The mainstream media normally compares Tesla to other automotive companies, but since the Tesla earnings call this week, we are seeing a lot more discussion and analysis of the company that strives to not put it into a box. Tesla is largely a software-enabled battery company that rolls its batteries into cars and stationary energy storage products powered by the sun. That new categorization has continued to scramble the brains of analysts the world over. It also has now learned many lessons about the hard work of assembling cars and has in-housed a relatively high portion of the products that go into its cars — going against a decades-long automotive outsourcing trend.
The most recent example of more centered analysis of Tesla was on “Squawk on The Street” on CNBC, where two analysts and two hosts picked apart Tesla’s earnings call and made projections looking forward. The big nugget of insight from the call came from Oppenheimer MD & Senior Analyst Colin Rusch, who shared that, “What we’ve seen historically with this company is that short-term guidance has actually been relatively accurate and anything 2 quarters or beyond has been difficult to trust.”
Colin accurately captures Tesla’s historical challenge delivering on overly ambitious medium- or long-term public targets along with its honesty and openness sharing expected deliverables in coming quarters. He also recognizes the strong drive within Tesla to challenge the status quo with best-in-class products that deliver robust margins at scale. Later in the call, Colin clarified that, “Elon Musk has talked a very big game and fallen short on a lot of promises. Nobody is confused about that. He has fulfilled a fair amount of some of those promises and that’s still impressive and that’s enough for us at this point.” As our own Kurt Lowder summarized it, “Is Tesla ever late? No, not really,” because even when it doesn’t hit its targets, it’s far ahead of the pack.
The ball doesn’t stop with Elon, though, as Colin sees the entire Tesla management team as on the hook for their failure to deliver on publicly committed goals in a timely manner: “We still have some real trust issues with this management team, what they tell us and what they’re able to deliver on and the timeframe they deliver it on.”
Tesla’s ambitious goals are a testament to its reason for existing: “accelerate the world’s transition to sustainable energy,” which has made the company the underdog in every fight it has been in for the entire history of the company. Taking on every other automotive manufacturer, the entire oil and gas industry, and the energy generation industry has been one of the most arduous battles in history — and all of that comes on top of just building great products that can support a business.
Knowing that they are up against the largest industrial titans in the world has made Tesla push harder and faster for bigger and more ambitious goals, and as if they needed another challenge, some of the products they’re building have never been created before. They are defining new categories and functionalities that did not exist in the market before they came along.
Autopilot brought new advanced driver-assistance systems to Tesla’s vehicles that singlehandedly advanced the adoption of autonomous vehicle technology. It is true that other auto manufacturers have been working on their autonomous driving technology for years, but it was Tesla that lit the fire under them and expedited bringing the technology to the market. From all reviews we’ve seen, Tesla’s semi-autonomous driving suite also outperforms competing products.
Long-range affordable electric cars are coming, and it’s thanks perhaps more than anything else to the Model 3. Tesla leaned into the market and lit a fire under traditional automakers, resulting in numerous affordable long-range electric vehicles coming to market years before they would have otherwise. Granted, they are still at relatively low volumes, but they give customers more options and serve to educate automakers as to what their customers are looking for in electric cars. Unfortunately, Tesla has yet to deliver on the “affordable” $35,000 Model 3, but the company has shared that orders for it will open up later this year.
The analysts on CNBC noted that Tesla had slowed down its capital expenditures (CapEx) and shared that if the more disciplined CapEx trend continued, it could lead to long-term sustainable growth. They also noted that the average sales price (ASP) of Tesla’s vehicles has remained firm for longer than they had expected when looking at Model S and X, indicating that Tesla’s healthy sales margins could support long-term sustainable financials.
Ironically, co-host of the show Sara Eisen dove in on comments about more responsible CapEx management, asking if it made sense for a pullback on CapEx for a company poised for hyper-growth. Colin accurately noted that, to date, Tesla has been slammed repeatedly for its unprecedented “cash burn” rate, and that questioning a throttling back of spending was silly, noting that Tesla is still spending a ton of cash on growth.
Basically, certain members of Wall Street and the press forced Tesla into a corner, claiming incessantly that Tesla was doomed if it didn’t reduce “cash burn.” Tesla supporters and bulls have generally said they’d rather Tesla borrow money to accelerate growth, so there has been a little concern that scaling back investment in favor of profits is the wrong way to go, but Elon noted on the call that the company no longer really needed to spend more money than it made to grow as fast as possible. Does that have you scratching your head? Perhaps we’ll ask Elon about it if we’re allowed on another Tesla conference call — or invited into Fremont or Sparks for an in-person interview.
Sara, unfortunately, continued the FUD slinging, citing how optimistic short sellers supposedly remained (even after eating a 15% surge in the stock over the last 2 days). She threw out a series of out-of-context issues — supposed accounting issues, cash burn, legal issues regarding to recent accusations around engineering and accounting. These have all been discussed at length in the past, so we don’t really feel a need to go there again.
Okay, so, the analysts aren’t all spot on and the co-host of the show resorting to FUD slinging was an unfortunate reminder that the Tesla story still isn’t clear to everyone.
Colin noted that his team did not see Tesla’s coming move to drop the floor price of its vehicles down to $35,000 per vehicle as profitable, but this is clearly in support of Tesla’s mission, if not its financial ones. We’re not assuming that Tesla can’t or won’t make money on a $35,000 Tesla — just that it might not make as much. That’s fair, as anyone can see that Porsche and Mercedes-Benz garner higher margins on their higher-end cars than Chevrolet does on its Spark.
Tesla is not necessarily in the business of making money. All signs point to Tesla being on the cusp of sustainable profitability, and that’s great, but that’s not the original core of Tesla’s mission. Tesla exists to challenge the entire auto industry, and will not let up until auto industry majors start making electric vehicles in earnest. To date, all we’ve seen are half-hearted attempts to appease. The time for that is long past. Tesla is a real threat today, at volumes other automakers simply can’t compete with. Tesla has ridiculously more battery production capacity than the other automakers. It has demand that many are envious of, but it has earned that demand.
After this week’s earnings update, the question is not about whether or not Tesla will succeed, but rather, how much market share will be left for other automakers when they finally start building electric vehicles and an EV ecosystem that competes with Tesla’s. Their complete failure to take action and build environmentally responsible vehicles in the past is not only a failure to see a pivotal disruption and lead from the front for shareholders — it is also a complete failure to take action on climate change. For that failure, history will judge these companies and their executives harshly. Luckily, the change we need is finally coming.
Don’t expect Tesla to react or change its strategies based on analyst critique, but the shift in tone from some analysts is a welcome change from the senseless, uneducated bashing we’ve seen in the past several months. Colin Rusch @ Oppenheimer has a price target for TSLA of $385, while Robert Cihra @ Guggenheim maintains a higher target of $430.
As a TL;DR, I’ll leave you with: “They’ve been investing to date and are they are just really ramping the volume now.”
**TL;DR is shorthand for “too long, didn’t read” and is a common way of asking for or providing a short summary of an article/post**
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