Near-future quarterly financial projections

[Right_Said_Fred]

My projections versus Q4 2020:

View attachment 650310

Thank you for your analysis. It's much rosier than I expected (which is great). Some questions:

- Did you account for the S/X line workers who have not been productive for an entire quarter but (presumably) still had to be paid?
- Have you taken into account that the margin on MIC Model Y may not be great yet as production has just started ramping?
- Did you account for the big price cut on the 5,500 French Model 3 cars (the price was cut in order to qualify for EV subsidies). The cuts were €5,000 for LR, €4,000 for SR+ and €3,000 for P.
- Why do you think regulatory credits will increase Q on Q? Q1 is usually a slower month for many OEMs, so wouldn't that translate to fewer ICE cars to compensate for? Or do you expect the stricter EU rules for 2021 to cause credit payments to go up?
- What is the 51 mln loss in Other Operating Income?

Thanks!

 

[Artful Dodger]

One possible nice surprise is since there was no S/X production for the quarter, you have to wonder what happened with the battery supply for the quarter that is normally for S/X production. I could see Energy & Storage actually being higher verse Q4 2020

That didn't happen at any time between 2017 (when S/X production peaked at 100K/yr) and 2020 (when Tesla produced just 54,805 Models S/X. If this were feasible, why wouldn't they have done so previously (it's been 4 yrs)?

There's no reason for Tesla to divert automotive 18650 cells to storage products when those cells can be used in higher-margin auto products in 2021 (Tesla has enough S/X production capacity for 100K total before the end of 2021, even with the production pause in Q1).

 

[The Accountant]

Thank you for your analysis. It's much rosier than I expected (which is great). Some questions:

- Did you account for the S/X line workers who have not been productive for an entire quarter but (presumably) still had to be paid?
- Have you taken into account that the margin on MIC Model Y may not be great yet as production has just started ramping?
- Did you account for the big price cut on the 5,500 French Model 3 cars (the price was cut in order to qualify for EV subsidies). The cuts were €5,000 for LR, €4,000 for SR+ and €3,000 for P.
- Why do you think regulatory credits will increase Q on Q? Q1 is usually a slower month for many OEMs, so wouldn't that translate to fewer ICE cars to compensate for? Or do you expect the stricter EU rules for 2021 to cause credit payments to go up?
- What is the 51 mln loss in Other Operating Income?

Thanks!

Thanks for the questions.
- Did you account for the S/X line workers who have not been productive for an entire quarter but (presumably) still had to be paid?
I added about $20m to COGS for what is known as idle capacity - this was meant to cover fixed costs that sat idle. In regard to unproductive labor on S&X, I may have some risk here. I assumed that S&X line workers were either furloughed or moved to the 3&Y lines as producton likely jumped from about 99k 3&Ys in Q4 to 105k 3&Ys in Q1 in Fremont.
- Have you taken into account that the margin on MIC Model Y may not be great yet as production has just started ramping?
I assumed the same cost for the MIC Y as the Fremont Y. So indirectly, I am assuming that lower efficiency during ramp up in China is offset by the lower cost of labor (China vs Fremont). There's a possibility that some raw materials are sourced at a lower cost in China than Fremont as well.
- Did you account for the big price cut on the 5,500 French Model 3 cars (the price was cut in order to qualify for EV subsidies). The cuts were €5,000 for LR, €4,000 for SR+ and €3,000 for P.
This I missed. This could reduce sales by $24m and GAAP Income by $19m
- Why do you think regulatory credits will increase Q on Q? Q1 is usually a slower month for many OEMs, so wouldn't that translate to fewer ICE cars to compensate for? Or do you expect the stricter EU rules for 2021 to cause credit payments to go up?
Tesla is not very transparent on the accounting for Reg Credits but I assumed that since EU sales were 24k in Q1 2020 and now about 28k in Q1 2021, we should see an increase. The Reg Credits in Q1 2020 were $354m. With significant deliveries in Q4 2020 (181k) and Q1 2021 (185k), I thought an increase to 420m in Reg Credits would not unreasonable (I could have supported a higher number).
- What is the 51 mln loss in Other Operating Income?
This is very difficult to forecast as it jumps around quite a bit from Qtr to Qtr. It mostly relates to Foreign Exchange transaction gains/losses and non-controlling interests in net income coming from Tesla's financing arrangements with their solar products and vehicles.

 

[st_lopes]

I added about $20m to COGS for what is known as idle capacity - this was meant to cover fixed costs that sat idle. In regard to unproductive labor on S&X, I may have some risk here. I assumed that S&X line workers were either furloughed or moved to the 3&Y lines as producton likely jumped from about 99k 3&Ys in Q4 to 105k 3&Ys in Q1 in Fremont

I believe there were several leaked emails around that time that confirmed this, namely that employees were furloughed until lines were back online and that they were encouraged to sign up for shifts on 3/Y lines.

Also we may not see idle capacity charges hit COGS in Q1. Given they produced 0 units off of those lines, all of the costs may be baked in to inventory costs and may only hit the COGS line in Q2 once they build and deliver units from that line.

 

[The Accountant]

I believe there were several leaked emails around that time that confirmed this, namely that employees were furloughed until lines were back online and that they were encouraged to sign up for shifts on 3/Y lines.

Also we may not see idle capacity charges hit COGS in Q1. Given they produced 0 units off of those lines, all of the costs may be baked in to inventory costs and may only hit the COGS line in Q2 once they build and deliver units from that line.

I agree with your point that we may not see Idle Capacity Charges but I wanted to add some additional costs and went with the extra $20m. I took a macro view and saw that in Q4 2020, Fremont produced about 115k vehicles and in Q1 2021 produced about 105k. With 10k less vehicles in Q1 2021, I surmised that there may have been some unfavorable variance to overhead absorption. But it's hard to say.

Here are my assumptions on Production and Deliveries:

 

[Artful Dodger]

Chances of recognizing the tax benefit must surely be increased now - given how unlikely it is that there will be unprofitable quarters going forward now.

Tesla's language in the 2020-10K** somewhat implies that they might already be in a position to use their deferred tax credits / valuation allowance. The gold standard is are they "more likely than not" to be profitable going forward, as a binary determination (see below).

The reason they did not use the VA after Q4 is that they already had sufficient expenses to write-off taxes due to stock-based compensation (SBC) mainly for the CEO compensation plan. They also said they would continue to monitor the situation.

I hope this all converges in a 'perfect tsunami' in 2021: (perhaps beginning as early as Q2)

• Tesla SP plateau leads to a temporary reprieve from large GAAP expenses for CEO Comp.
• Tesla is thereby able to move its ~$2.9B Valuation Allowance to the Income Statement
• Telsa delivers FSD beta to 10K users in the USA unlocking ~$500M in revenue reserves
• Tesla launches its Robotaxi service in at least 1 jursidiction (ie: Dubai, Vegas, Miami...)

To me, it seems like this could make Tesla the biggest company in the world by Mkt Cap in a few month...

Note re: Valuation Allowance comment above:

**Income Taxes (quoted from the 2020-10K)​

"As of December 31, 2020, we had recorded a full valuation allowance on our net U.S. deferred tax assets because we expect that it is more likely than not that our U.S. deferred tax assets will not be realized. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted."​

Cheers!

 

[lklundin]

Why not just sell and rebuy? Maybe it would be even possible to this transaction on a private exchange.

With (a projected) record GAAP income, Tesla would not want to realize more taxable gains - so this would make sense only if at the time of the sale + re-buy the BTC to dollar price had dropped to below the initial purchase price - and if a Wash-Sale Rule would not prevent this from being a tax deductable (I don't know if this rule applies to Tesla).

 

[EVWatcher]

With (a projected) record GAAP income, Tesla would not want to realize more taxable gains - so this would make sense only if at the time of the sale + re-buy the BTC to dollar price had dropped to below the initial purchase price - and if a Wash-Sale Rule would not prevent this from being a tax deductable (I don't know if this rule applies to Tesla).

I have no idea if this applies to crypto or companies, but I why would there be a wash sale? If tesla sold it would be a massive profit not a loss.

 

[kbM3]

Tesla's language in the 2020-10K** somewhat implies that they might already be in a position to use their deferred tax credits / valuation allowance. The gold standard is are they "more likely than not" to be profitable going forward, as a binary determination (see below).

The reason they did not use the VA after Q4 is that they already had sufficient expenses to write-off taxes due to stock-based compensation (SBC) mainly for the CEO compensation plan. They also said they would continue to monitor the situation.

I hope this all converges in a 'perfect tsunami' in 2021: (perhaps beginning as early as Q2)

• Tesla SP plateau leads to a temporary reprieve from large GAAP expenses for CEO Comp.
• Tesla is thereby able to move its ~$2.9B Valuation Allowance to the Income Statement
• Telsa delivers FSD beta to 10K users in the USA unlocking ~$500M in revenue reserves
• Tesla launches its Robotaxi service in at least 1 jursidiction (ie: Dubai, Vegas, Miami...)

To me, it seems like this could make Tesla the biggest company in the world by Mkt Cap in a few month...

Note re: Valuation Allowance comment above:

**Income Taxes (quoted from the 2020-10K)​

"As of December 31, 2020, we had recorded a full valuation allowance on our net U.S. deferred tax assets because we expect that it is more likely than not that our U.S. deferred tax assets will not be realized. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted."​

Cheers!

My guess would be that WallSt. would view the Deferred Tax Allowance and unlocking revenue reserves as one time events that don’t materially change the market cap.

Who knows how they really think, though

 

[st_lopes]

My guess would be that WallSt. would view the Deferred Tax Allowance and unlocking revenue reserves as one time events that don’t materially change the market cap.

Who knows how they really think, though

I find this argument to be misguided.

If Tesla recognizes its deferred FSD revenue it’s because it has launched new features allowing them to record more revenue. This is a permanent difference to future FSD sales, meaning it’s a permanent unlock to gross margins.

Same is true for releasing the valuation allowance, it will allow Tesla to record its tax benefits in various jurisdictions as they are earned. Again a permanent difference to their go forward operating margins.

Yes it’s a noisy quarter when they release these things for the first time, but they do have permanent ramifications.

 

[UkNorthampton]

I just had this youtube channel pop up. I searched on this thread but didn't get a result. New to me, probably not to many of you. Posting in case it's useful/thought provoking.

Tesla Economist

This video - talking about his 187,000 prediction for 1Q2021 (after P&D release)

predicted on video from 27th March 2021 -

"To view my price target model go to https://teslaeconomist.com/price-target Follow me on Twitter @teslaeconomist https://twitter.com/teslaeconomist"

2025 price target of around $6-15,000 -

- like Warren Redlich, he predicts on battery supply.

 

[lklundin]

I have no idea if this applies to crypto or companies, but I why would there be a wash sale? If tesla sold it would be a massive profit not a loss.

You seem to have overlooked the context which is "Why not just sell and rebuy?" And with Tesla projected to post a record, taxable profit, they should be reluctant to realize additional profits from their BTC position.

 

[ByeByeJohnny]

Whatever happened to those calls (I think) Tesla bought as insurance against Elons compensation cost? It's been explained to me before but I don't have enough brains cells left to remember. Have they expired and the profits cashed and if so where/when did this show up on an ER? If not, shouldn't that be incoming soon?

 

[Artful Dodger]

My guess would be that WallSt. would view the Deferred Tax Allowance and unlocking revenue reserves as one time events that don’t materially change the market cap.

Who knows how they really think, though

Yeah, you prolly rite, but $3B is about 6 quarters worth of record GAAP income, all in a neat little take-out baggie....

Remember the line where Wall St. says "Tesla may grow into their Mkt Cap"? This'll do nicely.

Cheers!

 

[CreativeName]

You seem to have overlooked the context which is "Why not just sell and rebuy?" And with Tesla projected to post a record, taxable profit, they should be reluctant to realize additional profits from their BTC position.

Just pointing out that they have a large amount of Federal NOL and R&D credit carryforward. So, if they were wanting to benefit these deferred tax assets that currently have a valuation allowance on them (and wouldn’t otherwise be releasing the reserve), they could decide to sell and recognize a gain on some portion of their BTC position and still pay little to no U.S. income tax.

 

[kbM3]

I find this argument to be misguided.

If Tesla recognizes its deferred FSD revenue it’s because it has launched new features allowing them to record more revenue. This is a permanent difference to future FSD sales, meaning it’s a permanent unlock to gross margins.

Same is true for releasing the valuation allowance, it will allow Tesla to record its tax benefits in various jurisdictions as they are earned. Again a permanent difference to their go forward operating margins.

Yes it’s a noisy quarter when they release these things for the first time, but they do have permanent ramifications.

I was talking about the deferred FSD revenue, not the ongoing aspect of an increase in margins. But I would think that could possibly already be priced in as well?

And same with deferred tax allowance.

Wall St is fantastic at finance. It’s more in the area of engineering and technology and thus Tesla being a very unique company, that they(except Ark) don’t get.

 

[st_lopes]

Both of those factors should already be priced in.

Wall St is fantastic at finance. It’s more in the area of engineering and technology and thus Tesla being a very unique company, that they(except Ark) don’t get.

I would normally agree, but my confidence in WS having priced anything in is at an all time low with the yield rate debacle of the last few weeks. Economy is rebounding, yield rates are back to pre Covid rates... how does that translate to a major reprice of long term discount rates.

Consensus 2022 estimates still have net margin at 8.3% compared to 6.7% 2021. Neither of these would have priced a release of VA and a permanent change to Tesla’s go forward effective tax rate. TESLA, INC. : Financial Data Forecasts Estimates and Expectations | TSLA | MarketScreener

edit: I would also point to Twitter’s release of VA and the subsequent stock price action as indicators that WS don’t price this in effectively

Same can be said of gross margin rates where most analysts are still below 30%. FSD deferred revenue releases (or moving to a monthly subscription which circumvents the deferral issue as well) would unlock a meaningful amount of gross margins that would push well past 30% targets.

 

[Mich]

Regarding the new S&X line: with the rear casting they will get rid of a little bit less than 100 robots. Maybe the new body will have a front casting and structural pack as well so even more robots will be unemployed.

How could this impact GAAP profit? Maybe they are still in the books.

 

[Rarity]

Regarding cryptocurrencies gain, would it be possible to have that reflected in the non-GAAP earnings figures, or are even the non-GAAP figures one-sided?

 

[kengchang]

Regarding cryptocurrencies gain, would it be possible to have that reflected in the non-GAAP earnings figures, or are even the non-GAAP figures one-sided?

No, there's no gain unless Tesla sold it.