Near-future quarterly financial projections

[bdy0627]

Interesting discussion involving one of our TMC members regarding Fox reporter Charles Gasparino's recent dire warnings to longs about imminent bankruptcy for Tesla. I keep seeing this same response from skeptics about it being virtually impossible for Tesla to be cash flow positive in Q3 after being so negative in Q2. I'd be curious to hear some opinions from Luv and other's about the Q3 cash flow estimate. The heavy consensus is that it will not be positive. Realistically, what's the worst it is likely to be?

 

[bdy0627]

A little more from this discussion. The crazy thing is that I think there are many financial analysts concluding the same thing as this Sean Coakley. Why the huge discrepancy from Luv's estimate? I give Luv's modeling a LOT of credibility based upon past accuracy. Are we possibly missing something that is skewing the cash flow by over $500M?

 

[bdy0627]

I do see that this guy mentions negative cash was $700M last quarter, but that's wrong. That was Q1. Last quarter was -$400M, so we are talking about a turnaround of around $1.1B between Q2 and Luv's estimate.

 

[ThereAre4Cars]

Like @mrdoubleb I'd too like to see how you arrived at that gross margin number, because it's contradicted by several other sources of gross margin data. Can you list key inputs, assumptions and justification of how you arrived at those numbers?

All of the assumptions are right there in the model which you can vary yourself (although it drops some nuance for simplicity because it assumes every car at a certain price point has the same margin). Otherwise, it's just math. When you argue that most people will take up the EAP @100% incremental margin you are raising the average ASP in that model, but if you do that while holding overall margin constant, the effect is actually to reduce the implied GM on non-EAP configurations.

If GM is 15% this quarter on 60k$ ASP (9k$ GP) and 100% of those people bought 100% margin EAP that means that a 55k$ ASP non-EAP variation of that analysis only has 4k$ in total margin. It's math.

So if you work backwards from what it means to sell 60k$ at 15% GM, the implications are that the gross margin on the 35k$ model is absurdly bad (-5k$ give or take, maybe even more), and I am asking for what categories of savings exist, what they are, and how big they are.

For instance, I was looking at warranty info. I don't know if this forum has analyzed this but it looks to me like S/X was cruising at about 2.1k$ warranty reserve (which goes into COGS) but as of Q2 the model 3 was 3.6k$ or so, and obviously that's temporary. That would be a big boost. D&A and general assembly labor don't seem like big enough items to matter much but might contribute another 1k$ or so IMO. It would seem to me the biggest thing left is part scrap and reworking, which is hard to measure and maybe that's where we're left is just faith in that.

I definitely agree Tesla will walk down the ladder and release configs from high GP to low GP. The only counterbalance to that is they have to be careful I think not to create a situation where they suck out too much of the higher priced configs and can't maintain it the next quarter and end up with lower profitability the following quarter, since that would lead to all kinds of rampant negative speculations. Safer to cautiously improve even if you have to mix in lower profit models and therefore deliberately underoptimize.

An example of where you can take that modelling approach. Here is a potential 500k\year pace sketched out. It notably includes GM on that 35k$ going from -5k$ to 2.5k$ (I don't know how they do that exactly, I am just asserting it). The overall ASP is ~50k$ which strikes me as intuitive although it's much higher than Elon's 42k$. It's important to watch the total gross profit number which goes from ~500M$ on my first model to 1.38B$ here as that's ultimately the only thing that matters. If you wanted to walk that GP back down to 800M$ to be conservative, you could vary the GM on the base model and it would show you just how far they are from here. You could also vary the proportion of sales at each price point. etc. All of this is good for developing intuitions.

Price | Volume | Gross Profit | Inc. Margin | Gross Margin
$35,000 14000 $2,500.00 7.14%
$40,000 24000 $5,250.00 55.00% 11.67%
$45,000 22000 $8,100.00 57.00% 18.00%
$50,000 20,000 $11,050.00 59.00% 22.10%
$55,000 18,000 $14,100.00 61.00% 25.64%
$60,000 12,000 $17,250.00 63.00% 28.75%
$65,000 7,000 $20,500.00 65.00% 31.54%
$70,000 4,000 $23,850.00 67.00% 34.07%
$75,000 2,500 $27,300.00 69.00% 36.40%
$80,000 1500 $30,850.00 71.00% 38.56%
$49,540.00 125000 $10,995.40 22.19%
Total Gross Profit $1,374,425.00

 

[Reciprocity]

Like @mrdoubleb I'd too like to see how you arrived at that gross margin number, because it's contradicted by several other sources of gross margin data. Can you list key inputs, assumptions and justification of how you arrived at those numbers?

One data set of professionally estimated gross margins on the $35k version of the Model 3 we can take a look at the Munro tear-down:

Munro calculated the $35k version with a 18% gross margin. (The independent German tear-down in 2018 came to a similar conclusion.)

Note that the Munro margin doesn't include per unit depreciation/amortization costs nor stock comp direct costs, which are around $2K at 8k-10k run-rates, so the real effective GAAP margin would be $6,300-$2,000 = $4,300, which is a margin of 12%.

But that's the base entry model with any color as long as it's black. Add in pretty much any option and margins improve significantly:

• Add in AWD as an initial mandatory bundle and the base price increases to $40k and margin improves to $6,300+$2,600-$2,000 = $6,900 = 17.2%.
• Or add in Premium as an initial mandatory bundle and the base price increases to $40k and margin improves to $6,300+$4,500-$2,000 = $8,800 = 22.2%.
• Or add in EAP (80% take rate currently) and the ASP improves to $40k and the margin improves to $6,300+$5,000-$2,000 = $9,300 = 23.2%.

Add any two of these very popular options, plus a color, and ASP increases to $45k and margin increases into the 25%-30% range.

Cash margin would be significantly higher, by another 5% or so.

I.e. even at 5k-8k run-rate with ~$1,000 more in depreciation costs Tesla is in a very good place even after introducing the Standard Range. Tesla will probably have to raise options prices again after they introduce SR, due to the spike in demand.

I have been wanting to formally do this analysts and glad someone did. In the simplest terms, if Tesla had SR pack production worked out, then it's as simple as backing out the margins and costs for PUP and LR battery. The only assumption you have to make is that pack costs are the same and we know that when the SR goes into production, it will do so with a more automated pack production machine from grohmann. 3x faster and 3x cheaper if I recall. It's pretty easy to see Tesla will be profitable with the SR and the blended rate should be very solid and improve every QTR.

Another thing to note on margins is that the S75D should be cannibalized by the AWD and performance model 3 which can add up to higher margins for the S where the mix well be heavily tilted to S100D.

 

[kakamora]

Like @mrdoubleb I'd too like to see how you arrived at that gross margin number, because it's contradicted by several other sources of gross margin data. Can you list key inputs, assumptions and justification of how you arrived at those numbers?

One data set of professionally estimated gross margins on the $35k version of the Model 3 we can take a look at the Munro tear-down:

Munro calculated the $35k version with a 18% gross margin. (The independent German tear-down in 2018 came to a similar conclusion.)

Note that the Munro margin doesn't include per unit depreciation/amortization costs nor stock comp direct costs, which are around $2K at 8k-10k run-rates, so the real effective GAAP margin would be $6,300-$2,000 = $4,300, which is a margin of 12%.

But that's the base entry model with any color as long as it's black. Add in pretty much any option and margins improve significantly:

• Add in AWD as an initial mandatory bundle and the base price increases to $40k and margin improves to $6,300+$2,600-$2,000 = $6,900 = 17.2%.
• Or add in Premium as an initial mandatory bundle and the base price increases to $40k and margin improves to $6,300+$4,500-$2,000 = $8,800 = 22.2%.
• Or add in EAP (80% take rate currently) and the ASP improves to $40k and the margin improves to $6,300+$5,000-$2,000 = $9,300 = 23.2%.

Add any two of these very popular options, plus a color, and ASP increases to $45k and margin increases into the 25%-30% range.

Cash margin would be significantly higher, by another 5% or so.

I.e. even at 5k-8k run-rate with ~$1,000 more in depreciation costs Tesla is in a very good place even after introducing the Standard Range. Tesla will probably have to raise options prices again after they introduce SR, due to the spike in demand.

Has anyone studied the S and X ramps. I am sure when they were producing only half the desired output the margins were pretty crappy - Due to fixed costs in COGS and higher warranty costs.

When they open up the short range option. They will balance production to include a healthy portion of premium versions.

Also when do the Tesla chips go into the cars. How much of an impact will that have? Sure NVDA is making a killing on the chips

 

[ThereAre4Cars]

Well it's fancy to say that the base model has 18% gross margin because Sandy Munro had a spreadsheet, but Tesla is giving 15% guidance on a 60k$ priced vehicle. You have to square the math with reality somehow.

 

[mongo]

Well it's fancy to say that the base model has 18% gross margin because Sandy Munro had a spreadsheet, but Tesla is giving 15% guidance on a 60k$ priced vehicle. You have to square the math with reality somehow.

They gave 15% guidance in the Q2 update. Then, demand shifted to AWD and P versions. They did not give 15% guidance based on mostly AWD and P.

Model 3 gross margin should grow significantly to approximately 15% in Q3 and to approximately 20% in Q4 predominantly due to continued reduction in manufacturing costs and to some extent an improving mix.

 

[ThereAre4Cars]

They gave 15% guidance in the Q2 update. Then, demand shifted to AWD and P versions. They did not give 15% guidance based on mostly AWD and P.

Yeah l expect gm to actually be closer to 18% based on the AWD demand, but that is not really addressing the question. The Sandy spreadsheet approach posted is a variant of the one I posted. His is a little more complex. Maybe it buys some advantage to the extra complexity I haven't decided. But he starts with 18% gm on the 35k$ model. Ok.. but that is mathematically and completely divorced with the actual reported numbers and anyone who wants to understand the story should be trying to connect these dots. They matter even more than the bounce in cash flow for 90 day supplier terms by an order of magnitude since that is mostly a one off effect.

 

[mongo]

Yeah l expect gm to actually be closer to 18% based on the AWD demand, but that is not really addressing the question. The Sandy spreadsheet approach posted is a variant of the one I posted. His is a little more complex. Maybe it buys some advantage to the extra complexity I haven't decided. But he starts with 18% gm on the 35k$ model. Ok.. but that is mathematically and completely divorced with the actual reported numbers and anyone who wants to understand the story should be trying to connect these dots. They matter even more than the bounce in cash flow for 90 day supplier terms by an order of magnitude since that is mostly a one off effect.

Yeah, the forecast % is strange compared to the breakdown. EAP on its own* is 8% GM on 60k. P is mostly all GM 14% on 64k. Mayhaps they were hedging lower volumes and mostly RWD.

*EAP still has deferred revenue which may mostly be claimed in Q4 due to 9.0

 

[ThereAre4Cars]

Yeah I mean the p model is like 9k$ of 100% margin. They flip a bit in the software that's all. And they are selling a boat load. Eap, as fact checking points out, is high uptake and nearly 100% margin. How is Tesla not pulling 30+% margins this quarter with the mix it is selling? This is such a weird unexplained thing. Almost nothing else matters but this question.

And at the same time if -5k$ is the gp on the 35k$ model implying 40k$ to build it how is that possible? The battery on the base is 8k$ which is a lot but the rest of the car isn't very complicated and Toyota is doing fine selling 30k$ camry's. Can Tesla not make a sr base model without battery for less than 32k$?

This whole thing is weird to me. Tesla needs to explain this and people need to understand it needs explaining.

 

[landis]

So if you work backwards from what it means to sell 60k$ at 15% GM, the implications are that the gross margin on the 35k$ model is absurdly bad

That is just nonsensical. They aren't yet selling $35k model. Cost efficiencies are coming before they do.

 

[mrdoubleb]

That is just nonsensical. They aren't yet selling $35k model. Cost efficiencies are coming before they do.

Indeed. I think the Munroe report calculated with 10k/week production rat. Also, it did not consider the new and improved pack design due Q1 2019.

 

[luvb2b]

i know a lot of people look to models like mine to give some comfort at times like these.

i believe price action should not be ignored, and reflexivity is a real thing.

soros's concept of reflexivity is the idea that the fundamentals and share price are intertwined: a rising share price can create its own positive fundamentals and a falling share price can create its own negative fundamentals.

on the positive side, imagine that rising share price implies investors who bought shares might cash some out to buy teslas. any needed financing is easily available by selling shares. suppliers and other creditors are willing to extend easy terms because they have confidence in the company due to its rising share price.

the opposite also happens. we all remember the biggest and best financial institutions in the world being brought to their knees as share prices and confidence in those entities collapsed in 2008-09.

i mention this because the share price is sending a totally different message from what my modeling would suggest. i don't know what will happen, but here's one way my model could be an epic fail.

in my model the cash balance grows on the back of payables. imagine for a moment a few suppliers saying we need to be paid sooner. with a model-estimated ~5b of payables outstanding at the end of this quarter, it wouldn't take much and suddenly the cash balance is not growing enough to easily cover upcoming debt payments.

to cover those debt payment: a share sale or a refinancing... and just imagine the terms on those were they needed. this may look better after 18q3 earnings, but there's also the chance that the overhang of the investigations + elon's behavior is enough to keep people from believing guidance.

fundamentals have zero importance once trust is broken - particularly in companies that have high leverage.

i have no idea how the future will play out. i am simply alerting people that risk should be managed and considered with an open mind to the possibilities.

i will regret posting my model if people believe it blindly and lose lots of money. please accept my reminder to always keep an open mind about the risks, to make your own independent judgements, and to not place over-reliance on any one data point (such as a model).

edit: i just saw the discussion around gasparino's tweets. without agreeing or disagreeing with the specifics of his content, i would say the general idea that a declining share price can create its own deteriorating fundamentals (i.e., soros's reflexivity) is valid. leveraged companies that lose the confidence of the markets can get in trouble very quickly. i guess i just repeated what i said above.

 

[ValueAnalyst]

i know a lot of people look to models like mine to give some comfort at times like these.

i believe price action should not be ignored, and reflexivity is a real thing.

soros's concept of reflexivity is the idea that the fundamentals and share price are intertwined: a rising share price can create its own positive fundamentals and a falling share price can create its own negative fundamentals.

on the positive side, imagine that rising share price implies investors who bought shares might cash some out to buy teslas. any needed financing is easily available by selling shares. suppliers and other creditors are willing to extend easy terms because they have confidence in the company due to its rising share price.

the opposite also happens. we all remember the biggest and best financial institutions in the world being brought to their knees as share prices and confidence in those entities collapsed in 2008-09.

i mention this because the share price is sending a totally different message from what my modeling would suggest. i don't know what will happen, but here's one way my model could be an epic fail.

in my model the cash balance grows on the back of payables. imagine for a moment a few suppliers saying we need to be paid sooner. with a model-estimated ~5b of payables outstanding at the end of this quarter, it wouldn't take much and suddenly the cash balance is not growing enough to easily cover upcoming debt payments.

to cover those debt payment: a share sale or a refinancing... and just imagine the terms on those were they needed. this may look better after 18q3 earnings, but there's also the chance that the overhang of the investigations + elon's behavior is enough to keep people from believing guidance.

fundamentals have zero importance once trust is broken - particularly in companies that have high leverage.

i have no idea how the future will play out. i am simply alerting people that risk should be managed and considered with an open mind to the possibilities.

i will regret posting my model if people believe it blindly and lose lots of money. please accept my reminder to always keep an open mind about the risks, to make your own independent judgements, and to not place over-reliance on any one data point (such as a model).

edit: i just saw the discussion around gasparino's tweets. without agreeing or disagreeing with the specifics of his content, i would say the general idea that a declining share price can create its own deteriorating fundamentals (i.e., soros's reflexivity) is valid. leveraged companies that lose the confidence of the markets can get in trouble very quickly. i guess i just repeated what i said above.

Any supplier who does that can say goodbye to future business with Tesla.

 

[bdy0627]

Any supplier who does that can say goodbye to future business with Tesla.

It would be quite a self-inflicted wound it seems, particularly any supplier who counts Tesla as a significant part of their business. If it happened and caused the dominoes to fall, it would prove to be a very bad business move for the supplier. I suppose the chance of it happening isn't 0, so it should be seen as a potential risk, but it doesn't make sense for any of the parts suppliers involved with Tesla.

 

[ValueAnalyst]

It would be quite a self-inflicted wound it seems, particularly any supplier who counts Tesla as a significant part of their business. If it happened and caused the dominoes to fall, it would prove to be a very bad business move for the supplier. I suppose the chance of it happening isn't 0, so it should be seen as a potential risk, but it doesn't make sense for any of the parts suppliers involved with Tesla.

I also don't know of any example of it, except for banks. Tesla is not a financial institution. Shorts tried to pull this crp on SolarCity, but they can't do it with Tesla, especially with Model 3 ramp already in strong position, and profitability is a few weeks away.

 

[Zhelko Dimic]

It would be quite a self-inflicted wound it seems, particularly any supplier who counts Tesla as a significant part of their business. If it happened and caused the dominoes to fall, it would prove to be a very bad business move for the supplier. I suppose the chance of it happening isn't 0, so it should be seen as a potential risk, but it doesn't make sense for any of the parts suppliers involved with Tesla.

I think more realistic chance is that Tesla has harder time getting any further concessions and/or lower prices from suppliers. And further lower parts prices may be part of Tesla gross margin modelling. If they can't get them, there could be some damage

 

[SBenson]

From a cursory look the baseline bear thesis seems to be
a) Q4 order flow will be weak, as the reservation book dried out. If not q4, it's q1.
b) Tesla hasn't raised money despite doing heroic maneuvers in cash management - signals that it CAN'T raise money
c) SP trending down to <253 makes convertible bonds cash-only payment
d) All together Tesla won't have money to pay the bonds

I think the first order of business is to watch for item-a. I don't know the best tool to watch it. Perhaps see how Troy's delivery estimate for Q4 changes over next few weeks. If it trends down, it's substantial trouble. But again, it could be too late by the time there is real tangible info.

There is considerable confusion/disagreement over gasparino's tweets even among bears. My interpretation is that the bankers are forward looking and are expecting the play above and thus getting ahead of the game in pitching pre-packs and dip financing. Their interest is in making IB fee. They don't care which way the chips fall.

I understand the theory of reflexivity. Though my opinion is that there gotta be something tangible as a trigger. Sub-prime loans and various forms of inter-bank lending and so forth were legit triggers that were there in 08/09.

Perhaps Musk's perplexing behavior is symptom of the problem as opposed to the problem itself.

Musk hoped to create a bidding war by putting out a fake price as secured. Why did he make such a desperate all-in feat to take Tesla private? Is SEC somehow blocking Musk from raising funds? Would going private take that risk away? Why is he so pissed at SEC? Just because of COB timeout? or is there something bigger?

So far I haven't seen a legitimate reason for why Musk went with the original go-private tweets. The only thing that makes sense, is that he sought cover from SEC (even before the latest charges). Going private is the way to accomplish it.

or maybe he is simply overdosing himself with drugs and lost his mind... Which ever reason pleases you... But unless you know why he did what he did, you don't know what you are getting yourself into.

Ultimately, I very much agree with luv. Be cognizant of the risk and exposure you have.

(full disclosure: i was all out few months ago, just watching the drama from sidelines)

 

[omgwtfbyobbq]

A little more from this discussion. The crazy thing is that I think there are many financial analysts concluding the same thing as this Sean Coakley. Why the huge discrepancy from Luv's estimate? I give Luv's modeling a LOT of credibility based upon past accuracy. Are we possibly missing something that is skewing the cash flow by over $500M?

View attachment 341632

Do you have a link to Coakley's analysis? I can't find the estimate you're referring to.