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Published on October 7th, 2019 |
by Frugal Moogal
Tesla FUD: I Was Wrong
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October 7th, 2019 by Frugal Moogal
The goal of this series is to examine current topics being written about Tesla [TSLA] that appear to be stirring up “Fear, Uncertainty, and Doubt” (or FUD). The plan is to try to provide reasonable analysis about the validity of the claims. I generally do not link to the articles that “inspire” me to write this, as I do not wish to reward analysis I feel is poor with increased traffic. However, I will freely admit that my analysis may contain incorrect assumptions, and will do my best to acknowledge them in future articles.
A while ago, I started a semi-regular series in which I examined specific cases of Tesla FUD (or “Fear, Uncertainty, and Doubt”). The plan was that I would look at a FUD topic that it seemed a ton of stock analysts were suddenly communicating about Tesla. The idea began because in my regular check-ins about how Tesla was doing, I would often find my newsfeed dominated by a bunch of writers claiming the same basic idea, and how that idea showed that Tesla was in big trouble.
The topics I chose were things that I felt were obvious but analysts didn’t see, which I found stunning. I also did write one article explaining why I felt that Tesla was a risky stock choice.
I haven’t kept up with the FUD as much as I had expected, at first because my personal life got incredibly busy, but lately because I haven’t seen the same rate of articles seemingly all focused on singular topics, and even when that happens, as in the case of the Smart Summon topic I recently covered, the articles aren’t directly discussing the impact that this would have on the stock price.
Recently, though, I have realized I made an error in those articles, one I wasn’t expecting. Before I get to that, I always put a bit of a boilerplate on my articles so people know where I’m coming from, so here we go:
“I remain a Tesla shareholder with 8 shares, with no intention to add to or sell that stake. I’ve mentioned in the past I think Tesla remains a risky stock, but one that I still believe has the potential to increase astronomically in the future, which is why I continue to hold a limited number of shares. I would not suggest anyone use the following article as their sole data point to decide to invest nor sell shares in Tesla.”
The Mistake
Let’s just get right to it. My boilerplate no longer applies, and in fact is wrong. As of this past Friday, I have added 7 additional shares to my stock portfolio, and I now own 15 total shares, worth as I type this Sunday night a total of $3,471.45. It’s by no means a huge position, and I do still think it’s somewhat risky, but I think there have been a ton of positive developments lately. Instead of going super deep into any of them, I am going to give you a quick bullet-point list of certain matters and how I interpret that data, which led me to my decision.
I would also caution you that I’m a voice on the internet writing behind a pseudonym. When you see that, it should be a red flag to independently verify the information in the article for yourself, as I could really be secretly holding 10,000 shares I’m hoping to bump up in price today to sell higher. I’m not, but I don’t have a way of proving that to you — and I suggest keeping that skepticism for all articles you read. I know I do.
Here’s what I see:
Q3 Performance — The end of Q3, while not quite reaching the 100,000 deliveries Elon Musk had been hoping for, proves that there is not a lack of demand for Tesla vehicles. The fact that Musk noted in an internal email that there were more orders than deliveries is even a further positive sign. Finally, based on everything I have seen with new orders, the pre-order backlog has been filled for over 9 months, even though apparently Wall Street is still baking a pre-order backlog into orders being filled now.
Q3 Sales Growth — Analysts were expecting a 12% reduction in US automotive sales in September across all manufacturers, and many companies reported sales significantly worse than expected. Sales in other major markets — notably, China and Europe — have said to have slumped considerably recently. So, while a 2,000 car increase from Q2 to Q3 may not seem like much, it shows that demand for Tesla has not been shrinking. Additionally, Musk noted that 110,000 orders had come in during the quarter a few weeks before the end of it, meaning that some demand went unfilled this quarter.
Gigafactory 3 and China — I expected the third Gigafactory to rise quickly, but I didn’t expect it to rise this quickly. It is exceedingly clear that China wants Tesla to succeed there, and to me it’s for really smart reasons. Tesla is seen as the world leader in EV technology. China wants to dominate the EV landscape in the future. Allowing Tesla to produce on the mainland will only accelerate China’s lead. Additionally, better EVs will allow China to phase out internal combustion engines quicker, further benefiting Tesla and positioning China to become a mass automobile exporter in the future.
China Demand — It’s easy to forget that the only Model 3s that China has been importing are the long-range variations of the Model 3. The Model 3 Standard Range (or Standard Range Plus) will start selling out of Gigafactoy 3, potentially by the end of this month. When Tesla starts manufacturing Model 3s, if it reaches 3,000 a week, that will add 39,000 additional cars each quarter. The margins expected from this would be significant.
Tesla Model Y Ramp — We don’t know much about this, but the glimpses I have seen show a Tesla that is laser focused on fixing the issues of the Model 3 ramp by designing a product easier to make. Additionally, analysis from people like Sandy Munro showed that there was a significant amount of extra steps in Model 3 production. If Tesla eliminates this, the Model Y could sell at margins significantly higher than the Model 3, and could start production significantly more smoothly too.
Battery Technology Breakthroughs — We know that Tesla recently patented a battery formula that is expected to create batteries good for more than one million miles. That could be extremely useful for either a fleet of robotaxis, or …
Tesla Semi Truck — I have a hunch the delayed start of production for the Tesla Semi is due in part to the battery technology breakthrough being integrated into it. That hunch could be wrong, but I find it striking that none of the companies that pre-ordered Tesla Semis have complained about the delay. It makes me feel like something positive is going on there, and I hope to see Semi production start soon.
Battery Grid Backup — Many proposed solar farms and wind farms are adding storage to smooth out their power delivery. Tesla’s grid backup has to be considered one of the leading utility-scale solutions, and it can be deployed extremely quickly. While I expect there to be a lot of competition here, having Tesla have such a public success in Australia should put them at the top of a lot of risk-averse utility lists for providing grid back up.
The Short Float — Conspiracy about who is shorting Tesla stock aside, since the end of July, the volume of Tesla shares sold on an average day has gone down, and so has the short interest — although the short interest hasn’t gone down much. This has resulted in their “Days To Cover” calculation having hovered above 6 days for the past month. The lowered volume increases the likelihood of a short squeeze on positive information coming out.
Smart Summon — I think the vast majority of people are underestimating the importance of Smart Summon in the quest to get to autonomous driving. It’s huge. Parking lots are a wildly complex problem to solve. People are overlooking it as a trick, but it’s a huge sign of things to come.
Climate Action — It’s become very clear in the last 6 months that the world is expecting our leaders to do something about climate change. Efforts are underway to encourage politicians to adopt stricter limits. Companies are leading the way, either by committing to invest and get their operations to carbon neutral or by divesting in fossil fuels. Companies that provide climate friendly solutions for energy generation, storage, and transportation will be called upon to partner with varied groups to provide those solutions. The recent announcement that Tesla is partnering with PepsiCo to provide a showcase facility with Semi Trucks, a large solar array, and battery backup for that solar array is an example. Tesla is the only company that can handle all of these facets at the same time.
On top of this, Tesla has potential positives via its new insurance option, the new Tesla Solar rental program, and its pickup truck to really move on tons of different fronts.
In Conclusion
When I wrote the article in June, almost everything above hadn’t happened, or wasn’t as clear as it was now that it was happening. The vision of Tesla seems to be coming together at a much more rapid pace than what analysts anticipated, and I expect further great news for the company on at least one or two major items on their upcoming earnings call.
I’ll also point out that I didn’t address a number of things in this article. I’m not expecting to see huge profitability this quarter. I’m not expecting to see a vastly increased margin on their vehicles. And I’m okay with that. If I get time, I’ll write a follow-up article on why those particular items concern me less today than they did even 4 months ago.
Maybe I’m right, and maybe I took a gamble that won’t pay off … but in future articles I may have to change what I write in my boilerplate, because if the share price remains similar to what it is now for long, I will definitely consider adding to my position in the near term.
Abou..
