Facebook & Tesla – Surprising times

Tesla Q2 19

Record shipments and more losses spells trouble.

• Tesla’s fundamental inability to make money by selling cars came back to haunt it again which combined with flaws in its robotaxi assumptions make for a very bleak outlook.
• Tesla reported weak Q2 19 results with revenues / EPS of $6.35bn / LOSS $2.31 which was well below consensus of $6.44bn / LOSS $1.63 as record shipments of the Model 3 damaged margins again.
• This combined with the departure of co-founder J. Straubel, left the shares floundering 12% down in after-hours trading.
• Tesla’s long-term strategy appears to be to use cars as the vehicle to bring its technology to market and to make money from that as vehicles become autonomous.
• The problem with this is that autonomous vehicles are going to take far longer than Musk thinks to become a reality (see here) and the financial assumptions Tesla has made with regard to its robotaxi strategy are deeply flawed (see here).
• The net result is that Tesla is not going to generate anything like the kind of cash from robotaxis that it needs to keep making vehicles meaning that the current lack of profitability is a massive problem.
• I think that this will eventually lead to Tesla being forcibly taken over by one of the big OEMs at a valuation that is far lower than where the shares are trading today.
• I would not be holding this one long-term.

Facebook Q2 19

Users simply do not care about Facebook’s issues.

• Until Facebook’s users and advertisers begin to vote with their feet, nothing is going to change at the company which demonstrated yet again that its customers and users simply do not care about the bad headlines.
• Facebook reported Q2 19 revenues / EPS of $16.89bn / Adj-EPS $1.99 nicely ahead of estimates at $16.49bn / $1.87.
• A total of 2.7bn people interact with at least one of Facebook’s properties every month with 2.1bn of those turning up every day.
• Furthermore, users are still signing up to its signature social networking platform as MaUs grew by 8% YoY to 2.41bn.
• This excellent performance comes despite a record $5bn fine from the FTC, a $100m fine from the SEC and a worsening reputation in both the industry and in the press.
• This further serves to underline my long-held view that users simply do not care about privacy and remain willing to share their data with Facebook in return for the service it provides.
• As a result, the advertisers continue to use the platform to market their wares indicating just how robust the appeal of Facebook is.
• Facebook is also engaged in a long-overdue integration of its services (Radio Free Mobile’s Laws of Robotics 5 and 6) which when complete will ensure that it understands its users better and can offer better targeted and more relevant marketing.
• This will increase the price it can charge and will provide a further avenue for long-term growth.
• This combined with the fact that the drag on its margins caused by its 3^rd rate AI (see here) is now priced into expectations means that most of the bad news is already priced in.
• I think that the shares could easily return to their previous highs meaning that there is at least another 10% upside in the short-term.
• The longer-term AI problem is still there meaning I would be more cautious in the long-term but the current momentum still has legs.