Analysts May Be Skeptical About Tesla, But Let’s Not Forget Amazon

Tesla

APR 30 2017 BY EVANNEX 28

Tesla

Tesla / Amazon, Image Credit: Pando

WILL TESLA DUPLICATE AMAZON’S ‘CRAZY’ SUCCESS STORY?

As Tesla passed Ford and GM to become the most valuable US automaker, the press started to run out of adjectives to describe insanity. “A company with no consistent profits worth $50 billion? It’s crazy, nutty, crackers, cuckoo!”

*This article comes to us courtesy of Evannex (which also makes aftermarket Tesla accessories). Authored by Charles

However, for those who are old enough to remember the Internet boom of the late 1990s, it isn’t crazy at all. Way back then, a certain startup company was selling books online, and pundits had all sorts of reasons why it was a mad idea.

“Books are heavy, they’ll cost too much to ship. Customers will never give out their credit card numbers on the internet. Companies will never extend credit to a risky startup.”

Nowadays, of course, it’s those arguments that sound bananas. The company in question was Amazon, now one of the 50 largest companies in the world, with a market capitalization of over $400 billion.

As a recent article in MarketWatch* points out, someday the arguments about whether Tesla’s Model 3 launch will be delayed, or whether buyers will prefer the Chevy Bolt, will seem just as daft as the quibbles that short-sighted commentators raised about the young Amazon.

Tesla

Tesla Model S P100DL with Tesla Forged Lightweight Arachnid Wheels

“History says that with growth stocks like Tesla, if the innovation is big enough, arguments about valuation and tactics come out in the wash,” writes Tim Mullaney. “And emissions-free transport, probably leading soon to driverless cars, is a really big innovation.”

Mullaney cites a contrasting pair of recent assessments: one from bull Adam Jonas of Morgan Stanley, and one from bear David Tamberrino of Goldman Sachs. Both analysts understand that Model 3 is going to be a big seller for Tesla – where they differ is on the question of how many units Tesla is likely to sell, and what kind of a profit it will make.

The bovine Jonas assumes Tesla will sell 165,000 Model 3s in 2019 (an estimate that Mullaney calls “reasonably conservative,” considering sales figures for Audi and BMW offerings in the same class), and that gross margins (the amount Tesla earns on each car sold) will hold steady through 2020, at around 27%. The ursine Tamberrino thinks gross margins will decline to around 23%.

Tesla Model X

Likely Goldman’s bear Tamberrino is guilty of static thinking – an error that many make when discussing the electric vehicle market. He’s assuming that Tesla will not get more efficient at manufacturing as it gets bigger.

In fact, says Mullaney, “Margins should widen unless something hurts Tesla’s pricing power – like people suddenly deciding Teslas aren’t cool, or price wars that force prices down more than the 35% reduction in battery costs Musk says Tesla’s Gigafactory will provide.”

Both the bull and the bear in this story are arguably pretty conservative – neither expects Model 3 to duplicate Model S’s accomplishment of becoming the leader in its segment, outselling gas-powered rivals; and neither takes much account of new vehicles yet to come. Tamberrino does concede that one risk to the bearish case is “incremental new product announcements.’’ For example, a Model Y small SUV, a semi, a pickup truck and a convertible Roadster?

Tesla

Image: Expansion

But here’s where the comparison to Amazon really comes into play: stock analysts seem congenitally unable to understand a company that puts a long-term vision ahead of short-term profit. Mr. Mullaney points out that “R&D spending depends on how aggressive management is in new businesses. [Amazon founder] Jeff Bezos’s investments in Amazon Prime and cloud-computing services scared the Street for years.” Likewise, “Musk could trim R&D but probably won’t.” Tesla will start logging substantial profits as soon as it stops pouring cash into new models and new lines of business – but that could be some time. Meanwhile, the bears and bulls will probably both continue asking the wrong questions.

“Tesla boils down to whether one believes in Musk,” Mr. Mullaney concludes. “I look at Musk and see Bezos, whose big bets deferred profits and scared half of Wall Street.”

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*Source: MarketWatch

*Editor’s Note: EVANNEX, which also sells aftermarket gear for Teslas, has kindly allowed us to share some of its content with our readers. Our thanks go out to EVANNEX, Check out the site here.

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28 Comments on "Analysts May Be Skeptical About Tesla, But Let’s Not Forget Amazon"

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Bob Nan
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Bob Nan

Yes I read the media saying all bad about Tesla because they are all controlled/supported by Big Oil.

Richard Demsk
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Richard Demsk

+1000 !

JustWilliamPDX
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JustWilliamPDX

“The Media”? Can you vague it up a bit more?

Media representing the tech, automotive, and “green living” sectors deservedly heap praise on Tesla, and help fuel it’s growth.

This very website is part of “The Media” at large, and it certainly is not controlled by big oil.

Buzz words and catch phrases loose all impact, significance, and attention once they become common but inaccurate insults.

Bonaire
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Bonaire

No mention of debt servicing, growth requiring enormous larger debt and falling profits per sale as prices co e down. Amazon is not a car company. Tesla does not resell chinese goods as a buying portal nor has AWS.

Richard Demsk
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Richard Demsk

I guess the founder of PayPal is aware of that 😉

AlphaEdge
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AlphaEdge

Co-founder of PayPal after a merger.

Bonaire
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Bonaire

Paypal existed with multiple founders. Musk came in with X.com and … well, read the Wiki.

Terawatt
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Terawatt

I’m sorry, but this is too stupid to take seriously. Emissions-free driving is a great idea, but it doesn’t follow that Tesla will own the market. And to say it will lead to driverless cars is doubly moronic, since autonomy is no harder (nor any easier) to implement if propulsion isn’t electric. These are independent megatrends, and the only reason car companies tend to showcase autonomy in their EVs is both things represent the near future of the industry.

Mint
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Mint

It definitely is easier to get top talent if you’re next to Silicon Valley.

Further to your point, Tesla’s customer base loves bleeding edge tech (even if it’s in a beta state) more so than any other automakers’ customers, making it more worthwhile for them to push the envelope.

It’s not as unrelated as it seems.

Bonaire
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Bonaire

There is a ton of talent in Michigan, Germany, Japan, S. Korea and China.

ffbj
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ffbj

It’s all quality, convenience, performance and price. Evs are superior in every way except price currently, and possibly convenience, if you don’t have easy access to charging.

Four Electrics
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Four Electrics

The quality of my Model X is terrible, and when traveling an EV is very stressful–especially below 60 degrees or above 80. Even remembering to charge very night gets old. Performance is great, though, as is reliability of the drivetrain. Emissions free driving is the real win.

Robert Weekley
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4E, just add wireless induction charging! Automate it! Think of the ‘Charger that charges the Machine’, for one solution!

Besides that, if you have to charge a Model X every night, you just drive too much! Still, better doing that much driving in an EV, than an ICE SUV!

Four Electrics
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Four Electrics

I do plan to install an induction charger sometime this year. I expect it will be fantastic!

Pushmi-Pullyu
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Pushmi-Pullyu

Four Electrics continues his anti-Tesla FUD campaign:

“The quality of my Model X is terrible…”

The quality of your imaginary Tesla car is just as “terrible” or wonderful as you choose to make it. Given the years of Tesla bashing you engaged in before you pretended to buy one, it’s hardly a surprise you choose to imagine it’s terrible. 🙄

Nix
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Nix

Four Electrics (AKA Mr. “Tesla is so easy to troll”) — nobody believes you own a Tesla.

You even admitted to trolling Tesla in a recent story. And now you go trolling pretending to own a car you admitted trolling?

GTFOHYT

Agzand
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Agzand

Comparison between Tesla and Amazon ends at lack of earnings. Amazon generates huge free cash flow, Tesla does not. That is the main reason Amazon last time sold equity in 2001, but Tesla has done so every year. If you don’t understand the difference then be ready for a shock when the curtain falls.

Robert Weekley
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Amazon went through years of investment and no profits, before they turned the corner. In that way they are the same. If Elon would take 1 year off from the next new idea development, he could capture those profits everyone looks for, but he is working on building everything from scratch, where he can’t buy it, and having at least 1 vehicle in each segment of the market, and pushing from 1 idea to the next, as fast as possible! We still have not heard him mention School Buses, Motor Coaches, RV Motor Homes, Boats, Ships, Motorcycles, etc! As for Aircraft, he is whimsical in talking about’Supersonic, Vertical Take Off, Electric Jets’, with little discussion about seating capacity, but I would think there could be a better plan just to build a 4-6 Seat, 200 Mph, 800-1,000 Mile Range, Light Fixed Wing Aircraft, with Electric Propulsion! At least to start. That could be expanded to 12-18 Seats, small Commercial Aircraft, and later to 36-50 Seats! (I guess, following the usual growth like thus, is not his style, though!) One might wonder when he will Engineer a modified 747, Adding a single Falcon 9 Rocket Engine on the Rear, for faster… Read more »
Pushmi-Pullyu
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Pushmi-Pullyu

Agzand said:

“Comparison between Tesla and Amazon ends at lack of earnings. Amazon generates huge free cash flow, Tesla does not.”

And how long do you think it has been true that Amazon.com has been consistently showing a net profit every quarter? Here’s a hint: Less than two years. Google it for yourself if you doubt it.

http://www.investopedia.com/articles/investing/111915/are-amazon-profits-here-stay.asp

agzand
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agzand

There is a difference between profit and cash flow.As long as a company is operationally profitable they can be on a sustainable growth path. If the core operation is not profitable it will need constant cash injection to grow. This is the case with Tesla, and the reason they have had new equity offering every year. Amazon’s core operations have been profitable long time before they showed a profit. It is not comparable to Tesla.

Nix
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Nix
agzand — There is also a difference between profits, operating cash flow, and producing assets/equity on the balance sheet. In the last 3 years, Tesla has gone from having $2 Billion in assets, to $23 Billion in assets, with the biggest growth being in fixed assets (land, buildings, equipment, etc) that represents Tesla’s investment into their own future. When you build $20+ Billion in assets, you have something you can take to the bank, even if you don’t have a positive operating cash flow. You can effectively get cash to continue to build your company on those assets, similar to how a construction loan works to build yourself a new home. When you say “As long as a company is operationally profitable they can be on a sustainable growth path.” But that is not the ONLY way for a company to grow. A company can also continue to grow by getting investors to fund asset generation for future products, even as the gross profits on current products is not enough to fund that expansion. If Tesla were not growing their assets year after year, and continued to borrow and raise funding, that would be a different story. That would not… Read more »
agzand
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agzand

You have to look closer to see the composition of assets. The $22.664 billion dollar in assets include the following big items: cash $3.4b, inventory $2b, leased vehicles $3.1b, leased solar energy systems $5.92b, property/plant/equipment $5.98b. They also have $16.75b in various liabilities. So the notion that they have invested $22b in their plants and equipment is very very very very misguided.

Nix
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Nix
agzand — Try reading what I actually wrote, I didn’t say that all their assets were fixed assets. I listed them as just their largest growing subset of assets: “$23 Billion in assets, with the biggest growth being in fixed assets (land, buildings, equipment, etc) that represents Tesla’s investment into their own future.” But thanks for listing all of the asset classes that were all SMALLER than Tesla’s fixed assets, to prove my point. Yes, they have liabilities, just like nearly every publicly traded company in the world. Did you not understand that is implied in this part of what I posted: “Equity growth has outpaced operating losses by more than a 2:1 ratio. Even when accounting for the -$3 Billion in lifetime retained earnings (losses), Tesla has still produced $5 Billion in total equity!! ” In case you don’t understand, that means that for every 3 dollars of losses, Tesla generates not only 3 more dollars of equity to 100% cover those losses, but 5 ADDITIONAL dollars of assets. This is a total of 8 dollars of assets for each -3 dollars in losses. This is AFTER ALL LIABILITIES you mentioned are accounted for. Now, do you understand that… Read more »
agzand
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agzand

Nix, your numbers just don’t add up. Their assets minus liabilities is only $5.85b. They have raised more than that in the last three rounds of share sales. Also, in case they are in financial trouble, value of inventory, leased cars and solar systems will drop to a fraction of the current value, so it is likely that most of that $5.85b will evaporate.

Pushmi-Pullyu
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Pushmi-Pullyu
I think many of Evannex’s articles are well worth reading, but let’s not forget that their business depends on selling to the Tesla aftermarket, and they’re not likely to bite the hand that feeds them. In other words, Evannex has a clear pro-Tesla bias, so let’s keep that in mind when we read their articles. I take with several grains of salt the claim that one of the analyst forecasts cited here is actually “bearish”. In truth, one is only slightly less bullish than the other. Case in point: The two estimates given here for the gross profit margin on the Model 3 are 27% and 23%. Yet back when the Model 3 was still the “Model E”, most analysts were estimating a mere 15% gross profit margin. (See link below for one example.) It’s true that Elon recently said Tesla… plans? hopes?… that the Model 3 will become as profitable as the Model S, and hopes to reach that objective before long. (He gave no time frame, but looking at how the auto industry works, I’d guess that would be within 3 years or less.) http://www.valuewalk.com/2014/02/tesla-motors-inc-tsla-gen-iii-model-e-cost/ * * * * * The overall analogy between Tesla and Amazon.com is… Read more »
Bob Nan
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Bob Nan

http://ev-sales.blogspot.com/

Tesla leads the 2017-Q1 and also 2017-03 sales by a big margin over the rivals.
This is enough proof to show optimism in Tesla and its stock.

90,000 Electric and Plugin vehicles were sold in 2017-03 and this is the 2nd highest month on record and its very unusual for a 1st quarter month like March to set this high a #.

We cannot expect April or May to set this much, but if the Chinese market rebounds, then its possible.

Martin Winlow
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Martin Winlow

As usual, no mention *at all* of how Tesla’s future success (and profits) hinges as much on its energy side as its vehicles. Tesla will (I hope) go down in history for bring us a revolution in transport and in the generation and distribution of electrical energy.

Mikael
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Mikael

Because it doesn’t. The energy part of Tesla will at best be a small portion of the vehicle sales.
The solar portion even less.

So it is (almost) all about the cars. The energy portion is more about keeping the gigafactory busy until demand and production of the vehicles need those batteries too.