Tesla’s supporters sing the company’s praises. Elon Musk, the CEO of Tesla, has been hailed as a genius. He has inspired Superheroes. Books are written on his vision and leadership. He garners headlines for his focus on customer service.
And the company’s products shine no less bright. Tesla’s Model S blew away the Consumer Reports measuring system with a first-ever perfect score of 100. When tested for safety, the Model S not only achieved a perfect 5-star rating overall and but also in every sub-category – it actually broke the machine doing the testing. The Tesla Model 3 has half-a-million pre-orders, with the company racing to produce enough cars to meet demand. And Tesla’s solar and battery businesses could shake up more than just the auto industry.
To Tesla’s backers, Tesla is not just a car company whose brand is now synonymous with the electric vehicle – Tesla is also transforming the way we use energy, the way we travel, and the very way we live our lives.
Tesla’s detractors sing a very different tune. They point to Tesla’s billions of dollars in losses, including more than $1 billion in GAAP losses expected in 2017, set against a market capitalization of $60B with billions more in debt – a valuation even Mr. Musk doubts. They say the Tesla business model is doomed with little or no pricing power. They caution that Tesla could face a liquidity crisis as it burns through its cash balance and warn that Tesla's financing model may be suspect. They question Tesla’s technology lead and warn of a coming onslaught of new competition in electric vehicles from deep-pocketed adversaries.
At the same time, they cast a wary gaze on Mr. Musk. They point to Mr. Musk’s track record of hype and broken promises. They worry about Tesla's high rate of executive turnover. They criticize the government subsidies Tesla receives and the conflicts of interest in the company’s recent acquisition of SolarCity. They highlight the granting of options by Tesla's Board to Mr. Musk worth more than a billion dollars - which make Mr. Musk's recent purchases of Tesla shares look immaterial by comparison. In short, they see a money-losing company with a promotional CEO trading at an extraordinary valuation – a business that faces a potential “death spiral” as the firm’s losses mount amidst a tidal wave of new competition.
For investors, this is a problem. Proper security analysis requires objectivity – a dispassionate reading of the facts to make an informed decision. But in the case of Tesla, too often emotion gets in the way of careful analysis. It is more about belief or non-belief, about hope or hype, than it is about facts and thoughtful inquiry.
This article presents five quantitative-based insights about Tesla in order to help Tesla’s investors, both long and short, better distinguish fact from fiction.
#1: Tesla has the Largest Dollar Short Interest of any Company in the World
Currently there are 27.1M shares of Tesla borrowed and sold short. This represents roughly 16.2% of Tesla’s outstanding shares and 20.5% of Tesla’s free float. On a dollar basis this is about $9.5 billion of stock sold short, the highest short interest by value of any company in the world (see
Exhibit A, comparing Tesla’s dollar short interest to the dollar short interest of the ten largest US-listed companies by market cap).
>Sources: Bloomberg, Seneca Park Research
The nearly $10 billion of outstanding dollar value short interest should give pause to both Tesla longs and Tesla shorts.
For any long position, it is one thing to be aware of a cautious thesis. It is something else, however, to see a large dollar short interest in a stock. In the case of Tesla, investors have “bet” roughly $9.5 billion that Tesla shares may decline in value. Short-selling is a difficult business in which only the strong survive; those that do tend to be skillful and tenacious in fundamental research. Given the large dollar amount invested short Tesla, it is clear the short-sellers are also deep-pocketed with substantial resources available to research the company. For longs, this fact is not something to be taken lightly.
For shorts, a large dollar short interest is also worthy of caution. With so many shares sold short, the trade is “crowded” as many investors share the same or a similar thesis on Tesla shares. As a result, should that thesis prove incorrect, an embedded bid exists for 20% of Tesla’s free float that would need to be covered to bring the short interest in the shares back to flat. This sets up the possibility for a short squeeze should the short thesis prove wrong.
#2: The Short Borrow Rate on Tesla is Currently Less Than -1%
The percentage of shares sold short is one metric to help investors understand the likelihood of a short squeeze. However, it is not the only measure – and may not even be the best measure.
Another important indicator is the “borrow rate” on Tesla shares. To sell shares short, an investor must first “locate” an owner of those shares (via a broker’s securities lending desk) and then agree to borrow those shares at an acceptable rate to then sell them short in the market. For shares that are easy to borrow, the “general collateral” rate (often referred to as the “GC” rate) is close to nil (as of this morning, our prime broker was charging us -0.06% as our “GC” borrow rate).
As the demand to short a security rises and/or as the supply available to lend falls, the cost to borrow shares goes up. Hard-to-borrow shares can cost -10% or more – and we have seen situations where the borrow rate has gone above -100% (implying the security would need to fall to zero within 12 months just to break even).
According to S3 Partners, the leading firm analyzing the securities lending industry, the current borrow rate on TSLA shares is -0.7%. The short borrow rate offered to us on TSLA shares at our prime broker today is -0.5%. And at Interactive Brokers, the current borrow rate is -0.6%.
These rates indicate that Tesla shares, though not “GC,” are inexpensive to borrow. Consequently, an imminent short squeeze appears unlikely. That said, it is important for all investors in Tesla, both long and short, to continue to monitor this key indicator.
#3: Tesla’s Implied “Replacement Value” is Near Tesla’s Market Cap
Tesla is not currently profitable. It is therefore not possible to use traditional earnings multiples to value the company.
One alternative valuation measure we think is informative is replacement value. In other words, if someone wanted to build Tesla today from scratch, how much would it cost that person to do so?
There are several ways to complete such an analysis. We have used one method here by doing an “investment sum-of-the-parts” to examine how much money has been spent building Tesla since its inception (see
>Sources: Tesla Motors, Public Filings, Seneca Park Research
For this analysis, we separate Tesla into five buckets.
The first two buckets are Tesla’s
capital expenditures (from the cash flow statement) and
research and development costs (“R&D”, from the income statement). According to Tesla’s SEC filings, from 2008 through H1 2017 Tesla’s total cap-ex plus R&D has totaled $9.7B. We forecast that combined figure to continue to grow by roughly $1B per quarter for the foreseeable future.
Next we add the $5B spent by Tesla on
acquisitions. Tesla has acquired three businesses – SolarCity for $2B of equity plus $3B of assumed debt, Grohmann Engineering for $135M, and Riviera Tool and Die for $10M.
It is also important to account for the billions of value Tesla has received from
government subsidies. These subsidies include $1.3B from Nevada for the Gigafactory, $1.0B from New York for Tesla’s factory in Buffalo, federal tax subsidies for electric cars sold of roughly $1B, saleable federal tax credits of $1.1B, California state subsidies of $198M, research and development tax credits of $300M, plus unknown additional state and international subsidies and tax credits. Add it all up, and Tesla has likely received between $5B and $7B total in government subsidies.
Finally, we consider the value of the Tesla
brand which has largely been built via word-of-mouth and free advertising, as Tesla does not have an advertising budget. Various analysts estimate Tesla’s brand value at roughly $5B.
Add it all up, and we see Tesla’s “replacement value” at a little more than $25B. This compares to a current market cap of $58B and, factoring in roughly $8B of liabilities, an enterprise value of about $66B.
There are two missing pieces, however, that close the gap between Tesla’s replacement value and its enterprise value.
First – there is an expectation that
spending generates returns on the money invested. If Tesla has invested $10B in R&D and cap-ex over the last decade-plus, it’s not unreasonable to think the value created is a good bit higher than just the $10B spent.
Second – this analysis does not take into account
the time value of money. It has taken Tesla fifteen years to build its business. Tesla has a considerable head-start in battery production (via the Gigafactory), intellectual property, brand equity, and in setting standards around its supercharger infrastructure and vehicle powertrain ecosystem. It would take years for a competitor to replicate this amount of IP and infrastructure. Using a discount rate of 10% and assuming it takes 7-10 years to “recreate” the company, the market value of Tesla actually seems relatively close to Tesla’s discounted replacement value.
#4: Demand for Electric Vehicles is Expected to Increase 100x by 2040
It is important to consider supply and demand in every investment analysis. For Tesla, this is not a simple exercise.
The increased demand for electric cars in coming years
is expected to be staggering. Electric car sales are growing roughly 60% annually – but that pace may well accelerate. Lithium-ion prices, the most important cost component of an electric car, are declining 20% per year. Some analysts predict electric cars will achieve price-equality with gasoline cars on an unsubsidized basis by 2025. Others think it could happen as soon as 2021. And electric cars may account for a majority of new car sales before 2040.
governments are helping speed up the electric car revolution. In China, electric vehicles were only 1% of auto sales in 2016. But aggressive new mandates from Beijing target 10% by 2019, 12% by 2020, and 20% by 2025. The Chinese mandates are modeled after a similar set of mandates set up by the State of California, a major economy in its own right. A group of economic powers including the US, UK, China, France, and Germany are seeking to achieve 30% electric car sales by 2030.
100% electric sales may not be far behind. Britain, France, and China are targeting 100% electric sales by 2040. India has set its sights on 2030. And Norway, perhaps most ambitious of all, has set a goal of 100% electric sales by 2025.
In 2016, according to the IEA, global electric car sales totaled 750,000, with half those sales in China. Total car sales globally today is roughly 88 million per annum. If we assume 1.5% annual growth in new car sales, total global sales will reach 125 million per year by 2040. At a 60% market share, electric car sales would reach 75 million - an increase of 100x from 2016.
#5: Tesla’s Competitors have Announced More Than $100 Billion of Investment in Electric Cars
On the other hand, the supply of electric cars is also expected to increase at a staggering pace. Industry insiders expect to see “incredible electric vehicles from every manufacturer” by the end of 2018, with tens of billions of dollars projected for investment in electric cars by competing manufacturers.
Volvo recently announced it plans to eliminate all sales of cars with traditional internal combustion engines by 2019, and its soon-to-launch Polestar brand is expected to compete directly with Tesla’s Model S. Ford announced a $4.5B investment in electric cars. Volkswagen shook the industry by announcing $84 billion of investments in electric cars and batteries by 2030. Mercedes-Benz has disclosed $11B in electric car investments including $1B into a single US factory in Alabama.
Even companies that previously have not competed in automobiles, such as the renowned British consumer product engineering firm Dyson, are getting in on the action – Dyson is planning to launch an electric car by 2020 with a $2.5 billion investment in the project.
All-told, the expected investment from competing brands in the next decade
totals more than $100 billion dollars.
Bulls tend to focus on the rising demand for electric cars. Bears tend to focus on new competition as more and more companies launch electric car models. To appropriately analyze Tesla, however, it is critical to take both into account.
For investors to do well, it’s important to ask the right questions – and to focus on the issues at the crux of any investment thesis.
>What do Tesla investors say who are on the other side of the trade? What are the trading implications of Tesla’s large short interest? What is Tesla worth? Can Tesla maintain its technology lead in the face of billions of spending from new competition? What will the balance of supply and demand in electric vehicles look like in coming years?
Carefully considering these questions using quantitative analysis can help provide a foundation for careful analysis of Tesla the company and Tesla the stock.
They are a good place to start in the ongoing battle to distinguish fact from fiction, hope from hype, and what the future may hold for one of the world's most misunderstood companies.
The author of this posting and related persons or entities ("Author") currently does not hold a position in this security. Author may buy or sell shares at any time. Author has no obligation to inform anyone of any changes to Author's view of TSLA. Please consult your financial, legal, and/or tax advisors before making any investment decisions. While Author has tried to present facts it believes are accurate, Author makes no representation as to the accuracy or completeness of any information contained in this note. The reader agrees not to invest based on this note, and to perform his or her own due diligence and research before taking a position in TSLA. READER AGREES TO HOLD HARMLESS AND HEREBY WAIVES ANY CAUSES OF ACTION AGAINST AUTHOR RELATED TO THE NOTE ABOVE. As with all investments, caveat emptor.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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Source : https://seekingalpha.com/article/4114734-5-things-may-know-tesla