I see lots of student company write-ups and pitches. Most are better than yesterday's $3,000 ARK Price Target Report for $TSLA. In reading the report its clear the motivation is to promote a higher stock price. The fantasy involved is simply spectacular... 1/
Let’s go right to the insurance valuation and model update, where the analyst assumes in a BEAR case Tesla’s “Insurance Operation” is worth $23B in 2025, four short years from now. It’s clear that the author and firm have no clue how insurance works. Harsh, I know. However... 2/
To begin and to be clear, Tesla has ZERO insurance underwriting operations. They are brokering auto policies in California alone for an underwriting fronting sub owned by Markel. The business written is so small to not be quantified either by Tesla or Markel in SEC reporting. 3/
The analyst writes, “ARK believes that in the next few years Tesla could roll out its insurance offering to more states, underwriting its own insurance policies. Because its vehicles have better than average safety profiles, Tesla should be able to use real-time data 4/
to offer insurance in its vehicles, pricing it dynamically, lowering customer acquisition costs, and increasing margins. Relative to Progressive’s 13% EBIT margin in 2019, ARK estimates that Tesla could achieve margins close to 40%. 5/
If it were to sell 40% of vehicles with its own insurance offering by 2025, Tesla’s insurance revenues could approach $23 billion annually in our bear case.” This is the stuff of legend. If "ifs" and "buts" were candy and nuts...This is nuts. 6/
The ARK "bear case" assumes insurance revenues of $23 billion and a 40% EBIT margin in 2025 with 5 million vehicles sold, up 10x from 500k in 2020. Hold underwriting aside for a minute and think about brokerage. 7/
Let’s give ARK credit and assume Tesla brokers the insurance on 40% of all Teslas sold over the next four years, call total sales 10 million units. At a ballpark industry average $1,600 in annual premium, total insurance policy revenue totals $16B on all Teslas sold. 8/
Brokerages and agencies will earn on average 15% of total auto premiums as commissions, so revenues at the 2025 run rate yields $2.4B in annual commissions to $TSLA. How in the world do you get to $23 billion in ARK assumed insurance revenues? Must be underwriting, correct? 9/
Suppose instead of brokering policies for an underwriting front Tesla does get into the underwriting game. Here’s where the analyst & ARK know little or nothing of insurance. Let’s presume Tesla is admitted to underwrite auto in every state in which they sell a vehicle. /10
Suppose for grins Tesla writes the full forecast 40% of all policies on every Tesla sold over the next four years, say a generous 10 million vehicles (5 million in 2025). Tesla would be underwriting insurance on 4 million vehicles, its 40% share of the total. Starting NOW. /11
At $23B in 2025 “insurance revenue,” that’s $5,750 in annual premium/vehicle, more than $3,000/year above what the industry charges per vehicle now and in this case more than 10% of the total vehicle price (before software “upgrades”). Avg is closer to 5% with a wide range. /12
Let’s just say Tesla underwrites on 100% of total vehicles sold over the next four years (I’d take the under on 10 million for a whole bunch of money). At the analyst’s assumed $23B in revenues, that’s $2,300 per policy, still way higher than $PGR’s or the industry average. /13
Now, to underwrite insurance requires capital, yet the ARK model presumes a share count of 1B shares outstanding, well BELOW today’s fully diluted count. Tesla already has 960m shares out and 1.155 out on a fully diluted basis. /14
You can count on all fully diluted shares outstanding if the stock moves up to ARK’s $3,000 price target/share, a $3.47 trillion market cap, 112 times trailing 12-month revenues. Beyond asking how in the world will the company have enough capital to finance building cars.../15
at a 5-10 million annual rate with the capacity they now have and have under construction (Fremont, Shanghai, Germany and Austin) without selling new shares, where will the capital come from to underwrite $23 billion in annual premiums and expand auto production? /16
I wonder if ARK knows auto insurance is underwritten on an admitted basis in each state? Regulatory approval in each state will be required, as will capital - lots of it. I wonder if ARK knows admitted auto insurers can write $3 in premiums for each $1 of statutory capital? /17
Underwriting $23 billion in premium requires almost $8 billion in statutory surplus (equity). Progressive has about $14 billion. What will it cost Tesla to start an insurance underwriting operation on a de novo basis in each state in which it sells cars? /18
It’s going to chew up a substantial portion of the $8 billion needed in surplus to underwrite $23B in business.

Here’s where the ARK report demonstrates its lack of understanding of insurance. How easy to say that Tesla will operate at a 40% EBIT margin versus $PGR’s 13%. /19
I’m not sure even a college junior with zero investing experience would make this Herculean leap. Tesla will, “achieve better than average margins on insurance thanks to the highly detailed driving data it collects from customer vehicles.” Wow. /20
First, the reason insurers don’t want to underwrite on Tesla vehicles is they are extremely expensive to repair. Their technological “advantage” against ICE vehicles means they have more technology on the vehicle - sensors, computers. /21
When a moron is tooling around thinking they are on FSD and rams into a semi or other vehicle, repairs are expensive, both to cars and to people. Next, the notion that Teslas are “safer” and will cost less to insure demonstrates a lack of understanding of insurance pricing. /22
Beyond the notion that Teslas are safer & thus cheaper to insure, losses (claims for repairs/medical) & operating expenses (underwriting, claims paying, management, investing) combine to yield little industry profitability. It's a regulated market with LOTS of competition. /23
If an underwriter like Tesla (remember we are pretending they are one) is consistently too profitable, insurance commissioners will drive pricing down. If collisions trend toward zero (frequencies), pricing will reflect fewer claims and insurance costs will decline. /24
Insurance will always be required — the car accelerates into your living room on its own or the sensors miss the sinkhole in the road that just appeared and swallows the car and driver. If it made sense for incumbent insurers to write on Teslas, believe me they would do so. /25
Continue with profitability. I wonder if the analyst realizes that more auto insurance profitability is derived from investment income than from underwriting profit? A 40% EBIT margin on $23B in premium revenue yields a $9.2B profit before interest and tax. /26
$PGR has total investment assets of about $47B against just under $40B in premiums earned. Given Tesla will have no surplus capital and no reserving history, they will be compelled to invest most of their invested assets in fixed-income (of which they have none today). /27
I don’t see them earning more than $1B on a bond portfolio. Maybe the Tesla "insurance operation" will be allowed by regulators to invest solely in #Bitcoin? If investments will be in fixed, the majority, maybe $8B of their EBIT profit of $9.2B, will come from underwriting. /28
The analyst ought to ring a few state insurance commissioners & ask, “Hey, ARK here, Tesla is going to be underwriting a ton of policies in your state over the next 4 years - we’re thinking they'll write at a 35% pre-tax underwriting margin - you have any problems with that?” /29
Bear in mind the comps to $PGR apply in the US alone. $TSLA will have to underwrite globally. The car crash coming watching these impossible projections hit the wall will be spectacular. Gandalf the Grey couldn’t pull this off, even after a promotion to White Wizard status. /30
Forget about the implausibility of a $3,000 price. Forget that the presumed $3 trillion forecast market cap doesn’t allow for new shares sold or even the vesting and exercise of more than 40 million of current option shares (there are WAY more issued but unexercised). /31
Forget the capital requirement to grow into 5-10 million vehicle production in 4 years (more than 5% to 10% of total vehicle global market share versus 0.5% today). The impossible assumptions regarding Tesla's valuation just as regards insurance blasts a hole in credibility. /32
Ask whether a firm or analyst that presumes $23 billion in insurance revenues in four years for a yet non-existent startup insurance underwriter, even one with prospective “vertical integration,” understands enough about insurance to make the absurd claims proffered above. /33
The ARK price target update report would fail in many undergraduate stock pitch contests. Client: "You put all of my money in Tesla and margined it. I lost it all when the world woke up to the impossibility of the projections." You: Well, they ran a Monte Carlo simulation... END

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More from @ChrisBloomstran

Aug 5
Berkshire reported 2Q results this morning. As always, there's more under the hood than the reported results. A few thoughts on what is a very mixed bag. BRK is a good proxy for the US economy. The industrial economy is weak, consistent with what other companies are reporting. 1/
For starters, operating income was $10.0 billion for the quarter, up 6.7% over 2Q 22 and up 9.2% for six months. However, properly excluding forex gains on non-US denominated debt, profit rose from $8.3 billion to $9.6 billion in the quarter, up 15.2% and 17.9% for six months. 2/
However, much of the increase came from income on Allegheny's acquired assets in October and from BRK's now 80% investment in Pilot, up from 38.6% (5 months consolidated and 1 month equity method). Higher interest income on a larger cash balance further drove much of the gain. 3/
Read 23 tweets
Apr 22
Ark Invest, the bucket shop EFT promotional “investor,” the one whose founder CEO told a CNBC audience a year ago that ARKK would earn 50% a year (correct if she said minus), is back with its 3rd annual Tesla “research report” with a fresh $2,000 price forecast by 2027. Amen. 1/
That’s a $7 trillion market cap, or a mere 21% of the S&P 500's current cap. MSFT, AAPL, GOOGL, AMZN and META have a combined $7.7 trillion market cap today, up from $6.2 trillion at yearend. From today’s $165 share price, $2,000 in 4.75 years is 69% per year. Makes sense. 2/
Zero mention of expected hyperinflation in the report. Cue the class action lawyers. Cue @SECEnfDirector. The bull case is $2,500 per share, 25% higher than the base case and a market cap of nearly $9 trillion, or 26% of the current S&P and up from 1.5% of the index now. 3/
Read 25 tweets
Jan 21

1. Loss from 2/12/2021 Peak: -80.1%
2. CNBC Appearances Since 2/12/2021 Peak: 23
3. Cumulative NET Assets Raised Since 10/31/2014 Launch: $17.1 Billion ($14.5B in 2020 and 2021)
4. Assets at 12/31/2022: $6.0B
5. Cumulative Management Fees Earned: $300 Million
6. Market Value at 2/12/2021 Peak: $29 Billion
7. Dollar Loss Since Peak: $23 Billion
8. Annual Return vs S&P 500 Since 10/31/2014 Launch: 5.4% vs 10.3%
9. $ARKK Price 12/31/22: $31.24
10. Date Last $31.24: 08/22/2017
11. AUM at 8/22/17: $450 million ($15m @ 1/1/17)
12. Net Inflows Since 8/22/17: $16.9B (Out of $17.1 Since Inception)
13. Percent of ALL DOLLARS Invested in ARKK Since 10/31/2014 Inception Losing Money: 98%
13a. Yep
Read 8 tweets
Dec 25, 2022
Who could forget the C-Suite high jinks when Elon and CFO Zach Kirkhorn invested $1.5 billion in Bitcoin and added the titles "Technoking of Tesla" and "Master of Coin?" Since the March 15, 2021 rebranding, Tesla and Bitcoin are down 48% and 70%, respectively. Great fun.🎄 1/
While the Bitcoin position and the Tesla outside shareholders have suffered mightily, how have the INSIDERS fared? If you guessed considerably better you are correct. Collectively the brass at Tesla appear to have unloaded 126 million Tesla shares for more than $41 billion. 2/
While Elon's sales are the preponderance of that, selling at an average share price of $325 is pretty good when measured against the present $123.15 price. That's a current bid 62% below the average sale. Nearly all shares were gifts from the board, not bought out of pocket. 3/
Read 15 tweets
Dec 17, 2022
Unlocking this valuation genius. When offering to buy Twitter on April 14 for $54.20, $44 billion, the 3-mo T-bill yielded 0.77%. Today, at 4.20% (what are the odds), it’s reported Twitter is seeking a new equity “funding round” at the same $44 billion valuation. Fascinating. 1/
Given the purchase closed on October 27, solidly in Q4, curious as well if Twitter will open the interim books to prospective “investors.” As a public company, Twitter naturally wouldn’t publish financials until 12/31. It’s reported the money needs to be raised before yearend. 2/
I’m quite certain prospective investors will want to see the state of revenues. Conventional wisdom here on Twitter believes a massive cut in labor means huge margin expansion. Important when on $5B in revenues and $13B in debt, $1.2B in interest expense exceeds $1B in EBITDA. 3/
Read 4 tweets
Dec 2, 2022
Bernie Madoff was charming. Ponzi operators generally don’t begin as crooks, but once losses develop and they first steal to finance the “makeup trade,” their new criminal career is set. Imagine the sociopathic charm required to raise sustaining capital from ongoing victims? 1/
Ponzis work as long as incoming money is sufficient to finance withdrawals. At the point SBF took customer money to cover losses at Alameda, he was now Madoff. If Ackman believes the kid, and Mr. Wonderful believes Ackman, look into how many sophisticates believed Madoff. 2/
By the time SBF reveled as the next Warren Buffett and Forbes 400er, he had evidently already moved client money to his private trading fund. He knew he was a fraud but convinced otherwise smart people to believe him. Some still do it seems, not seeing a forest for the trees. 3/
Read 4 tweets

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