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Short-Term TSLA Price Movements - 2016

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And profits from sales of S and X seem highly likely to rise in Q4. In fact, another 2-4+% gross margin increase for S/X -- from 25% to 27-29+% on a non-GAAP basis -- is in the cards due to a variety of factors including:
  • Discontinuing the X60, Tesla's lowest margin vehicle
  • P100D sales
  • Enhanced Autopilot and Full Self-Driving Capability
  • Improved production efficiency of S and X
  • Less discounting
With X production now running smoothly S and X should continue to generate positive GAAP and non-GAAP earnings, as well as serious amounts of cash.

Not to unduly curb your enthusiasm but there may be some countervailing currents between Q3 and Q4 that you may also want to consider:

The most obvious is the $139 million in ZEV credits that guidance stated would be negligible in Q4.

Another is the impact of Denmark deliveries, Guidance is for total Q4 deliveries of 25,000 vs 4Q15 deliveries of 17, 868, so a Yr over Yr increase of 41%. Deliveries in 4Q15 to Denmark were 1,886; during the first three quarters of 2016 they totaled just 106. If the 2016 quarterly average of about 35 combined S&X deliveries to Denmark applies to Q4, that's a deficit of 1,851 that would have to be delivered in other markets just to maintain parity with 4Q15 A 41% increase would be an additional 773 deliveries to other markets

A third is a one-time benefit in Q3 from reducing pre-existing warranty reserves by $19.5 million--that's a 9% reduction in just one quarter of the warranty reserve balance at the beginning of the quarter that had been building up over eight years since reserves began accruing for the Roadsters. The negative adjustment is even more significant since additional reserves would have to be added for RVG cars retained by their owners at the end of the option period as warranty work was expensed as incurred rather then accruing an initial reserve. It's unlikely a similar "pie" can be baked in Q4.

A fourth issue is valuation of the CPO inventory. There are over 130 listings on the CPO consolidator that have been offered for sale for eight months or longer. Used cars lose value relatively quickly; that's why "stealerships" tend to send trade-ins to auction if they can't sell them in a month or two. Tesla's continual improvements/upgrades to new versions tend to exacerbate the value reduction rate of the older Teslas traded-in. Fourth quarter results are reported in the annual report which has to be signed off by the auditors. Inventory is carried at the lower of cost or market. It's likely there will be an inventory write down just as there was in 4Q15.​
 
Another is the impact of Denmark deliveries, Guidance is for total Q4 deliveries of 25,000 vs 4Q15 deliveries of 17, 868, so a Yr over Yr increase of 41%. Deliveries in 4Q15 to Denmark were 1,886; during the first three quarters of 2016 they totaled just 106. If the 2016 quarterly average of about 35 combined S&X deliveries to Denmark applies to Q4, that's a deficit of 1,851 that would have to be delivered in other markets just to maintain parity with 4Q15 A 41% increase would be an additional 773 deliveries to other markets​

Not sure what is the significance of deliveries to Denmark in Q4 of last year, when in Q2 of 2016 they delivered 15,234 cars in NA, 4964 cars in Europe and 4623 in Asia/Pacific region, for a total of 24,821 cars. All of the above while delivering only 28 cars in Denmark. Obviously a reduction of deliveries to Denmark from 1886 cars in 2015 Q4 to just 28 in 2016 Q2 did not keep Tesla from delivering a total of 24,821 cars in 2016 Q2.​
 
Not to unduly curb your enthusiasm but there may be some countervailing currents between Q3 and Q4 that you may also want to consider:

The most obvious is the $139 million in ZEV credits that guidance stated would be negligible in Q4.​
ZEV credits are irrelevant to non-GAAP margins, which is the 25% figure I quoted.

Another is the impact of Denmark deliveries, Guidance is for total Q4 deliveries of 25,000 vs 4Q15 deliveries of 17, 868, so a Yr over Yr increase of 41%. Deliveries in 4Q15 to Denmark were 1,886; during the first three quarters of 2016 they totaled just 106. If the 2016 quarterly average of about 35 combined S&X deliveries to Denmark applies to Q4, that's a deficit of 1,851 that would have to be delivered in other markets just to maintain parity with 4Q15 A 41% increase would be an additional 773 deliveries to other markets.
I compared Q3 2016 margins to likely Q4 2016 margins. Q4 2015 sales in Denmark are irrelevant to that comparison.

A fourth issue is valuation of the CPO inventory. There are over 130 listings on the CPO consolidator that have been offered for sale for eight months or longer. Used cars lose value relatively quickly; that's why "stealerships" tend to send trade-ins to auction if they can't sell them in a month or two. Tesla's continual improvements/upgrades to new versions tend to exacerbate the value reduction rate of the older Teslas traded-in. Fourth quarter results are reported in the annual report which has to be signed off by the auditors. Inventory is carried at the lower of cost or market. It's likely there will be an inventory write down just as there was in 4Q15.
130 CPO cars? I don't think a marginal loss of value on 130 cars will have a material effect on anything and in any case Tesla vehicles have consistently had less depreciation than comparable models.

A third is a one-time benefit in Q3 from reducing pre-existing warranty reserves by $19.5 million--that's a 9% reduction in just one quarter of the warranty reserve balance at the beginning of the quarter that had been building up over eight years since reserves began accruing for the Roadsters. The negative adjustment is even more significant since additional reserves would have to be added for RVG cars retained by their owners at the end of the option period as warranty work was expensed as incurred rather then accruing an initial reserve. It's unlikely a similar "pie" can be baked in Q4.
I am not an accountant and don't have time to parse this, but based on the other three items doubt it will make a material difference.
I am sticking with my forecast of 27-29% S/X non-GAAP GMs for Q4 based on current information. GAAP margins should be similar even w/o ZEV credits.

If you are confident in your views perhaps you can share your forecast for Q4 margins? Feel free to use GAAP, non-GAAP or both.
 
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Thanks for the heads up on the 5 seat interior. The lack of folding second row seats has bothered me - probably not enough to wait this long to configure and order, but certainly enough to make it easy to wait since I've needed to wait for other reasons.
 
Not sure what is the significance of deliveries to Denmark in Q4 of last year,​

OK, on the chance you want to understand, I'll explain it differently.

The year over year increase in deliveries for the third quarter was an increase of 114%--24,821 in 2016 versus 11,603 in 2015. The Danish component in 3Q15 was 335 deliveries, so if Denmark kept proportionally apace in the third quarter one would expect 716 deliveries for 3Q16. However, because of a change in tax related subsidies, there has been a severe contraction in Danish demand, and only 28 were delivered in 3Q16, a shortfall of 688 equivalent to 2.8% of the world-wide deliveries (668/24,821)

The short fall becomes more severe in 4Q16 because of a stellar quarter in Denmark last year. If the 2016 average quarterly delivery holds for the fourth quarter, the expected shortfall is 2,624, nearly four times the third quarter short fall and a full 10.5% of fourth quarter guidance of 25,000.

It's too early to predict whether guidance can be achieved, but the demand contraction in Denmark means the rest of the markets have to do much better.
 
OK, on the chance you want to understand, I'll explain it differently.

The year over year increase in deliveries for the third quarter was an increase of 114%--24,821 in 2016 versus 11,603 in 2015. The Danish component in 3Q15 was 335 deliveries, so if Denmark kept proportionally apace in the third quarter one would expect 716 deliveries for 3Q16. However, because of a change in tax related subsidies, there has been a severe contraction in Danish demand, and only 28 were delivered in 3Q16, a shortfall of 688 equivalent to 2.8% of the world-wide deliveries (668/24,821)

The short fall becomes more severe in 4Q16 because of a stellar quarter in Denmark last year. If the 2016 average quarterly delivery holds for the fourth quarter, the expected shortfall is 2,624, nearly four times the third quarter short fall and a full 10.5% of fourth quarter guidance of 25,000.

It's too early to predict whether guidance can be achieved, but the demand contraction in Denmark means the rest of the markets have to do much better.
Why are you comparing last year's Q4, when there were virtually no Model X deliveries, to this year's Q4? A much more valid comparison is 4Q16 to 3Q16. Model X is shipping in volume in both quarters and the Model S variants are similar, albeit with the addition of AP2 hardware. Denmark wasn't material to 3Q16 and it won't be material to 4Q16.
 
ZEV credits are irrelevant to non-GAAP margins, which is the 25% figure I quoted.

All regulatory credits should be reported in Other Income which would end the distortions and variability of GM under the current regime. But given the current regime, what sense does it make to exclude ZEV credits from non-GAAP calculations but include GHG/CAFE credits (the apparent $30 million "mouse nut'' last quarter)? Excluding all credits last quarter, Auto GM would be ($631.6-$169.7) /$2148.7-$169.7) =23.3%


I compared Q3 2016 margins to likely Q4 2016 margins. Q4 2015 sales in Denmark are irrelevant to that comparison.
I mentioned Denmark because I think the year over year comparables will make it difficult for Tesla to meet delivery guidance. If there is a delivery shortfall, there will be less leverage to improve GM i.e factory and operating overheads will be spread over a fewer number of cars..


130 CPO cars? I don't think a marginal loss of value on 130 cars will have a material effect on anything and in any case Tesla vehicles have consistently had less depreciation than comparable models.
130 is just the number readily visible on the consolidator, Tesla adds and removes unsold cars frequently. Regardless, you are probably correct- -maybe several dozen basis points on GM at the most


I am not an accountant and don't have time to parse this, but based on the other three items doubt it will make a material difference.
I am sticking with my forecast of 27-29% S/X non-GAAP GMs for Q4 based on current information. GAAP margins should be similar even w/o ZEV credits.

If you are confident in your views perhaps you can share your forecast for Q4 margins? Feel free to use GAAP, non-GAAP or both.

I'm not either but $19.5 million additional gross profit on $1,960 of revenue is about a 1% benefit to GM.

I'm going out of the country for two weeks but will revert about GAAP GM when I get back (I think believing stock based compensation has no cost is fatuous)
 
Not to unduly curb your enthusiasm but there may be some countervailing currents between Q3 and Q4 that you may also want to consider:

The most obvious is the $139 million in ZEV credits that guidance stated would be negligible in Q4.

Another is the impact of Denmark deliveries, Guidance is for total Q4 deliveries of 25,000 vs 4Q15 deliveries of 17, 868, so a Yr over Yr increase of 41%. Deliveries in 4Q15 to Denmark were 1,886; during the first three quarters of 2016 they totaled just 106. If the 2016 quarterly average of about 35 combined S&X deliveries to Denmark applies to Q4, that's a deficit of 1,851 that would have to be delivered in other markets just to maintain parity with 4Q15 A 41% increase would be an additional 773 deliveries to other markets

A third is a one-time benefit in Q3 from reducing pre-existing warranty reserves by $19.5 million--that's a 9% reduction in just one quarter of the warranty reserve balance at the beginning of the quarter that had been building up over eight years since reserves began accruing for the Roadsters. The negative adjustment is even more significant since additional reserves would have to be added for RVG cars retained by their owners at the end of the option period as warranty work was expensed as incurred rather then accruing an initial reserve. It's unlikely a similar "pie" can be baked in Q4.

A fourth issue is valuation of the CPO inventory. There are over 130 listings on the CPO consolidator that have been offered for sale for eight months or longer. Used cars lose value relatively quickly; that's why "stealerships" tend to send trade-ins to auction if they can't sell them in a month or two. Tesla's continual improvements/upgrades to new versions tend to exacerbate the value reduction rate of the older Teslas traded-in. Fourth quarter results are reported in the annual report which has to be signed off by the auditors. Inventory is carried at the lower of cost or market. It's likely there will be an inventory write down just as there was in 4Q15.​

Let me join the chorus on the Denmark deliveries. TSLA's delay of U.S. deliveries until December indicates that demand is robust, with or without good Denmark deliveries in Q4. We don't have a demand issue this quarter.

Also, you may be 100% right in accepting guidance of negligible ZEV credit contributions in Q4, but we both might be surprised by more credits than indicated. Why? Musk is a negotiator, and if he guided for substantial numbers of ZEV credits in Q4, he would lose negotiating power because the other side would realize he has already committed himself with parting with a certain number of ZEV credits. In fact, the other automakers might deliberately try to trip Tesla up if we guided for ZEV credits. It'd be pie in Elon's face and they'd kind of enjoy that. Also, Wall Street should be pleasantly surprised with earnings, whenever possible. I have no strong feeling we'll see substantial ZEV credits in Q4, but I'm also not counting out that possibility either.
 
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