Short-Term TSLA Price Movements - 2016

[SBenson]

It's a question of abstract vs. concrete thinking. From a distance, we want everything to work out. But if you have to propose tradeoffs I am in complete agreement that getting things right is more important than their deadline, and that gross margin optimization is more important than units shipped, and that brand quality protection is more important than units shipped (which actually adds mystique and desirability).

I might put a lower emphasis on the automation aspect though. Elon might want it, but so does every OEM that has ever existed. The idea that EVs are simpler and thus more prone for automated assembly is logical, but I'd like to see more specifics (e.g. the drivetrain hump gets in the way of the X, and that doesn't exist, so this can be done, which is automatable). I'm not really willing to ascribe much value to the dreadnought yet, but there's a lot of hand-waving because the simplicity of EVs is clearly a long-term advantage.

Here is a tiny little problem - if AD doesn't arrive, we are all doomed!

I am saying it with all seriousness with a really serious amount of my money in TSLA.

Speaking in very round numbers, S+X has an ASP of about 100K with margins of about 25%. In other words S+X take about $75K to make.

How on earth is Tesla going to make any "gross" profit on a model-3 at 42K ASP??

Everybody talks about batteries. Guess what, that is the second biggest cost component of building an EV. The bigger one is manufacturing overhead - in other words putting all the raw material together to actually make the car.

I am basing this on Randy Carlson's info-graphic from this article. Randy knows more about Tesla and manufacturing than anyone I know. So unless someone presents proof or solid reasoning otherwise, I consider Randy's number to be as good of an estimate as any.

So getting the dreadnaught right is even more important than giga-factory!!

GM can play this game of losing $9K per car to make it up in selling the gas guzzlers. Unfortunately for Tesla, there is only one way it can play this game: deliver but profitably.

If Tesla starts producing model-3 with out progress on AD I will sellout a lot of my shares.

So any calls forward, I would be paying more attention to progress on AD than the timeline for initial deliveries of model-3.

 

[Krugerrand]

Why are all the factpry tours crammed into the end of the quarter?

Clearly they (the members of this forum) are trying to present a false/shady/slanted view of what's going on in the factory.

 

[dandurston]

Speaking in very round numbers, S+X has an ASP of about 100K with margins of about 25%. In other words S+X take about $75K to make.

How on earth is Tesla going to make any "gross" profit on a model-3 at 42K ASP??

That's basically Mark Spiegel's argument. To counter, like the S/X, the BMW 7 series has an ASP around 100k with margins at best equal to the S/X, and yet they can profitably sell their 3 series for a similar ASP as the M3. So a similar magnitude of cost reduction can and has been done. [Admittedly my knowledge of BMW's finances is limited, but they average around 10% gross margin so it's hard to believe their 7 series and up cars contribute >25% GM].

Tesla should be able to do even better than BMW, because they have a lot of same cost reducing options available to them (e.g. steel vs aluminum), plus they have a time advantage because the M3 is being released years later in the EV market where costs on electronics, batteries, drive units etc are all dropping fast (unlike ICE components). My guess is Tesla could design a new MS that is similar good to the current model for quite a bit lower cost (20%?) if they were starting from a blank sheet of paper (in reality, they will do this at some point but keep the cost about the same as the spec's improve - similar to the Apple model of same price with improving specs each generation).

How does BMW do it? I'm not sure. I expect there are more costs than can be taken out of a car then we realize. A touch screen 75% the size might have 50% of the price, steel vs aluminum, cheap interior etc. Volume alone drops manufacturing overhead a lot.

Looking at this another way, Elon has said the base MS 60 @ 66K is modestly profitability. I take that to mean a margin around 10%, so a cost of ~$60g. They basically need to chop that $60g down to about $32g to make a small profit on a base M3. That does sound like a big task, but the M3 is ~20% smaller and much higher volume. If we assume 20% cost savings based on size, and 20% based on volume (e.g. better parts contracts) then we're already down to $36g before de-contenting the car and accounting for cost reductions over time.

 

[3Victoria]

@SBenson First, Tesla is still a risky investment -- not a great basket to put all ones eggs in. But you know that.
Second, that is a great article, but I do not see where it said it relied on ADv1.0, so 0.5 should suffice.
Third, GM is calculated across the entire production, so even if the base is not very profitable, since most of the initial run will be the more optioned vehicles, things should be ok.
Last, it all will improve as battery costs improve, AD1.0+ appear, and parts costs improve.

 

[SBenson]

I fundamentally disagree with you on this point and provided a timeline supporting my position here. Musk's epiphany on manufacturing efficiency occurred less than 2 months before pencils down on the Model 3. There just isn't enough time to do a completely new approach to final assembly without jeopardizing the M3 delivery schedule. That's why Musk said AD 1.0 would not happen until mid-2018.

But Model 3 will still be more efficiently manufactured than S/X, even at the initial AD 0.5 stage. Tesla has been talking about the Model 3 being designed for ease of manufacturing for more than a year. Musk is not stupid. He learned from the Model X. And he is not going to let himself screw up Tesla's #1 priority.

"Musk is not stupid" - Yes, we both agree on that one. That's a start.

That timeline is plain wrong. That is when Musk started discussing the dreadnaught, not when he started thinking about it. In the latest call, Musk actually said he is been on the line due to X for an year! So the epiphany could have happened way before.

My memory is vague and I need to go back to google searching, but I vaguely remember Musk firing a senior exec literally on a stroll when he discovered that the exec didn't have much of knowledge in the latest robotics. This happened way back maybe in 2014 or early 2015.

Musk has been dead serious about robots (and AI) since a very long time. Maybe the more recent epiphany is simply putting a proper context around automation. The space/speed thing. But it would be silly if he became serious about automation only from that point on.

Maybe all this struggle between different posters is really lack of knowledge of what AD 0.5 really is. My imagination is something. But yours is something else. Unfortunately we just have to wait for more info.

My base point is Model-3 should NOT be rolled out on poor margins. That would be disastrous and be a very bad start. What excuse will Musk make to ask more money from the market? Oh, I'm building another factory or two? while not being profitable?... As you say, he is not stupid, he won't go that route.

 

[FredLambert]

I love electrek and read it every day, but they aren't normally first to market with Tesla news (usually summarizing other articles) and therefore they do not control the SP. I'll also mention that they are not shy about posting negative Tesla news either, so it's not a one-way ratchet. They get a lot of criticism about being a Tesla cheerleading blog but in my view it's unfounded. If anything, the non-Fred authors go too far in attempting to appear even-handed and to promote the "same team" argument - again, just one man's opinion.

That's fair. But I would say that though I write 95% of the content on electrek, I wasn't actually the one pushing for the "same team" thing on the site.

I'm actually working on a piece explaining why it's easier for EV enthusiasts to get behind Tesla than behind other automakers since they keep sending mixed messages about EVs.

As for the reblogging, we do our fair share of that with our added perspective on the EV market, but when it comes to Tesla, we are almost always first when it comes to important news. As for the China story just now, it's obviously based on an article in China Daily, but I was surprised to learn that it wasn't shared by US or international media yet - even though it came out last week.

I would expect quite a few will reblog it now that we published.

 

[esk8mw]

That's fair. But I would say that though I write 95% of the content on electrek, I wasn't actually the one pushing for the "same team" thing on the site.

I'm actually working on a piece explaining why it's easier for EV enthusiasts to get behind Tesla than behind other automakers since they keep sending mixed messages about EVs.

As for the reblogging, we do our fair share of that with our added perspective on the EV market, but when it comes to Tesla, we are almost always first when it comes to important news. As for the China story just now, it's obviously based on an article in China Daily, but I was surprised to learn that it wasn't shared by US or international media yet - even though it came out last week.

I would expect quite a few will reblog it now that we published.

On the first point I think we are saying the same thing - unlike other contributors, you do not go out of your way to promote this "same team" theory, which I appreciate. I agree that building EVs is better than not building EVs, but I like your willingness to call out compliance cars when you see them. The result is that you get flak for telling the truth - Tesla is the only game in town when it comes to widely available compelling BEVs - which I think is unfortunate.

As to the reblogging thing, I hope you didn't take it as a slight as it was not intended as one. My only point is that the articles you write are mostly not based on your inside sources/original reporting. Thus, you aren't leading the stock price movements as the other poster suggested, whoever wrote the original article would do that. You guys do a great job of picking the most relevant articles, reporting them quickly, concisely summarizing them and adding additional sourced information where possible, which is why you have a permanent tab open on my browser.

 

[SBenson]

That's basically Mark Spiegel's argument. To counter, like the S/X, the BMW 7 series has an ASP around 100k with margins at best equal to the S/X, and yet they can profitably sell their 3 series for a similar ASP as the M3. So a similar magnitude of cost reduction can and has been done. [Admittedly my knowledge of BMW's finances is limited, but they average around 10% gross margin so it's hard to believe their 7 series and up cars contribute >25% GM].

Tesla should be able to do even better than BMW, because they have a lot of same cost reducing options available to them (e.g. steel vs aluminum), plus they have a time advantage because the M3 is being released years later in the EV market where costs on electronics, batteries, drive units etc are all dropping fast (unlike ICE components). My guess is Tesla could design a new MS that is similar good to the current model for quite a bit lower cost (20%?) if they were starting from a blank sheet of paper (in reality, they will do this at some point but keep the cost about the same as the spec's improve - similar to the Apple model of same price with improving specs each generation).

How does BMW do it? I'm not sure. I expect there are more costs than can be taken out of a car then we realize. A touch screen 75% the size might have 50% of the price, steel vs aluminum, cheap interior etc. Volume alone drops manufacturing overhead a lot.

Looking at this another way, Elon has said the base MS 60 @ 66K is modestly profitability. I take that to mean a margin around 10%, so a cost of ~$60g. They basically need to chop that $60g down to about $32g to make a small profit on a base M3. That does sound like a big task, but the M3 is ~20% smaller and much higher volume. If we assume 20% cost savings based on size, and 20% based on volume (e.g. better parts contracts) then we're already down to $36g before de-contenting the car and accounting for cost reductions over time.

My point is NOT that tesla will lose money on model-3.

My point is that tesla will actually make money on model-3 through increased automation of making the car.

The context of this discussion is: The increased automation can take, totally unexpectedly, longer than announced. Like with everything else, Musk always announces timelines with the base assumptions that a) everything will go absolutely perfectly plus b) people will work harder to get things done sooner than the best case. So my base hypothesis is Model-3 will be delayed but it will be profitable from the get go and will have a very good ramp (better ramp than analysts expect).

 

[Fallenone]

Here is a tiny little problem - if AD doesn't arrive, we are all doomed!

I am saying it with all seriousness with a really serious amount of my money in TSLA.

Speaking in very round numbers, S+X has an ASP of about 100K with margins of about 25%. In other words S+X take about $75K to make.

How on earth is Tesla going to make any "gross" profit on a model-3 at 42K ASP??

Everybody talks about batteries. Guess what, that is the second biggest cost component of building an EV. The bigger one is manufacturing overhead - in other words putting all the raw material together to actually make the car.

I am basing this on Randy Carlson's info-graphic from this article. Randy knows more about Tesla and manufacturing than anyone I know. So unless someone presents proof or solid reasoning otherwise, I consider Randy's number to be as good of an estimate as any.

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So getting the dreadnaught right is even more important than giga-factory!!

GM can play this game of losing $9K per car to make it up in selling the gas guzzlers. Unfortunately for Tesla, there is only one way it can play this game: deliver but profitably.

If Tesla starts producing model-3 with out progress on AD I will sellout a lot of my shares.

In fact at any serious volume, with out AD, Tesla will go bankrupt and half the "all in" investors will consider suicide, if they haven't gotten out already.

Maybe this is a bit of too much info: I am actually one of the "all in" investors. It might not appear that way the way I speak.

So any calls forward, we should be paying more attention to progress on AD than the timeline for initial deliveries of model-3.

I had the same worries before and while they still exist, they are much less. Essentially it comes down to the production level. Raw material (aluminum sheet, steel sheet, etc.) and parts (tires, wheels, chairs, etc.) make up a big chunk of the COGS (my estimate for the S and X to be around 50%). But as you are ordering amount for 50 k a year to 100 k a year and to 500 k a year, you can get them cheaper. And even a 5% cheaper cost here translates to 2.5% gross margin. Battery comes next and GF sure can help with this once mass producing battery packs. Then there's tooling costs, labor costs, and general D&A. This is where the AD really comes into play. But even without the AD (or something we have now, be that AD0.5 or not), as long as they are hiring no more people than they need to produce the cars they plan to, i.e. expanding as planned, it should be fine. And finally the warranty cost (basically the cost they spent to fix the cars once sold) for Model S is about 3k each. This cost is reducing as they improve on quality (still room for improvement though).

So in my opinion, the cost reduction on raw material and parts is a given. The cost reduction on battery packs is also more or less a given (need further confirmation, hopefully no later than Jan 4 2017 when they have the event in GF). AD certainly would help on tooling and labor but I'm not counting on it in 2017. However, as long as Tesla doesn't fall significantly behind their internal schedule by hiring people to produce 100 k a year but only crunched out at a rate of 20 k a year, the impact of not having the AD would be more or less contained.

 

[AcesDealt]

Sbenson, finding holes in the tesla narrative is exactly what you should be doing with a sizeable investment. I am closer to 40% in, but that's what i do as well. Contrast to the people who run on perpetually with extreme point of views and no invested position. I don't find them neutral, i find them to be motivated by partisan attention.

You will find of my few posts thus far, ringing my hands about how they make margin to also be a concern. that's why i would like to escape proclamations of elons intelligence and get specific on where savings comes from. i think a huge chunk is lower supplier prices because i assume volume dilutes the high cost of initial design and fab. But in general i think you start with the cost of the s and try to back it down to the 3 you fail, but if you ask what the difference in cost should be between a 3 series bimmer and a m3, you can get more comfortable. can't really be thorough i am on the road.

 

[dandurston]

My point is NOT that tesla will lose money on model-3.

My point is that tesla will actually make money on model-3 through increased automation of making the car.

Well you're arguing the M3 is unlikely to be profitable without automation, which I don't think there is evidence for. I think it will be modestly profitable without, and handsomely profitable with, although automation is unlikely to be a yes/no thing. Like everything else it'll gradually improve over time.

 

[larmor]

Regarding tesla market cap: Uber is fighting CA DMV claiming their cars are just like tesla with drivers, we all know this, but then on the radio-npr, they said the market cap of uber is 68 billion! wow. That is twice of tesla, and uber only acts like a broker...

Tesla actually makes cars and will drive themselves level 4/5, and are all ready doing what uber is doing now in terms of tech.

 

[JRP3]

I get it, they have heavy import taxes If Gigafactory is a product unto itself, putting one in china is IP suicide.

Has China been known for successfully implementing what it may have stolen from existing in country automotive OEM's? I'm not aware of any Chinese made copies that are a serious threat to the products of other OEM's, but maybe that's just my lack of knowledge.

 

[dennis]

You dont get to say that and then not provide more details. Lol, its painful to see you have more info literally from the factory floor and you aren't sharing.

The NDA that you sign when you go on a factory tour prohibits you from publicly sharing any info that you learn while inside the factory. In the briefing our guide used the % of S vs. X you saw on the line as an example. So unfortunately I can't respond.

 

[sunhelm]

I knew that his wife bought him a Tesla, and the reason for that decision (superchargers).

Months ago, as reported here at AutoWorldNews, he bluntly stated in his Facebook account that the Tesla Model S has a lot of flaws and that all those flaws had been resolved by the Chevrolet Bolt EV. He even went as far as saying that people should choose cars based on their ability and not just because the brand is making a buzz.

What I'd like to know is does anyone know specifically why Woz prefers the Bolt to an MS? We know that superchargers are the reason he prefers the MS. This definitely calls into when question he aurguments that you'd need to be crazy to choose a Bolt over an M3.

I don't know specifically but Woz at one time was a GM advertising talent, appearing in the Cadillac ads - you might have seen it, "those who dare to dream" or along those lines. Might be an extension of that to create viral buzz endorsing another GM product using social media.

 

[generalenthu]

The NDA that you sign when you go on a factory tour prohibits you from publicly sharing any info that you learn while inside the factory. In the briefing our guide used the % of S vs. X you saw on the line as an example. So unfortunately I can't respond.

Did you feel like adding more TSLA after the tour, stay where you are or lighten up?

 

[Krugerrand]

That timeline is plain wrong. That is when Musk started discussing the dreadnaught, not when he started thinking about it. In the latest call, Musk actually said he is been on the line due to X for an year! So the epiphany could have happened way before.

No, he wasn't on the X line for a year. He spent a few weeks at the end of the line when things were at their worst with X production and it was during that time that he had the machine that builds the machine epiphany.

 

[esk8mw]

The old low volume afternoon drop. It's an American tradition.

 

[Papafox]

Not to distract from the Woz discussion, but is anyone surprised by the almost 3 million (Yahoo Financee) shares traded in the first 2 hours of trading? That would put us on track for an almost 10 million shares traded day, during the week of Christmas?? I will leave it to Papa and others who watch this more closely, but it seems that there is an expensive tug-of-war being waged right now over the next technical hurdle. Good luck deep pocketed longs.

There's always an inevitable consolidation day or two when a stock has run up as high and as quickly as TSLA. That's where we are today, IMO, and there's a mixture of both shorts and longs as both buyers and sellers. The volume is so high because you have such a mixture of buyers and sellers today. The shorts who are selling right now are those who perceive TSLA as being at a local high. The shorts have really lost the ability to steer the stock price on an up day when there's adequate volume, but they retain the ability to push it down in low volume afternoons, and they'll definitely take advantage of that situation if the opportunity arises. So, the weakness that is a consolidation breather can and will be exploited by shorts. The problem for longs is that once a decline starts in the low volume afternoon, longs typically sit on the sidelines and wait for it to bottom out before jumping back in. That waiting can allow for a pretty big descent. This is how the game is played.

 

[Green Pete]

Has China been known for successfully implementing what it may have stolen from existing in country automotive OEM's? I'm not aware of any Chinese made copies that are a serious threat to the products of other OEM's, but maybe that's just my lack of knowledge.

Basically everything is a Chinese "copy". It's just about their willingness to follow international law. Their domestic market is all domestic goods made in same factories.