House Mountain Partners

Tesla Sparks More Questions Than Answers

Chris Berry1 Comment

By Chris Berry (@cberry1)

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Tesla Motors (TSLA:NASDAQ) released Q4 and 2014 full year earnings last night and the results were disappointing. The company missed expectations on just about every conceivable metric one would use to judge success including earnings, deliveries, and revenues. Although disappointing, TSLA should still likely be viewed through a longer-term lens than its competitors as the company is still arguably in its early growth phase and isn’t yet a mature operating entity.

While the numbers we all tend to focus on were down, what was perhaps more notable were the statements made by Mr. Musk and his team on the call. They include: 

·         Mr. Musks’ statement that within ten years TSLA could have a market cap that equaled that of Apple Inc. (AAPL:NASDAQ). AAPL’s current market cap of US $740 billion would give TSLA a share price of approximately $5,920 per share based on TSLA’s current share count. When was the last time you heard of a company selling what is effectively a commodity (cars) with that sort of valuation and share price?   

·         The company plans to spend a “staggering” amount going forward on capital expenditure and actually forecast spending $1.5 billion in cap ex in 2015 – roughly 50% higher than analysts had estimated. With $1.9 billion in cash on the balance sheet, how will this cap ex be financed? What is the dilution strategy? That level of detail was not addressed.

·         Musk stated he has a “secret weapon” to ignite demand if it flags in 2015. After listening to past conference calls with the company, I understood the company to not have any issues with demand. All issues were supply-related. Has something changed? 

·         Finally, the company expects to be cash flow positive AFTER cap ex in 2015. This was a surprise, as in 2014 TSLA generated negative $1 billion in free cash flow and spent just under $1 billion on cap ex last year. Again, this is set to rise by 50% in 2015, so it is imperative that the company hit its 2015 sales target for Model S and X cars of 55,000. For those unaware, free cash flow is calculated by taking cash flow from operations and subtracting cap ex. Many people believe that free cash flow does a better job of demonstrating a company’s ability to generate cash relative to gauging this through earnings.

Other concerns include foreign exchange movements (the USD is up 7% versus the EUR in 2015), competition (BMW and Mercedes are but two of an increasing number of competitors), the sales strategy in China, and the general inability to test drive TSLA’s cars (would you buy a thoroughbred horse without thoroughly vetting it first?).

Given the concerns above, I think it’s important to remember that all early stage companies run into growing pains. TSLA’s product is unique and I would agree when people say there’s nothing like it out there. The financials of any company are of utmost importance, but in TSLA’s case it’s more important to see the trends in spending, revenues, cash flows, etc rather than the absolute numbers. TSLA’s cars aren’t (yet) commodities, and low gas prices won’t hurt them, though this could come into play later in 2017 when the mass market Gen III model is forecast to be released. The real key in thinking about TSLA is separating the high flying share price from the potential of the actual business.  

However, I still believe that TSLA hasn’t yet faced its biggest challenge – specifically securing enough raw materials to satisfy future growth targets. TSLA’s audacious plans are well known, but adding growth plans of other major automotive and battery manufacturers together puts forth the possibility of challenges in procuring a reliable source of raw materials. To be clear, I’m not forecasting shortages, but this thinking is why I’m optimistic on the prospects for lithium and cobalt over the next few years. I actually expect to see recycling become more prevalent here.  

This issue was briefly (and unsatisfactorily) addressed on the call with management saying they are “pleased” with battery supply chain discovery but weren’t prepared to make any commitments on supply chain announcements. You’re planning on doubling the global capacity of lithium ion batteries by 2020 and you’re “pleased” with what you’ve found out? More detail is necessary here. One would assume 2015 will be the year we learn more about solutions to this issue.

Vehicle electrification is here to stay and it is an exciting time to be involved in the space. Just how relevant TSLA remains in this increasingly competitive field is anyone’s guess. They offer the best product at the highest price – a fact that their financials obscure somewhat. The stock was arguably overdue for a re-rating and how TSLA achieves its goals this year and going forward will determine the company’s stature in the automotive sector in the future. Until then, I await answers to some of the questions posed above.










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