Quick take on some Tesla news:
So there has been a lot of hullabaloo over the Tesla stock soaring and their mythical market cap exceeding that of other major automobile manufacturers even though they have a fraction of the sales and routinely post losses. Why is that? Is the market insane? Could Tesla really be more valuable than Ford?
What exactly does that mean anyway. Ford sold ~6.6 million vehicles in 2016 for gross revenue of ~141.5 billion dollars. By comparison Tesla sold 76,230 cars for revenue of ~5.5 billion. Clearly Ford is a more 'valuable' company if you are looking at what they actually produced for the year. IE if Ford and Tesla were to disappear tomorrow it is likely you would notice the exit of Ford more. But... their stock prices tell a different story. Ford trades around 11 bucks per share for about 44 billion in market cap (~ 4 billion shares in the market). Tesla trades for around 300 bucks per share and ~48 billion in market cap (~160 million shares in the market).
On the face of it that would seem to say the market is insane. Why? Even though Tesla's sales are a rounding error in Ford's volume, as a company they are being valued higher by the market. Lets say Ford and Tesla went bankrupt tomorrow and you had to liquidate their respective assets, which one do you think would return a higher percentage of value per share? In this sense both stock valuations are insane... as I in general believe the stock market to be as neither would return full value. But Ford would net far more return on sale of assets and recoverable debt (out standing loan payments etc...) compared to Tesla. They have vastly larger holdings of tangible salable assets.
So before I go any further keep that in mind. The market is insane. Basically Tesla is currently being valued alongside established and mature industry titans. This only makes sense at present capabilities if you only consider the fact that if you look at the news Tesla is on par with ANY automotive brand for recognition and coverage... and they may be the top in that measure. They are exciting. But their valuation seems to be anticipating that they will join established automakers at the top of the current market. That may be true long term but it is most certainly not true now. Now they are valued this high because of speculation in their ability to severely upend the personal transportation market.
So... how about that. Can they? Is it realistic for Tesla to revolutionize the market? That mostly depends on whether electric vehicles cross the fuzzy line from technological marvel to mass adopted solution. To me the litmus test is the Chevy Bolt and the almost here Tesla Model 3.
The math of the model 3 is interesting. ~400k pre orders at 1000 per order (refundable) represents a very VERY strong signal the market is hungry for an affordable EV with the Model 3's capability. The Bolt launched in limited markets and by all measures Chevy can't keep up with demand. They are going to wider market availability well ahead of schedule indicating increased commitment to the bolt platform. The difference between the two though when you look behind the scenes is stark. The Bolt is a toe in the water where Chevy will conservatively follow strong market results but they are not situated to massively ramp up the cars production to Model 3 levels the way Tesla is. Tesla is poised to be able to supply 500k cars a year with the batteries needed to make them go. To give you an idea what that means... the giga factory Tesla is building is capable of doubling the global lithium ion battery capacity production of 2013. Now... capacity generation has not stood still. China in particular is mobilizing its industry to compete with a largely trumpeted commitment to growing their own market production capacity by 120GW per year... roughly equivalent to 4 Tesla Giga factories. And Tesla is looking to built out 4 or 5 more plants themselves. So to source the batteries for increased Bolt production Chevy is going to have to source them from somewhere. If EVs take off and they are relying on Chinese production they are going to be competing with a lot of other manufacturers. If they build their own capacity like Tesla the signals and signs will be clear, but the lead in is years to bring that kind of production online. To keep up with Tesla Chevy (or combined other manufacturers) will have to soak up the entirety of Chinese growth in lithium battery production capacity... but China is growing its own EV sales and market. The current major automakers are not poised for an EV revolution. They are at best hedging their bets. Without Batteries, you can't make an EV work. Everything else on an EV is much easier to scale and grow production of or already exists in automotive production capacity. And they require massive infrastructure investment. Tesla is making that investment. China is pushing that direction. No other single car manufacturer is investing in it at those scales. This is the first concrete sign in my opinion that Tesla is climbing to the top. The unassailable position of established automakers has long been tied to the massive infrastructure investment required to support the production of cars.Tesla is all in on what they think is the next generation of that infrastructure at a scale nobody else is matching.
Long story short... while I think the success of the Bolt is important, I think Chevy is fundamentally hamstrung in a market that meets Tesla's expectations, IE if Tesla is right then the Chevy Bolt simply cannot keep up with demand. So the bolt is a canary checking the environment for affordable 200+ mile range EV's and the signs are more than favorable. I think the success of the Model 3 at the scale Tesla is planning for tells the tale. Chevy is ready to benefit if the model succeeds, but they are positioned to survive a failure as opposed to being positioned to capitalize fully on success. Tesla is committed to success and success only.
Rough notes on my calcs on this...
1 giga factory producing 35GW of battery capacity can support the sales of 500k EVs with a 70 kilo watt hour capacity packs. The exact specs of the Model 3 pack are still under wraps except for a tweet from Musk saying 75 KW hours was the largest pack they could fit in the Model 3 design due to space constraints. The numbers seem to suggest that at expected Model 3 size/weight they could get away with a 55-60 Kwhr pack and meet advertised range minimums. My suspicion is they have a larger pack installed by default that is electronically limited to lower capacity usage ala what has been happening with the model S. Represents a path to charging customers for options after the initial sale. Not a sales model I like, but I understand why they may do it. Also... I don't expect it to be dedicated to Model 3. The statement has been from Tesla that they need to reach production of ~500k vehicles to become profitable based on current infrastructure investments... so I use here at what is likely to be the lowest profit margin vehicle. Pretty much any other combination of Model S and Model X sales is just added profitability for the company. This also does not take into account battery production to support home and industrial power plant usage. But the usage in those markets is so far peanuts to mass production of EVs. Home battery pack is ~7kw, we are talking 10 of those for ~one model 3 pack. And also... if you have a Tesla or equivalent car, you really should not need to buy a Tesla power wall as you have far more capacity in your car than you would ever be likely to install otherwise.
Tesla's giga factories are not at risk of a Chinese explosion of battery production. I suppose that would be more accurately stated as they are not at risk if the market for personal cars is headed for full electrification. I think it is based on the technology as it sits now... just a question of time. I think the first Tesla Roadster proved that lithium ion batteries have crossed the minimum thresholds needed to make a modern electric car a reality. Tesla has since solved the other two big chicken and the egg problems. Charging infrastructure, and (as I just discussed) battery production. They produced the first trans continental charging infrastructure and battery production capacity to meet demand for 500k cars. What is now needed is critical market mass to drive the shift to electric. This is not to say I expect to see ICE powered cars disappear overnight. But a successful Model 3 (>=400k units per year) will beget other models selling in that range. As infrastructure grows to match that success the advantages of the EV that make it appealing when it costs more than ICE will drive it to kill ICE at similar cost with lower operating cost. The Model 3 is a much lower cost of ownership proposition at 35k than a comparable 35K ICE car. The Model S and X are already proving that case in the 75-120k class of cars albeit that market is far less sensitive to operating cost savings. And if Tesla (or anyone else for that matter) cracks 30k then it is 'Katy bar the door' time. A successful Model 3 means EV's will own urban commuting in a decade or less. And that means they will dominate the market for personal vehicles. Why does that mean Tesla is not at risk from a Chinese explosion? Because if the current ramp up predicted comes in the context of a global shift to electric cars then all predicted ramp ups in battery production are just the start of far more massive increases. 300 Gw (around what is proposed with all possible giga factories and Chinese industry increase) increase in global lithium ion battery production would supply a market of something like EVs taking over ~10% of the current global market. So to saturate the battery capacity needs at a full change over battery capacity will need to be pushing up around 3000Gw. I think Tesla is much more at risk of a disruptive new chemistry coming to market that is not an easy swap out on a lithium cell production line.
For Tesla to succeed at their current planned infrastructure levels (4-5 giga factories), they need to capture roughly 5% of that future EV dominated market space (2-3 million cars a year assuming sales of personal cars remain roughly the same... which is probably a bad assumption). As the first major mover and one committed to that future... they can do that. And they can probably do a lot better, especially out of the gate. They could enjoy early Ford levels of dominance of the car industry. Something that directly connects to Fords current leading position in the now 100+ year old industry. That is what has intelligent speculators buying Tesla stock at current reality insane prices. In a future market where Tesla has a shot to have a 10, 20, possibly higher percentage of the automotive market post transition to electric base vs current ICE base, their stock price is undervalued. The insane part, and yes that price today is insane, is that you are buying based on a pretty long term bet they make it there, and you are likely talking a 5-15 year window for any kind of payback on the bet buying at today's prices. Thus the bottom line on the stock seems to be it has an upside if and only if the market for cars is headed to primarily electric in the next 10-20 years.
The amazing thing to me about that, and Tesla in general, is that they are in no mans land right now. Musk probably could have made a viable small niche performance marque with the roadster standing on its own. The Model S is possibly an urban island viable platform but it is really being bought by people expecting an electric future. The infrastructure roll out for Solar City and the Model 3 though is a different story. The investment level is going to require a successful mass market sales success with a bottom line profit (even if it is plowed right back into infrastructure investment). I think Tesla is close to the end of their venture capital rope without a demonstrated model 3 success. Hence what I mean when I keep saying they are committed to success with the model 3. There is no fall back position. If the Model 3 tanks there is no way to cover the sunk investment cost with niche market supply of the S/Roadster etc... and without at least a break even I am not sure they would get the capital to perhaps forge ahead to a commercial market success (automated semi's for example). That would be a hell of sales job... and probably depend on the exact nature, and extent of a model 3 failure in the market place.
But the Model 3 seems to be on schedule. The initial battery capacity production capability is online. What they have to do now is prove they can produce the model 3 at scale profitably. If they do it I think we are over the electric vehicle rubicon.
And this is all without the potential revolution of automated cars becoming a reality. But that is a subject for a different time.
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