The contrast between Tesla and the rest of the auto industry is terrifying
Matthew DeBord is Business Insider&#x27;s resident Tesla bear. His background is as a &quot;car guy&quot; automotive journalist, not as a financial analyst or financial journalist. This lack of a finance background painfully shows in much of his writing.<p>If you look at his author archive, he is literally publishing 4-5 Tesla related stories a week, often with some kind of clickbait title. To avoid running afoul of Graham&#x27;s Hierarchy, let&#x27;s consider his arguments.<p>- Tesla&#x27;s valuation -<p>Before diving in, I think most people can agree that based off any kind of traditional financial analysis (DCF or comps), Tesla stock is overvalued. Musk himself has said this at times(<a href="https:&#x2F;&#x2F;qz.com&#x2F;1031702&#x2F;all-the-times-elon-musk-has-trash-talked-teslas-tsla-stock-price-as-overvalued&#x2F;" rel="nofollow">https:&#x2F;&#x2F;qz.com&#x2F;1031702&#x2F;all-the-times-elon-musk-has-trash-tal...</a>). Nasdaq estimates, perhaps generously, that the stock trades at a 36.57 P&#x2F;E of 2020 earnings, so anyone buying into the stock today is paying for a decade or more of future growth today.<p>Aswath Damodaran has called Tesla a &quot;story stock&quot;, one whose valuation is largely dependent on what scenario of future growth you believe in. He said in August 2017 that the stock is worth anywhere from $82.66 to $316.46, with his base case estimate of $151.85. You can see his assumptions mapped out here: <a href="http:&#x2F;&#x2F;aswathdamodaran.blogspot.com&#x2F;2017&#x2F;08&#x2F;a-tesla-2017-update-disruptive-force.html" rel="nofollow">http:&#x2F;&#x2F;aswathdamodaran.blogspot.com&#x2F;2017&#x2F;08&#x2F;a-tesla-2017-upd...</a>.<p>Now to look at some of DeBord&#x27;s &quot;comparisons&quot; between Tesla and other companies.<p>- Tesla vs. GM -<p>&gt; &quot;What Tesla considers to be an ambitious production target at its single factory (ironically, once jointly operated by GM and Toyota, another global juggernaut) in California — 5,000 Model 3&#x27;s per week — is a rounding error to GM. GM could have achieved and surpassed Tesla oh-so-obsessively monitored objectives in a few months at most.&quot;<p>DeBord seems to slight Tesla for only having a single factory, while also claiming that its total production is insignificant compared to GM. At its peak, the NUMMI plant produced 400k cars annually. Tesla delivered 101,312 S and X vehicles in 2017. This was a 33% increase over 2016. (<a href="https:&#x2F;&#x2F;auto.ndtv.com&#x2F;news&#x2F;tesla-posts-record-sales-in-2017-1795693" rel="nofollow">https:&#x2F;&#x2F;auto.ndtv.com&#x2F;news&#x2F;tesla-posts-record-sales-in-2017-...</a>). Tesla has produced 27k Model 3&#x27;s in 2018, if we use the data from the Bloomberg production tracker. For the roughly 30 weeks left in the year, if we assume they maintain an average of 3k cars produced per week, we&#x27;re already looking at 117k Model 3&#x27;s produced for the year. That would represent a doubling of production at Fremont.<p>The apples to apples comparison would be the revenue derived from the Fremont factory, and the operating margin on the vehicles sold. GM&#x27;s gross margins are ~15%, and we&#x27;ve seen from the Models S and X that they can hit ~25% gross margins. The bottom line seems to be that for a similarly sized factory, Tesla will ultimately be able to generate much more revenue and profits because of the nature of the cars that they sell. The measures investors care about are ROIC and operating margins, not just the raw number of vehicles produced.<p>Note that in 36 years of operation, NUMMI produced ~8 million cars. Let&#x27;s say it was a flat 8 million, that&#x27;s still only an average of 4444 cars per week over the life of the plant. When considering that in the 2000&#x27;s the plant was making 350k+ cars annually (~7k weekly), simple math should tell us that the plant had years where it was making many fewer cars than what Tesla is producing now. The Model 3 rollout has been a debacle, but let&#x27;s not pretend that NUMMI was ramping up to 350k annual production in the first decade of its life.<p>&gt; &quot;The third is speed. Everybody thinks Tesla is a fast-company Silicon Valley operation, but the carmaker is, in fact, agonizingly slow...GM, on the other hand, revealed and launched its Chevy Bolt long-range EV in about a year, start to finish. It&#x27;s been on sale in the US since fall of 2016.&quot;<p>The Chevy Bolt sold 26,000 units globally last year. Tesla achieved this run rate in October of last year. Let&#x27;s not pretend these are manufacturing challenges of equal scale.<p>- Tesla vs. Ford -<p>&gt; &quot;And although it isn&#x27;t priced anywhere near what Tesla charges from its Model S and Model X luxury vehicles, the F-150 throws off huge profit margins. The F-150 can witness sales dips, but for the most part, it&#x27;s nearly an invulnerable product. Ford can always count on it, like an insurance policy.&quot;<p>I&#x27;m an admirer of the F-150&#x27;s aluminum construction, which was an engineering achievement. But, DeBord seems to forget that the early years of the vehicle were plagued by challenges like convincing customers to trust a new unproven technology, and operational considerations like supplying enough bodyshops with the equipment and parts to repair aluminum bodies. (<a href="https:&#x2F;&#x2F;jalopnik.com&#x2F;how-a-2015-ford-f-150-aluminum-repair-cost-17-000-and-1719664610" rel="nofollow">https:&#x2F;&#x2F;jalopnik.com&#x2F;how-a-2015-ford-f-150-aluminum-repair-c...</a> and <a href="https:&#x2F;&#x2F;jalopnik.com&#x2F;why-the-aluminum-2015-ford-f-150-is-having-a-disappoint-1718520125" rel="nofollow">https:&#x2F;&#x2F;jalopnik.com&#x2F;why-the-aluminum-2015-ford-f-150-is-hav...</a>).<p>The F-150 actually has had production stopped because of a fire at a plant that produces the aluminum parts (<a href="http:&#x2F;&#x2F;www.chicagotribune.com&#x2F;business&#x2F;ct-ford-suspends-f-150-production-20180510-story.html" rel="nofollow">http:&#x2F;&#x2F;www.chicagotribune.com&#x2F;business&#x2F;ct-ford-suspends-f-15...</a>). So, no, it&#x27;s not an &quot;insurance policy&quot;. Delays and supply chain failures affect even the largest of automakers.<p>The margins of the vehicles also seems to hover around 20% (<a href="https:&#x2F;&#x2F;www.nytimes.com&#x2F;2018&#x2F;03&#x2F;01&#x2F;business&#x2F;ford-f150-aluminum-trucks.html" rel="nofollow">https:&#x2F;&#x2F;www.nytimes.com&#x2F;2018&#x2F;03&#x2F;01&#x2F;business&#x2F;ford-f150-alumin...</a>).<p>&gt;  &quot;Tesla, by contrast, has probably topped out in its luxury segment and now has to pull off a potentially impossible stunt: sell hundreds of thousands of electric sedans to a market that has shown limited interest in EVs (they&#x27;re only 1% of the global market) and that ... doesn&#x27;t want sedans. The four-door is dying. FCA has given up on them in the US, and Ford is heading in that direction. GM will likely make the shift in the next year. Ferrari doesn&#x27;t sell them.&quot;<p>Two problems here. One, if we believe that Tesla is able to take market share away from existing sedan makers, it doesn&#x27;t really matter if the industry shrinks by 1-2% per year. Two, the attractiveness of SUVs versus smaller cars fluctuates with oil prices. Remember the last time automakers switched to producing mostly SUVs and pickup trucks in the early 2000&#x27;s? A financial crisis and high gas prices flipped that trend. It&#x27;s difficult to see how in the long term, oil prices are ever going to trend downwards as opposed to upwards.<p>- Tesla vs. FCA -<p>&gt;  Since taking over Chrysler after a government bailout and bankruptcy, Marchionne has focused on making the Jeep brand a profit-minting beast and maintained the RAM pickup brand&#x27;s number-three-market position behind Ford and Chevy&#x2F;GMC. This has generated the cash flow that he needs to pay down FCA&#x27;s debt and to bolster the carmaker&#x27;s cash balances. It&#x27;s actually not that complicated. He inherited a ruined balance sheet, but one that was getting a fresh start. And he has done what&#x27;s needed to transform it into a fortress. Over the past two years, FCA shares have outperformed Tesla shares by 200%. So which was the better &quot;growth&quot; investment? (And that outperformance took place, shockingly, even after FCA spun off Ferrari, which represented a huge chunk of value in the company.)<p>It&#x27;s not all that complicated...if you decide to transition your business to making many more SUVs and trucks, and fewer sedans. As I noted in the Ford comparison, if oil prices increase and you find your models out of favor with consumers, it&#x27;s not such a perfect turnaround anymore. Let&#x27;s also note that FCA has given estimates that 2018 automotive margins will be 8%, versus 7.1% last year. It&#x27;s unclear how even massive sales growth will deliver compelling growth in operating profits, and this is reflected in a stock that commands a 5-6x P&#x2F;E ratio.<p>- Tesla vs. Ferrari -<p>&gt; Tesla, unfortunately, isn&#x27;t modeling itself on Ferrari, which would actually be logical. Instead, it&#x27;s aiming to become GM or Toyota, producing cars at a gigantic scale. Tesla&#x27;s core business — luxury vehicles — shares Ferrari&#x27;s sexiness and preoccupation with performance. It&#x27;s larger, of course — Ferrari sells less than 10,000 cars per year — but Teslas are also far less expensive. An entry-level Tesla luxury vehicle is under $100,000, while the cheapest Ferrari is $200,000.<p>So Tesla last year Tesla already sold 10x the vehicles of Ferrari, and is on pace to increase that to 20x by this year. DeBord thinks Tesla should model itself on a company whose stock trades at 41.92 P&#x2F;E today, and 30.05 P&#x2F;E of estimated 2020 earnings. I&#x27;m not sure how it&#x27;s logical to compare the two companies when Tesla is set to bring in orders of magnitude more revenue in the future.<p>Keep in mind DeBord also thinks that Tesla doesn&#x27;t make enough cars. So which is it, they need to get big faster, or they need to get&#x2F;stay small?<p>- Who DeBord doesn&#x27;t compare to -<p>It&#x27;s pretty interesting to look at who DeBord doesn&#x27;t compare Tesla to. Little companies such as Daimler, Volkswagen, Honda, and Toyota. Each company has faced significant headwinds, and has had topsy turvy financial and stock performance over the last couple years.<p>TL;DR I really wish Matthew DeBord would put some effort into addressing some of the more glaring contradictions in his own arguments before he publishes his 5 Tesla-branded clickbait articles a week.