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Long TSLA, but bearish next six months

I'm long TSLA and generally very positive on the company, but am somewhat leery about the next six months for the following reasons:

1) The initial gross margins on the X are probably much lower than most realize (10-12%).
2) The introduction of the Model X may temporarily sap demand for the S, which is nearly three times as profitable.
3) As well, we now have a meaningful number of used Model S cars hitting the market, which may also sap demand from those buyers that would have otherwise stretched for a new S.
4) If Tesla temporarily sees less demand than anticipated for the S, it will have a huge impact on gross margins.
5) My experience is that changes in the perceived profitability of a company -- even short term -- often have a disproportionate impact on stock prices.
6) Musk also suggested that initial gross margins on storage will be low – just slightly positive gross margins.
7) Tesla is investing heavily right now on cap ex and operating expense. It is counting on a decent mix of Model S sales to contribute to profitability and cash flow in the second half of the year. Weaker than expected S sales, combined with low profitability on the X and still huge cap ex spend, makes for an ugly near term financial picture.
8) Unlike the perma-bears, I do believe there is latent demand for the S, which could be generated with marketing spend. However, if they are forced to ramp up marketing spend in the second half of the year, it will occur precisely when profitability is getting squeezed because of low gross margins on the X and on storage. In addition, it would take some time for marketing spend to translate into sales, even for Tesla.

To be clear, I’m bullish on TSLA long term and I certainly don’t see the above dynamics as fatal to the company. But I do see the possibility of a 30-60% decline in the stock price and perhaps a dilutive capital raise at a much lower valuation. Of course, we’ll know much more about the plausibility of the above scenario after the second quarter call, but I’m interested in the views of those on this forum now. What am I missing?
 
The 6 month to be leery of is ending. The next 6 month period is the one to be bullish about.


I agree, I have had all my holding in SCTY because I mistimed their announcement of 2016 guidance and I feel like the next 6 months will see all time highs for sure. I agree that the Model X will launch with much lower margins but I do not think there is any demand lacking for the Model S. I also think they are making plenty on the resale of old Model S's so the more of those that come on the market the better for Tesla. A lot of people are coming in to test drive a used model S and being up sold into a 70D since you can get it for about the same price as a used p85/+.

With a stock as volatile as Tesla it is hard to say what will happen by if anyone remembers how awesome it was when the Model S hit the streets and all the rave reviews/awards started coming in you can imagine what it will be like when they knock it out of the park with the SUV too. There are still people that believe Tesla struck gold with the Model S but will never be able to replicate it. If they have a quick ramp up on the X, They will go from not having an SUV to having one of the best selling luxury SUV's period.

Unless somehow the X is not received well the next 6 months should see 300+(+)
 

uselesslogin

Active Member
Supporting Member
Jun 13, 2013
1,832
3,804
Omaha, NE
Hmm, I don't know if I agree with all the points but I do agree that so far the Model S ramp on the original line went behind schedule and the ramp on the second line went behind schedule and had pitiful margins with all the production issues of the early P85Ds. For me it is a coin toss. I have set myself up to be ready to buy as well as to profit. Because the coin flip is $400+ by the end of the year or back down around $200 if things don't go well. Didn't Causalien say to by calls to $290 and then straddle at $290? That sounds like a good strategy to me for the next 6 months although my strategy is a bit more long term focused.

Oddly, I would almost cheer Model X production issues and a slow ramp. It would draw in the shorts and then Tesla would probably clear everything up in Q1. Well, remember Q1 2013?
 
Oddly, I would almost cheer Model X production issues and a slow ramp. It would draw in the shorts and then Tesla would probably clear everything up in Q1. Well, remember Q1 2013?

I agree. However, initial gross margins on the X will be low even without significant production issues. Perhaps the Street will simply look past this, but I'm not convinced yet. I think the Street will become bullish once they realize the demand for the X will be large and it will be very profitable, but that may not happen until the end of the first quarter even with a fairly decent production ramp.
 

Robert.Boston

Model S VIN P01536
Moderator
Just to respond to a few of these points:
I'm long TSLA and generally very positive on the company, but am somewhat leery about the next six months for the following reasons:

1) The initial gross margins on the X are probably much lower than most realize (10-12%).
Why should this be true? I'll accept that on the first dozen or even hundred that Tesla will have some inefficiencies in ramping up the line, but this will have only a small impact on Q3.
ChrisA said:
2) The introduction of the Model X may temporarily sap demand for the S, which is nearly three times as profitable.
Or it could boost demand. There will be a huge amount of publicity around the release, but Tesla has sold out ~9 months of Model X production already. How many people, as they come to teslamotors.com to look at the Model X, will decide to order the Model S instead, either to avoid the wait or because they decide it's a better car? Don't assume that everyone who should be interested in the Model S even knows about it.

Your second clause is based on the dubious assumption in (1).
ChrisA said:
3) As well, we now have a meaningful number of used Model S cars hitting the market, which may also sap demand from those buyers that would have otherwise stretched for a new S.
Conversely, robust demand for used Model Ss enhances resale value, which makes buying a new one seem less expensive (on a $/mile basis).

Oh, and what are the people who sell their Model Ss buying? I'm betting that at least 95% are buying new Model Ss.
 

Hogfighter

Professional Lurker
Sep 7, 2012
1,045
4,940
Florida
You do have many good points. It's entirely possible that the X will have issues, lower profit margins, and suck some demand from the S. Like Uselesslogin, I believe that we will either be at $400 or $200 by year end. Of course, if there was clarity on all of these issues, the stock would be at $400 already.
 
Robert, thanks for your thoughts. In reply:

I think we can have the most confidence in point 1). My understanding is that the company was guiding Wall Street analysts to expect an 11-12% gross margin on the X for the fourth quarter 2015 back in February. There's no reason why this would have changed for the better. And, per your question, this makes sense as the very low volume cars first coming off the production line are probably at a significantly negative gross margin (the full cost of production equipment depreciating against a relatively small number of vehicles being produced, among other things) and you don't arrive at a half decent gross margin until you are much closer to being fully ramped. The low estimated fourth quarter gross margin on the X would be the blended combination of that ramp.

On point 2), possible. In general, earned media adds huge value to Telsa (save for the occasional Broder type article). And, assuming there are no big problems with the X at launch, I imagine it will get a lot of great press. But on balance, I think the near term impact will be to move some $ away from the S and to the X. The farther we go out, the more likely we will see a positive sum game where good press on the X benefits the company as a whole and the S, as you suggest. It's the transition that I'm worried about. Also, we know now the wait time for an S is down to about a month. Yes, improved production has a lot to do with that, but it also could be due to somewhat softer demand for the S as we get closer to the X launch.

On point 3) you make a decent argument. I agree that 95% of those selling an S will go on to buy another Tesla.

Again, thanks for the thoughts. We'll get more of an opportunity to consider the above with the second quarter earnings call, but I find it helpful think through risks ahead of time.
 
I would have to say that Tesla's $33 billion market cap is so forward looking that the gross margins of the Model S and X don't matter.

That being said sales do matter. Based on the current 4-5 week build time and what I view as rushed 90 kWh and ludicrous models the sales for the Q3 will be flat to slightly up compared to Q1 and Q2. That would put extreme pressure on Q4 to hit 55,000 vehicles for the year.

Tesla may have saturated the high-end electric luxury market for sedans. Model X is required for growth.
 

neroden

Model S Owner and Frustrated Tesla Fan
Apr 25, 2011
14,676
63,889
Ithaca, NY, USA
I'm long TSLA and generally very positive on the company, but am somewhat leery about the next six months for the following reasons:
Weird. I'm long TSLA in the short run (next few years) but I'm starting to get bearish in the long run.

1) Tesla has horrible communication-with-customers problems which haven't improved for 2 years
2) Tesla has horrible internal communications problems (left hand doesn't know what the right hand is doing) which haven't improved for 2 years
3) Tesla's legal department seems to be boneheadedly incompetent at everything they put their mind to
4) Tesla doesn't seem to have thought out the problems of congestion at the 'free to use' Superchargers
5) Tesla is making boneheaded moves with respect to cutting Ranger/Valet service which are alienating everyone who lives far from a Service Center, with no clear direction or policy
6) The Service Center network is not expanding anywhere near fast enough, and the past expansion plans made no sense whatsoever (when's the last time they opened one which wasn't practically right next to an existing one? There are five in the NYC area, five in the SF area, five in the LA area, two in the Seattle area, none in upstate NY or western PA)
7) Tesla's made it very hard to maintain the cars yourself or at independent shops (though this may be changing, maybe)

I think these factors lead to long-term brand damage, which will make Tesla much more vulnerable to a late-entry competitor than it was when it was THE gold-standard brand.

----

In the short term, by contrast, the massive model X sales will boost the stock massively, regardless of margins. (And I see no reason to believe that in steady-state the margins would be lower than for the Model S; it'll be a more expensive car built on the same production line. Lower margins during ramp-up, sure, but it shouldn't be as bad as it was with the Model S due to more experience.) Model S sales will continue to hold up for a while, before the brand-damage from Tesla's boneheaded management failures starts really hitting in earnest.
 

Robert.Boston

Model S VIN P01536
Moderator
Moderator's Note

I've moved one post and a reply to Snippiness. Anyone can start a thread to discuss a topic, and @ChrisA is presenting (and even defending) his case responsibly. Don't attack motives; instead rebut content.

- - - Updated - - -

Robert's non-moderator post:
I think we can have the most confidence in point 1). My understanding is that the company was guiding Wall Street analysts to expect an 11-12% gross margin on the X for the fourth quarter 2015 back in February.
So let's look at that guidance paragraph:
We expect that such improvements, when combined with a favorable mix of vehicles, will allow us to achieve a 30% gross margin on Model S by the end of 2015.... However, we expect these cost improvements will be partially offset by production inefficiencies during the introduction of Model X. During our product introductions in 2014, we incurred manufacturing inefficiencies which negatively impacted our gross margin. When we introduce Model X, we expect that both production inefficiencies and supply chain inefficiencies typical of a new product introduction will suppress Model X margins for at least a few quarters after its introduction. If we are not able to achieve the planned cost reductions from our various cost savings and process improvement initiatives or introduce Model X efficiently, our ability to reach our gross margin goals would be negatively affected.
So Tesla is saying that the Model X will not reduce the overall gross margin goals unless it can't achieve the "planned cost reductions" in producing the Model S, and that the cost inefficiencies are transitory and expected.

From an investor's POV, I don't see the issue. The street expects lower gross margins on the first Model Xs, so that's already priced in. I worry only when I think that Tesla can't do what it has said it will; in this case, Tesla's give reasonable cautions to investors, so I don't see a negative hit to the stock from lower margins on the first few months of the Model X.
 

ecarfan

Well-Known Member
Moderator
I do not understand the OP's assertion that "initial gross margins on the X will probably be much lower than most realize". Tesla plans to ramp up X production volumes as fast as possible to meet the huge backlog of reservations and the demand is almost certain to be high for years to come. Americans are in love with big SUVs, much more so than full size sedans, and the S demand has far exceeded everyone's expectations (including Elon's) for years now. X demand will be even greater than the S, which means that Tesla can price the X to include a healthy margin. Tesla looks to be production constrained for the foreseeable future.
 

trils0n

2013 P85
Feb 12, 2013
1,529
1,982
Earth
As to point 7 of the OP: A large portion of Tesla's CapEx is related to bringing a new paint shop online (believe total cost was $300 million, a serious expense, and designed for 500k+ vehicles /yr), and to building the new line that will produce model X. The spending for those two projects will be done soon (as it needs to be finished to start building Model X). So I expect CapEx will decrease in the short term as expected projects are completed, and revenue will get a nice boost from Model X. Unless of course they just start mega spending on the Gigafactory as soon as they complete spending in Fremont. For some reason I feel like they will surprise critics with a decrease in capex though.
 

AlMc

'When the music is on...you gotta dance' (Go Elon)
Apr 23, 2013
7,363
15,695
Delaware
Chris: Thanks for your thoughts/concerns. It is very easy to be a bull on TMC but difficult to present and defend bear arguments. My only legitimate worry for the next three months is any serious delay in the X release. I believe Q2ER/CC will be good and we will see just below/just above previous ATH. My worry beyond that time will be Q3ER...will TM accomplish the ramp to get enough cars delivered that they will not have to decrease yearly guidance OR be in a position where they need to deliver an unrealistic number in Q4.
 

dakh

Active Member
Supporting Member
Jun 14, 2015
1,145
2,615
Seattle, WA
Another way to look at profit margins on X is to consider how much added value is there that's not related to the actual manufacturing of the vehicle. Are gullwing doors more expensive to make than regular doors? Is there a lot more aluminum in X compared to S? What are the other features that we don't even know about that might move the profit margin needle one way or the other?

Personally I'd expect higher profit margins on X once it's in full production because it has more added value in design and intellectual property vs. anything else in the market including Model S.
 
I do not understand the OP's assertion that "initial gross margins on the X will probably be much lower than most realize". Tesla plans to ramp up X production volumes as fast as possible to meet the huge backlog of reservations and the demand is almost certain to be high for years to come.

I'm expecting the X ramp to be slower than most people think. A while back (maybe the Q4 2014 call?) Elon stated the ramp for the X would be considerably faster than the S when discussing the latest X delay. Since then I haven't heard that sentiment again, and any time the launch date is brought up he refers to "first deliveries" and doesn't mention volume production. To me that indicates they aren't as confident with the ramp time anymore and are instead concerned about getting the first few official deliveries while still working out the kinks before really scaling up. I would be surprised if they ship more than 1500 X's this year, however after the first 3-6 months when they production issues are smoothed out the X should get up to par with the S pretty quick.
 

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