January 30th, 2020 by Frugal Moogal
Below are a number of top takeaways from Tesla’s latest shareholder letter and conference call. Perhaps these thing stood out to you as well. Perhaps they will light a spark in your brain.[embedded content]
Retail Investors Versus Professional Analysts
This isn’t something I would normally lead with, but it was something that stood out to me a ton today. In the past couple years of earnings calls, as Tesla started to take “retail investor” questions on the calls, those questions were often looked upon with scorn. The Wall Street analysts would kind of scoff at the questions that were asked.
I have always appreciated the retail investor questions. Often, the analysts that have been chosen to ask questions simply tried to pick apart tiny things that happened in the previous quarter, but didn’t look ahead much at the growth strategies, which was always the part that made investing in Tesla so interesting.
The analysts that always seemed to me to understand Tesla best — like ARK Invest — seemed to never be the Wall Street analysts that got to ask questions, or chose not to. And before people in the comments say that I like ARK Invest because they are giant bulls, it’s not that — I like them because they share their research and have analysts from multiple industries examining Tesla, not just someone who usually looks at auto manufacturers.
Anyway, instead of the usual derision, Adam Jonas started the conversation off by noting that the retail questions were excellent, and then followed that up by asking if Tesla vehicles would be fitted with user terminals compatible to the Starlink terminal.
Honestly, while I thought this was a really strange question, I think that his question was his attempt to try to expand how he looks at the company, beyond as a simple automaker. I didn’t love the question, but I think he was trying to see how future synergy between Tesla and SpaceX may reduce costs for Tesla to be connected to data. Good on him for trying, I guess. [Editor’s note: From my experience, Jonas has a long history of this. For whatever reason, he likes asking wild, outside-the-box questions. Sometimes they seem odd, to put it nicely, but other times he opens up a highly informative answer. I recall him being the first one to phish out of Elon the early stages of a plan for a Tesla robotaxi fleet. I’m not saying I’ve been a fan of his analysis, but I do think he’s always tried to ask the visionary, long-term questions as well as the more typical Wall Street stuff.—Zach]
In the last question by Joseph Osha, who asked about the plans for Maxwell Technology, Musk flat out said that some of the retail investors have put together some of the pieces of the puzzle, and Osha flat out said, “I shall have to read the blogs more, thank you.”
Tesla wasn’t taking a victory lap here on all these analysts, but it’s fascinating that pretty much all of them have been so wrong about the stock, and it came through how coming at Tesla with an open mind gives you a much better view of the company.
So many analysts were certain that the Tesla story was the story of an automaker that would fail because that’s what new automakers do. And they were so certain that the “big guys” could just crush Tesla at any given point in time. And now, so many of them have been proven wrong (with Tesla’s financials as well as the stock market showing that) that it felt like there were a lot of tails tucked between their legs. Many of these analysts boasted current stock price predictions less than half what the stock was in after-hours trading and all day today. Being so wrong on a stock that they have publicly stated they were confident was going to fail must sting.
Not to pat myself on the back here, but when I started writing about Tesla for CleanTechnica, I owned just a few shares of stock, and I was certain that I was going to discover through my research things about the stock that made me question its value — I have with every other investment I have made, and that’s good. I find that if you don’t know both sides of a story, it’s tough to really understand what the debate is about. And the thing that I kept finding with Tesla was that the bear stories did not add up with what Tesla was trying to do, and instead of actually analyzing that, so many Wall Street folk just parroted the same information.
Why Don’t You Spend More Cash?
It struck me as odd, after so many quarters of analysts arguing that Tesla was burning cash and wouldn’t be able to keep the lights on, now they are saying that they should be spending more money to ramp production faster and fund acquisitions. My favorite comment of the entire call came after Dan Levy asked Musk why they shouldn’t raise capital to pay down debt or make acquisitions, specifically ones that could benefit Tesla’s battery or autonomy goals.
After a slight pause, Musk replied with, “If you know about any acquisitions, we’d love to hear about them. Yeah, sure, sounds great. Who should we acquire?”
After Levy awkwardly replied by stating that they should consider acquiring other autonomy-focused companies, Musk just simply states, “We’re not aware of anyone we’d want to acquire.”
This is the perfect highlight of why so many of the Wall Street analysts don’t understand the company. A company like GM needs to acquire an outside company like Cruise to bolt onto their existing company to create their own autonomous division.
Tesla doesn’t work with traditional divisions, so purchasing a company doesn’t create a new product or even necessarily accelerate what they have. If Tesla can find a product worth purchasing, I expect they will make a purchase.
Speaking of Cash…
Unless I totally missed it — and I may have, so tell me in the comments if I did — Tesla didn’t talk about its deal with FCA for Europe at all in the call. Their statement about how their current cash flow would allow them to continue to expand at a reasonable rate made sense, and I wonder if the money from the partnership is expected to go straight to capital expenses this year. If it is, I’d expect Tesla can remain profitable throughout the year.
Model Y is Early, But…
Model Y is ramping as we speak, which I and anyone paying attention expected, but Tesla only guided for 500,000 vehicles to be delivered in 2020. When you consider that if they just matched Q4 production levels, they would only need an increase of 52,000 vehicles to reach 500,000 total, this seems too conservative.
What I was surprised about is that everyone was good with this! While this is a nearly 40% increase over the low end of guidance for 2020, I’m used to Tesla making bold claims, and was expecting to see them claim that they would produce at least 600,000 vehicles throughout the year.
Which, by the way, wouldn’t even be a crazy claim. 600,000 vehicles would be current Fremont capacity levels and 152,000 from Shanghai, or an average rate of 3,000 per week, and we would assume no increases of capacity for Model Y in Fremont. In fact, Tesla’s “Vehicle Capacity” guidance in the shareholder letter states that they could do 640,000 next year if everything is running at full capacity, and they expect to extend Fremont to 500,000/year capacity in the middle of 2020, which means full capacity would be 690,000.
If you want to see how far this company has come and how much it has changed, this is the biggest indicator to me. A few years ago, I feel like Musk would have looked at the data and said that they would do 650-690,000 cars this coming year — the peak of their capacity. This is what they often did with the Model 3 ramp that got them into a bit of trouble.
Instead, they are claiming they expect to hit a number that is about 72% of their anticipated capacity for the year. If they exceed this number, as I expect they will comfortably do each quarter, expect the bear thesis of dried up demand to start to go away.
Also, Model Y…
… is far more efficient than everything. The updated EPA range is incredible, and I can’t wait to find out what they did to get the larger Y to have a longer range than the Model 3 had for so long. Tesla’s efficiency advantage is why I think the stock is valued as it is, and when you see the Ford Mustang Mach-E, which is going to apparently compete with the Model Y, has efficiency that is more than 25% less than the Model Y, I don’t see a way for other companies to easily compete.
Finally, Model Y, Sort Of…
Tesla noted that between the reveal of the Model Y prototype in March, it took the company just 10 months to have a production version of the vehicle. Unstated — the Cybertruck was unveiled two months ago, which means if Tesla needs it, maybe there is a plan to bring it to production in a shorter period of time that is on the website.
There was a telling point when Musk stated that when demand for everything that is already out is so high, it doesn’t make as much sense to bring out a ton of models and have them all battery cell starved. This seems to lead me back to my analysis that Tesla has a battery breakthrough that it will debut with the Cybertruck, and we’re going to learn about what that is and how they can bring it to market at the Battery Investor Day, which will explain so much more.
Well, that took longer to write than I anticipated. Overall, this earnings report hit on everything that I hoped it would, and then some. An upside surprise to earnings allowed Tesla to understate goals for the year that it should easily be able to exceed. I expect the strength of the balance sheet right now is going to continue the short squeeze, and absolutely goofy valuations for Tesla’s stock may be on the horizon for the next few months.
I still do feel that a lot of this ride up in value is caused by the short sellers, who are continuing to get burned but apparently keep buying back in. I feel like they are now just feeding into the hysteria around the company, as the Starship ride that the stock is on right now is starting to put the screws to legacy auto as investors realize that they are completely unprepared for a future in which demand shifts to electric powertrains. The only corporation that has proven it can profitably build electric cars is Tesla.
These crazy high stock prices are getting the word out more and more about how electrification of transportation is the future, and it will start to weigh on internal combustion infrastructure not just from investors, but also from those in the auto market who are going to start to see the writing on the wall and wonder what the resale value of their new gas car will be in five years if Tesla is going to be dominating the future of the industry.
That’s absolutely insane when the company made less than 400,000 vehicles last year, but it’s the point that we’re at. One way or another, the Master Plan that Musk put into place is starting to be realized right now, and today’s earnings were a huge step on the way to changing what the future is.
Congrats to everyone at Tesla, and, as a shareholder, I hope for more crazy awesome good news like this in the future.
I am a Tesla shareholder who has purchased shares within the preceding 12 months. Research I do for articles, including this article, may compel me to increase or decrease stock positions. However, I will not do so within 48 hours after any article in which I discuss matters that I feel may materially affect stock price is published. I do not believe that my voice could or should influence stock price by itself, and I strongly caution anyone against using my work as your sole data point to choose to invest or divest in any company. My articles are my opinion, which was formulated using research based on publicly available data. However, my research or conclusions may be incorrect.
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