to agree with him that at this point the stock is probably overpriced, but the bottom line is he has been wrong about Tesla for years. If he is right now, it's only because even a broken clock is right twice a day.

kristopher

(29,798 posts)
10. Graphic that might help.
Mon Mar 3, 2014, 10:13 PM
Mar 2014

I saw this yesterday and thought it was worth throwing into the discussion:



http://www.businessinsider.com/morgan-stanley-raises-tesla-to-320-2014-2

I have no opinion on the value of the stock itself, but the graphic shows what Musk is shooting for. If he isn't the one that serves the need reflected there, someone else will.

 

BlueStreak

(8,377 posts)
13. That graphic is what I call "the 2 billion Chinese" argument.
Tue Mar 4, 2014, 12:25 AM
Mar 2014

I have heard arguments like that hundreds if not thousands of times over my career and they never pan out. The argument goes like this:

Step A: There are two billion CHinese.

Step B: We aren't greedy. If we sell to only 0.5% of the market, we will be filthy rich.

That's basically the argument with no reasoning in between the steps. I call it the Chinese argument because I heard that same argument for about 30 different products about 1996-1999. But the same fallacy is used with any market, not specifically the Chinese market.

Fallacy: Tesla doesn't sell to a 2 trillion dollar market (i.e. the entire global car market.) They sell to the status seekers among the most affluent, who are early adopters for all-electric vehicles. That's a tiny, tiny fraction of the $2T global automotive market. And nothing they have ever discussed publicly will put them in contact with a market bigger than about $100 Bn in the next 5 years or so and they will get a small fraction of that without dealerships and ubiquitous charging infrastructure. They have no intention of a range-extended vehicle like the Volt or I3. They have no prospects of a battery system that will break the range anxiety problem for the average driver in the next 4 years. And they have no likelihood of producing a sub-$50K vehicle in the next generation, so they will still be dealing with only the most affluent 10% worldwide. That may be enough to have a nice niche, maybe even a very profitable niche. There is no need to use the "2 billion Chinese argument.

Fallacy: They have no access to the energy PRODUCTION market at all. That $1.5 T number is a gross exaggeration. The grid storage market is projected to be around $10 B by the end of this decade, but it is extremely unlikely that much of that will go to producers of the kind of batteries Panasonic intends to produce at the giga-factory. That just isn't an attractive technology in any respect: cost, scalability, or safety. There are much more appropriate technologies that will get the lion's share of that $10 B if indeed there ever is such a market. Improvements in interconnection of the grids limits the need for temporary storage. And quick-start distributed generation from companies like Capstone also reduces the need for storage (i.e. you can fire up micro-turbines and add grid capacity instantly, running off plentiful natural gas. Looking holistically, that is a lot cheaper than dedicated battery systems on the grid in most cases. So if Musk is telling people grid storage will justify his plant, I don't think he's telling the truth. Li-Ion is the best technology currently available for automotive applications, and if he can achieve a breakthrough that has eluded some of the best scientists in the world, then he'll be in a very strong position in the automotive industry. Otherwise some state is going to be very disappointed with how few jobs they actually got for the money they spent to woo and build that plant.

As I say, the nice thing is we don't have to wait forever to know the truth. It will all become clear in several years, and if I am wrong, I will admit it.

kristopher

(29,798 posts)
15. Your framing isn't what Musk is saying
Tue Mar 4, 2014, 01:23 AM
Mar 2014

In 2000 the National Renewable Energy Lab estimated that global solar PV manufacturing capacity would be 3gigawatts by 2020 if everything went well.

In 2007 China entered the renewable manufacturing sector in a big way.

By 2012 global solar PV manufacturing capacity hit 55GW (some estimates place it as high as 60GW) - most of it new facilities in China.

As you'd expect the industry entered a shake out period as global demand slid up to meet manufacturing at 45 GW - 50 GW for 2014.

The advanced timeline for the manufacturing increase and accompanying price decline means the solar has outstripped development of many market niches.

The graph shows the principle markets that have opened suddenly.

With Tesla (you are mischaracterizing his product line) and Solar City, Musk is well positioned to enter those markets.

That is where his gigafactory and the tie-ups with other major industry players in the supply chain comes in.

He may not be able to pull it together or he might succeed; I don't know and frankly don't care. My concern is that the plan he has laid out reflects a very real and very fundamental shift in the balance of political and economic strength within the global energy structure.

Do with that what you will but your manner of characterizing his strategy shows that storage isn't the only area of energy where your knowledge level is that of a novice. I truly wish you luck no matter what you do.

PS- I came across a 1%er named Grantham a couple of weeks ago. I have no idea of his position on Tesla, but he is supposed to be one of the best investors in the move away from carbon. This post gives everything I know about him but it tells me enough to know that I'll vouch for his grasp of the energy market.
http://www.democraticunderground.com/112763985

Hope that helps.

 

BlueStreak

(8,377 posts)
16. Musk's BROTHER does Solar City. You are conflating data.
Tue Mar 4, 2014, 01:52 AM
Mar 2014

The stated purpose for the giga-factory is battery systems, specifically Lithium-ion battery systems. The global market for grid-related storage is estimated by AES (who has a vested interest in promoting this) is only $10 billion by the end of the decade. The graphic is 150 times bigger than the AES estimate. That kind of hype is what I am talking about.

If you are saying that this gigaplant is also going to produce a trillion bucks worth of solar panels, that is news to me.

This is SOP for Musk. He throws buzzwords around like crazy and there are a bunch of dopes bowing at his feet who can't unravel what he is claiming. It is like his claims that his superchargers will be solar powered. No, they won't. They might have a solar panel for show, but they will run off the grid. A solar panel of the size of his charging station couldn't charge a Tesla if it were connected for a week, and it most certainly can't "super charge" anything. It is a trickle charge at that scale. Musk knows that. He just lies a lot.

kristopher

(29,798 posts)
17. Sure dude, you have it down pat.
Tue Mar 4, 2014, 01:57 AM
Mar 2014

I was way off target, you are clearly in full mastery of all the relevant data.

 

BlueStreak

(8,377 posts)
12. I agree Peterson is a minority voice. I look at his factual observations more than the conclusions
Mon Mar 3, 2014, 11:51 PM
Mar 2014

I think some of his factual observations are very troubling.

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