From my analyst Kevin DeCamp:
This Tiger Cub Giant Is Betting On Banks And Tech Stocks In The Recovery
The first two months of the third quarter were the best months for D1 Capital Partners' public portfolio since inception, that's according to a copy of the firm's August update, which ValueWalk has been able to review. Q2 2020 hedge fund letters, conferences and more According to the update, D1's public portfolio returned 20.1% gross Read More
I wanted to follow up on “My analyst’s bull case on Tesla” that Whitney sent around on 4/13 (copy below).
First of all, I want to thank those of you who provided feedback. It was the first time I’d gone (semi-) public with my thoughts and I thoroughly enjoyed the response. For the record, that wasn’t my entire bull case because I don’t think there is any value in repeating what most of this informed group already knows. As I admitted, the bear case is “extremely compelling” and I will add that - even with my bullish bias - it sometimes seems obvious that the story is in its final stages. However, this leads me to ask: if it is so obvious, why hasn’t the stock collapsed yet?
I would like to propose two possible explanations:
- The extreme passion for Tesla cars is such a powerful force that it can overcome all (or most) of the negatives.
- The TAM is much larger than we all think.
I would also like to add some additional points that I see as weaknesses in the bear case to try to bring something new to the table and hopefully learn something again.
Some bears admit that Tesla owners love their cars, but this is really because of the EV driving experience and not because it is a Tesla – therefore other automakers will easily take share as they introduce their competing EVs. It will not surprise you that I disagree with this because it is clear to me there are many other factors that contribute to Tesla owners passion for their cars (although the EV driving experience is the foundation of it).
Some bears are making a lot of noise about weak Model S & X sales right now, but I think the pendulum will swing when Tesla refreshes these models with a near 400-mile range (E-tron is going to seem even lamer with that ~200 mile range), but that’s not what I want to discuss here.
One of the main issues bulls and bears debate is the over-the-air updates (OTAs). Bears dismiss them as band-aids for poorly developed software, but my take is that customers love them and see their cars getting better over time (the opposite of their prior experience). Why not listen to the customers? If OTAs are just a band-aid and actually a sign of weakness why did Ford and GM announce that “some” of their models will allow OTAs in 2020? Tesla has been doing this since 2012. Why are Ford and GM 8 years (at minimum) behind? Do we actually believe that Tesla hasn’t learned anything about OTAs over the last 8 years and that will not give them some sort of an advantage for the foreseeable future? Not the best comparison, but Amazon had a 7-year lead with AWS and we all know how that worked out.
So maybe it has something to do with the dealership model:
Jared Allen, spokesman for the National Automobile Dealers Association, tells Consumer Reports that dealerships will still have to handle most serious fixes. “These are still machines that are mechanical in nature, and most of the components need to be repaired and replaced by physical, mechanical means,” he says.
He says dealers will also need to explain to customers how their vehicles changed after an update, especially if it enables new features that a driver might not understand.
For example, even though Cadillac’s semi-autonomous Super Cruise feature can receive OTA updates, the automaker says it uses the technology only to deliver new maps—not to give drivers access to new functions they may not yet understand and not to change how existing features work. For those updates, drivers still have to go to a dealership.
As a customer that is accustomed to OTAs I would never buy a car that couldn’t update itself. Obviously, cell phones and cars are different, but bringing my car into the dealership for an update so they can explain to me new functions sounds like bringing my cell phone into Best Buy every time I need an update so they can educate me. It just sounds hilariously stupid and outdated. What am I missing?
And to those bears who say they don’t want OTAs, you sound like grandpa with a flip phone in 2010 saying he doesn’t need a smart phone.
In addition, bears love chuckling about “fart mode”, but what about all the free press that Tesla is already getting for Sentry Mode and Dog Mode? Check out this recent headline where a politician got caught in a hit and run of a Model 3 or this headline on twitter, “This car saves dogs lives”. This is not to mention Romance Mode and all other features such as Atari games that bears laugh at yet customers love. Do you think Tesla is going to slow down with these updates? Do you think customers are going to wonder why no other cars even have the capability? The answer seems obvious to me, but again, what am I missing?
Lastly, I would like to address this critique of my last post:
“No discussion on the size of the addressable market, how impractical these are for many people, the quality issues scaring people off, and Tesla’s horrific financials. Just a passionate following in the virtue signaling tech bro crowd. We get it.”
I will respectfully say that I don't think you get it. Do you really believe that only virtue signaling tech bros are passionate about Teslas? This was the most laughable feedback I received. Is Ray Lewis a tech bro:
Pure passion ????@TeslaMotors pic.twitter.com/44rg35cfOM
— Ray Lewis (@raylewis) February 18, 2017
How about Biz Markie:
— BIZ MARKIE (@BizMarkie) September 10, 2017
I will discuss the “size of the addressable market” by saying that there is a material risk that bears are massively underestimating the TAM due to their skeptical, finance minds (I am usually a part of this camp, but got swept into the Tesla cult years ago!!) and forgetting that they are likely part of the 1% – or close to it – and therefore may not have a good sense of how people outside of their bubble feel about Tesla and Elon Musk. Notice that Lewis pays respect to Musk at the end of his rant. Do you think Lewis, or most other people, can name one other auto CEO? Also, his comments about the car being like an iPhone are spot on and what many customers want. Meanwhile the rest of the industry sucks at integrating hardware and software and my Model S screen from 2014 somehow still works great and has only gotten better as they updated the UI completely.
And what about Joe Rogan (who now gets 1.5+ billion listeners a year): https://www.youtube.com/watch?v=ITbTyfjAprw
Rogan saying that other cars are dumb brings up a speculative thought for which I invite as much pushback as possible. As EVs become more affordable, ICE cars will become the flip/dumb phones of the past. Tesla will be like iOS and all other EVs will run into the same problems that Android phones ran into (but worse) because the incumbent automakers are not good at integrating software and hardware. Someone said I wasn’t a “forward looking" analyst. If you don’t think OTAs are important, which way are you looking?
I am not going to address autonomy at this point, but will just say that – even if Musk is half right with his predictions – bears should be worried.
Finally, because the Tesla debate at times gets as ugly as the political debate (especially on Twitter), I would like to attempt to be the mediator between bulls and bears – since many bears are my friends – and try to get everyone to lighten up. Bulls: Musk is not the god that you think he is and Tesla’s stock can actually go to zero. Bears: your analysis is thorough and compelling, but just because some of the smartest people in finance agree with you doesn’t mean you’ll be right about the stock (social proof?). The stock market is usually not that easy. And to all of you, I have a message from that virtue signaling tech bro Biz Markie: make sure your confidence is not just a case of the “Vapors”:
Sent on 4/13:
My analyst's bull case on TSLA
My analyst Kevin DeCamp has owned Tesla’s stock for nearly seven years and drives one. He sent me this and gave me permission to share it:
When people drive a Tesla (or ride in one), this tweet is their usual experience more often than not:
Or watch this 12-minute video by a guy who bought one of the first Model 3s a year ago and has put 26,000 miles on it:
I think the two guys above are closer to the “average American” than the finance guys who are short Tesla. I admit without shame that buying a Tesla CHANGED my life!!
Tesla bears tend to dismiss such rave reviews, saying things like, “Oh, its screen is like an iPad glued to the dashboard, I heard it crashes all the time right? I like Audi and Porsche interiors because they are way more luxurious, etc.”
In other words they see what they want, confirming their bias.
I got news for you, the average American is not short Tesla nor knows what a balance sheet is. They actually just have an intuition that Tesla is cool, is the future, and there is NO way it could go bankrupt.
Many of Tesla’s critics are “car guys” who work in finance and/or drive a Porsche. This is the ultimate handicap for understanding what Tesla’s bring to the table. They are NOTHING like the average American. (Obviously “average American” is a very broad term. The typical “average American” couldn’t afford a Tesla although the Model 3 opens up a whole new market.)
I wouldn’t be caught dead in a Porsche (or a Mercedes, BMW, Audi) because I would feel like a douchebag and it’s just not me. However, I am 100% comfy driving a Tesla for some reason. I would like to think I am unique, but I believe many people feel the same way. After all, I traded in a Toyota for my Tesla and many people trade in Nissan, Honda, etc. cars (as well as BMW, Mercedes, and Audi) for Teslas, as Andrew Left has pointed out.
In the nearly 7 years that I have owned the stock, I have never seen the bears so confident – almost as if there is zero probability they are wrong. The markets tend to punish such hubris.
To summarize, this comment on Value Investors Club captures my feelings well:
I have never seen this level of consumer passion, and the only thing that comes close is Apple users thirty(?) years ago when they would suffer all sorts of inconveniences to use an Apple desktop computer.
As a short, my great fear is that somehow they can translate this extreme passion over time into a highly profitable brand, like Apple. Cars are different from computers, and I do not see how Tesla can pull it off, but this level of passion is worth something
The bear case is indeed extremely compelling. However, what if Tesla gets through its current problems (as it always seems to) and this passion continues to spread and is powerful enough to outweigh all the negatives?