2017 Investor Roundtable: TSLA Market Action

[ValueAnalyst]

Tesla certainly has a problem in terms of Demand being 10x greater then Supply. Its a good problem to have, but solving this problem will be what separates the men from the boyz, or women from the girlz if that suits you better.

VA's thought is not completely out the question. The reason being that its going to take a lot of time to find/build a factory and put in things like stamping presses that already exist in Fremont. In theory, they could build what VA is alluding to in any large building with parts from Fremont to facilitate the alpha/beta and RC process as well as some of the initial production ramp issues WHILE they build the actual manufacturing facility and install the $50 Million stamping presses. Ideally this new temporary facility would be close to Fremont and could even be a new building on the same campus. This would allow them to shorten the time to market because they do not have wait until the new factory is completely built out to start building release candidates. New robots go to the new facility and are installed based on what was learned on the prototype line. This would speed that part of the ramp.

The prototype line can then be re-purposed for the Tesla Truck or Roadster or some other vehicle.

Thank you for the explanation. I agree.

I also note that during the 1Q17 earnings call, management guided for end-19 for Model Y production, and in the most recent call, "a lot sooner" after changing back to using Model 3 platform to build it.

"A lot sooner" can't be only one month, and where can they possibly build the RC and initial few hundred cars in early-19? It has to be Fremont. He has even said previously that it can potentially ramp up to 1m/year although not advisable.

 

[surfside]

Alright guys, here is my speculation (not that I was much right in the past).

I work in the periphery of the bond markets. My prediction is that the bonds will get priced very favorably. Based on standard ratings, the bonds would be so called non-investment grade. However, the debt market has been very hot for a few years now, thanks to near infinite liquidity by central banks around the world. Per my estimation the bonds will get priced around 5% coupon.

Secondly, I believe there will be an unexpected amount of demand for these bonds. Globally there are 100s of billions of $s looking for so called green investments. They generally look for bonds (as opposed to equity). Don't have references handy but you can search them up. I see no issue of these bonds taken up what so ever. Pricing might even come in better than expected as well.

Roadshow is Aug 7 to 10. I think either 10th evening or 11th pricing comes out. My speculation is that the stock will rally hard on the news.

Agreed @SBenson re: your prediction of the rough coupon in the ~5% range. Personally, I'm pleased to see they aren't issuing convertible bonds again; no dilution is just one reason. Other benefits include the fact that the convertible bond market isn't nearly as deep as the high yield bond market, and in a downturn, access to convertible bonds dries up much quicker than the high yield market. In addition, buyers of converts are 50-60% hedge funds, whereas buyers of high yield paper are more traditional fixed income investors (e.g. Insurance companies, pension funds, etc). The fact that the high yield market is now open to Tesla is a reflection of confidence in Tesla's future by the bond markets, which is a very good thing, particularly for future capital needs. And given this market looks at debt to EBITDA as a primary metric, Tesla will have significantly increased access to debt capital in the near term as EBITDA grows via the Model 3 ramp.

Just a couple other thoughts (I'm also involved in the periphery of the public bond markets)...

surfside

 

[ValueAnalyst]

Alright guys, here is my speculation (not that I was much right in the past).

I work in the periphery of the bond markets. My prediction is that the bonds will get priced very favorably. Based on standard ratings, the bonds would be so called non-investment grade. However, the debt market has been very hot for a few years now, thanks to near infinite liquidity by central banks around the world. Per my estimation the bonds will get priced around 5% coupon.

Secondly, I believe there will be an unexpected amount of demand for these bonds. Globally there are 100s of billions of $s looking for so called green investments. They generally look for bonds (as opposed to equity). Don't have references handy but you can search them up. I see no issue of these bonds taken up what so ever. Pricing might even come in better than expected as well.

Roadshow is Aug 7 to 10. I think either 10th evening or 11th pricing comes out. My speculation is that the stock will rally hard on the news.

That would be awesome. At that rate Tesla should sell all they can!

Agreed @SBenson re: your prediction of the rough coupon in the ~5% range. Personally, I'm pleased to see they aren't issuing convertible bonds again; no dilution is just one reason. Other benefits include the fact that the convertible bond market isn't nearly as deep as the high yield bond market, and in a downturn, access to convertible bonds dries up much quicker than the high yield market. In addition, buyers of converts are 50-60% hedge funds, whereas buyers of high yield paper are more traditional fixed income investors (e.g. Insurance companies, pension funds, etc). The fact that the high yield market is now open to Tesla is a reflection of confidence in Tesla's future by the bond markets, which is a very good thing, particularly for future capital needs. And given this market looks at debt to EBITDA as a primary metric, Tesla will have significantly increased access to debt capital in the near term as EBITDA grows via the Model 3 ramp.

Just a couple other thoughts (I'm also involved in the periphery of the public bond markets)...

surfside

It's pretty amazing how quickly the narrative for additional debt changed in just 24 hours... People are coming out of the woodwork with optimistic projections

 

[Alketi]

There are realistically only 3 places the Model Y production line can be built:

1. Fremont
2. Gigafactory #1 (Nevada)
3. Future Gigafactory

Fremont has all the expertise in-house, but is too space constrained, parking constrained, and paint-shop constrained.

The Nevada Gigafactory has plenty of space remaining, but would represent a departure of plans, potentially impact battery projections, and has unknown auto talent.

A future Gigafactory geared for both production and batteries would seem to be the most logical. Musk already said that they're paying tremendous freight costs to move battery packs and drive units from Nevada to Fremont. Consolidating this all to one location is absurdly obvious.

The question is when and where? To hit an early to mid 2019 launch they'd have to break ground end of 2017 or early 2018.

 

[GoTslaGo]

Alright guys, here is my speculation (not that I was much right in the past).

I work in the periphery of the bond markets. My prediction is that the bonds will get priced very favorably. Based on standard ratings, the bonds would be so called non-investment grade. However, the debt market has been very hot for a few years now, thanks to near infinite liquidity by central banks around the world. Per my estimation the bonds will get priced around 5% coupon.

Secondly, I believe there will be an unexpected amount of demand for these bonds. Globally there are 100s of billions of $s looking for so called green investments. They generally look for bonds (as opposed to equity). Don't have references handy but you can search them up. I see no issue of these bonds taken up what so ever. Pricing might even come in better than expected as well.

Roadshow is Aug 7 to 10. I think either 10th evening or 11th pricing comes out. My speculation is that the stock will rally hard on the news.

Agreed @SBenson re: your prediction of the rough coupon in the ~5% range. Personally, I'm pleased to see they aren't issuing convertible bonds again; no dilution is just one reason. Other benefits include the fact that the convertible bond market isn't nearly as deep as the high yield bond market, and in a downturn, access to convertible bonds dries up much quicker than the high yield market. In addition, buyers of converts are 50-60% hedge funds, whereas buyers of high yield paper are more traditional fixed income investors (e.g. Insurance companies, pension funds, etc). The fact that the high yield market is now open to Tesla is a reflection of confidence in Tesla's future by the bond markets, which is a very good thing, particularly for future capital needs. And given this market looks at debt to EBITDA as a primary metric, Tesla will have significantly increased access to debt capital in the near term as EBITDA grows via the Model 3 ramp.

Just a couple other thoughts (I'm also involved in the periphery of the public bond markets)...

surfside

Just checked with a friend of mine who also is "involved in the periphery of the bond markets"...His reply:

"5% interest!"

 

[EinSV]

Thank you for the explanation. I agree.

I also note that during the 1Q17 earnings call, management guided for end-19 for Model Y production, and in the most recent call, "a lot sooner" after changing back to using Model 3 platform to build it.

"A lot sooner" can't be only one month, and where can they possibly build the RC and initial few hundred cars in early-19? It has to be Fremont. He has even said previously that it can potentially ramp up to 1m/year although not advisable.

Slight nitpick: Elon did not say that the changes to Model Y would allow them to bring it to market "a lot sooner," he said "faster":

And -- oh and one thing I wanted to correct. I think in a prior call, publicly I had said that Model Y or our compact SUV, which is called Model Y, may or may not be -- would be totally architecture. I've gone -- I've decided -- well, upon the counsel of my executive team, thank you, thank you, thanks, guys, who reeled me back from the Cliffs of Insanity, much appreciated, the Model Y will, in fact, be using a substantial carryover from Model 3 in order to bring it to market faster. Yes. So that will really accelerate our ability to get Model Y to market faster for -- because it's fundamentally to -- you have people who prefer a sedan, people who prefer an SUV and, in fact, the SUV market is larger which is the biggest single [proximity] I believe in the world.

Edited Transcript of TSLA earnings conference call or presentation 2-Aug-17 9:30pm GMT

IMO, the ability to get Model Y to market faster could mean one month earlier than previously planned, it could mean six months, or it could simply mean they are more likely to hit their earlier schedule estimate (2020, or perhaps late 2019). We don't really know yet.

Personally I'm penciling in late 2019 until we hear more from Tesla. It could be a little earlier if the Model 3 ramp goes smoothly and they can build the Model Y factory and production line fast enough.

 

[elasalle]

There are realistically only 3 places the Model Y production line can be built:

1. Fremont
2. Gigafactory #1 (Nevada)
3. Future Gigafactory

Fremont has all the expertise in-house, but is too space constrained, parking constrained, and paint-shop constrained.

The Nevada Gigafactory has plenty of space remaining, but would represent a departure of plans, potentially impact battery projections, and has unknown auto talent.

A future Gigafactory geared for both production and batteries would seem to be the most logical. Musk already said that they're paying tremendous freight costs to move battery packs and drive units from Nevada to Fremont. Consolidating this all to one location is absurdly obvious.

The question is when and where? To hit an early to mid 2019 launch they'd have to break ground end of 2017 or early 2018.

If next GF is in China(or Europe), then one can assume that part of M3 volume will be from there. if this happens and also since Model Y is going to be based on Model 3 - It will likely free up some Fremont capacity for ModelY

 

[dakh]

I have a similar but slightly different take.

It makes sense to expedite the Model Y, because it'll be in greater world-wide demand than the 3, but it doesn't make sense to talk about it or promote it too soon.

To put it bluntly, Tesla would rather have someone buy a Model 3 for a year, then sell it to buy a Model Y, rather than just have them wait and only buy a Model Y.

So, I'd be surprised if we see an early Model Y reveal event that implies a 2+ year lead time vs. a 1+ year Model 3 reservation time. I think Tesla will instead go guns blazing with a secretive 6-12 month Model Y reveal to production.

Not to veer off the market action topic, but please don't forget the way this company is being run. Tesla wants to open up a gap in the ability to design and manufacture vehicles to the rest of the automotive industry. Model Y will be the first vehicle that will demonstrate that gap, which is achieved by designing the manufacturing process and the vehicle itself together with an eye on drastically increasing factory throughput. Whenever they are done figuring out how to do this, they'll start making the factory and then Model Y. We can't predict at this point how long will that take but I highly doubt there will be many tactical compromises made to achieve the long term goal. Bottom line, I don't think this is should show p in the market action thread for a while now.

 

[EinSV]

If next GF is in China(or Europe), then one can assume that part of M3 volume will be from there. if this happens and also since Model Y is going to be based on Model 3 - It will likely free up some Fremont capacity for ModelY

They said on a call earlier this year that Model Y would be produced at a new factory with batteries from GF 1. While theoretically that could change I think given the demand for the 3 and Y the most straightforward solution is to stick with the original plan and build a new US factory for the Y and have the GFs in China and Europe produce both 3 and Y (and at least in China probably S/X too). But there are a lot of moving parts so hard to know for sure ....

 

[neroden]

Just checked with a friend of mine who also is "involved in the periphery of the bond markets"...His reply:

"5% interest!"

OK, thanks to three of you confirming that 5% is the most likely coupon rate!

That's actually a very good deal for Tesla for an *8 year bond*. (I did manage to find confirmation that it was an 8-year bond.) Especially if interest rates go up, as they might. That's only 2.7% over the 10-year T-bond rate. If interest rates go up, it's going to look like a total steal. At those prices, I'm almost surprised Tesla isn't issuing more (though I guess they can issue more in January).

There's a LOT of bookrunners on the deal -- seven. Every investment bank wanted in, I guess.
http://www.nasdaq.com/article/tesla-announces-plan-for-us15bn-bond-20170807-00493

 

[MitchJi]

"A lot sooner" can't be only one month, and where can they possibly build the RC and initial few hundred cars in early-19? It has to be Fremont. He has even said previously that it can potentially ramp up to 1m/year although not advisable.

Of course they can build the release candidates anywhere. But they are not going to build production MY's on a temporary mini production line, either at Fremont or anywhere else.

If it's either at Fremont or it's not happening then it's not happening. Another alternative is that they could produce MY's at either the existing Gigafactory or a new one.

 

[30seconds]

Agreed @SBenson re: your prediction of the rough coupon in the ~5% range. Personally, I'm pleased to see they aren't issuing convertible bonds again; no dilution is just one reason. Other benefits include the fact that the convertible bond market isn't nearly as deep as the high yield bond market, and in a downturn, access to convertible bonds dries up much quicker than the high yield market. In addition, buyers of converts are 50-60% hedge funds, whereas buyers of high yield paper are more traditional fixed income investors (e.g. Insurance companies, pension funds, etc). The fact that the high yield market is now open to Tesla is a reflection of confidence in Tesla's future by the bond markets, which is a very good thing, particularly for future capital needs. And given this market looks at debt to EBITDA as a primary metric, Tesla will have significantly increased access to debt capital in the near term as EBITDA grows via the Model 3 ramp.

Just a couple other thoughts (I'm also involved in the periphery of the public bond markets)...

surfside

Convertibles also drive short interest as the convertible holders have incentives to move equity prices. So more benefit to doing straight bond offering

 

[MitchJi]

They said on a call earlier this year that Model Y would be produced at a new factory with batteries from GF 1. While theoretically that could change I think given the demand for the 3 and Y the most straightforward solution is to stick with the original plan and build a new US factory Gigafactory for the Y and have the GFs in China and Europe produce both 3 and (and at least in China probably S/X too). But there are a lot of moving parts so hard to know for sure ....

Are you sure that they said that?

I agree that they eventually are planning to build Gigafactories with M3 and MY production lines in China and Europe at least.

I believe that it would make more sense if they don't build the MY in Nevada to build them at a new Gigafactory. They only need one one battery module to get started. It might make sense to build the semi's in the same location.

 

[mmd]

New York, August 07, 2017 -- Moody's Investors Service assigned a B2 Corporate Family Rating (CFR) to Tesla, Inc., and also assigned a B3 rating to the company's offering of senior unsecured notes. The company's Speculative Grade Liquidity is SGL-3, and the rating outlook is stable.

Moody's assigns B2 CFR to Tesla, B3 to unsecured notes; outlook is stable

The assumptions made by Moody's is mind boggling. 300k Model 3 sold in 2018 at 25% GM? By Tesla's own plan of staggered launch of the long range, base and AWD options, that target is a near impossibility.
Elon also didn't say 25% GM for Model 3 in 2018. It is an aspirational GM goal that may be achieved sometime in the future.

But we can't blame them for not using any grain of salt when Tesla is pushing hard on spreading the hyperboles. Yahoo video headline news today says "Tesla is averaging 1800 model 3 a day since its launch in late July" !

Edit: Corrected 350k in 2018 to 300k in 2018.

 

[EinSV]

I believe that it would make more sense if they don't build the MY in Nevada to build them at a new Gigafactory. They only need one one battery module to get started. It might make sense to build the semi's in the same location.

Possibly, but Elon said at the shareholder meeting in June that (1) Model Y would not be built at Fremont and (2) the Model Y batteries and drivetrains would be sourced from GF1 (transcript excerpt is below).

So I think most likely there will be a separate Model Y factory that does not produce batteries/drivetrains -- essentially another Fremont but for Model Y. Given the huge batteries likely needed for Tesla Semi and Pickups I expect a full new GF somewhere in "truck country," which may also produce TE products.

But with so many balls in the air this is all subject to change -- hopefully we'll learn more later this year.

Are you expecting a new plan[t] to be built for the Model, yes, we are. I think the existing Gigafactory will probably supply the bat – will in fact, will supply the battery pack and drivetrains and motor and power electronics for the Model Y. But the Model Y vehicle plant will be a new plant, essentially a new Gigafactory that we are going to figure out the exact location of. But there is just no room at Fremont. We are bursting at the seams. I will say like, if you ask me like what’s their number one complaint, it’s parking. It’s like okay, we like practically had a riot the other day for parking. And I am like, sorry guys. What happens, we had a bunch of contractors come on site to install equipment for the Model 3 and we haven’t counted on the fact that there will be 500 extra people that showed up to install massive amounts of equipment, okay. Well, probably the parking lot was full. So therefore, it’s like a conservation of mass, conservation of volume as there is 500 people who can’t park. Anyway, it’s crazy how much parking lot is bringing about. So we are bursting at the seams at Fremont. So there is no way we could do Model Y at Fremont, it’s going to have to be somewhere else. And I think Fremont is just going to be focused on obviously S and X and then ramping up Model 3. I think we even have to transfer some of the things we do at Fremont to the Gigafactory just to allow for Model 3 expansion.

Tesla Motors' (TSLA) CEO Elon Musk Hosts Annual Shareholders Meeting Conference (Transcript) | Seeking Alpha

 

[vgrinshpun]

The assumptions made by Moody's is mind boggling. 350k Model 3 sold in 2018? By Tesla's own plan of staggered launch of the long range, base and AWD options, that target is a near impossibility.

But we can't blame them for not using any grain of salt when Tesla is pushing hard on spreading the hyperboles. Yahoo video headline news today says "Tesla is averaging 1800 model 3 a day since its launch in late July" !

You are misquoting assumptions made by Moody. From the link:

The B2 CFR reflects Moody's expectation that the launch, production ramp up, and market acceptance of the Model 3 will be successful enough to achieve approximately 300,000 unit sales during 2018 (a full-year sales rate averaging about 5,500 per week) with a gross margin approximating 25%.

 

[MP3Mike]

Possibly, but Elon said at the shareholder meeting in June that (1) Model Y would not be built at Fremont and (2) the Model Y batteries and drivetrains would be sourced from GF1 (transcript excerpt is below).

But when he said that the Model Y was going to be a completely different platform than the Model 3. So with the recent change to using the same platform for both they could run both 3 and Y down the same production line. Sure they wouldn't be making more cars at that point, there would just be more choice. But it would for sure get the Model Y to production sooner.

 

[neroden]

No, they're absolutely not going to use the same production line for Model Y and Model 3. More variations on the line == slower production.

They may be using some of the same *parts*.

 

[Curt Renz]

There are realistically only 3 places the Model Y production line can be built:

1. Fremont
2. Gigafactory #1 (Nevada)
3. Future Gigafactory

Fremont has all the expertise in-house, but is too space constrained, parking constrained, and paint-shop constrained.

The Nevada Gigafactory has plenty of space remaining, but would represent a departure of plans, potentially impact battery projections, and has unknown auto talent.

A future Gigafactory geared for both production and batteries would seem to be the most logical. Musk already said that they're paying tremendous freight costs to move battery packs and drive units from Nevada to Fremont. Consolidating this all to one location is absurdly obvious.

The question is when and where? To hit an early to mid 2019 launch they'd have to break ground end of 2017 or early 2018.

Perhaps in the Midwest: Smallest SUVs most popular in US Midwest, less so in west, south

 

[EinSV]

But when he said that the Model Y was going to be a completely different platform than the Model 3. So with the recent change to using the same platform for both they could run both 3 and Y down the same production line. Sure they wouldn't be making more cars at that point, there would just be more choice. But it would for sure get the Model Y to production sooner.

It's true that this statement was made when plans were for a completely separate Y build. But there is also the problem of Fremont already bursting at the seams and no room for Y production. So I could be wrong but IMO a separate factory that produces the Y using GF1 drivetrains and batteries is still the most likely plan.

My assumption is that European and Chinese GFs would produce both 3 and Y, including batteries and drivetrains, plus TE products, etc.