2017 Investor Roundtable:General Discussion

[EnzoXYZ]

I just bought S60, would have gotten Model 3 if it were available. Model S size is a disadvantage for me, not an advantage. It was also a financial stretch from what i wanted to spend.

This is only an anecdotal evidence, but there is certainly portion of S buyers that would be more than happy to go with Model 3, especially if they live in city cores (I live in the downtown of Toronto, this is typical size of single [expensive!] home) or anywhere in Europe... I was _schocked_ after parking my Model S first time, and started looking if there is a way to return it inside of first few days. Of course I didn't, but maybe because there wasn't a way?

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I have no doubt this happens but in the larger picture with such vast consumers it's a drop in the ocean. When a company is suppy constrained trying to worry about this group of buyers switching is their last concern... or should be. I don't see Tesla meeting demand well past 2020.

The high end Germans and Lexus LS L are Boats if you compare it to the S. You got a nice 996 TT so maybe the S isn't all that a stretch.

Should also added if you think Porsche really cared buyers went with the GT4 rather than the more expensive GT3? Or is it that didn't matter as both were sold out before the first one was delivered?

 

[esk8mw]

That's not how ISO's work. Yes the time period for the options is 4 years, but they vest in tranches. The typical incentive stock options vests 25% after the first anniversary of working for the company, and then 1/12 of 25% every month thereafter, until all of your stock options have vested by the 4th anniversary of working for the company.

One thing to note is that these are options, and you can't really trade them even if they've vested. You have to exercise the options to get the stocks, and those you can sell on the open market.

There's an additional wrinkle, although your options don't vest until after the first year, with some companies, you can actually exercise the options well in advance of vesting. It's just that if you choose to do this, and leave the company before they've vested, you'll have to return the shares back to the company, not a very smart option.

Anyway, the point is that the employees can start exercising their options and selling their shares (25% of them) after just 1 year.

Just to clear a few things up here since I work in this space...

There's no vesting requirement for options generally - it's whatever the option agreement says. A 4 year cliff is a little more unusual than having graded vesting, but a 3 year cliff is quite common. The most common in public companies is a 3 year schedule, vesting in equal 1/3 increments each year. Really the only prescribed rule is that options expire (regardless of vesting status, use it or lose it) after 10 years unless you specify a shorter life.

Once vested, options can be exercised at any time prior to expiration. Those who can afford it and believe in the company wait until the last year or so to exercise to defer taxes and hopefully pocket maximum gains. When you exercise, you can pay the exercise price/taxes in cash and receive share, sell enough shares to cover these costs and retain the net shares or do a cashless exercise - basically exercise, sell and pocket the leftover cash after expenses are paid.

You are talking about incentive stock options, but those are actually quite rare. These can only be granted in limited quantities and gains can be excluded from taxes if certain holding period requirements are met (have to hold the shares 2 years from grant and 1 year from exercise). The vast majority of options out there are nonqualified stock options.

The additional wrinkle you mention isn't really a feature of today's public company options. I think you are referring to old west coast options or something (a pre 2000 concept, predating IRC 409A), though what you are describing sounds more like an 83(b) election for restricted stock awards - both of which are private company concepts for the most part. Options can't be exercised until they are vested, though you are correct that vested options can be exercised in pieces even if a portion of the award remains outstanding and unvested because it has a graded vesting schedule.

 

[schonelucht]

If it was true (all options vest after 4 years), then taking a 4 year period starting Jan 2013 would be the most biased comparison. A fair method would be to do random simulation (yes, simulation!) with employees joining and leaving with different lengths of employment, and see what the compensation converges to. But that would require writing a few hundred lines of code, and may not yield the desired result.

They don't need to run a simulation. They already have the data for every single factory worker of when they were awarded options and when said employee exercised. Moreover they don't need to write a few hundred lines of code to work out how much dollars in compensation that employee got through the program because they already have those written : they report stock based compensation in their quarterly reports.

 

[NicoV]

I feel qualified to comment.

As a car guy, someone that spends waaay more budget-wise on cars than is appropriate, owner of couple of Porsches over the years (that's my current GT4 in my avatar) and anything and everything else sport/luxury-wise, frequent visitor to race-tracks(to drive, not observe , brother of a guy who lives in a very poor country and yet owns 9 cars (runs in the family!), and most importantly, as a new owner of S60 (bare-bones stripper one), I can confidently say:

There is no way M3 doesn't shake car-industry and change the world.*

*(after first few quarter of glitches)

Strange how actually owning a Tesla makes you more confident about the future of Tesla isn't it? It happened to me too. I was very optmistic, but with some doubts, before I got my S. Those doubts disappeared the first time I drove my S home.

 

[GoTslaGo]

Strange how actually owning a Tesla makes you more confident about the future of Tesla isn't it? It happened to me too. I was very optmistic, but with some doubts, before I got my S. Those doubts disappeared the first time I drove my S home.

True. I never even thought about investing in Tesla until we bought one.

After a lifetime of driving a myriad of ICE cars (ranging between crap to good--or what I thought was great), I never once thought of investing in an automaker.

Once we drove a Tesla, bought it and drove it and drove it and drove it, my wife and I were convinced that this is the future. It didn't take much for me to convince her to invest in Tesla.

 

[vgrinshpun]

Just to complement the mosaic of different experiences of owning TSLA and Model S, I invested in TSLA first, with thoughts of buying a car some time with gains of my stock purchase. This was the only way I could imagined owning a Tesla as I never did, and did not even think of paying for a car that much.

After few month after my initial investment (at about $37), and significant run-up in SP, in May of 2013, I decided to splurge on top of the line Model S, but my belief in the future of the company was so strong, that I could not make myself part with the stock to pay for the car. So I decided to take a loan for the most of the price paid, believing that I can trade the stock and generate enough to cover the paymnets. I remember one member of TMC (I will not name names, but mention that he though that any member who was more enthusiastic about the company than himself belonged to the "Church of Tesla" - that would be enough of a hint for old timers) lecturing me that I should sell stock, pay taxes and then pay for my purchase in cash, which was actually pretty prudent advice, that I, however, did not follow.

Not only did I hold on to every share I got from the initial purchase, but added more shares along the way, trading the stock, after car payments (and a few other things that I did not think I could ever afford). That was a very, very bumpy ride, and I certainly had a lot of up and downs along the way, but owning a car helped me to stay the course.

 

[jbcarioca]

Then question of TSLA ownership influencing Tesla purchase and vice versa is interesting.

I recall from academic courses about investment decisions that thorough analysis of fundamental value has no substitutes, just as Benjamin Graham pointed out in his seminal work before we all were born. The question is how to evaluate fundamentals.

Brands have value, products have value. TSLA accounts for itself as a traditional manufacturer so has no monetary value assigned for brand, products, process knowledge nor any other intellectual property. Those of us who own Tesla products tend to understand (accurately or not) that TSLA has considerable intrinsic value not shown on the balance sheet, though the financial cost of enhancing that value is largely reflected on the P&L in disproportionate investments much of which is expensed in current periods.

With all that the GAAP operating margins for S and X are >20%, quite respectable by any definition. So, what does that have with Tesla owners being more optimistic than typical non-owners? In my very humble opinion the crucial variable is that owners of Roadster, Model S and Model X have all seen the incredible learning curves at TSLA, and are often convinced that that capacity for continuous improvement sets TSLA apart from other publicly held manufacturers.
I held TSLA before I bought an S. In the two years since I have roughly quadrupled my holdings. That happened because I personally experienced the learning curve as my own car improved with software and hardware updates.

That ability to continuously improve existing products will be transformational in stationary storage and photovoltaics just as is being so with cars. No analyst so far seems to have understood that advantage, perhaps because they do not understand it.

For historical reference it took Toyota and a handful of other Japanese firms to understand and implement the work of W Edwards Deming, although many US firms tried valiantly. The Toyota Way ended out making them the largest auto manufacturer in the world, though their star is dimming a bit now.

Imagine what will happen during the next decade as the visions of Elon Musk and JB Straubel continue to propagate! There will be disarray and setbacks, but their vision has already become an almost irresistible force. I shall buy more TSLA this coming week, and plan to continue investing for the foreseeable future.

 

[madodel]

Just to complement the mosaic of different experiences of owning TSLA and Model S, I invested in TSLA first, with thoughts of buying a car some time with gains of my stock purchase. This was the only way I could imagined owning a Tesla as I never did, and did not even think of paying for a car that much.

After few month after my initial investment (at about $37), and significant run-up in SP, in May of 2013, I decided to splurge on top of the line Model S, but my belief in the future of the company was so strong, that I could not make myself part with the stock to pay for the car. So I decided to take a loan for the most of the price paid, believing that I can trade the stock and generate enough to cover the paymnets. I remember one member of TMC (I will not name names, but mention that he though that any member who was more enthusiastic about the company than himself belonged to the "Church of Tesla" - that would be enough of a hint for old timers) lecturing me that I should sell stock, pay taxes and then pay for my purchase in cash, which was actually pretty prudent advice, that I, however, did not follow.

Not only did I hold on to every share I got from the initial purchase, but added more shares along the way, trading the stock, after car payments (and a few other things that I did not think I could ever afford). That was a very, very bumpy ride, and I certainly had a lot of up and downs along the way, but owning a car helped me to stay the course.

My initial TSLA was at about $37/shr also. I used that to justify paying way more than I had ever contemplated when I first reserved my Sig X. But I never sold any either to pay for it.

 

[Krugerrand]

Curious to say the least. Wondering, if he didn't agree with some of the stuff in the quarterly report, or if he forced somethings in there that Elon didn't want to see. Both CEO and CFO need to sign the shareholder report. Some disagreements might have showed up. He was also snubbed by Elon in the ER for giving a straight answer about the available credit line.
But it seems, Jason Wheeler didn't see a path to $1000 SP. He is leaving with only 30% of his stock options vested.

Or, he just left for the reason he stated: wants to pursue a different path in public policy that he's been wanting to do for some time.

Of course, your 'story' is way more nefarious and fits your continued 'let's turn absolutely every little bit of information into something, well...nefarious where Tesla is concerned.

Edit: If only I was so inclined to go back through the archives for the time when Deepak left to dig up what you had to say about that terrible situation for Tesla, I wonder what I would find...

 

[vgrinshpun]

They don't need to run a simulation. They already have the data for every single factory worker of when they were awarded options and when said employee exercised. Moreover they don't need to write a few hundred lines of code to work out how much dollars in compensation that employee got through the program because they already have those written : they report stock based compensation in their quarterly reports.

I am having really hard time to follow this line of thought. The letter was about compensation package provided by the company. I do not believe it is even remotely fair to say that compensation package was lower depending on how an employee decided to use it. If, for example, an employee needs to make a large purchase and decides to take a pay day loan, would it be fair to factor the reduction in cash available for him/her after an interest charged into the characterization of what his company's compensation package is? Not in my mind.

 

[neroden]

http://www.anaheim.net/ArchiveCenter/ViewFile/Item/694

Total revenues for Anaheim are $570M.

This is a good example for others of how to do "Apples and oranges" misleading comparisons for the purposes of misleading people.

So, you have a world-famous resort park which is the *largest major employer* and main source of income in the city, and you compare its taxes paid to the city tax revenue, and because it's 9% you think that's high? No, actually, it isn't, it's super low.

IIRC one-company towns often get 30% - 50% of their income from taxes paid by the single largest employer. I've looked at several.

 

[neroden]

WARREN BUFFETT: The stock market is 'virtually certain' to be worth far more

Frankly, this is just panglossianism. Meaningless garbage. I like Buffett, but when he says that particular line, he's _______.

I can, if I have to, dig up quotes saying the same thing about the Russian stock market a few years before the Bolshevik Revolution, and you all know what happened there.

It's even easier to dig up quotes saying this from July of 1929 in the US.

I do think that the main risk to the US stock market is something *truly* big: a serious war, a Great Depression, revolution, etc. A bet on the US stock market in general is a bet on the US economy in general. That bet is NOT guaranteed, any more than a bet on any other economy is guaranteed.

Having read the whole letter, he spends an absurd number of paragraphs on a panglossian paean to the American economic system, not having noticed that it's actually been changed more than once and that the Reaganite system doesn't really resemble the system which created most of the wealth for the country.

That said, if you're hedging against the risks which will destroy the American economy, you probably still want to be invested in stocks and businesses of some sort as opposed to bonds or cash... just maybe not necessarily *American* stocks. Stocks represent productive business, and over the long run, productive business tends to be a better investment than other stuff. His letter is mostly arguing for stocks vs. cash/bonds, so I think he wasn't really addressing the US stocks vs. Chinese stocks question.

Reading the letter further, he makes a good point that the market is awash in capital -- but unlike him, I am aware of multiple enticing projects which have died for lack of capital. Seriously. They happen to be the sort Buffett doesn't like because he doesn't understand them. There's a sense in which the available capital is too risk-averse in a particular way. This is a side-effect of overconcentration of wealth; it's documented that richer familes become *more* risk-averse with their investments (unexpected though that may be).

Buffett's panglossianism about the US Economy is a bit of a sideshow. When you get into the details, you realize that basically he's running an insurance company, and he's running an *extremely well run* insurance company which would do very well under anything short of expropriation.

It's fascinating to me that Buffett spends two pages detailing what I have called "Nathanael's First Law of Investment Advice" -- if an investment manager can beat the market, the fees they charge will (with very rare exceptions) eat up all the gains and will mean that you can't *pay* them to beat the market *for* you.

 

[vgrinshpun]

Does not seem that the issue of unionization at Fremont is going to be going away any time soon. It seems quite simple to me, as what Musk is offering to employees is a buy-in into the goals of the company, while giving them additional potential sizable reward which comes with some risk, as opposed to them just being a crew for hire. Not everybody, obviously, sees it that way: What's at the root of Tesla's labor troubles?

 

[Jeeps17]

No analyst so far seems to have understood that advantage, perhaps because they do not understand it.

Self-fulfilling prophecy ?

Jokes aside, I fully agree with you. I also bought a core of TSLA shares before my Model S (2013 P85) and have added to my holdings since, have an X on order, and enjoy seeing Tesla grow into Elon's and JB's vision (among others).

The CAN$/US$ exchange is much more painful now than in 2013 though...

 

[DragonWatch]

Had to laugh this morning. Our original 2006 Prius which was gifted to our daughter/son-in-law at their wedding is showing signs of finding its way to the salvage yard.

Our son-in-law has troubleshoot the Prius problems to the point of exposing and testing the cells on the battery, while cleaning the terminals as he goes.

Bottom line I asked him if he was replacing the Prius battery with a Tesla battery. Smile or laugh.

Okay, I guess you had to be there at the time:-(

 

[neroden]

Does not seem that the issue of unionization at Fremont is going to be going away any time soon. It seems quite simple to me, as what Musk is offering to employees is a buy-in into the goals of the company, while giving them additional potential sizable reward which comes with some risk, as opposed to them just being a crew for hire. Not everybody, obviously, sees it that way: What's at the root of Tesla's labor troubles?

The Cornell ILR professor knows what he's talking about.

The core issue here is actually the ludicrously high housing costs in the Bay Area. Stock options don't help pay rent. (As a result, this issue will NOT arise at the Gigafactory 1 in Nevada and will NOT arise at the Gigafactory 2 in Buffalo NY; Reno has reasonable housing costs and Buffalo has low housing costs.) There's a sense in which the money is being extracted by landlords.

It's possible that there might be a way to deal with this directly -- company housing. I don't think Musk has thought of that, and I don't know how the local government would react.

 

[vgrinshpun]

The Cornell ILR professor knows what he's talking about.

The core issue here is actually the ludicrously high housing costs in the Bay Area. Stock options don't help pay rent. (As a result, this issue will NOT arise at the Gigafactory 1 in Nevada and will NOT arise at the Gigafactory 2 in Buffalo NY; Reno has reasonable housing costs and Buffalo has low housing costs.) There's a sense in which the money is being extracted by landlords.

It's possible that there might be a way to deal with this directly -- company housing. I don't think Musk has thought of that, and I don't know how the local government would react.

I hear you, but I do not buy for a second that UAW will help to solve this problem. So if Cornell professor knows what he is talking about (and I believe he does) it seems to be disingenuous to bring this issue into the discussion about unionization.

The bottom line for me is that UAW and Jose Moran are misrepresenting situation and just being self-serving. I do not believe that bringing UAW to Fremont will serve anybody's interests except the interests of their (UAW) bureaucrats.

 

[schonelucht]

I am having really hard time to follow this line of thought. The letter was about compensation package provided by the company. I do not believe it is even remotely fair to say that compensation package was lower depending on how an employee decided to use it. If, for example, an employee needs to make a large purchase and decides to take a pay day loan, would it be fair to factor the reduction in cash available for him/her after an interest charged into the characterization of what his company's compensation package is? Not in my mind.

Point is that the numbers are only this good for employees that work there since March 2013. That's actually a minority of current employees, and depending on turn over maybe even a small minority. For example, getting hired just 6 months later means a $20k less compensation package. If you are comparing against averages of other companies, I think it is fair to compare with your actual average and not with the (minority) employees that happen to have the an unequalled run up in their stock options worth.

 

[dennis]

It's possible that there might be a way to deal with this directly -- company housing. I don't think Musk has thought of that, and I don't know how the local government would react.

Google is proposing to do this in Mountain View - unsuccessfully so far.

Google pitches housing project in East Whisman

 

[vgrinshpun]

Point is that the numbers are only this good for employees that work there since March 2013. That's actually a minority of current employees, and depending on turn over maybe even a small minority. For example, getting hired just 6 months later means a $20k less compensation package. If you are comparing against averages of other companies, I think it is fair to compare with your actual average and not with the (minority) employees that happen to have the an unequalled run up in their stock options worth.

Well, that was NOT the point you were making in the post I responded to, and my response stands.

You are now bringing another point, that is not quite relevant as a 4 year term that Musk used in his comparison did NOT expire for a person hired six month later. Overall Musk did state that he expects similar returns going forward. The bigger point is that it is in employee interest not to exercise options awarded to them until just before they expire in 10 years after the award.