2017 Investor Roundtable: TSLA Market Action

[GoTslaGo]

The total par value of 2018 notes was $660 million; there is only ~$60 MM left. From the 2Q16 10Q "Subsequent to June 30, 2016, we have received additional conversion notices from certain holders of our 2018 Notes which require cash outlays to repay the principal portion of our 2018 Notes. The total amount of notices received to date is for principal value of approximately $411 million, which we expect to pay during the third quarter of 2016." IIRC, the VWAP for that ~$411 MM was a share price of ~$225; par amount was redeemed for cash, hedge parties picked up the layer between an SP of $124.52 and $184.48 and Tesla was on the hook for the difference between $184.48 and VWAP.

"During the three and nine months ended September 30, 2016, we repaid $421.8 million and $435.5 million in aggregate principal amount of our 2018 Notes pursuant to conversions by their holders. As of September 30, 2016, we had remaining outstanding $224.3 million in aggregate principal amount of the 2018 Notes."

So early conversions of 2018 note face values appear to be approximately:
2Q16 $14 MM
3Q16 $422 MM
4Q16 $ 20MM
1Q17 Negligible
2Q17 $145 MM
Total $601 MM with only ~$60 MM unredeemed.

Awesome! Thanks for the break-down of the conversions!

 

[RobStark]

I think there are several small luxury carmakers who would be able to do this, by saying "well, you know we don't make enough volume to build our own Superchargers". Bentley. Rolls Royce. Aston Martin.

They haven't made electric cars yet though.

Perhaps odder is that Rimac hasn't contracted with Tesla.

Bentley is part of the VW Empire.

Rolls Royce is part of the BMW Group.

And Aston,while independent, grows more dependent on Mercedes every day.

They buy their engines, transmissions, and a lot of their high tech electronics from AMG Mercedes.

 

[Reciprocity]

Definitely agree. Isn't this as close to a no brainer as you can get? Since that is a certainty within 16 months, what is the conservative valuation of the company based on that level of production and expected gross margins? I've seen several models presented but they often seem optimistic. If this has already been presented somewhere, please let me know where. Limiting leverage over the next year out of concerns of a possible overdue market correction while this stock runs up big time may be a very expensive lost opportunity. The market will respond to this production certainty a lot sooner than when it actually happens. Most likely within 4 to 6 months. At that point, I believe TSLA will overshoot it's reasonable forward valuation even going out several years. It seems to me that would be the time to reduce leverage.

It is a no brainer for me because per Bob Lutz the Model X was not manufacturable and now they are making over 1000 a week. I get that it is not 10,000 a week, but it was supposed to be utterly impossible. We all know the pains they went through to get where they are today, which is lowering prices and pulling massive demand levers like Free Supercharging and including more options and improving performance in the base model:

Tesla reduces the price of Model X, adds more standard options to performance vehicles

I have zero doubt that they will get to a very high production number per week in 12-18 months and think it could take just 12 months before they are at 10,000 a week. You would have to think that supplier related issues would be worked out in the first few months, I mean either the parts are showing up and not failing or they are not. Supplier problems should not persist for months like they did with the X because there are no FWD or any other crazy item. The car is much easier to manufacture then the S/X which are manufactured at a rate of upwards of 2400/w combined. If the parts are their and quality is good, then its just a matter of working out steps in the production process. We have to remember that this manufacturing process was a prototype and simulation in the computer first. This is what the Audi guy was famous for bringing to Tesla. This puts them in a better place today during the start of the production with less issues to resolve because some were already resolved in the simulation.

Tesla Hires Audi Veteran to Head Vehicle Production

I have faith that Tesla is a much more mature company today then it was in 2015 when the Model X was supposed to a full production. Looking back at the numbers from inside evs:

Monthly Plug-In Sales Scorecard

These are only US deliveries, but they are find when looking at Model X ramp because the vast majority, if not all, would have been US. The X was a nightmare, but only took 6-7 months to get to what would be considered full production, though there were still issues. About 8 months later they built mine and its pretty much flawless. If you compare the Model X ramp to what Elon has stated you will notice the first 3 months Tesla build an average of 6 cars a month. Yes, just 6 cars a month. After that it was 3 months ~200/m before hitting over 1800 in month 7. Tesla is aiming for 30,100, 1,500 for the first 3 months of the model 3. By that point, any parts issues should be resolved and the production line should be coming into shape. Another 3 months should allow them to dial in the production line and ramp to full speed which should be 5000/w. Once they can get to 5000/w, then they can just duplicate the line, or the majority of it, to get to 10,000/w. The duplicated parts of the line should go much smoother. These are all wouilda, coulda, shouldas, but using the model X ramp as a proxy for the worst case scenario still has Model 3 ramping to decent volumes this year.

 

[erthquake]

You would have to think that supplier related issues would be worked out in the first few months, I mean either the parts are showing up and not failing or they are not. Supplier problems should not persist for months like they did with the X because there are no FWD or any other crazy item.

Plus, the big difference now is that Tesla got the A team from top-tier suppliers for the Model 3 instead of the B or C teams from lower quality suppliers.

 

[Reciprocity]

Plus, the big difference now is that Tesla got the A team from top-tier suppliers for the Model 3 instead of the B or C teams from lower quality suppliers.

Great point, but what I was trying to highlight is a pessimistic assessment should still leave investors feeling good about the prospects of a smooth ramp.

 

[MXWing]

Pesky Convertible notes: (from the 10Q):
__________________________________________________
p.53:

Upon conversion of the applicable Tesla Convertible Notes, we will be obligated to make cash payments in respect of the principal amounts thereof, and we may also have to deliver cash and/or shares of our common stock, in respect of the conversion value in excess of such principal amounts on such Tesla Convertible Notes. For example, in June 2017, pursuant to separate privately negotiated agreements, we converted $144.8 million in aggregate principal amount of the 2018 Notes in exchange for 1.2 million shares of our common stock.

p.55:

Transactions relating to our convertible notes may dilute the ownership interest of existing stockholders, or may otherwise depress the price of our common stock.

The conversion of some or all of the Tesla Convertible Notes or the SolarCity Convertible Notes would dilute the ownership interests of existing stockholders to the extent we deliver shares upon conversion of any of such notes. Our 2018 Notes and the SolarCity Convertible Notes have been historically, and the other Tesla Convertible Notes may become in the future, convertible at the option of their holders prior to their scheduled terms under certain circumstances. If holders elect to convert their convertible notes, we could be required to deliver to them a significant number of shares of our common stock. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the convertible notes may encourage short selling by market participants because the conversion of such notes could be used to satisfy short positions, or anticipated conversion of such notes into shares of our common stock could depress the price of our common stock.
_____________________________________________________

And there we have it.

June/July 2017 market action was likely directly affected by these convertibles. Sudden pool of 1.2 million shares in June, I suspect led to the crashing prices in early July (IIRC these 2018 notes are the same notes that were being redeemed at the end of last year, valued around 180 or so. @brian45011 or @neroden , please correct me if I'm wrong).

I suspect @zdriver's dark pool observation just prior to the ER was directly related to the final off-loading of these shares. At their conversion price, pure profit.

Hence the need to know about these convertible notes. They will affect stock prices in the future, IMHO. Likely negatively.

.....ok, back to the 10Q...

I've been searching to no avail but was wondering WHEN convertible bonds can be exercised. I believe the popular 2022 notes had a strike of 327 and we are well past that.

Thanks

 

[GoTslaGo]

I've been searching to no avail but was wondering WHEN convertible bonds can be exercised. I believe the popular 2022 notes had a strike of 327 and we are well past that.

Thanks

I recall the newer notes have a specific time frame when they can be exercised. I'll look as well.

 

[GoTslaGo]

Record of Convertible Bonds: (see page 19 & 20 of the 10Q)

Name..............................UnPaid Balance......................Net Carrying Value..............Interest Rate.......Maturity Date......Conversion Date

...................................................................................Current..........Long-Term.........................................................................................

2018 Notes (161.88).......60170*...............................58482........................................1.5%....................June 2018...........Mar 1, 2018

2019 Notes (467.83).......920000.....................................................847935................0.25%..................March 2019.........Dec 1, 2018

2021 Notes (467.83).......1380000...................................................1158463...............1.25%.................March 2021.........Dec 1, 2020

2022 Notes**(425.75)......977500.....................................................827796................2.375%...............March 2022.........Dec 15, 2021

These I'm not sure of:

2.75% Notes 2018...........230000......................................................217037...............2.75%....................Nov 2018

1.625% Notes 2019.........566000.......................................................497199...............1.625%.................Nov 2019

Zero-coupon 2020...........103000........................................................83909.................0.0%....................Dec 2020

*Unpaid principal balance in Dec 2016 was 205,013

**New since Dec 2016

All others are "unchanged"--their net carrying value had increased since Dec, 2016.

HOW TO INTERPRET:

The notes are named according to their maturity date (2018 Notes= maturity 2018). I have put their conversion share price in parenthesis next to the name. This is the price that as long as the SP stays ABOVE for 20 days within the last 30 days, the note is then able to be converted to shares (usually around 3 shares +/- per note for the later ones, 2018 was much more). Usually in the following quarter. Please note the 2018 Notes are the ones we are seeing move into the market right now.

Tesla has this handy chart now and will put the notes that can be converted into the "Current" side of the chart, and those that cannot into the "Long-term" side of the chart.

I have put the conversion date at the end to show the official date, afterwards that the note can be converted to shares, irregardless of SP.

There are three notes listed at the end of the convertibles that I cannot find record of. Not sure if these maybe from the SCTY merger.

Other Solarcity debts tend to be Non-recourse debts.

 

[GoTslaGo]

To add share equivalence per convertible note:

2018 Notes: 8.0306 shares/$1000 note....approx 660 million borrowed initially = 5,300,196 shares
2019 & 2021 Notes: 2.7788 shares/$1000 note...................2.3 billion borrowed = 6,391,240 shares
2022 Notes: 3.0534 shares/$1000 note..........................977.5 million borrowed = 2,984,698.5 shares

Let's not forget Executive employee and CEO performance shares (p 23/24):

Exec employees = 1,073,000 shares (1/2 have already been met and awarded), next 1/4 will be available with Model 3

CEO = 5,274,901 shares (7/10 have been met, not all awarded yet). But these are not likely to be sold into the general market.

 

[GoTslaGo]

So what to do with this information.

I think the price points of 425.75 and 467.83 will become key price levels to watch (I have to pinch myself for saying this, last year those prices seemed impossible!). We would have to see 20 days in a 30 day period when the price is above those levels. Then one would have to be be wary that these shares would be available the following quarter, and may depress the SP.

FWIW, My fibonacci calculations based on a low price point of 303.13 (current cycle low, Elliott wave 4?):

0.618 ==>$61.8............SP=364.93
1.0 ====>$100.............SP=403.13
1.236==>$123.60.........SP=426.73**

** notice the similarity of this price with the 425.75 conversion price of the 2022 Notes.

 

[Starno]

So what to do with this information.

I think the price points of 425.75 and 467.83 will become key price levels to watch (I have to pinch myself for saying this, last year those prices seemed impossible!). We would have to see 20 days in a 30 day period when the price is above those levels. Then one would have to be be wary that these shares would be available the following quarter, and may depress the SP.

FWIW, My fibonacci calculations based on a low price point of 303.13 (current cycle low, Elliott wave 4?):

0.618 ==>$61.8............SP=364.93
1.0 ====>$100.............SP=403.13
1.236==>$123.60.........SP=426.73**

** notice the similarity of this price with the 425.75 conversion price of the 2022 Notes.

Agree.
Though macro could slow the process down.

 

[GoTslaGo]

Agree.
Though macro could slow the process down.

I was thinking about this.

It may actually be better for Tesla in the short run (this year) if SP does not broach the 425 range. This would prevent the convertible notes from being converted or redeemed. These are the most recent notes. So if SP shoots to the moon, Tesla could be on the hook for covering the 1 billion borrowed early this year... the last half of the year... or more likely just let the shares be converted. The share conversion would depress the prices and hopefully prevent the 467's from being converted (a much larger number). By next year, with the Model 3 at full run rate this will be less of an issue.

The 2019's would almost definitely convert if the sp gets high enough. The interest rate on those are only 0.5%. Likely conversion of the 2021 as well, only 1.25%. This would be a hard conversion given how much and how many shares are at stake.

At least the most recent notes (425) are 2.375%, which may convince those holders to keep the notes... for now. Last I checked 10 year T-note is 2.26% or so.

 

[ValueAnalyst]

To add share equivalence per convertible note:

2018 Notes: 8.0306 shares/$1000 note....approx 660 million borrowed initially = 5,300,196 shares
2019 & 2021 Notes: 2.7788 shares/$1000 note...................2.3 billion borrowed = 6,391,240 shares
2022 Notes: 3.0534 shares/$1000 note..........................977.5 million borrowed = 2,984,698.5 shares

Let's not forget Executive employee and CEO performance shares (p 23/24):

Exec employees = 1,073,000 shares (1/2 have already been met and awarded), next 1/4 will be available with Model 3

CEO = 5,274,901 shares (7/10 have been met, not all awarded yet). But these are not likely to be sold into the general market.

I estimate future enterprise value, use 200m shares, and call it a day. I don't think the number of shares outstanding will ever exceed that number.

Where's the you called it thread?

 

[ValueAnalyst]

I will gladly give VA that first dividend if it comes before 2020.

We need a new thread for me to keep track of all the dividend checks and shares coming my way.

 

[Wenche]

From the only non commercial norwegian broadcaster, NRK:
Vidar Helgesen fikk se den nye Teslaen
The norwegian Minister of Climate and Environment, Vidar Helgesen, visited Tesla between 31.st july and 3.rd august. He was given a personal guided tour of the factory, and the journalist that followed, was not allowed to join. The report from the journalist says that Teslas goal of sales is 250k cars for 2017. I have sent a message to both the Minister and the journalist, to find out where this number came from.

 

[ValueAnalyst]

I was thinking about this.

It may actually be better for Tesla in the short run (this year) if SP does not broach the 425 range. This would prevent the convertible notes from being converted or redeemed. These are the most recent notes. So if SP shoots to the moon, Tesla could be on the hook for covering the 1 billion borrowed early this year... the last half of the year... or more likely just let the shares be converted. The share conversion would depress the prices and hopefully prevent the 467's from being converted (a much larger number). By next year, with the Model 3 at full run rate this will be less of an issue.

The 2019's would almost definitely convert if the sp gets high enough. The interest rate on those are only 0.5%. Likely conversion of the 2021 as well, only 1.25%. This would be a hard conversion given how much and how many shares are at stake.

At least the most recent notes (425) are 2.375%, which may convince those holders to keep the notes... for now. Last I checked 10 year T-note is 2.26% or so.

You probably know what I think about the chances of SP not breaching $425 by 2019...

Good thing Tesla has taken steps to limit dilution from these converts.

 

[ValueAnalyst]

From the only non commercial norwegian broadcaster, NRK:
Vidar Helgesen fikk se den nye Teslaen
The norwegian Minister of Climate and Environment, Vidar Helgesen, visited Tesla between 31.st july and 3.rd august. He was given a personal guided tour of the factory, and the journalist that followed, was not allowed to join. The report from the journalist says that Teslas goal of sales is 250k cars for 2017. I have sent a message to both the Minister and the journalist, to find out where this number came from.

Do the numbers 150k and 250k sound similar in Norwegian?

 

[Alketi]

From the only non commercial norwegian broadcaster, NRK:
Vidar Helgesen fikk se den nye Teslaen
The norwegian Minister of Climate and Environment, Vidar Helgesen, visited Tesla between 31.st july and 3.rd august. He was given a personal guided tour of the factory, and the journalist that followed, was not allowed to join. The report from the journalist says that Teslas goal of sales is 250k cars for 2017. I have sent a message to both the Minister and the journalist, to find out where this number came from.

Would be awesome, but not possible.

100K S/X.

Model 3 @5K / week * 30 weeks = 150K

Except there aren't even 30 weeks left in the year. And Tesla is nowhere near 5K cars / week.

 

[EinSV]

From the only non commercial norwegian broadcaster, NRK:
Vidar Helgesen fikk se den nye Teslaen
The norwegian Minister of Climate and Environment, Vidar Helgesen, visited Tesla between 31.st july and 3.rd august. He was given a personal guided tour of the factory, and the journalist that followed, was not allowed to join. The report from the journalist says that Teslas goal of sales is 250k cars for 2017. I have sent a message to both the Minister and the journalist, to find out where this number came from.

Probably confused target end of 2017 Model 3 production rate (5K/wk or 250K/year) with actual 2017 production.

 

[GoTslaGo]

You probably know what I think about the chances of SP not breaching $425 by 2019...

Good thing Tesla has taken steps to limit dilution from these converts.

I do think Tesla will be above 425 by 2019. I think Tesla will get to 425 this year. I am hoping that the holders of those convertibles will be happy with the interest rate, and not opt to convert or redeem.

IMHO, the 467 price point will be easily hit next year once Model 3 is up to speed, TSLA becomes GAAP+, and gets included into the SP500. At that point the 2019 and 2021 notes will start to be redeemed/converted (approx 6 million shares). That will keep prices from getting too far from that point. Once those shares are mostly converted/played out, that's when we will see 500+.

It's all supply and demand. I suspect the smart/large shorts know this (or know the players who are thinking of redeeming/converting) and play upon the excess shares that will likely be coming onto the market.