Tesla Inc

Fundamentals

Written by Ophir Gottlieb, 10-12-2015

A recent change in tone from Tesla's master mind, CEO and founder, Elon Musk, has made many abruptly aware of a behaviorial change which may point to an end to the sky high expectations that even the most bullish investor recognized were extremely optimistic.

Landscape
The skeptics of and believers in Tesla have created a whirlwind of hyperbole and angst the likes of which we haven't seen in decades. Tesla is either the revolutionary creator of electric cars that will push it to the forefront of a multi trillion dollar industry and forever transform the world, or it's a flop, haemorrhaging impossible amounts of cash flow and surviving only on government subsidies so large that they match the company's total revenue. These are the two sides and they are very much disputed.




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The Facts: They are Not Disputed
Tesla has been manufacturing at 100% capacity for over a year, with a backlog proving that at the very least, it can sell a luxury race car cloaked as an electric vehicle. Elon Musk didn't need, nor does he want Detroit's help. He's a visionary that recognized quite quickly that he is the genius in the room -- and there really was nowhere else to start than with his vision. Here's the company's revenue (TTM) in the blue bars and the company's free cash flow in the orange line.



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Revenue (the bars) has been a bonanza, up 52% year-over-year and over 200% over the last two-years. Levered free cash flow (the orange line) has been equally a bonanza. Tesla showed negative $1.2 billion in free cash flow in the last year, down from -$156 million just one-year ago. The company has received billions in government subsidies to keep running and those numbers aren't reflected in the free cash flow.

Tesla is staying in business, right now, because of unprecedented government subsidies (including $1.3 billion in incentives to help build a massive battery factory near Reno) that total somewhere near $3 billion.

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I recently penned an article Tesla's Critical Moment in its Existence is Upon Us . That article focused on the release of the Model X, what is is essentially Tesla's second car. I will touch on that critical subject later, but first, let's address what I believe to be a rather radical shift in Musk's behavior and that shift may well be due to fear.

On Friday, October 9th, Musk said Apple is the "Tesla graveyard" where failed employees go to work when addressing their new apparent entry of Apple into the self-driving world. A CNBC article reads:



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Here's where that argument not only falls apart, but reveals a braggadocio that can only be described as fear, denial or blindness (or maybe a genius we just can't understand):

Silicon Valley is home to the most innovative companies in the world including Apple, Google, Netflix, Facebook, Twitter, Oracle, Qualcomm, Uber, Tesla, Yahoo, Intel, Nvidia and hundreds of others. This isn't an accident. Harvard's Michael Porter in his book, The Competitive Advantage of Nations, states and defends that the strength of any country's technology industry, is based on Regional Clusters. That is, a number of firms that compete and cooperate and which hire each other's former employees.

This has long been the case in Silicon Valley, so much so that a lawsuit was brought down on Apple and Google for colluding to prevent each others' employees from getting jobs at the other. In total 64,000 employees alleged that bosses including Google’s Sergey Brin and Eric Schmidt and Apple's Steve Jobs orchestrated an elaborate scheme to prevent poaching and drive down wages (Source: Apple and Google settle antitrust lawsuit over hiring collusion charges).

The point is, the flip flopping and poaching of employees is not only commonplace in Silicon Valley, it's the very 'Competitive Advantage' that breathes prosperity into the area. Here's a different take on Musk's bizarre and combative statement.

Apple is going to come out with electric cars and it's almost a certainty that it will be successful at some level while reinventing the supply chain and sell more electric cars per year than Tesla, which is expected to sell just 50,000 cars in 2016.

Tesla does not have the optimal supply chain yet, and while the firm certainly sells every single car it manufacturers there is a legitimate argument that Tesla's Model S (the sports car) is simply a luxury item that has found demand for a small group of people during an economic boom where the top 1% have reaped all the benefits. That makes it less about Tesla as an enterprise and more about a generic luxury item.

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Tesla's Model X
The argument that the Model S is a luxury phenomenon rather than a "car" can be laid to rest with the release of the Model X. Beyond the obvious, that the Model X is now a second product, it is a bridge to the Model 3. In order for Tesla to even get to the Model 3, Tesla must drive more cash to the company with a higher volume product.



What's Happening Right Now
Jeff Reeves, Executive Editor of InvestorPlace.com reminds us: "Keep in mind the Tesla Model X is actually two years late already thanks to persistent production woes before the Model X even started rolling off the line" (Source: Investor Place).

Several large banks have downgraded Tesla stock and Benzinga did a wonderful job reporting on Brian Johnson of Barclay's:



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The future "enterprise changing" event for TSLA is the opening of its massive manufacturing facility, aptly named the "Giga-factory" scheduled for 2020. Now read these numbers carefully:

CEO and founder Elon Musk aims to sell 500,000 cars in 2020, up nearly 10-fold from the forecast for 2015 as well as produce millions of home energy storage units (batteries).

Look, there's no doubt that Tesla is an absolute marvel and it may very well achieve the wonderful goals it has its sites set on. It's an American auto-manufacturer that's actually working. It has been transformational and Musk's vision is nothing short of inspirational.

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But, with Model X sales (manufacturing) numbers looking to miss estimates and the entry of Apple into the market within two years, Musk's combative approach toward Apple is not only fear based, it's totally absurd. Further, it turns out that the best stock analysts on the planet are actually key employees, and when they leave a firm en-mass, it ain't a bullish sign.

Tesla is bleeding cashflow at nearly unprecedented levels just to get to a point of manufacturing at mass scale while Apple can reach that level with rounding error on its balance sheet. And for the record, so can Google (GOOGL) and almost every other car manufacturer. Now is the time for Elon Musk to be an inspiration and come out of the shadows of petty rhetoric and fear.

Having said all of that, I do believe TSLA will reach a functional Giga-factory and will find success with its Model 3 "affordable" car. To what level, I have no idea, but the company very well may flourish (that's not the same thing as the stock).

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