Short-Term TSLA Price Movements - 2016

[jesselivenomore]

NP. My post was just a general description of the ABL for anyone interested. Can't really answer your question definitively without researching it too - off hand I don't think it is a cut and dried as a before and after thing. GAAP FCF is what it is. This ABL use and Cash Flows from Core Operations is more of a descriptive thing for the shareholder letter - which if you take it on face value speaks to the management accounting view. CPA accountants would more likely throw a fit - so I would say its a case of researching adoption and acceptance of these metrics by analysts etc than trying to work out apples to apples facts. If everyone is tracking cash flows from core operations then it matters, otherwise it doesn't.

I understand. Like I mentioned before, the "cash flow from core operations" is just for investors to understand the business better. Their prior guidance was not based on that.

We did not hit their prior FCF guidance due to the Model X delay. I get that. But even as I plug in the numbers for a nominal Model X launch, I still do not get to FCF breakeven for Q4 2015 or Q1 2016. What am I doing wrong? See prior posts.

Perhaps I am missing something very simple. Besides these numbers, I do not have any of the concerns that are widely circulated by the media right now.

 

[Julian Cox]

I understand. Like I mentioned before, the "cash flow from core operations" is just for investors to understand the business better. Their prior guidance was not based on that.

We did not hit their prior FCF guidance due to the Model X delay. I get that. But even as I plug in the numbers for a nominal Model X launch, I still do not get to FCF breakeven for Q4 2015 or Q1 2016. What am I doing wrong? See prior posts.

Perhaps I am missing something very simple. Besides these numbers, I do not have any of the concerns that are widely circulated by the media right now.

Not sure and can't really stop to find out atm. Just one thing springs to mind is that pre Wheeler I don't think they called the revolver thing an ABL - and that might not even be relevant - and from memory they were not FCF positive in Q4 15 anyway - and that might not be relevant to your question either.

 

[Fallenone]

Thanks Fallenone. Yes this is what I am referring to.

I went back and listened to both the 2015 Q2 and Q3 CCs to confirm.

During the Q2 CC they guided for $40-50M in TE revenue in Q4, and 10x that in 2016. This shortfall contributed a little like you mentioned, but not much to the end result. They were looking for 15% gross margins, so only $6M-7.5M contribution to cash flow. So this is not the answer.

In the Q2 guidance for full year was already lowered to 50-55k range. They commented that Model X ramp was extremely challenging. Knowing this, their comments on Q4 FCF+ was still that it was "questionable", and "too close to call". Their comments on 2016 Q1 FCF+ was "certainly we will be". Perhaps at this point they were still counting on 3-5k Model Xs in Q4, and 7k like you mentioned in Q1. This still doesn't really add up for me. Even if they hit the top of their guidance of 55k for full year, on 5k Model Xs in Q4, $130k ASP, 15% GM. That still only adds $97.5M to cash flow, which would've brought them to -$300M for Q4. Far from "questionable" or "too "close to call".

In Q3 guidance after they lowered full year to 50-52k they said they had "aspirations for Q1 FCF+". That Q4 Model X spend was still at peak, and it will come down in 2016. So that fits with the decrease in Q1 2016 capex. However, even if they hit 7k Model Xs in Q1, assuming $120k ASP, 20% GM, that only adds around $180M in cash flow. In reality, using your -4% GM and 2400 untis, they lost around $10M on Model X, so a net gain of $190M. That still only takes FCF for Q1 to -$200M from -$400M.

I know I am doing the math a little different from you, I am just adding in the Model X cash flow with expected GM and units. Is that not a good way to look at it?

I do not see any flaws in your calculations. But would like to bring up two points that you may have forgotten to consider:

1. ZEV credits are flexible to be depolyed
2. CapEx is relatively discretionary, as long as production is on track

So, IMO in Q2 they were still trying to finish the ramp of X in Q3 and try to reach Q4 FCF+. If X ramp up was really that well, they have the option to hoard ZEV credits generated in Q3 and sell them in Q4. ZEV as I mentioned is quite a substantial chunk of 100% GM revenue. And IIRC, it scales with the emission of ICE cars that can be replaced too so X would have a higher value of ZEV per car compared to S. Also, early X was dominantly shipped to CA so the ratio of ZEV for X is much higher than the S. So I think it wouldn't be outlandish to assume they can sell $100M ZEV last Q4 if they saved their Q3 ZEV credits. Also, I remember there were tooling for X happened during Q4 (related to changing hydraulic FWD to electronic FWD IIRC) so you have unplanned CapEx here. Easily $100M on this one. The tooling cost amortized on a per car basis and goes into COGS over 250k cars produced, but shows up fully as CapEx when it happens - I'm not 100% sure on the later part so correct me if I'm wrong. Also they did some other upgrades on their production line too, so another $100M here is quite possible. My point here is, if X was smooth, they would have avoided the $100M mandatory tooling CapEx (think Q1 lower CapEx), hoard up the ZEV credit from Q3 to give Q3 an extra boost, and delay the upgrades later. Together that's in the ballpark of the $300M missing. But as they found out during Q3 the expected X ramp was not possible in Q4, they lowered guidance during Q2 ER (which was almost half way into Q3), and decided to save Q4 ZEV for Q1 hoping Q1 would be a smooth ramp up. And knowing Q4 FCF+ is not possible, went along with the production line upgrade so they can take off some CapEx pressure in Q1 (or Q2).

Now for their guidance of Q1 2016 FCF+ guidance made in Q3 ER when ABL was still not in place. IMO by that time they thought they can solve all ramp problems in Q4 and Q1 would be a home run. But as we all know, it wasn't. I suspect additional mandatory tooling and/or other stuff that resulted in CapEx happened related to the quality issues in Q1. SG&A could be higher due to solving the quality issues (in fact it was on a per car delivered basis, and mounted up to about $20M compared to their average for 2015 and 2014). Also, they still have ~$50M worth of ZEV unused (my guess, Q4 and Q1 ZEV only added to $65M, that's less than 2015 Q1+Q2+Q3 ZEV sale of about $110M with roughly the same number of cars delivered, and with high % of X sold in CA in the mix, so I think they are still hoarding some ZEV). Taking these into consideration, and the miss on delivery and GM for X, the gap for FCF+ may had been closed without ABL.

Of course everything above is my own speculations on what was going on behind the numbers reported in their 10-Q and what we've been seeing for the X ramp up. There's no guarantee on it.

 

[petteriiiiii]

Correct me if im wrong but isnt tesla currently building cars only 8 hours 5 days a week? If demand is there (as we know it is ) it shouldnt be that hard to add another shift for model 3 production lines?

 

[EinSV]

Elon reinforces the late 2017 target for volume Model 3 production on Twitter:

@elonmusk ya think those of us who ordered pre reveal will see it late 2017?

Elon Musk ‏@elonmusk
@LifeOfRockstar I think so

Elon Musk on Twitter

 

[mrdoubleb]

Correct me if im wrong but isnt tesla currently building cars only 8 hours 5 days a week? If demand is there (as we know it is ) it shouldnt be that hard to add another shift for model 3 production lines?

AFAIK they have 2 shifts working 5 days a week, although I seem to remember reading they were considering (asking employees to vote?) to go 3 shifts but only 4 days a week. Either way, 2 comments need to be made here:

1, if you add overnight or weekend shifts, those usually cost a lot more due to premiums. Not sure what the rules are in California, but probably not as expensive as in Europe. (E.g. we have a 100% bonus rule for Sunday work where I live and this can only be max 3 Sundays per person per month even so)

2, Tesla's real constraint has not really been inability to add more shifts or workdays, but rather battery cells. Granted, the flow from Japan seems to be at a much higher stable rate than before, but it is not unlimited.

 

[mrdoubleb]

I understand. Like I mentioned before, the "cash flow from core operations" is just for investors to understand the business better. Their prior guidance was not based on that.

We did not hit their prior FCF guidance due to the Model X delay. I get that. But even as I plug in the numbers for a nominal Model X launch, I still do not get to FCF breakeven for Q4 2015 or Q1 2016. What am I doing wrong? See prior posts.

Perhaps I am missing something very simple. Besides these numbers, I do not have any of the concerns that are widely circulated by the media right now.

Jesse,

If i read your posts right you are saying FCF positive did not really add up due to higher costs than predicted. Where do you see that coming from, RND or SAG? Or is it something else that you are not seeing quite clearly yourself either (yet)?

I agree that any sort of X delay does not add up to those amounts. Could it be that they pulled forward RND on things like multiple iterations of the 3 platform, or stepped up preparations of Supercharger rollout or TE behind the scenes?

 

[vgrinshpun]

The proxy states the O&D share count includes "options exercisable within 60 days after December 31, 2015." As those options are exercised, the shares outstanding increase one for one.

For instance: Elon Musk's count is 37,193.974 shares, but the footnote explains:

" Includes 28,371,342 shares held of record by the Elon Musk Revocable Trust dated July 22, 2003; and 8,822,632 shares issuable to Mr. Musk upon exercise of options exercisable within 60 days after December 31, 2015. Includes 9,420,113 shares pledged as collateral to secure certain personal indebtedness."

As of 12/31/15, he had 6.7 million options with a strike price of $6.63 which lapse on 12/3/16. IIRC he has exercised about 0.7 million since the beginning of the year. He will need close to $700 million to exercise those grants before they expire since Tesla collects employment and income taxes on the bargain value of the transaction before issuing the shares.

Not sure what was the point of your post - all of the numbers included in my original post are on the same basis, and the fact that institutional and insiders shares add up to 420 thousand shares more than the outstanding shares (as defined in the proxy statement) still stands.

I think I do know why @Dr ValueSeeker rated your post "Like" - because he read it as an indication that situation is less ominous for the short sellers based on his interpretation that the pool of shares they can easily cover their positions from is larger than indicated in my original post by 8.8M shares. Sorry to disappoint, Doc, it is just not so.

Here is how proxy defines the outstanding shares (top of page 46):

In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of common stock subject to options or other convertible securities held by that person or entity that are currently exercisable or exercisable within 60 days of December 31, 2015.

 

[Hogfighter]

This is very good point. I am a fan of this metric as well and watching it with interest.

The situation is actually more ominous (for short sellers) that you pointed out. According to the Proxy statement (p.46), as of 12/31/2015 and NASDAQ data:

Outstanding Shares....................................131,424,866
Insiders (Exec. Officers & Directors)............-38,711,940
Institutional Shares.......................................-93,133,331
TMC members and other retail
(without accounting for shares sold short)......-420,405

Yes, my math is correct - it is NEGATIVE 420K shares. The trick is, as I learned about a year ago (thank you, jhm), is that as short sellers sell borrowed shares, the actual shares in circulation exceed outstanding shares by the quantity of shares sold short.

Nevertheless, the situation is explosive. I have to confess, that every time I see gloating self-important proclamation from the shorts and ideological Tesla critics (just to clarify - nothing to do with politics, just goof balls void of any connection with reality, endlessly repeating mindless juxtapositions with big established auto manufacturers), I have this vision of TSLA short squeeze wiping their wealth...

Anyhow, back on topic, this situation seems like a conflict of interest 101 to me. Just who is lending all these shares to the short sellers?? Right - the institutional holders that have big Brokerages - Fidelity and alike. According to the article about Fidelity inner dealings, posted couple of weeks ago there is SEC limit to how many shares a brokerage house allowed to lend for short selling - 70%. This rule is likely designed to put a limit on the ratio of shares in circulation to outstanding shares (1.7 max)

Additionally, brokerages must control their risk from insolvent short sellers. I am just speculating here (may be some professionals in the area can chime in), but the main tools of such risk control would be margin rules for short sellers and the interest charged for the shares borrowed for short selling.

Now to the gist of my thought on this: what prevents a large brokerage house to change margin requirements and interest charged to short sellers? In fact, as above negative 420K shares grow to negative MM of shares it seems to be their fiduciary duty to do so!

And this, IMO, is the huge factor that flies mostly under the radar - the short squeeze can be triggered seemingly independently from any big positive catalyst, just by change in margin requirements and interest is response to the reckless growth of short positions.

I will leave the rest to the imagination of the reader...

Just one week ago, a hedge fund friend of mine made the argument that 'one day, wrath will come to the retail TSLA investor, as the institutions have access to much more information and are usually more correct long-term'. My reply was that he was correct.....but in an incorrect way. Institutions do have more information and are usually more correct long-term than retail investors....but most institutions are long TSLA, not short. It is entirely conceivable that the sum of retail investors are net short.

 

[vgrinshpun]

Just one week ago, a hedge fund friend of mine made the argument that 'one day, wrath will come to the retail TSLA investor, as the institutions have access to much more information and are usually more correct long-term'. My reply was that he was correct.....but in an incorrect way. Institutions do have more information and are usually more correct long-term than retail investors....but most institutions are long TSLA, not short. It is entirely conceivable that the sum of retail investors are net short.

It certainly appears to be so. The short interest on 12/31/2015 was 27,676,403. Based on the table in my original post the non-institutional and non-insider share holders (nick named "retail" for convenience) owned 420,405 shares less, i.e. 27,255,998.

What this essentially means is that the size of the pool easily available for covering shares sold short is LESS that quantity of shares sold short!

In another word, for any event that can force the short sellers hand, and as I theorized before, it is not necessarily just a positive catalyst - it could also be the largest institutional shareholder (Fidelity) and one of the largest brokerage houses (Fidelity) deciding to change margin requirements for short sellers of TSLA to mitigate increased risk of their insolvency, the short sellers will be fighting to buy shares to cover, because the shares available to cover are LESS than the shares that they sold short to begin with.

It would be very interesting to see if this deficit (420K shares) grows to millions of shares once all of the institutional share holders report their holdings as of end of Q1 on May 15th.

"Unwise" indeed. Hope that @tftf has a chance to read this...

 

[mejojo]

"Unwise" indeed. Hope that @tftf has a chance to read this...

I think I saw him/her over on a Harley-Davidson forum explaining to them why BMW builds a better motorcycle.

 

[tander]

This was months ago, and at the time they expected TE margins of 15%. We know now from pricing that GM will most likely be a lot higher. But that does not contribute much to cash flow yet because numbers are still small.

Yeah what I meant to say was that I wonder if those original number were just sort of conservative projections to get people thinking, rather than best guess/actual planning type stuff. In reality, from my perspective it seems like margins could be quite a bit higher, and production/revenue growth rates could double/triple... quarter to quarter so the numbers could get grow much quicker than some might expect.

 

[doctoxics]

AFAIK they have 2 shifts working 5 days a week, although I seem to remember reading they were considering (asking employees to vote?) to go 3 shifts but only 4 days a week.

Last I saw, employees agreed to one shift of 10 hours per day for four days/week. It would be of great interest to know if the schedule has changed and when the change occurred.

 

[brian45011]

Not sure what was the point of your post - all of the numbers included in my original post are on the same basis, and the fact that institutional and insiders shares add up to 420 thousand shares more than the outstanding shares (as defined in the proxy statement) still stands.

I think I do know why @Dr ValueSeeker rated your post "Like" - because he read it as an indication that situation is less ominous for the short sellers based on his interpretation that the pool of shares they can easily cover their positions from is larger than indicated in my original post by 8.8M shares. Sorry to disappoint, Doc, it is just not so.

Here is how proxy defines the outstanding shares (top of page 46):

The point of my post was to help clarify. Your quote above truncated the full explanation which includes:

"We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Applicable percentage ownership is based on 131,424,866 shares of Tesla’s common stock outstanding at December 31, 2015."

In essence, the percentage ownership shown in the proxy's table is slightly overstated. It's similar to the difference between un-diluted and fully diluted per share calculations.

The freely tradable float is indeed tight, but to assert it is a negative 420k (in my opinion) expresses a misunderstanding of what is being reported. Institutions and funds (just like individual retail traders) can be simultaneously both long and short the same issuer's securities and the same with derivatives related thereto. NASDAQ compiles quarterly the long equity component only. If you are interest in viewing a more complete compilation, go to a site like WhaleWisdom.

 

[vgrinshpun]

The point of my post was to help clarify. Your quote above truncated the full explanation which includes:

"We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Applicable percentage ownership is based on 131,424,866 shares of Tesla’s common stock outstanding at December 31, 2015."

In essence, the percentage ownership shown in the proxy's table is slightly overstated. It's similar to the difference between un-diluted and fully diluted per share calculations.

Well, now that you clarified your point I can conclude that it does not hold because you are not looking at the whole write up that is included on p. 46 of the Proxy statement.

The "other" people that are referred to in your post are the people that are NOT listed on page 46 under the heading "Named Executive Officers and Directors", so everything I posted is accurate, while your conclusion is not. Here is the full explanation of what deemed as outstanding shares in the 2016 Proxy:

The freely tradable float is indeed tight, but to assert it is a negative 420k (in my opinion) expresses a misunderstanding of what is being reported. Institutions and funds (just like individual retail traders) can be simultaneously both long and short the same issuer's securities and the same with derivatives related thereto. NASDAQ compiles quarterly the long equity component only. If you are interest in viewing a more complete compilation, go to a site like WhaleWisdom.

The sum of the shares that is not owned by institutions and insiders is technically not a tradable float, and I did not claim it to be. I do agree that institutional ownership listed by NASDAQ includes long shares only, and that is the basis of my point: the sum of long shares owned by institutions and insiders is 420K MORE than the outstanding shares, and most likely will be MM more by the time Q1 data is available by May 15. Since the quantity of shares sold short reported by Nasdaq is comprehensive, i.e. includes all shares sold short regardless of the entity which owned these positions, my conclusion that total pool of shares that are easily available for covering short positions is 420K LESS than the shares that were sold short is accurate.

 

[sub]

Not sure this adds anything to the conversation, but can't a share be sold short multiple times (infinitely)?

If the original owner loans his share out, the long buyer of that share can then loan it out again, this process could repeat indefinitely barring any regulation to stop the loaning of shares at a point (1.7?). If this is correct, there could indeed be more shares sold short than actually exist.

 

[vgrinshpun]

Not sure this adds anything to the conversation, but can't a share be sold short multiple times (infinitely)?

If the original owner loans his share out, the long buyer of that share can then loan it out again, this process could repeat indefinitely barring any regulation to stop the loaning of shares at a point (1.7?). If this is correct, there could indeed be more shares sold short than actually exist.

Not infinitely. As I mentioned in my original post (and the point you are making is exactly why I included this information), according to the article about internal dealings at Fidelity, there is SEC overall limit on portion of shares sold short - 70%. So shares in circulation can't be more than 1.7 x outstanding shares.

 

[Johan]

Very interesting stuff indeed on the severity of the situation for shorts. I would just like to mention one effect that I believe could to some (a large?) extent mitigate/counteract a full blown short squeeze: many large funds, especially funds that aren't aggressive hedge funds but rather pension funds, sovereign wealth funds and last but not least index funds are long TSLA. Some from analysis (they believe it to be a good investment), some automatically because they mirror an index. If TSLA rapidly appreciates many of these funds will gradually exit parts of their positions as they would otherwise become overexposed to TSLA or no longer reflect the index properly. I'm unsure of how internal guide lines that regulate how different funds would act in such a position compare with the understanding of fund managers that it will be "strong longing" i.e. not exiting long positions that is the prerequisite for a continued squeeze? Does someone here have more insight to how large funds would handle a squeeze?

 

[Johan]

One other Sunday musing: what if Elon's very confident projections in the recent call that came without any mention of a capital raise (or only very vague insinuations that yes, some additional capital may be required) means that they have already secured the capital needed? My thoughts go to Google: With Elon's recent focus on manufacturing, physical engineering, the "making of large physical objects" perhaps it makes sense to finally partner with another company to provide the software engineering and the cloud services? When Tesla continues to grow there is going to be huge value from the map data collected, the data from all the autonomous miles driven, from a future app eco system, and probably a whole lot of other software related aspects of the business that I'm not mentioning now. At the same time it is hard enough for Tesla to keep up with the manufacturing and physical engineering, including lots of vertical integration, but now they want to do all the software and systems engineering themselves too? Let's face it, the weakest link right now is their software and systems, and while autopilot 1.0 is very nice there will be orders of magnitude more software engineering required to get to full autonomous. I'm not sure it would be right for Tesla to do this in house. Google seems like the perfect partner.

So maybe Elon said to Larry, you can be our software partner, I'll sell you 5% of Tesla for 5 billion and going forward we split the profits from an app eco system and from future licensing of autonomous drive and sale of millimeter precision map data.

 

[Bet TSLA]

... what I did for them was to built a road-show that toured major shopping malls with a giant movie-prop scale replica Compaq Presario personal computer with a dance show on its giant keyboard in front of its giant screen ... I got it co-sponsored by Disney ...

Clown work! I'm deeply impressed. This explains a lot. I can see why we should trust your insights into Elon Musk's psyche. This sounds exactly like the sort of thing he's known for doing.