Comment by 11thEarlOfMar | Hacker News Reader

Comment by 11thEarlOfMar | Hacker News Reader

At the same P/E that Apple currently holds, and assuming a 15% net margin for Tesla, Elon needs to sell 5x the cars he sold in 2020 to yield today's price. Current auto capacity is 2x units sold in 2020 (Fremont + Shanghai). By the end of 2021, will be 3x (+Berlin). By the end of 2022, should be 4-5x with Texas and expansions at the earlier factories. Tesla will be producing the Cyber Truck, Semi tractor and updated Roadster, though the unit leader should be Model Y(?).

Historic sales growth is somewhat behind capacity growth. 2017 ended at about $12B. 2020 is tracking to maybe $32B. That's around 40% annual sales growth. Let's call 2.5 million cars $125B in sales. At 40%, Tesla needs around 4 years to get to the $125B level. Essentially, the back of my envelope says long buyers today will need to hold for 4 years to see a profit based on some semblance of fundamentals.

Stock prices for high-growth companies can be fluffy for a long time. I absolutely agree that current levels are in the realm of absurdly ridiculous, but as long as the underlying economy doesn't crater, the exuberants can be irrational for quite a long time. Can they hold out for 4 years?

>Assuming a 15% net margin for Tesla

Your model assumes a profit margin 3-4x the most profitable auto companies in the world? You do realize Tesla's best ever profit margin was less than 2%, and that didn't come from selling cars, right?

>Essentially, the back of my envelope says long buyers today will need to hold for 4 years to see a profit based on some semblance of fundamentals.

A profit how, by selling their shares to other people? Why would those people buy at that valuation?

AAPL net earnings for 2020 was 30%.

AMZN had almost no Net Profit their entire existence, because they were reinvesting in growth. Once their growth slows, you can expect them to show higher Net Margins.

The key for high growth companies is Gross Margins. The higher the gross, the more they can reinvest. And, the higher their net margins will be once the growth slows.

Tesla is vertically integrated. That means they don't need to share profit with a supply chain to the same extent as the incumbents. Hence, I split the difference between the incumbents and Apple's net profit.

Feel free to adjust the numbers to what you speculate the future holds. You'll get a different time horizon that will likely be even more ridiculous.

> AAPL net earnings for 2020 was 30%.

Apple is not in the auto industry. Their margins are not comparable to auto companies.

> AMZN had almost no Net Profit their entire existence, because they were reinvesting in growth. Once their growth slows, you can expect them to show higher Net Margins.

Amazon did not need nearly as many capital injections as Tesla has over its existence, and acting as though the Amazon story was slowing growth rather than AWS is missing alot.

Why would you compare with Apple, though, instead of other auto companies?

I think for many investors the large appeal of Tesla is in the batteries and infrastructure put in place for charge stations.

If it's about batteries, why isn't then Panasonic stock booming? Panasonic is the one that's actually supplying the technology and building the Tesla's battery factories. However, Panasonic's market cap is less than 5% of Tesla's, and batteries are not even its main business. It seems that the investors value Panasonic's battery technology and expertise at something like 1% of Tesla's market cap.

I'm not sure what exactly you mean by "infrastructure put in place", but I can't imagine running charge stations to be hugely profitable business: gas stations most certainly aren't. They might still be pretty good business, but they clearly are not so good to account for hundreds of billions in valuation.

Your information is a little out of date.

Panasonic will now manufacture TSLA designed batteries, but TSLA will also be contracting other firms and build manufacturing facilities itself.

https://electrek.co/2020/12/27/tesla-tsla-4680-battery-cell-...

It does seem to be out of date, but doesn't change the thrust of my argument. With the advancements of battery technology by Tesla, would you say that Tesla's battery business (which is mostly IP and research labs) is worth more than entire Panasonic's business? I say that's highly unlikely: building a good research lab and coming up with a good new battery design is worth a lot, but not tens of billions of dollars. Even if it was worth as much as entire Panasonic, it would still be <5% of Tesla's market cap. As such, I can't see how Tesla's battery business would explain its huge market cap.

Oh, I don't know. I'm not able to predict anything about Tesla, and I'm not trying to.

My bad for seeming like I was contradicting your argument, I have no opinion on that. I was just clarifying some of the facts.

Because Tesla is only kind of a car company

In terms of base tech, Tesla is more like Apple + BEV than like GM + BEV. Said another way, a Tesla is a supercomputer you can drive around. A GM is a car with an electric motor.

Also, Tesla sales growth is 40% annually over the last 3 years and will likely continue for 5-10 years. GM's might be 1%. Keep in mind, GM is fighting to retain market share. Tesla is taking it away from the incumbents. They really cannot be compared in this analysis. Apple is the closest as a proxy for future P/E.

If the legacy autos spun out their BEV business, that would be the closest comparable.

>Said another way, a Tesla is a supercomputer you can drive around. A GM is a car with an electric motor.

They have an awesome software experience, but they buy off the shelf parts and assemble them into cars, just like everyone else. Nothing about that makes it a supercomputer on wheels.

>Tesla is taking it away from the incumbents

Competitors are already taking EV share back in some markets. Won't be as easy as you seem to think.

I was referring to this supercomputer:

https://heartbeat.fritz.ai/computer-vision-at-tesla-cd5e8807...

I don't see a "supercomputer" in that article anywhere.

If Tesla keeps growing 40% for 10 more years (which would be hugely amazing achievement), in 2030 it will become the biggest car producer in the US, selling something like double the number of the next biggest competitor, GM. I'm not going to speculate on likelihood of this, but consider this: if the optimistic scenario is that future revenues are expected to be twice that of GM, wouldn't you expect Tesla's value to be something like twice of value of GM, additionally discounted by time needed for these revenues to materialize? Alas, the market cap of Tesla is >10x that of GM.

Moreover, the market cap of the biggest car companies have been relatively stable over last 10 years, as the market cap of Tesla was soaring. If the expectation is that the Tesla will eat the automotive market (as it well might), wouldn't you expect the market cap of other companies fall accordingly? As of right now, it seems like the market expects insane increase in revenues of entire industry, not just Tesla, which doesn't seem likely to me: Tesla's growth is almost certainly mostly predicated upon cannibalizing sales of its competitors.

I think Tesla is great company, and I think Elon Musk is exactly the kind of person we need more of, if we want to have bright future instead of stagnation or degeneration. My only point is that Tesla's market cap seems to be greatly inflated, by factor of at least 5x, and possibly even 20x.

Market cap is the wrong metric for comparing the value of two companies, Enterprise Value is the right metric.

The Enterprise Value of GM is $150B. There's <4X difference between the two, not >10X.

Enterprise Value can be incredibly misleading for companies with large financial arms. GM has a large financing arm that provides loans to consumers which is what makes up the vast majority of their total debt. If you EV correctly captured what you wanted, companies should make as many loans as possible.

That's nonsensical.

If Company A borrows $10 from the bank and then loans $10 to Joe, it's got $10 in assets and $10 in liabilities on its balance sheet.

A fair price for Company B to acquire Company A is $0 in cash changing hands. That's the market cap.

But on the books for Company B it will show a cost of $10 to acquire Company A. It had to assume a debt of $10 to gain assets worth $10. To company B, assuming a debt of $10 has no material difference from paying out $10 in cash. So $10 is the true value of the transaction.

> If Company A borrows $10 from the bank and then loans $10 to Joe, it's got $10 in assets and $10 in liabilities on its balance sheet.

Yes, it's equity hasn't changed. However, the debt on its balance sheet has, so the enterprise value formula of EV = market cap + debt - cash now has, because the loan asset won't be counted as cash, but the loan liability will be counted as debt.

That's why no one calculates enterprise value for bank/insurance companies. It doesn't provide any insight or meaning.

> Tesla's growth is almost certainly mostly predicated upon cannibalizing sales of its competitors.

Yes, this is a large element of the reason that Tesla's stock price has grown quickly (though from here, who knows) while the incumbents have not.

A notable difference that plays into the discussion is the profitability of the business itself. Tesla should be able to achieve a ~30% gross margin. The legacy companies come in around 15%, once you expense their R&D spend (it's hard to find, I did it once. They amortize it over car sales on their P&L.). A significantly higher gross margin is a significant competitive advantage, but also enables higher net earnings. In principle, P/E is founded on 'anticipated net earnings'. Clearly, buyers today (whether they are aware of it or now) are anticipating Tesla to be greatly profitable in the future.

In my mind, there is no rational thesis that justifies the current trading levels. Buyers today couldn't possibly be thinking through the risk they are taking, unless they know they can hold for many years, and through stomach-churning gyrations. That said, if any NHers have a thesis that they've penciled out and which determines, 'yes, buy TSLA at $860 (1:40PM EST 1/8/21)'. I'd be very interested in seeing it.

> Clearly, buyers today (whether they are aware of it or now) are anticipating Tesla to be greatly profitable in the future.

Right. To justify the current trading levels, the expectations must be that it will capture significantly bigger part of its market than any of its competitor, and it will have better profit margins than them. I simply can't see that happening over long-terem horizon. I can definitely believe that Tesla will capture large part of the market, and in fact that it becomes number one automaker. I can also believe they will significantly enjoy higher profit margin than their competition. I just can't see any path to both at the same time: this would imply having some enormous advantage that none of its competitors can get even close to. Since the competitors are not bumbling morons, I think it's unlikely.

Such an advantage could be well-integrated self-driving capability, assuming they can make it work. Everyone seems to be assuming that this will be a commodity, but it might be very hard to achieve.

If e.g. only two companies in the world achieve it in a reasonable timeframe, those companies will be able to price it such as to capture a large portion of the value. This is a huge market, and Tesla would already have millions of vehicles deployed.

The comparison to Apple or a software company only makes sense is if an incremental sale requires very little investment. That's not true for Tesla though. They have to scale up massive factories to meet demand, while Apple can quite easily scale up iPhone production through contract manufacturers. Apple can also scale up their subscription revenue on TV, Music, Arcade and what not with zero incremental investment. These two companies are not comparable at all. Apple has very little CapEx on its books.

because they can sell 10k of software upgrades?

Tesla is worth like 700/share in 4 years if everything works out with their factories and expansion. If they hit the lottery and magically figure out self driving, then they will 2x-3x, because they can have better than software company margins.

I don't fault the crowd for thinking they will have self driving cars in a few years. I don't see it really happening outside of a few really well managed cities.

And Toyota can sell higher "trim" version of their vehicles, which also has extremely good margins (as higher trim are not significantly more expensive to manufacture than base, just like software upgrades). But the issue is not about margin on some specific upsell, rather the question is about the entire margin on the whole business. Can Tesla make as good or better cars as competition for lower prices, and keep this advantage for a while? Very much possible. Will their advantage be 10x, like the current market cap suggests? In my opinion, highly unlikely.

I have no idea. But you can also sell an aftermarket 10k upgrade of "trim". I don't think toyota can offer that.

I don't think the bull case is very strong. But I do think the previous bear cases of "they cant run a factory", "they cant scale production", etc are all mostly disproven.

I would describe myself as bearish on their self-driving future as something I could trust to sleep or do work in. The recent videos are impressive and exciting. I hope they succeed.

Of course Toyota could offer that. There are plenty of independent car shops that will do all kinds of stuff to your ride, from visual trim replacement, repainting, mechanical tuning, engine swaps, aftermarket parts etc etc. Toyota doesn't bother, because there isn't much money in it. An independent tuning shop can make $1M/year in revenue, and a thousand of such shops can make a total of a $1B. But $1B/year of extra revenue is paltry change for Toyota.

Anyone can offer 10k aftermarket upgrade, but the real question is how many will buy it.

> But I do think the previous bear cases of "they cant run a factory", "they cant scale production", etc are all mostly disproven.

Yes, I'm very bullish on Tesla, mostly because I have great trust in Musk's ability to run business. However, my bullishness doesn't extend to valuing Tesla today more than next five of biggest auto makers combined.

>because they can sell 10k of software upgrades?

Maybe, depending on what those features do. But all you are doing is moving the car into a higher market segment, with fewer potential buyers. Other manufacturers do this, too.

How many people are buying a software upgrade for their car that is worth close to a new car? None of this scales outside of Tesla's small incredibly wealthy customer base.

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