Is Tesla A Buy?

Summary:

• Anton Wahlman on development of charging networks and standards, highlighting Tesla’s more customer-friendly connector. Ford and GM have decided to use Tesla connector on their electric vehicles from 2025.
• Potential impact of Tesla opening up its charging network to other brands, suggesting it could reduce Tesla’s market share as the charging network has been a key differentiator for the brand.
• Self-driving cars, Musk’s promises, and feasibility. James Foord lays out what he sees as Tesla’s competitive advantages.

Listen below or on the go via Apple Podcasts or Spotify.

• (0:30) – Tesla’s charging network evolution – net benefit not clear
• (10:50) – Self-driving cars, robotaxis and Tesla’s competitive advantage

• Free trial for The Pragmatic Investor

Transcript

Rena Sherbill: James Foord, who runs The Pragmatic Investor investing group on Seeking Alpha and Anton Wahlman, a long-time Seeking Alpha analyst, join us for a bull-bear conversation on everybody’s favorite stock, Tesla (NASDAQ:TSLA).

Anton Wahlman: I think we should go back in time a little bit to look at the history of how these charging networks developed and the standards that went into them. Going back to about 2010, 2011, that was when Tesla proposed their version of a new standard, which is that connector that we all see at the Tesla supercharger.

It’s a very elegant connector that combines both AC and DC charging in a very light, narrow cable, that I think everybody will agree is fundamentally more customer friendly connector, sort of like comparing USB versus some other previous flavor of USB like a USBA. It’s just simply smaller and a little bit easier to handle.

And the rest of the industry, however, decided to go with two different other standards that subsequently have really whittled down to one. It’s called CCS, combined charging standard that really combines an AC and a DC, but they don’t sit inside each other. They sit essentially on top of each other, so that that makes for a very clunky connector. When you go to one of these CCS chargers, you will see that it’s a pretty fat piece, basically, that you have to stick into the car. In and of itself, it functions just fine. It’s just a bit ugly when you think about it.

And it functions a little bit different in the European version thereof than the U.S. one, but nevertheless, this went on for the last few years, and most automakers standardized on this. And now what happened here in early May was that Ford (F) decided that, you know what? Starting in 2025, we’re going to put the Tesla connector on our electric vehicles. It didn’t explicitly say, and neither did GM (GM) that they were going to abandon their old CCS connector.

So in theory, one might at least suspect that maybe they will keep the other one also. I don’t think they will at all. I think that they will get rid of the old CCS, but they never said so explicitly. So that at least leaves the possibility open there.

But we also have to look here at the differences between the North American market and the European market. In the European market, for those of us who travel around frequently in Europe, we see that a large chunk of the cars already today that charge at Tesla superchargers are non-Tesla’s.

So in Europe, they’ve had these adapters that people are using because it’s essentially became the law in Europe that all of the other automakers have the right to charge at Tesla superchargers.

So what is being implemented here in a slightly different way in the U.S./North American market, has already been enforced as a practical matter in Europe. And even so in the U.S., you can already today, you could have added for the last year, I mean, I have friends who have Ford F-150 Lightning and so forth, they’ve been charging from Tesla superchargers for a year already.

All you got to do is to buy an adapter. And so this has been working, but who wants to buy adapter, basically? There’s a subset of the market that once to carry an adapter around and fiddle around with it. All of the things equal, you want to get rid of it, but it’s there. And so this thing has been possible. All you needed to do is to essentially download the Tesla app and create an account, and then you were charging, and people were doing it. But most people weren’t even aware of it.

So part of what GM and Ford have done here, and I assume all automakers are going to be announcing at some point within the near future, is to make – also raise consumer awareness that they can take whatever cars to charge in the Tesla superchargers. Mind you, however, that it also works the other way around.

Until now, there had been very little incentive for all of these other charging networks. We all know several of them that, you know, there are blank charge points. You go down the list, all of these other charging networks, independent ones, that are smaller, that aren’t public, they had a very little incentive to install the Tesla connector, which they have had the right to do for a long time because this is after all a standard.

Tesla cannot charge money for a standard. So they can do this, but they haven’t done so in the past because at the end of the day, if you’re a small fish and you’re going to tangle with a large player that sort of controls the rest of the network, you’re probably going to stay away from it.

But now that for GM and soon all the other automakers have bust the doors open to this. I think we saw announcements a week or two ago from some of these networks that they’re going to start installing these Tesla connectors at their chargers.

So from the calculation, just strictly monetarily in terms of the charging revenue of other cars, say, a Ford or a GM or soon everybody else charging at Tesla superchargers, you will also have to subtract all of the Tesla owners that are going to be charging at non-superchargers in the future that they weren’t doing thus far.

So, it’s not clear to me that this is going to be a net benefit even in that calculation for Tesla because in the U.S. market, Tesla has — they’re by far their largest market share. It’s like, well over 50% of all the EVs sold today. 60% — whatever 62%, 65% of the market are Tesla so far.

So if a certain portion of those 65% start charging at non-Tesla chargers where they weren’t doing so before, that could end up being, we don’t know, but that could end up being as large or a larger number than those of the minority EVs, the other 35%, 40%, that now in the future will start charging at Tesla superchargers.

James Foord: I had a question. I was wondering in terms then, so your thesis here is that because Tesla owners are going to be charging at other stations, what kind of infrastructure is in place right now?

So we know, for example, there’s about 40,000 superchargers out there. What is the competing infrastructure out there then? Do you have any idea on the numbers for that?

AW: I don’t have them in front of me, but it’s a number that is not too different from the Tesla superchargers. If we look at the number of DC chargers that are out there and so forth. The difference is that, thus far, Tesla’s had the best chargers. The best in the sense that they’ve been maintained the best.

If you go to some of these stations along the freeways, for those of us who have owned Teslas and driven them and compared them with other vehicles, it is clear to me that Tesla’s had the best charging network, not just because of the speed of the actual connector or any of those things, but the biggest thing has frankly been reliability.

And the reliability of many of these other networks has been poor. You show up at one of these networks and for whatever reason they don’t function their app doesn’t work, their car doesn’t work, this thing is just down or there has been some physical impairment along the way that basically hasn’t been maintained. There are chargers that I’ve seen over the years that have been sitting there broken for, forget weeks, some of them going into the months.

So what Tesla’s done very well is that they’ve maintained their charging stations very well, and their reliability in terms of just plug and play has been very, very good. And that’s been their advantage.

It’s not so much that they have more chargers than the rest the other companies, when you combine them, they have roughly a similar number, but the reliability of others has been poor. And now this combined charging standards, so to speak, not in terms of the actual name of the standard being implemented, but the one that Tesla has been using exclusively before, and now everybody will be using. I think will put the feet under the fire and really even out some of these reliability concerns across the board.

So, I think that to the extent that this was an advantage for Tesla in the past, and I believe I’ve been saying since 2013 that the charging network and its reliability has been Tesla’s number one differentiator. Especially the last couple of years when heavy competition has come onto the market with lots of cars with more than 250 miles of range, I think that this has been the number one reason by far that customers would buy a Tesla over another brand.

And now with this advantage, being reduced quite considerably, I think that this will really threaten Tesla’s ability to sell cars on the margin and we see it to some extent in Europe, I mean, Tesla’s market share in Europe, whatever the last few months of what we’re talking, market share numbers that are way, way, way below what they are in the U.S., and we can argue as to whether the fact that Europe has already opened up Tesla’s charging network has been a main reason for that or not.

But I think that going forward, certainly in the U.S., I mean, U.S. has a different driving pattern than Europe. In U.S., people do use superchargers a little bit more for long distance travel, whereas in Europe, they use chargers more for you know, people who live in apartment buildings, and they charge a little. In Europe, they have more chargers deployed on the streets like that the — where the parking meters are and so forth. You could walk up and down the streets of Paris or Stockholm or whatever, you can see tons of these things. Whereas in the U.S., you’re not going to see many of those.

So I think that when this now evens out, I think this will reduce the propensity of people to buy a Tesla versus another brand because really the charging network is no longer a factor in your purchases decision going forward.

JF: You could question whether the move to open up the charges is going to be profitable for Tesla whether they do because of that or Elon Musk did come out and say, well we’re just trying to bolster EV adoption.

I guess my issue would be you say that with opening up the network that they are losing their main kind of competitive advantage. I would say, well, it’s kind of subjective, but I do believe there are a lot of other reasons why Tesla has become such a leader. I think there’s a clear product differentiation to an extent of – I’ve compared kind of Tesla before to the Apples right? So an Apple (AAPL) isn’t perceived as a lot of the other smartphones, and I don’t think that Tesla is either.

And I don’t know if you wanted to talk to this a little bit, but in my previous article on Tesla, I also talked about the driverless technology, right, which I think is also a big selling point behind what Tesla is doing.

And in fact, the argument there, which was made by Elon Musk a while ago, was that they could even sell cars at a loss and the idea is that once the driver’s technology is enabled, and they can monetize that in a certain way, whether it’s by using it as a services or saying kind of a subscription that would also greatly benefit the company, right?

I actually have a quote here from Musk. It’s a bit of a mouthful. It says,

But actually, we do have this unique strategic advantage that we have — we’re making a car that if autonomy pans out and we think it will, where that asset is actually will be worth a hell a lot more in the future than it is now. So, it is taking to be possible to sell it at zero profit, but still have the net present value of future cash flows associated with that asset very significant.

So again, that’s also something that I think is often overlooked with a company like Tesla, which is also — yeah, basically a tech company and the value of all that data, right?

Now if we look at, for example, a chart of all the miles that are being driven by the Tesla cars, and how that AI and that is basically why I think they can win the driverless technology race, is because they have that kind of — they have that asset already on the road kind of picking up that data. I don’t know. I know it’s a little bit of a change in subject. I don’t know if you wanted to speak to that a little bit at all?

AW: Sure. No, the whole issue of a self-driving car is, of course, I mean, it’s kind of a little bit of a holy grail type situation, right. Where if a car truly can drive itself, and what we’re – we have to really define the terms here, because there’s a lot of talk about self-driving, and assisted driving, and so forth.

But when Elon Musk talks about it, he talks about it in these robo-taxi terms, and that means there’s nobody behind the wheel. There is no steering wheel. There doesn’t have to be a steering wheel.

And the car just goes and somehow knows where it’s going and can make it there safely. And all of that, you can put your blind grandma in the back seat and this thing can just barrel away in some direction, and you’re going to be very happy with it somehow. And this thing is still a bit of waste. You can do these things, other automakers have this thing up and running today in San Francisco and Phoenix and so forth. You got the GM Company Cruise.

You got Waymo, which is owned by Google (GOOG), Alphabet, those guys have – those guys have products for that, but they go on fairly slow speeds. They go in a very tight geo-fenced environment. And when Tesla today they – when they filed their regulatory filings for example, with the Public Utilities Commission within California, the various bodies that are supposed to regulate these things, they never make the claim, that they will ever get to what we called in industry terms, so called Level 5.

Level 5 is when there’s no person in the car, and the car can go anywhere. Level 4 is the same except that it’s somehow geofenced. And so, yes it is possible one day that Tesla and or others will get to the point where the car can drive anywhere. But that’s another issue from saying that the cars that are already on the road today are going to be upgradeable to that. And that is where I think Tesla’s going to get into trouble, not just with the consumer, but potentially also it could be a legal liability.

Because the company has been selling their products ever since October of 2016 with the promise that, they are going to be software upgradable to so called Level 5. If you look at the initial press conference that Elon Musk held in the 3rd week of October in 2016, he said that the cars that are rolling off the line today in October 2016, and of course, everything going forward are going to be upgradeable to Level 5, specifically Level 5. And of course, nothing has happened, I mean we’re talking we’re going on seven years now.

Is it seven years? 2016, yes its seven years. And of course, there’s no I mean, and if you buy a Tesla today, the instructions are very clear. You have to keep your eyes on the road and hands on the wheel. Tesla is not even hands off the wheel type system, which many other automakers have from GM to Mercedes or selling cars today that have been delivered in the case of GM, they’ve been delivering them since, let’s say now 2017 or 2018, where you are legally allowed to take your hands off the wheel.

You still have to – you can’t take your eyes off the road, because they have a camera that is monitoring your eyes. And even though you have funky sunglasses on, the signal detect whether you’re really paying attention on. It will literally — I’ve tested this, so I know. I’ve taken a smartphone and try to cheat a little bit by glancing onto my smartphone, and this thing has all of these lights that light up like a circus carnival in the middle of the steering wheel is basically saying, you know, just stop looking at your phones. You should be looking at the road even though you’re hands off legally.

And Tesla’s not even at that level yet. So when Tesla says that they’re going to get there, I see a lot of obstacles in front of them to actually deliver on a product that will meet all their requirements. So that’s where the rhetoric that Elon often engages in, is a bit different from when Tesla actually has to put text, legally available to the various authorities.

First of all, with respect to the user instructions for the car that are very, very clear, as well as what they have filed with the various government bodies that are supposed to monitor the testing activity for this. And if what they’re filing with those authorities, for example, the leading one, which is California, is true then Tesla has many, many years away from even producing anything that can be upgradable to Level 5.

I’m not saying they can’t ever get there. I’m saying that this is nowhere near right around the corner. And we’ve seen these promises every single year now for at least seven years. This thing is a quick software upgrade here, and this is going to work. It was always, basically six months to a year out at some point, and this thing is no closer in any legal definition of driving itself today than it was seven years ago.

What’s going to be important for the stock relatively short-term, and not today or tomorrow or next week, perhaps, but I’m talking within a few short months, not years. And my thesis there is simply that earnings estimates. I mean, what drives most stocks, I mean, it doesn’t matter almost what industry we’re looking at. I mean, this just goes back to Graham days and just the inception of stock market analysis.

I mean, when estimates come down, when Wall Street reduces their earnings estimates, stocks tend to go down. And what we’ve seen in the last few months starting basically since the beginning of this year since January. Starting in January of this year, earnings estimates for Tesla started to come down.

And now they’re sitting at about $3.25, $3.30, something like that on average, dollars per share for 2023. They were, at some point, at the beginning of the year, I think, $4 and change. And I think what’s set them down here are all these price cuts, which obviously generated far lower margins, and I don’t think that has played out yet.

And at some point, if to the extent that Wall Street continues to lower their earnings estimates, it becomes – all other things equal – very difficult to swim against that grain. That’s a bit of an uphill battle that, you know, a lot of things have to go right. And, clearly, in Tesla’s case, I mean, hello, the stock’s gone from basically, from $100 to $270 here over the last few months. A lot of other things have gone right, whatever they may be.

But all other things equal, a lot of things have to go right when if earnings estimates come down, one way or the other that tends to be the defining gravity that determines the stock. So I view that on the — from a perspective of a few months, not a few years, but a few months, I think that that will be the factor that will cause me to be more bearish than not on the relatively short-term. Again, not this day or this week, but I mean, in a matter of a couple of months.

JF: Right. Well, I can’t necessarily disagree with that, because as I kind of mentioned already, I do you know, I like to look at lot of other factors as well, other than fundamentals, the macro, the technical outlook.

You say Tesla has run a lot, and I do expect it to come down as well in the coming months, perhaps. I guess the difference is I would see that as a buying opportunity, you know, whether you think about short-term or long-term, I mean, the momentum is up, and I would use that as an opportunity to buy.

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