You've asked a very good question. I know some of it was mix (there were plenty of S and X in that 90k). There were enough ZEV and GHG credits to add about 500 mil of pure profit if I remember correctly. And some people *claim* that panasonic temporarily gave them a price break on battery costs. Not sure about this last part. But definitely in going from Q3 2018 to Q1 2019 a lotta stuff changed for the worse at the same time: tanking of S&X volumes, delay in getting stuff to EU, overall decline in volume, margin contraction even on the mix of 3s sold. I heard some bears say that with the new mix, and with continuing decline in S&X volumes, the new quarterly 3 sales number they are looking for in order to break even is 120k. That's roughly 1, 320 per day.
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Hi, I’m a short seller
- Thread starter ShortSeller
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You've asked a very good question. I know some of it was mix (there were plenty of S and X in that 90k). There were enough ZEV and GHG credits to add about 500 mil of pure profit if I remember correctly. And some people *claim* that panasonic temporarily gave them a price break on battery costs. Not sure about this last part. But definitely in going from Q3 2018 to Q1 2019 a lotta stuff changed for the worse at the same time: tanking of S&X volumes, delay in getting stuff to EU, overall decline in volume, margin contraction even on the mix of 3s sold. I heard some bears say that with the new mix, and with continuing decline in S&X volumes, the new quarterly 3 sales number they are looking for in order to break even is 120k. That's roughly 1, 320 per day.
I bought in under $30. I've had CFOs tell me to sell TSLA when it hit $50, $85, $100, etc. They looked at the numbers and thought I was nuts for sticking with it. Now, they own TSLA, too.
You cannot just look at the numbers. Well, you can, but I think that's missing the bigger picture. I bought in because I saw something different than I'd ever seen before. I've done due diligence on companies countless times in my career. All companies have issues, Tesla included.
But I bought in for a couple of reasons:
1) I'd never ever seen a company where just about everyone in the company believed in the CEO's mission statement. Sure, all companies gave lip service, but no one actually believed it. Tesla is different. I've had shuttle bus drivers talk to me about how important the mission is. Engineers. Marketing folks. Manufacturing. Management. Designers. You cannot buy that, you cannot demand that - it has grown organically and it has brought them thru countless challenges, and,
2) I owned their product (an early Roadster). Not only was it unlike anything I'd driven before, they went above and beyond to do the right thing - not only for me, but for other owners. And while some here will disagree with me, my first-hand experience is that when management is aware of a situation, they will do the right thing. Every time. Even when it costs money and bandwidth.
How could I not buy in? If I thought I had any expertise at all in evaluating companies & their chance for success, I had to. So I did. And never have I regretted it.
If you time everything right, shorting will make you some money. If. If you get it wrong, it's going to hurt. And ultimately, you will have gotten it wrong, imo.
I'm very curious if the original shortie and you are still on this thread and if you are both sticking to your original positions. A woman I work with also bought in around $25, 1000 shares I think. After talking to a guy at work who is a big stock picker, after the 420 tweet when it spiked a lot she sold all her shares (one kid in college, another about to go). Her older kid is a finance major, later last year he even convinced her (after she was already out of the shares) to buy puts at $220. She did so to humor him but not a large position. At the time I thought $220 was silly low and those puts would be worthless. I wonder if she still has them. I bought shares along with the woman at work, similar price and position, and sold out around the same time but I don't really play with options and have never shorted so I stayed away after that. Initially I was looking to re-enter at a lower price but I decided not to take that much risk after reading a lot of stuff on here.
Doggydogworld
Active Member
Q3 diluted EPS was $1.75.
Q3 Model 3 mix was very AWD/P heavy since it was the first quarter for those variants and US pent-up demand for LR had been mostly met in Q1/Q2. Also, prices for the same configuration were 5-6k higher then than now (depends how you value AP vs. EAP). Q3 was the all-time high for Model 3 ASP, close to 60k vs. COGS of ~47k.
They also delivered more S/X than normal (27.7k, with 25.2k sold) at better than usual 25% margin. So something like:
S/X: 25.2k * $29k = ~$730m
Mod3: 56k * $13k = ~$730m
S/X leasing: ~$100m
BTW, Model 3 leasing is now a headwind that will hurt profits, especially the first year.
It sounds like most of the Services, other negative margin is from used cars. They don't resell non-Teslas trade-ins and aren't all that great at reselling Teslas. They probably get close to break even on a gross basis, but lose $2k+ per car net after the expenses of handling, repairing, transporting, etc.
dqd88
Member
So back in early-mid 2018, when you were forecasting for Q3 2018, what was your forecast? And how close/far did you get? I'm pretty sure no one (bull or bear) was forecasting 1.75. Why were you personally off? What assumptions did you get wrong?
Doggydogworld
Active Member
Early 2018 was all about production hell. Nothing else mattered. After consecutive huge misses I was in wait and see mode.
In late June the now-infamous Skabooshka leaked that Model 3 was ramping toward a 5000 car week, which Tesla soon confirmed. Subsequent leaks from Skabooshka and Fred Lambert showed them sustaining close to 4k/week. I spent most of Aug/Sep mocking Seeking Alpha death cult members who predicted a massive Q3 loss and imminent BK. I explained cash would exceed 2.5b (it ended at almost 3.0b), they all said <2b with many <1b. I also estimated breakeven to ~50m profit vs. their massive loss forecasts.
I didn't expect a 300m Q3 profit, though, because I used Tesla's 15% Model 3 margin guidance. They came in over 20%, a terrific accomplishment!
Only one bull on SA predicted 300m - Ross Tessien (sp?). Even perpetually over-optimistic bulls like ValueAnalyst were in the breakeven to 150m range.
So what is your forecast now for Q2 and the rest of the year?
Doggydogworld
Active Member
300m loss for Q2 on 85-90k deliveries.
GAAP results for Q3/Q4 depend somewhat on Shanghai. I don't expect anything like production hell, but a factory built and staffed for 3k/week is very inefficient at sub-1k/week. That could generate 100m++ of loss in Q3 if they build any deliverable cars. Same for Q4. Ex-Shanghai I'd expect Q3/Q4 to be 100-200m loss with non-GAAP profits.
Tesla will amortize many of the costs associated with the production ramp. Traditional automakers very intentionally don't take that approach, but Tesla is in a different situation where they always want margins to look good.
I thought it took longer from the time the building is ready to having all the factory equipment installed and operating than a few months. Was reading more like end of year for completing the insides and having it ready to produce.
dqd88
Member
Just curious - what do you think the margin is on the FSD software alone? I was pricing a Mod 3, as I'll prob get one soon. SR+. Came out to about $47k with the FSD software, which costs $6k.
Doggydogworld
Active Member
Software gross margin is effectively 100%. But Tesla has historically deferred FSD revenue and even some EAP revenue. Margins get a small boost as they recognize revenue from prior EAP sales and will get a bigger boost in the future if they can recognize current and prior FSD revenue. This doesn't affect cash, but does affect GAAP profit.
Yeah, Tesla has not figured out how to make money in the used car business, not even with used Teslas. Frankly I think they should get out of it.
(1) Offer "courtesy trade-ins" for the sales tax break in states and countries which have the sales tax break, for people who have lined up someone to sell their old car to
(2) Don't do any other trade-ins at all
(3) Do not run a used car sales business
The actual service centers seem to lose some money but not that much. It's the used car business which seems to lose most of the money in "Services & other".
Note that that would be operational cash flow positive for certain. Depreciation + the fake cost of stock options is generally greater than $400m/quarter.
dqd88
Member
You seem to know a lot of the nitty gritty accounting details. Do you think there are any cost levers they can pull to get to a sustainable margin? I don't study the detailed financials, maybe I should; just don't have the time and don't have enough invested to warrant the time investment. But at a high level I would be perplexed if there is no viable business here. With way fewer components (ie less hardware) than ICE and high margin software, it seems like a new paradigm in auto manufacturing, where the manufacturing process, should, in theory, be more streamlined than an ICE car due to the fewer components.
I wish I had more insight/details into the costs, esp the one's that are non-essential. If all non-essential costs are removed then I wonder what the margin would be and if it would be sustainable. Thoughts?
Also, if they scaled into every major city in the world (for ex, the top few cities in India, Brazil, Russia, southeast Asia, etc)... I would think, if they would be able to sell the cars at a profit in these cities since it would be a very premium, niche, product. It would seem that, with GF3, overall the company should be able to max out at about 1M units/year production, and that the demand, globabally would be there. Do you believe there's not enough demand for 1M cars and, if they could sell 1M, do you still believe they would have no chance of seeing profit?
Doggydogworld
Active Member
I don't see levers in terms of cash margins. Taking deposits years in advance, selling $5k+ features that don't exist, getting full payment from customers a month before you pay for the parts in their car and paying $1b++ per year of expenses in stock instead of cash are the stuff of dreams. Not to mention governments paying for your factories (GF2 and 3).
GAAP margins get a boost from emissions credits. Tesla sold 400m+ of credits last year, mostly to FCA. That was 1600+ per car. If the latest FCA deal is ~700m/year as rumored that'd be 2000/car this year. They have 1.9b of deferred revenue. If we pretend is $1b is EAP/FSD that could add 1000/car through YE 2020. They'll keep shaving costs, but so will the competition so I don't see any gains there. Possibly the opposite.
Demand is primarily driven by regulation and incentives. That's a headwind for Tesla in the US, a tailwind in Europe. I don't see much action in Brazil, Russia, India, etc. China is hard to judge, they are phasing out credits but other incentives still exist and Shanghao-built Model 3s will avoid tariffs. If China goes into full Norway mode it could help Tesla a lot, but I think that's a long shot.
The car business is tough. Robotaxi is Musk's shiny new thing for good reason.
As far as China, what are the odds they will support Tesla through loans long enough that they get their factory set up and running, and then engineer a sure-fire failure so they can repo all their tech as part of their loan collections? Based on reading about the state/company connections this doesn't feel that far-fetched especially the way the trade war is going.
dqd88
Member
That's quite the conspiracy theory.
China wants and needs EVs. It's a national security issue (in addition to pollution). They don't want to rely on oil imports for their energy needs. They are phasing out fossil fuels. They like Tesla's mission and will support it.
Doggydogworld
Active Member
China doesn't need to engineer a failure. They'd just "buy" the factory under some new regulation or something. As long as Tesla employs people and Musk doesn't promote dissident speech or offer uncensored internet access through StarLink or something they have no reason to do that.
Why do you believe COGS will not drop below 42k? Considering the german engineering firm guessed at 18K cost+10k in labor and Munros guess was somewhere around there as well. What do you believe keeps costs that high?
Doggydogworld
Active Member
An industry guy once told me the teardown firms were usually spot-on for off-the-shelf parts but often off by an order of magnitude on custom or in-house parts. Tesla has a lot of the latter. Also note the teardown guys tend to talk in terms of contribution margin, not GAAP gross margin.
That being said, I don't exactly why Model 3 costs so much. But it's not depreciation, labor or anything else in Tesla's direct control. They don't user super-premium materials. They have enough volume to get reasonable pricing on parts. All these things can get better, but they can't get that much better. Tesla has focused on stabilizing the production lines and getting costs down for nine months, with only minor improvements. The low hanging fruit is gone.
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