Should I buy TSLA shares?

I am not so sure about this. Apple has been able to constantly raise the price of its products over the last ten years, and nobody gave a sh*t. Tesla has not been able to post a single year of positive earnings, but this could have been avoided if they raised the price of their car by let’s say 5k USD. The fact that they did not show a lack of pricing power.

I think this comes mainly from the fact that outside of Switzerland and USA, the price of a Tesla in most countries is more than one year of salary. People in EU are willing to sacrifice a month of salary to show social status with their Iphone (sigh), but certainly not one whole year. So far this limits a lot Tesla’s addressable market.

Thus Tesla is in the uncomfortable place where the mass market dreams about having a Tesla but cannot afford it, while the car luxury market presents already a lot of competitors and Tesla cannot raise their prices as they wish.

As long as Tesla builds and sells cars and not only software, they have the cost structure and capital expenditures of an automaker. This means huge expenses in factories/tools/assembly lines and so on. Tech companies don’t have this issue. This makes them way more shareholder friendly, because they don’t need to re-invest their earnings into assets that depreciate quickly. Therefore a bigger part of the earnings accrue to the shareholders.

Let’s have a thought experiment, and try to figure out what a 1 trillion USD market cap would mean for Tesla:

  • At this market cap, it is likely that the expected long term growth rate will be much lower than it currently is. Let’s be optimistic however, and say that TSLA will still command a P/E of around 20, which still means the market expects an healthy growth.
  • That would mean that TSLA would roughly earn USD 50 billion per year.
  • The current good players in the auto industry have net margins of 4-5%, which means that TSLA would need to sell at least 1,250 trillion USD per year worth of cars.
  • With a unit price between 40k and 80k USD (let’s cut it in the middle at 60k USD), that means TSLA would need to sell 21 million cars per year (and growing). As a comparison, the current absolute giant of the auto industry (Volkswagen Group) sold 10 million cars in 2019.
  • But VW sells 10 million cars per year in the mass market, and as I said above, this mass market is currently inaccessible to TSLA because most people are too poor to buy their car. Achieving to sell so many cars would mean that TSLA managed to design a car that is way cheaper, without altering their prestige image. As the biggest cost of an EV is its battery, that would likely mean a new technology of batteries that is twice cheaper as the current one…
  • What about the capital and the assets needed to sell these cars? Tesla would need to invest in factories/plants/machinery/tools that need to be maintained/replaced every N years. let’s try to ballpark those numbers.
  • We suppose Tesla has finally a viable business model and earns its cost of capital, which is a huge feat for a car maker (otherwise, a P/E of 20 does not make sense). So let’s say TSLA’s ROE is 10%. That means that they have around 500 billion Equity. Their current capital structure is 26 billion of assets vs 6 billion of equity. if this ratio stays the same, we would have to expect total assets to be worth around 2 trillion USD. Ok, some of it would be acquired via debt (being lent a trillion dollar will be a huge feat as well, but let’s assume it is possible), but the rest needs to be financed by retained earnings.
  • That means that in order to be able to make 50 billion earnings per year, Tesla will need to reinvest around one trillion dollar of its historical earnings into depreciating assets. This is likely to be money that the shareholders will never see in their pocket…
  • however, TSLA was still losing a billion dollar per year in 2019. Hard to invest in assets when you cannot reinvest earnings to begin with…

Feel free to correct if you think some parameters of this thought experiment are unrealistic. The goal was just to have an idea of what 1 trillion USD would mean as a market cap.

As you see, although it is not absolutely impossible, but still very difficult to achieve within 10 years. So many things need to go right at the same time that I’ll gladly take a pass on this one.

On the other hand, many things can happen. They could change their business model (but it needs to be proven right). They could finance their factory with taxpayer money (as they did already with some of their plants), and so on. But so far this is only speculation.

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Back 15 years ago, Apple was a niche computer maker. They were producing solid computers that just different a different operating system and were powered by different CPUs.

They had just begun to dabble in the consumer electronics space, by selling portable music players and music online, which was a major contributing factor to their tremendous growth in revenues (and earnings) they had had over the preceding five years or so.

Apple’s 2004 revenues qualified them for rank no. 263 on the Fortune 500 list of biggest companies by revenue - right behind a company called Smurfit-Stone Container Corporation. I’m sure you’ve heard of them.

From 2006 they changed their computers to be powered by the same type of “engine” (CPU) all of their remaining competitors had been using - in the process also making their computers compatible with the most popular and widely-used operating system platform used in the world (Microsoft Windows).

The major catalyst in becoming what they are today though, was of course the iPhone, introduced to great fanfare and hype in 2007.

…and the rest, as they say, is history: Apple used their previous experience in making computers to successfully pivot their business into a ( for a couple of years the) world’s leading maker of handheld computing and internet communication devices.

…or “smartphones”, as we’re calling them: A huge market that Apple created almost single-handedly.

Sure, neither had Apple been the first nor the only company making such handheld devices. But they were the first to fuse “traditional” internet-accessing and application-running computers and mobile phones (and a bit later consumer cameras) into one device that didn’t suck anymore - but instead was a pleasure, even somewhat “magical” to use.

They since used that early advantage to establish themselves as the as the leading provider of mobile handheld communication devices for enterprise use (overtaking Blackberry and fending off Windows Phone/10 Mobile), as well as a major player in mobile computing (tablets).

Taking that comparison and running with it, the question is what you believe:

  • Are they are revolutionizing the whole product category of cars? Or are they going to?
  • Is their product so miles ahead of the competition that everyone thinks everyone else’s cars “really suck” in comparison? Or are Tesla essentially making cars like the competition - just with a fancier design and different engine in them, just like Apple with their computers back in the days.

And looking into the future:

  • Do they have any substantial network or vendor lock-in advantages? (For instance, will governments mandate a common standard in charging stations and open access to them?)
  • Will they be able to maintain their pricing premium, once other competitors compete with their own electric cars?
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Thank you all for your valuable input. You gave me a lot to read, but fear not, I read it all! Let’s get to my replies.

Maybe, but the last three quarters were already positive (Q3 2019 - Q1 2020). And don’t forget that Tesla heavily invests in new factories, so it’s only natural they will yield no big profits for years. Amazon is a good example of a similar company.

I disagree. I don’t think they are very similar. Tesla cars are cheap compared to their rivals. Yes, the purchase price is high, but you will save on fuel and repairs. Just check some comparisons of Tesla Model 3 vs BMW 3 etc. Tesla invests no money in marketing.

This is unfounded criticism. Just listen to Sandy Munro, an auto industry legend, who is very impressed by Tesla engineering. Tesla continuously improves their process. So the car that leaves the factory today is much more polished than the one from 1 year ago, even if it’s the same model.

I think we are going nowhere when we compare Tesla to traditional automakers. Let me try to propose how could Tesla deliver these $50 billion with a $1 trillion valuation.

  1. Tesla’s end game isn’t selling you car parts, like other automakers. Thus, they do things that other companies would not do, which is putting more expensive, robust parts in their car, that will never break.
  2. They also constantly innovate, e.g. replacing 70 parts with 1 part, cutting costs and making the car easier to make. The Cybertruck is a great example. The car is made of bent stainless steel and has no paint job. This massively simplifies the production process.
  3. Teslas are computers on wheels. They collect millions of miles every day and they know you better than any car insurance. Considering that they want to make their cars as robust as possible, what do you think, who will offer you the cheapest car insurance rate, if not Tesla?
  4. But Tesla’s end game isn’t even selling cars. Once they have developed self-driving, they will be able to run their own robo taxis. Just think: a global fleet of robust self-driving electric taxis which make the ownership of your car not economically reasonable. I think many people will stop buying cars if they can conveniently order a car which will always come in 3 minutes and is maybe 3x cheaper than current taxis.
  5. And what about self-driving cargo trucks? Did you know they can drive very closely behind each other, basically forming a train? Self-driving trucks will pose a competition to the rail industry.
  6. Tesla factories are constantly being improved. The goal is that you can turn off the light and let the machines do the job.
  7. Tesla hired leading engineers in AI development, autonomous driving, battery technology. They already have a lead over others AND they have the best people.

So let’s assume that Tesla has 10’000’000 self driving cars, which drive around 365 days per year, doing 300 chargeable km per day, charging… $0.10 per km.

10’000’000 cars * 365 days/year * 300 km/day * 0.10 $/km = $109.5 billion
Even if you deduct manufacturing cost, charging infrastructure etc, this should still leave a large portion of this revenue.

That being said, I acknowledge your arguments about this company depending so much on one erratic man. It’s a risky bet, I just think in 10 years we might not recognize the World anymore, if Musk delivers on his promises.

Imagine you drive to work and instead of leaving your car for 8 hours in a garage, it works for you as a self driving taxi. The profits will be shared between you and Tesla. You might earn enough to pay all the expenses including insurance etc. and making the car basically for free.

I’m pretty confident that Tesla (and SpaceX) will change the world.

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Look, I totally agree that Tesla’s innovation is impressive, no doubt about it. What I am saying is that it is not really fattening for your portfolio.

Let me develop.

Tesla might do whatever they want with the cars they are building, the fact is that they still have to build cars, which is one of the most capital burning industries.

And the business model that you propose does not acknowledge it:

Manufacturing costs alone are more than your revenues…
In 2019, TSLA’s manufacturing cost of building 360’000 vehicles was 21 billion dollar. The manufacturing costs alone of a 10’000’000 fleet would be around 560 billion. Not good. i am not sure the cost could be lowered that much because most of the price comes from the batteries. But if a new cheaper battery technology comes on the market, you would have to pray that TSLA is the inventor, otherwise they would suddenly have a serious competitor…

But the sad part is that those 560 billion are only the variable costs of creating such a fleet. What i did not even mention yet is:

  • this fleet would depreciate and would need to be replaced every 7-10 years => you need to pay these 560 billion regularly
  • Add to this your fixed costs: factories, tools and machinery depreciation on such a gigantic scale. i really don’t see much remaining of your 109.5 billion per year.

And finally, what i said above about the assets needed to build such a fleet are still valid: they would need a gigantic balance sheet in terms of fixed assets (factory, machinery…) to build such a fleet. The capital has to come from somewhere.

You have to bet as well that they will also tackle once and for all fully self driving automation. In spite of what Musk said 2 years ago, full autonomy is still not there, and does not seem to arrive soon, as the difficulties when you arrive in dense neighbourhoods become exponentially more difficult. If you still need to drive a car for the last few kilometers, consumers still need to buy a car and won’t need TSLA as much.

That said, I have the impression that your desire to own TSLA comes more from a desire to belong to an innovative and world-changing community (which TSLA definitely is), rather than to become wealthy.

That’s a noble endeavour, but if that’s the case I would not bet 20% of my portfolio if I were you.

Maybe i am wrong and in five years you will tell me “Told you so!”. But i can also clearly see the case where TSLA price is back to 100 USD in five years because so many assumptions that needed to work did not.

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That is true and I have stated this in the beginning. I am just very grateful for what Tesla is doing, but I see your point that they may not be the ones to reap the benefits of their breakthrough.

Regarding the profitability calculation:

  1. Production cost: I think once they produce a self-driving compact car in the style of the cybertruck, given that the battery technology will improve, I believe they will be able to manufacture these cybertaxis for $20’000.
  2. Range: Tesla already is rumoured to soon be able to produce batteries which will have a lifespan of 1 million miles. Let’s assume 1 million kilometers of serving customers. This means the car itself will cost $0.02 per kilometer.
  3. Electricity: Current estimations are at $0.02 per kilometer when charging at off-peak hours.
  4. Servicing & Infrastructure: Hard to say, but we’re talking about cars which are designed not to break down.
  5. Income: at what cost would people use these taxis en masse? I pulled $0.10 per kilometer out of my a… trunk, but imagine you would like to take your family skiing. The taxi pulls up at your house, you load it up, it drives you 100 km, and the end of the day it picks you up. How much would you be willing to pay if you didn’t have a car? Or you commute 10 km to work every day. Imagine not having to pay for the garage spot at home and work, or not worrying where to park the car, not having to do service. In Switzerland, maybe people would be even ready to pay 0.25 CHF per km.
  6. Fleet size. I said 10 million because I thought you only need to produce 1 million cars per year for this to happen. But theoretically, this fleet could be even bigger. At first, all Teslas that are in private hands, and this includes the ones that are on the road today (!), could be converted to robo taxis via a simple software update. Tesla would take a share of the profits of course and use it to build their own fleet.

Or some of the best people went there but didn’t stay long: TechCrunch is part of the Yahoo family of brands

Funny that no one mentioned that Musk once said that he also plan to sell part of Tesla technologies to other manufacturers. I think he meant the power train and not only batteries. I see that very possible once their waiting list get shorter (or 0)

There are just too many things to mention. Yes, some say the true product of Tesla are not just their cars but their car factories, which can produce parts for other companies. Also their self-driving tech could be licensed to others. So when EVs take over, we might see Tesla technology in a large chunk of them.

If you want to buy TSLA but you are worried about single stock risk, perhaps consider an ETF with a relatively high allocation to TSLA. The ARK Innovation ETF (ARKK) is an interesting one).

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You give some scenarios, where Tesla becomes incredibly valuable. These scenarios are clearly possible, but far from certain. @Julianek and @San_Francisco offered some arguments for other possible scenarios, where Tesla is at least not undervalued at the moment.

However, I can’t see you arguing for the likelihood of these scenarios. So it would be interesting to see, for example, what you believe to be the approximate likelihood of these things being true in 10 years time:

  • Tesla gaining an automobile sale market share of over 50%
  • Tesla earning at least 20% of their revenue by supplying parts to other manufacturers
  • Tesla sucessfully launching a global fleet of more than 10 million taxis
  • The car costing $0.02 per kilometer
  • Maintenance and Infrastructure costs being so low that it makes sense to (kinda?) ommit them from your profitability calculations
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I did not omit them, I just did not provide an estimate. I’m just playing with numbers here, not making a deep analysis. Yes, it’s all very uncertain, if it was more certain, then the price would be even higher already today.

I provided a list of ways that could make Tesla very profitable in the future, and these are the things we know that Tesla is working on. Can you say the same about any other company? Yes, Tesla may fail but at least we know that they are on track. Other automakers seem to struggle with this transition that is happening before our eyes.

Let’s try a different calculation. You can invest in a robo-taxi company:

  • The car will do 1 million kilometers in its lifespan of 10 years
  • The car will cost $20’000 to build ($0.02 / km)
  • The electricity to charge the car will cost $20’000 ($0.02 / km)
  • The car service and support will cost $20’000 ($0.02 / km)
  • The taxi will make $200’000 in fares ($0.20 / km)

That gives a return of $140’000 with an investment of $60’000 after 10 years, equivalent to a CAGR of 12.8%. These are of course only fun calculations and one should not take it too seriously.

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50%.

If they can make 'em fly.

Otherwise: Small. Very small. Electric cars are just… cars. They won’t be able to drive in large parts of the world practically, as there’s no charging infrastructure. When there is for combustion engines - and oil prices have just gone lower.

As it happened, I put my money where my mouth is, I forewent buying shares of Tesla and bought shares in Toyota instead just last week.

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When you live in the middle of nowhere (e.g. Mongolia), what is easier to get? Gas, or electricity from the power outlet in your house? And even if you have no power from the grid, you can install solar panels on your roof.

Charging infrastructure does not mean superchargers around every corner. There is little need for people to do more than 500 km per day. You can charge in your own garage. And for large underground garages, they have even come up with these chargers on wheels, which can drive up to your car and charge it. So you can have a few of these to service the whole garage of 100 cars.

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I’m with you. Let’s establish a 10% TSLA position, what do you think? :smiley:

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That’s an interesting thought.

From what I hear, Tesla has one of the best infotainment solutions in the automotive industry. I was in the market for a new car three years ago and walked away from one brand whose infotainment system was so primitive that it was a dealbreaker. 10-15 years ago, I probably wouldn’t have paid much attention to the software in the car?

Tesla could thus license their system to other brands. And their software could more and more become a significant advantage over their competitors selling cars.

What I see as a danger for Tesla is that 1) other manufacturers can and will catch up; if I’m in the market for a big electric SUV, I could get a Mercedes EQC for example. And 2), if electric cars are not the future, then other manufacturers will have the resources to change course; Toyota for example has conventional internal combustion engines, hybrids, one fuel cell car, but Tesla has nothing but electric propulsion.

I don’t think that Musk might drag Tesla down; the child has outgrown the parent.

How does it compare to other systems? There’s two tech companies in that field as well (Apple, Google).

I also see Software as the only way to make giant profits for Tesla. Like in the computer industry, hardware manufacturers don’t make the big money, software developers do (at least some big ones). The challenge will be to become leader in this autopilot, shared vehicles etc. stuff. Apparantly Tesla is planning on some Self-Driving subscription plan (https://www.teslarati.com/tesla-full-self-driving-subscription-confirmed/). If Tesla gains an advantage in this field they could also rent their software to other manufacturers because in the end not every person will want to buy a Tesla.

But besides the point, Musk doesn’t seem like the type of guy who is caring much about shareholder profits. If Tesla like Amazaon won’t pay dividens, even if they make good profits, investors rely on stock growth. At already 145B you are not a first mover if you haven’t bought yet.

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Apple and Google have systems that allow you to integrate your smartphone, nothing beyond that.

Thinking about it, who needs expensive car infotainment systems if a smartphone can do everything… :thinking:

Tesla still seems to have an advantage over others when it comes to features like autonomous driving.