2017 Investor Roundtable:General Discussion

[EinSV]

Be interested to hear any thoughts coming out of the hangout.

For me, the highlights of the ER/call were:

• Confirming most likely scenario 500K vehicles in 2018 and 1M in 2020
• Model 3 margins expected to match S/X once initial 5K/week ramp is achieved -- that they expect such high margins so quickly is a surprise (at least to me) and should make financial models skyrocket if factored in
  • Also suggests that after AD1 and AD2 margins could be even higher
• Affirming TE margins are expected to roughly match Tesla Automotive -- this could be huge in the long-term
• I loved how they messaged the Model 3 ramp -- reasonable, achievable (hopefully) and starting soon. Really loved how this was done
• Reaching 10K Model 3 per week in 2018 -- what I expected but good to hear
• Reaffirming solar roof production starting later this year
• Two more Gigafactories, possibly three, in the works.
• Seem to be managing capital effectively

Less exciting but ok:

• Cash flow in Q4 not as strong as expected. On the bright side, seem positioned well for Q1 and Q2
• Guidance for S/X -- perhaps setting up for a beat
• No specific guidance for TE. This is what I expected. I like this because it sets it up for a positive surprise when they have enough GF capacity to ramp TE along with vehicle production. By 2020 (three years) this should be a significant contributor to the bottom line
• Cap raise all but confirmed. In the long-run this is the right move and with the SP where it is now should be ok.

Not happy about:

• Jason leaving. Nothing against Deepak but the investor community was very comfortable with Jason.

Not surprised about:

• Model 3 reveal being pushed off. I thought they would probably do this to minimize cannibalizing S/X sales. As Jason said, they don't want a longer line for Model 3 right now.

Interesting wording from the announcement of the next Tesla Referral Program -- refers to the Model 3 "delivery event" rather than Model 3 "Reveal."

• 7+ Qualifying Referrals Owners who make 7 qualifying referrals will receive an invitation for themselves and a guest to attend our Model 3 delivery event.

Possibly reading too much into this wording but wonder whether "keeping powder dry on Model 3" includes holding off on the final Model 3 "reveal" until cars are ready to be delivered to the first employees, or at least closer to delivery than the March/April timeframe that many have suggested. This would make some sense given the need to keep orders rolling in for Model S/X with minimized risk of Osborning.

 

[Ulmo]

Cap raise on the table.

Are they targeting the highest stock price, and therefore they think it's going way up more?

 

[Buddyroe]

I agree those doors lead to a year long delay and quality problems, however without Elon's insistence on those doors, the Model X may be a much tougher sell.

Then how is it that EVERY other SUV with regular doors are selling like hot-cakes? Saying the FWDs are what sold the Model X (though sales in the 4th qtr were horrible) implies that the X was otherwise inferior in comparison to an ICE SUV, and only the FWDs helped it sell. I find that utterly ridiculous when, in the luxury Sedan class, the S, being of no noticeable difference than any other luxury car, kills ALL of them in sales BECAUSE it is an electric car.

You assume that had Tesla made a typical SUV, it wouldn't have sold because it wasn't differentiated from the ICE SUVs, yet, that very argument holds NO water with the S.

I just can't comprehend the argument. The FWDs have HURT sales, not helped. Otherwise, the X would be competing near the top of the class, as the S has in its class. Do you disagree? Or are you saying that without the FWD's the X would have struggled immensely?

 

[TNEVol]

Buddyroe calm down. I wached you get exercised unnecessarily last year over the annual slowdown in Superchargers that you tried to make into the certain demise of Tesla. The MX is similar. We are both from the South and I would not have an SUV on a bet. My neighbors and family would not have such a small SUV. They want an escalade, navigator or explorer or nothing. How many have a Porsche Cheyenne? What we see everyday is not the real world for Tesla sales. It may be that MX will be the car that takes China by storm. They have more people buying luxury cars. We can't decide what Tesla should sell by our own myopic experiences. While i wouldn't buy an X every single person who has an X who I asked is thrilled with it. X will fullfill the need for a luxury SUV and help get us to the M3.

 

[EnzoXYZ]

I disagree with your blame on Musk. Personally, I think the styling is off on the Model X. I fell in love with the Model S the moment I saw it, but not so much with the X. I know styling is a personal choice but a lot of the people I spoke to did share similar viewpoints...

Now this is where I think the falcon wings saved the X. Thankfully Elon insisted on having those dual hinged doors. The car almost transforms and looks MUCH better with those doors open. It is like a moving advertisement for Tesla and leaves people in awe.

I agree those doors lead to a year long delay and quality problems, however without Elon's insistence on those doors, the Model X may be a much tougher sell.

GM's Pontiac came out with the Aztec just for comparison. If that passed the consumer taste polling no doubt the X is beautiful.

 

[Ulmo]

X is great flashy advertisement for Tesla.

Yes. This is supported by about 5 dates I went on in my Model S. Every one of them to the last person said "oh, the Tesla! I have a friend with a Model X -- that's a great car! I loved that car!" with an enthusiasm you can only get from people who are emotionally attached to their opinion, and then went on to say they weren't impressed with the Model S, while sitting in my Model S, even though they all wanted to treat me well. This amount of honesty about that product means people are extremely interested in the Model X, and it has a huge amount of staying power as ... well, something, but some sort of something very good.

And yes, I would have gotten one if I had $20K more at the time. (If I had known the stock price would do what I predicted it would do but 4x as fast, I would be ordering that X today and still be in some sort of temporary vehicle and have money left over to spare.)

 

[EinSV]

The exit path for shorts is getting very narrow. I think their "ace in the hole" in case Tesla was able to pull of a reasonable Model 3 ramp was to make hay out of low initial margins for the Model 3. Now their best bet is that Tesla stubs its toe on the Model 3 launch, the market gets scared by "cash burn!" or some black swan event. That's a pretty risky bet for someone who is already likely in a pretty deep hole. I wouldn't be surprised to see more shorts heading for the exits.

 

[dennis]

You really should be reading my responses in the context My response was on posting youtube videos, presumably by Tesla employees.
At this stage, people are interested in the interiors and details of Model 3. You seem to be answering about spy shots, that we weren't talking about.

Wrong. I did read your responses in context. It was where you said that we wouldn't be able to know if any production deliveries to employees were made or not. And Martin Austin responded "Tesla employees aren't made of money. They can't afford to buy a car and keep it in the garage, and get to work some other way." And then you responded about NDA's. That was the context. And I was showing the absurdity of asking Tesla employees to sign an NDA for a car they just purchased.

You may return to your bridge.

 

[AlMc]

What leads you to this conclusion? I'm sure some people are turned off by them, but I'd also bet an even higher number of people are turned on by them. I'd think most people looking to spend Model X kind of money on a vehicle appreciate a vehicle which stands out from the crowd.

IMO, it is the lack of folding second row seats for over a year after delay after delay that turned off more people, like me. The FWDs were more of a QC/repair/hold up on launch than a people turn off.

 

[Buddyroe]

What leads you to this conclusion? I'm sure some people are turned off by them, but I'd also bet an even higher number of people are turned on by them. I'd think most people looking to spend Model X kind of money on a vehicle appreciate a vehicle which stands out from the crowd.

Then why hasn't the X risen to the top of its class as the S did? Heck the X can't even outsell the S, it surely won't outsell many other SUVs.

Produce a nice electric SUV. People will buy it. Period! They WON'T however, pay thousands for those doors - that they aren't even sure they want. And they definitely don't want to pay the repair bill when the warranty runs out. I imagine that the resell value on an X will be FAR lower than the 'plane door" S, with those boring traditional doors.

BTW - how on EARTH did Tesla manage to sell a sedan without a gimmick? I mean, they're selling a car in a class NOBODY is buying - BECAUSE IT IS An ELECTRIC CAR. No FWDs needed. Just a great car. Plain and simple. Give it a try in the X. It might just work!

 

[EinSV]

Re the Model X -- in case you haven't noticed every time Tesla has positive financial news some people don't like it and try to change the subject. The Model X is doing great but that's not really all that relevant for this ER.

Same for deliveries to Tesla employees. Completely irrelevant to Tesla's financial future.

 

[MP3Mike]

Then how is it that EVERY other SUV with regular doors are selling like hot-cakes? Saying the FWDs are what sold the Model X (though sales in the 4th qtr were horrible)

Really? Tesla sold every Model X, and S, that they could make, sales were just fine, Tesla is production limited. (And they had a ~2 week delay as a result of complications in their switch from the AP1 system to the AP2 system in Q4.)

How many of your "hot-cake" SUVs have an average sale price above $100k? Completely different market.

 

[dennis]

I agreed to send you chocolate if Tesla isn't producing 2 cars a minute by mid 2018. That was because you continued to believe that for Tesla to even consider anything close to that number was crazy. If they miss, and I happily send you chocolate (IMO chances are close to zero), I was still correct that that was their plan. Also I stated the opinion that the numbers in the pdf were deliberately understated, which is still probably IMO the case. So I feel completely vindicated by the call. But don't worry, when reports that Tesla is producing 2 cars a minute start coming out of Fremont in 2018 you'll make enough on the price increase on one share to pay for your chocolate.

Here is what I remember.

- Elon said initial M3 production would be AD 0.5, and that AD 1.0 would come a year or so later.
- You said that Elon was planning initial production to be equal to the fastest auto production line, i.e. one car every 25 seconds
- I said he wouldn't have named it 0.5 if that was the case

So if they reach 10K/week a year or more after initial production to me that is because they have implemented AD 1.0 as Elon forcasted. But I'd be happy to buy my own chocolate either way.

 

[RobStark]

Otherwise, the X would be competing near the top of the class, as the S has in its class.

X5 starts at $4k more than 5 Series
GLE is the same price as E Class
Q7 starts $20k less than A7
Cayenne starts $20k less than Panamera.

Model X starts $20k more than Model S.

$20k moves the demand curve.

For Tesla deliveries don't necessarily equal sales.

 

[elasalle]

Anxious times behind TSLA longs after a long time, next couple of months, hoping for TSLA ticker to keep running upwards on Auto Pilot

 

[Buddyroe]

Really? Tesla sold every Model X, and S, that they could make, sales were just fine, Tesla is production limited. (And they had a ~2 week delay as a result of complications in their switch from the AP1 system to the AP2 system in Q4.)

How many of your "hot-cake" SUVs have an average sale price above $100k? Completely different market.

Ok, so why is Tesla constantly pulling "demand levers" if they are production constrained? Why pay $1000 referrals if you are selling more than you can make? Why give away powerwalls for referrals? Does that make ANY damn sense to you? And why are they constantly going into new markets if they are production constrained? Come on now, surely you are smarter than that.

I guess you have simply forgotten that Elon said that sales of the X would be on par with the S (50% of sales). What happened with that?

And thank you for making my point. The FWDs pushed this car into a price category that makes the X unavailable to most people and kills sales. What would the price have been w/o the FWDs? - with the SAME profit and much higher profit margin. In other words, the FWDs reduce sales, without increasing gross margin on the cars they do sell.

I'll bet you $1,000,000 that you will NEVER get Elon to tell you what the gross margin on the X and S were separately. I guess you didn't notice the fall in gross margin for automobiles this qrtr. I'll tell you why - because they make almost NOTHING on the X. The S is carrying Tesla.

They need to fix the X. No company can survive being a "one-horse" pony. And you're nuts if you think the M3 will carry the company.

Fix the X - now!

 

[FluxCap]

Be interested to hear any thoughts coming out of the hangout.

For me, the highlights of the ER/call were:

• Confirming most likely scenario 500K vehicles in 2018 and 1M in 2020
• Model 3 margins expected to match S/X once initial 5K/week ramp is achieved -- that they expect such high margins so quickly is a surprise (at least to me) and should make financial models skyrocket if factored in
  • Also suggests that after AD1 and AD2 margins could be even higher
• Affirming TE margins are expected to roughly match Tesla Automotive -- this could be huge in the long-term
• I loved how they messaged the Model 3 ramp -- reasonable, achievable (hopefully) and starting soon. Really loved how this was done
• Reaching 10K Model 3 per week in 2018 -- what I expected but good to hear
• Reaffirming solar roof production starting later this year
• Two more Gigafactories, possibly three, in the works.
• Seem to be managing capital effectively

Less exciting but ok:

• Cash flow in Q4 not as strong as expected. On the bright side, seem positioned well for Q1 and Q2
• Guidance for S/X -- perhaps setting up for a beat
• No specific guidance for TE. This is what I expected. I like this because it sets it up for a positive surprise when they have enough GF capacity to ramp TE along with vehicle production. By 2020 (three years) this should be a significant contributor to the bottom line
• Cap raise all but confirmed. In the long-run this is the right move and with the SP where it is now should be ok.

Not happy about:

• Jason leaving. Nothing against Deepak but the investor community was very comfortable with Jason.

Not surprised about:

• Model 3 reveal being pushed off. I thought they would probably do this to minimize cannibalizing S/X sales. As Jason said, they don't want a longer line for Model 3 right now.

Excellent summary. You should join us next time on the Hangout.

 

[EinSV]

Excellent summary. You should join us next time on the Hangout.

Thanks! I will try -- got home too late for this one.

 

[Vitold]

Then why hasn't the X risen to the top of its class as the S did? Heck the X can't even outsell the S, it surely won't outsell many other SUVs.

Produce a nice electric SUV. People will buy it. Period! They WON'T however, pay thousands for those doors - that they aren't even sure they want. And they definitely don't want to pay the repair bill when the warranty runs out. I imagine that the resell value on an X will be FAR lower than the 'plane door" S, with those boring traditional doors.

BTW - how on EARTH did Tesla manage to sell a sedan without a gimmick? I mean, they're selling a car in a class NOBODY is buying - BECAUSE IT IS An ELECTRIC CAR. No FWDs needed. Just a great car. Plain and simple. Give it a try in the X. It might just work!

You're one year too late. This is 2017 - the year of Model 3.

 

[jhm]

It interesting auto revenue went up 88% in 2016 Q4 over prior year, but the number of stores and service centers went up only 26%. This implies a 49% increase in revenue per store.

Also SG&A and R&D went up 58% and 29% respectively on GAAP basis. So these expenses as a fraction of revenue went down.

So Tesla is making progress towards profitable scale, even if profit margins were a bit screwed up recently.