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Why I Buy TSLA

I wrote an email over the weekend to a friend who wants to invest in TSLA but worries that he missed the boat with the 600% gain over the last year and a half. This was my explanation why I'm still in it for the long term. Please let me know if you can offer any corrections or improvements to the argument!

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First you need to understand Tesla's mission.
Elon has stated many times the purpose for Tesla is to accelerate the advent of sustainable energy in transportation. They're not in it to provide more high performance sports cars for the wealthy, or to dominate (any segment of) the auto market. He wants to slow down carbon emissions, and decided that the most effective way he can make a difference is by convincing the world to switch from internal combustion engine vehicles (ICE) to electric vehicles (EV).

Why would the world switch to electric vehicles? Because when designed properly they outperform ICE vehicles in almost every way. Elon's mission is to shine a bright spotlight on these advantages, prove that costumers really want EVs, and convince other manufacturers to follow quickly.
- The drivetrain is dirt simple (composed of a couple dozen moving parts vs 500-1,000 for ICE), delivers instant torque at any speed (no need for air intake, gear shifting, flywheel momentum, energy transmission thru rods and bushings, etc) meaning the acceleration feels even faster than the published numbers, and allows for millisecond traction control response (almost direct link between motor and wheels).
- Maintenance is dirt simple, with no requirements for oil changes, smog checks, spark plugs, timing belts, water pumps, catalytic converters, etc, etc, etc (only 6 parts require regular replacement: 4 tires & 2 windshield wipers!).
- The revolutionary battery "skateboard" design allows many unique advantages: lowest center of gravity of any sedan; stiff chassis for excellent handling; totally flat underside allows lowest drag coefficient on the market; 3x longer crumple zone in the front; best safety rating of any car ever tested (5 stars in every category; NHTSA couldn't induce rollover; crush test machine broke because roof is so strong); etc, etc.
- The convenience of charging from home is easy to overlook, but surprisingly psychologically powerful (takes just seconds to plug in every night, leave every morning with a "full tank", never worry about range around town, never notice gas prices, potentially full independence from energy providers - plus every home in America already has many "charging stations" built in).

Tesla is a 100% EV-only company, and they alone are committed to breaking down all barriers to EV adoption. Almost as a side effect, this will leave them with world class leadership in battery & electric drivetrain technology & manufacturing, and ownership of the most expansive, technologically advanced high powered charging stations in the world.
- Range anxiety: Their smallest battery provides 200 mile range while all others still max out at ~80 miles); superchargers provide quick charging on the road for free, for life; potential battery swap for fast (couple minute) "recharge" for the cost of a tank of gas.
- Cost: Tesla is executing on their "Secret Master Plan" published 8 years ago to methodically drive down cost. In 2017(ish) they'll deliver the GenIII sedan starting around $35k(ish). This is the keystone to their ultimate plan and they're aggressively burning down risk to achieve it. They have recently announced an audacious plan to build a $5BB "Gigafactory" to provide the Li-ion cells (The Gigafactory output in 2020 will match the 2013 worldwide output of Li-ion cells!).
- Performance & style (already covered above; 2013 Motor Trend car of the year).
- Demand: Perception has been that people don't want to buy EVs, but that's not reality. Dealers don't want people to buy EVs because their profits come from maintenance, which won't be profitable for EVs. Plus, side-by-side comparisons on the lot would make all of their other inventory look antiquated :)

Tesla is different than all other auto manufacturers (and more in line with silicon valley tech companies).
- Exceptional customer service (best ever 99/100 consumer reports customer satisfaction rating) with a stated goal of a profit-neutral service center (total income is targeted to offset total costs).
- Profit margin is highest of all car manufacturers (currently 25% and climbing for Model S), aided by their direct-to-consumer sales model (no middleman marking up prices, and no need for inventory), and no marketing expenses (supercharger rollout is their only "marketing" cost).
- Transparent OUS pricing (example: they sell for ~1/2 the cost of competitive cars in China because they charge the same base price worldwide plus cost of tariffs, shipping, etc while all others "gouge" some foreign consumers because they can)
- Business savvy: When cash was tight they forged deals with Daimler and Toyota to move forward, bought the NUMMI factory and tons of manufacturing equipment from Detroit at firesale prices during the great recession, capitalized on government ZEV incentives to essentially fund the supercharger rollout, timed secondary offerings with stock surges and used the money to pay off government loans (10 years early!) and accelerate R&D, etc, etc - all while attracting the greatest worldwide talent to come help build the future.

But even if they have dominant leadership of a revolutionary product, continuously execute on a bold business plan, attract fiercely loyal customers, and make the competitors look foolish, how could they deserve a valuation approaching $30BB? That would be about half of GMs market cap, while selling less than 0.005% of the number of vehicles sold by GM! Of course they're not worth $30BB today, but I believe in 5-10 years they could realistically be worth many times that much.

Here's a breakdown of some revenue numbers:
- 2013 sales = 22,000 cars ($90k each) = $2.0BB [actual; compared with $413M for 2012 and $204M for 2011]
- 2014 sales = 35,000 cars ($90k each) = $3.2BB [informed estimate]
- 2020 estimate: [total guess, probably conservative]
---> Model S: 50,000 * $100k = $5BB ($1.25BB profit) [25% profit margin]
---> Model X: 100,000 * $100k = $10BB ($2.5BB profit) [crossover SUVs typically sell at >3x volume of their comparable sedans]
---> GenIII: 500,000 * $50k each = $25BB ($2.5BB profit) [10% profit margin]
---> Total = $40BB revenue ($6.25BB profit)
---> Subtract $3BB for R&D + SG&A [was $0.5BB in 2013] = $3.25BB earnings
---> P/E of 20 would yield $65BB market cap, or $525/share (15% annual return starting today)

Those vehicle delivery numbers won't be easy to achieve, but I'm highly confident they will happen. That could justify today's stock price because it would mean an annual return of 15% from today through 2020. However, the numbers can start to look ridiculous if you account for other potential sources of revenue.

Tesla doesn't want to be the worlds largest car manufacturer; they want to convert the world to electric vehicles, which means they need a lot of competitors toeing the line. Since they have such a huge head start over the rest of the world, it makes sense for Tesla to provide components and license technology wherever possible. (Note their recent decision to open their IP to competitors is a big step in this direction, as any new EVs may easily be compatible with Tesla's battery, drivetrain, and supercharging capabilities). According to the Innovator's Dilemma, most established manufacturers will be incapable of making the switch to EV until it's possibly too late. The one's who fight to survive (or new startups strapped for cash) will be really tempted to save costs by not reinventing the wheel; they can easily buy electric drivetrains from Tesla (as Toyota and Mercedes currently do), battery packs from the Gigafactory (which are projected to drive down cost by at least 30%), and license access to superchargers (which will blanket the US, Europe, and China with the most advanced technology for fast charging).
Let's look at some possibilities for the 2020-2025(ish) timeframe:

- Car sales:
---> Current worldwide auto sales = 100M vehicles [conservative assumption that this stays flat]
---> By 2020-2025 maybe 10% will be EV [conservative: Elon thinks it could be 50% by then]
---> Tesla might sell 1% of all cars - maybe $70BB revenue ($10BB profit selling cars)

- What if their Gigafactory provide batteries to 1/3 of the other EVs?
---> Suppose TM sells battery packs for $15k with 20% profit margin
---> 3,000,000 vehicles * $15k = $45BB revenue ($9BB profit selling batteries)

- What if those competitors cars also license access to Superchargers?
---> TM currently charges customers $2k for access
---> 3,000,000 vehicles * $2k = $6BB revenue (maybe $4BB profit licensing supercharge access)

- Gross profit = $23BB ($10B EV sales + $9B battery sales + $4B supercharger licensing)
- Maybe total net earnings = $16BB [conservative]
- PE of 20 would yield $320BB market cap, or $2,500/share (25-50% annual return starting today)

So in order to compare Tesla's market cap with GM, I think you would need to consider what GM might be worth if their cars had the best quality, style, and performance on the market … and they owned the patents on the best engine, transmission, and exhaust system designs … and they owned the majority of gas stations in the world - and the patents on what makes them work well … and they controlled the oil refineries needed to supply the gas.

Not to mention the Gigafactory could make a lot more money selling batteries for home energy storage (to work with rooftop PV cells) and will probably build many Gigafactories in the next 10 years. They'll have awesome new designs for the Roadster and a Pickup truck (among others) in the next 10 years. They'll have the world's most advanced autopilot program in the next 5 years. And those are only the "knowns" as of today. Who knows what else the future will hold?!

(… and all of this pales in comparison to what SpaceX will achieve in the next 10-20 years…)

Other reading material by much more qualified analysts than myself :)
This was the first article I saw that really captured the big picture; admittedly I haven't read it in the last 6 months and don't know if it's outdated and/or contradicts anything I'm saying :) http://seekingalpha.com/article/1463661-on-elon-musk-and-tesla-motors-th...
http://seekingalpha.com/article/1292591-5-reasons-tesla-motors-will-thrive

Very rational. Could also add in service revenue which will increase as there are more cars out there - both annual service and out-of-warranty repair.

15% seems almost unfair for such a tremendous accomplishment - going from selling 22,000 vehicles in 2013 to selling 650,000 in 2020!

I have been long TSLA for about 2 years now and I plan to continue to hold for the long term.

I think your numbers in general are realistic but they need some refinement. Your Tesla sales will consume the full production of the giga factory. To sell the 45B you propose to other manufacturers would require six or seven more giga factories.

If the EV market is to be as successful as we all hope, it will be battery constraint for the foreseeable future.

2020 estimates are very high. There is a lot of hope that it could go that high but there is no real history of EV sales yet (2011 through now) and the public's opinion of EVs is still quite muted. Mainly due to cost and incentive-based selling. Sales growth of plug in cars this year is nothing like last year's growth so the growth curve looks muted as well. I think Tesla can sell 200K in 2020. That is if they do well in the years between now and then. There are still challenges to meet the battery price decrease target and also getting a compelling car built for under $40K.

Wow, Jamon! You really thought this through! ;-)

+1 @Captain. Much better than most of the analyst reports I have seen.

@bonaire - all future projections are based on assumptions. @Jamon has showed you all the assumptions - if you want to tweak them based on your crystal ball instead of using his, go ahead. He has put forward a good, simple model and basis for future stock price.

@ghilair - I think the battery problem can be solved. If there is demand, those additional gigafactories should be no problem.

At 80% of battery life the batteries can used for PV storage which I believe SolarCity is doing. I see no reason why there couldn't be 2 or 3 Gigafactories. I have not seen how much used batteries and replacements can contribute to the EPS. Also Apple is very happy to see Tesla's battery factories go into production which reduces the iPhone costs. Of course being on the outside I bet Tesla has some even bigger surprises upstream. Nice to see price of shares drop on funny news stories for more share purchases. If a MS has a flat tire the short stock holders will spin it on the news media hoping some will sell.

bonaire;
Public demand for EVs in general is almost irrelevant. The true measure of demand for Tesla products is the test drive conversion rate: about 1 in 4, despite the cost. This forum and TMC are rife with stories of consumers who sharpen their pencils to stilettos to manage to acquire the MS, sometimes after detailed research, sometimes after a single exposure. To drive it is to love it. "Compelling" is not just verbiage.

Jamon;
Edit: "The one's who ..." → The ones who ...

You might elaborate slightly on the SpaceX point you make, as it is a source of great financial strength and leverage for Elon Musk, principal shareholder of Tesla. And he has a track record of going "all in" to help it "live long and prosper"

Sorry 'bout the unclosed sentence; glitch in a GreaseMonkey user script, I think. Testing, testing

testing testing

ghillair. You are indeed fortunate to have bought TSLA two years ago, in fact, you are a hero. Since you are bullish on TSLA, the question is, how much TSLA do you plan on buying tomorrow at only $226.70?

JB Straubel's talk at Stanford last fall had a slide that showed 700,000 cars sold by 2019, so I think the assumptions in this are reasonable. Means there will likely be an operational factory in China or Europe by then.

www.teslamodels.wordpress.com

The slide was a math demo showing the numbers necessary to begin to nibble at the market, using "doubling" each year. It was not a prediction or promise. Elon is still hoping to "get next to the decimal point".

Brian, you know at least some people on CNBC take that as prediction and talk it up. I think it would be huge to get to 100,000 per year.

People are buying the stock because they have heard "many times" that on CNBC the Fremont factory can produce 500,000 per year, the Gigafactory is being built for 500,000 per year and you get these presentations. Musk saying "the autoindustry will need 100 gigafactories"... The inference overall is to keep people guessing and hoping to see 500,000 per year any year now. I do wonder what people feel the year number will be when they do sell 500,000 per year. That will surely need a plant in China and a very ripe market for EVs both in Europe and Asia - both high fuel cost zones.

Someone asked me when I will sell my TSLA acquired at low double digit prices. My answer was I'll part with them when the stock is worth 1000 or 0. Either is a possibility but the former, I hope, is a stonger one. One needs to recognize the auto market is almost a trillion dollars per year, much larger than the even smart phone market. Apple did not make a single smart phone before 07'.

OK, Jamon, you get a PhD in " Teslaology".
But investing in Tesla, as I have done, is a bet on Tesla continuing to execute in all areas.
Past performance has been on point but doesn't guarantee the future. It will be an exciting ride.
Your friend needs to be comfortable with that.

Mine was not related to current price; it was just getting in before "the event". I wanted to buy before the launch of the Gen3, and hold until a decent amount of time after it was out and selling like hotcakes. I know that is going to be a game changer. When I was pretty decided to do it was around the time of the fires, so the stock took a big hit from around $180 down to around $120. I didn't have my money ready at that moment, but then I got it at $150, before it worked its way back up.

I am not selling any of my TSLA holdings until they have a full line-up of cars including a pick-up truck and a sports car. That is probably 2022 at the earliest.

@tes-s: do you think there will really be service revenue, or do you think they'll stick with their attempt to remain profit-neutral for service, even for out-of-warranty repair? I think they'll work hard to minimize income from service - especially because low cost of service could be an incredibly powerful selling point for the mass market Model III. I'm hoping the annual service package will be dirt cheap on the Model III to really prove that EVs have superior total cost of ownership.

@ghillair: I agree these numbers would require multiple gigafactories (which I didn't state explicitly). I have no idea what to expect for the cost of building and operating the gigafactories, how the costs will be split with any partners, etc.
What does anyone think of my guess of selling battery packs for $15k with 20% profit margin? This was totally pulled from thin air, and I have no idea how to estimate that now.

@bonaire: you may be right that these numbers are high. I'm thinking there's an equal chance that these numbers will turn out to be too low. Time will tell…

@Captain: Thanks! I feel forced to spend a lot of time thinking about this investment since TSLA (combined with SCTY) has grown from <5% of my portfolio to >35% in the last 2 years. I need justification to keep holding my shares!

@Brian H: I've been planning to list out the possibilities for SpaceX as well. I don't know the numbers, but however many hundreds of millions of dollars per satellite or astronaut must add up quickly when you lay it all out. Then for the task of quantifying the financial benefit of creating the only colony of life on Mars. It might be easier to wrap my head around the possibilities if I could visit a SpaceX enthusiasts forum every day :)

@carlk; @Rocky_H; @JZ13: my plan was to sell when Elon announced he would be stepping down. But now I'm feeling more confident that he'll get them in such a good position that even without major innovation they could milk the cash cow for years to come. My only plan to sell is in the event of a ridiculous short squeeze, which seems much less likely now that everybody is paying attention to it.

@georgehawley: I think my friend is comfortable with the investment decision now, but still plans to wait for an overall market pullback. May be smart, or may miss the boat. Again, only time will tell...

Crystal Ball Fun for All...

I'd like to point out the specific distinction between 'capacity' and 'production'. I believe that capacity refers to the amount of vehicles is able to manufacture at Fremont. I would say that production is the actual amount of vehicles they produce there.

I say that because I think that over the next few years, capacity at Fremont will be higher than production. This is due solely to the need to purchase batteries from a third party, Panasonic, that is not yet willing to go 'all in' to back up Tesla Motors' plans. Of course, it also allows them to be ready early on for the move to their new platform, Tesla Model ☰.

That is to say... As of August 2014 the Fremont facility will have a capacity of 50,000 vehicles per year. However, the total production at that location is projected to be only 35,000 -- though I suspect it may reach 40,000 -- during 2014.

I believe that by June/July 2015, capacity at Fremont will be increased to 100,000 units. Production though will likely only be around 75,000 to 80,000. cars.

I believe that by mid 2016, capacity at Fremont will rise again, to 200,000 units. Production will climb, but will still be trailing at 125,000 to 150,000 units. By this time it is hoped, and presumed, Panasonic will have finally signed on to produce battery cells at the rate Tesla asks, based upon their rapidly growing sales.

2017 will see capacity reach 400,000 units in time for a full rollout of Tesla Model ☰. With the Gigafactory in place, production will come close to maxing that potential rather quickly, reaching at least 75%-80% of capacity before year end.

There is also the fact that a high percentage of production at Tesla equals sales, because the cars are ordered, not sold. Anything produced for a canceled order will be used as demos for test drives at Tesla Stores or loaners at Service Centers. Those vehicles are eventually sold as well, after a predetermined amount of use.

Let's stop for a moment. Please note that these are not 'pie in the sky' numbers. There are numerous automotive factories that churn out in excess of 350,000 units per year. The Fremont facility was previously known as NUMMI, run by a partnership of General Motors and Toyota. They manufactured cars and trucks amounting to roughly 430,000 units per year.

If you presume operations as being done on a 50 week year... 50,000 units is only 1,000 per week. 100,000 is 2,000 per week. 200,000 is 4,000 per week. 400,000 is 8,000 per week. 500,000 equals 10,000 per week.

If half of those are to be sold in the US, and the rest in other territories, it gives a sense of perspective. Of the top 25 passenger cars sold in the United States of America during 2013, 23 sold in excess of 100,000 units. 15 sold over 150,000 vehicles. 11 sold at least 200,000.

          Projections for US Sales
     Year   Model S   Model X   Model ☰   Totals 
     2015   25,000    20,000       -          45,000
     2016   25,000    30,000      7,500       62,500
     2017   25,000    50,000     75,000      150,000
     2018   25,000    75,000    150,000      250,000
     2019   25,000    75,000    200,000      300,000
     2020   25,000    75,000    250,000      350,000

During 2013, 24 of the top 25 automotive marques sold at least 75,000 vehicles in the US. I believe that Tesla Motors will crest that mark on sales of Model S and Model X alone by 2017. Added sales from Model ☰ will put them at the 150,000 based upon my calculations. That would have earned Tesla #22 in the US last year -- next to the decimal point, almost at 1% of total US sales volume. If Tesla can have total US sales across all models of 350,000 by 2020, that will be greater than the 334,350 units that Mercedes-Benz managed in 2013, to get a #14 ranking.

This all presumes that at some point in the next few years, Tesla manages to put up new buildings at Fremont, to further expand beyond the current projection of a 500,000 unit capacity at that site. Alternatively, they might open facilities in Europe or Asia to handle demand in those locations more expeditiously. By 2020 a second Gigafactory should either be in operation, or on the near horizon. Tesla will need it and others if there is any hope of reaching a 1% share of the worldwide market.

I'm pretty sure that wherever the first Gigafactory is built, Tesla will have it constructed to the same rigorous levels of safety, efficiency, and environmental cleanliness that would be required by the Great State of California. The difference is that they could do so sooner in another state because of the more streamlined approval processes. Right now, sooner is better, because getting the place online even one month sooner (and it would likely be nine-to-twelve months sooner than California) would solidify the release of Tesla Model ☰ that much sooner. Ultimately, I believe every state under consideration will eventually get their own Gigafactory anyway.

     2013 Competitors' Best Sellers
      #    QTY       Vehicle                
      18   119,521   BMW 3-Series (& 4-Series)
      26    88,251   Mercedes-Benz C-Class
      33    72,581   Lexus ES
      45    48,798   Buick LaCrosse
      50    42,130   AUDI A4
      54    40,062   Infiniti G37/Q60
      55    38,319   Cadillac ATS
      63    32,361   Lincoln MKZ
      68    24,318   Acura TL
      69    23,210   Volvo S60
      95    10,442   Porsche 911
     103     7,922   Jaguar XF

Only one of the companies that might be considered a direct competitor to Tesla Motors breached the top 25 vehicles sold during 2013. Most of the rest didn't even make it to the top 50. That is why the BMW 3-Series is being targeted by Tesla Model ☰. If that car can be defeated in performance and sales it will say a lot about the newcomer.

"Wow, Jamon! You really thought this through! ;-)" i know, wow! Is your friend going to buy some stock now?

I will say that to sell more cars,China, which the Model S has had a slower than anticipated time doing, something has to be done to the rear seating to make it more engaging for the passengers, the A/C back there has to be upgraded, an a taller headrest.

@jamon - there is service revenue now. $600 for the minimal annual/12,000 mile service, it has to be profitable or they are doing something wrong.

It is a well-engineered vehicle without a complicated engine to maintain, but I'm not sure why you think the service cost is low.

MS: $.05 per mile ($600/12,000 miles).

Prius: $.03 per mile for all service including oil change if I did everything as scheduled. All I do is change the oil and replace wiper blades, and at 150,000 I did everything. $2,325 lifetime total, so actual is closer to 1.5 cents per mile.

Add in tires (2 cents/mile Prius and 4 cents per mile MS), and fuel (8 cents per mile Prius, and 4 cents per mile MS) and TCO is the same before taxes, insurance, and depreciation. Of course, the Prius is no MS.

For Model 3 they may do something different, but for the MS I think they figure people with $100,000 cars are used to paying a lot for service - $600 annually is not a lot in relation to the cost of the car, and people will want to maintain it.

@red - those look more like worldwide sales to me for the MS and MX, and IMHO high at that. I think you are a year or two early on the Model 3. Just my opinion - but your crystal ball may be clearer than mine.

@tes-s Elon has said they don't plan to make money from service. They can do that because there is no dealership that needs service to support. The annual service is optional you can choose not to do it.

@Red Sage At $35k base price Model III will not only take away a lot of 3 series, C class sales but many from Camry, Accord buyers will be tempted to upgrade too. It will be actually a cheaper car than what they are driving when you figure in the gas savings.

@tes-s: "It is a well-engineered vehicle without a complicated engine to maintain, but I'm not sure why you think the service cost is low."

I don't think the service cost is low on the MS. It's actually much higher than I was expecting before they announced the cost. I'm still hopeful that they set the service cost high for the MS (as you said, "they figure people with $100,000 cars are used to paying a lot for service") because there were so many unknowns and they had planned to spend a lot of time (money) studying the performance & degradation of cars that came in for service.

In another couple years they should have learned a lot from servicing MS, and I'm hoping Model ☰ will be able to offer a much much lower service cost. Low enough to get everyday people talking and thinking about all the advantages of an electric drivetrain, and how it results in a tangible benefit to them as an owner. I think this would have a huge impact on sales to the masses.

@carlk - yes, if you don't have the car serviced, then they will not make (or lose) any money on service.

For each person that has their car serviced for $600, they are making money. If not, then I want to be a Tesla mechanic because they must be making $250/hr.

The service breakdown for the annual visit I just had was 4 hrs @ $125/hr plus approx $100 for wiper blades, cabin filter and fob batteries.

Were you there more than an hour? :)

@tes-s
I accrued a punch list since I live 425 miles away, so they actually had the car for just over 24 hours. Everything on my list was sorted out. Pretty much knew they couldn't get it all done in a day, so I arranged to stay in town an overnight, courtesy of another forum member. They had offered a courtesy flat-bed pick-up, but I couldn't get comfortable with the idea of 1900 pick-up truck miles, which probably would have cost them $600 in gas, not to mention accommodations.

1700 miles.


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