Podcast Blurbs [Tesla long and short case, Framing investment success]

Grant’s Podcast (1/16/2018; Electric Slide)

Mark B. Spiegel (Managing Member of Stanphyl Capital)

“Number one, Tesla has no moat of any kind.  It has absolutely nothing meaningfully or sustainably proprietary.  Number two, it loses a huge and increasing amount of money despite relatively light competition, but will soon be confronted with massive competition in every aspect of its business.  And number three, Elon Musk is an extremely untrustworthy stock promoter who as far as I know has never run a consistently profitable company.  Even SpaceX they used to say on the website was profitable and the Wall Street Journal had an expose on it last year that that was losing money and they had to change the website…

[The cult of Elon Musk] is gradually being chipped away…as you may know, when you’re short something and you’re short it in size, you do your homework and you keep doing your homework and your keep saying to yourself what am I missing, and I’ve spoken with or engaged with every long holder of note of this stock, and universally they have no facts to work with, they avoid facts, they avoid all the stuff I’m talking about…it’s a religion for those guys.  But this is a religion that takes $5bn a year in fresh capital injections just to keep the lights on…

Time is not on Tesla’s side because the competition gets closer and closer and closer, and the company itself is showing negative scale, meaning it loses more money the more cars it produces, so those lines are about to cross.

Adventures in Finance, Ep. #49 (Charge!: The Bull Case for Tesla)

Rob Maurer (host of the Tesla Daily podcast)

“Many people who are invested in Tesla start out with the thesis that fundamentally electric vehicles are superior to internal combustion engines for most use cases.  For a variety of reasons, those reasons include safety, performance, acceleration, cost of ownership (fuel, maintenance – fewer moving parts, residual value – fewer moving parts means the powertrain can last longer into the future)…the main downsides to EV vs. ICE historically have been range.  Tesla’s kind of corrected that by offering 200+ mile range vehicles and now into the 300+ range vehicles.

And then fueling time, that’s been a huge concern as well.  Tesla’s addressing that with the super charge network, which seems to suit people very well.  Tesla in the past has tried out a battery swap station that was able to swap the pack of a Tesla vehicle in the same amount of time it took to fill up a car with fuel.  And what they found was that owner actually preferred supercharging…because after a long period in the car, 200 to 300 miles, most people just actually want to take a break…The supercharging network now has basically 100% coverage throughout the US, Europe, and many parts of Asia…

The other big one was cost.  So, over the course of time, the cost of batteries has been a limiting factor to #1 how far the range of vehicle is because the more batteries you have to put into the vehicle, the higher the cost obviously, so Tesla has addressed that by increasing the scale of production.  Going back to 2006, Elon Musk kind of wrote his secret master plan…to start with a low volume, high priced sports car, which was the Tesla Roadster, and then use the money that they make from selling that vehicle to develop and scale a lower model vehicle, which is now the Model S.  So, the original Tesla Roadster cost around $110,000, the Model S costs around $70,000.  And the third part of the master plan was to use the profits from the Model S to develop an even more affordable car, which we’re now seeing …in the Model 3, with a base price of $35,000.  So, Tesla has stuck to that plan very much to the T…

Once you understand those things and you really understand that the EV is probably going to be the future of mobility, then really what you want to look at is who’s going to lead that market and in my opinion…Tesla will lead that market…Cost: they are definitely the lowest cost battery at a pack level in terms of kW per hour, the technology: so, obviously the autopilot suite has them leading the market for a couple of years…I know that [Mark Spiegel] talked about how Tesla didn’t really have any IP with their battery packs because they’re partnered with Panosonic.  Panosonic’s just really giving the cell to Tesla and Tesla’s doing the rest of the battery pack architecture.  There’s a lot of things that go into that like thermal management and just production and how efficiently those battery packs can be assembled…so Tesla actually has a lot of IP in that area that many other manufacturers do not…

The infrastructure, that’s huge.  Nobody seems to be willing to commit at all to building a charging infrastructure.  A couple of other companies are partnering and doing some small things in Europe, but compared to Tesla’s charging infrastructure, it’s 5 years behind at this point…

The main players in the automotive industry…VW, BMW, Audi, Porshe, they all have assets, they’ve invested heavily in the ICE for 50 to 100 years and those assets are going to be not valuable once the transition to electric mobility happens.  All those assets are going to be stranded and just tie a weight around those companies.  Tesla doesn’t have to worry about that…

The investor base for Tesla is very different than the investor base that exists for those other companies…Tesla’s obviously not profitable at this point in time, they definitely have significant negative free cash flow as you’ve talked about, spending heavily in R&D and capex…the investor set for Tesla is 100% on board with that spending because they believe Tesla can turn that spending into significant growth in the future.  The other automakers don’t necessarily have the investor base that will support that kind of spending, so it’s a much more difficult position for them to be in when they think about spending $5bn on a battery manufacturing plant like Tesla has done with the giga factory.

The media draws a lot of attention to cash burn, I think they’re now at negative $9bn free cash flow since they IPO’ed…but that doesn’t necessarily mean that their business isn’t profitable…gross profit from Tesla’s business in 2016 was $1.6bn, so the rest of that profit was reduced by various things that they spent money on in addition to their cost of goods sold…SG&A spend was $1.4bn.  What really drove the negative income and negative free cash flow was spending on R&D and spending on capex…those are investments in the future…

If we look at how Tesla spent capex in 2014, they spent almost $1bn in capex that generated 2015 revenue of $4bn.  If we move to 2015 capex spend, they spent $1.6bn in capex dollars that generated 2016 revenues of $7bn.  So those rates are 24% and 23% in terms of percent of revenue of the next year.  If we look at the capex of 2016 and what that will generate in terms of 2017 revenue, Tesla spent about $1.5bn…that’s 12% [of revenue].  So, they’ve actually been very consistent in how they’re spending.  It’s 24%, 23%, and 12%, so it’s actually coming down over time, which signifies that they are generating that operating leverage you want to see.  If we do a similar ratio for R&D, back in 2014 it would be 11% of 2015’s revenue, in 2015 it would be 10%, and in 2016 it would be 7%.  Similar ratios for SG&A…

If we look at the revenue that the Model 3 should be able to generate annually, based on the amount of pre-orders that they have, which is 500k+ at this point, that equates to a very likely possibility of $20bn/year in revenue.  Model Y, which will be the cross over built on the Model 3 platform, that vehicle segment should be or is becoming larger than the sedan segment, so if the Model 3 can generate $20bn annually, the Model Y should be able to generate $25bn annually.  If we add that onto the revenue that Tesla’s already generating from Model S, Model X, and then Tesla Energy…Tesla’s easily at $50bn-$60bn in revenue and they have a very clear path to get there.

Capital Allocators with Ted Seides (1/29/18; Seth Masters – Investment Polymath)

Seth Masters

“A lot of people have defined value added historically as your performance vs. the benchmark, and that is very easily measurable which makes it attractive to many organizations…but, I would argue that it’s one of the least important things you should worry about.  The most important thing is what is the problem that you’re trying to solve with that money in the first place.  For example, if you’re a pension fund…or if you’re an individual with money in a 401(k), the problem you’re trying to solve is basically you want to make sure you’re going to have a comfortable retirement.  Duh…does it matter that you did 1% better than the S&P this year?  Last year, the S&P did really, really well, so actually if you did 5% worse than the S&P, it’s probably great.  And there’ll be a year in the next few when the S&P will do really, really badly, which means if you did 5% better than the S&P, it’s still terrible.  This is not rocket science.  This is very simple.

But I think the entire industry has unfortunately been very focused on exactly the wrong thing…in my experience, most Boards and other bodies that are overseeing pots of money end up spending very little time on….what are we here to achieve and how do we make sure that we’re maximizing the chances of succeeding at that and minimizing the risks or failure.  They tend to spend a ton of time on ‘let’s take this huge pot of money we have, divide it up into a lot of different buckets, set up a benchmark for each of them, and look at exactly which buckets we’re doing a little bit better than that benchmark in or a little bit worse and then focus especially on the ones we’re doing a little bit worse, because there must be a problem’.  And to me, that’s a massive governance error […]

I’d say most of the endowments I know are laser, laser focused on performance.  In that case, they’re probably also thinking about risk-adjusted performance, which is good…but, what they rarely do is link their spending policy and their fundraising policy to that equation.  If you think about it, there are a lot of things you can do that are not about either asset allocation or investment implementation that have probably even more impact on the longevity and sustainability of an endowment program.  So, for example, most endowments don’t really think strategically about the kind of spending that they’re doing every year…you can say, ‘look, there have to be at least 50% of the expenditures that we make that can be no greater than X in any given year and that will not last longer than a maximum of Y years’…from an investment mindset, if you have enough of your total spend that’s in small, discrete lumps that are time bound, it makes it a lot easier to have elasticity in your spending policy.  Most educational institutions preclude themselves from doing that by having the vast predominance of their spend being obligations they’re locked into for many, many years…now, why is that important?  Because if you have a big down year and you cannot adjust your spending quickly, you’re guaranteeing that you’ll be forced to spend into principal at the worst possible time…if you could get the community to understand this and agree ‘oh, wait a second, our spending policy is a strategic element in our financial survival’, that can lead to much, much better outcomes in the long run and it means you can get those better outcomes with less investment risk.  Nobody does that that I know of.”