Pabrai q2 letter

[Marve2013]

Any other insights from folks who've read the letter?  Thanks

 

http://www.valuewalk.com/2016/09/tesla-blowing-billions-dumb-ideas-pabrai/

[Picasso]

Tesla is like a murdering maniac with a chainsaw way off in the distance.  It's still just far enough away that investors like Pabrai feel they can get away in time before bad things happen.  Or they're hoping it's just a dream.

 

Just a brief recap of what the thesis has morphed into...

 

i. They can't make a compelling electric car people will want to buy.

ii.  Okay, even though they made a great car they can't turn a profit.

iii.  Okay, even if they might turn a profit someone else will just copy them.

 

This drives me nuts.  It ignores that there is a reasonable probability Tesla massively disrupts the auto industry on orders of magnitude much higher than we've already seen.  How does someone like Pabrai know that won't be the case?  How can you prove this is not a profitable business model when you don't even know what the business model will look like in five years?  When PayPal started, they had to give money away hand over fist to get users.  The company nearly didn't survive the dot com bubble bursting before being sold to Ebay.  Back then someone would have said "look at how much money these guys are burning, Visa or someone else will just copy them if they ever become profitable."  No one knows how much capital Tesla needs before all this investment potentially turns into a repeat of Amazon.  What profit will other automakers "clone" if Tesla decides to simply reinvest all future cash flow?  The entire industry may become a race to the bottom.  Which is actually the intent of Tesla if you read any of their mission statements. 

 

Which brings me to the next argument I always hear.  "Well Amazon barely issued stock and lived within their cash flows."  This is true, but it ignores the pages and pages of dead auto companies since the Ford IPO.  It's incredibly hard to produce a mass market car (now throw in electric with limited infrastructure!) without ridiculous capital investment.  Amazon started at a fertile time to invest a relatively small amount of capital in a business with decades of tailwinds and that didn't initially require ten billion dollars to double the world's battery capacity or develop charging infrastructure or retool a car factory from scratch.  There's some threshold where Tesla *can* start looking like an Amazon if the mass market car turns out to be a great success.  They basically have to create their own supply chain from scratch because no one wants to risk investing billions if the company is going to fail, or if there's no end user demand for tons of battery plants.

 

And of course if you look at the first several years of Tesla one can try to extrapolate capital expenses into the distant future.  But Elon has approached the business in a fairly logical manner.

 

i) Build a fast, fun electric car with enough range to show it's a viable product.  A good part of this was done with Elon's own money.

ii) Use that success to build a mid-market car to demonstrate further how viable the product is for mass market.  This is where more public capital becomes important.

iii) Use that success to build the mass market car. 

iv) Constantly make your cars better and better until it forces other automakers to do the same thing.  Most of those improvements are simply not possible on ICE.

 

We're still somewhere between stage ii and iii.  So for the life of me, I don't know why investors are trying to value or extrapolate this business on what is still technically a proof of concept.  Now there's clearly risk.  But someone needs to prove to me why the mass market car will be a total flop.  So far they've already shown tremendous interest in a car almost no one has seen in person yet.  Instead the short thesis has shifted around and it's kind of gone into this desperate "well the competition will be better than the Tesla Model 3."  And that, more than anything, is absurd.  People don't necessarily want an EV, they just want the best car for the value.  Everyone keeps pointing to the Bolt with 200 miles of range like someone is just going to spring for it when it's not capable of reasonable long distance travel.  The Tesla is fast, it drives itself, it's insanely safe, it has way more brand attached to it than GM, and so on.  If someone thinks "You know, let me make the shift to electric," their first thought isn't to check out a Chevy.  It's instantly Tesla.  Built by the guy who lands rockets out on a barge in the middle of an ocean.  The company that lets you drive from LA to NY for free.  The company that makes nice looking cars instead of something that looks like a frog.  I see kids running in the mall pulling their dads to the Tesla store.  The brand value that Tesla has created from solving really difficult engineering challenges and actually making a great electric car is not something to dismiss as "someone will copy them."  That's pure arrogance from the legacy automakers.  Not too different than when Sergio said "people like driving their cars too much for autonomy to take off."

 

Anyway I could go on with this but it's probably not worth the time.  To Pabrai's credit he made a great purchase of Fiat and he's basically saying bad stuff won't happen fast enough (if it happens at all) to hurt my investment thesis on Fiat or GM.  But I find his argument for why Tesla is doomed to fail as a lame regurgitation of what the automakers are telling every other investor.  We'll see whether that chainsaw maniac is part of a dream or if he's just a few years away...

[oddballstocks]

Saw a quote recently that Picasso's post made me think of.  In essence it said that investors forget public markets are for companies looking to raise capital, that is their purpose.

 

Tesla love them or hate them is using the capital market correctly.  It serves their purposes, that investors come along for the ride is secondary to the primary purpose of raising capital.  To raise capital you need enough hype that your shares don't trade in the gutter.  I don't think Musk could ever be accused of hyping too little..

 

How this turns out is in the hands of the people who work at the company.  I think it's a fools errand to speculate.

 

Personally I'd love a mass market electric car with a long range, a gas assist or charging stations that take 3-5m max.  The torque an electric motor can produce is mind numbing.  It would be awesome to have a full sized pickup packed with batteries, an independent motor per wheel and a crazy amount of power.  A 300-400 kW engine can get to 1,500 ft pounds of torque given a high enough RPM, that's semi-truck territory. 

 

The winning combo for now isn't anything new, it's the diesel-electric locomotive.  A diesel engine that provides power to electric motors.  Whenever I talk to someone about electric cars and they doubt their power I state that if an electric motor is good enough to pull trains across mountains I'm sure it'll be fine pushing a few thousand pounds of metal down the road.  The diesel electric enables electric drive motors for a train without the overhead wires.

[Spekulatius]

Elon Musk strikes me as somebody who always doubles up. Keep doing this often enough and he will go broke. That is what I think will happen to Tesla as well.

 

Somebody else may pick up the pieces and make it work in financial terms. I do give it to him that he did come pretty far.

 

I would not be afraid to invest in a car company because of Tesla. I think the bigger risk is that more and more know how is going to be in the software (self driving car ) and companies like Google and perhaps Apple may make the hay and the exisiting car makes may deal with low margin hardware, just like with smartphones.

[JBird]

Really well said, Picasso!

[benjamin1978]

Elon Musk strikes me as somebody who always doubles up. Keep doing this often enough and he will go broke. That is what I think will happen to Tesla as well.

 

Somebody else may pick up the pieces and make it work in financial terms. I do give it to him that he did come pretty far.

 

I would not be afraid to invest in a car company because of Tesla. I think the bigger risk is that more and more know how is going to be in the software (self driving car ) and companies like Google and perhaps Apple may make the hay and the exisiting car makes may deal with low margin hardware, just like with smartphones.

 

It already is and always has been low margin hardware, particularly on the passenger vehicle side, don't think anyone is making respectful margins

[Spekulatius]

Elon Musk strikes me as somebody who always doubles up. Keep doing this often enough and he will go broke. That is what I think will happen to Tesla as well.

 

Somebody else may pick up the pieces and make it work in financial terms. I do give it to him that he did come pretty far.

 

I would not be afraid to invest in a car company because of Tesla. I think the bigger risk is that more and more know how is going to be in the software (self driving car ) and companies like Google and perhaps Apple may make the hay and the exisiting car makes may deal with low margin hardware, just like with smartphones.

 

It already is and always has been low margin hardware, particularly on the passenger vehicle side, don't think anyone is making respectful margins

 

BMW, Daimler, Porsche, Audi, Ferrari have pretty good margins, however the value lies either in the brand and proprietary hardware know how. The latter is going to be less important going forward, which I think could hurt the margins of luxury car makers. Who cares about having a sporty car, if they don't drive any more. Maybe not an issue for the super luxury cars  like Ferrari, but certainly for the likes of Mercedes, BMW or Lexus.

[Guest longinvestor]

BYD has buses, cars (taxis), battery storage solutions, forklifts, trucks etc. in their line up.

 

They even have the iconic London double decker bus market! http://www.byd.com/usa/news-posts/transport-for-london-launches-the-first-all-electric-long-range-double-decker-bus-into-service/

 

None of this is disruptive?

[randomep]

Picasso seems to imply Pabrai is ignorant.  I haven't read too much about Tesla but I haven't seen anyone put it as succinctly as Pabrai. It seems as if the media is afraid of criticizing Tesla just like they were with Theranos. Pabrai is one of few that will point out the other side. If you want the disruptive argument I am sure Musk has 10 videos on youtube explaining it. Oddball says it right no point in trying to predict. I would do the same with my money, no point in trying to invest because right now it is a money pit and even if we all drive electric cars in the future, who knows if Tesla will get any of the profits.

 

Michael Porter has said that companies in manufacturing thrive when they achieve some competitive advantage.  I have no idea what is Tesla's competitive advantage, except as someone mentioned to me, ELON MUSK.  I don't know where to find Elon Musk in the competitive advantage manual.

 

Disruptive technologies are great, but this is an investing forum and I have never had heard a succinct explain how Tesla will make its investors rich.

 

[CorpRaider]

Zero people who want a model 3 would substitute with that volt.  Zero.  Maybe the charger network is a point then again his philosophy is that the big entrenched companies with vested interests cant or arent changing so hes going to disrupt and perhaps bankrupt the fookers. 

 

Elon musk is preeminent in the minds of some of the best engineering and automotive design talent in the world.  Thats at least one huge competitive advantage.  Why do you think von holtzhousen works for Tesla?  The lack of the anticompetitive and corrupt dealer cabal is another huge advantage.

 

None of this means Tesla is a good investment but if you dont think hes going to impact the legacy guys with their crappy cars you are delusional.  It might mean don't do anything stupid, like having a big chunk of your portfolio in the industry's legacy players.  Capital is pouring into that industry and will be for decades it seems.  I mean apple and freaking google, not to mention the Chinese, are coming too.  Even if Elon blew through all of his capital he could just take the remnants of his company over to google and do the same thing on a lesser scale with his buddies over there.  They already had a tentative deal to buy him out once during the financial crisis and they can throw a wall of cash at the industry for a long long time. 

 

[JBird]

I haven't read too much about Tesla

 

Respectfully, this is a conversation disqualifier.

 

Disruptive technologies are great, but this is an investing forum and I have never had heard a succinct explain how Tesla will make its investors rich.

 

By selling 500,000 cars in 2018 at ~20% margins.

[frog03]

+ Many Picasso, you are the man!

[Travis Wiedower]

Cloning a Tesla overnight is always made to sound so much easier than I imagine it to be. GM's first serious attempt is the Bolt, really? That thing is ugly as all hell and makes me even more confident in Tesla's competitive position. When Steve Jobs created the first beautiful smart phone, I bet a lot of investors said these same things: "If the iPhone takes off, Blackberry and the others will just clone it, no big deal!"

[Picasso]

Cloning a Tesla overnight is always made to sound so much easier than I imagine it to be. GM's first serious attempt is the Bolt, really? That thing is ugly as all hell and makes me even more confident in Tesla's competitive position. When Steve Jobs created the first beautiful smart phone, I bet a lot of investors said these same things: "If the iPhone takes off, Blackberry and the others will just clone it, no big deal!"

 

[Ballinvarosig Investors]

Anyone got the full letter? The editing at Value Walk is awful and often misses out good bits.

[randomep]

I haven't read too much about Tesla

 

Respectfully, this is a conversation disqualifier.

 

Disruptive technologies are great, but this is an investing forum and I have never had heard a succinct explain how Tesla will make its investors rich.

 

By selling 500,000 cars in 2018 at ~20% margins.

 

Your 2 part response gets 2 questions.

 

1. why did you answer my post?

 

2. a) does that include government subsidies?

    b) with what probability do you think that 20% margin on 500,000 cars will happen?

  c) has Tesla made a profit margin on a single car in the past?

 

 

[Vish_ram]

The real disruption is when the solar cells advance really well to cover a Tesla with panels and run without recharge in moderate sunlight. 

 

Tesla may not make a profit, but the potential impact to traditional car companies is high. 

 

Don't worry about marketing savvy Pabrai, he'll come up with a new learning, say a new buzzword like "cross check manifesto" and retain assets. It will be interesting to watch a cyclical heavy portfolio meet the buzz saw of upcoming recession with bull market in 9th innings.

[JBird]

Your 2 part response gets 2 questions.

 

1. why did you answer my post?

 

2. a) does that include government subsidies?

    b) with what probability do you think that 20% margin on 500,000 cars will happen?

  c) has Tesla made a profit margin on a single car in the past?

 

1) I thought I'd give you the 9 word explanation on how Tesla will make its investors rich.

 

2a) Yes. The first 200k Model 3 purchasers will get a fed tax credit of $7.5k (50% of the 2018 Model 3 production). Tesla will also receive from Nevada a transferable tax credit of $12,500 per permanent full-time job, up to 6,000 jobs as well as transferable tax credits of 5 percent for the first $1 billion and 2.8 percent for the next $2.5 billion investment (source: Forbes).

 

Don't know how this is relevant though. Accepting tax breaks is not bad business practice and is also not unique to Tesla or the auto industry.

 

b) Somewhere between 0 and 100.

 

c) Since we're talking about the future I don't know how this is relevant either, but now we've come full circle on your not reading too much about Tesla. Is the selling price of a Model S today more than its cost of production? Yes. They have negative net income because they're making all the investments and R&D expense required to grow a car company that produces 600 cars a year in 2010 to one that produces 500,000 in 2018.

 

If you're curious to read more about Tesla: www.tesla.com

 

Disclaimer: I've never owned TSLA shares.

[TwoCitiesCapital]

I don't think anyone is arguing that Tesla won't disrupt the auto industry. It already has!

 

The real question is does that disruption lead to profits for investors. Tons of internet companies were disruptors in 1999. Only a handful made any money for anyone other than their founders.

 

[kfh227]

The problem with Tesla is that their tech can be copied.  The thing is, other companies know what consumer want other than the electric car part.

 

http://www.siliconbeat.com/2016/09/08/apple-co-founder-may-swap-tesla-gms-bolt/

 

 

[oddballstocks]

Had a thought while reading this.  Is the Tesla more like the iPod than the first IBM computer?

 

Tesla has taken existing tech and created a product.  It's hard to answer the question "what's the most important part of a Tesla car?" If you were to break it down almost everything is a part any other car company can create.  Maybe the software's unique.  This was the same as the iPod.  The iPod had no special glue making it better.  What sets both apart is the experience.  It's the marketing, branding, and the experience of owning one of these products.

 

Why did consumers buy iPods over Zunes?  They both did the same thing.  I think that's what people are asking about the Volt.  If you look at specs the Volt is the same, so why aren't people lining up to buy the Volt?  It's the disruption field thing.  Jobs had it and Musk has it.  They make you feel special for purchasing their product.  People feel a certain way buying a Tesla.  They might even pay more for that feeling.  People did the same for iPods.

 

This is a really hard thing to capture from an investment perspective, but it's vital to marketing.  If you have a charismatic leader who can create an emotional response to the product you will generate a lot of demand.  Leaders like Musk are in short supply.  Was Steve Jobs a huckster and hype machine?  Yup, probably one of the best.  I've read articles describing how carefully planned his demos needed to be so he didn't accidentally hit a feature that wasn't complete or didn't work right.  When he unveiled the first iPhone he was mostly selling a dream, not a working product.

[hyten1]

i think this is too simplistic, if this was the case then everything that apple/steve job touch should turn into gold, but it didn't (apple tv is great example)

 

sure awesome leader like musk/job helps, but i don't think that is enough (not for the long term). at the end of the day your product/service needs to provide considerable utility and value ... relative to the competition.

 

i would argue ipod did and iphone did when it came out. and i would argue tesla less so.

 

ipod was one of the very first that had a complete experience (ipod, nice design, easy of use and ... don't forget itunes). everything else at the time wasn't the case (especially ease of use in terms of downloading music etc etc.). also don't forget ipod is a $200 item. it can capture the market fairly quickly, even when competition catched up in terms of the actual product, it was too late. tsla doesn't have this characteristic.

 

now does tsla provide enough of value to get to ipod/iphone status. i would argue no.

 

but then again that is my opinion.

 

 

 

 

Had a thought while reading this.  Is the Tesla more like the iPod than the first IBM computer?

 

Tesla has taken existing tech and created a product.  It's hard to answer the question "what's the most important part of a Tesla car?" If you were to break it down almost everything is a part any other car company can create.  Maybe the software's unique.  This was the same as the iPod.  The iPod had no special glue making it better.  What sets both apart is the experience.  It's the marketing, branding, and the experience of owning one of these products.

 

Why did consumers buy iPods over Zunes?  They both did the same thing.  I think that's what people are asking about the Volt.  If you look at specs the Volt is the same, so why aren't people lining up to buy the Volt?  It's the disruption field thing.  Jobs had it and Musk has it.  They make you feel special for purchasing their product.  People feel a certain way buying a Tesla.  They might even pay more for that feeling.  People did the same for iPods.

 

This is a really hard thing to capture from an investment perspective, but it's vital to marketing.  If you have a charismatic leader who can create an emotional response to the product you will generate a lot of demand.  Leaders like Musk are in short supply.  Was Steve Jobs a huckster and hype machine?  Yup, probably one of the best.  I've read articles describing how carefully planned his demos needed to be so he didn't accidentally hit a feature that wasn't complete or didn't work right.  When he unveiled the first iPhone he was mostly selling a dream, not a working product.

[gg]

Had a thought while reading this.  Is the Tesla more like the iPod than the first IBM computer?

 

Tesla has taken existing tech and created a product.  It's hard to answer the question "what's the most important part of a Tesla car?" If you were to break it down almost everything is a part any other car company can create.  Maybe the software's unique.  This was the same as the iPod.  The iPod had no special glue making it better.  What sets both apart is the experience.  It's the marketing, branding, and the experience of owning one of these products.

 

Why did consumers buy iPods over Zunes?  They both did the same thing.  I think that's what people are asking about the Volt.  If you look at specs the Volt is the same, so why aren't people lining up to buy the Volt?  It's the disruption field thing.  Jobs had it and Musk has it.  They make you feel special for purchasing their product.  People feel a certain way buying a Tesla.  They might even pay more for that feeling.  People did the same for iPods.

 

This is a really hard thing to capture from an investment perspective, but it's vital to marketing.  If you have a charismatic leader who can create an emotional response to the product you will generate a lot of demand.  Leaders like Musk are in short supply.  Was Steve Jobs a huckster and hype machine?  Yup, probably one of the best.  I've read articles describing how carefully planned his demos needed to be so he didn't accidentally hit a feature that wasn't complete or didn't work right.  When he unveiled the first iPhone he was mostly selling a dream, not a working product.

 

I think there's no question that if you are in the market for an electric car, there is no better option than a Tesla. Performance and design, of the Model S a least, are top notch. The people I know with Teslas absolutely have the feeling a 'certain way' that you describe, and it's a very interesting marketing effect that is more about the founder's charisma than it is about the actual quality of the product.

 

Regarding the iPod, though, I think itunes was one of the things pretty early on that got Apple's ecosystem going, and in my opinion, it was/is the ecosystem that was responsible for a lot of the customer stickiness. I wonder if Tesla has anything like that which might get its consumers to come back. In that class of vehicle, I would imagine that customers are typically upgrading on a 3 year cycle. I don't see any other viable luxury alternatives at the moment for those people to switch to in the next year or two, but longer term, if the known luxury brands have a very good alternative, I don't know if Musk's charisma will be enough to keep customers from switching to an excellent Mercedes electric vehicle...

[CorpRaider]

Yeah the nationwide network of superchargers is just marketing.  Yes, people can copy them...derp...they open sourced their IP/donated it to human kind. 

[rohitc99]

In terms of consumer behavior, is it reasonable to compare an ipod/iphone to a car. the first one costs 200-650 dollars and the worst that will happen is that one can replace it in a year or two. In contrast a 35K+ purchase will be far more involved. To ditch a fully depreciated ICE engine car and upgrade to a EV will be a bigger economic decision than changing your phone. also at 35K and higher, not everyone would like to pay too much of a premium for the brand/ emotional appeal, especially at the lower end.

 

i dont have an answer, but will it not be tougher for a tesla to disrupt other car makers compared to the cell/ electronic industry where there have been several waves of disruption (motorola, blackberry and then apple) compared to auto