Thread by @truth_tesla

@AswathDamodaran Professor Damodaran, I'd like to thank you for your honesty, for admitting that you were wrong about Tesla & for your self-reflection. Not a common trait among Tesla bears. I'm a long-time fan of your "Musings on Markets" blog - while disagreeing with your Tesla thesis. 🙃

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@AswathDamodaran 2/

Here's a list of key points where I think you are mistaken in your Tesla valuation:

▪️Why cap (net) margins at 16%? The fact that Tesla already has 30.5% gross margins despite 70% YoY hyper-growth expenses is a strong signal that operational efficiency hasn't peaked yet.

@AswathDamodaran 3/

▪️With a +70% YoY growth rate Tesla has countless operational inefficiencies, both incidental and unavoidable ones: expansion of facilities & hiring has to lead actual sales by several quarters, and much of it isn't capex but increases cost of revenues, opex / SG&A.

@AswathDamodaran 4/

▪️Even "old" capex from 2 years ago is temporarily reducing margins right now, because Tesla depreciates their investments on an accelerated schedule. Capex overhead of the $4b+ Model 3 factory has been much reduced with the ~$1b Shanghai factory.

@AswathDamodaran 5/

▪️Much of the capex efficiency improvements have not rolled into Tesla margins yet - yet it now has higher margins than literally every other major auto company, many of whom have 10x-20x of Tesla's unit scale.

@AswathDamodaran 6/

▪️But as Tesla increases its unit scale 20x, that will work in their favor as well:
▪️Plain efficiencies of scale in parts and materials purchases
▪️Wright's Law
▪️Say's Law

@AswathDamodaran 7/

▪️Operational margins are a direct multiplier to valuation: a company with 30% net margins is worth twice as much as one with 15%, all other things equal. Capping Tesla net margins at 16% while increasing revenue to $400b needs more justification than historic parallels.

@AswathDamodaran 8/

▪️Margins are also a function of market power & pricing power. Tesla recently demonstrated their quasi-monopoly status, when they didn't take a fleet purchase deal from Hertz, who has to buy 100,000 Teslas at retail prices. Unprecedented market power in the auto industry.

@AswathDamodaran 9/

▪️Unprecedented high Tesla margins and quasi-monopoly market dominance aside - both of which are hefty valuation multipliers in pretty much any industry - there's other positives of Tesla which I believe your thesis missed:

@AswathDamodaran 10/

▪️I quote below your reasoning for why you think Tesla margins will come under pressure.
▪️This argument omits Tesla's meanwhile oppressive manufacturing efficiency lead versus competitors - such the lead over one of the best legacy companies: Volkswagen.

@AswathDamodaran 11/

▪️A recent quote from Volkswagen brand CEO Brandstätter highlights Tesla's lead in car manufacturing tech:

"Model 3 is built in 10 hours, more than 3 times as fast as a VW ID.3 in Zwickau. This puts Tesla in another dimension in terms of productivity and profitability"

@AswathDamodaran 12/

▪️Tesla isn't just a "lucky" pioneer who benefits from first-mover status. Tesla is also an innovative high-tech disruptor who has leapfrogged legacy auto in their core strength: manufacturing.
▪️Similar sentiment shared by Ford CEO Farley as well:

valuewalk.com/fords-jim-farl…

@AswathDamodaran 13/

But the list of Tesla upsides, reflected in Street valuation, continues:

▪️Tesla addresses not just the $2.3t market of new car sales, but the broader $5t+ auto market with high margin businesses such as dealerships, used car sales, service, parts, financing & insurance.

@AswathDamodaran 14/

▪️If we just double your target market size from the $2.3t to the actual auto market targeted by Tesla to $4.6t - with all other things equal revenue doubles to $828b... and so does valuation.
▪️Tesla's integration of all these other auto businesses has to be recognized.

@AswathDamodaran 15/

▪️We also cannot ignore the fact that Tesla has expanded the auto market in terms of revenues.
▪️Lending data confirms the "Tesla stretch", that consumers are willing to spend more on Teslas than any other car:

@AswathDamodaran 16/

▪️Apple expanded the "phone market" from below $100b per year to above $500b.
▪️How much are Tesla's "iPhones on wheels" expanding the auto market? Time will tell, but early data suggests a substantial percentage. Higher willingness to spend results in higher margins too.

@AswathDamodaran 17/

But I'm not even half through the list of Tesla valuation factors you missed:

▪️Tesla has guided cell production of 5,000 GWh/year by 2030. 50% of that for vehicles, 50% for stationary energy storage.
▪️Tesla's energy utility products are cell-starved, waiting list 1+ year.

@AswathDamodaran 18/

▪️With Tesla's announcement last September that they have cell production technologies that lower expansion capex by several multiples and production costs by -70% Tesla is poised to lead the world's installation of 100+ TWh stationary storage required by renewables.

@AswathDamodaran 19/

▪️Stationary energy storage is a huge future market, which will disrupt and replace current fossil fuel peaker plants & baseline power plants. Total current global energy market spending per year: ~$5 trillion. High margins.

@AswathDamodaran 20/

▪️Much has been written about Tesla's autonomous car project, but your thesis only touches it tangentially.
▪️Autonomous vehicles are probably a trillion dollar market in itself - but it's hard to value & Tesla's share is uncertain, so I agree with you not even trying to.

@AswathDamodaran 21/

▪️But autonomy looms large, and valuations are future cash flows probability- and rate- discounted to the present. Even if we rate Tesla's success in autonomy at only 10% - a trillion dollar income source increases stochastic valuation today.

@AswathDamodaran 22/

▪️It's important that Tesla is a unicorn among autonomy startups: the only major player whose central thesis is that vehicle autonomy is a 𝙝𝙖𝙧𝙙 problem that forced Tesla to design two chips (client & server) to handle general purpose vision-only AI computing.

@AswathDamodaran 23/

▪️The overwhelming majority of self-driving competitors to Tesla took the "easy but expensive" shortcut of LIDAR & radar sensors, which are both expensive & fragile to common weather features such as rain or snow, or don't detect pedestrians (most radar sensors).

@AswathDamodaran 24/

▪️Tesla's approach to autonomy is "inexpensive sensors but powerful AI" is the only mass adaptable approach to vehicle autonomy.
▪️If Tesla is right & they succeed, it's another huge lead & dominance in another high margin, trillion dollar market.

@AswathDamodaran 25/

▪️Side note: Tesla's AI chip efforts enable entry into the largest market on Earth, the ~$50 trillion dollars per year labor market...
▪️But it's fair & appropriate to not consider future revenue from armies of rented out Tesla Bots while it's still in the prototype stage.

@AswathDamodaran 26/

TLDR: Tesla is basically a giant incubator of startups created by uber-nerd Elon Musk, many of which startups have their own trillion-dollar moonshots.

Tesla is undervalued as an auto company already & it is so much more than just an auto company.

tesmanian.com/blogs/tesmania…