- Tesla investors have been preoccupied with the Model 3, Elon Musk’s behaviour, and the promise of profits – but they have been overlooking Tesla’s potential surge in revenues.
- Tesla could see massive topline improvements over the next year and a half.
- If Tesla can ride out its current assorted crises, this ocean of forthcoming cash could take the company to a new level and undermine the bear thesis.
If you’ve been closely following Tesla and CEO Elon Musk for the past six months, you could be forgiven for thinking that the company is on the ropes and that Musk’s days are numbered.
There was the first-quarter earnings-call outburst. The Twitter feuds. The mini-sub fracas. The open letter begging Musk to cool it.
Meanwhile, Tesla’s business continued to chug along. The carmaker will report second-quarter earnings in a few weeks, and while the “earnings” are again expected by analysts to be extremely negative and Tesla’s cash-burn anticipated to be staggering, revenue should continue a trend.
Tesla has been adding about $US200 million to the topline every quarter for several years. In only one of those recent quarters – Q3 2016 – did the company post a profit, due largely to the sale of a zero-emissions credits, which Tesla can stockpile thanks to its status as an automaker that sells only electric vehicles.
Forgetting about the company’s solar and energy-storage businesses, automotive revenue has come via the high-priced Model S sedan and Model X SUV, both of which sell for around $US100,000 on average. Last year, Tesla delivered about 100,000 examples of these vehicles and should repeat that in 2018.
This brings us to the Model 3, Tesla’s less expensive and much-troubled vehicle. After launching in July of 2017, the Model 3 has endured a fraught birth, routinely failing to hit production targets. Teslas celebrated a run-rate of 5,000 Model 3’s per week at the end of June, a pace that may or may not be sustainable.
But lost in the brouhaha over Tesla’s woes as a manufacturing enterprise is the simple fact that if 5,000-per-week could be tough to sustain, 2,000 per week should be far easier. And the Model 3’s Tesla is now building aren’t the el-cheapo $US35,000 versions; they’re the costly upmarket trim levels, with the most expensive topping out at nearly $US80,000.
Over a six-month period, that translates into $US2.4 billion in revenue – or, by my maths, over ten times in topline improvement in two quarters, rather than a time period of more than two years at Tesla’s historic rate of growth.
That’s a tsunami of cash on the way for Tesla, and I’ve been conservative in my estimates. Very conservative.
There’s no guarantee that the surge in revenue will convert to bottom-line profits. Tesla might still have to raise funds in 2018 or 2019. But the intensified cash-flow is going to be an issue for Tesla bears. A major issue.
Despite Tesla’s wild ride in 2018, the stock is flat.
Since the beginning of 2018, Tesla stock has surged and retreated, but headed into Q2 earnings, at around $US320 per share, is only down 1% year-to-date.
Over a 12-month period, it’s down 2.5%. If you move out five years, it’s up over 160%, and all-time, it’s returned more than 1,000%.
The takeaway here is twofold. For the bulls, the situation is tricky because much of the upside could have passed, leaving Tesla as a less go-go investment for the future, even if revenues explode and profits arrive.
For the bears, it’s clear that wagering on the bad news has been sucker’s bet. Tesla’s big institutional investors haven’t raced for the exits, and shares have fended off many waves of negativity.
Both sides have a challenge, but for the bears, it’s really a game of beat-the-clock against the topline. Tesla could lose 50% of its pre-orders for the Model 3 and still have 200,000 on the books. And sustaining production for the vehicle at a modest 2,000 per week still means about $US5 billion in additional annual revenue.
That might not get it done with some of Musk’s more ambitious goals – semi-trucks, pickup trucks – but it will be tough for naysayers to avoid drowning in a small sea of new cash.
Reviews of the Model 3 have been mostly positive.
I drove the Model 3 earlier this year and thought it was terrific. Other reviewers have been similarly impressed.
There have been some complaints about build quality, but there were complaints about build quality for the Model S and Model X when they first launched. And the majority of Model 3 buyers, panel gaps and other manufacturing issues aren’t going to register – as long as the car serves up its Tesla-ness, looking cool and high-tech, owners will be delighted.
Even if stuff goes wrong, I suspect Tesla will continue what I like to think of as its infinity warranty and fix any and all problems.
Counter to what some Tesla super-enthusiasts believe, the company isn’t going to take over the world. But if it continues to sell vehicles that customers adore, for the most part, the cash flow won’t just increase, it will become very dependable.
Elon Musk is important, but is he really great?
Tesla often cites “great man risk” in its financial filing, addressing the possibility that losing Musk would be a disaster for the company.
Musk just signed on for another 10 years, and the Tesla board has tied his pay package to a $US650-billion market cap (it’s just over $US50 billion now), so his departure probably isn’t imminent.
Folks who are exceptionally passionate about Tesla have a hard time separating Musk from the company – an investment in Tesla is a stake in Musk, the argument goes. And while that might have been true in Tesla’s seat-of-the-pants early years, the company is 15 years old. If it can actually hit 250,000-500,000 in yearly Model 3 production and maintain Model S and X at 100,000, it’s cash-flow pattern will be like any other significant automaker.
The business won’t be about vision – it will be about balancing production against demand and trying to figure out to convert a gross-profit margin to a net margin.
This is why Musk’s out-there conduct over the past six months hasn’t really dented Tesla’s stock price: he matters, but in the big picture, he isn’t the entire company, which now has over 30,000 employees.
The Tesla machine now runs on its own.
Once they overcome their cash issues, carmakers can be very durable as businesses.
There haven’t been many new car companies created in the past few decades; Tesla is pretty much the only one with major ambitions that’s survived and prospered.
Little startups have risen and fallen, but all the big players have hung in there. Even the bankruptcies and bailouts of General Motors and Chrysler required the one-a-century obliteration of the US auto market – annual sales plunged from 17 million to 10 million in a year – and a credit crisis during the Great Recession.
Before that, dozens of global car companies rode out recession after recession. Even struggling automakers, such as Mitsubishi, have avoided being completely wiped out.
True, the companies all have better economics and more scale than Tesla. But Tesla is getting there. Again, if Tesla can stabilise its balance sheet, it will find that its relative domination of the luxury electric-car market is a big plus.
Tesla’s pitch of it being a Silicon Valley tech company will also fade as it operates, beneficially, more like an automaker. Car companies aren’t creamed overnight like software firms are; automobiles are big and expensive and designed to last for decades.
Software is cheap, if not free, and ephemeral. Excuse the esoteric pun, but much of Silicon Valley is a castle of sand, financially. Car companies are fortresses of iron.
When Tesla starts to build new factories, it will be investing in a multi-decade framework, a strategy that’s justified in an industry where some plants built in the early 20th century are still operating. Take Ford. The company is 115 years old and made it through two world wars.
Or don’t take Ford. Take Toyota: 80 years old, a giant that rose from the ashes of a world war.
Car companies are very, very tough customers.
Tesla trades on news, but eventually it will trade on fundamentals.
Tesla shares can swing up and down pretty wildly, but a lot of that action can be attributed to how much news the company generates, compared to the rest of the auto industry.
The recent obsessive focus on Model 3 output is a good example. Nobody in the “normal” car business pays any attention at all to production, unless for whatever reason big supply-demand mismatches development, leading to well-understood maneuvers around inventory and pricing.
Since the beginning of the year, however, Tesla-watchers have been keeping track of seemingly every single Model 3 that has rolled off the assembly line.
Tesla’s unenthusiastic opposition to a possible unionization effort at its Fremont factory has also garnered outsized attention. Fremont was a union plant when it was jointly operated by GM and Toyota in the 1980s. It’s reasonable to assume that it could go union again, given that California isn’t a “right to work” state (all the new car factories that have been built in the past few decades have all been constructed in the US South, and none have been organised by the United Auto Workers).
It’s no mystery, either, what a unionized Tesla would look like: the UAW would use the template contract it negotiated with the Detroit Big Three the last time around.
But the Tesla unionization effort is clearly going nowhere. It doesn’t matter how you feel about organised labour – this is just a fact. Compare Fremont with Volkswagen’s plant in Chattanooga, where a unionization effort failed in 2014. Back then, the effort moved through all the usual stages prior to the vote. Tesla may or may not be discouraging collective bargaining, but a serious unionization push hasn’t managed to take shape yet.
So that news should obviously be discounted, at least until the organisers make better progress (which they might, as Tesla’s business becomes more solid and sustainable).
A lot of hopes and dreams are invested in Tesla, so small fluctuations in sentiment can have major effects. Confidence and panic live side-by-side. But if Tesla can get hundreds of thousands of additional cars on the road, the signal will become louder and the noise will quiet. The company will become more boring. But serious investors will have fundamentals to concentrate on.
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