Tesla: Musk se abre sobre los desafíos que se avecinan: en busca de Alpha


Translating…

Tesla (TSLA) just held its shareholders’ meeting with its Battery Day rolled into one and the message was clear and dreadful. Don’t get me wrong that doesn’t mean the stock will continue to go down. But the takeaways regarding the business were really awful. I want to discuss a number of statements made by CEO Elon Musk and Andrew D. Baglino, SVP of Powertrain & Energy Engineering. I’ve selected these because I either thought they were questionable or to illustrate why I thought this was a bearish call, especially in regard to the long-term future of Tesla (all emphasis within quotations is by me):

So I think solar sometimes underweighted at Tesla, but it is a massive part of our future.

The 3 parts of a sustainable energy future are sustainable energy generation, storage and electric vehicles. So we intend to play a significant role in all 3.

At the start of the Battery Day presentation, Musk can hardly wait to mention Tesla’s solar business and put it in the perspective of “Tesla the sustainable energy company.”

Every time I speak to a Tesla bull in the wild he (it’s invariably a he) believes Tesla derives some value from its future in the energy business. I’m inclined to believe that is because Musk elevates this segment by highlighting it frequently and making it a part of his overall vision. I’d be willing to accept that if it was reflected in the financial statements but it isn’t.

The table below shows Tesla’s most recently published quarterly financials. Revenues are down for the entire company. They are down for automotive revenue. But more importantly, regarding the myth of the energy business, it’s a pitiful line-item, especially since Tesla paid $2.6 billion to acquire SolarCity. If you hear Musk talk about it.

Admittedly it went up quarter over quarter from $369 million to $370 million. But with the cost of revenue increasing fast and at $349 million it is entirely inconsequential to Tesla. Let’s not even think about assigning it a part of overhead costs. It is a money-losing business line and definitely not one of three pillars of a unified strategy.

Three Months Ended June 30,

Six Months Ended June 30,

2020

2019

2020

2019

Revenues

Automotive sales

$ 4.911

$ 5.168

$ 9.804

$ 8.677

Automotive leasing

268

208

507

423

Total automotive revenues

5.179

5.376

10.311

9.100

Energy generation and storage

370

369

663

693

Services and other

487

605

1.047

1.098

Total revenues

6.036

6.350

12.021

10.891

Cost of revenues

Automotive sales

3.714

4.254

7.413

7.110

Automotive leasing

148

106

270

223

Total automotive cost of revenues

3.862

4.360

7.683

7.333

Energy generation and storage

349

326

631

642

Services and other

558

743

1.206

1.429

Total cost of revenues

4.769

5.429

9.520

9.404

Gross profit

1.267

921

2.501

1.487

Operating expenses

Research and development

279

324

603

664

Selling, general and administrative

661

647

1.288

1.351

Restructuring and other

117

161

Total operating expenses

940

1.088

1.891

2.176

Income (loss) from operations

327

(167)

610

(689)

Interest income

8

10

18

19

Interest expense

(170)

(172)

(339)

(330)

Other expense, net

(15)

(41)

(69)

(15)

Income (loss) before income taxes

150

(370)

220

(1.015)

Provision for income taxes

21

19

23

42

Net income (loss)

129

(389)

197

(1.057)

Net income attributable to noncontrolling interests and redeemable noncontrolling interests in subsidiaries

25

19

77

53

Net income (loss) attributable to common stockholders

$ 104

$ (408)

$ 120

$ (1.110)

Net income (loss) per share of common stock attributable to common stockholders

Basic

$ 0,56

$ (2,31)

0,65

$ (6,40)

Diluted

$ 0,50

$ (2,31)

0,59

$ (6,40)

Weighted average shares used in computing net income (loss) per share of common stock

Basic

186

177

184

175

Diluted

207

177

203

175

In some regards, this presentation was a breath of fresh air because Musk and Baglino mention several important issues that bears have been pointing out for years.

For example, Musk sums up how much battery manufacturing is needed to go through the energy transition:

Yes. And this number, I think, might grow even more. As the world economy matures and as countries with high populations industrialized, we could see this number be even more. But let’s say it’s like roughly 20 to 25 terawatt hours per year sustained for 15 to 25 years to transition the oil to renewable. This is a lot.

In a recent report, Wood Mackenzie forecasts global lithium-ion cell manufacturing could quadruple and reach 1.4 terawatt-hours (TWh) by 2030 compared to 2019. To get to this total capacity the consultancy added up 119 battery manufacturing facilities that are operational, under construction, or announced by more than 50 vendors.

I get that Elon Musk is always pushing the boundaries of what’s possible, but it illustrates where we are now and how far away we are from an all-electric fleet. I’ve always been quite bearish on Tesla but it’s not that I don’t see there is an energy transition ongoing. But in my opinion, there are many more interesting angles to get involved than through obvious electric vehicle plays, Tesla, NIO (NIO), Nikola (NKLA), etc.

Yes. And you can see it’s — we’re talking about 100x growth in batteries for electric vehicles to achieve this mission. And we are going to get there. It’s just a matter of how fast. And our intention is to accelerate it.

So the duo is clearly acknowledging that we are far away from having the resources to even allow energy transition to take place within a few years or even a decade. That’s also why I don’t believe in the idea that we’re done with natural gas or even oil in the next few years.

I’m sure they would love to push things forward and that could help. Musk has recently been begging miners to start up some nickel projects. But the mining world is a galaxy away from Silicon Valley. I like to invest in mining (nobody likes it except the precious metals, meaning you can buy excellent assets for little) but it is a brutal business.

There are always lots of companies on the verge of bankruptcy. Once in a while there’s a boom because of demand strongly outpacing supply. That’s when they make tons of money and everyone is throwing money around at new greenfield projects (which Musk is asking for) and a few years after they’re all regretting those investments as the higher-cost producers are once again losing money.

There’s no capital to start lots of mines on a vague thesis. Even exploration and proving out resources is an expensive, long, and arduous process. There are no mining companies that people have thrown $7 billion at in 2020 or any other year, at virtually no cost of capital, as is the case with Tesla. If Tesla really wants to accelerate the discovery and mining of key materials, it needs to buy a miner. Don’t get me wrong it would be getting into a horrendous business but maybe that would give it a chance to get anywhere near its ambitions.

But the company isn’t done discussing some real problems. According to Baglino, there are like 35 fully built-out Nevada Gigafactories necessary to get to 20 terawatt-hours a year. “It’s not scalable enough of a solution. We need a dramatic rethink of the cell manufacturing system to scale as fast as we can and should.”

I expected an event where it would reveal some revolutionary technology but instead, it is revealing there is a need to dramatically rethink the cell manufacturing system to scale as fast as it should, and that’s just the start of all the problems it is putting on the table.

Musk chimes in:

obviously, we need to make more affordable cars. The — I think one of the things that troubles me most is that we don’t yet have a truly affordable car, and that is something that we will make in the future.

So far all its cars are premium. Those are the cars where you can grab the better margins but Tesla’s automotive segment is structurally unprofitable already, even while just producing premium cars with industry-low investments in CapEx or R&D. But it gets worse:

But in order to do that, we’ve got to get the cost of batteries down. We’ve got to make — and we’ve got to be better at manufacturing, and we need to do something about this curve. The curve of the cost per kilowatt-hour of batteries is not improving fast enough. So we’ve given us a lot of thought over many years to say, okay, how can we radically improve the cost per kilowatt-hour curve? It’s been somewhat flattening out actually in the years.

Bears have been arguing for years that the cost per kilowatt-hour of batteries would not continue to improve at the pace it had. Baglino doubles down on this observation:

Yes. I mean, early growth was promising, but you can see we’re kind of plateauing. So that’s what’s motivating us to rethink how cells are produced and designed.

This means that Tesla will find it extremely challenging to increase margins on its products. Or to sell more products because there’s a limit to what people can afford to pay for a car.

The duo structured the presentation by first laying out the problems. Which I liked because they acknowledged some real bottlenecks in the energy transition. But they moved on to the stage where they would present the solution to these problems. Musk and Baglino have a plan:

And when we look at what — what’s happened today, at least in our products, we move from 18650 form factor to the 2170 form factor through great collaboration with our partners, Panasonic, new partners like LG and CATL and probably others in the future.

But this sounds an awful lot like the innovations Panasonic (OTCPK:PCRFY) (which makes Tesla’s cells) has already announced. It is working on cobalt-free and switched Tesla to the 2170 form factor. And Baglino more or less acknowledges that it’s Panasonic’s innovation:

And this was a evolutionary step going from 1865 to 2170, bringing 50% more energy into the cell. But when we look to the ideal cell design, if we were to do it ourselves, we need to go beyond just what we’re looking at us in front of us and study the full spectrum of options.

Next, they present a new technology to create batteries in a tabless design. This sounds pretty great, but as will become apparent throughout the presentation it’s years away from production at scale. Tesla had already filed for a patent for this technology earlier this year:

A cell of an energy storage device with at least one electrode that is tabless, and methods of forming thereof, are described,» the patent application states. «The cell includes a first substrate having a first coating disposed thereon, wherein a second portion of the first substrate at a proximal end along the width of the first substrate comprises a conductive material. An inner separator is disposed over the first substrate. A second substrate is disposed over the inner separator. The second substrate has a second coating disposed thereon. The first substrate, the inner separator, and the second substrate in a successive manner, the first substrate, the inner separator, and the second substrate are rolled about a central axis.

Baglino makes a point of stressing that the battery is not just a concept or rendering. “We are starting to ramp up manufacturing of these cells at our pilot 10-gigawatt-hour production facility just around the corner.” I’m not sure why they didn’t bring one.

But Musk followed this up with a few surprising and deflating comments:

Yes. So video of some of what’s going on in the plant. Now I mean, to be clear, it will take about a year to reach the 10-gigawatt-hour capacity. So this is important to appreciate. Like when you build a factory, there’s a certain capacity that you design to, and then it takes some period of time to actually achieve that capacity. So I would say it’s probably about a year before we get to the 10-gigawatt-hour annualized rate with the pilot plant. And this is just a pilot plant, but the actual production plants will be more on the order of maybe 200-gigawatt hours, maybe more over time.

This is an unusual cautious statement by Musk. Something is different, maybe the Shanghai factory isn’t ramping as planned and he wants to prep shareholders that ramping factories takes time. One of the reasons I’m suspicious of Tesla’s perceived path to world domination is that I’ve invested in “new innovative factory concepts” in the past. It just didn’t scale. Bottlenecks kept popping up and ultimately I ate a donut of the kind no one likes to eat.

The executives talk about the ideas they have for an ideal battery factory they want to build. I actually don’t think all the vertical integration of battery production, mining, etc. is such a great idea. Except for the fact that Tesla has virtually no cost of capital while it’s expensive to finance all this for actual battery manufacturers or miners. As long as people keep throwing billions at newly issued stock, I think it makes a lot of sense from Musk’s perspective to do it this way. But there’s another unusual comment by Musk:

I mean it’s hard, actually, just to be clear. So if this was easy, everyone would do it. So it’s not like dry coating electrode is actually easy. It’s actually very hard to do what appears to be a simple thing. And it’s worth noting like we did acquire Maxwell. It was like a little over a year ago, I guess, and certainly a good company and everything, but the dry coating they had was like — it’s like sort of, I would call, proof of concept. Since the acquisition, we have actually ramped the machine that does dry coating 4x, so when — revision for post-acquisition of the machine. And there’s still a lot of work to do. So I would not say this is like completely in the bag. There’s still a lot of work to do.

…It’s insanely difficult to scale up…

The process apparently isn’t production-ready and they don’t give a date for when it will be. Then there is this concerning bit:

Yes. I mean basically, Tesla is aiming to be the best at manufacturing of any company on earth. This is the thing that’s actually most important in the long run. I think just from a company standpoint and from basically achieving sustainability as fast as possible, but I think also for long-term competitiveness, eventually, every car company will have long-range electric cars. Eventually, every company will have autonomy, I think, but not every company will be great at manufacturing. Tesla will be absolutely head and shoulders above anyone else in manufacturing. That is our goal.

Bulls sometimes argue Tesla is a software company. Musk is calling it a manufacturing company. And that’s what he wants to be in the long run. He also uncharacteristically acknowledges that every car company will have long-range electric cars. In this previous article I’ve discussed how you can argue they already have. He’s saying everyone will have autonomy. I’m not so sure. Musk’s uncharacteristic reservedness almost gives me the impression that either A) things aren’t going so well with autonomy or B) he’s getting regulatory heat for claims about Tesla’s advancements and now claims them for the entire industry in order not to appear comparatively weak.

It seems kind of a weird shift from when Musk explained on this recent earnings call:

Yes, I mean the thing that’s really going to I think probably just have a profound effect on our financials is like is high volume and high margin obviously and that high-margin part comes from autonomy. So, do people buy the full self-driving package or not

Basically, laying out that any profitability would need to come from autonomous. If everyone has it… that’s going to be challenging. But then again, he’s also said that he doesn’t care beyond being at least a bit profitable on the Q4 2019 earnings call:

Yes, I mean we’re trying to make the cars as affordable as possible, as fast as possible, while maintaining reasonable – while still being at least a little bit profitable and growing the company like crazy and having good free cash flow and accumulating our cash balance. Zach, anything you want to add?

Nothing new was announced in this presentation. Everything talked about still being “a lot of work” or at least a year away. Musk doesn’t care about profitability. He calls Tesla a manufacturing company and that’s what he wants it to be. Musk acknowledges that others will catch up in range (if they haven’t already) and everyone will have autonomy. I’m not sure about the latter but agree that Tesla is unlikely to be the leader, given it woefully underinvests in the space.

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Disclosure: I am/we are short TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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