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Barron's Negative Tesla Article

I recently purchased a MS and am considering purchasing some stock, but this article sounds pretty convincing that the valuation of the stock has gotten out of hand. In my opinion Barron's is a fairly reputable magazine.

The only way Tesla deserves the current stock price is if they are successful with their gen 3 vehicle. However there seems to be a significant risk that the battery technology will not be advanced enough to lower the cost by the 3-4 year time frame Musk keeps mentioning. If there is a significant delay, chances are the stock will take a major hit and allow competitors to catch up as well.

Any thoughts? Posted below is the link to the article.

http://online.barrons.com/article/SB500014240527487035782045785233032800...

Depends how you do the car and what you require it to be able to do.

$35k car with 60kWh battery, lets say $15k for battery leaving $20k for rest of the car means 15000 / 60 = $250/kWh. That's very realistic, almost pessimistic estimation. Tesla current battery price is somewhere under $400/kWh: that's what we pay for the battery, which means there is profit margins included.

400/250 = 1.6 increase in energy density while keeping price same: 3.1Ah battery to 4.0Ah battery is already ~1.3 change, just one more generation and you get that required energy density. Considering that that 4.0Ah is the first generation Silicon-anode battery and knowing the potential for that I'd say it's pessimistic to say that it wont happen.

60kWh should be enough to give that car over 200 mile range.

Buying stock now is a bet on the future. No guarantees. Your estimate of probabilities vs. the market's is what you're playing with.

JULY 14, 2008 -- Barron's Cover Story

Barron's Predicts A RETURN To RISING Housing Prices

http://online.barrons.com/article/SB121581623724947273.html

After citing many empirical studies showing that housing would collapse, Barron's declared "...such pessimism appears overdone..." and that "...This real-estate rout has been more painful than prior ones, but it may be shorter-lived. Indeed, there are early signs of recovery..."

If given the choice between investing a $100M on Tesla Motors (and Elon Musk) or Barron's, I choose Tesla Motors.

In 2007, Barron's Wanted You To BUY The Following Stocks:

http://online.barrons.com/stockpicks-SC_BULL_O_2007_L

Blockbuster Video (buy at $4/share, now selling at 15 cents/share)

Citigroup (buy at $51/share, now selling at $13/share)

In 2012, Barron's Wanted You To BUY The Following Stock:

http://online.barrons.com/stockpicks-SC_BULL_O_2012_L

Apple (buy at $527/share, now selling at $421/share)

In 2007, Barron's Wanted You To SELL The Following Stocks:

http://online.barrons.com/stockpicks-SC_BEAR_P_2007_L#

SalesForce.com (sell at $10/share, now buying at $40/share)

Amazon (sell at $84/share, now buying at $277/share)

Under Armor (sell at $25/share, now buying at $60/share)

Stock pickers on average get average returns, but they are often worst at predicting disruptive technologies. All Tesla needs is a better, cheaper, safer battery. Good thing one was announced this week:

http://phys.org/news/2013-06-all-solid-sulfur-based-battery-outperforms-...

Whether this is the breakthrough we need or not, there are now thousands of really bright people out there working on it. Hard to bet much against a good result.

It's not unusual for new technology driven companies to be valued much higher than other stocks. Doesn't mean those companies are really worth more - but the market has a history of (over)valuing technology companies as they are growing. One example is AOL - which took its high valuation and acquired Time Warner - something they probably couldn't have done later as their business declined.

If Tesla continues to hit their goals, and maintain revenue growth, the stock could continue to rise - and could be valued more than other auto manufacturers.

But if they hit a rough patch, the market may not be as forgiving as they would with the established companies.

Don't buy Tesla stock. If you have any, sell.

This isn't the company for you, if you are taking the advice of Barrons.

@Timo thanks for the analysis. your argument makes the most sense though I have no idea about 4.0Ah batteries or battery technology in general

@TDurden Like all stock pickers sometimes Barron's is right and sometimes they're wrong. At least they try not to be blatantly biased and have some rationale to their recommendations.

@SamoSam I take advice from multiple sources including Barron's, Jim Cramer and even this Tesla motors forum. All with a grain of salt of course.
What I do see repeatedly is that Barron's articles move stocks, and I would guess that TSLA will drop 5% or more on Monday.

If we were to ask Musk what are the chances that the gen 3 will deliver on time, what would he say? I'm sure he wouldn't say 100% if he's honest. Maybe 90%? 80%? That still leaves a 10-20% chance that the stock will get rocked if he announces a delay.

Tesla does not need low margin Gen3 justify and exceed current valuation. In a $100k Model S, the battery is about 30% and the car is 70%, including profit. The car ex-battery is quite simple, including the induction motor. With automated manufacturing the cost of car ex-battery should drop by >50-60% to something like $30-35k including the 25% gross profit. The battery tech is maturing and that cost including the packaging should drop the price, including the 25% profit margin, by 10-20% in the $25k price range. Final price of P85 the $100k Model S should be around $55-60k. Same with comparable Model X. Tesla could offer a premium Model S with the Panasonic 4Ah batteries, adding 20% more cells to the pack... increase motor to 500 HP. That would a range of 500 miles. Price that model to $100k.

In that price range, Model S, X, plus free nationwide supercharger use, Tesla would dominate the market of the BMW 5, 7 series, Mercedes E to S class, etc. Sure, features like smart cruise control, collision avoidance, proximity sensors, etc could be added along with extra supersize cup holders, storage, improved seats, etc. Tesla could sell 500,000 Model S+X worldwide. Gain market share from BMW, Mercedes, etc. Even Germany supports electric cars!

Do the math with sales at 500,000 cars, ASP=$65k and gross margin of 25%. Sales $32.5B. Gross profit at $8.125B. Net after R&D, overhead, taxes = $5B. Growing tech like company with its own supercharger network could have a PE of 25. Market cap = $125B. That is $1,000/share. That is a 10 bagger from here.

It is certainly possible. Yes, there is competition, but they are focussed on ICE autos. Tesla has first mover advantage with practical BEV, Supercharger network coming up, IPRs in battery tech, inverters, hi performance induction motor, etc. Can Elon/Tesla do it? Given his track record, YES.

You take advice from Cramer?

ROFL

Manufacturing economies of scale, especially of a simple design like Model S, X that have few moving parts are huge. Most costs are fixed like design, R&D, plant and equipment are fixed. Same for supply chain items like electronics, custom glass, etc. With full automating, including electric motor manufacturing, final assembly, Tesla can produce 25,000 cars/year with single shift. Add second shit and the production become 50,000 Model S/year. Spend $200M and with 2 shifts they could produce 50k Model X/year. Total 100,000 Model S+X. Scale the factory to 500,000 cars using the existing NUMMI plant space.

Tesla could achieve the same volume as the NUMMI plant in its heyday with GM/Toyota. The Model S, X are much simpler than Toyota Corollas to manufacture. No ICE. Extra Al costs but that is not more than a couple thousand dollars incremental. Electronics come down with Moore's Law and volume. So a price of $30-35k, excluding battery pack, including 25% gross profit is achievable in my opinion. In the ball park anyway.

Again, Tesla does not need Gen 3 to be a 10 bagger from here. Once the street gets wind that Tesla is increasing sales, they will price accordingly. Heck, they gave a Facebook a market cap of nearly $100k based mostly on eyeballs. Tesla is more than that.

"Add second shit and the production become 50,000 Model S/year." Do you think corporate constipation is a problem for them? ;p ;)

Management matters. Don't focus on trying to guess battery technology four years out. Instead, look at Musk's (and Straubel's, and the team generally) record.

Then it becomes obvious that if there is a way on Earth to deliver a third generation car equal to or better than their stated objectives, they will find it.

You can't say that about a lot of companies. Most CEO's are mediocre.

So it's a great stock. Only question is, do you get in at $100 or wait for a pullback? That's a tough one, and nobody can answer that for you.

Worth noting: TSLA now trades, in dollars, at a volume similar or higher than Facebook. On Friday it was a $1 billion for TSLA and $900 million for FB.

Tesla design, technical and management skills are among the best. I do not know of any other auto company that has designed a car from scratch and came with 99/100 from Consumer Reports on the first version. Not even Toyota/Lexus, it took several versions before they got their 99/100.

I think that Tesla is focussed on getting their design, manufacturing optimized along with the supply chain. Mostly probably something like SAP will be implemented to control the supply chain, production, order flow, etc. They even got a good sense of the market... after the shorts got spanked, Tesla raised $1.1B at the expense of the shorts mostly via stock and convertible offering with great timing.

Once their processes are optimized, supercharger network, service, sales etc deployed, Tesla will crank up production. Using 2 shifts should not be a problem with good controls. Something like 6am>4pm, and then 4pm>midnight. Cost/unit drops big time. Allows for price cuts to drive demand.

Wonder how soon a second production line (with upgrades?) will be in place.

Listening to Elon Musk, I get the impression they will make some design changes to the Model S components to make production, assembly efficient. An example may be panels or other components that need to be put together before being welded, riveted, etc. It may have for the parts to have some kind of lock and key type of design like Lego blocks. Everything lines up and the welding robots can weld with a higher level of precision and speed. I think they will work with their supply chain to do similar changes. All takes time because the design changes have to be validated, etc before being incorporated. They probably need to add a few more robots, etc. Their supply chain also needs to be optimized to cut costs and improve logistics. Implementing something like SAP is a possibility, but that is risky, expensive and time consuming... but needed to scale production.

I would say it would be middle of next year, before Tesla can step up production, add another shift. Model X design and assembly process will be optimized based on lessons they learn from Model S. When they say it is going to start shipping end of 2014, it will be in the middle of 2015. Elon Musk is managing for the long term, and he is not going to allow a Ford Pinto to happen. I suspect Model X will have newer techs in display tech, inverter electronics, induction motor tech, etc. The battery may be more than 85 KW-hr by 2016. That is why I signed up for the Model X Sig. I got a reservation and spec for a Model S 85P. I want to wait for the Jun-20 announcement. Want to see if it is some feature I can include in the order.

My guess is that Model S production will be stepped up next year and Model X will start in 2015 in earnest and scaled up in 2016. If Tesla is able to achieve huge economies of scale, which I think they will, prices could be cut for the 85 KW-hr models by 25% driving demand big time to 250,000-500,000 worldwide.

Meanwhile, the stock will be very volatile.

I think in the medium term the stock will trade sideways. Fear is mostly what pushed it so far so fast, meaning the short squeeze, and it may have one or more momentary pull backs but it is difficult to justify a higher valuation now or in the next year or two, especially compared with downside risk. It's very tempting for me to buy Tesla stock, as I've been wanting to do for six months or more now, but I always try to remain disciplined and not react to market moves. I patiently wait for a buying opportunity that would match my criteria.

I think that whether or not the battery technology would improve much in the next 3 years, the smart thing to do with the gen3 is to lower performance a notch, as long as it is still competitive with similarly priced cars. Although the effect is not as significant as with an ICE, using a less powerful electric motor to limit instantaneous energy need might help extent battery life considerably. That means the car would take longer than the model S to accelerate, if it was the same weight. The more important factor, of course, is that it would be a smaller, lighter, more aerodynamic car than the model S. Folks paying 30 to 40 k would be more willing to compromise than someone buying a model S. I'm not suggesting that the gen3 has to be lame, but there is a lot of room between model S performance and what is actually required, so relaxing performance is one option to make it affordable.

Short term, the Tesla stock having been at a RSI of 90% (70% is considered overbought), it would be foolish to get in expecting a smooth ride from here. Any determined Tesla shorter would see that and the somewhat stable price of the moment as an invitation to sell or short, a kind of upside-down bottoming out. I would never short Tesla because I believe in it and it's my life goal to move humanity towards more sustainable solutions, but I think the absence of a significant pullback from here would be surprising. The important question to ask yourself is whether you are in for a quick profit or wish to hold the stock "forever", as Buffet would say. A day trader or swing trader would not hesitate that much buying it or shorting now, but as a long term value investor with an appetite for growth and a cause, I want to get in at a price I will feel good about because I intend to keep the stock forever. And of course, invest only money you can afford to lose.

Sounds like a great technology, Donalan; I hope it's true. Whether or not you own share in Tesla or anyone else, it will be interesting to find out what the next evolution in battery technology and the Tesla gen3 will look like.

To complete my thought: the difference now is that when we read about a great battery technology, we know it won't systematically be put on the shelf because no many corporation has an interest in pursuing it. That's what I like about Tesla: if there is a better way, I have faith that they will at least try to bring it to market.

I am a bit bothered that Musk broke off the interview. Certainly he should have answers for doubters. I would have liked to have heard them.

@JZ13

There is no doubt about the battery technology. Doubting the battery is like doubting that Superchargers work. Yes it will take some time to roll them out, but they aren't vaporware.

Same with quoting GM on how battery technology can't be commoditized and made cheaper. 10%/year improvements are "baked in" according to EM. And that was from a year ago.

@Brian H
+1 for your Ex-Lax shout out.

TR;
More aerodynamic than the Model S? The sedan with the lowest Cd in the biz? Not asking for much, are you?

@TeslaRocks, batteries Tesla uses are not designed for cars alone, they are used in bazillion different systems, so while car manufacturers do not create pressure to develop them everything else does, mobile phones, power tools, electric lawnmowers, RC toys etc. etc. This is the beauty of the thing, Big Oil has no influence in there, they can't kill the development.

Tesla has several options to increase range. Model S weighs 4,647 lbs of which 1,200 are for the battery pack that includes the Li-ion 18650 cells, housing, cooling system, etc. My understanding is that the pack is not fully populated due to weight and cost limitations.

The weight of the car, ex-battery pack, is 3,447 lbs and the body is made of Al. Tesla could choose to use a stronger alloy of Al like Al-Mn alloys like those used in aircrafts with a minimal increase in cost. They could save may be 500 lbs. Use the weight savings to add 20% more batteries and use the newer Panasonic 4Ah batteries that have 33% more energy than the current 3Ah batteries being used. Probably get 500 mile range. All this adds up to cost.

Elon know all this and then some. HIs goal is bring the cost down, not up. Over time, as the tech matures, newer Li-ion battery costs will come down, like anything else. Denser supercharger network may mitigate the need for larger battery packs.


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