Why Tesla's critics and fans are wrong


Tesla is about to enter another critical moment. The automaker will announce its first quarter results next week and, after two consecutive quarters of profit, analysts expect a loss – and they have been guided by this forecast by CEO Elon Musk himself.

Tesla shares have slid by 12% since the beginning of the year, and at around $ 270, they are far from the currently well-known price of $ 420 that Musk proposed to privately make the company private year last. Tesla has not exceeded $ 350 per share this year before having to cover the payment of a convertible bond. The automaker has settled the bill with more than 900 million dollars in precious cash.

This is just the tip of the iceberg. Tesla announced lower-than-expected sales of vehicles for the first quarter (although 10,000 cars were in transit for owners and were not included in the total), disappointing investors who had seen nearly 250,000 vehicles delivered in 2018.

Read more: Tesla is not the next Theranos – here are 10 reasons why

I will not continue, but the bad news has reinvigorated the Tesla bears, that it is professional investors such as hedge fund manager David Einhorn, who has been running for years on Tesla, and ad hoc.#TSLAQ"Community that gathers on Twitter, largely discussing Tesla's impending bankruptcy.But many bulls have doubled." ARK Invest's Cathie Wood has not yielded to the ambitious (sometimes comical) goal of his business) of Wolf Ventures, Loup Ventures "Gene Munster remains totally positive for Tesla, and various analysts on the sellers' side have reaffirmed the purchase ratings and price targets above where Tesla was traded.

Fantasies left of me, fantasies on the right

The Tesla 3 model.
Hollis Johnson / Business Insider

Tesla is hosting an investor event to introduce its Full Self Driving (FSD) technology next week, fueling the fires that both sides are monitoring. For bears, that's another case where Musk promises something that Tesla can not deliver – as he has seen the multibillion-dollar investment that GM's Cruise has reported from SoftBank and Honda for autonomous vehicles.

For the bulls – well, for some of them (mainly Wood), it means that Tesla will soon become a provider of high-margin "transportation services" and move away from capital-intensive technologies. , low margin and high capital density. – troubled automotive sector (despite Tesla's plans to build another plant in China, presumably to make cars).

Each group whistles furiously. Wood tweeted that Tesla's stand-alone event would make Lyft ashamed (the idea is that Tesla will create a fleet of self-taught electric cars), while Einhorn told investors that Tesla was again on the verge of doing the full. In the wilderness of #TSLAQ, Musk is being pulverized, and of course, at Seeking Alpha, the negativity continues to manifest itself. All of this looks like two opposing armies hitting swords and axes against shields before unleashing a hell.

All this is good for business. Both bulls and bears have to make their point, and in the automotive sector, Tesla is the only chance to use a public company to take strange positions. All the others – Ford, GM, FCA, Ferrari – have a relatively transparent business and have spent the last decade just making money. But anyone wishing to rationally evaluate Tesla must block the noise and locate the signal.

This is not difficult Tesla manufactures cars and sells them. The company does not differ from what Henry Ford had undertaken more than 100 years ago. At the time, people loved their Model T. In 2019, people love their models 3 (and models S and X). This type of business requires huge sums to keep operating. Globally, it can generate tens of billions of dollars each quarter – and generate decent, even spectacular margins (unless you're Ferrari!).

Tesla created the electric car market

Jaguar I-PACE is one of many new electric vehicles coming onto the market.
Hollis Johnson / Business Insider

By examining Tesla's activities in this context, we see a car manufacturer that has created a single electric vehicle market in the United States – Tesla's overall share of the 17 million annual vehicle sales is &; 39 39 39 about 3%, tied with Volkswagen. Tesla sold nearly 250,000 vehicles last year and, in the fourth quarter, its revenue exceeded $ 7 billion. Its net margins, given its price composition (about $ 50,000 to $ 150,000), average around 10% to 15%, although it is too early to give Tesla a figure because did not slow down long enough to consolidate their profits. .

Tesla's cash position could be better, and its debt is worrisome (although it is largely a legacy of SolarCity, acquired by Tesla in 2016 and had to absorb solar panel leases) . But its massive sales and sales increases put it well above other niche car manufacturers and give it market credibility that is close to BMW and Audis.

And that, ladies and gentlemen, is that.

I'm sorry to have to tell you that. There is no massive fraud at the Theranos / Enron level. Nor is there an imminent takeover of the transportation industry in the world. The extremists are absolutely wrong. Jim Chanos, short seller, wrong, the super-bull Ross Gerber is wrong. False, false, false. But do not worry, they and their supporters on either side will continue to argue their case.

Large short sellers have been, at the macro level, wrong for years. But mega bulls too, with their extravagant futuristic visions inspired examples from Silicon Valley, such as Apple and the smartphone sector or Amazon and its disdain for profits. This did not prevent them from constantly pursuing new angles.

It's scary in the middle

Tesla's market capitalization has far exceeded its sales.
Andy Kiersz / Business Insider

I'll tell you, though, that it's lonely in the middle – or scary, like when Ulysses had to navigate between the Scylla and the Charybdis. That's where I've been sitting for some time now, and the only people I can find who are supportive of my point of view are in the auto industry.

And to be honest, I do not think that the current valuation of Tesla is justified by the growth of its activities. But I also think that it is unlikely that a real correction will occur before the US auto sector is experiencing an economic slowdown, and it may still be within a year. Tesla may not even be hit as hard, because its buyers are more engaged than consumers in general – and tend to be richer and can continue to buy even when the economy is bad.

Tesla's detractors, more serious, generally cite the deluge of new electric vehicles arriving on the market of confirmed car manufacturers as a sign that the benefits of Tesla may soon disappear. But they do not know that Tesla has reached its market share with virtually no publicity. For Big Auto to start eating Tesla's lunch, it will have to spend billions of dollars in addition to the billions spent on developing electric cars – and in the short term, it may not be worth it. The big car can take its time, as long as it continues to print money by selling SUVs and vans.

The extremists are rarely right, but they have one goal: they have an insatiable appetite for their opinions on Tesla. Moderate Tesla, meanwhile, are fighting on two fronts. You do not win in such scenarios; at best, you remain hooked until one or both fighters on your flanks are out of ammunition or withdrawing.

They usually do. And when that happens, Tesla will move on and become the company that his existing business predicts. As expected, the extremists will disappear or switch to a new fantasy. And then they may be wrong again.

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