Articles/megaposts by DaveT

[DaveT]

Did Tesla just give 2016 guidance?

In the last 5 trading days since Q2 earnings, TSLA has gone up $30 (from $223 on July 31 to $252 today). Some people are baffled trying to find the reasons. But in my perspective it’s quite simple: Tesla’s surprise announcement of 100k production run rate by the end of 2015.

So I want to take a deeper look into Tesla’s surprise announcement and what it means.

First off, let’s be clear. Big money (institutional/fund investors) is needed to move the stock in significant directions. Traders feed off of those bigger movements to amplify them. And retail investors tend to trail last.

To big investors, they can’t take production numbers and enter them directly into their spreadsheets. They need to take production forecasts and then translate them into sales/revenue and then enter revenue into their spreadsheets. Thus, when Tesla announced a 100k production run rate by end of 2015, what funds/analysts are doing is they’re translating that number into revenue/sales and then adjusting their forecasts.

So, what does 100k production run rate by end of 2015 mean?

First, Tesla is in effect giving guidance for 2015. Since they already announced 50k production run rate by end of 2014, a 100k production run rate by end of 2015 means that Tesla will likely deliver 65,000+ cars (to be conservative) for 2015, and possibly more. Elon mentioned at least 60k cars delivered in 2015 but he seemed to be giving a conservative number.

Second, Tesla in effect give rough guidance for 2016. By announcing they’re aiming for 100k production run rate by end of 2015, that pretty much is saying that they expect to sell at least 100k vehicles in 2016. I say at least, because it’s likely going to be more than that since they are planning to start 2016 at over a 100k production run rate and should be able to easily sell that amount as long as there is demand (note: in the conference call Elon emphatically mentioned several times that demand won’t be an issue).

Now, not many funds/analysts were expecting Tesla to sell over 100k Model S/X in 2016. And not many were expecting Tesla to announce such guidance so early (still mid-2014).

In effect, Tesla is giving a huge bullish/confident projection saying that demand is not an issue and they’re going to sell at least 100k cars in 2016 (of course they qualified it by saying they need to keep executing and in absence of a macroeconomic event).

By announcing 2015/2016 guidance (in rough terms) this de-risks TSLA as a company/stock in the view of the institutions.

For a while I’ve mentioned that the big number to watch is when people/investors/institutions start believing that Tesla will/can sell 100k Model S/X vehicles in a year. I wrote this in Feb 2014 when TSLA was at $200 (Q4 2013 results - data points, projections and expectations - Page 16):

I don’t think this will happen in Q4 ER, but at some point this year people will wake up to the fact that demand for Model X is very strong. On TMC we know Model X reservations are already at around 12,000. And I think Model X demand could be at least as high as the Model S. At some point (maybe this year), people will realize that Model S global demand is at 50k+ units/year and Model X global demand is at 50k+ unit/year. If you do the simple math (100k units x $100k asp = $10b x 30% gross margin = $3b GM x .5 (expenses) = $1.5b income. Give it a 25x forward multiple and you’re looking at a $37.5b valuation or close to a $300 stock price). In other words, if Model S remains robust (ie., U.S., Europe, China) and Tesla is able to ramp production significantly, and if Model X reservation pace picks up (test drives are supposedly starting in Autumn this year), then it could become clear to the market that Tesla is headed to 100k Model S/X per year in a couple years, and that could take the stock higher. I wouldn’t be surprised to see TSLA print $300 at some point this year. That being said, if TSLA runs into challenges (ie., production challenges, safety issues, fires, etc), then the stock could get hit as the valuation is based on future earnings potential and a generous multiple.

Anyway, I'm not going to share my thoughts on where I think this is headed in more specific terms because I'm not interested in giving short-term price targets and such. And I don't like influencing short-term trades/decisions since the skills needed is so high. Rather, I’m just trying to share thoughts so we can all try to think more deeply on such topics. Some articles attributed the $10 stock rise a couple days ago to the Chinese trademark issue being resolved. Really? Is that worth $10? Not a chance. There’s a bigger backdrop of buying going on that’s driving the trend.

 

[Cattledog]

I think in 2016 100k production is a very conservative floor, sort of like Elon's 60k production number for 2015. Perhaps the very aggressive ceiling is 150k, which he mentioned was a pre-Gigagfactory battery production constraint (unless you look to his off-hand mention of 200k, which personally I discount.) So I think we'll see something like:

2013: 22,000
2014: 35,000
2015: 65,000-70,000
2016: 120,000-130,000

That the 100k 2015 exit run rate was in the Q2 letter, instead of a flip comment made in response to an analysts question, contributes to the real gravity. Plus Elon saying it's obvious to him that EV powertrains will be cheaper than ICE equivalents in less than 10 years just has everyone thinking again this ride is just beginning.

I'm just guessing here, but it wouldn't surprise me to see a Chinese factory (and perhaps Chinese Gigafactory) announced in late 2015 or 2016 for start-up in 2018-20. The earnings call hint of 40% NA, 20% Europe, 40% China(Asia), and Elon's reference that China will likely be our biggest market, to me signals Chinese factory before 2nd US factory or European factory. If it could produce on the Fremont scale (500k/yr), that would really rattle some cages.

I echo the appreciation for your thoughts Dave, thank you.

In the last 5 trading days since Q2 earnings, TSLA has gone up $30 (from $223 on July 31 to $252 today). Some people are baffled trying to find the reasons. But in my perspective it’s quite simple: Tesla’s surprise announcement of 100k production run rate by the end of 2015.

So I want to take a deeper look into Tesla’s surprise announcement and what it means.

First off, let’s be clear. Big money (institutional/fund investors) is needed to move the stock in significant directions. Traders feed off of those bigger movements to amplify them. And retail investors tend to trail last.

To big investors, they can’t take production numbers and enter them directly into their spreadsheets. They need to take production forecasts and then translate them into sales/revenue and then enter revenue into their spreadsheets. Thus, when Tesla announced a 100k production run rate by end of 2015, what funds/analysts are doing is they’re translating that number into revenue/sales and then adjusting their forecasts.

So, what does 100k production run rate by end of 2015 mean?

First, Tesla is in effect giving guidance for 2015. Since they already announced 50k production run rate by end of 2014, a 100k production run rate by end of 2015 means that Tesla will likely deliver 65,000+ cars (to be conservative) for 2015, and possibly more. Elon mentioned at least 60k cars delivered in 2015 but he seemed to be giving a conservative number.

Second, Tesla in effect give rough guidance for 2016. By announcing they’re aiming for 100k production run rate by end of 2016, that pretty much is saying that they expect to sell at least 100k vehicles in 2016. I say at least, because it’s likely going to be more than that since they are planning to start 2016 at over a 100k production run rate and should be able to easily sell that amount as long as there is demand (note: in the conference call Elon emphatically mentioned several times that demand won’t be an issue).

Now, not many funds/analysts were expecting Tesla to sell over 100k Model S/X in 2016. And not many were expecting Tesla to announce such guidance so early (still mid-2014).

In effect, Tesla is giving a huge bullish/confident projection saying that demand is not an issue and they’re going to sell at least 100k cars in 2016 (of course they qualified it by saying they need to keep executing and in absence of a macroeconomic event).

By announcing 2015/2016 guidance (in rough terms) this de-risks TSLA as a company/stock in the view of the institutions.

For a while I’ve mentioned that the big number to watch is when people/investors/institutions start believing that Tesla will/can sell 100k Model S/X vehicles in a year. I wrote this in Feb 2014 when TSLA was at $200 (Q4 2013 results - data points, projections and expectations - Page 16):



Anyway, I'm not going to share my thoughts on where I think this is headed in more specific terms because I'm not interested in giving short-term price targets and such. And I don't like influencing short-term trades/decisions since the skills needed is so high. Rather, I’m just trying to share thoughts so we can all try to think more deeply on such topics. Some articles attributed the $10 stock rise a couple days ago to the Chinese trademark issue being resolved. Really? Is that worth $10? Not a chance. There’s a bigger backdrop of buying going on that’s driving the trend.

 

[vgrinshpun]

I think in 2016 100k production is a very conservative floor, sort of like Elon's 60k production number for 2015. Perhaps the very aggressive ceiling is 150k, which he mentioned was a pre-Gigagfactory battery production constraint (unless you look to his off-hand mention of 200k, which personally I discount.) So I think we'll see something like:

2013: 22,000
2014: 35,000
2015: 65,000-70,000
2016: 120,000-130,000

That the 100k 2015 exit run rate was in the Q2 letter, instead of a flip comment made in response to an analysts question, contributes to the real gravity. Plus Elon saying it's obvious to him that EV powertrains will be cheaper than ICE equivalents in less than 10 years just has everyone thinking again this ride is just beginning.

I'm just guessing here, but it wouldn't surprise me to see a Chinese factory (and perhaps Chinese Gigafactory) announced in late 2015 or 2016 for start-up in 2018-20. The earnings call hint of 40% NA, 20% Europe, 40% China(Asia), and Elon's reference that China will likely be our biggest market, to me signals Chinese factory before 2nd US factory or European factory. If it could produce on the Fremont scale (500k/yr), that would really rattle some cages.

I echo the appreciation for your thoughts Dave, thank you.

What if this IS what Elon meant when he said to an analyst during the ER call that there are "things that you don't know", "we are not showing all our cards"...

 

[c041v]

Thanks for more great insight DaveT. I noticed the view count on this thread is 2,000 more than yesterday. Where do you find the time to view it so much? Hehe.

I just checked the 2013 Annual report for Porsche and saw that they produced 165,000 units (not sure how many are sitting unsold on dealer lots) Tesla is quickly becoming a force to be reckoned with. I love it.

 

[DaveT]

What if this IS what Elon meant when he said to an analyst during the ER call that there are "things that you don't know", "we are not showing all our cards"...

Definitely possible. Especially since if they manufacture inside China (with a Chinese joint venture partner) they'll be exempt from the import tariff and that will drop the price of the car and increase demand.

- - - Updated - - -

Thanks for more great insight DaveT. I noticed the view count on this thread is 2,000 more than yesterday. Where do you find the time to view it so much? Hehe.

I've hired someone to hit refresh on this thread constantly. j/k.

 

[Cattledog]

What if this IS what Elon meant when he said to an analyst during the ER call that there are "things that you don't know", "we are not showing all our cards"...

That would be pretty awesome. I really think it's simply a matter of when, not if anymore. I think they see demand oustripping Fremont's capacity in the 2018-19 timeframe. Remember, JB gave a talk at Stanford that had a slide that showed 700k by 2019. My guess is they have a good forecasting model and they are looking at China's reservation numbers super early in the delivery process there and they see explosive growth. I mean, he said he thought they would have 100 service centers in China by the end of 2015. Today they have 6. You only need a lot of service centers if you are...servicing a lot of cars. For perspective, today there are 45 service centers open in the US, 18 coming soon.

I wonder if they'll raise more cash in the next 12 months to ramp up a Chinese factory?

 

[vgrinshpun]

That would be pretty awesome. I really think it's simply a matter of when, not if anymore. I think they see demand oustripping Fremont's capacity in the 2018-19 timeframe. Remember, JB gave a talk at Stanford that had a slide that showed 700k by 2019. My guess is they have a good forecasting model and they are looking at China's reservation numbers super early in the delivery process there and they see explosive growth. I mean, he said he thought they would have 100 service centers in China by the end of 2015. Today they have 6. You only need a lot of service centers if you are...servicing a lot of cars. For perspective, today there are 45 service centers open in the US, 18 coming soon.

I wonder if they'll raise more cash in the next 12 months to ramp up a Chinese factory?

Not only I remember this, I've been actively thinking about it... If one pairs this with Elon saying that they can have enough batteries for 150-200 cars even without GF (GF being enough to produce 500 cars), and with the statement in the Panasonic press release that TM will continue to buy batteries from Japan even while factory is operational, the mosaic pieces start to fall into place...

 

[Cobos]

I've hired someone to hit refresh on this thread constantly. j/k.

Considering all the time I spend on this thread anyway I might as well be paid... what is the salary for clickers of this thread? I can take that job.

Cobos

 

[erha]

Definitely possible. Especially since if they manufacture inside China (with a Chinese joint venture partner) they'll be exempt from the import tariff and that will drop the price of the car and increase demand.

Didn't Elon say that this was a misconception? I don't really remember exactly his words, but I think I recall that he said Tesla would get all the exemptions without manufacturing in China...

It might only be the ones related to EVs, and that there is no way of getting away from the import tariffs

 

[chickensevil]

Didn't Elon say that this was a misconception? I don't really remember exactly his words, but I think I recall that he said Tesla would get all the exemptions without manufacturing in China...

It might only be the ones related to EVs, and that there is no way of getting away from the import tariffs

I think that was just to clear up the current landscape of how their sales are going. Not anything to do with future sales. He has mentioned before (only once I believe) about starting their second factory in China. If they have already taken steps in that direction it would be a huge surprise.

The note about extra "secret" spending was made in reference to R&D *AND* CapEx. Building a Chinese factory would contribute to the CapEx. I still think it might be a little too soon for that, but who knows?

 

[Robert.Boston]

I think that was just to clear up the current landscape of how their sales are going. Not anything to do with future sales. He has mentioned before (only once I believe) about starting their second factory in China. If they have already taken steps in that direction it would be a huge surprise.

The note about extra "secret" spending was made in reference to R&D *AND* CapEx. Building a Chinese factory would contribute to the CapEx. I still think it might be a little too soon for that, but who knows?

Too soon to execute on the Chinese factory, but not too soon to start planning for it. And wouldn't Tesla also want to build a Chinese gigafactory to supply its local factory?

 

[AlMc]

Too soon to execute on the Chinese factory, but not too soon to start planning for it. And wouldn't Tesla also want to build a Chinese gigafactory to supply its local factory?

Yes. Cramer also just indicated that SCTY, TSLA and Netflix are the only companies he knows that raising and spending money has NO impact on the stock, which baffles him.

 

[FredTMC]

Didn't Elon say that this was a misconception? I don't really remember exactly his words, but I think I recall that he said Tesla would get all the exemptions without manufacturing in China...

It might only be the ones related to EVs, and that there is no way of getting away from the import tariffs

on the earnings call, those comments by a Elon were related to customer EV tax Exemptions. Tesla WOULD still qualify for those newly announced tax rebates because tesla adopted China's high speed charging standard.

Tesla still needs to establish building cars in china if tesla wants to avoid import tariffs.

 

[DaveT]

Didn't Elon say that this was a misconception? I don't really remember exactly his words, but I think I recall that he said Tesla would get all the exemptions without manufacturing in China...

It might only be the ones related to EVs, and that there is no way of getting away from the import tariffs

on the earnings call, those comments by a Elon were related to customer EV tax Exemptions. Tesla WOULD still qualify for those newly announced tax rebates because tesla adopted China's high speed charging standard.

Tesla still needs to establish building cars in china if tesla wants to avoid import tariffs.

+1 Fred.

There are different taxes involved in China.

There's the import tariff for cars manufactured outside the U.S. Tesla is subject to this since they don't manufacture inside China with a Chinese joint venture. The only way to get around this is to manufacture inside the country with a Chinese joint venture. The import tariff for high-end luxury cars is roughly 25%. So, if Tesla can avoid this if/when they set up their factory in China.

Then there's the VAT/sales tax (roughly 18-22%, not sure on exact numbers). China is waiving a 10% purchase tax for EVs but they need to qualify. Current Model S's don't qualify, but Elon mentioned that it's because they need to meet the newly announced China charging standards (which are similar to Europe). Tesla plans to do so and they will qualify for this 10% purchase tax waiver.

Then there's the license plate fee, and it appears that each city has their own fees. Shanghai is waiving the license plate fee for all EVs (roughly $10k-15k fee), including Tesla.

Here's an excerpt from A Fair Price | Blog | Tesla Motors:

$81,070 US price
$3,600 Shipping & handling
$19,000 Customs duties & taxes
$17,700 VAT

734k CNY @ 6.05 exchange rate

 

[DaveT]

How to Make Crazy Outsized Gains with Common Stock, v. 0.1

(note: this is version 0.1 and is a work in progress. results not guaranteed. use at your own peril. the purpose of me sharing this is more to develop the ideas behind this model through discussion and feedback.)

1. Find a growth company (or potential growth company) that you believe is going to be continuing to grow at a fast rate even in 3-5 years.

2. Confirm that their product is awesome, their customers are big fans, and their management is smart.

3. Calculate the company’s market cap in 3-5 years by projecting profit (or potential profit if still rapidly growing) and multiplying it by a conservative multiple.

4. If the projected market cap is at least 3x greater than the current stock price, then buy the stock.

5. Hold on and don’t sell unless the company’s long-term prospects/story changes.

6. Enjoy crazy outsized gains (ie., 300-1000% or more in 5 years).

If you lose on this investment it’s likely because the company didn’t grow as fast as you’d expect and your revenue/profit forecasts fell short. This is why you need to be uber-confident (through your due diligence) that the company is going to continue it’s high growth even in 3-5 years. It’s also important to make the correct calculations in projecting future revenue/profit and investor multiple. This isn’t easy for most people but I’ll be covering this throughout my series with TSLA and by the end of the series hopefully you’ll have a better grasp on how to do this.

Another reason you could lose on this is if you get caught up during a hyper-enthusiastic time and overpay for the stock, and as a result you don’t get as outsized gains as you could have. This is why I added that the projected market cap in 3-5 years needs to be at least 3x greater than the current stock price. This helps make sure you have an entry point that’s decently low enough to make the outsized gains needed.

Overall, the main reason why I like this investment model is because funds/institutions are typically only looking out 1-2 years and using those numbers in their calculations since looking out 3-5 years is too risky and most funds/institutions are risk-averse. Since funds/institutions look only 1-2 years out that means that there’s still a lot of untapped future growth potential in the market cap of those companies that continue their growth even after 3-5 years. This investment model taps into that.

I could write pages and pages on this but I’ll stop here and see if folks have feedback, and decide to develop/explain the model more or not based off of that.

 

[The Blue Owl]

It’s also important to make the correct calculations in projecting future revenue/profit and investor multiple. This isn’t easy for most people but I’ll be covering this throughout my series with TSLA and by the end of the series hopefully you’ll have a better grasp on how to do this.

I'm one of those people, so I'm looking forward to your on-going posts on the subject.

Meanwhile, a question: from the little I know, this sounds very close to the principles of value investing. Am I confused?

Update: or, value investing applied to growth stocks.

 

[DaveT]

Meanwhile, a question: from the little I know, this sounds very close to the principles of value investing. Am I confused?

Update: or, value investing applied to growth stocks.

Value investing typically is mostly a quantitative approach while high-growth investing has typically been mostly a qualitative approach (ie., I haven't seen much on a convincing high-growth investing methodology of actually applying a framework to make a decision that includes numbers and forecasts). So, this model tries to apply a quantitative and qualitative approach to high-growth investing in a simple (hopefully) model.

 

[The Blue Owl]

Value investing and high-growth stock investing usually don't work well together since value investing is usually looking for bargains and bargains are usually not found in high-growth. And with typical high-growth investing, I haven't seen much on a convincing methodology of actually applying a framework to make a decision that includes numbers and forecasts. Most high-growth investing methods rely predominantly on a heavily qualitative approach. Value investing typically is mostly a quantitative approach. So, this model tries to apply a quantitative and qualitative approach to high-growth investing in a simple (hopefully) model.

So your approach would be close to a hybrid attempting to combine the best features of both, right?

BTW, I didn't mean to sound like "this is something well known, just with another name." That's why I added the clarification at the end.

Update: I thought of the value part because of your 3x safety factor. That's spotting a bargain, no? Not by blindly applying simple metrics like P/E and such, but by good due diligence.

 

[DaveT]

So your approach would be close to a hybrid attempting to combine the best features of both, right?

BTW, I didn't mean to sound like "this is something well known, just with another name." That's why I added the clarification at the end.

Yeah it's a hybrid combining quantitative elements (typically found in value investing) and qualitative elements (typically found in high-growth investing).

It's something that was birthed out of my personal goal of trying to find an investment model that can achieve outsized gains (ie., 3-10x in 5 years) but lower the risk of attempting such gains.

 

[The Blue Owl]

Yeah it's a hybrid combining quantitative elements (typically found in value investing) and qualitative elements (typically found in high-growth investing).

It's something that was birthed out of my personal goal of trying to find an investment model that can achieve outsized gains (ie., 3-10x in 5 years) but lower the risk of attempting such gains.

I totally want to read this series.