Whitney Tilson‘s email to investors about the discussion of Tesla’s battery technology on the ValueInvestorsClub.com message board.
An interesting discussion of Tesla on the ValueInvestorsClub.com message board, which I sent to my Tesla email list:
Odey Discusses Howard Marks’ Astute Observation On Why Hedge Fund Alpha Is Increasingly Rare [January Letter]
According to a copy of the firm's January investor update which ValueWalk has been able to review, the Odey Asset Management Odey Special Situations Fund returned 7.7% in January, outperforming its benchmark, the MSCI World USD Index, by 8.7%. Q4 2020 hedge fund letters, conferences and more The $60 million fund, which Adrian Courtenay manages, Read More
376: HTC2012, Reasonable Bull Case?
I am a bear on Tesla, but recently met a bull on Tesla who I consider quite smart who provided me with his positive take on Tesla being worth several hundred billion dollars in 10 years.
Overall, his thesis centers around the belief that electric cars are going to be much cheaper than ICE cars in the long-run and Tesla has a huge headstart when it comes to battery technology.
The bull says that there are far fewer parts and moving parts in a electric car than an ICE vehicle (less than 20 in electric vs. 200+ in an ICE) with the single largest cost in the electric vehicle being the battery (makes up the vast majority of the cost of the electric car). The bull believes that Tesla has a large lead in battery technology and that further advances in battery technology will contintually drive the cost of the battery down over time. As a result, at scale, an electric vehicle manufacturer can make sustainably much more $$$ per car even at lower price points than an ICE manufacturer since the cost per electric vehicle at scale will be far lower than an ICE vehicle at scale. This will give electric vehicle manufacturers a sustainable cost advantage vs. ICE manufacturers that will enable them to take significant share over time.
The bull believes that Tesla will be the first company to get to scale in electric vehicles and therefore develop this sustainable cost advantage vs. ICE manufacturers. Why Tesla and not another company?
#1: He believes that Tesla's battery technology is by far the best and that other electric vehicle manufacturers costs are much higher than Tesla's. It will take years for others to catch up to where Tesla is today by which point Tesla will widen its battery advantage and drive down its cost.
#2: ICE manufacturers who are now starting to make electric vehicles (GM, Ford, Jaguar, etc.) are not incented to sell those vehicles en masse because it's cannabilizing their higher margin, profitable ICE vehicles. They are just doing it to get tax/incentive credits and comply with regulators.
The overarching view/thesis is that the electric vehicle at scale will be far cheaper than an ICE vehicle at scale because electric vehicles have far fewer parts and battery costs will be going down. Tesla will be the winner because they have the best battery technology.
As a result, he believes that Tesla will be able to earn 15%+ operating margins at scale in the long-run while underpricing the competitors.
I have my own view on this thesis but curious what other people think.
377: Light62, Re: Reasonable Bull Case?
Not really an answer to your question and I'm not that close to the situation but doesn't Tesla intentionally not patent anything? If that's true how could they have a durable (and expensive to cross) moat around their battery technology [scale doesn't seem like a durable one given the prospective competition]?
378: hkup881, Re: Re: Reasonable Bull Case?
A TSLAQ battery is just an off-the-shelf Panasonic battery and due to the price they signed their long-term take-or-pay contracts at, is set at a price level that is competitively more expensive than Panasonic sells the exact same batteries to other producers.
TSLA then takes those batteries, puts them into bandoliers (old tech vs what everyone else is doing) and punctures a few along the way.
They have ZERO competitive advantage here. Much like they have no competitive advantage in pretty much anything else except stock promotion...
There seems to be a lot of anecdotal evidence that demand is collapsing in Q4 (inventory cars building up in random SHLD/M/JCP parking lots and the assembly operating at half capacity the past few weeks) and what is sold is at lower ASPs. Q1 may see one last uptick due to them selling into Europe, but that is only a few weeks of demand at the higher priced ASPs. Then what? Le Deluge?
379: TallGuy, Re: Re: Re: Reasonable Bull Case?
For starters - I think EV adoption will take much longer than forecasted due to supply chain issues (see my thoughts in my ORLY write up). Second it took me a minute to write this up and Hkup and Light addressed the same points.
#1 Quoting Elon, “all our patents are open sourced” and see blog https://www.tesla.com/blog/all-our-patent-are-belong-you This should inherently limit Tesla’s ability to have a sustainable competitive advantage from technology alone.
One could go down the rabbit hole of Tesla’s relationship with Panasonic as well to counter this point.
Another element of tech advantage is human capital. Simply smarter people want to work at Tesla rather than GM and F. This is likely true and I buy that argument. Here is the WSJ’s take. https://www.wsj.com/articles/tesla-is-the-hot-spot-for-young-job-seekers-1543150801. Arguably the number one asset for recruitment is Elon. Arguably the largest liability and reason for turnover is also Elon. I see Elon as a net liability to Tesla’s work place environment.
#2 Since battery technology is not a durable advantage then 15% operating margins (if Tesla get there) will likely not be sustainable as competition enters the market. Consumers will then make their choices based on branding, capabilities, and ultimately price. If you have time read The Machine That Changed the World: The Story of Lean Production -- Toyota's Secret Weapon in the Global Car Wars That Is Now Revolutionizing World Industry. It was written over the 80’s and 90’s and its amazing how many blunders Tesla has run into that were addressed during this period.
On a broader point - When I read initially read point 2 I thought of every TMT thread on VIC. Increasing competition is disrupting legacy business models and the consumer is the ultimate beneficiary through increased purchasing power. If EVs are going to be cheaper than ICE vehicles (or OTT cheaper than cable) then where will the excess discretionary cash be spent? This is the question that I have been pondering for some time and I do not have many great answers.
Finally I have debated sharing this for some time but now seems reasonable. We are all long Tesla. If they are successful in advancing EV technology and more importantly increasing consumer adoption of electric vehicles then we all win. If Tesla fails? Why hedge your long exposure with a short position?