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Why A Hedge Fund Manager Thinks Tesla's Model 3 May Put Elon Musk Out of Business
Fortune.com
DECEMBER 2, 2016
by Jen Wieczner


Tesla has to double the Model 3’s advertised price or it will lose tons of money, he says.

Tesla Motors customers are lining up to wait as much as two years to own the company’s eagerly anticipated cheaper electric car, the Model 3. But while the new car has created a lot of buzz for Tesla, one high-performing hedge fund manger says the Model 3 will end up being a total wreck for the company. In fact, he says it will likely put Tesla out of business. Put another way: His price target for Tesla’s stock: $0.

Mark Spiegel, founder of hedge fund Stanphyl Capital Partners, says the Model 3—which Tesla CEO Elon Musk has promised to sell for as little as $35,000—may put Tesla on a path to bankruptcy before it even comes out.

The prospect of a $35,000 “mass-market” Tesla Model 3—much more affordable compared to Tesla’s other vehicles, which cost at least twice as much—is the “real reason” investors have bought into Tesla’s stock, Spiegel said at the conference Tuesday. But “that will never happen,” asserts Spiegel. That’s because at that price Tesla would be selling the Model 3 at “a gigantic loss”—indeed, it could lose nearly as much on each car as the price customers are paying for it, Spiegel estimates.

Here’s how he got there, by the numbers:
In Tesla’s latest quarter, it reported a $22 million surprise profit, its first in years. But much of the boost came from a one-off sale of government subsidy credits for electric vehicles that Tesla had been collecting. Without that, the company actually lost $117 million in the third quarter—or a loss of $4,710 per car.
Each car Tesla currently sells costs $81,000 to build, Spiegel estimates. Those cars are currently profitable on their own (excluding leased cars and other unrelated company expenses)—but they sell at an average of $105,900, a price point that’s only affordable for a higher-income segment of consumers.
In order to sell the Model 3 at as low a price as $35,000 and still make a profit, Tesla would have to cut its production costs by more than half.
Where will Tesla find all those savings? The company hasn’t said specifically, but Spiegel estimates that it can cut about $6,000 off the $81,000-per-car cost by using its new batteries produced at its so-called gigafactory (which also cost $5 billion to build), another $5,000 by using cheaper parts for the Model 3—substituting steel for aluminum, for example—and $5,000 on top of that by finding ways to make its manufacturing more efficient (perhaps with greater automation). Still, that only brings the cost to build each Model 3 down to $65,000, much more than Tesla plans to sell it for. But Spiegel gives Musk some benefit of the doubt, and allows for what the investor calls a “cost savings fudge factor” that’s “extremely generous” and “probably undeserved” but which could knock off as much as $15,000 or so off the cost—bringing the cost per Model 3 down to just under $50,000, say $48,000 at the lowest.
While Tesla has said the Model 3 will be available for as little as $35,000, Musk has predicted that the average sales price of the car will be $43,000, once customers add various upgrades and features. At that price and a minimum of $48,000 in costs per car, Tesla would lose at least $5,000 for every Model 3 it sells.

Yet with the “mass-market” Model 3, selling the car for more could be just as fatal a sentence for Tesla as selling it at a loss. If Tesla raised the base price of the car to $50,000 or more, as Spiegel expects, the Model 3 would no longer be competitive with the many other electric cars that will be on the market by then—as the Model 3 won’t start shipping to customers until the end of next year, and likely not before the end of 2018 for most orders, analysts predict.

For example, at a price of $50,000, the Model 3 would be about 33% more expensive than the cheapest Chevy Bolt, an electric car from GM that’s already on the market starting at $37,495 at select dealerships—more than a year (or two) earlier than the Model 3.

And the higher the price of the Model 3 goes, the more Musk’s dream of a cheap and affordable Tesla disappears. And without that mainstream demand, Spiegel thinks Tesla’s future doesn’t look so bright at all.
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Well Jon Bereisa did a much more detailed break down of the cost. (Jon Bereisa was a electrification honcho at GM for many years and still does consulting so he's definitely someone who can cost out a vehicle). He found that Tesla's factory variable costs, what it takes in direct labor and material to build a vehicle, to be more around $37K or $38K. Quite different -- and much lower -- than the arm waving cost estimate you find in this presentation.

The issue of course would be margin. Tesla claims a 28% margin for the Model S, which isn't sufficient to cover all the cost beyond Factory Variable Costs. Add 28% to the Model 3 and you end up at $47500. That's not very far off Musk's estimate of what most Model 3 will sell for. But if you need a 40% margin to cover costs you're at $52, a price point at which all the problems outlined in the presentation come into play. On the plus side for Tesla, each Model 3 sold will net Tesla 3 ZEV credits, and each ZEV credit will be worth $3500 - $5000. Consequently Tesla shouldn't need the 40% margin.

Same analysis holds true for the Bolt EV by the way, the difference being GM doesn't need the Bolt EV to be profitable.
 

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Why A Hedge Fund Manager Thinks Tesla's Model 3 May Put Elon Musk Out of Business
Fortune.com
DECEMBER 2, 2016
by Jen Wieczner


Tesla has to double the Model 3’s advertised price or it will lose tons of money, he says.

Tesla Motors customers are lining up to wait as much as two years to own the company’s eagerly anticipated cheaper electric car, the Model 3. But while the new car has created a lot of buzz for Tesla, one high-performing hedge fund manger says the Model 3 will end up being a total wreck for the company. In fact, he says it will likely put Tesla out of business. Put another way: His price target for Tesla’s stock: $0.

Mark Spiegel, founder of hedge fund Stanphyl Capital Partners, says the Model 3—which Tesla CEO Elon Musk has promised to sell for as little as $35,000—may put Tesla on a path to bankruptcy before it even comes out.

The prospect of a $35,000 “mass-market” Tesla Model 3—much more affordable compared to Tesla’s other vehicles, which cost at least twice as much—is the “real reason” investors have bought into Tesla’s stock, Spiegel said at the conference Tuesday. But “that will never happen,” asserts Spiegel. That’s because at that price Tesla would be selling the Model 3 at “a gigantic loss”—indeed, it could lose nearly as much on each car as the price customers are paying for it, Spiegel estimates.

Here’s how he got there, by the numbers:
In Tesla’s latest quarter, it reported a $22 million surprise profit, its first in years. But much of the boost came from a one-off sale of government subsidy credits for electric vehicles that Tesla had been collecting. Without that, the company actually lost $117 million in the third quarter—or a loss of $4,710 per car.
Each car Tesla currently sells costs $81,000 to build, Spiegel estimates. Those cars are currently profitable on their own (excluding leased cars and other unrelated company expenses)—but they sell at an average of $105,900, a price point that’s only affordable for a higher-income segment of consumers.
In order to sell the Model 3 at as low a price as $35,000 and still make a profit, Tesla would have to cut its production costs by more than half.
Where will Tesla find all those savings? The company hasn’t said specifically, but Spiegel estimates that it can cut about $6,000 off the $81,000-per-car cost by using its new batteries produced at its so-called gigafactory (which also cost $5 billion to build), another $5,000 by using cheaper parts for the Model 3—substituting steel for aluminum, for example—and $5,000 on top of that by finding ways to make its manufacturing more efficient (perhaps with greater automation). Still, that only brings the cost to build each Model 3 down to $65,000, much more than Tesla plans to sell it for. But Spiegel gives Musk some benefit of the doubt, and allows for what the investor calls a “cost savings fudge factor” that’s “extremely generous” and “probably undeserved” but which could knock off as much as $15,000 or so off the cost—bringing the cost per Model 3 down to just under $50,000, say $48,000 at the lowest.
While Tesla has said the Model 3 will be available for as little as $35,000, Musk has predicted that the average sales price of the car will be $43,000, once customers add various upgrades and features. At that price and a minimum of $48,000 in costs per car, Tesla would lose at least $5,000 for every Model 3 it sells.

Yet with the “mass-market” Model 3, selling the car for more could be just as fatal a sentence for Tesla as selling it at a loss. If Tesla raised the base price of the car to $50,000 or more, as Spiegel expects, the Model 3 would no longer be competitive with the many other electric cars that will be on the market by then—as the Model 3 won’t start shipping to customers until the end of next year, and likely not before the end of 2018 for most orders, analysts predict.

For example, at a price of $50,000, the Model 3 would be about 33% more expensive than the cheapest Chevy Bolt, an electric car from GM that’s already on the market starting at $37,495 at select dealerships—more than a year (or two) earlier than the Model 3.

And the higher the price of the Model 3 goes, the more Musk’s dream of a cheap and affordable Tesla disappears. And without that mainstream demand, Spiegel thinks Tesla’s future doesn’t look so bright at all.
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They have been shorting Tesla stock for years.
 
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