Automotive

Break Down Tesla Valuations And Everything Looks Bonkers


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Tesla’s valuation is so sky high that once you break down its individual business components, you start to realize that none of this makes any sense. All that and more in The Morning Shift for August 25, 2021.

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1st Gear: None Of This Makes Sense

Tesla’s stock price is overinflated. We all know that kind of generally, but it’s hard to pin down exactly how perception doesn’t meet reality, though this new report from The Financial Times does help. It focuses on Morgan Stanley’s Adam Jonas’ recent “bullish missive” on Tesla’s valuation following AI Day, the time when Elon brought someone in a morph suit onstage and claimed he was going to make robots for colonizing Mars. Elon was, amazingly, not laughed out of town.

Here is Jonas’ valuation:

Our PT of $900 is comprised of 6 components: (1) $375/share for core Tesla Auto business on 5.6mm units in 2030, 8% WACC, 14×2030 exit EBITDA multiple, exit EBITDA margin of 20%. (2) Tesla Mobility at $75 on DCF with 500k cars at $1.7/mile by 2030. (3) Tesla as a 3rd party powertrain supplier at $88/share. 4) Energy at $78/share. 5) Insurance at $30/share. & 6) Network Services at $255, 17mm connected fleet, $100 ARPU by 2030,20% discount 

And here’s what the FT has to say about it:

Ignoring the fact that two of these business lines literally do not exist, we were drawn to the insurance segment. Although it seems relatively insignificant at just 3.3 per cent of the $900 price target, you might be surprised to know that 3.3 per cent of $700bn is actually quite a chunk of change.

As a quick reminder, Tesla’s own in-house insurance is currently only offered in California. And the car company doesn’t actually underwrite the risk itself. Instead, it simply acts as a broker for State National Insurance Corporation, a subsidiary of insurance giant Markel. So in all likelihood, the business segment is probably a rather low-margin broking business for a car brand that currently commands a 2 per cent market share in the US. We say “probably” because the disclosure around the insurance business is thin: it was only mentioned four times in the recent 10-Q filing.

So back to Jonas’s Tesla Insurance valuation. Take Tesla’s shares outstanding — 990,015,158 — and multiply those by $30, and what do you get? $29.7bn.

If that sounds like a lot, that’s because it is. In fact, it would make Tesla’s insurance business the 21st most valuable insurance company in the world. Worth more than Aviva, Arthur J Gallagher and Hannover Rück — the third largest reinsurer globally. Indeed, at that valuation, Tesla Insurance would be worth roughly two-thirds of AIG, a company with an asset base of $395bn. 

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Again, we sort of get that there’s no real way Tesla can be worth more than established auto giants like Ford, or Volkswagen, but it’s interesting to see a more granular view in how the valuation doesn’t make any sense. It’s so overinflated generally that there’s no way the individual parts of Tesla’s business can support it.

2nd Gear: There Are Still A Lot Of Killer Takata Airbags Out There

This report from Bloomberg is interesting in that it can’t really pin down exactly how many explosive, recalled Takata airbags are out there worldwide, in part because other countries don’t really track that data:

As of early July, more than 14 million still hadn’t been fixed in the U.S. alone, in addition to an unknown but likely substantial number in the rest of the world. That means that millions of car owners like Drisaldi—especially in countries with weak consumer protections—may remain unaware that the propellant used in their cars’ air bags could be degrading as a result of heat and humidity, turning their vehicles into potential explosion hazards.

At least 37 fatalities and 450 injuries allegedly linked to the defective parts worldwide have been reported to U.S. auto safety regulators. Of the deaths, 19 were in the U.S., while others have been reported from all corners of the globe, including in French Guiana, Nigeria, Brazil, Australia, and China.

[…]

[A]uto safety recalls, even for deadly defects, can fly under the radar in parts of the world with weak regulatory regimes. In the U.S., the National Highway Traffic Safety Administration (NHTSA) has taken unprecedented steps to not only oversee but also coordinate the industry’s campaign to replace the tens of millions of inflators. An independent monitor also prodded companies into adopting more effective outreach techniques beyond what’s required by law. Nothing similar is going on in Mexico, where companies say there’s not even an effective registration system through which they can locate owners of used cars.

“While the U.S. recall system is flawed, in other countries we see systems that are virtually nonexistent,” says Sean Kane, president of Safety Research and Strategies Inc., a consultant and advocacy organization in Rehoboth, Mass.

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Again, it’s hard to know how big of an issue this is or isn’t, because we can’t really prove it one way or another.

3rd Gear: Japan’s New EV Problem: Too Many Chargers

The dense confines of Japan makes a great place for an electric car, if you have a convenient public charging network that works for a heavily urban population. At least, that was the thinking of the Japanese government a few years ago, when it flooded the country with charging poles only to see EV adoption stagnate at 1 percent of the market. This is not ideal, as Bloomberg details:

Now, with EV penetration only at around 1%, the country has hundreds of aging charging poles that aren’t being used while others (they have an average lifespan of about eight years) are being taken out of service altogether.

The number of EV charging stations in Japan fell to around 29,200 in the 12 months ended March, down from more than 30,300 the previous year, according to Zenrin Co. It’s the first decline since 2010, when the publisher of maps began collecting data.

“Next year or the year after will be a peak” for replacing EV charging stations, said Tsuyoshi Ito, a planning division manager at e-Mobility Power, a joint venture between Tepco Co. and Chubu Electric Co. Going forward, it will be crucial to place chargers at convenient spots for users and ensure not all expire at once to sustain EV growth, he said.

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I can’t say that I definitely predict that Biden’s EV charging plan will have similar results, but I would say this is something to watch for.

4th Gear: Mercedes F1 Boss Just Made Really Lucky Bet On Aston Stock, Not Insider Trading, Say Regulators

I have no idea what it takes to actually get caught insider trading, at least based on this report from The Financial Times explaining how Mercedes F1 boss Toto Wolff is clean and clear and he was just in the right place at the right time:

Wolff purchased a 0.95 per cent stake in Aston Martin from a vehicle controlled by Lawrence Stroll, the UK carmaker’s executive chair.

The following month, Aston Martin appointed Tobias Moers, the former head of Mercedes’ high-performance AMG business, as its chief executive. In late October, Daimler said it would increase its stake in Aston Martin to 20 per cent from less than 5 per cent. Daimler has owned Aston Martin shares since 2013.

Mercedes F1 said Wolff had not been aware of either plan when he acquired the shares and that “all relevant disclosures were made to the UK financial authorities at the appropriate time”. Wolff did not acquire or trade any Daimler shares or securities last year, Mercedes said. 

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The market watchdog that chose not to pursue the case against Wolff is German, and I’m sure that has nothing to do with anything. Germany is famously not corrupt.

5th Gear: Biden Admin Blaming EPA On Weak Car Regs

I’m not exactly sure what to make of this story, which claims that the Biden administration had told the EPA that its upcoming auto emissions regulations were too weak and then the EPA did nothing about it. From Bloomberg:

White House and other administration officials told the Environmental Protection Agency that its industry-backed plan for tightening auto emissions limits was too lax, but the agency rebuffed those warnings and released the proposal with provisions that could lessen its bite.

The discord was revealed in thousands of pages of correspondence, analysis and drafts newly released from an interagency review of the measure the EPA unveiled earlier this month and is set to finalize by the end of the year. The correspondence highlights tension within the administration over how aggressively to wield regulations to fight climate change, especially when the efforts are opposed by industry.

“This makes clear that numerous officials in the Biden administration believed that EPA should have proposed stronger clean car standards that are more effective at fighting climate change,” Amit Narang, a regulatory expert with Public Citizen, said in an interview.

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At odds is that the EPA gives more benefits to carmakers for each EV or hybrid vehicle they make with healthy multipliers. Unnamed Biden officials reportedly warned that might make it too easy for carmakers to meet their targets with relatively few EVs, as opposed to making carmakers work harder to hit their environmental goals.

Reverse: Rail Advocates Gain An Anthem

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Less so this:

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Neutral: How Are You?

I was out of town for a week and when I left my cucumbers and eggplants were in disarray, wilted and under attack by mealy bugs. I sprayed them with neem oil before I left and when I returned, they have bounced back to full health, with strong leaves and some new fruits. Care and attention: It works!

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