2017Q1 results

[surfside]

i think something is wrong with that ubs estimate. either i did something wrong or some other error exists. it just doesn't make sense with how negative they are on the price target. the guy has the highest net income excluding nci's and the lowest price target!

I just double checked the numbers, and they are right: -0.39 GAAP 1Q2017 EPS after taking into account NCI's. Their full year GAAP EPS for 2017 is -2.90 based on -477 of GAAP net income after 338 of NCI's (full year GAAP net income of -815 before NCI's).

surfside

 

[moe.salih]

luvb2b's estimates (average case) in context. Looks pretty good

 

[DaveT]

@luvb2b and others

1. What's your estimate as to how many cars delivered in Q4 had the AP 2.0 hardware? I'm curious because it appears that Tesla didn't realize AP 2.0 revenue in Q4, so a good portion of that would be recognized in Q1 (note: from Q4 shareholder letter, "despite continued strong demand for Autopilot, we recognized almost no new Autopilot-related revenue in Q4, as software updates were delayed until Q1").

2. On March 31, 2016 how complete was AP 2.0 features? In other words, what % of AP 2.0 revenue could they realize?

3. Any evidence for or against Tesla's ability to sell substantial ZEV credits in Q1 (vs being delayed into Q2)?

4. Curious to hear what you think the impact of aggressive Supercharger expansion plans on Tesla's profitability over the next few quarters, if any.

 

[DaveT]

On #1: 22,200 cars delivered in Q4 2016. 6,450 cars in transit at end of quarter... so I assume all of those have AP 2.0 hardware. AP 2.0 hardware announced Oct 19, 2016 with announcement that Model S/X being produced now with new AP 2.0 hardware. So, I'll assume that Tesla produced cars with AP 2.0 hardware for the last 6 weeks of the year... with an average production rate of 2k/week. So, 12,000 AP 2.0 cars produced in Q4, but of those 6,450 were in transit. But let's round up the cars delivered in Q4 with AP 2.0 hardware from 5,550 to 6,000 because 1) I like round numbers, 2) it's possible that Tesla ramped production faster in December.

Out of 6,000 cars, what percent of buyers paid for AP 2.0 features? My guess is 75-80%.

If there was an 80% take-rate on AP 2.0 features for the 6k cars delivered w/AP 2.0 hardware in Q4, then that's 4800 cars x $5000 (for enhanced autopilot). That's If that's the case, then $24M that Tesla didn't realize in Q4 due to AP 2.0 features not being complete.

On #2: How complete was AP 2.0 features on March 31, 2016? My guess would be 75%. I'd love to hear if anyone has some better guesses on this and why.

So, in Q1 Tesla would be able to realize 75% of the AP 2.0 revenue in Q4 ($24M). That would be $18M of extra revenue booked in Q1.

Question: Did Tesla book the cost of revenue for AP 2.0 hardware in Q4 for the 4,800 cars or so cars? Or is that cost of revenue booked when revenue is booked?

In Q1, we know Tesla delivered 25k cars. Let's say AP 2.0 take-rate of 80%, means 20k cars x $5k. That's $100M.

But if AP 2.0 is only 75% complete at end of Q1, then they're only able to book $75M (out of $100M). But good news is that they're able to book $18M from Q4.

So, while in Q4, gross margin and profits were hit substantially because they couldn't book AP 2.0 revenue, in Q1 there won't be that hit.

In Q2 however, we'll likely see extra revenue because Tesla will likely complete AP 2.0 features and will be able to book the extra 25% AP 2.0 revenue from Q4 and Q1 cars.

So overall in Q1, it's as if they're booking full AP 2.0 revenue for all cars in Q1. 26k cars x $1250 = $32.5M revenue additionally booked in Q2. This is likely going to help in any effort to be profitable in Q2.

So, if Tesla is able to show GAAP profits in Q1 next week... then they're going to have additional help (in the amount of $32.5M) to help reach profitability in Q2.

 

[luvb2b]

@DaveT where are you on your earnings estimate? gaap/non-gaap etc.? or are you punting this quarter due to solarcity messing it up? answers as best as i know them below:

1. a few pages back there was a good discussion on the ap2 and revenue recognition. i think it was in this thread and @neroden that had the discussion on how partial revenue is recognized, and then someone else chimed in on how many cars etc. if i ballpark the math, it was like this:
35,000 vehicles sold in q4+q1 x 70% take rate = 24,500 with ap
24,500 x 5000 = 122.5m in revenue to be realized for ap
assume 30-40% is recognized this quarter. i used 44m as the total.

2. it's a guess of course but i would say it's definitely less than 50% complete, i used more like 35%. could be even lower than that.

3. @racer26 and others have better handles on it than me. my best edge comes from knowing they spend a lot of time thinking about that shareholder letter and q4 the letter very specifically guides gaap and non-gaap margins to q3 2016 levels. that quarter there was a 5% difference between gaap/non-gaap margins. the only variable between gaap and non-gaap auto gross margin is zev credits. so i take guidance to imply that a meaningful number of zev credits will get sold. i think in the general thread @racer26 and others estimated that as many as 140m in credits would be available for sale.

4. supercharger expansion is primarily capex, so it would expense through depreciation and therefore large spending would have limited impact (assuming for example a 10 year useful life and straight-line depreciation, $1b spent on supercharger expansion adds 25m/quarter of depreciation expense). this is for the next quarter or two. beyond that you'd have additional o&m expenses. i'm sure they had included this in their spending plans, it's sort of a no-brainer when you'll have 500k vehicles on the road and people have to pay for supercharging. the revenue from supercharging will help offset the expenses, maybe even more than offset expenses.

@luvb2b and others

1. What's your estimate as to how many cars delivered in Q4 had the AP 2.0 hardware? I'm curious because it appears that Tesla didn't realize AP 2.0 revenue in Q4, so a good portion of that would be recognized in Q1 (note: from Q4 shareholder letter, "despite continued strong demand for Autopilot, we recognized almost no new Autopilot-related revenue in Q4, as software updates were delayed until Q1").

2. On March 31, 2016 how compete was AP 2.0 features? In other words, what % of AP 2.0 revenue could they realize?

3. Any evidence for or against Tesla's ability to sell substantial ZEV credits in Q1 (vs being delayed into Q2)?

4. Curious to hear what you think the impact of aggressive Supercharger expansion plans on Tesla's profitability over the next few quarters, if any.

 

[luvb2b]

nice work @DaveT !
this is broadly the logic that the group applied in helping me. you're quite a bit more aggressive than me recognizing ap revenue, but the general idea is it's a solid boost toward profitability on the order of 20-40c gaap. i'm assuming of course that they already realized most of the costs through other line items and/or the gross margin on ap is 95%ish as it is for software in general.

On #1: 22,200 cars delivered in Q4 2016. 6,450 cars in transit at end of quarter... so I assume all of those have AP 2.0 hardware. AP 2.0 hardware announced Oct 19, 2016 with announcement that Model S/X being produced now with new AP 2.0 hardware. So, I'll assume that Tesla produced cars with AP 2.0 hardware for the last 6 weeks of the year... with an average production rate of 2k/week. So, 12,000 AP 2.0 cars produced in Q4, but of those 6,450 were in transit. But let's round up the cars delivered in Q4 with AP 2.0 hardware from 5,550 to 6,000 because 1) I like round numbers, 2) it's possible that Tesla ramped production faster in December.

Out of 6,000 cars, what percent of buyers paid for AP 2.0 features? My guess is 75-80%.

If there was an 80% take-rate on AP 2.0 features for the 6k cars delivered w/AP 2.0 hardware in Q4, then that's 4800 cars x $5000 (for enhanced autopilot). That's If that's the case, then $24M that Tesla didn't realize in Q4 due to AP 2.0 features not being complete.

On #2: How complete was AP 2.0 features on March 31, 2016? My guess would be 75%. I'd love to hear if anyone has some better guesses on this and why.

So, in Q1 Tesla would be able to realize 75% of the AP 2.0 revenue in Q4 ($24M). That would be $18M of extra revenue booked in Q1.

Question: Did Tesla book the cost of revenue for AP 2.0 hardware in Q4 for the 4,800 cars or so cars? Or is that cost of revenue booked when revenue is booked?

In Q1, we know Tesla delivered 25k cars. Let's say AP 2.0 take-rate of 80%, means 20k cars x $5k. That's $100M.

But if AP 2.0 is only 75% complete at end of Q1, then they're only able to book $75M (out of $100M). But good news is that they're able to book $18M from Q4.

So, while in Q4, gross margin and profits were hit substantially because they couldn't book AP 2.0 revenue, in Q1 there won't be that hit.

In Q2 however, we'll likely see extra revenue because Tesla will likely complete AP 2.0 features and will be able to book the extra 25% AP 2.0 revenue from Q4 and Q1 cars.

So overall in Q1, it's as if they're booking full AP 2.0 revenue for all cars in Q1. 26k cars x $1250 = $32.5M revenue additionally booked in Q2. This is likely going to help in any effort to be profitable in Q2.

So, if Tesla is able to show GAAP profits in Q1 next week... then they're going to have additional help (in the amount of $32.5M) to help reach profitability in Q2.

 

[luvb2b]

@DaveT are you coming around to the notion of a q1 gaap and non-gaap record profit? record revenues too? record gross profit?

there are so many potential tailwinds this quarter, between:
1. ap revenue as you noted
2. zev credits backlog
3. mix shift to higher price x
4. less expensing for resale value guarantee in usa.
5. rvg releases starting to come through from leases expiring.
6. factory running at very good efficiency: producing/delivering 25k vehicles despite a 1 week shutdown.

and then of course the biggest, the swing that comes from solarcity nci's at the end.

the biggest thing that could torpedo my estimate is if they handle solarcity accounting differently from q4 2016. i don't think they would do it, but with a cfo switch not impossible either.

i know you live and breathe this company so if you've convinced yourself that's a big confirmation vote.

 

[DaveT]

@DaveT where are you on your earnings estimate? gaap/non-gaap etc.? or are you punting this quarter due to solarcity messing it up? answers as best as i know them below:

1. a few pages back there was a good discussion on the ap2 and revenue recognition. i think it was in this thread and @neroden that had the discussion on how partial revenue is recognized, and then someone else chimed in on how many cars etc. if i ballpark the math, it was like this:
35,000 vehicles sold in q4+q1 x 70% take rate = 24,500 with ap
24,500 x 5000 = 122.5m in revenue to be realized for ap
assume 30-40% is recognized this quarter. i used 44m as the total.

2. it's a guess of course but i would say it's definitely less than 50% complete, i used more like 35%. could be even lower than that.

3. @racer26 and others have better handles on it than me. my best edge comes from knowing they spend a lot of time thinking about that shareholder letter and q4 the letter very specifically guides gaap and non-gaap margins to q3 2016 levels. that quarter there was a 5% difference between gaap/non-gaap margins. the only variable between gaap and non-gaap auto gross margin is zev credits. so i take guidance to imply that a meaningful number of zev credits will get sold. i think in the general thread @racer26 and others estimated that as many as 140m in credits would be available for sale.

4. supercharger expansion is primarily capex, so it would expense through depreciation and therefore large spending would have limited impact (assuming for example a 10 year useful life and straight-line depreciation, $1b spent on supercharger expansion adds 25m/quarter of depreciation expense). this is for the next quarter or two. beyond that you'd have additional o&m expenses. i'm sure they had included this in their spending plans, it's sort of a no-brainer when you'll have 500k vehicles on the road and people have to pay for supercharging. the revenue from supercharging will help offset the expenses, maybe even more than offset expenses.

Thanks for your thoughts.

Regarding my earnings estimates, I see 99% probability that Tesla beats consensus analysts estimates. But that doesn't mean much to me. What's more important to me is what kind of mood/sentiment does Q1 earnings report provide over the next few months. I think there's a 80-90% chance that the earnings report contains enough positive news that it's enough to sustain the enthusiasm around the stock. Regarding specific earnings estimates, I think you along with others have done a great job dissecting available info and making reasonable assertions from them. However, I do have a few concerns.

1. A large part of your profit forecast depends on Tesla fulfilling their gross margin guidance as shared in Q4 shareholder letter ("both GAAP and non-GAAP automotive gross margin should recover in Q1 to Q3 2016 levels and then continue to expand in Q2 2017."). Also from the shareholder letter:

• Non-GAAP automotive gross margin decreased sequentially for three primary reasons with a combined unfavorable gross profit impact of more than 3 percentage points of gross margin:
  o despite continued strong demand for Autopilot, we recognized almost no new Autopilot-related revenue in Q4, as software updates were delayed until Q1
  o unfavorable exchange rate changes during the quarter
  o a sequential increase in fixed asset dispositions

Q3 GAAP auto margins were 29.4% (boosted by ZEV credit) and 25.0% non-GAAP. Q4 GAAP auto margins were 22.6% and non-GAAP were 22.2%.

While I think Tesla does reach Q3 non-GAAP auto margins in Q1, I think there's a decent possibility that Tesla doesn't reach their GAAP targets due to possibly not being able to off-load enough ZEV credits for Q1.

The main reason for my hesitancy regarding this is because in the past, lots of folks here used to speculate on ZEV credits with earnings predictions. But in retrospect, the sale of ZEV credits was just too random to predict. I think even Tesla has a difficult time predicting how many ZEV credits they can sell in which quarter. I wish we had some other info regarding this... like info on when/how other auto makers are buying ZEV credits, so we can substantiate a more credible figure of how many ZEV credits Tesla can sell.

Now, I do think Tesla can sell enough ZEV credits to reach Q1 GAAP gross margins. I just don't take this as certainty.

2. NCI. I haven't dug into Solarcity documents that much, so I don't have the depth of knowledge that you and others here have on this. But it appears to me that NCI varies significantly per quarter and while I think it's reasonable to estimate a good/decent amount of NCI based on average of past quarters, there's always the chance that NCIs for Q1 come in a bit lower than the average. I don't have any reason for this other than the volatility of past quarters. Of course, it could go there other way and NCIs could come in higher than expected.

Overall, here's how I'm looking at Q1 earnings.
40% odds Tesla reports $0.50 GAAP eps or higher.
40% odds Tesla reports GAAP eps around $0.00 plus or minus $0.10.
20% odds Tesla reports GAAP loss of more than -$0.10.

The first scenario happens if Tesla sells substantial ZEV credits and books decent NCI.
The second scenario happens Tesla sells substantial ZEV credits OR books decent NCI, but not both.
The third scenario happens if Tesla doesn't sell substantial ZEV credits and doesn't book decent NCI. Or there could be other surprises, like expenses growing faster than expected, or even some one-time costs related to SCTY acquisition/downsizing.

 

[DaveT]

Overall, here's how I'm looking at Q1 earnings.
40% odds Tesla reports $0.50 GAAP eps or higher.
40% odds Tesla reports GAAP eps around $0.00 plus or minus $0.10.
20% odds Tesla reports GAAP loss of more than -$0.10.

If Tesla reports $0.50 GAAP eps or higher for Q1, then it's going to get interesting with possible S&P 500 inclusion.
Q3 2016 - $0.14 GAAP profit
Q4 2016 - -$0.78 GAAP loss
Q1 2017 - $0.50 GAAP profit (for sake of argument)

Then in Q2 2017, we'd need to see a GAAP profit of at least $0.15 for Tesla to be considered for inclusion into the S&P 500.

Or another scenario:
Q1 2017 - hypothetically Tesla reports $0.15 GAAP profit.

Then, they'd need to show a $0.50 GAAP profit for Q2 to be considered for inclusion into the S&P 500.

 

[DaveT]

@DaveT are you coming around to the notion of a q1 gaap and non-gaap record profit? record revenues too? record gross profit?

there are so many potential tailwinds this quarter, between:
1. ap revenue as you noted
2. zev credits backlog
3. mix shift to higher price x
4. less expensing for resale value guarantee in usa.
5. rvg releases starting to come through from leases expiring.
6. factory running at very good efficiency: producing/delivering 25k vehicles despite a 1 week shutdown.

and then of course the biggest, the swing that comes from solarcity nci's at the end.

the biggest thing that could torpedo my estimate is if they handle solarcity accounting differently from q4 2016. i don't think they would do it, but with a cfo switch not impossible either.

i know you live and breathe this company so if you've convinced yourself that's a big confirmation vote.

The way I look at it is Tesla had a historic turning point quarter in Q3 2016. Prior to that, they're selling $1B in vehicles (plus or minus a few hundred million dollars), and with a gross margin of 25%... that leaves $250M in gross profit to cover $500M in operating expenses ($200M R&D, $300M SG&A). Which leaves a loss of $250M. (note: of course these are super rough numbers, but I'm trying to get the concept across).

But the big turning point was Tesla delivering 25k cars in Q3 2016. Now, revenue grows to $2.3B... with gross margin of 25%, you're left with $600M in gross profit and that's able to cover your operating expenses and other items. Tesla is left with a slight profit (or maybe slight loss) but it's near break-even.

Now, what was supposed to happen was Tesla was supposed to deliver 25k in Q4 but they didn't due to switching out AP 2.0 hardware and lots of cars in transit. This hurt revenue, but also various factors hurt gross margin (like not booking AP 2.0 revenue, exchange rate, etc). And they're left with a loss.

I think what Q1 represents is going back to how things are supposed to be as shown in Q3 2016. Meaning, revenue covers expenses. We got our first good sign of this happening with Tesla reporting 25k vehicles delivered in Q1. So, that guarantees good revenue numbers. And as long as we got good gross margins (which they should be substantially better than Q4), then we've have a good gross margin number that should be able to cover most of the expenses (not all because Solarcity adds a lot), but Solarcity also brings NCI that will wipe out most, if not all, the net loss.

I think a lot of people are lulled into thinking that Q3 2016 was a fluke and the evidence was the $121M loss in Q4. They are kind of in a sleep-like mode where they think Tesla also loses money every quarter. So, I do think if Tesla posts a profit, even a small one, then it's going to surprise a lot of people. The question then becomes for folks and investors, if Tesla is able to post a profit pre-Model 3, then what kind of profits will Tesla be able to post after Model 3 reaches full production next year?

I also like Elon Musk being bullish on TSLA. 1) letter to fremont workers about TSLA appreciation over next 4 years, 2) letter to Grohmann workers about 10x in 5 to 10 years, and 3) shortsville tweet... and even more recently 4) Elon converting $10M solar bonds into TSLA stock at $300/share.

 

[DaveT]

@DaveT are you coming around to the notion of a q1 gaap and non-gaap record profit? record revenues too? record gross profit?

I have to admit that I've become somewhat jaded in regards to Tesla's quarterly guidance over the years. I think somewhere in 2014 or so they started giving guidance that they mostly couldn't meet. And it continued for a few years. Occasionally they would meet or beat, but more of than not, they would disappoint. As a result, I've grown accustomed to taking Tesla's quarterly guidance as "aspirational" and not something that they're really committed to. Thus, when they guide gross margin in Q1 2017 to Q3 2016 levels, I take it more as they're hoping for that but not committed to it.

However, I've always(?) had this feeling that at some point things would change and the momentum would turn in Tesla's favor, and they would start outperforming the guidance they give. I thought Q3 2017 was that quarter... but Q4 disappointed. But I still think perhaps Q3 2016 was that turning point (with an anomaly in Q4)... thus I'm inclined to think perhaps your enthusiasm is actually perhaps more reliable than my skepticism.

Anyway, we shall see in a week.

 

[luvb2b]

a quick thought on forecasting nci's. here's the last 9 quarters of nci's and a naive forecasting rule which is: use the prior quarter nci's as this period's forecast (x(t) = x(t-1)).

actual nci -327.68 -278.56 -194.77 -258.12 -236.51 -215.19 -133.373 -125.412 -137.881
forecast -278.56 -194.77 -258.12 -236.51 -215.19 -133.373 -125.412 -137.881 n/a
error +049.12 +083.79 -063.35 +021.61 +021.32 +081.82 +007.96 -012.47 n/a
% error 14.99% 30.08% -32.53% 8.37% 9.01% 38.02% 5.97% -9.94% n/a

with this rule, you underestimate the level of nci's 75% of the time (meaning error term is positive). 87.5% of the time the actual nci's are >= 90% of your forecast value (meaning pct error is > -10%). i think if someone cared to back further these percentages would hold up.

the only time this simple rule fails is in q2 when some of their installations couldn't be completed due to turmoil around the merger announcement.

mainly we care that we don't overestimate nci's and end up massively optimistic on our eps forecast. i've used for example 275m vs. last quarter being 328m.

if the actual nci's come in under 300 million, it would be the 2nd time in 9 quarters that the naive forecast rule has failed - and the one other time there was some reasonable explanation.

 

[MitchJi]

4. Curious to hear what you think the impact of aggressive Supercharger expansion plans on Tesla's profitability over the next few quarters, if any.

I looked at this from the opposite perspective that the reason that they waited to do this is because now they can afford it.

I have to admit that I've become somewhat jaded in regards to Tesla's quarterly guidance over the years. I think somewhere in 2014 or so they started giving guidance that they mostly couldn't meet. And it continued for a few years. Occasionally they would meet or beat, but more of than not, they would disappoint. As a result, I've grown accustomed to taking Tesla's quarterly guidance as "aspirational" and not something that they're really committed to. Thus, when they guide gross margin in Q1 2017 to Q3 2016 levels, I take it more as they're hoping for that but not committed to it.

However, I've always(?) had this feeling that at some point things would change and the momentum would turn in Tesla's favor, and they would start outperforming the guidance they give. I thought Q3 2017 was that quarter... but Q4 disappointed. But I still think perhaps Q3 2016 was that turning point (with an anomaly in Q4)... thus I'm inclined to think perhaps your enthusiasm is actually perhaps more reliable than my skepticism.

Anyway, we shall see in a week.

I think that that mostly was during the MX problems? Which I believed were mostly due to unfounded optimism and partly due to a desire to help the SP, not to help,Tesla, but to try to help the shareholders.

 

[S3XYTSLA]

@DaveT are you coming around to the notion of a q1 gaap and non-gaap record profit? record revenues too? record gross profit?

there are so many potential tailwinds this quarter, between:
1. ap revenue as you noted
2. zev credits backlog
3. mix shift to higher price x
4. less expensing for resale value guarantee in usa.
5. rvg releases starting to come through from leases expiring.
6. factory running at very good efficiency: producing/delivering 25k vehicles despite a 1 week shutdown.

and then of course the biggest, the swing that comes from solarcity nci's at the end.

the biggest thing that could torpedo my estimate is if they handle solarcity accounting differently from q4 2016. i don't think they would do it, but with a cfo switch not impossible either.

i know you live and breathe this company so if you've convinced yourself that's a big confirmation vote.

i am sure you have already seen this seeking alpha article regarding GAAP

Tesla: A Hand Filled With Aces - Tesla Motors (NASDAQ:TSLA) | Seeking Alpha

cat out of the bag nearly a month ago?

 

[DaveT]

The way I look at it is Tesla had a historic turning point quarter in Q3 2016. Prior to that, they're selling $1B in vehicles (plus or minus a few hundred million dollars), and with a gross margin of 25%... that leaves $250M in gross profit to cover $500M in operating expenses ($200M R&D, $300M SG&A). Which leaves a loss of $250M. (note: of course these are super rough numbers, but I'm trying to get the concept across).

But the big turning point was Tesla delivering 25k cars in Q3 2016. Now, revenue grows to $2.3B... with gross margin of 25%, you're left with $600M in gross profit and that's able to cover your operating expenses and other items. Tesla is left with a slight profit (or maybe slight loss) but it's near break-even.

Now, what was supposed to happen was Tesla was supposed to deliver 25k in Q4 but they didn't due to switching out AP 2.0 hardware and lots of cars in transit. This hurt revenue, but also various factors hurt gross margin (like not booking AP 2.0 revenue, exchange rate, etc). And they're left with a loss.

I think what Q1 represents is going back to how things are supposed to be as shown in Q3 2016. Meaning, revenue covers expenses. We got our first good sign of this happening with Tesla reporting 25k vehicles delivered in Q1. So, that guarantees good revenue numbers. And as long as we got good gross margins (which they should be substantially better than Q4), then we've have a good gross margin number that should be able to cover most of the expenses (not all because Solarcity adds a lot), but Solarcity also brings NCI that will wipe out most, if not all, the net loss.

I think a lot of people are lulled into thinking that Q3 2016 was a fluke and the evidence was the $121M loss in Q4. They are kind of in a sleep-like mode where they think Tesla also loses money every quarter. So, I do think if Tesla posts a profit, even a small one, then it's going to surprise a lot of people. The question then becomes for folks and investors, if Tesla is able to post a profit pre-Model 3, then what kind of profits will Tesla be able to post after Model 3 reaches full production next year?

I also like Elon Musk being bullish on TSLA. 1) letter to fremont workers about TSLA appreciation over next 4 years, 2) letter to Grohmann workers about 10x in 5 to 10 years, and 3) shortsville tweet... and even more recently 4) Elon converting $10M solar bonds into TSLA stock at $300/share.

Another thought regarding Q3 2016... to me it was THE quarter that demonstrated the potential of operating leverage in Tesla's business.

Notice a few things about Q3 2016 vs Q2 2016 (and prior quarters): revenue jumps to $2.3B and that allows gross profit to double, but all the while operating expenses are not doubling... thus allowing gross profit to cover operating expenses.

What's exciting about this is that Tesla's R&D and SG&A don't scale linearly with revenue. Meaning, R&D and SG&A will grow more gradually and at a slower pace than will revenue... thus this means that gross profit will grow faster than operating expenses, allowing for greater net income.

I think the beauty of this operating leverage gets realized probably during the period of Q4 2017 to Q4 2018. Meaning, we could see net income accelerating during 2018 due to this operating leverage as Model 3 reaches full production. And the size/amount of the resulting net income might surprise a lot of people. Of course, this will be very good news for the stock as well. Likely very, very good.

 

[DaveT]

I think that that mostly was during the MX problems? Which I believed were mostly due to unfounded optimism and partly due to a desire to help the SP, not to help,Tesla, but to try to help the shareholders.

There was a lot more than MX issues. Elon had given overly ambitious goals/guidance in regards to Germany sales, China sales, TE sales, S production, S gross margins... to name a few. I'm sure we could come up with quite a list over the past 3 years of missed guidance by Tesla.

 

[doctoxics]

Margins will be a problem with the base Model 3. No one has made a compelling all electric car at the $35,000 price point. The cars that aspire to this label are sold at a loss. If Tesla can make any money at all on the base model, that will be a revolutionary development in the auto industry. Margins of 20 % for the base model will be a small miracle. I expect this will happen in time and we will all be amazed at the hard work, discipline and technology required to get there. Fully optioned Model 3s will be much easier. Bottom line: a steady increase in S and X production is more likely to get us to profitability than the early ramp of Model 3.

 

[luvb2b]

Overall, here's how I'm looking at Q1 earnings.
40% odds Tesla reports $0.50 GAAP eps or higher.
40% odds Tesla reports GAAP eps around $0.00 plus or minus $0.10.
20% odds Tesla reports GAAP loss of more than -$0.10.

so you're saying there's a chance then!

 

[sunhelm]

Question: Did Tesla book the cost of revenue for AP 2.0 hardware in Q4 for the 4,800 cars or so cars? Or is that cost of revenue booked when revenue is booked?

Assuming you're referring to 4800 cars with AP2 in transit? I would think it would be the latter as it would not make sense and will understate gross profit margin if deferred costs are included.

 

[mmd]

Another thought regarding Q3 2016... to me it was THE quarter that demonstrated the potential of operating leverage in Tesla's business.

Notice a few things about Q3 2016 vs Q2 2016 (and prior quarters): revenue jumps to $2.3B and that allows gross profit to double, but all the while operating expenses are not doubling... thus allowing gross profit to cover operating expenses.

What's exciting about this is that Tesla's R&D and SG&A don't scale linearly with revenue. Meaning, R&D and SG&A will grow more gradually and at a slower pace than will revenue... thus this means that gross profit will grow faster than operating expenses, allowing for greater net income.

I think the beauty of this operating leverage gets realized probably during the period of Q4 2017 to Q4 2018. Meaning, we could see net income accelerating during 2018 due to this operating leverage as Model 3 reaches full production. And the size/amount of the resulting net income might surprise a lot of people. Of course, this will be very good news for the stock as well. Likely very, very good.

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How does the shifting of accounts payable factor into the income statement for Q3 of 2016? As I recall, there was a big jump in accounts payable (increased by $628M from $1673 M to $2301 M).
Accounts receivable also increased from $178M to $326M, but that's a smaller $148M. A net increase of $480M in (AP+AR). Does this explain the lower 'Cost of revenue' line in income statement?
I don't think that kind of delaying of payments can be repeated for Q1 of 2017.

Secondly, a question for the accounting pros. How is the stock based compensation expense computed under GAAP? IIRC, there is ~4% dilution each year. Is it expensed based on grant date price? As the stock has been much higher in the last 3-4 years, will this expense be much higher in coming quarters?

PS: The Q4 letter also says, a lot of M3 capex has been delayed to right before M3 production start. Seeing lower than projected capex in the last many quarters, some people have guessed that Tesla may be leasing the manufacturing equipment ( robots etc.) to reduce capital outlay. If any of that is true, we should be seeing increased expenses going forward.