When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact - Warren Buffett
Elon Musk is incredible. He is the real-life version of Tony Stark – a larger than life Iron Man. He is also the modern-day Thomas Edison, whose creativity has no boundaries. He may be a 21st-century Leonardo Da Vinci – a polymath – working on his Sistine Chapel. He wanted to travel to space, so he taught himself Rocket Science and founded SpaceX. I could go on and on with other accomplishments such as OpenAi, Neuralinks, Hyperloop, Paypal etc. He truly wants to make the world a better place by harnessing clean energy and securing a second home on Mars. South African by descent, Elon is a great American success story. The past generation wanted to be like Mike, while the current wants to be like Elon!
But when investing in a business, we must separate our admiration for the founder and objectively look at the merits of the business. The car manufacturing business is hard. Here is a list of defunct auto-related businesses per Wikipedia. Did you know that in 2010, Tesla was the first U.S. auto IPO since Ford in 1956? Autos and airlines have fought each other tooth and nail to capture the title of “greatest capital destroyer” over the past century.
But to everyone’s surprise, the Model S was a runaway success. It is arguably the best car introduction ever, which put Tesla on the map and the stock into the stratosphere. Today, those are past accomplishments. An owner of the Tesla business has to peer into the future to figure out how the business can grow. Here are a few considerations:
Will the Model 3 have mass market demand?
The Model 3 was marketed as the first mass-market Electric Vehicle (EV) at $35000. Within days of the announcement, there were 450,000 orders with refundable $1000 deposits. If you consider a $7500 EV credit, a model 3 was cheap and instantly brought a lot of credibility and coolness to the owner. Today, the price range for a Model 3 is between $50,000 and $80,000. Simply, the cost to make a Model 3 is higher than $35000. A price tag between a BMW 5 and BMW 7 series price tag is hardly a mass vehicle. The current debate has focused on meeting production targets. That is a silly debate. We know Elon will, over time. Will the Model 3 have mass demand and can it be manufactured profitably is the real question?
What about Model 3 quality?
Focusing on meeting 5000 Model 3’s/week production goal and the related ‘production hell’ has led to poor product quality. The rising number of complaints by new Model 3 owners and failure to fully respond to complaints is surprising and alarming. This reveals a company-wide underinvestment in operations, customer service, and logistics. While these issues are fixable, the reputational brand damage might now be. Also, did you know that 20% of the cars were built in a tent?
What about the competition?
Today, Tesla has a first mover advantage and has a superior product offering. The Chevy Bolt is the sole credible competitor. But “they” are coming. Audi, BMW, Mercedes, Porsche, and Volvo are all entering the market over the next 18 months. They are real competitors with brand, technology, and capital. On a positive note, new products grow the EV end market. On a negative note, it brings competition. If Model 3 product quality doesn’t improve, it will most definitely lead to lower sales. Google’s Waymo might be the toughest competitor – one that is leading in autonomous driving - and Tesla doesn’t seem to have an answer today. Where is Tesla on L4 autonomous driving progress?
Why the employee turnover?
Great organizations have incredible employee cultures with great continuity. Founders and visionaries alone cannot push a company past the finish line. It requires a strong supporting cast. A public peer – Netflix – has a great culture. I doubt that is the case for Tesla. For years, the turnover at Tesla has been high. But now the turnover is at alarming proportions. If the prospects of the business are great, why are important employees leaving at such a high rate? Why the revolving door?
Does Tesla have enough capital?
Mr Market has been upbeat, and Tesla has been able to raise capital despite inflated forecasts. But the cash burn continues. It is much better to raise capital while one can, rather than when one must. The cost of capital will rise dramatically if the market senses desperation. But Elon has been adamant that Tesla doesn’t need to raise any capital. There are two ways to look at this: 1) He may be right. In that case, the business will do just fine. 2) Even if Tesla needs to, the Company cannot because it is somehow restricted from raising capital. The latter would be bad. Which one is it?
The list is already too long, so in the interest of brevity, I will skip the discussion on falling bond prices, rising costs to insure against default, the future challenge to sell “green” credits, and poor corporate governance. Valuation is another important consideration. As an investor, I am more focused on moats rather than valuation. Is Tesla’s moat as strong as we believe? If anyone can meet these challenges head-on, its Elon Musk. But when a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. Is there trouble under the Tesla hood?
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I am an investor and these are my personal thoughts on investing, behavioral finance, markets, and sports viewed through the prism of a Latticework