2017 Investor Roundtable:General Discussion

[Paracelsus]

It should be called.. The inconvenient shot at Elon, the one guy who is probably doing more then anyone to further the goal. Don't get how the left eats its own so easily.

Agree! - the same people that chose Ken 'Frack Colorado until you can light your well water on fire' Salazar as an advisor in the last campaign. No ideological disconnect there! In addition to giving up on the DNC, I even gave up on Colorado beer/microbrew after Kenny poisoned the aquifer. Thanks for your post!

 

[techmaven]

Is this because the deal would require them to lock in specific chemistry? It seems like a lot of the improvement we've seen in cells over the last decade wouldn't require much new capex to the battery factory lines to implement. Do you think they are waiting for a more revolutionary form factor + chemstry change rather than the incremental improvements we've seen in the last 20 years?

Clearly the major automakers would prefer a slower, gentler transition and ideally, less volatile and more energy dense batteries. That way they don't have to change nearly as much as they are doing on nearly as compressed of a time scale. Solid state batteries that replace the flammable electrolyte has been promised for some time now and they would rather have those than deal with the pack design that Tesla had to go through. They can, of course, but if the transition is slow, why incur the costs of platform development of that magnitude when they won't have to do that if they just wait a little bit? A little bit being 10-20 years of PHEVs and low range BEVs (talking from 2010-ish).

 

[Waiting4M3]

Clearly the major automakers would prefer a slower, gentler transition and ideally, less volatile and more energy dense batteries. That way they don't have to change nearly as much as they are doing on nearly as compressed of a time scale. Solid state batteries that replace the flammable electrolyte has been promised for some time now and they would rather have those than deal with the pack design that Tesla had to go through. They can, of course, but if the transition is slow, why incur the costs of platform development of that magnitude when they won't have to do that if they just wait a little bit? A little bit being 10-20 years of PHEVs and low range BEVs (talking from 2010-ish).

And then came some punk named Elon, "Nice road map you have there, it'd be a shame if someone totally trashed it."

 

[kenliles]

Gotta love it

Russian spaceflight director thinks Elon Musk is out of his mind - BGR
Russian spaceflight director thinks Elon Musk is out of his mind (BGR)

Must be Pissed off they can't hack into SpaceX, like they did the 'out-of-their-minds' NASA dudes/dudettes
I worked on that one myself-
When you can't even copy it right, ya got no game

The Russian space shuttle that never was

 

[RobStark]

Gotta love it

Russian spaceflight director thinks Elon Musk is out of his mind - BGR
Russian spaceflight director thinks Elon Musk is out of his mind (BGR)

Dude thinks rich people trust Russian company RSC Energia more than SpaceX to ferry them to and back from space. That guy is out of his mind.

 

[SteveG3]

My critique of Seba's analysis is here: Shorting Oil, Hedging Tesla. There are some real methodological and conceptual problems. Specifically, an IO A-EV that owners can put to use optionally in a fleet service market undermines Seba's conceptual model. If you include the option of private use and public rental in IO A-EV, then this clearly has higher value than A-EVs in commercial only fleets. Thus, there will be an equilibrium between private ownership and fleet ownership. Seba's model fails to anticipate this sort of equilibrium, leading to the radical extreme that private ownership is ultimately abandoned. He has not thought deeply enough about how economic markets set the value of income producing assets, and how that most surely will apply to private autos.

BTW, my background is in housing economics. There is an equilibrium between private homeownership and rental markets. It would be patently silly to argue some technological shift could come about to turn us all into renters. Even Airbnb, actually serves to enhance the value of private homeownership. Likewise Uber et al serves to enhance the value of private auto ownership. In both cases the private owner receives an option to monetize their asset in effectively a rental market. This option to monetize adds to the price a private buyer is willing to pay for the underlying asset. So disruptive technologies like Airbnb and Uber actually support asset prices for both private and commercial owners. Technology increases such optionality. What would be necessary to make us all renters would be government like regulation that bars private homeowners from renting out their homes or rooms, such that they only entities that can offer rental units are commercial entities. Technology generally does not move in that sort of direction.

So when Tesla embeds a ride sharing platform within Tesla vehicles that give all Tesla owners equal access to various vehicle rental markets, they are effectively undermining the commercial fleet model. This optionality enhances the value of privately owning a Tesla. Consequently, it will support the price Tesla can command for new vehicles. Why in the world would Tesla a Model 3 to commercial fleet operators for $30k (as Seba seems to assume), when they can sell to private owners for $40k or so? Furthermore, if commercial fleet operators need to rent out at say 12c/mile to break even on the full cost of ownership, why couldn't a private owner be willing to rent out below 12c/mile? The private owner does not need to cover the same cost of depreciation per mile because they have excess mile capacity that would otherwise go unutilized apart from ride sharing. Thus, the private owner has a marginal depreciation per mile cost that is practically zero, while the commercial fleet operator must recover that 8c/mile of depreciation. Thus, private owners are willing to undercut commercial operators. This happens in the same way that private homeowners use Airbnb to undercut commercial hotels. So Tesla can support high prices for new cars and avoid disruption from commercial fleet operators or car sharing platform operators simply by offering their own ridesharing platform and embedding that optionality into the new car itself. It's all well and good if fleet operators and platform operators want to use Tesla vehicles too, but there is no need for Tesla to offer those vehicles at a discount. So Tesla can retain all the value of these ridesharing markets simply through the price of new vehicles. Tesla just needs to make the vehicles so that they are easily monetized by private owners.

Musk has already disrupted Seba's conceptual model.

Agree re not seeing Tesla selling these cars to fleet owners for a discount. I do think there very likely will be fleets of autonomous Tesla's available for rides in some cities. Tesla's not owned by consumers, but, not as a result of vehicle sales of any other kind either.

 

[dennis]

Gore is just mad that he was not put in the Trump cabinet and EM is attending WH meetings.

And that Kleiner Perkins, where he is a partner, invested in Fisker instead of Tesla.

 

[SteveG3]

Can someone please enlighten me on this?

Elon Musk projected 150 GWh/yr (pack level) for Gigafactory 1 capacity, and that was as of a year ago, before Grohmann acquisition!

He also said the split between automotive and Tesla Energy would be even.
70
If Model 3 has 55 kWh battery pack, and the vast majority of Tesla's production will be the base model...

150 GWh x 50% / 55 kWh = 1.36 million vehicles, before Grohmann acquisition.

I understand that some packs will be for larger capacity, but Model S/X will likely make less than 10% of Tesla's production in 2020.

The vast majority will be Model 3 and Model Y base battery capacity, so ~55 kWh, and maybe even less since range per kWh increases 5%/yr.

And this is all based on production numbers before Grohmann acquisition.

Why is Tesla projecting only 1 million vehicles in 2020?

I've heard Elon reference 70 kWh as he's thought out loud on a very top line level re the kind of volume GF1 can offer supply for.

 

[moe.salih]

I think this is the first mention of Model 3 deliveries in July. They previously only mentioned production in July.

 

[geneclean55]

Yay... tweetstorm in progress!

 

[geneclean55]

Who wants to ask about TSLA valuation?

 

[techmaven]

Who wants to ask about TSLA valuation?

I thought about it. I chickened out... too many possibilities that whatever he writes is misconstrued, especially given its Twitter.

 

[TNEVol]

Gore is just mad that he was not put in the Trump cabinet and EM is attending WH meetings.

I know Al Gore from years ago and this could not be further froom the truth. I understandand that there might be an inappropriate assessment of EM but I believe it is not intentional. Al is totally on the environmental good guy side of things.

 

[ValueAnalyst]

View attachment 227934

I think this is the first mention of Model 3 deliveries in July. They previously only mentioned production in July.

Yep.

 

[geneclean55]

Take that! Mr. Jonas

 

[ValueAnalyst]

Investors should be cautious about any and all stock recommendations and should consider the source of any advice on stock selection. Various factors, including personal ownership, may influence or factor into a stock analysis or opinion. All investors are advised to conduct their own independent research into individual stocks before making a purchase decision. In addition, investors are advised that past stock performance is not indicative of future price action. You should be aware of the risks involved in stock investing, and you use the material contained herein at your own risk. I do not guarantee its accuracy or validity, nor am I responsible for any errors or omissions which may have occurred. Nothing I write provide, imply, or otherwise constitute a guarantee of the stock's performance. Accuracy and completeness cannot be guaranteed. Users should be aware of the risks involved in stock investments. It should not be assumed that future results will be profitable or will equal past performance, real, indicated or implied. The material herein is provided for information purpose only. I do not accept liability for your use of my posts. The information is provided on an “as is” and “as available” basis, without any representations, warranties or conditions of any kind.

This article includes my notes on the Form 10-Q, which I believe is one of the most important documents for long-term investors. Readers should note that I will not be summarizing the document, but instead, sharing observations that I believe may be helpful in estimating the long-term intrinsic value of the company.

• Page 4: Accounts Receivable declined 10% from $499 thousand as of December 31 to $440 thousand as of March 31. Combined with a quarter-over-quarter ("QoQ") increase in Total Automotive Revenue, a decline in A/R balance can mean that the company's receivables turnover improved. The company's days sales outstanding (a measure of how quickly the company is getting paid what it is owed from customers) was at 15.9 days in 1Q17, which is favorable. If the company can improve its receivables turnover compared to its payables turnover (discussed below), this can have favorable implications to the company's future cash flow needs. On the other hand, a slowdown receivables turnover can also serve as a leading indicator of collection issues. I will explore the historical trend in this metric and compare it to those of luxury car manufacturers in subsequent articles.
  
• Page 4: The combined value of Accounts Payable and Accrued Liabilities and Other as a percentage of Total Cost of Revenues declined QoQ, which can mean that the company slowed down payments to suppliers. Days payables outstanding of 82 is in-line with comments from Deepak that the company has favorable payment terms with its suppliers: "in many cases it's 90 days." I will explore the historical trend in this metric and compare it to those of luxury car manufacturers in subsequent articles. Readers should note that the days sales outstanding is significantly below days payables outstanding. This has favorable implications to the company's future cash flow needs as the company's growth rate accelerates significantly in the coming quarters.
  
• Page 5: Automotive leasing revenue to Automotive revenue declined slightly from 1Q16 to 1Q17. I will explore the historical trend in this metric and compare it to those of competitors in a subsequent article.
• Page 5: Research and Development expense as a percentage of Total Revenues dropped significantly from 15.9% in 1Q16 to 11.9% in 1Q17. I expect this line item to be a source of operating leverage in the coming years, but it's not clear at this point how significant this will be in the coming quarters as the company continues to invest heavily in the development of the Model Y and the Tesla Semi. I will explore the historical trend in this metric and compare it to that of Apple during its development of the iPhone and the subsequent ramp-up phase in a separate article.
• Page 5: Noncontrolling interest in subsidiaries, which relates to SolarCity's financing fund arrangements, is often misunderstood, but I do not believe it is as material to Tesla's future as some believe, but nevertheless, I will expand on this subject in a subsequent article.
• Page 6: The change in foreign currency translation adjustment from 1Q16 to 1Q17 was nearly $12 million. The company is exposed to swings in foreign exchange rates, especially in USD:EUR and increasingly so in USD:CNY as the company's revenues in China accelerates. Understanding the company's foreign exchange exposure is important, because the majority of the company's costs are denominated in USD, but an increasing portion of its revenues are denominated in other currencies. As it was a major headache for Apple in 2H14 and in 1H15, a strong dollar can also become a headwind for Tesla as the Fed continues to raise the funds rate.
• Page 7: Amortization of discount on convertible debt increased from $21 million in 1Q16 to $30 million in 1Q17. It is important to note that the amortization of discount on convertible debt (a non-cash expense) comprises the majority of the company's interest expense on recourse debt, which means that the company's cash flow is not being negatively affected by interest payments. On the other hand, however, issuance of convertible debt dilutes the existing shareholders. I expect the company to opt for issuing non-dilutive debt going forward, especially following a successful (i.e. on-time and profitable) ramp-up of the Model 3 in 2H17 and throughout 2018.
  
• Page 8: Vehicle sales to customers with a resale value guarantee exercisable by customers within the next 12 months amounted to $197 million and $180 million as of March 31, 2017 and December 31, 2016, respectively. This program ended as of June 30, 3016.
• Page 8: The company has bulked together energy generation and energy storage businesses in one bucket, which does not lend itself to a meaningful analysis of the operating results of either business segments at this time.
• Page 9: The maximum cash the company could be required to pay under the vehicle sales to leasing partners with a resale value guarantee program was ~$980 million as of March 31. Because of the favorable resale value of Tesla's vehicles, this number is unlikely to be pertinent in calculating Tesla's intrinsic value in the foreseeable future. Readers should note, however, that incumbent car manufacturers will soon be faced with a material issue as used internal-combustion-engine ("ICE") car values are declining at a rapid rate, and these quickly depreciating assets back tens of billions in lease debt on their balance sheets. I will explore this subject further in a subsequent article.
  
• Page 11: The total number of "potentially dilutive shares that were excluded from the computation of diluted net income (loss) per share of common stock attributable to common stockholders because their effect was anti-dilutive" was 12.7 million as of March 31, down from 18.6 million as of December 31, potentially due to the ~$60 per share rise in the stock price in 1Q17. In other words, if the stock price continues to rise substantially, the number of diluted shares outstanding may increase by nearly 13 million shares. This is an important consideration when calculating the market capitalization (i.e. price) of the company.
• Page 11: Tesla's dependence of single-source suppliers continues and comprises a major risk to the upcoming Model 3 ramp-up. Having said this, the company's ability to insource the work done by a major supplier like Mobileye in just six months should be noted. I will explore the potential risk in relying on single-source suppliers during the Model 3 ramp-up in a subsequent article.
• Page 11: Accrued warranty balance increased from $199 million at March 31, 2016, to $307 million at March 31, 2017. The increase in warranty reserve is slightly smaller than what I would have expected given the rate at which Tesla's fleet is growing, but this may also reflect the increasing reliability of Tesla's cars. Warranty expense is an important line item with several significant implications for future results; therefore, I will dig deeper into the historical trend and compare it to those of competitors in subsequent articles.
• Page 12: Recent Accounting Pronouncements section includes that the company's gross U.S. deferred tax assets increased by ~$900 million as a result of the company's adoption of ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, but it was fully offset by a corresponding increase to the company's valuation allowance. A valuation allowance is a balance sheet line item that offsets all or a portion of the value of a company's deferred tax assets because the company doesn't expect it will be able to realize this value (i.e. become profitable in the foreseeable future). Although companies may conservatively choose to record a valuation allowance to fully offset a deferred tax asset, when the company becomes profitable, which I expect in 2H18 for Tesla, the reversal of the valuation allowance may boost the bottom-line earnings.
• Page 13: I am surprised by how reasonable the price tag was on the Grohmann acquisition: ~$110 million in cash and $26 million in contingent payments. For this price, (1) Tesla advanced its capabilities around manufacturing automation, which has the possibility of becoming a sustainable competitive advantage, but also (2) prevented its competitors from benefiting from Grohmann's knowhow. This was a good strategic move by the company.
• Page 13: The purchase price allocation may give us some insight into Grohmann's operations. Of the ~$110 million all-cash purchase price (an additional $26 million contingent payment was immediately expensed when the founder left), the net tangible assets acquired were ~$48 million, the allocation to goodwill (a plug-in figure) was ~$40 million, and only ~$22 million was allocated to intangible assets. Of the $22 million allocated to intangible assets, which may include things like patents, trademarks, and customer relationships, ~15 million was the combined fair value of the technology and software, with useful lives of 10 and 3 years, respectively. The portion of the purchase price attributed to technology/software is smaller than I would have expected, which tells me that the "acquired talent" may have been a more important part of the transaction than I originally thought. People are more difficult to build a moat around than patents/technology/software, as people have the option to leave the company.
• Page 14: Even though Tesla's acquisition of SolarCity was completed on November 21, 2016, fair value adjustments are still being worked through. The company noted: "Fair value adjustments recorded during the measurement period (a period not to exceed 12 months) may have a material impact on our consolidated financial statements," and recorded a $12 million "fair value adjustment" in 1Q17 as a loss to other
  income (expense), "to reduce the gain on acquisition initially recognized in 4Q16." I will keep an eye on this item in future SEC filings.
  
  
• Page 15: The company shows $87 million of acquired in-process research and development ("IPR&D"), which is classified as an indefinite-lived asset
  "until the completion or abandonment of the associated research and development efforts." I need to look further into this to see if the majority of the $87 million relates to the company's efforts to develop full self-driving technology. This is important, because the company then says:
  

The fair value of the IPR&D was estimated using the replacement cost method under the cost approach [...]. We expect to complete the research and development efforts in the second half of 2017, but there can be no assurance that the commercial feasibility will be achieved.

The timing noted above is in-line with management guidance with respect to creating the full self-driving software by the end of 2017.

• Page 15: The company holds all of its cash in money market funds, and uses interest rate swaps to convert variable rate interest payments to fixed rate payments. This is important to note in order to understand the company's exposure to a potential disarray in bond markets.
• Page 16: As of March 31, the carrying and fair values of the company's convertible notes were $3.8 billion and $4.6 billion, respectively. The fair value premium over the carrying value was 20%, up from 8% as of December 31, likely due to the rise in stock price in 1Q17. The hedge fund manager who recently presented at the SOHN conference, Talihapitiya, characterized the convertible notes as a "cost-less call option."
• Page 16: The breakdown of inventories do not yet show a substantial increase in raw materials or work in progress. This is normal as the number of Model 3's produced per week will not comprise a significant portion of total production until after 3Q17. I will keep an eye on this in subsequent quarterly filings.
• Page 17: Property, Plant and Equipment (PP&E), net of Accumulated depreciation and amortization, increased from $6.0 billion at December 31 to $7.0 billion at March 31, as the company continues to build its Gigafactory 1 and Gigafactory 2. The category that primarily drove the increase was Construction in progress, which is primarily comprised of tooling and equipment related to the manufacturing of the company's vehicles at Gigafactory 1 as well as build-to-suit lease costs incurred at Gigafactory 2. I will dig deeper into the company's PP&E, and future cap-ex needs, in subsequent articles.
• Page 18: Consumer Deposits declined from $664 million as of December 31 to $616 million as of March 31. Management had indicated on the last earnings call that the decline was primarily due to lower Model X deposits as the company worked through the Model X order backlog, partially offset by deposits from additional Model 3 reservations, which are increasing "week after week." I expect Consumer Deposits to gradually increase from here on until the Model 3 Final Reveal event in July, followed by a surge above $1 billion in 2H17. $1B in customer deposits would approximate one million Model 3 reservations, which the company will likely not be able to work through until 2019. I will present how I reach my one million Model 3 reservations by end-2017 estimate in a subsequent article.
• Page 19: Convertible and Long-Term Debt Obligations table shows that Tesla's marginal interest rate on recourse debt is ~7-8%, which is reasonable given that the company is essentially a pre-revenue (Model 3) venture capital investment. I expect the company's ability to issue non-dilutive debt at lower interest rates to improve, as the company executes through the Model 3 ramp-up in 2H17 and 2018. Improved access to debt markets is extremely important for the company and its shareholders, because the exponential growth foreshadowed in Elon's Master Plan Part Deux will require tens of billions in capital expenditures over the next five years. Readers should also note that: (1) of the $8.5 billion in total debt, $5.9 billion was recourse (mostly convertible notes) and $2.6 billion was non-recourse (mostly SolarCity related); (2) less than $1 billion was "current" debt (i.e. due within the next 12 months); and (3) the majority of $8.0 billion of debt is due after 2020. Given the cash balance of $4.0 billion at the end of the quarter, tangible assets that back the total debt, management's option to delay the company's exponential growth if need be, the company's favorable gross margins compared to those of its competitors, and the long waiting list for the Model 3, it is reasonable to say that the company is run conservatively from a balance sheet perspective.
• Page 21: At the time of issuance of convertible debt, the company purchases convertible note hedges (effectively call options on the company's stock with a strike price at the conversion price) and sells warrants at a higher stock price, effectively creating a bull spread. This is positive for long-term shareholders who believe the company's stock price will rise significantly in the future, as this hedge reduces the potential dilution from convertible debt as the stock price rises. I will present how this hedge affects the company's valuation in a subsequent article.
• Page 22: The vast majority of the interest expense (~$25 million of the $31 million) is non-cash amortization of debt discount on convertible notes. This is important to note as it has financial modeling implications when estimating the company's future cash flow needs.
• Page 22: The company notes that its stock option and restricted stock unit awards generally vest over up to four years. As of March 31, there were ~17 million shares underlying outstanding equity awards, but 10 million of the 17 million shares were excluded from the computation of diluted net income (loss) per share, because their effect was anti-dilutive. For reference, the company had 164 million shares outstanding as of April 30.
• Page 23: Of the 1.1 million shares underlying the stock option awards to non-CEO employees, three quarters were likely to be vested by 3Q17 as the company completes the first Model 3 production vehicle and achieves aggregate production of 100,000 vehicles in a trailing 12-month period. For the last one quarter of options to vest, the company needs to achieve an annualized gross margin greater than 30.0% for any three-year period, which I do not expect in the foreseeable future.
• Page 23: Of the 5.3 million shares underlying the stock option awards to the CEO, all were likely to be vested by 1Q18 as the company completes the first Model 3 production vehicle and produces the 300 thousandth vehicle.
• Page 24: The company generally allocates ~10%, ~45%, and ~45% stock-based compensation expense in COGS, R&D, and SG&A, respectively.
• Page 24: Commitments and Contingencies section includes further details on the company's build-to-suite lease arrangement in Buffalo, New York. I will dig deeper into this agreement in a subsequent article.
• Page 25-26: I did not note any significant and likely potential liability related to legal proceedings.
• Page 27: As the primary beneficiary of its variable interest entities ("VIE"), which relate to funding and monetization arrangements of its solar energy systems with third-party investors, the company consolidates their results in its financial statements. Investors should note that VIE creditors have no recourse to the company.
• Page 28: As of March 31, the VIE's in aggregate had $4.9 billion in assets (mostly solar energy systems) and $0.9 billion in liabilities (mostly long-term debt). In other words, the liabilities associated with the VIE's are more than covered by the VIEs' assets.
• Page 29: The company's revenue in China more than quadrupled from $120 million in 1Q16, or 10% of total, to $500 million in 1Q17, or 20% of total, essentially doubling the company's overall revenue growth.
• Page 31: The following paragraph is important:

In addition to expanding our vehicle production and deliveries, we expect to continue to lower the cost of manufacturing our vehicles over the next several quarters due to economies of scale, material cost reductions and more efficient manufacturing. The decreasing trend in cost of manufacturing vehicles is expected to improve total automotive gross margin over time and mitigate some of the higher ramp up costs associated with the launch of Model 3. We have achieved cost improvements through material cost reductions from both engineering and commercial actions and increased manufacturing efficiencies including better inventory control over utilization and minimization of scrapping materials. This is also evident through increased product reliability including vehicle, battery and drive units that resulted in a reduction of our warranty expense.

I used to expect Tesla's gross margin to suffer in 2H17 due to the Model 3 ramp-up. I no longer expect Tesla's companywide gross margin to dip below 20% at any quarter going forward, and I expect to rise above 25% in 1H18.

• Page 31: In 1Q17, the company tested sales of solar and storage products in several stores, which saw sales productivity rise by 50% to 100%. This is in-line with management's comments regarding the benefits of the SolarCity acquisition.
• Page 31: The company notes that the Powerpack 2 and Powerwall 2 offer "a significant price advantage per kilowatt-hour and higher energy density." This is likely due to the scale achieved with the Gigafactory. I am also keeping an eye on the bidding process in South Australia, which may conclude in the company's favor if the company truly has a significant price advantage over its competitors.
• Page 31: The company expects to invest $2.0 billion in cap-ex ahead of the start of the Model 3 production in 2017, and expects to make additional investments throughout 2017 as it increases automation and production capacity.
• Page 31: The net book value of Superchargers was ~$215 million for 828 locations. Assuming some accumulated depreciation, the average cost of a Supercharger location may approximate $300 thousand.
• Page 31: The company expects SG&A expenses to continue to increase in absolute amounts but decline over time as a percentage of revenue, and over time, it also expects total operating expenses to decrease as a percentage of revenue. This may mean that operating leverage in the near-term will come primarily from SG&A and secondarily from R&D, as the company ramps up Model 3 production but continues to invest in the development of the Model Y and the Tesla Semi. I will explore how operating leverage had evolved for other high-growth companies in subsequent articles.
• Page 31: The company continues to expect resale prices for its vehicles above resale value guarantees.
• Page 32: The company guides for 1 GW annual production at Gigafactory 2 beginning in 2019. At approximately 10 kW of power per Solar Roof, 1 GW would approximate 100 thousand Solar Roofs in 2019, which is aligned with my forecast of 25 thousand, 50 thousand, and 100 thousand units in 2017, 2018, and 2019, respectively. At $80 thousand ASP and 25% gross margin, this forecast would approximate $8 billion in annual revenue and $2 billion in gross profit, 2019 and beyond, unless the company chooses to expand annual production above 1 GW.
• Page 33: Energy generation and storage revenue increased 840% or $191 million YoY to $214 million in 1Q17, but this was primarily due to the inclusion of revenue from SolarCity of $209 million, partially offset by a decrease in energy storage revenue of $17 million. In other words, energy storage revenue in 1Q17 was a mere $5 million. This is not in-line with Elon's prediction of "super-exponential" growth, but the energy storage business segment is still very new. Nevertheless, I will keep an eye on this in the coming quarters, as my forecast assumes very fast growth in energy storage revenue.
• Page 34: Automotive gross margin, a metric of great interest in the coming quarters, increased from 22.0% in 1Q16 to 24.4% 1Q17. Management has guided for slightly lower gross margin in 2Q17. I expect this metric to improve meaningfully in 2H17 for the Model S and the Model X, as the company focuses on streamlining those production lines, but I expect the improvement in Model S and Model X margins to be more than offset by the Model 3 production ramp-up. I do not, however, expect companywide gross margin to dip below 20% in any future quarter as the Model 3 revenue will not comprise a major part of the company's revenues until after the production exceeds 4,000 per week in October. I will dig deeper into gross margins by product in a subsequent article and explore how the Model 3 ramp-up may affect companywide gross margin.
• Page 35: R&D expense as a percentage of revenue declined from 16% in 1Q16 to 12% in 1Q17. I will dig deeper into the trend over time and compare it to that of Apple in a subsequent article. I will also look into how this percentage evolved throughout the Model X launch and ramp-up.
• Page 35: SG&A expense as a percentage of revenue declined from 28% in 1Q16 to 22% in 1Q17. I expect significant improvement in this metric in 2Q17 and throughout 2H17, as the company streamlines SolarCity operations, and the Model 3 revenue ramps up.
• Page 36: At March 31, the company had $4.0 billion in cash and cash equivalents, which is enough to finance the cap-ex needed to ramp the Model 3 up to 5,000 per week by the end of 2017. I expect the company, however, to increase its production goal for 2018, again, following the Model 3 Final Reveal event in July. If this happens, then the company may revise its $2.0 billion cap-ex guidance for 2017 upward.
• Page 36: As part of its acquisition of SolarCity, the company agreed to spend $5.0 billion in New York during the ten-year period following full production at Gigafactory 2 (i.e. 2019 - 2029). If the Solar Roof sees meaningful consumer adoption, as I expect over the next three years, then the company is likely to significantly exceed the $5.0 billion spending requirement.
• Page 37: Gigafactory 1 cap-ex is expected to be ~$2.0 billion. In 1Q17, the company spent ~$280 million towards Gigafactory construction, and it expects to spend a total of ~$800 million in 2017.
• Page 38: As of quarter-end, the company's largest foreign exposure was from the Japanese yen, USD:JPY. I estimate that this is followed by USD:EUR and USD:CNY. The company stated that:
• ... it is reasonably possible that adverse changes in foreign exchange rates of 10% for all currencies could be experienced in the near-term. These reasonably possible adverse changes were applied to our total monetary assets and liabilities denominated in currencies other than our functional currencies as of March 31, 2017 to compute the adverse impact would have had on our income before income taxes [i.e. EBT]. These changes would have resulted in an adverse impact on our income before income taxes of $16.6 million.
  
  Given that the USD has already strengthened considerably in the last three years, that the recent political turmoil in the US is likely to keep a lid on potential further strengthening in the USD, and that the company's own sensitivity analysis shows less than $17 million pretax for a 10% (significant) adverse simultaneous move in all currencies, I conclude that the company's foreign currency risk is not material at this time. Having said this, I expect the foreign currency risk to increase in the coming years as the company's international revenue continues to grow faster than domestic revenue.
  
  • Page 38: The company uses derivative instruments to convert certain floating-rate debt to fixed-rate, which limits the company's exposure to fluctuations in interest rates. Per management, a hypothetical 10% (significant) change in interest rates would have increased interest expense for 1Q17 by $2.0 million, which is not material.
  • Page 39: In a subsequent article, I will dig deeper into the Legal Proceedings section, which includes some information on ongoing securities litigation as well as litigation related to the SolarCity acquisition. For now, however, readers should note that the company believes that the claims are without merit, and is unable to estimate the possible loss, if any.
  Risk Factors
  
  • Page 40: Because the company's vehicle models share certain production facilities with other models, the volume or efficiency of production with respect to one model may impact the production of other models. This increases the significance, and risks related to, the Model 3 production ramp-up in 2H17.
  • The company's production plan for Model 3 is based on the following key assumptions:
  1. Building and equipping the final assembly line;
  2. Expanding Gigafactory 1;
  3. Ensuring that equipment and processes will produce high volumes of Model 3 with high quality;
  4. Obtaining components from suppliers on a timely basis in the necessary quantities and on acceptable terms;
  5. Completing final tooling, production planning and validation for Model 3 and delivering final component designs to suppliers on time; and
  6. Ensuring the company has enough skilled employees on the production line.
  I have not seen any indication that the company has fallen behind its timeline on any of the key assumptions listed above based on publicly available information. I believe #4 (single-source suppliers) and #6 (potential unionization of employees) pose the highest risks to the Model 3 production ramp-up.
  
  • Page 41: Unique design features introduced by the company, such as a 17-inch display screen, dual motor drivetrain, autopilot hardware falcon-wing doors, may pose unique manufacturing challenges (that may not be foreseeable). The company's recent unfavorable experience with the Model X production ramp-up may have positioned it better for Model 3 production.
  • Page 41: The company repeatedly notes throughout the document that it is "dependent on [its] suppliers, the majority of which are single source suppliers." This is likely the single biggest risk to the Model 3 production ramp-up, and it is one that is very difficult to mitigate, let alone eliminate. I note that the company's proven ability to efficiently insource an outsourced function (as it did with Mobileye) is valuable and an important consideration for long-term investors.
  • Page 44: The company notes that inability to reduce manufacturing costs of Model S and Model X or control manufacturing costs for Model 3 would negatively affect its results, and singles out potential increase in the costs of materials and components, such as lithium-ion battery cells or aluminum used to produce body panels. I will keep an eye on the costs of these materials going forward.
  • Page 45: In further discussing the effect of potentially higher costs for lithium-ion cells, the company notes that it is exposed to fluctuations in JPY:USD as the company's battery cell purchases for Model S and Model X are denominated in Japanese yen. In other words, contradictory to my earlier understanding, while a stronger dollar would lower the value of international revenues, the negative impact could partially be offset by favorable changes in the cost of batteries. As the company builds its next-generation Gigafactories around the world over the coming years, I expect a higher level of natural hedges inherent in the company's operational costs.
  • Page 45: While discussing that its business is dependent on the continued supply of battery cells from a very limited number of suppliers, the company notes that it expects to eventually rely substantially on battery cells manufactured at its own facilities. This is in-line with the company's previously stated strategy of increasing vertical integration going forward.
  • Page 45: In most jurisdictions, the company self-insures against the risk of product liability claims, meaning that any product liability claims will likely have to be paid from company funds, not by insurance.
  • Page 46: In addition to noting that the worldwide automotive market is highly competitive, the company notes that decreases in the retail prices of electricity from utilities or other renewable energy sources could make its products less attractive and lead to an increased rate of customer defaults under its existing leases and power purchase agreements. Readers should note that, although lower electricity prices could potentially lower demand for the company's energy generation products (i.e. solar panels and Solar Roof), this would increase demand for the company's electricity consumption products (i.e. Model S/3/X).
  • Page 47: The company notes the following risk regarding resale value guarantees to customers:
  If we incorrectly estimate the residual values of our vehicles, or the volume of vehicles returned to us is higher than our estimates and/or we are not able to resell them timely or at all, our profitability and/or liquidity could be negatively impacted.
  
  I have noted in Part 1 that I do not foresee this risk to materialize in a major way as the company's products command significantly higher residual values than its competitors' products. The company then goes on, however, to state the following:
  
  In cases where customers retain their vehicles past the guarantee period, our gross margin will be negatively impacted as all remaining revenues and costs related to the vehicle will be recognized at no gross profit.
  
  I do not yet fully understand the accounting behind this, but I will explore the potential impact from customers retaining their vehicles past the guarantee period on the company's gross margins in a subsequent article. Having said that, however, I note that Tesla discontinued this program in July 2016; therefore, I do not expect this to pose a great risk to Tesla's future results.
  
  • Page 47: The company applies lease accounting on (1) sales of vehicles with a resale value guarantee, (2) on leases made directly by the company, or (3) by its leasing partners. The last paragraph on Page 47 makes it clear that a higher than anticipated prevalence of these programs could have an adverse impact on the company's near term revenues and operating results. I will explore the historical trend in automotive leasing revenue as a percentage of total automotive revenue in a subsequent article, but for now, readers should note that this metric has declined to 11.1% in 1Q17 from 12.1% in the year-ago quarter.
  • Page 48: The company lists examples government and economic incentives in the United States and abroad, elimination of which, could have some impact on demand for its products and services. Because the company is not demand-constrained, and unlikely to be in the foreseeable future, I do not expect the potential and eventual elimination of incentives to pose a major threat to the company's competitive position.
  • Page 49: The company is highly dependent on the services of Elon Musk, its CEO, and JB Straubel, its CTO, loss of whom would significantly impact the company's future, and therefore, intrinsic value. This is a very significant risk, which the company cannot eliminate, but even if either of these individuals left the company for any reason, I expect the company would be able to execute through its Model 3 ramp-up, and that its stock may still prove to be a solid long-term investment at its current per-share price.
  • Page 50: The company notes that potential unionization of employees can result in higher employee costs and increased risk of work stoppages. This is one of the headwinds currently facing the company as it approaches what is arguably the most important milestone in its path: Model 3 production ramp-up. I am keeping a close eye on any developments on this.
  • Exhibit 10.7: Deepak Ahuja, who was recently brought back as the company's CFO, was offered a salary of $500,000 per year and an equity award of $15,000,000 of which 25% will be in the form of stock options and the rest in the form of restricted stock units, both subject to vesting schedules.
  • Exhibit 10.8: The Tenth Amendment to the agreement between The Research Foundation For The State University Of New York and Silevo lists the equipment, and its cost, which will be absorbed by the Foundation. I will dig deeper into this agreement and subsequent amendments in a separate article, as this is an important agreement related to Gigafactory 2.
  Bottom Line: The speed and profitability of Model 3 production ramp remain the most important factors in calculating the company's intrinsic value. The company's reliance on single source suppliers is the single biggest risk, in part mitigated by the company's proven ability to insource valuable parts of its supply chain, if need be.
  

 

[vgrinshpun]

But that's basically the same argument used to claim that BLDC is more efficient than induction, yet the Tesla blog explains why that is not necessarily the case. BLDC and PMAC seem to be essentially the same:




Basic Motor Types: PMDC, BLDC, AC Induction, Synchronous and Series DC

So unless there is data showing the PMAC average efficiency is higher than BLDC average efficiency I'd think the points made in the Tesla blog would apply equally to both types.

That is a strange way arriving at a conclusion. It would be much simpler to just google the subject of efficiency of synchronous PM motors vs. induction motors.

As I mentioned, efficiency of synchronous PM motors is higher than efficiency of induction motors, but they are more expensive - that is the main trade off. This is commonly known fact for anybody involved with motors professionally (and that is how I know about it).

You can do your own googling on the subject. Here is what my search turned out:

 

[techmaven]

That is a strange way arriving at a conclusion. It would be much simpler to just google the subject of efficiency of synchronous PM motors vs. induction motors.

As I mentioned, efficiency of synchronous PM motors is higher than efficiency of induction motors, but they are more expensive - that is the main trade off. This is commonly known fact for anybody involved with motors professionally (and that is how I know about it).

Please see this paper:

http://www.parkermotion.com/whitepages/Comparing_AC_and_PM_motors.pdf

They compare PMAC versus Induction in a vehicular application across 3 operating points within a drive cycle. At low speed and high torque situation, the PMAC is far more efficient for the same torque and speed. At high speed, low torque, the PMAC motor looses to the induction motor... they were looking at 4500 rpm. Note that for a Model S/X, 65 mph corresponds to 7,200 rpm.

At low values of torque and high values of speed the induction motor outperforms the PMAC motor. The very low flux density in both the stator and the rotor will keep the total losses to a minimum at this point.

They also compare with different driving modes and in the highway driving mode with a max 65 mph, the AC induction motor setup was within 1% efficiency.

Of course, these is a synthetic approach is not directly comparable to Tesla's induction motors versus other's PMAC motors. This paper used a finite element program to simulate these two motors.

Here's another article discussing ACIM and PMAC:

ACIM, PMAC, PMDC motor efficiency and electric cars

Relevant quote of Eric Persson, Field Applications Director at International Rectifier:

The one thing he did not mention about PMAC motors and on road EV’s is that the efficiency depends on the peak to average power ratio. A "normal" car these days runs about a 10 X peak to cruise power ratio. The eddy current losses of a BLDC/PMAC (whatever the wankers want to call it today) motor are relative to the peak torque. Stronger magnets and more iron = more losses. A single ratio 100kw UNIQ joke (sorry, "motor") makes over 1500 W of waste heat at highway cruising speed, and that’s with the power turned off. Not so good for a car that takes about 15kw to cruise. So if you made a 15 kW PMDC and attached it to a 100 KW Induction for acceleration plus peak you would be golden, but that’s complicated and a bit expensive. Years ago some people suggested and even mocked up a light PM machine with extra windings to beef up the field for higher current. It was a green box visiting all the shows in the mid 90’s. Can’t remember the name now but I’m sure they had a patent or some such. A bit large it was, and surely a bit expensive, but efficiency was in the cards.

As one looks to make a more powerful motor, the PMAC motors will have more losses... at the power levels in a Tesla, they are significantly much more an issue than in lower powered vehicles.

A lot of the articles that explore ACIM versus PMAC do so for low speed, low power applications. The article you referenced, for example, was looking at 2 to 20 hp (15kw) motors, spinning up to 1,800 rpm. That scenario is very different than Tesla and Bolt drive units and those graphs end well before things get interesting in an EV.

 

[ValueAnalyst]

Ford Motor Is Replacing Mark Fields as C.E.O.

BOOM!

I've been saying for more than a year now that Ford is headed for bankruptcy, and we'll if this can change anything.

I doubt it.

 

[dennis]

3. He mentions R&D and SG&A expenses "were all there to support model 3" which is not true. He mentions "building out the Supercharger network, building out the retail stores, doing more R&D on future programs." NONE OF THESE HIT THE INCOME STATEMENT, YET. So these are not reasons for gross profits being more than offset by operating expenses, as he implies. According to Generally Accepted Accounting Principles (GAAP), these expenditures are capitalized on the balance sheet as assets (mostly in Construction-in-progress line item) for now, and will later be depreciated, vastly increasing the company's operating expenses.

Unlike other automotive companies, Tesla does not capitalize R&D expenses. Instead it recognizes them as part of OpEx as they are incurred. This means that R&D for Model Y, Tesla Semi, Solar Roof, etc. are being expensed even though there is no revenue for them as of yet. So they are hitting the income statement.

This accounting treatment is consistent with that of other technology companies and is more conservative than what the automotive companies do since there is no assurance that the current R&D will result in future revenues. OTOH, as compared to traditional automotive companies, this practice ends up overstating Tesla's gross margins and understating net margins assuming R&D expenses are increasing QoQ.