Unlock: Tesla (TSLA) – Don’t Be Short Sighted
In Jaguar, we are bullish on Tesla. Like every other research we do, it comes down to understanding basic building blocks of fundamentals. In case of Tesla the views are driven by increasing consumers adoption and early phases of product cycle. In Jaguar 3Q18 Outlook issued on July 1, we provided clients an extended detail view on Tesla by attacking 5 key bearish points one by one. Below is that full article.
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Don’t Be Short Sighted
July 1, 2018
If there was big cap stock that was more on spotlight in past 3 months than others, it was Tesla. As you all know I remain long Tesla common. We first bought common many years ago at $26. Rode it higher all the way to $145. Then switched to leap calls and traded several times in and out. Last year I went long common again and sold naked puts underneath the stock on dip to $280, which have now nicely expired worthless. I still remain long common. One of my highest conviction trades, and I believe stock is heading to $1,000+ per share over time.
What is one common thing about all disruptors in early phase of hyper growth? Too many skeptics!
The skepticism comes in many forms. There were skeptics in Boeing when stock traded at $65 and Dreamliner had issues with brakes and wiring. Now trades at $335. There were skeptics in Twitter at $18 when MAU growth had flatlined. Now trades at $45. There were skeptics in Alibaba when stock went down from $80 to $60 after the IPO over concerns about accounting. Now trades at $185. There were skeptics in Netflix when stock crashed to $55 after company raised streaming prices. Now trades at $391. For as long as I can remember in all of past 20 years there have been nothing but skeptics circulating around Amazon. The list is much bigger and history is full of such examples.
What is the most common thing about all these skeptics around disruptors? Short sightedness!
I have said this many times before in chat room, trade ideas, webinars and live conferences. The greatest quality that separates a great investor from average crowd is ability to separate noise and news. It is a skill that one learns only with experience over time, after having done many blunders and learned from them. Short sighted people are easily swayed by noise. They will point out issues with braking systems in Boeing but lose sight of $400 billion Dreamliner backlog order. They will point out Facebook privacy issues but lose of grand scale secular shift in advertising dollars from print media to online. They will point out Netflix spending too much money on original content but lose sight of consumers increasingly shifting to on-demand media resulting in cable cord cutting. They will point out Amazon never producing any profits and trading at stratosphere PE but lose sight of ecommerce trends. By the way, right now there are too many skeptics in Mercadolibre pointing out higher shipping costs while losing sight of Latin ecommerce still in infancy. The short sightedness blurs the grand vision about mega trends, disruptive nature of leading businesses, and consumers behavior.
The inability to generate any profit is one of the most common view presented by people with short-sightedness about disruptors. They believe in Price/Earnings ratio religiously and shut themselves out from all other aspects of understanding a business. Let me ask you this: Which one is better business to buy? One that has mature industry, flat YoY Sales growth, enjoys high margin and fat profits. Or the business which is growing sales at +25% YoY, industry is far from maturation, but has low marigns and doesn’t make any profits as company reinvests all its capital to capture as much sales as possible?
What do skeptics complain about Tesla? Everthing while losing sight its disrupting transportation sector.
Tesla Production Goals –
Bears: Tesla has history of missing production targets. Model 3 will not reach 5,000/week. Tesla doesn’t even have proper assembly line. They are using a tent!
Bulls: Model 3 didn’t even exist until summer 2016. Within one year over 400,000 people had already made deposits. First delivery started in August 2017 and ever since production is gradually rising each month with 38,000 already with VIN registration. Tesla now sells more cars in California than luxury automakers BMW and Mercedes. Do you really want to bet against this mega trend?
Tesla Capital Needs –
Bears: Tesla will run out of money soon with losses mounting each quarter and Free Cash Flow negative. They will have to do another secondary share offering specially if they don’t meet Model 3 production or launch another model.
Bulls: Why would capital raise be so bad? It shouldn’t be a question of IF but rather WHEN and the net result will be a big boost is balance sheet liquidity to fund aggressive growth targets. Tesla bonds are trading 13% below par. Tesla also recently announced need to open another factory in China with partner Panasonic to boost battery production, as well as need for additional capacity to produce Model Y, the new Roadster as well as Semis. Bond market is already pricing equity raise and every analyst is already baking in assumptions around it in the projections. I believe an equity raise will actually be a positive de-risking event to propel stock higher as odds of meeting production goals will improve.
Tesla Autonomous –
Bears: Tesla autonomous is a joke and cars crash into objects with reports of accidents appearing at least once per month.
Bulls: More cars crash and people die on daily basis while texting and driving, spilling hot coffee, or putting make up during traffic jams. The truth is Tesla’s advanced driver assistance system (ADAS) has materially improved now reaching level 3 functionality which recently allowed company to complete a test trip from LA to NYC. Full autonomous launching in August is testament of this improvement years ahead of competition. Ultimately Musk wants to ADAS to reach max level 5 functionality. For few accidents that have been reported, they are still far less than GM Cruise 105 incidents and 63 Google Waymo incidents all in just state of California. The short sighted bearish argument once again loses sight of big picture that since December 2017, more than 30 companies have filed for Autonomous Vehicle Testing Permits with the California DMV, an increase of 150% through May 18. New filers run the gamut of established OEMs, component manufacturers, tech, ride sharing, and start-up companies. This industry is moving towards autonomous and Tesla has the lead.
Tesla Valuation –
Bears: Tesla is a car company and should be valued like GM or Ford.
Bulls: The stupidest bearish argument one can come up. The fact is Tesla is blurring the lines between consumer electronics and durable goods product cycles with an attempted brisk pace of new vehicle rollouts and ongoing over-the-air software updates, all of which are creating an eco-system or moat around the business. One of the biggest misunderstood things about Tesla is being strongly tied with tech (software, hardware), Tesla will significantly reuse and leverage from the Model S development program which would accelerate future product rollouts. As a result this becomes disruptive force for transportation sector making it much harder for competition to catch up.
Tesla Not for Common Person –
Bears: Tesla largely remains a luxury car. Model 3 was supposed to lower the price deep enough to appeal to masses but that didn’t happen. Without Tesla moving into lower tier segments it cannot grow fast enough.
Bulls: To certain extent this is true. Tesla buyers remain largely luxury car buyers and with introduction of Model 3 dual motor that is priced at $70,000 it is certainly not for common person. But once again this arguments misses big picture. Starting from first roadster pricing has come down from $125,000 to $70,000 in past 8 years along with improving battery efficiency. Can’t underscore the progress. Within luxury, Model S has been an unmitigated success having taken significant share of the luxury market with the Model X augmenting that success. Just ask German automakers how badly they are losing market share. Luxury is 5 million global annual addressable market size in which Tesla is killing it. Tesla doesn’t need a desperate attempt to move down to lower tier segments to continue to grow.
