2017 Investor Roundtable:General Discussion

[ValueAnalyst]

Tesla is making an important strategic mistake!

As I laid out in my article in August 2016 titled, Tesla Profitability: A Game Theory Perspective, (which forum rules preclude my linking), I presented the next logical steps Tesla would take with its Model 3 program:

Bottom Line: With demand already at impossible levels, game theory would suggest that the next logical moves are (1) reach lower on the Model S demand curve to tap into Model 3 reservations, (2) price Model 3 options high in order to capture more economic profits during the initial ramp-up through 2018 and (3) focus solely on bringing Gigafactory to full capacity immediately before credible competition arrives, which will not happen until 2019 at the earliest.

Tesla followed these steps to a tee. It even set Model 3 ASP higher than most estimated. This level, however, turned out to be still very low compared to the level at which demand for Model 3 would closely align with how quickly Tesla can possibly increase production in the next twelve months. By the end of 2017, Model 3 reservations will exceed one million.

Now that the prices of options are set, however, Tesla can't increase the Model 3 ASP. The steps it can take, however, are:

• Move planned capex from Supercharger buildout to accelerating additional Gigafactory buildout. Tesla should be building five or more Gigafactories simultaneously, not three or four, and it should break ground yesterday.
• Lower referral awards and limit number of referral awards one owner can at most receive to three. Now that the brand value of Tesla has a life of its own, the purpose of this program should move slightly from increasing demand to motivating more people to talk up their Tesla's, not motivating Tesla enthusiasts to talk more. There is a slight but important difference in the benefit-to-cost ratio to Tesla.
• Further increase efforts to get Model 3 reservation holders to buy Model S. This is very important in 2018.
  
• Lower warranty coverage further for base-model Model 3 (i.e. decrease warranty cost/accrual as a percentage of revenue) until subsequent Gigafactories start coming online in 2019 and plow savings to Gigafactory buildout. This would also increase Tesla's borrowing capacity as it would improve its income statement and balance sheet metrics.
• Borrow non-dilutive debt to accelerate Gigafactory buildout. Tesla's cost of incremental debt = 7-8% but its Return on Capital = 100%+. By managing its balance sheet so conservatively, Tesla is foregoing substantial economic profits.

If you're thinking these steps would anger potential customers, you know what would anger them more? Waiting for what you want for three years.

fixed

 

[kenliles]

Actually near the end of the video it shows the north east corner wall is still open.

good catch

 

[kenliles]

Tesla made an important strategic mistake!

• Move planned capex from Supercharger buildout to accelerating additional Gigafactory buildout. Tesla should be building five or more Gigafactories simultaneously, not three or four, and it should break ground yesterday.
• Lower referral awards and limit number of referral awards one owner receive to three. The purpose of this program should move slightly from increasing demand to motivating more people to talk up their Tesla's. There is a slight but important difference in the benefit-to-cost ratio to Tesla.
• Lower warranty coverage further for base-model Model 3 (i.e. decrease warranty cost/accrual as a percentage of revenue) until subsequent Gigafactories start coming online in 2019 and plow savings to Gigafactory buildout.
• Further increase efforts to get Model 3 reservation holders to buy Model S. This is very important in 2018.
• Borrow non-dilutive debt to accelerate Gigafactory buildout. Tesla's cost of incremental debt = 7-8% but its Return on Capital = 100%+. By managing its balance sheet so conservatively, Tesla is foregoing substantial economic profits.

agree with this in principle - I'm on record long ago that Tesla is under capitalized to supply the demand curve- voting for much more dilution - see historical posts of under-diluted strategically--
Already they're now adjusting GF scope -
however, my assessment is void of many underlying facts regarding GF manufacturing efficiency goals and curve- It's an unfair criticism -
but I'm still free to make it

 

[ValueAnalyst]

I usually agree with you, but not this time. You are certainly correct that increased volume will yield many benefits.

However (there is always 'however'):
1. Tesla will continue to have huge R&D expenditures for all manner of new products and product improvements, so;
2. The new S and X are due not later than 2020, but almost never mentioned. Remember that their platform dates to a decade ago with substantial design compromises that were forced due to small Tesla size, minimal car design experience and dependence on Mercedes Benz for many design features and suppliers. As wonderful as these are, there will be, even with Tesla efficiency, at least $3 billion on the new models;
3. New battery, drivetrain and accessory technology is getting substantial R&D which will be at least $300 million per year for the foreseeable future. These are usually not specifically broken out on financial statements, so I admit I'm guessing. Because there are quite a few publicly held Tier One providers of this kind of gear a fair amount of the R&D might be done by those providers, but Tesla is becoming more vertically integrated, not less, so R&D for such things as elimination of huge wiring harnesses will be done by Tesla. Will they get that kind of advance from Delco, Siemens or Denso? Right, I don't think so either. Those will certainly require $300 million per year for a while. Remember that Tesla will certainly eliminate the 12V in favor of 49V or something else soon. The Germans are leading right now but are still deeply devoted to wringing out better ICE performance rather than optimizing BEV. That will change very soon, but right now these advances are happening with Tesla, so that R&D will continue.
4. Tesla Semi, Model Y, new Roadster, new PowerPacks, Solar Roof refinement, then busses, trains and aircraft are all waiting in the wings,,so;
5. The instant power/weight reaches ~500kWh/kg long range transport category aircraft and shorter range hovercraft/tilt-rotor become practical. Then vast permutations of drone technologies suddenly work. Tesla will let somebody else lead all that? No chance! That will require as much R&D as TSLA can muster. You might say that is a decade away, but advances in energy storage are now happening that have not since the li-ion was made practical.

There is more, but my point is not that TSLA will not be profitable. It is that the TSLA mission has massive continuing opportunity,so dividends ought to not even be imagined because they'll only happen when TSLA loses imagination and forgets the company mission.

Please don't be short-sighted. It does not become you!

Ok. As always, you make great points.

I'll scale back on dividend talk.

 

[kenliles]

Ok. As always, you make great points.

I'll scale back on dividend talk.

producing more time to scale up talk of GF expansion--
a dividend

 

[ValueAnalyst]

producing more time to scale up talk of GF expansion--
a dividend

I'm on it.

 

[jbcarioca]

Ok. As always, you make great points.

I'll scale back on dividend talk.

FWIW, one reason I always pay attention to @ValueAnalyst is that the assumptions are always clearly stated and input from others is always welcomed.

IMHO, a key problem for those of us who are unabashed bulls is that we tend to
' drink our own Kool-Aid'. That is why I pay attention to bears and try to challenge my own assumptions.

In this case the oddity is probably that we are anticipating continuing massive growth. As even the new brand head for VW lists TSLA advantages he pointed out that Fremont is a competitive advantage for engineer recruitment! I had never really thought about that so explicitly. Oddly, that may actually make R&D more efficient for TSLA by avoiding some errors.

 

[EinSV]

agree with this in principle - I'm on record long ago that Tesla is under capitalized to supply the demand curve- voting for much more dilution - see historical posts of under-diluted strategically--
Already they're now adjusting GF scope -
however, my assessment is void of many underlying facts regarding GF manufacturing efficiency goals and curve- It's an unfair criticism -
but I'm still free to make it

I think there is an element of "you have to walk before you can run" here.

Tesla has no experience at large volume production. Once they gain that experience through the Model 3 and initial TE ramps, it would not surprise me to see growth accelerate with Tesla Semi, Model Y, additional Model 3 production beyond 10K/week, more TE production, additional S/X production, etc. But trying to accelerate faster than their incredibly ambitious current growth targets without the benefit of experience, while loading up on debt, would have been extraordinarily risky -- potentially creating existential risk.

I like the current plan quite a bit. But I do agree that they are going to be capital constrained very quickly given their advantages over the competition. I would not be surprised if they take on additional debt late this year or next year or raise capital next year to take advantage of their massive first mover advantage, but I think Elon will want to be careful to avoid taking on too much debt too quickly or creating significant dilution.

 

[schonelucht]

Looking at the ER numbers again and I think something significant is happening. The SG&A portion for the auto business as a % of auto rev dropped significantly. This is a good thing, a very good thing. Historical SG&A/Rev was too high for the company to be ever profitable. There are a chunk of it for Model 3, I know I know. But they need to keep this % under control, which is something happening.

...

Q4 2016 ER said $85M increase OpEx caused by SCTY and that's before fully integration. SCTY when standing alone was running $200M+ each Q on SG&A. So I think it is contributing $100M+ on the current TSLA SG&A. So Q2 17 auto related SG&A would be in the neighborhood of $400-450M. Compare this with Q2 16, which was solely auto, $321M. So SG&A increased about a third, while auto rev increased 100%. So, good progress.

Why do you say that it is happening now? Tesla realized this efficiency gain already way back in 16Q3 when automotive revenue nearly doubled but SG&A increased by only 5%. Your comparison with 16Q2 only reflects that quarter's gains. Since then SG&A (when accounting for SCTY like you do) has been relatively stable versus revenue.

I am not expecting another step up (or down, really) for the SG&A over revenue metric before the M3 deliveries scale up, ie 18Q1. But then it will once again be as drastic as 16Q3 (hopefully).

 

[kenliles]

In this case the oddity is probably that we are anticipating continuing massive growth. As even the new brand head for VW lists TSLA advantages he pointed out that Fremont is a competitive advantage for engineer recruitment! I had never really thought about that so explicitly. Oddly, that may actually make R&D more efficient for TSLA by avoiding some errors.

I think this point manifests slightly differently. Auto manufacturers have (over time) outsourced expertise in nearly everything but ICE drive train. They became metal punchers and ICE makers rather than transportation companies. I think the problem is much bigger than efficiency of R&D. The current (pun intended) disruption is precisely targeting the only area they conduct any significant R&D (& internal expertise value added)- but
Transportation is now
electrical power and storage;
software,
AI,
computer chips,
sensors and interactive real-time feedback control
user interface
networking
direct to customer purchase and service

they don't just have an R&D problem- they're in the wrong business
I think the VW CEO is vastly understating the issue here--

I think there is an element of "you have to walk before you can run" here.

Tesla has no experience at large volume production. Once they gain that experience through the Model 3 and initial TE ramps, it would not surprise me to see growth accelerate with Tesla Semi, Model Y, additional Model 3 production beyond 10K/week, more TE production, additional S/X production, etc. But trying to accelerate faster than their incredibly ambitious current growth targets without the benefit of experience, while loading up on debt, would have been extraordinarily risky -- potentially creating existential risk.

I like the current plan quite a bit. But I do agree that they are going to be capital constrained very quickly given their advantages over the competition. I would not be surprised if they take on additional debt or raise capital late this year or next year to take advantage of their massive first mover advantage, but I think Elon will want to be careful to avoid taking on too much debt too quickly.

fair point EinSV - thanks

 

[ValueAnalyst]

Tesla is making an important strategic mistake!

As I laid out in my article in August 2016 titled, Tesla Profitability: A Game Theory Perspective, (which unfortunately moderators do not allow me to link here, but you can find it with a Google search), I presented the next logical steps Tesla would take with its Model 3 program:

Bottom Line: With demand already at impossible levels, game theory would suggest that the next logical moves are (1) reach lower on the Model S demand curve to tap into Model 3 reservations, (2) price Model 3 options high in order to capture more economic profits during the initial ramp-up through 2018 and (3) focus solely on bringing Gigafactory to full capacity immediately before credible competition arrives, which will not happen until 2019 at the earliest.

Tesla followed these steps to a tee. It even set Model 3 ASP higher than most estimated. This level, however, turned out to be still very low compared to the level at which demand for Model 3 would closely align with how quickly Tesla can possibly increase production in the next twelve months. By the end of 2017, Model 3 reservations will exceed one million.

Now that the prices of options are set, however, Tesla can't increase the Model 3 ASP. The steps it can take, however, are:

• Move planned capex from Supercharger buildout to accelerating additional Gigafactory buildout. Tesla should be building five or more Gigafactories simultaneously, not three or four, and it should break ground yesterday.
• Lower referral awards and limit number of referral awards one owner can at most receive to three. Now that the brand value of Tesla has a life of its own, the purpose of this program should move slightly from increasing demand to motivating more people to talk up their Tesla's, not motivating Tesla enthusiasts to talk more. There is a slight but important difference in the benefit-to-cost ratio to Tesla.
• Further increase efforts to get Model 3 reservation holders to buy Model S. This is very important in 2018.
  
• Lower warranty coverage further for base-model Model 3 (i.e. decrease warranty cost/accrual as a percentage of revenue) until subsequent Gigafactories start coming online in 2019 and plow savings to Gigafactory buildout. This would also increase Tesla's borrowing capacity as it would improve its income statement and balance sheet metrics.
• Borrow non-dilutive debt to accelerate Gigafactory buildout. Tesla's cost of incremental debt = 7-8% but its Return on Capital = 100%+. By managing its balance sheet so conservatively, Tesla is foregoing substantial economic profits.

If you're thinking these steps would anger potential customers, you know what would anger them more? Waiting for what you want for three years.

Waiting for feedback from @Krugerrand, who "disagreed" with my post, and hopefully others as well, before I publish my article on this topic.

 

[GoTslaGo]

Tesla is making an important strategic mistake!

Now that the prices of options are set, however, Tesla can't increase the Model 3 ASP. The steps it can take, however, are:

They prices are not fully set. They can and have changed option prices in response to demand and costs. Autopilot originally was 2500 (and I argued it was too cheap, especially in comparison to their competitors: MB, BMW, Audi, Volvo...I posted this way back when). Then they raised it to 3000, and now it is 5000. They can offer other options in the future, once they can get the run rate out.

Move planned capex from Supercharger buildout to accelerating additional Gigafactory buildout. Tesla should be building five or more Gigafactories simultaneously, not three or four, and it should break ground yesterday.

Chicken and the egg. IMHO, the demand for Teslas is incumbent on their Supercharger network. This needs to be built out to sufficient levels to accommodate all current and FUTURE Tesla drivers. The Superchargers is what makes a Tesla a complete ICE replacement. So no, they NEED to build out the superchargers. The additional GFs Must wait.

Lower referral awards and limit number of referral awards one owner can at most receive to three. Now that the brand value of Tesla has a life of its own, the purpose of this program should move slightly from increasing demand to motivating more people to talk up their Tesla's, not motivating Tesla enthusiasts to talk more. There is a slight but important difference in the benefit-to-cost ratio to Tesla.

They could tier the referral awards. 1k for S&X and 500 for Model 3 (or less or none). Referral awards are an important reward to current owners for helping out the brand. The brand has NOT YET taken a life of its own. Tesla still needs to maintain this benefit until all production lines are humming.

• Further increase efforts to get Model 3 reservation holders to buy Model S. This is very important in 2018.
  
• Lower warranty coverage further for base-model Model 3 (i.e. decrease warranty cost/accrual as a percentage of revenue) until subsequent Gigafactories start coming online in 2019 and plow savings to Gigafactory buildout. This would also increase Tesla's borrowing capacity as it would improve its income statement and balance sheet metrics.

Don't disagree here.

• Borrow non-dilutive debt to accelerate Gigafactory buildout. Tesla's cost of incremental debt = 7-8% but its Return on Capital = 100%+. By managing its balance sheet so conservatively, Tesla is foregoing substantial economic profits.

I'm sure they will do this in the future to help fund future GFs. However, they need to show profitability and that they "don't need" the money. Lenders hate lending to someone who NEEDS THE MONEY.

This conversation came up in the past. Tesla's borrowing costs at this point would be too high (lower than junk status) to be worth it. Later, when they are profitable, that's when they could/should borrow to accelerate the GF buildout.

 

[jbcarioca]

I think there is an element of "you have to walk before you can run" here.

Tesla has no experience at large volume production. Once they gain that experience through the Model 3 and initial TE ramps, it would not surprise me to see growth accelerate with Tesla Semi, Model Y, additional Model 3 production beyond 10K/week, more TE production, additional S/X production, etc. But trying to accelerate faster than their incredibly ambitious current growth targets without the benefit of experience, while loading up on debt, would have been extraordinarily risky -- potentially creating existential risk.

I like the current plan quite a bit. But I do agree that they are going to be capital constrained very quickly given their advantages over the competition. I would not be surprised if they take on additional debt or raise capital late this year or next year to take advantage of their massive first mover advantage, but I think Elon will want to be careful to avoid taking on too much debt too quickly.

These are certainly valid points. There is a related argument to be made, possibly with equal validity. That is the observation that in terms Gross margin TSLA is now outperforming the best in the industry. That does not negate the probable need for more capital, but does strongly suggest that any analyst capable of evaluating credit risk will see that TSLA is highly profitable on a steady-state basis, thus likely to obtain very attractive terms on any type of financing.

For comparison I have used YCharts to ensure that the comparison is Apples to Apples, as it were:
Gross Margin %
Quarter ending BMW TSLA
March 31, 2017 20.52 24.77
Dec 31, 2016 18.43 19.05
Sept 30, 2016 19.64 27.70

BMW Gross Profit Margin (Quarterly) (BAMXF) BMW
Tesla Gross Profit Margin (Quarterly) (TSLA) TSLA

BMW is normally a primary reference for high GM within the industry. TSLA are ahead of them even considering the massive growth rate, hubristic Model X issues during the period, and high ongoing expenses to keep ahead of the TSLA growth curve. So, while agreeing with @EinSV on most points I also think that TSLA has already proven their ability to tackle unprecedented engineering and production issues while creating extraordinary margins. It is true that TSLA corporately has not yet done large scale mss production, but they do have a large number of people who have established new large auto plants, have sourced robotics from well-established auto industry suppliers and have mostly established Tier One quality suppliers now. In batteries, inverters, motors etc they are already world leaders. They have long been avoiding such difficult-to-scale issues as permanent magnets, for example. Those speak to TSLA advantages to well-informed capital sources.

Beyond those issues the TSLA distribution system is another big advantage for GM and growth. For all we complain about support problems, spare collision parts and other such issues TSLA is well ahead of the curve in distribution quality. That is another major GM advantage. Then there is the issue of sales recognition accounting, itself a Big Deal. TSLA recognizes income when the product has been delivered to the end user. Almost all competitors ('almost' only because I have not checked them all.) recognize income when the product is legally transferred to a dealer, generally when the product is placed in transportation to the dealer. For TSLA a sale is a sale. For others a sale is conditional and is subject to numerous questions. Lastly TSLA has less exposure to lease accounting risks than any other comparable entity, even including the overhang from former SolarCity installations.

So new capital needs, certainly. Problem? no way!
We mostly agree, I'm sure, but I thought a little more detail might illustrate how low the probable capital raising risk actually will be.

 

[jbcarioca]

I think this point manifest slightly differently. Auto manufacturers have (over time) outsourced expertise in nearly everything but ICE drive train. They became metal punchers and ICE makers rather than transportation companies. I think the problem is much bigger than efficiency of R&D. The current (pun intended) disruption is precisely targeting the only area they conduct any significant R&D (& internal expertise value added)- but
Transportation is now
electrical power and storage;
software,
AI,
computer chips,
sensors and interactive real-time feedback control
user interface
networking
direct to customer purchase and service

they don't just have an R&D problem- they're in the wrong business
I think the VW CEO is vastly understating the issue here--



...

Excellent points. I express these in terms of R&D efficiency as well as internal growth capacity. In seems to me our primary unknowns are in terms of TSLA capability to grow distribution and support rather than pure manufacturing or even product development. Most of those distribution issues will hit SG&A but CAPEX will be strongly affected by global sales, support and charging infrastructure. Thus far they seem to have managed that unusually well. What will happen as they move to Korea, South Africa, Brazil etc and have mass distribution in RHD markets? All of that is in "direct to customer purchase and service" in which area there are few useful analogues.

Note: Some years ago I led a consulting project for one of the largest auto companies in the world that wanted to evaluate a direct-to-consumer model for a new auto brand they were planning. Only a few years later I led a repeat project for another auto company, and yet another one a couple years after that. None of them ever actually adopted that model. All of them could not surmount the established dealer models. BTW, one of these was US only, the other two were global. Looking at today TSLA really has a gigantic advantage by sidestepping indirect distribution, even if they lose ability to establish stores and/or service centers directly in some major jurisdictions. Thus far I haven't managed to quantify the advantage for TSLA, but it is probably >5% on MSRP. That is gigantic! It includes sales, warranty, floor-plan support, dealer risk management and administration. It's tough to imagine anybody replicating that advantage.

 

[ValueAnalyst]

They prices are not fully set. They can and have changed option prices in response to demand and costs. Autopilot originally was 2500 (and I argued it was too cheap, especially in comparison to their competitors: MB, BMW, Audi, Volvo...I posted this way back when). Then they raised it to 3000, and now it is 5000. They can offer other options in the future, once they can get the run rate out.



Chicken and the egg. IMHO, the demand for Teslas is incumbent on their Supercharger network. This needs to be built out to sufficient levels to accommodate all current and FUTURE Tesla drivers. The Superchargers is what makes a Tesla a complete ICE replacement. So no, they NEED to build out the superchargers. The additional GFs Must wait.



They could tier the referral awards. 1k for S&X and 500 for Model 3 (or less or none). Referral awards are an important reward to current owners for helping out the brand. The brand has NOT YET taken a life of its own. Tesla still needs to maintain this benefit until all production lines are humming.

Don't disagree here.

I'm sure they will do this in the future to help fund future GFs. However, they need to show profitability and that they "don't need" the money. Lenders hate lending to someone who NEEDS THE MONEY.

This conversation came up in the past. Tesla's borrowing costs at this point would be too high (lower than junk status) to be worth it. Later, when they are profitable, that's when they could/should borrow to accelerate the GF buildout.

Thank you for your input. I agree with some of your points and not with others (as one would expect). Would you mind if I use the tiering of referral awards between Model S/X vs. Model 3 in my article? I think that's a great idea, but I won't use it if you rather me not.

 

[GoTslaGo]

Thank you for your input. I agree with some of your points and not with others (as one would expect). Would you mind if I use the tiering of referral awards between Model S/X vs. Model 3 in my article? I think that's a great idea, but I won't use it if you rather me not.

Please do. Don't quote me on it in SA. My doppelgänger over there may take offense?

 

[GoTslaGo]

For the Semi: Think bigger than Walmart (although that is not small): Fed X/UPS.

There is a precedence here:

UPS Adds 200 Hybrid Electric Vehicles To Alternative Fuel Fleet

So UPS is definitely thinking/moving in this direction.

 

[ValueAnalyst]

Please do. Don't quote me on it in SA. My doppelgänger over there may take offense?

LOL, yea. Your doppelgänger on SA has quite the opposing views... Entertaining.

Thank you.

 

[EinSV]

These are certainly valid points. There is a related argument to be made, possibly with equal validity. That is the observation that in terms Gross margin TSLA is now outperforming the best in the industry. That does not negate the probable need for more capital, but does strongly suggest that any analyst capable of evaluating credit risk will see that TSLA is highly profitable on a steady-state basis, thus likely to obtain very attractive terms on any type of financing.

For comparison I have used YCharts to ensure that the comparison is Apples to Apples, as it were:
Gross Margin %
Quarter ending BMW TSLA
March 31, 2017 20.52 24.77
Dec 31, 2016 18.43 19.05
Sept 30, 2016 19.64 27.70

BMW Gross Profit Margin (Quarterly) (BAMXF) BMW
Tesla Gross Profit Margin (Quarterly) (TSLA) TSLA

BMW is normally a primary reference for high GM within the industry. TSLA are ahead of them even considering the massive growth rate, hubristic Model X issues during the period, and high ongoing expenses to keep ahead of the TSLA growth curve. So, while agreeing with @EinSV on most points I also think that TSLA has already proven their ability to tackle unprecedented engineering and production issues while creating extraordinary margins. It is true that TSLA corporately has not yet done large scale mss production, but they do have a large number of people who have established new large auto plants, have sourced robotics from well-established auto industry suppliers and have mostly established Tier One quality suppliers now. In batteries, inverters, motors etc they are already world leaders. They have long been avoiding such difficult-to-scale issues as permanent magnets, for example. Those speak to TSLA advantages to well-informed capital sources.

Beyond those issues the TSLA distribution system is another big advantage for GM and growth. For all we complain about support problems, spare collision parts and other such issues TSLA is well ahead of the curve in distribution quality. That is another major GM advantage. Then there is the issue of sales recognition accounting, itself a Big Deal. TSLA recognizes income when the product has been delivered to the end user. Almost all competitors ('almost' only because I have not checked them all.) recognize income when the product is legally transferred to a dealer, generally when the product is placed in transportation to the dealer. For TSLA a sale is a sale. For others a sale is conditional and is subject to numerous questions. Lastly TSLA has less exposure to lease accounting risks than any other comparable entity, even including the overhang from former SolarCity installations.

So new capital needs, certainly. Problem? no way!
We mostly agree, I'm sure, but I thought a little more detail might illustrate how low the probable capital raising risk actually will be.

What a difference a year makes!

I agree with most of your post but it is interesting to think back to early May 2016 when Tesla announced plans to accelerate their 500,000 vehicle production target by two years from 2020 to 2018. I personally thought this was the obvious/logical thing to do given the massive number of Model 3 reservations and was very excited about it, but the market punished the stock, sending it down 5% -- from $222.xx to $211.xx -- on May 5, the day after the announcement. This was lower than it was before the Model 3 reveal (~$230/share), which was truly bizarre IMO given the huge number of reservations. The stock price stayed depressed for the rest of the year -- the Solar City merger announcement didn't help but doubts about Tesla's aggressive production plan were also definitely part of the equation.

The prevailing sentiment outside of this forum (and to some in it) seemed to be that this was a crazy plan that Tesla could not possibly achieve and was extremely risky. But 15 months later with production starting, it now seems much more feasible and most shareholders have calmed down quite a bit (and the more pessimistic or risk averse probably sold their stock).

But imagine if Tesla had announced plans to raise even more capital and debt to, for example, simultaneously build out Model Y production and ramp up to 1.5 or 2 million vehicles in 2020. I think that would have been technically feasible given their highly experienced team, but the market would have freaked out, and lenders would have very likely followed suit.

Also, things seem to be going great so far with the Model 3 but it is early days in the production ramp and we are not out of the woods yet. I would be shocked if there are not some significant issues with initial production because that's normal with a brand new vehicle. We can almost guarantee that any issues will be blown out of proportion by the media and naysayers on social media. If Tesla took on additional debt to accelerate production plans even further, the predictable hysteria over issues in initial production would be amplified even further, and lenders (not just investors) would probably not be immune to the perceived risks.

I do think a successful Model 3 ramp could change everything. It should give even more confidence to investors and lenders that Tesla is capable of high volume production, which will make it easier to raise cash if necessary to accelerate the completion of GF1, and buildout of GFs 3-6. I personally don't think we are there quite yet though. But soon, with a little luck.

 

[pz1975]

Why would Tesla offer any kind of referral rebate for Model 3? Maybe in the future when they are producing millions of cars and production can meet demand but it makes no sense anytime soon.