"Tesla also expects to achieve full GAAP profitability in Q3"
That would be a massive hit at skeptics as Q3 is almost around the corner (I wasn't even expecting it to happen this year), but even being a fanboy myself I still doubt such bold statement.
I hope they do become profitable, but I'm skeptical they will.
1) Their losses are growing, not shrinking. From March 2017 to now, they lost $330M, $336M, $619M, $675M, and $785M. Maybe they hit a tipping point and there is an abrupt change, but it seems like the more natural trajectory would be for losses to become smaller and then turn into profits.
Tesla is a really cool company, but it's hard to see a future where they justify their share price. Let's say that Tesla becomes the next Toyota 15 years from now. Toyota is only worth $213B. So, the kinda max value for Tesla is around 4x their current price. So, under really rosy conditions, Tesla appreciates at 12% per year over the next 15 years. That's not bad, but the likelihood that Tesla is the next Toyota is very small.
Let's say that Tesla is incredibly successful and becomes the next Volkswagen, Daimler, or BMW (the #2, 3, and 4 auto makers by market cap). They'd be a $106B, $85B, or $73B company. That doesn't leave much for price appreciation over their current $51B market cap.
Maybe Tesla can make a company that's way more profitable per vehicle and sell so many vehicles. But that's a bit of a moon-shot.
It seems more likely that Tesla will become a company like Subaru ($26B), Mazda ($8B), Nissan ($43B), Ford ($44B), Hyundai Motor ($40B), Fiat Chrysler ($34B), Renault ($32B), PSA Peugeot Citroën ($22B), Suzuki Motor ($26B), GM ($51B), or Honda ($60B). Those are all very successful auto companies. If Tesla becomes the next Mazda 15 years from now, that will be incredibly bad for investors. Basically, if Tesla doesn't become the next Toyota, it seems hard to believe Tesla won't underperform the market by a lot.
It's possible that Tesla will become the next Toyota, but unlikely. Comparing Tesla's market cap with that of most auto manufacturers makes you realize that investing in Tesla isn't just betting that Tesla will become a great volume car company like Mazda. They have to become the car company.
When investing, it's also important to note that money later is less valuable than money now and account for risk. Tesla is being priced like it's making $6B/year today and it's future is certain.
Beyond that, is the automotive industry long for this world? People are re-urbanizing and city traffic is only getting worse. Self-driving vehicles will mean that being driven unlimited places might fall to $50-100/mo which is significantly less than the $400+/mo of car payments, insurance, gas, parking, maintenance, etc. Why should I spend $631/mo for a $35,000 car plus insurance, gas, parking, maintenance when I can just get driven around for a fraction of that cost? Today, Uber's help is more limited since the human driver costs a lot of money per mile. If that future comes to pass, there will be a lot fewer cars manufactured and bought which limits Tesla's value.
If an autonomous car is serving 25 people a day, that's a lot fewer vehicles that need to be bought. World vehicle production is around 90M/year and Toyota and Volkswagen are 10M of that each. If the demand for vehicles falls to 4% of its current demand, that's only 3.6M vehicles per year. Even if Tesla makes 100% of those vehicles, they don't come close to being the next Toyota or Volkswagen. Even if an autonomous vehicle only serves 10 people a day, that cuts the vehicle market down to 9M. Even if an autonomous vehicle can only serve 4 people a day, that cuts the market to 22.5M. The future market for vehicles might be pretty small compared to the current one and so even if Tesla hits a Toyota or Volkswagen-like 10% of the market, it might not be a large market.
And self-driving services are likely to have stiff price competition. Unlike an Uber competitor that has the network effects of having drivers already signed up, it's relatively cheap to blanket a city with self-driving vehicles. $20,000/mo isn't a huge run rate to to buy 50 vehicles at $400/mo and that will let you place a vehicle within a short distance of everyone in a city like San Francisco (47 square miles). You could position them so that they're usually less than half a mile away to pick you up. $20,000/mo isn't a huge run rate to get your service started and you can buy more vehicles as you get riders. So, even if you think that Tesla might be that self-driving network and will make profits that way, I think it's more likely that the space will have a lot of competition that will push margins down. Waymo and GM/Cruze are well on their way. Nissan and Toyota are expecting to enter the game in a few years. Uber wants to be in this space.
It just seems like Tesla is more likely to become Mazda than Toyota and that the auto industry might be facing a large market-shrinking threat in self-driving cars. As such, it's hard (for me) to look at Tesla's market value and see the potential for a lot of appreciation over the long term. They're already worth more than most successful auto makers.
All good points but, I think you're missing one (extremely unlikely) scenario, which is the bet that Tesla to cars will be like Apple was to phones. Not just supplanting existing phone manufacturers, but redefining what the market means and how big it is.
Nokia was a $90b phone company in 2007. The best-case scenario for a new phone company could in 2007 be expressed as a topping out at Nokia's size (Toyota in your example), but it'd be a moonshot. It'd more likely be an Ericson or Motorola, whose phone divisions weren't half as big as Nokia's. So the best case scenario is $90b, and more likely to be around $30b. And that would've made sense, until you figure Apple drove a market cap approaching $900b, mostly on the basis of its phones, all within 10 years of 2007.
So there's something to be said about the possibility that Tesla doesn't just supplant Toyota to become the car company, but also redefining cars and the size of its market, just like with smartphones. I see some people making that bet. That having been said, I personally think the chance of that happening approaches zero. The points you make are very apt. Self-driving cars means we can increase utility rates of cars (which sit still for 90% of the day) from 10% to say 90%, and that will completely destroy sales volume.
The problem with this is that for many people, cars are already one of the biggest expenses and they're at their limit with what they can spend on their car. Apple's success was possible because a lot of people afforded the extra $600-800 every 1-2 years. You cannot really expect people to spend an extra $50,000 every few years, that won't work for most.
This thought crossed my mind too but then remembered an old stat. The difference is Apples margin. At one point they had something like (these are estimates as I couldn't find on a quick google) 20% smartphone market share for 90% of the profits made from the market.
Tesla is unlikely to take that margin or share of profit from the market.
I feel the bet on Tesla is Elon Musk. And I recognise there is a cult following but consider, how many people in the world have a better chance of opening a new multi-billion dollar category within their company from scratch? If you are going to be on someone, he's not a bad choice.
I'm not sure how that last part plays out. If you need 100 cars active at rush hour and 10 active the rest of the day, then sure those 10 might have 90% utilization but the other 90 wont.
Well, suppose you have a fleet of 100 cars. In the morning and evening, 100 people travel for 1 hour to work and back during rushhour. That's 2 hours in total, or 100% utility of the fleet during 8% of the day.
Now suppose that every hour of the rest of the day, there's only 10 people making a trip of 30 minutes. That means there's only 10% of the traffic volume compared to rushhour on the road. But you're seeing 22 hours of two groups of 10 people making a trip every hour. That's 440 trips.
Now suppose that the two groups of people, rush and non-rush, all used their own cars. You'd have 100 cars for the rushhour group and 440 cars in the non-rushhour group. You get to 540 cars needed.
Now suppose the two groups shared vehicles. You just need 100 cars still to make the same amount of trips.
Under these (made up) assumptions, you can reduce the amount of cars needed by 5x.
Then there's the notion that you can get dynamic pricing, e.g. look at Uber, but for semi-public transport. This incentivises people and companies to distribute their travel in a better manner, which also allows a system where producers of congestion pay for it. Thereby you can distribute load better, increase utilization, decrease the number of vehicles needed even further.
But indeed, you're unable to get to 100% utilization because demand fluctuates during the day. But even increasing it from 10% to 20%, or 30%, would introduce massive changes to the market size.
I agree with most of your post, but here's where I disagree:
Yes, new car consumption will likely decline in the USA and Europe, but in the coming decades, more folks in China and India (and elsewhere) will enter the middle class and start demanding car services. In addition, as the cost of car services falls (due to self-driving), the quantity demanded will increase.
So I don't think the future market will be as small as you've projected. It might even increase.
China will want to manufacturer most of those cars themselves. India probably too but they're not as aggressive about it as China is. I doubt any of the large car manufacturers can make much more money in India/China than they're already making (unless via local subsidiaries).
> Tesla is a really cool company, but it's hard to see a future where they justify their share price. Let's say that Tesla becomes the next Toyota 15 years from now. ...
There is one future that I can imagine, in which Tesla is a wildly profitable buy today.
If the company is using the car business to bootstrap itself into a space manufacturing company. I honestly think that this is the only reasonable explanation for some of the weird decisions that Tesla is making on the production line - trying to get to full automation, for example.
At around $1B negative cash flow a quarter, with a little over $3B in the bank, they _have_ to do this. I'm not a bond expert, but the debt markets seem tapped out for them, and another stock offering wouldn't look so good either (but is likely).
The skeptics should be saying, "what a coincidence that they project to achieve profitability _just_ before they go bankrupt."
I have no idea why people talk about Tesla going bankrupt. It will never happen in this liquid market. Even Uber raised $10bn from SoftBank. There is a ton of liquidity in the market and a lot of it is coming from middle East sovereign funds. It should be easy to do a stock sale with that kind of revenue and demand numbers.
As someone mulling buying a Model 3, I'm keeping an eye on their solvency. One thing that occurred to me is that, to expect a bankruptcy, you'd have to completely disregard the efficient market hypothesis. Sure, there are plenty of crazy fanboy retail investors out there, but there SHOULD be more than enough shorts if that's truly where the smart money was.
Tapping out capital is a "Musk equilibrium." If there's too much runway, he considers it inefficient use of available capital and invests that extra available capital in some new project.
He operates close to the edge intentionally. It's a risky strategy that could easily blow up in his face, but it has also paid off very well in the past.
If they somehow had a bunch of extra cash in the bank right now, you'd find Musk simultaneously pushing hard on, say, Model Y right now, too.
Depending on how you want to view Musk's ambitions, he wants/needs to get Tesla big before the EV market is flooded with large scale competition and or he's looking to accelerate a switch to renewable energy and away from the murderous fossil fuel, gasoline burning nightmare we're currently living with. Regardless of what one believes about Musk, speed is critical here.
Tesla needs to get very large if it's going to compete with GM, Ford, BMW, Mercedes, Toyota, etc. long term in EVs. They need a certain minimum scale to survive as a meaningful volume independent auto maker.
That would be amazing if they did achieve GAAP profitably, considering that GAAP earnings include stock-based compensation, non-operating expenses, and R&D expense.
OTOH, GAAP because generally requires R&D to be expensed in the period incurred, Tesla may really be saying that R&D expenditures are expected to drop to near $0 in Q3 (R&D being their biggest non-operating expense). That should worry investors if that's really what's happening.
I’m a Tesla skeptic but at this point they just need to put cars on the road. They can ramp up R&D later. They’re pretty far ahead of their competition right now so can afford a pause.
"Tesla also expects to achieve full GAAP profitability in Q3"
This is essentially saying "we don't expect to go insolvent". But no company would announce that they expect to go insolvent, so the statement is mostly meaningless.
That would be a massive hit at skeptics as Q3 is almost around the corner (I wasn't even expecting it to happen this year), but even being a fanboy myself I still doubt such bold statement.