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Why Tesla critics and fans are both wrong



Tesla is about to enter yet another critical moment. The carmaker will report first-quarter earnings next week, and after two consecutive quarters of profits, analysts expect a loss – and they've been guided toward that prediction by CEO Elon Musk himself.

Tesla shares have wear 12% year-to-date, and at about $ 270, they're far away from the now-notorious $ 420 price that Musk proposed to take the company private last year. Tesla also did not climb above $ 350 a year this had to cover a convertible bond payout, so the carmaker took care of the bill with over $ 900 million in precious cash.

That just the tip of the troubling iceberg, too. Tesla reported lower-than-expected vehicle sales for Q1

(although 10,000 cars were in transit to owners and were counted in total), disappointing investors who had seen almost 250,000 vehicles delivered in 2018.

Read more: Tesla isn't the next Theranos – here are 10 reasons why

I won't go on, but the bad news has invigorated Tesla bears – both professional investors such as hedge fund manager David Einhorn, who has been short Tesla for years, and the ad-hoc " #TSLAQ " community that congregates on Twitter, widely discussing Tesla's impending bankruptcy. But plenty of bulls have doubled down. Cathie Wood of ARK Invest not backed by her firm's ambitious $ 4,000-per-share target, Loup Ventures' Gene Munster remains thoroughly Tesla-positive, and assorted sell-side analysts have re-affirmed buy ratings and price targets above where Tesla has been trading.

Fantasies to the left of me, fantasies to the right

The Tesla Model 3.
Hollis Johnson / Business Insider

Tesla is holding an investor event to showcase its "full self driving" (FSD) technology next week, and this has added fuel to the fires that both sides have been turning. For the bears, it's another case of Musk promising something that can't deliver – because he's seen the multi-billion investments that the likes of GM's Cruise has raked in from SoftBank and Honda for autonomous vehicles.

For the bulls – well, for some of them (chiefly Wood), it's a signal that Tesla will soon morph into a high-margin provider of "transportation services" and move away from the capital-intensive, low-margin, hard-t0-disrupt car business (despite Tesla's plan to build another factory in China, presumably to manufacture cars).

Each group is furiously blowing its dog whistles. Wood tweeted that Tesla's autonomous event would shame (the idea is that Tesla is going to create a fleet of self-driving, hailable electric cars), while Einhorn customs investors that Tesla is again on the "brink" or refueling. In the wilds of #TSLAQ, Musk has been getting pulverized, and of course at Seeking Alpha the negativity just keeps coming. The whole thing sounds like two opposing armies banging swords and axes against shields before unleashing hell.

This is all good for business. Bulls and bears both need to market their views, and in the car segment, Tesla is the only chance to use a public company to stake out outlandish positions. Everybody else – Ford, GM, FCA, Ferrari – has a relatively transparent enterprise and has spent the past doing nothing but making money. But anyone who wants to rationally assess Tesla needs to block out the noise and locate the signal.

It's not hard. Tesla basically makes cars and sells them. Henry Ford has been making a living over 100 years ago. Back then, people loved their Model T's. In 2019, people love their Model 3's (and Model S's and Model X's). This type of business requires a huge amount of money to run, that a global scale can bring in tens of billions of revenue each quarter – and throws off decent, if not spectacular margins, (Unless you're Ferrari!).

Tesla has created the electric-car market

The Jaguar I-PACE is one of many new EVs to market
Hollis Johnson / Business Insider

Looking at Tesla's business in this context, we see a carmaker that has singlehandedly created an EV market in the US – Tesla's overall share of the 17 million in annual vehicle sales is about 3%, on par with Volkswagen. Tesla sold over 250,000 vehicles last year and in the fourth quarter moved above $ 7 billion in revenue. Its net margins, given its pricing mix (roughly $ 50,000- $ 150,000), probably average to something like 10% -15%, although it's too soon to credit Tesla with a number there because it's not slowed down long enough to consolidate profits .

Tesla's cash position could be better, and its debt load is concerning (although much of it is a legacy from SolarCity, which Tesla acquired in 2016 and whose solar panel leases it to absorb). But its massive sales and revenue increase the well above other niche automaker and give it a level of market credibility that is closing in on the BMWs and Audis.

And that, ladies and gentlemen, is it.

I'm sorry to have this break. There is now massive, Theranos / Enron-grade fraud at work. Nor is there an impending takeover of the worldwide transportation industry. The extremists are flatly wrong. Short-seller Jim Chanos is wrong, uber-bull Ross Gerber is wrong. Wrong, wrong, wrong. But don't worry, they and their supporters will continue pumping their arguments.

Big short sellers have been at the macro level, wrong for years. But so have the mega-bulls, with their crazy futuristic visions drawn from Silicon Valley, such as Apple and the smartphone business or Amazon and its disdain for profits. That hasn't stopped them from endlessly chasing new angles.

It's scary in the middle

Tesla market cap has far outpaced its sales.
Andy Kiersz / Business Insider

I will tell you, however, that's it's lonely in the middle or scary, when Odysseus had to navigate between the Scylla and Charybdis. That's where I've been sitting for some time now, and the only people I can find who are sympathetic to my view are in the actual auto industry.

And to be honest, I don't think Tesla's current valuation is justified by the growth of its business. But I also think that a real correction is unlikely to happen until the US auto industry slips into a downturn, and that's perhaps a year more away. Tesla might not even hit that hard because its buyers are more than consumers at large – and tend to be more affluent and able to keep on buying even when times are bad.

The more serious Tesla naysayers usually cite a new electric vehicle coming to market from established automakers as a sign that Tesla's advantages could soon go away. But they ignore that Tesla has achieved its market share with essentially no advertising. For big car to start eating Tesla's lunch, it's going to need to spend billions on top of the billions they've already spent developing electric cars and in the short term that might not be worth it. Big auto can take it, so long as it continues to print money selling SUVs and pickup trucks.

Extremist is rarely correct, but they have one thing going for them: there's an insatiable appetite for their views on Tesla. Tesla moderates, meanwhile, are fighting on two fronts. You don't win in such scenarios; you just hang on, at best, until one or both combatants run out of ammunition or retreat.

They usually do. And when that happens, Tesla will move on and become the company its existing business predicts it will be. The extremists, predictably, will vanish, or switch to a new fantasy. And then they can be wrong all over again.


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