Wall Street Is Confused By Elon Musk's Master Plan - "Credibility Is Challenged... How Do They Fund it? "

After a much anticipated and dramatic buildup, in last week of july  Elon Musk revealed the details of his "Master Plan, Part Deux", which as Musk himself summarized is as follows:

• Create stunning solar roofs with seamlessly integrated battery storage
• Expand the electric vehicle product line to address all major segments
• Develop a self-driving capability that is 10X safer than manual via massive fleet learning
• Enable your car to make money for you when you aren't using it

As we said at the time, "It's one of those thing you read twice, three times, and then look at those around you to see if you somehow missed the deep message." Judging by the litany of responses by the sell-side this morning, we weren't the only ones confused. As the following reactions from Wall Street analysts, the confusion was far-ranging.

Here are some examples.

From DB's Rod Lache:

Elon Musk released Part 2 of his “Master Plan” for Tesla. At a high level the document is aimed at explaining how (Tesla’s) actions fit into a “larger picture” of accelerating the advent of sustainable energy. The document is relatively short on details, and it does not contain any economic or financial objectives (these will be needed eventually, as capital markets will be called upon to provide a key “material” for the execution of this plan).

 

1. Creating an integrated solar energy and battery storage product;

 

2. Expanding the “Tesla Motors” consumer products that we know (Model S, X, 3) with the addition of a compact SUV and a “new kind of pickup truck”; expanding into commercial vehicles such as a Tesla Bus and a Heavy Duty Truck (products that we believe could benefit tremendously from Electrification and Automation); and at the same time achieving revolutionary improvements in manufacturing;

 

3. Developing, validating, and achieving regulatory approval for Fully Autonomous Vehicles (which Elon hints could take several years); and

 

4. Once Autonomous Vehicles are available, applying them in innovative ways such as creating a Tesla Owned Autonomous Ride Sharing fleet for dense urban centers, and also enabling Tesla owners to add their cars to Autonomous fleets (so that they can generate income when they are not in private use; the practical effect would be an incredibly low cost of capital for these vehicles, as owners may only be looking to reduce the fixed cost of ownership; in addition, this could also upend the entire framework we’ve been using for estimating the potential growth of shared mobility, leading to a far larger market).

 

At a high level none of [the] objectives are surprising. Parts of these plans have all been floated in the past. And while it goes without saying that all aspects of the plan involve very high levels of execution risk, we continue to find the “Tesla Motors” plans, which are encompassed in Parts 2, 3, and 4, as innovative and potentially compelling. We continue to work on better appreciating whether Solar is in fact a “good” business for Tesla shareholders (To be clear, we are not yet convinced of this: The business has, and will continue to consume significant amounts of capital; The NPVs ascribed to SCTY’s projects are highly dependent on government incentives and they are presented using relatively low discount rates; Valuation metrics used by TSLA investors appear to be quite different than those used by SCTY investors). We also note that parts 2-4 are likely to drive the overwhelming majority of value creation and valuation for Tesla’s Enterprise.

From Goldman's Patrick Archimbault:

Energy Storage: The company reiterated that a well-integrated solar roof with battery product continues to be a goal for the company, supporting the proposed merger between Tesla and SolarCity. Our work suggests the lifetime cost of solar + storage will remain above grid prices until storage costs fall dramatically or changes to policy accelerate a change.

 

New vehicle lines: TSLA plans to introduce a compact SUV and a pickup truck for consumers as well as a heavy-duty commercial vehicle and a high passenger-density bus for urban areas. Interestingly, its plans did not include a lower priced version of its upcoming Model 3 sedan. Vehicle autonomy development importance stressed. This follows recent NHTSA statements following that “no one incident will derail” development of a safety enhancing technology.

 

Car/ride sharing: TSLA also announced the ability for vehicle owners to turn their cars into an income generating asset during the 90% to 95% of the day they sit idle, as well as its intention to provide its own ride-sharing fleet. A key enabler for both is the approval of true self-driving technology.

 

Implications

 

Some areas of the plan were widely anticipated such as reinforcing the company’s earlier stated goal of sustainable transportation and outlining a new shared mobility plan, which makes sense to us given the extent to  which shared mobility can increase accessibility to AV and EV technologies. Tesla’s product ambitions, which include pickups, SUVs, buses and commercial vehicles, were broader than we expected.

Morgan Stanley's note was aptly named: "Now That They’ve Said It, How Do They Fund It?"

Elon Musk has re-affirmed the importance for Tesla of owning a solar company while attaching itself to new multi-trillion-dollar addressable markets in shared and autonomous transportation. Will the market’s faith match the strategic ambition?

 

What we learned:

 

Tesla’s CEO emphasized that solar energy was always part of the original plan and re-affirmed the SCTY deal logic. At the same time, Elon Musk announced a variety of new vehicle segments (small SUV, pickup truck, buses and semi trucks) and entirely new business models for transportation (shared autonomous buses and cars).

 

Investment Significance:

 

In our view, the Master Plan Part Deux serves 2 major purposes: (1) To address investor concerns over governance in the wake of the SCTY announcement by impressing the logic of the combination. And (2), to attach the auto business to as many multi-trillion-dollar addressable markets as possible. We have been writing about the need for all automotive companies, including Tesla, to change how they view the addressable market to include the ‘bundled mile’ (10 trillion miles per year or 1.7 Light Years) and the roughly 600 billion hours of time spent by humanity in automobiles (equal to 68 million years annually). As we have written throughout our research pieces, including our April 19 Blue Paper: Global Investment Implications of Auto 2.0, we estimate the global miles market to be as large as $10 trillion and the global automotive value of time (both driver and passenger time) at potentially several trillion dollars including the potential to sell content and monetize data.

 

In addition to being an automaker, Tesla is a crowd-funded R&D innovation effort focused on transforming two of the world’s largest markets: Energy and Transportation. Given the company’s rate of cash consumption, to put this innovation into action, Tesla must fund the plan with large amounts of external capital. Tesla management have demonstrated a strong ability to convince investors of the validity and scope of its business and technological ambition. The expansion of business scope announced last night is very significant, likely requiring substantial deployment of capital and potentially many years of  upfront losses to see to fruition.

 

Developing an all-new product line such as a small SUV or pickup truck can conceivably require more than $1bn of investment each. Development of an allnew heavy commercial vehicle (Tesla Semi) and the related infrastructure could run into the billions of dollars. Developing and launching a small bus public transport network could potentially require significantly more investment. Absorbing the losses at SCTY while funding its further expansion could likely add a further investment burden on top of all that. These are big markets and we understand they require large capital investments, time and execution risk to address. Are public investors prepared to continue to extend capital on the same terms they have done over the past 6 years? Do investors get excited over the potential to disrupt a broader scope of multi-trillion-dollar markets? Or is there a point where the cost of capital could bend somewhat under the weight of the company’s market ambitions?

Finally, UBS's Colin Langan with the most scathing take yet:

Secret Master Plan Part 2 has few surprises

 

Last night, TLSA outlined its long term strategy: tackle solar/storage, mass/commercial transport, fully autonomous tech, and car-sharing. With expectations around TSLA's future already high, we question if this new plan will surprise most investors. The integrated solar-storage was known post the SCTY deal, more models were expected, and autonomous/shared vehicles are a likely part of many OEM's plans. Tesla previously alluded to improving factory. TSLA now specified that it sees a 5-10 fold increase by version 3 in 2 years; however details remain light on how this will be different from traditional OEMs and credibility is challenged given near term production issues.

 

Lacks new color on solar storage combo

 

Given investor caution around the SCTY deal (stock traded down ~10% on the news), we are surprised by the lack of new details on the solar/storage combo. It is unclear why a JV wouldn't enable the same opportunity. We see the merger as an unneeded distraction adding complexity to TSLA, which already has too much on its plate with near term production issues, the coming Model 3 launch, and aggressive production targets (see Driving off into the Sunset). Also, in our prior note Merger Puts Battery Storage Front and Center, we highlighted our view that storage is not economic for most residential customers due to net metering.

 

Heavy truck a surprise; autonomous/shared cars expected

 

TSLA announced that a new compact SUV and new kind of pickup are coming. These mass market models were widely expected; however, we are surprised by the announcement of an eventual heavy duty truck (TSLA Semi) and bus. TSLA did not provide a timeline for these new vehicles, but we question if it can handle the added complexity of varying platforms when it is currently having issues with only 2 models. Moreover, a heavy truck application may be challenged by range (imagine the battery needed to make a cross-country trip). TSLA's focus on self-driving (10x safer than human) and shared cars is not surprising or unique to TSLA. For example, GM bought Cruise Automation and invested in Lyft with these future trends in mobility in mind

In short: Elon Musk just admitted that his company will need lots and lots of additional capital in the coming years, and as MS politely puts it: "Do investors get excited over the potential to disrupt a broader scope of multi-trillion-dollar markets? Or is there a point where the cost of capital could bend somewhat under the weight of the company’s market ambitions?" which said otherwise, means will investors keep handing over their cash to Musk to fund what is an unprecedented hype machine, and one which is years, if not decades away from profitability, and where the cash burn seems to get bigger with every passing year.