2017 Investor Roundtable:General Discussion

[generalenthu]

With regards to the high short interest, there was an interesting comment S.A. recently on one of the more balanced articles. Could explain part of the high short interest. Maybe some here have an opinion on what part of the high short interest could be due to this ? Significant or insignificant ? Could it possibly explain why we did not see the high short recall we discussed last year ?


" Now I would like your opinion as well as that of other commenters on the effect of Tesla’s Convertible Bonds on the short trade. These instruments are favored as a hedge for major short traders. I have read their Prospectus for all of the Convertible Bond issuances. Each of them contains this statement:
[ We expect that many investors in, and potential purchasers of, the notes will employ, or seek to employ, a convertible arbitrage strategy with respect to the notes. Investors that employ a convertible arbitrage strategy with respect to convertible debt instruments typically implement that strategy by selling short the common stock underlying the convertible notes and dynamically adjusting their short position while they hold the notes. Investors may also implement this strategy by entering into swaps on our common stock in lieu of or in addition to short selling the common stock.]

The Convertible Bonds are attractive to sophisticated short traders. Therefore Tesla were able to sell a larger tranche of Convertible Bonds than they would have to long investors only. This raised a great deal of financing for Tesla at crucial times in their history.

< snip >

On my other related topic I have also read this about the Convertible Bond Underwriters in the Prospectus:
[In connection with the offering, the underwriters may purchase and sell notes and common stock in the open market. These transactions may include stabilizing transactions, short sales and purchases to cover positions created by short sales. Stabilizing transactions consist of certain bids or purchases made for the purpose of preventing or retarding a decline in the market price of the notes while the offering is in progress. Short sales involve the sale by the underwriters of a greater number of notes than they are required to purchase in the offering. If the underwriters create a short position in the notes in connection with the offering, the underwriters may cover that short position by purchasing notes in the open market or by exercising all or a part of the option to purchase additional notes described above."

This is something I've pondered in the past and here is some back of the envelope analysis I'd done.

Tesla has 3 notes outstanding as per the link here. Outstandings are in $MM.

Tesla Motors, 0.25% 1mar2019, USD (Conv.) 800 USD outstanding
Tesla Motors, 1.25% 1mar2021, USD (Conv.) 1,200 USD outstanding
Tesla Motors, 1.5% 1jun2018, USD (Conv.) 660 USD outstanding

The first two are trading at around 85-90 cents on the dollar, with about 50-60 delta. Shorting out the exposure to TSLA is done only by convert arbs and not outright convert investors. Typically 80% convert arb ownership is a good one to use when there is no data. Multiplying the numbers ($2B * 0.88 * 0.55 * 0.8) gives close to 800 MM of TSLA that is shorted against these bonds.

The third one is tricky. This is trading at ~370 cents on the dollar as the strike is pretty low relative to current price. The arbs were paying through the nose to maintain their short hedge and there were redemption requests. I believe Tesla paid back a good amount of this. So I am going to pull number from my behind (as I don't have time to look it up) and say the arbs are short a billion against this deal. This leaves the total arb driven shorts at ~1.8 Billion which compares to $8.1 Billion that is shorted as of today as claimed by @ihors3 on twitter

$TSLA ,largest U.S. non-ETF short,hits historical high short interest today of $8.1 billion. $BABA is largest W.W. non-ETF short at $10.3 bn

I think Tesla is the largest non-ETF US short even after you ignore the arb driven shorts of ~1.8 Billion. Fun times ahead.

PS: I ignored SCTY converts. I am not sure they had any. Welcome due diligence from this forum as I need to run now.

 

[Fallenone]

So I sat down and made some assumptions and did some calculations to try to predict the coming ER. Here are the assumptions and results

1. S and X deliveries as reported yesterday, S 12700 and X 9500
2. ASP for S at $87 k. This is based on in Q3 ER they said ASP for S decreased QoQ by 6.5% due to late introduction of P100D (4.5%) and the discounts (2%). I simply added these back because we had a full Q of P100D and no widespread discount happened. In addition the price hike of AP 2.0 would also contribute here. Note that I am accounting $1.5 k for this because out of the full 8k price of AP 2.0, I am assuming half of it (AP 1.0 function parity not achieved at end of year) got recognized. And not all deliveries in Q4 got AP 2.0 (it came out in Oct after all). The result is $87k.
3. ASP for X at $104 k. Same approach as above, only not including adding 2% back for discounts because there were few in Q3 to begin with.
4. Gross margin of S increased to 31%. Aside of a flat 2% due to no discounts, the high margins of P100D, AP 2.0, and continue improvement of supply chain/manufacture efficiency all contributed for another 2%.
5. Gross margin of X increased to 28%. Mainly due to similar reasons except for the 2% discount but more gains from manufacture efficiency.
6. Regulatory credit contribution to gross margin balanced out with the strong dollar. This is because Tesla have no horded ZEV to sell so the positive impact on gross margin would be far less. No net impact on overall automotive gross margin.
7. A nice increase in the revenue from services and others to $200 m in total mainly due to TE initial ramping up. However, I still consider gross margins on TE in Q4 very poor (around 0) so gross profit for this section is still very low - $10 m.
8. Overall I think expansion of stores and superchargers was on a similar pace with Q3, so OpEx increase the same rate QoQ, $593 m compared to $551 m in Q3.
9. No idea on the interest side but made similar assumptions in OpEx, net loss $62 m compared to $56 m in Q3.
10. Same provision for income taxes of $8 m.

With these assumptions, total revenue would be $2,295 m with $2,095 m coming from automotive. Gross profit $630 m compared to $638 m in Q3. After deducting OpEx, interest expenses, and income taxes, net loss is $33 m. However, this number is very small and could easily swing $100 m to either side. But overall I would expect to see a small loss of EPS for Q4.

As for cash flow, since in my calculation, gross profit is stable thanks to higher gross margins, I continue to assume cash flow provided by operating activities be about the same as in Q3, or $424 m. Deducting $1 b of predicted CapEx results in a negative $576 m. Full AP 2.0 could provide at least $50 m additional cash in Q4. In addition, Tesla said 2750 cars were not delivered but already paid in full. These won't count into income but I think goes in to cash flow. A nice $250+ m. Now we're at about $275 m negative on the free cash flow. However, there's also the increase of $500 m in ABL and accounts payable to soak up cash drain so maintaining a positive free cash flow is too out of this world I think. Even if SolarCity part didn't do great, the small size of this segment of the company won't make things too bad.

TL;DR. I expect close to breaking even on the EPS and slightly negative free cash flow for Q4.

 

[Navin]

So I sat down and made some assumptions and did some calculations to try to predict the coming ER. Here are the assumptions and results

1. S and X deliveries as reported yesterday, S 12700 and X 9500
2. ASP for S at $87 k. This is based on in Q3 ER they said ASP for S decreased QoQ by 6.5% due to late introduction of P100D (4.5%) and the discounts (2%). I simply added these back because we had a full Q of P100D and no widespread discount happened. In addition the price hike of AP 2.0 would also contribute here. Note that I am accounting $1.5 k for this because out of the full 8k price of AP 2.0, I am assuming half of it (AP 1.0 function parity not achieved at end of year) got recognized. And not all deliveries in Q4 got AP 2.0 (it came out in Oct after all). The result is $87k.
3. ASP for X at $104 k. Same approach as above, only not including adding 2% back for discounts because there were few in Q3 to begin with.
4. Gross margin of S increased to 31%. Aside of a flat 2% due to no discounts, the high margins of P100D, AP 2.0, and continue improvement of supply chain/manufacture efficiency all contributed for another 2%.
5. Gross margin of X increased to 28%. Mainly due to similar reasons except for the 2% discount but more gains from manufacture efficiency.
6. Regulatory credit contribution to gross margin balanced out with the strong dollar. This is because Tesla have no horded ZEV to sell so the positive impact on gross margin would be far less. No net impact on overall automotive gross margin.
7. A nice increase in the revenue from services and others to $200 m in total mainly due to TE initial ramping up. However, I still consider gross margins on TE in Q4 very poor (around 0) so gross profit for this section is still very low - $10 m.
8. Overall I think expansion of stores and superchargers was on a similar pace with Q3, so OpEx increase the same rate QoQ, $593 m compared to $551 m in Q3.
9. No idea on the interest side but made similar assumptions in OpEx, net loss $62 m compared to $56 m in Q3.
10. Same provision for income taxes of $8 m.

With these assumptions, total revenue would be $2,295 m with $2,095 m coming from automotive. Gross profit $630 m compared to $638 m in Q3. After deducting OpEx, interest expenses, and income taxes, net loss is $33 m. However, this number is very small and could easily swing $100 m to either side. But overall I would expect to see a small loss of EPS for Q4.

As for cash flow, since in my calculation, gross profit is stable thanks to higher gross margins, I continue to assume cash flow provided by operating activities be about the same as in Q3, or $424 m. Deducting $1 b of predicted CapEx results in a negative $576 m. Full AP 2.0 could provide at least $50 m additional cash in Q4. In addition, Tesla said 2750 cars were not delivered but already paid in full. These won't count into income but I think goes in to cash flow. A nice $250+ m. Now we're at about $275 m negative on the free cash flow. However, there's also the increase of $500 m in ABL and accounts payable to soak up cash drain so maintaining a positive free cash flow is too out of this world I think. Even if SolarCity part didn't do great, the small size of this segment of the company won't make things too bad.

TL;DR. I expect close to breaking even on the EPS and slightly negative free cash flow for Q4.

Don't you need to factor in solar city stuff now?

 

[sdtslafan]

i have one foot in reality and one foot in the stock.

Great. sounds like you're all in (TSLA). Congratulations! You must have made a fortune today;

 

[Fallenone]

Don't you need to factor in solar city stuff now?

Based on my poor understanding, I simply can't. Plus I don't think SCTY's size is more influential than 1% of gross margin on the Model S.

 

[mmd]

Based on my poor understanding, I simply can't. Plus I don't think SCTY's size is more influential than 1% of gross margin on the Model S.

Chanos estimates, combined company should have $1B cash burn per quarter.
Short-seller Chanos calls Tesla-SolarCity merger 'crazy': CNBC conference

BTW, is the video of GF investor event online yet? Haven't seen the electrek article yet.

 

[SteveG3]

My question is still - at what point do the shorts see the writing on the wall and start capitulating en masse?

Gigafactory is producing cells. That's another mark on the board that Model 3 will be at least reasonably close to on-time.

Demand is still growing, shoots their demand arguments even more full of holes than they already were.

SolarCity cashflows can be leveraged to provide whatever cash is needed up to around $5B.

What's left of their thesis?

the bulk of the shorts might just be an investment by the fossil fuel industry to slow down the replacement of their cash cow. "losing" $5 billion or even $100 billion on a short position in exchange for shifting out the transition to sustainable fuel a few years is a great return on investment if all you are thinking about is money.

 

[Dwdnjck]

The market was not spooked because the miss was mouse nuts.[/QUOT

A big miss would have been moose nuts?

 

[Fallenone]

Chanos estimates, combined company should have $1B cash burn per quarter.
http://www.reuters.com/article/us-hedgefunds-cnbc-chanos-idUSKCN1

BTW, is the video of GF investor event online yet? Haven't seen the electrek article yet.

I don't think he understands the business.

 

[Bobfitz1]

Bloomberg article cell cost chart today.

My recollection is that JB Straubel projected Tesla battery pack cost at less than $100/kwh by 2020. The Bloomberg article states cell cost.

Good catch. If the chart author got the $100/Kwh from JB's projection of pack cost by 2020, then assuming Ford and all the others really are projections of cell cost only, then Tesla has even more of a lead than suggested. Maybe Tesla cell cost will be down to $80/kwh by then. Does anyone have a guess as to what % of pack cost comes from the cells? 80%? Higher or lower? Thanks.

 

[SteveG3]

Another possibility is to cut over the Osaka plants to also build 2170's.

Bloomberg article today said Tesla is already using imported 2170s in TE products. Bloomberg could have made an error, but if not, that would seem to say at least some process of switching of some 18650 production to 2170 is already underway.

 

[Papafox]

Bloomberg article today said Tesla is already using imported 2170s in TE products. Bloomberg could have made an error, but if not, that would seem to say at least some process of switching of some 18650 production to 2170 is already underway.

Bloomberg's article is consistent with what many of us have been expecting. Powerpack 2.0 has been deployed during Q4 and many of us assume that Tesla would not make both an 18650 and a 2170 version of the same Powerpack 2.0. In fact, I'm not sure that 18650s could even yield the rated KWh in the same size pack as the 2170s can. Clearly, Powerpack 2.0 and Powerwall 2.0 were both designed as 2170 packs.

 

[mmd]

Few questions on giga factory. Anyone with real answers? TIA.
1. Till May 2016, only 14% was complete. Any idea what percent is complete now?
2. Does the GF need to be complete ($5B total investment and 100% done) to make M3 profitable?
3. Weren't some cells already being made at GF when Tesla held the opening party on July 29?
4. What is the definition of "mass produce" 2170 cells? What volume is that in terms of GWh per year?

 

[winfield100]

The market was not spooked because the miss was mouse nuts.[/QUOT

A big miss would have been moose nuts?

OT
it was a comment/allusion perhaps on Montana Skeptic of SA and his "....mouse nutz...." article (with a shoutout to Bonaire)
(MS is short TSLA by long term putz or something similar)
http://seekingalpha.com/article/4034077-mouse-nuts-mattered-teslas-q3-profitability
{back to mostly lurk mode}

 

[AlMc]

Few questions on giga factory. Anyone with real answers? TIA.
1. Till May 2016, only 14% was complete. Any idea what percent is complete now?
2. Does the GF need to be complete ($5B total investment and 100% done) to make M3 profitable?
3. Weren't some cells already being made at GF when Tesla held the opening party on July 29?
4. What is the definition of "mass produce" 2170 cells? What volume is that in terms of GWh per year?

#1: <snip from Press Release> The Gigafactory is being built in phases so that Tesla, Panasonic, and other partners can begin manufacturing immediately inside the finished sections and continue to expand thereafter. Our phased approach also allows us to learn and continuously improve our construction and operational techniques as we continue to drive down the cost of energy storage. Already, the current structure has a footprint of 1.9M square feet, which houses 4.9 million square feet of operational space across several floors. And we are still less than 30 percent done. Once complete, we expect the Gigafactory to be the biggest building in the world.

#3: IIRC back when they had the first GF party the cells were shipped to the GF and the packs 'assembled' there.
Today was the first day it was stated the cells were made AT the GF

 

[Intl Professor]

Unfortunately I give FF 0% chance of success. They are trying to hit a home run their first time at bat.....when it's practically impossible to just get on first base. Walk before you run, fellas.

In my 80 plus years, 70 of which involved admiring auto looks, I've never found one worth buying with a smile like the FF.

 

[T3slaTulips]

Few questions on giga factory. Anyone with real answers? TIA.
1. Till May 2016, only 14% was complete. Any idea what percent is complete now?
2. Does the GF need to be complete ($5B total investment and 100% done) to make M3 profitable?
3. Weren't some cells already being made at GF when Tesla held the opening party on July 29?
4. What is the definition of "mass produce" 2170 cells? What volume is that in terms of GWh per year?

1. I don't recall the current completion percentage, but you could probably find it quick on Electrek.co
[it's less than 30% complete]
2. Unlikely to need completion to make M3 profitable. Just need to produce cells and packs and motors there. [Check!]
3. No. December saw the first cells made there, and those were a quality run. Mass production started today.
4. "mass produce" = several GWh, with a run rate near 35GWh/year by Q4 2018.

 

[Intl Professor]

the bullish price action totally dismisses the 'missed guidance' negative propaganda

Which would imply the long term bullish scenario is starting to reign .

Just a hypothesis

To illustrate the point, here's a positive one from Business Insider:

The world needs to stop obsessing over how many cars Tesla is selling

Edit: probably posted later or already as I'm just getting started today. Sorry if duplicate.

 

[Paracelsus]

the bulk of the shorts might just be an investment by the fossil fuel industry to slow down the replacement of their cash cow. "losing" $5 billion or even $100 billion on a short position in exchange for shifting out the transition to sustainable fuel a few years is a great return on investment if all you are thinking about is money.

Thanks for this post, SteveG3. This is very insightful and I agree with you completely. What I most enjoy about this site is that occasionally someone posts something that makes you stop in your tracks and re-evaluate how you look at things. Much appreciated!

 

[doctoxics]

Few questions on giga factory. Anyone with real answers? TIA.
1. Till May 2016, only 14% was complete. Any idea what percent is complete now?
2. Does the GF need to be complete ($5B total investment and 100% done) to make M3 profitable?
3. Weren't some cells already being made at GF when Tesla held the opening party on July 29?
4. What is the definition of "mass produce" 2170 cells? What volume is that in terms of GWh per year?

1. 2 million square feet done; 2.5 million square feet almost done; 10 million square feet to go; 14.5 million square feet when completed ~ 2020 (~5.5 million square feet footprint with three floors in most of the building)

2. Elon said that the model 3 would be net cash flow positive from the start of production.

3. Packs but not cells were made in Gigafactory1 from late 2015. Cells were imported from Osaka.

4. We don't yet know the Tesla/Panasonic definition of mass produced cells. Soon we may get an idea based on cells/day, cells/week, cells/month, or packs/month. Panasonic thinks mass production will not happen until April; Tesla used the term mass produced cells as of this week. Once we know how many cells are in a pack and the rated kwh for the pack, we can estimate the production rate in both cells, packs and gwh/yr.