Tesla Bull/Bear Thesis With Anton Wahlman And James Foord

Summary:

• Seeking Alpha analysts Anton Wahlman and James Foord discuss their bear and bull thesis on Tesla.
• Can’t value Tesla like a regular auto company.
• Evolution of Tesla’s charging networks.

Listen to the podcast here or on the go via Apple Podcasts or Spotify.

Seeking Alpha analysts Anton Wahlman and James Foord discuss their bear and bull thesis on Tesla (NASDAQ:TSLA).

• 2:00 – Can’t value Tesla like a regular auto company
• 6:45 – Development of Tesla’s charging networks
• 18:20 – Does Tesla’s competitive advantage still exist?
• 36:40 – Investing for the future – is Tesla a good investment?

Recorded on June 23, 2023

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 (TSLA). Thank you both for joining us today. Really appreciate it.

I’m going to start with the bull I think. James, you want to lay out your thesis for the Investing Experts audience?

James Foord: Yeah, so Tesla is one of those companies that gets a lot of hate from people, also a lot of love. Of course, the valuation is a big point of contention for the bears but I think for the bulls we have to you know we have to say you can’t value Tesla as a regular auto company, right. There’s so much more that goes into the company, it has other sources of revenue, it has other business segments, right. Whether it’s selling solar panels and of course, the kind of technology that they’re developing, you have to understand it more as a bit of tech company and see those possibilities for those other revenues.

And I think that’s what we’ve seen in recent weeks. We’ve seen this big run-up in the stock since the year started and also recently in the last few months. And a lot of that can be attributed to some of the latest news that we’ve got. So I recently wrote an article on Tesla and the recent deal struck with General Motors (GM) which will enable their EVs to use the supercharge network and I had talked about why this is a big catalyst for Tesla and could lead to billions in profit.

And of course the GM deal which follows a similar deal with Ford (F) that was struck a few weeks ago which will allow these cars to charge on the Tesla super network. So why is this good for Tesla? Well, we can imagine that Tesla will make a substantial amount of revenue from this.

And there was a report from Piper Sandler talking about the potential of making $3 billion in revenue by 2030 from non-Tesla users and $5.4 billion by 2032. So I decided to look into this and crunch the numbers in my latest article. Now if we look at the financial summary of Tesla’s results we can see that they have 3 different segments and the revenue that would be from superchargers would be held under. the Services and Other Revenue segment which in 2022 brought in about $4.39 billion.

We don’t know how much of that is due to the use of the superchargers but we have that number as a kind of top of how much it could be and now we can try to estimate more or less how much this is. Now, Piper Sandler doesn’t give us an exact idea of and and how they reached those numbers I mentioned before, but I did fine a Goldman Sachs article where they talked about how much the Tesla supercharging network could make potentially.

So they have this table where you have on the one hand Tesla superchargers on and then daily EV charges on each supercharge and then an idea of how much revenue that could bring. So for example, with 50,000 superchargers and 5 EVs charging every day, Goldman estimated that Tesla would be making $958 million. So if we look at the data that we have today for Tesla we know that there’s roughly about 4 million Teslas out there and we know that there’s roughly, I think about 45,000 superchargers today.

So I crunch these numbers and if you have roughly 4 million Teslas I said maybe charging about twice a week on these superchargers that would imply about 1.40 million charges. This would imply that today Tesla is making about $3.3 billion. And that doesn’t include a lot of things like Services so potentially this could be a bit less but you know overall we can see that there is some sense to these numbers.

So I decided to project how these numbers could look in the future moving forward using some data from the IEA where they’ll be 350 million EVs by 2030. I had calculated that realistically, Tesla could make somewhere between $3-9 billion. 3 billion is the low end, that would be Piper Sandler valuation. Now I estimated this could be quite a bit more. maybe roughly around $9 billion. And this would be if Tesla controls about 2.4% of the EV charging market.

Going through the internet I managed to find how much this would affect the bottom line, so how much in earnings this could translate to and we have this tweet from Elon Musk back in 2022. He was asked about the gross margin on the superchargers and he said that they aim for 30% gross margin or 10% profitability. So ultimately, that 3 billion could lead to about 3 million in pre-tax earnings all costs included. So that is about a 10% add to the bottom line. So about 300 million, I guess, you could say, an operating income or pre-tax earnings.

And this is one of the reasons why I think we’ve seen the stock run up so much in recent weeks. Now of course it’s impossible to know what moves stocks but this is one of the fundamentals that have been contributing to the stock rally and overall I think it’s very bullish for Tesla and it show the underlying principle that Tesla is more than auto company and there’s so many other avenues it can use to get those revenues.

Anton Wahlman: All right. So, maybe I can jump in here and provide also an additional perspective here. 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 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 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. So 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 the 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. So, anyway, I think that’s maybe a beginning, and maybe we can take it from there.

JF: Right. I just 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. So 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: Right. I did want to raise a couple of points there. Just for the record, I’m also — I am originally from Europe, so I’ve been living in Spain. And now it is true that they have much more share there. I will say, I also came to America through Oslo, through Norway, which is the leading country in terms of EVs, and Tesla does dominate the market a lot. That’s just a little point there. But like you say, it is true that the — that Tesla does dominate the market a lot less in Europe. Is it because of the charging network? Well, we don’t know that for sure.

But you pointed out that the Tesla network is a lot more robust. It’s just better. I mean, I thought you were the Tesla bullet at one point, you were just talking so highly of Tesla. But my point is that, you also mentioned that companies are going to own, sorry, users are going to also be using the other charges. Therefore, the revenue argument doesn’t apply. But you can only have it one or two ways, right? Either the Tesla network is that much better. They’ve lost a competitive advantage. Well, are they going to keep the revenues or they’re going to lose the revenues because people are going to use the other chargers. But in that case, was it ever that much of a competitive advantage? So, I don’t know if that was clear.

AW: Well, I think it has clearly been a competitive advantage to this date. Because if you look at the long distance travel that then people do I mean, the proverbial driving from LA to San Francisco, which was a real pain in the neck with many of these other charging networks. Again, they had chargers there. The problem was you could not rely on them as well. Whereas now that other cars A, will be able to use the Tesla ones and the Tesla users will be able to use the newly refurbished chargers that will be installed here in the coming months by all of these other competing charging networks that will presumably raise their reliability and ease of use.

So it really will even out the field because now you have one connector, that is going to be integrated far more better with all of the cars. So, I think that that will just really not completely eliminate necessarily, but largely remove the consideration for buying a car? Because right now, buying a car is for some people — I mean look, some people are buying EV. They just don’t charge away from their home at all or almost never. So for them, it’s not a big issue. They buy an electric car. It goes to — they deliver the kids to school, they go to the supermarket, they go to the soccer field, and you know, the average American travels 35 miles per day, 35 miles.

So the 250 mile car is really overkill, for most people in most days. So people also have, on average, more than two cars. So, like, one of their cars typically never ventures far away from home. It’s just around town runabout and then they have some other vehicle that is being used for those far more, less common road trips where they travel hundreds and hundreds of miles. And that’s where, you know, it’s for that car that if you wanted to make that car your EV that Tesla had the advantage up until recently.

And I think that now that is going to really be reduced pretty dramatically in terms of a purchase consideration because, hey, from another car, yes, I can charge with a Tesla supercharger, but also at the same time, all these other networks are now going to be on the exact same standard. There’s no need for an adapter. And when they make these upgrades, now that they have really the same connector that Tesla does, I think that they will find a huge incentive all of a sudden to better maintain all of these and to increase the reliability of their chargers because now it’s really is they’re really pulling from the same user pool.

In the past, those other networks, they were really different users. I mean, they were the users who were buying, say, Chevy Bolt or whatever other EVs, you know, Audi e-Tron and Jaguar I-Pace and so forth that people who were driving around. There was a very little cross pollinization in the U.S. market. And then all of that changed a little bit over a year ago in Europe, first because of the legal mandates there, and now they’re coming to the U.S., not because of a legal mandate, but because Tesla, for whatever reason, you said, hey, you know, we’ll just give this thing to you guys, and then let’s see what happens.

And I think that from Tesla’s perspective, I think that that is I don’t think that’s a positive for their bottom line. I think that they’re going to be A) selling fewer cars that way and, yes, they will get some revenue from these other cars that we’re charging on Tesla’s network, but it could be offset to some degree by, as we discussed earlier, Tesla owners starting to charge up other charging stations.

So either way, the number is going to be tiny on that side. We’re talking, maybe on a good day, a few hundreds of millions of dollars per year in potential profit, which is really a drop in the bucket in the scheme of Tesla’s near $1 trillion market cap. But I think the bigger risk, Tesla is simply the one that they will, have removed their main argument for buying a Tesla over a, whatever other brand you have out there, a Volvo or a Volkswagen.

JF: Well, I think you do make some compelling arguments there, and 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 and obviously, he cares a lot about the environment. I guess my issue would be you say that with the 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 Apple’s 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 strategy advantage that we have. We’re making a car that if autonomy pans out, and we think it will, where the assets actually will be worth a hell a lot more in the future than it is now. So it is taken to be possible to say that zero profit, but still have the net present value of future cash flows associated with the 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 driver’s 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 – doesn’t really define the terms here, because it’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), the 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 you’re – 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. But this thing is a quick software upgrade here, and this is going to work. There 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.

JF: Right well, I see the point that you’re making. It is true that Tesla had a tendency to overpromise and you could say, and to deliver in some aspects. I’m just wondering then, I mean, so your argument is that, this technology won’t really be there until a few years. But do you see any other companies that could actually beat Tesla to the punch here?

AW: First of all, I think the problem is far harder than everybody in the industry has been saying. You remember going back to about 2014 or so, which was when the real hype started emerging out of the blue. Like, out of left field, suddenly everybody started talking about. And I have published articles on Seeking Alpha at the time saying, this is the most overhyped thing in a long while. It will take many, many more years than people think, at the time, not just Tesla, but other automakers were at least insinuating that we’re going to get to it, like a truly full – self driving car, Level 5. Not that they said, that they actually had a product or anything, let alone, that could be software upgradable, but they said that something was coming. Something was coming within the next three or four years.

And so in other words, everybody at the time were arguing that certainly by 2019 there would be tons of these things flying around. Nobody has come up with a product yet that could possibly deliver on the regular customer expectations. And the stuff that GM has in San Francisco and a couple of other places now and that Waymo has in similar locations, I don’t really count them as finished products, because they are — these are very clunky products.

They’re very, very – first of all, they’re very expensive. You look at the amount of hardware that goes into these things. I mean, you’re talking about many tens of thousands of dollars, if not more that go into making these systems. You also have to make them very redundant, because what if one of these systems fail? Right, I mean, what happens? It’s like being caught in a submarine trying to, look at the Titanic and suddenly system fails and oops – that’s the end of it.

So these systems, many of them, have to have redundancy as well, and that makes them very, very expensive. So when you ask the question, will other automakers get there? I’m not saying necessarily that any other automaker is going to get to a full self-driving car in a mass produced way, any faster than Tesla. I don’t think they are. I’m saying that they are getting there faster than Tesla in these various specialized applications.

Again as Waymo and Cruise, which are not really, again, the same product, because a consumer cannot go and buy these products, and they can’t use them to drive anywhere. So maybe one day they will get there and maybe one day they’ll get there at a price that people can afford in some form or fashion. But I still view it as still, so many years out that it really, in my opinion, anyway, should not be on anyone’s investment horizon, whether you’re involved in Tesla or any other automotive company.

I mean, this is still in the kind of the R&D stages, because the intelligence, I mean, my house cat has more situational awareness than a self-driving car at this point. I mean this car just randomly, it was like, will stop some place. And it’s like, wow what is it thinking, what is it doing? And that’s not good. I mean any – my half blind, half deaf, great grandma could kind of figure out the situation in a nanosecond a lot faster than some of these implementations of AI that really pertain to driving in real traffic in, like, real situations.

It’s a going to be a while, I think before you can get to, I mean I was just driving – I mean this is totally anecdotal. I was just driving around yesterday at lunchtime, and their red lights were out. There were no lights. So people, it was like total chaos. It was like something out of Baghdad 1952 or Calcutta in 1967. I mean, it was complete chaos. And I said to myself, dear lord, if any computer is going to figure out, how I’m going to muscle myself through this maze like, Don Corleone only 4 wheels, basically.

I mean, this is just not going to happen. A car that is run by computers probably is going to sit there still, block the road, and just stop anybody else from moving forward in using what we might call an economic spontaneous order, a little bit to get through. So, I think this is what I mean, a Mercedes once told me in a presentation – in one of the earlier Level 3 R&D cars. I took a ride in it. It was something like 2014 or so.

And they said, what the conclusion, they had arrived at then, it was like, nine years ago, was that the more they look at the problem, the more difficult they see how it is to get to the end Nirvana here, where a car truly can effortlessly drive, itself around. They had a book that was majestic, that consisted of thousands of edge cases, corner cases that they haven’t figured out yet how to make the computer intelligent enough to solve.

Eventually, again, decades from now, I think they and others, everybody will eventually get there. But they said, look in the short-term, these technologies can be wonderful perhaps to assist the driver in terms of avoiding certain bad situations like auto braking, like almost any part that’s sold in the market now in the U.S. market come standard with auto braking. There are a few exceptions, but almost all cars have.

So you basically are — its almost impossible to rear-end another car you could buy almost any brand new car in the market today. And that is something that it’s a limited functionality, but it could be a very good one. People get distracted – again, they look down on their phone or something else, and then this will prevent them from just doing that really horrible rear end that we’ve all seen a hundred times in traffic I believe in our lifetimes.

JF: Right, I mean, I think I agree probably with what you’re saying. I’m not saying that, this technology it’s Tesla, and everyone, for that matter it’s developing is going to change the world in the next few years. But I kind of disagree with your point. You say, well, this is too far in the future to even be thinking about. And I think that as investors, this is that kind of the point?

I mean, we’re here to kind of invest in the companies today they’re going to change tomorrow. And I think that that’s a lot of what people are looking for when they think about investing in Tesla. Right, I mean, it’s a little bit like saying, well, Apple in the 1980s or they have these computers, they’re not going to do anything until 20 years from now maybe, but still would have been a good investment in the 1980s right.

AW: Was it a good investment after 1997. There were a few years there when Apple was down. I mean – don’t tell me the exact percentage, but I mean, this thing was down for the count and arguably, a couple of quarters away from bankruptcy. And then, they managed to sort of pull the plane off from right as if it was brushing against the tree tops. So, I think the circumstances are a little bit different. Look, we’re really I mean, when it comes to self-driving cars, I mean and I mean, this is really unchartered territory.

I mean, I mean, if it happen, if it really can be made to happen, it can be made to happen at a price that people can afford, and there’s no question that it will have value. But when you can’t even I mean, there is today, it just simply so far out, I think, that I mean, how does one incorporate that into a thesis today that where we have really no evidence that the product I mean, even if you throw an unlimited amount of money at the problem.

So, you take these Waymo and Cruise vehicles, right, that are driving around San Francisco and Phoenix and maybe a couple other places. Now, money was not an object right? So the amount of hardware that goes into them, in multiple LiDARs, you see all these little things protruding – all around the top of the vehicle. Money was not an object, and still this is not really a finished product that is consumer friendly that really can go anywhere. So unlimited amount of money, unlimited resources, and it still isn’t there.

I think that, this is still a far, far way. I mean, it’s not to say that there won’t be progress. I mean, at some point, I mean, you just look at the curves, right, for computer intelligence right? I mean, clearly computers are going to be able to process more situations, sensors are getting cheaper. I mean, there’s no doubt that all the ingredients are fundamentally there, but some point, maybe get to a substantially better product.

But I mean, we’re still not I mean, we can reach your arm out as far as you can reach it today with everything that we have under our belt, and there is still no self-driving anything that is an acceptable product, let alone, at a consumable price. So I have a very hard time using that as something that I wouldn’t want to start discounting to present day value, whether it’s with Tesla or any other company.

JF: Right, I’d be curious to know then, do you have any, I mean, do you have any price target for Tesla?

AW: There’s so many things here. There’s a lot of subjectivity. The framework I have is this. Let’s say that the entire automotive market unless, for the sake of argument, just start out with what is Tesla worth as an automotive company? We can throw all sorts of other things on top of it that, this other businesses you have. But let’s say Tesla’s automotive business, what is it worth? We would start out by saying, what is the entire automotive industry worth?

So up until four years ago or so, the entire automotive industry was not significantly away from about $1 trillion, slightly more than $1 trillion. And Tesla essentially itself managed to get about a $1 trillion market cap, right? So you had an industry that was worth a $1 trillion, but now we put – we take, one giant block like a big Lego of the same size as the combined mini Legos of all the other automakers, and suddenly, the whole industry was worth about $2 trillion.

So but either way we can, so we can play with either of those two numbers. We can say the whole industry ultimately, should be worth a $1 trillion or it should be worth $2 trillion or maybe the answer is somewhere in between. And of course, if you look far out into the future after inflation or just all these things are $1 trillion anybody used to be. But no, let’s use the smaller number for starters, like a $1 trillion for simplicity. And then you say, let’s say that the entire industry, the entire automotive industry, goes a 100% electric.

So let’s take the most favorable outcome for Tesla’s ability to grab market share that could possibly be conceived. There’s, no more non-electric vehicles out there in the world I mean, look, that’s not going happen in my opinion within 25 years or more. It will happen maybe a little faster in Western Europe and North America and China and a couple of other countries. But let’s just go with the whole thing. Let’s just say it’s a 100% of the market.

Now is Tesla go – what kind of terminal market share on a worldwide basis is Tesla going to get their total average all geographies included. You include Latin America, Africa, Southeast Asia, the whole shebang, if it is the case. And then, of course, we assume that everybody in the industry has some sort of similar profit picture. Then Tesla would be worth. Let’s say, Tesla gets 10% I mean, I don’t think they’ll get 10%.

I think the answer is that they’ll get somewhere south of 5%, but let’s say they get 10%, 10% out of $1 trillion. That means that Tesla’s market cap ceiling, is about a $100 billion. And if the market cap today is a rounding error from a trillion, then I view that that’s under that scenario, as an — for Tesla’s automotive business, it will have — it’s got basically a 90% downside.

So that’s the framework, and then we can play with the assumptions. You know, it is the ultimate value, not a trillion, but $2 trillion because for whatever reason, the car business is just worth more than it isn’t and otherwise, and do we, you know, change some of these other assumptions, let’s say that only half the car market in the world goes all electric. Well, then Tesla’s addressable market is half as large.

On the other hand, if you assume that Tesla’s going to get 20% market share. Well, then, you know, you just double that assumption from 10, so but that is the framework. So you have to look at, in my opinion, the terminal state of the market, when the market has reached its peak all-electric penetration in terms of new sales, and then you say, well, what’s Tesla’s market share of that market, and I’m saying it’s considerably lower than 10% of that market share, and I think that, but I’m giving them for the sake of argument upfront that the 100% of the market would be all electric. But in that scenario, they’re sealing as our market cap, it’s like a $100 billion, I think in the end, it’ll come down to something less than half of that. So my personal price target is that it’ll be, you know, Tesla’s worth somewhere south. Their automotive business is worth south of $50 billion.

JF: Right. Well, I mean, you know, I think you made some compelling arguments there, but I think — again I think that kind of misses the point that I made originally which was that, you have to look at Tesla something a bit more than an auto company, right? So that is the value of just the auto company. However there’s so much more that I believe Tesla can do with the technology and the kind of data that they’re acquiring and just as I said, for example, you know, having that AI, kind of, driving as a service.

And just in general, this new idea I think that people are thinking about is the car is more of a computer, right? Where, you know, the car is a — it’s just a lot more than just getting you from point A to point B, you know, it’s, kind of, it’s a home entertainment system. It’s all kinds of things, right? It’s where you hang out. You’ve got your Internet. You’ve got everything in there. So, again, I think the possibilities are large and I think saying Tesla has got 10% of the market in the future might be conservative. You know, like I said, I think look again, I know I’ve drawn this conversation with this comparison a lot of times before, but, you know, Apple has what almost 50% of the smartphone share. So, you know, I don’t think it’s crazy to think that it’ll go up. I think that’s the product is differentiated in a lot of ways, superior in a lot of ways, and I think it’s a very, very conservative estimate.

AW: Well, clearly, to the extent that there are other businesses on top of the auto business, you would have to layer that on top. I mean, Tesla makes, whatever solar panels, you know, and they have — they make battery packs that they sell for storage. I mean, those business are legitimately something that would need to be added on top of the valuation of the automotive business. You have to, sort of, look at them a bit separately from each other. So that’s absolutely true, I think. So, yes, no doubt about it. I mean, then — but, you know, they have to look at, you know, what are those companies worth, you know, that are engaged in those businesses today.

And when I look around and I look at the various solar companies and all the companies that have battery storage businesses, these are low multiple type of situations where profitability is exceptionally low, and they get a very low multiple on them. And in terms of moving the needle on the market cap, I think that the big scheme of things, yes, they do add on top of whatever number I would ascribe to their automotive business, let’s say, $50 billion or something like that. I mean, — it doesn’t fundamentally sort of change my investment conclusion, but clearly, when you’re adding up some of the parts valuation, you will then add on to — I mean, look, this little — what did they call it? The humanoid Optimus, the dancer in a leotard, whatever the — it’s going to go and pick up garbage for people or whatever it was. That product you know, I mean, if they can make a — the best humanoid robot in the world that actually can go around and be my personal butler, serve me champagne and chocolates here as I’m sitting in my living room, and otherwise eating bonbons and watching television. And that would be wonderful. I mean, that will definitely be worth something.

I mean, I love to see that, but at this point, I mean, it’s not obvious to me that they’re going to have a better product there or that’ll anybody will have a really good product there anytime soon, but to the extent that happens, during — I can totally see why, somebody out there makes a household robot of some sort that can help elderly people with whatever household chores. Somebody’s going to make money from that. Maybe Tesla will do it, but I can’t rule it out. And if so, that would be on top of that proverbial $50 billion that I, kind of, laid out a few minutes ago.

JF: Well, if anyone can do it, right?

AW: Maybe, yes. So, anyway, one thing and the other thing I would say that okay. So that — my long-term thesis is that, again that just taking as a base, the base building block, the largest Lego, perhaps, at least that we can see today is the automotive business. That’s like the long-term terminal value as I said, that’s how I arrive at it being worth maybe about $50 billion. But then you looked at, you know, 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 to — back to Graham days and just the inception of stock market analysis. I mean, when estimates come down, when Wall Street reduces their earnings estimate, stocks tend to go down, and what we’ve seen in the last few months where it’s starting basically, this is the beginning of this year since January.

Is that 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, they’re 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 are obviously generated for our 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 stocks gone from basically, from a 100 to 270 here over the last few months. A lot of other things have gone alright, whatever they may be.

But all other things equal, a lot of things have to go right when its 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, and they’re 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. And now 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.

AW: Yes. So the other thing I maybe, I should mention too is that, you know, I think that you brought a couple of these upside potentials. So, for example, this or the one I was talking about, like, the humanoid robot, the optimism. Like, clearly, if that really comes through, right, I think that could be a huge positive, right? But there are also black swans on the negative side that are — there are — that nobody can really, I mean, nobody is a clue whether they will happen and in what time frame. But I’m just thinking of all the legal exposure, right? Because, they have legal exposure on so many levels. We talked earlier about this whole full self-driving thing or Tesla has been making claims for years. I mean, there’s a lot of legal liability there.

We have no idea if this is going to go anywhere. I mean, it may turn out to be absolutely nothing. And then we have stuff that concerns Elon Musk outside of Tesla, right? He has now put himself in a different position in society overall, especially as a result of his purchase of Twitter that I mean, you can imagine scenarios under which I mean, he is essentially, you know, you could say that he’s becoming a larger target from forces that will want to, you know, take him down a notch that, that until a year ago, we’re never going to think about doing that with nearly the same ferocity that they might now consider doing.

So, I mean, you have to look at it. You have to at some point, if I were — if I own the stock, I would be most worried perhaps waking up one day and just seeing like, a 1,000 page indictment saying that for all of these whatever they’ve cooked up, right? I mean, this may be coming from multiple angles of the equation that they’re going after him for some reason that may have been triggered by something that had nothing to do with Tesla, and that is — I had no idea how to assign a probability to that happening, but it probably isn’t zero, right?

I mean, it’s, like that at some point, you know, you hope that the probability that there’s a house fire is also extremely low, and that won’t happen in your lifetime. But the probability is not zero, and at some point you have – some of you buy insurance for fire risk, even though you don’t think that you’re going to have a fire in the next decade or whatever. So I would view that as, you know, a potential something that I mean, if I would be — that would be the thing that would, you know, caused me to be lose sleep at night if I were a shareholder, you know, to wake up one morning and see some, sort of, significant legal action had been taken, either against Tesla as a company, Musk as a person, because they’re so intertwined. And you can, you know, that’s one of those days when, you know, you could have the biggest down day of the company’s history. So, I would — that would have to be in the back of my mind as an investor.

You know, I’m not saying that it’s a reason for somebody to be short to stock because, again, you can, you know, this is like we’re — again, fumbling in something that is truly unchartered territory, but that unchartered territory goes both ways, is my fault.

JF: Right. Well, like you said, I mean, I think, you know, Musk didn’t make many friends buying Twitter. I’m sure he also made some fans there. But I guess, yes, it’s an interesting point. I think, you know, if we start talking about the Tesla robots and how speculative that is. I think that, you know, beginning to think about how the powers that be might want to take Elon Musk down is also kind of…

AW: No, I agree, but that’s what I’m saying it because there are things that are out there that are very hard to put probabilities on. I’m just saying they go both ways, right? I mean, we have upside potential from some of those things that if they ever were to solve full self-driving in a cost-effective way. And if this humanoid robot were to work and so forth in a cost effective way. I mean, these would be really, really big things, but there are also risks on the downside that would be really, really big if any of those things were to come to pass.

I mean let’s just take this whole self-driving thing. Okay, let’s say that Tesla does solve it for new products, but let’s further say that the old products, the cars that have been sold to-date or maybe up until very recently, simply cannot be upgraded. You know, the hardware requires something more and it’s not cost effective to retrofit them. The computer power with the modules that they once brought from NVIDIA (NVDA), once were essentially getting themselves and previous to that it was that other Israeli company. All of those products, if they can’t be upgraded, and then, you know, they get sued by previous owners who said, look, I mean, I bought this car under the premise that it would be upgraded to full self-driving, Tesla has been very clear about that it will be upgradeable full self-driving.

And if it isn’t upgradable full self-driving, then, well, you know, we have a situation here, right? We have, you know, what does Tesla owe me as a Tesla owner at that point if I can say, like, look, I bought this car for this reason, and you never delivered on it. And now what do I do? I’ve owned this car now for a few years. And, I mean, shouldn’t you know, is this there a risk that Tesla has to buy back the car or send people a really big check to compensate?

Will there be a settlement? I mean, all those tricky issues would come to pass. So, I mean, those things are not on top of investors’ mind today, but they could be triggered just by, you know, even by the perverse result of an advancement in full self-driving ability on their new cars, because then people will start asking the question: Well, whatever happened to the old cars where you promised that they would be upgradable? So that’s a two-edged sword is my point.

AW: I guess we’ll have to see — we’ll have to have this conversation again in 10-years, and either we’ll be driving Tesla self-driving cars, or Musk will be rotting away in jail.

JF: Well, you know, I mean, again, we don’t know. These are a lot of there are black swans and there are white swans. There are swans to the upside that can happen. And I would just like to say that there are also swans that could happen to the downside. I mean, it says this is a case where, you know, company fortunes have turned around based on some of these matters very dramatically in the past. And this wouldn’t be the first time that conflict in this you know, the example that I gave are conflict between whatever the government has in mind, and they, you know, kind of big company CEO at some point, it flies a little bit too close to the sun.

RS: Can I interject? Because I feel like you guys have given such smart articulation on Tesla, the stock, Tesla the company, and you’ve ended a bit with Musk and talking about his place in society. And I feel like if we can end on a less — on a lower note than the high level of conversation, do you feel like there are — there’s worth in spending one second of time on the sensational part of Musk?

Like, you know, now there’s this cage match between him and Zuckerberg. What do you think of Musk as a leader, and what do you think of people paying attention to the shenanigans?

AW: Well, this whole latest thing that I mean, we’re recording this about just over 24 hours after this whole cage match thing. I mean, I thought it was a joke to be honest, I mean at first, I thought it was just a pure joke. But then, you know, when they start saying that, well, they actually mean this. Like, wait a minute. There’s just no way. I mean, this is going to be I still have a hard time to believing that this thing, whatever it really means, you know, is anything, but these people having had, you know, just knocked back one too many, and now they’re just — they for some reason, they felt like they didn’t have enough attention, you know. They needed to come up with something more sensational that was even more off the wall that, that the world was not printing their name too many times, you know, in the paper. I really don’t know what to make of it. I do that. If it were to happen and they were really serious about it, I don’t think it’s a positive.

I mean, you know, this gets really, really weird, but — and my thoughts went back to the 1804 duel between Aaron Burr and Alexander Hamilton. And I mean, maybe they won’t have weapons this time, but the outcome could be a little bit dangerous if you put two grown men into a cage and are told to fighting each other essentially with almost no rules. That’s just, you know, I mean, you know, you talked about unprecedented, and we were always talking about here, I mean, Tesla is one big case study of all sorts of unprecedented things happening in on all sides of the equation, but if this actually does happen, I think this would actually take the cake.

JF: You know, I just hope that they if it does go on that, you know, Tesla will be will be sponsoring that, because I’m sure a lot of people would be watching. My money is on Zuckerberg. I understand that he’s been doing Jujitsu for the last couple of years. I think it’d be interesting to throw Jeff Bezos in there, because I know that he’s been hitting the gym quite hard lately. It’s a crazy world that we live in, I like it.

AW: You know, let’s put it this way. If this whole tech company thing doesn’t work out, I mean, I guess, they will have a second career and something closer to Los Angeles, you know, in the entertainment world somehow, because this is just too weird. I’ll believe it when I see it. Let’s put it that way. I somehow don’t think this will happen. But if I’m wrong, God bless.

RS: High and low conversation here on Investing Experts. Start with the high end with the low. Anton and James, I really appreciate the conversation. You’ve both written articles expressing some of the case you laid out here. Thanks for extrapolating so much on your theses, and thanks for joining us.

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