Tesla's Risk Calculus

seekingalpha2022-05-05

ThesisTesla (NASDAQ:TSLA) investors have been on a roller coaster recently. On the positive side, its 2022 Q1 was another record-setting quarter. It delivered better-than-expected results pretty much ...

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Tanyl
2022-05-05
Tanyl
Must invest Tesla in option
Tanyl
2022-05-05
Tanyl
Must invest Tesla
MauChin
2022-05-05
MauChin
Good analysis and thanks for sharing
Hui Soh
2022-05-05
Hui Soh
[Smile]
HeRock
2022-05-05
HeRock
Huat
HeRock
2022-05-05
HeRock
Huat

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It delivered better-than-expected results pretty much ...</p>\n\n<a href=\"https://seekingalpha.com/article/4506801-teslas-risk-calculus\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Tesla's Risk Calculus</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nTesla's Risk Calculus\n</h2>\n\n<h4 class=\"meta\">\n\n\n2022-05-05 11:05 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4506801-teslas-risk-calculus><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>ThesisTesla (NASDAQ:TSLA) investors have been on a roller coaster recently. On the positive side, its 2022 Q1 was another record-setting quarter. It delivered better-than-expected results pretty much ...</p>\n\n<a href=\"https://seekingalpha.com/article/4506801-teslas-risk-calculus\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK4099","symbol_name":"汽车制造商","start_time":0,"source_url":"https://seekingalpha.com/article/4506801-teslas-risk-calculus","article_id":"2233004021","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2233004021","pubTimestamp":1651719928,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"ThesisTesla (NASDAQ:TSLA) investors have been on a roller coaster recently. On the positive side, it","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK4099":"汽车制造商","BK4511":"特斯拉概念","BK4574":"无人驾驶","BK4548":"巴美列捷福持仓","BK4551":"寇图资本持仓","BK4534":"瑞士信贷持仓","BK4527":"明星科技股","TSLA":"特斯拉","BK4581":"高盛持仓","BK4550":"红杉资本持仓","BK4555":"新能源车","BK4533":"AQR资本管理(全球第二大对冲基金)"},"translate_title":"特斯拉风险演算","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"TSLA":1},"content_text":"ThesisTesla (NASDAQ:TSLA) investors have been on a roller coaster recently. On the positive side, its 2022 Q1 was another record-setting quarter. It delivered better-than-expected results pretty much across the board.It delivered 310,000 vehicles despite market concerns over supply chain challenges and factory shutdowns in Shanghai. Both topline and bottom line also showed healthy growth and the operating margin expanded to a record 19%. After reporting such up beating numbers, the stock price rallied by more than 10% the next trading day on April 21 to almost $1,100.However, on the other side, a few negative developments sent the stock price back to the $850 level. Note that the price information was taken during the trading session on Monday, May 2. With the large market volatilities these days, the prices may have changed a bit when you read this article. First, the overall market sentiment had been dominated by fear last week after TSLA’s earnings release. With major institutions like Bank of America trimming S&P 500 targets and forecasting an increased possibility of a recession ahead, all major indices suffered a large correction, and the S&P 500 lost a whopping 3.6% in a single day last Friday. Second, Elon Musk unloaded about $8B worth of his shares in lots priced between $870 to $1,000 according to filings released on April 29, adding more fuel to the fire. Unfortunately, such events have happened before and very likely will happen again. Another recent example involved polling his 62.5 million Twitter followers whether he should reduce his holdings or not. And we all know what transpired next – the stock price fell by more than 17% to the $1,000 level during that week.Yahoo FinanceLooking forward, we see both some additional uncertainties ahead and also some catalysts to support its production ramping up and profitability growth. Overall, we see the investment feature a positive return profile despite large variance. Specifically,Looking past the above short-term price dramas, there are a few additional key uncertainties ahead for TSLA investors. Both the Texas and Berlin factories are in earlier ramp up phase, and their production goals may be delayed due to variable uncertainties (supply chain issues, labor shortage, material shortage, et al). Its Shanghai factory is operating on partial capacity and its status hinges on the COVID situation in the city. Also, as a key port city, Shanghai can also interrupt TSLA’s overall supply chain in China.But at the same time, we also see positive catalysts that support a favorable risk/return profile. The investment would feature breakeven odds return even assuming a relatively small probability (about 16%) for management to deliver their growth expectations of about 50% CAGR.More importantly, TSLA achieved an important milestone for future capacity growth in the last quarter: the inhouse production of 4680 battery cells. In April 2022, TSLA delivered the first Model Y with 4680 in-house made cells, single-piece front body castings and structural battery packs. Ultimately, Gigafactory Berlin-Brandenburg will be able to produce Model Ys using both structural packs with 4680 cells as well as non-structural packs with 2170 cells. Inhouse battery production is one of the bottleneck issues for TSLA’s production growth. It is a key piece in TSLA’s overall strategy of vertical integration. Going forward, the successful 4680 inhouse production and structural battery packs give the company better control of its supply chain and a leg up over other automakers.TSLA Q1 HighlightsThe most important highlights to me in the earnings were the production and delivery updates. As seen below, TSLA delivered more than 310k vehicles in Q1 2022 and produced more than 305k. Despite market concerns over supply chain challenges and factory shutdowns in Shanghai, TSLA was able to grow both its production and its delivery above the previous quarter. On a year-over-year basis, its deliveries and predictions grow spectacularly by almost 70%.Looking forward, production and deliveries started from the Berlin Gigafactory in March 2022, and from the Texas Gigafactory in April 2022. And I have no doubt that these new Gigafactories will further boost growth in vehicle production and deliveries.TSLA earnings reportGiven the healthy growth in deliveries and production, its profits also improved. It raked in a record $18.8B of total revenues and a total of $3.6B in GAAP operating income. Both were at record levels and represented spectacular growth both compared to the previous quarter and also YoY. In terms of margins, it managed to reduce costs (COGS costs) per vehicle despite inflationary pressures. The operating margin expanded to a record 19.2% in Q1, and GAAP Automotive's gross margin also expanded to a record 32.9%.However, there are a few not-so-rosy numbers too. Operating cash decreased by about $500M to about $4B compared to the previous quarter. As a result, the operating cash flow less CAPEX (i.e., free cash flow) dropped to $2.2B in Q1, lower than the previous quarter’s 2.7 billion by about $500M. More than fundamentals, there are also some uncertainties in future production and growth, as detailed next.TSLA earnings reportProduction Uncertainties And ModelingNow on to the production risks and uncertainty. In Q1 2022, management reported a continuation of the global supply chain, transportation, labor, and other manufacturing challenges. These issues have limited the ability of the factories at full capacity.Looking forward, some of these issues are going to persist. Both Berlin and Texas factories are in their earlier ramp-up phase. One of the key pieces for TSLA capacity growth involves Gigafactory Texas to be able to produce Model Ys using both structural packs with 4680 cells as well as non-structural packs with 2170 cells. This goal may be delayed due to supply chain issues and throttle production. In China, a spike in COVID-19 cases in Shanghai has led to the lockdown of the city and the shutdown of the factory. As a key port city, Shanghai can also interrupt TSLA’s supply chain. Although limited production has recently restarted, the situation is very fluid and could reverse.TSLA earnings reportThe margin of uncertainties widens as we look further out. TSLA’s management's target is at 20 million by 2030, translating to about 25x of 2021 volume and a growth rate of about 50% CAGR per year. Management’s optimism is certainly shared among the investment community. For example, some analysts believe TSLA can comfortably grow production by 50% every year through 2025 and possibly 2030. While ARK Invest CEO Cathie Wood is even more optimistic, predicting Tesla to sell 20m vehicles a year by 2025. On the other hand, there is no lack of skepticism either. For example, Morning Star analysis assumes Tesla only delivers around 5.7 million vehicles by 2030, well below management’s target.Given such uncertainties, it makes sense to explore a couple of scenarios to form a more comprehensive and objective view. This next table summarizes three scenarios of 20%, 30%, and 50% annual growth rates for TSLA considering its fixed cost and variable cost of production. The analyses of its production cost have been detailed in my earlier article and here I will just summarize the key points for the ease of reference:It has passed the pivot point of critical scale (with a break-even point that occurred somewhere around 100k vehicles), recouped the fixed cost, and now began to harvest the benefit of the scale of production and expanding margin. Its variable cost is estimated to be about $40k per vehicle.I also assumed that the operating expenses to be 13% of total sales and the average vehicle price tag to be $58,000, which is consistent with its current levels. Note these assumptions also make my analysis more on the conservative side, because operation costs would also be diluted on a per-vehicle basis as Tesla sells more units.As seen, depending on the growth rates, the return scenarios can be drastically different. Right now, there is no doubt that the business is expensively valued even after the recent corrections. At about 16x of sales and 83x EV/EBITDA, it is expensively valued both in relative terms and absolute terms (the overall market is valued at about 3x sales and 16x EV/EBITDA). However, if it indeed grows its production at a 50% annual rate, it could outgrow its current valuation quickly. By 2025, the price to sales ratio would be 3.2x and EV/EBITDA multiple by about 17.6x - not too different from the market at its current price. However, if growth slows to 20%, then it would be still trading at an expensive premium for years to come.AuthorKelly Bet AnalysisSo it is indeed a high uncertainty investment. Both large gains and losses are possible as summarized in the following table. In this table, I considered the above three growth scenarios and assumed that:The base scenario with 30% production growth would enjoy an EV/EBITDA multiple of 25.7x, a 50% premium over the overall market.The bearish scenario with 20% production growth would be valued at an EV/EBITDA multiple of 20.5x, a 20% premium over the overall market (because a 20% growth rate still deserves a valuation premium).The bullish scenario with 50% as expressed by management would be valued at an EV/EBITDA multiple of 24.2x, a 100% premium over the overall market.AuthorUsually, the discussion from here would turn into a subjective debate between the bulls and bears as aforementioned. This article will take a different approach and gauge the risk/reward profile in a more objective way using the Kelly bet size analysis. More details of the analysis can be found in my earlier article on Altria (another high uncertain stock), and only a brief summary is provided below to facilitate the remainder of the discussion.The Kelly method helps to turn such subjective debate into more action-oriented decision-making. The Kelly bet analysis is a way to determine bet sizing as a percentage of bankroll that leads to optimal growth in the long run (i.e., if you place a large number of the same bet over and again). Another reason I use it is that it not only considers the expected return, but also the variance among the outcomes, which is equally important, or more important in my view. With the above background, a Kelly bet analysis is shown below for the TSLA investment for the scenarios analyzed above. As seen, the Kelly analysis allows you to assign different odds – based on your judgment of the situation - and shows what your bet size should be.For me, my assessment of the most likely odds is 50% for the base case (30% production growth), 25% for the bearish case, and 25% for the bullish case. Under these odds, the expected return is a positive 3.9% - note here the 3.9% means the expected return is 3.9% each time I place such a bet with these odds. And the bet size is 66% of the bankroll.As another example, let’s imagine someone who holds a more doomed view for TSLA with the following odds (the so-called break-even odds) – i.e., the odds that make the expected return zero so it is not worth betting on anymore. As seen, the breakeven odds are the following: 50% odds for the base case, 34% for the bearish case, and 16% for the bullish case. In this case, the expected return is almost zero and the Kelly bet size is also almost zero too (3% of bankroll only). In other words, if your view of the odds for things to unfold is close to (or worse than) these breakeven odds, then you should not invest in TSLA.AuthorConclusions And Other RisksThe recent developments of TSLA represent a textbook example of an investment opportunity with high uncertainties. TSLA stock prices are dominated by market sentiment and also the fundamental uncertainties of its production ramping up. And you should really consider your risk appetite before engaging.A Kelly assessment shows an overall positive return profile based on quite conservative assumptions. Even assuming a 16% probability for the bullish case and a 34x EV/EBITDA multiple, the investment would have breakeven odds. And also note the 34x EV/EBITDA multiple is conservative in the bullish case. To put things under perspective, the fair valuation implied in the analyses from several leading institutions (such as Bank of America) under ~50% growth rate is in the range from 60x to 100x EV/EBITDA.At the same time, TSLA achieved a key milestone last quarter, the inhouse production of 4680 battery cells, which will serve as a key catalyst for future capacity growth. It is a key piece in TSLA’s overall strategy of vertical integration. Going forward, the successful 4680 cell inhouse production and structural battery packs give the company better control of its supply chain and a leg up over other automakers.And finally, a few words about some other risks and the limitation of the Kelly analysis itself:Specific to TSLA, in the near term, its production continues to be hobbled by the global shortage of semiconductor chips, congestion at shipping ports, and the rising cost and/or shortage of raw materials (especially nickel and lithium which are crucial for EV production).In the longer term, the competition in the EV space is also heating up. TSLA’s market share in some of the major markets is under a lot of pressure not only from established car manufacturers but also from EV companies in the US and abroad. Especially in China, its key EV market, it faces competition from NIO, Li Auto, Xpeng, et al. The future of EVs also depends sensitively on government policies and incentives, which may not always be in TSLA’s favor.Finally, the Kelly analysis itself cannot – nothing can – turn investment decisions into a completely scientific and objective process. If uncertainties/risks can be quantified, then they are not uncertainties/risks to start with. In the end, some degree of subjective judgment is always required based on each person's risk tolerance. For me, the Kelly analysis maps out the bounds and limits of the risks, so I can judge if I am comfortable with those limits.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":9068870568,"gmtCreate":1651757647654,"gmtModify":1676534963133,"author":{"id":"4087109808120260","authorId":"4087109808120260","name":"Tanyl","avatar":"https://static.tigerbbs.com/174329973340cf0f5b68791ee5b08afd","vip":1,"crmLevel":9,"crmLevelSwitch":1},"htmlText":"Must invest Tesla in option","listText":"Must invest Tesla in option","text":"Must invest Tesla in option","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9068870568","repostId":2233004021,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9068870057,"gmtCreate":1651757595479,"gmtModify":1676534963109,"author":{"id":"4087109808120260","authorId":"4087109808120260","name":"Tanyl","avatar":"https://static.tigerbbs.com/174329973340cf0f5b68791ee5b08afd","vip":1,"crmLevel":9,"crmLevelSwitch":1},"htmlText":"Must invest Tesla","listText":"Must invest Tesla","text":"Must invest Tesla","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9068870057","repostId":2233004021,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9068164453,"gmtCreate":1651738356172,"gmtModify":1676534959304,"author":{"id":"3577838395517451","authorId":"3577838395517451","name":"MauChin","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":3,"crmLevelSwitch":0},"htmlText":"Good analysis and thanks for sharing","listText":"Good analysis and thanks for sharing","text":"Good analysis and thanks for sharing","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9068164453","repostId":2233004021,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9068341528,"gmtCreate":1651724106252,"gmtModify":1676534957392,"author":{"id":"3581636665948590","authorId":"3581636665948590","name":"Hui Soh","avatar":"https://static.tigerbbs.com/635f70843f822851180aeb884ee030e8","vip":1,"crmLevel":4,"crmLevelSwitch":1},"htmlText":"[Smile]&nbsp;","listText":"[Smile]&nbsp;","text":"[Smile]","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9068341528","repostId":2233004021,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9068350473,"gmtCreate":1651722451494,"gmtModify":1676534957039,"author":{"id":"3584016424234099","authorId":"3584016424234099","name":"HeRock","avatar":"https://static.tigerbbs.com/44f6d5bfca82d1cd31bc460ab914dcd6","vip":1,"crmLevel":3,"crmLevelSwitch":1},"htmlText":"Huat","listText":"Huat","text":"Huat","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9068350473","repostId":2233004021,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":9068350391,"gmtCreate":1651722381050,"gmtModify":1676534957055,"author":{"id":"3584016424234099","authorId":"3584016424234099","name":"HeRock","avatar":"https://static.tigerbbs.com/44f6d5bfca82d1cd31bc460ab914dcd6","vip":1,"crmLevel":3,"crmLevelSwitch":1},"htmlText":"Huat","listText":"Huat","text":"Huat","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/9068350391","repostId":2233004021,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":63,"commentSize":20,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; 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