Short-Term TSLA Price Movements - 2016

[Drax7]

Conspiracy theories, the mumbo jumbo never stops.
Demand has totally collapsed.
Who has the energy or disposition to even argue
That.

Alibaba is a splendid firm, they will sell you a counterfeit
Tesla any day now.

 

[maoing]

Based on your best educated estimates, can TM build out full size (5.8 millions sqf) shell by Q4 of 2017? If not, then it's delayed from PoR plan which is documented in incentive agreement. Also from the link you referenced, it's clearly specified that TM will directly invested $2B to GF, so far only 308 million as you mentioned earlier, which represents 1/7 of the planned investment. So it's up to you still believe everything is on track.

The on track or not debate was not my intention. I just wanted to point out that there are serious cash gap for GF too in order to achieve M3 production plan. So TM will need to raise more money than people think.

Yes, originally the idea was the entire shell would be done basically at the end of 2017. But it is still immaterial as you are still talking about the shell of the building. .

 

[techmaven]

Based on your best educated estimates, can TM build out full size (5.8 millions sqf) shell by Q4 of 2017? If not, then it's delayed from PoR plan which is documented in incentive agreement. Also from the link you referenced, it's clearly specified that TM will directly invested $2B to GF, so far only 308 million as you mentioned earlier, which represents 1/7 of the planned investment. So it's up to you still believe everything is on track.

The on track or not debate was not my intention. I just wanted to point out that there are serious cash gap for GF too in order to achieve M3 production plan. So TM will need to raise more money than people think.

We already knew there is a cash gap. We knew it the moment the $2.2 billion was raised. We just didn't know if it would be closed organically or if we had to raise money for it. We did have to raise for it last year due to Model X delay. We might have been able to make it organically after that if the Model 3 reservations weren't so high. Damn you all for being so excited by Tesla's future product. Now Tesla will have to raise money to build it faster.

To re-iterate, the agreement has a Minimum Capital Investment through June 30, 2024. The state is smart enough to allow some leeway here.

As for the size of the building... we actually don't know what the final manufacturing floor square footage is anymore. So talking about "full size" is a bit difficult, I think Tesla is sandbagging us somewhat. They are not revising their 35 GWh cell production estimate yet with any real numbers.

Look at it another way. The original construction schedule has the last module finishing in Dec, 2017. That's about $375 million dollars that would have had to be spent in Q3 and Q4 of 2017. Then it sits dormant until roughly Q1 or Q2, 2020 when Panasonic starts to install the equipment in there. If Tesla spends that $375 million in 2019 instead, it doesn't change Panasonic's schedule at all. But Tesla gets to hold off for 1.5-2 years before dropping that $375 million. You want to criticize the company for being more cash efficient?

 

[MikeC]

I'm expecting an up day tomorrow now that the May 6th calls have expired. I have a suspicion that the muted response after the huge news from the ER might be partly due to MM trying to keep the stock from running away, but they can only hold back the market for so long.

I am hoping to get some more LEAPs and buy back some covered calls, but I think I probably should have done it last week.

 

[nienco2]

I am aware of 1 and 2. Why exactly is it relevant?

The shares you owned before are then a smaller portion of the company, but the company's assets have increased equivalently, so your portion is worth more than it was yesterday. Isn't this a net "nothing", disregarding for the moment the market's reaction to the raise?

Not sure if this has been answered already but stock price is ultimately a function of earnings per share, see Warren Buffet, so to use the above numbers and a hypothetical eps of $1 to keep things simple, $1 divided by 6.7 million shares times a multiple of say for sake of argument 40 equals stock price valued at 5.97, but $1 divided by 9.3 million time multiple of 40 equals equals $4.30 a difference of 28% in the value of your stock with equivalent earnings. add however many zeros to these numbers but the percentages remain the same so please have no allusions that dilution is not a significant event. Whatever the percentage of dilution is impacts stock price (eventually), by whatever the market multiple of earning per share is.

 

[landis]

to keep things simple, $1 divided by 6.7 million shares times a multiple of say for sake of argument 40 equals stock price valued at 5.97, but $1 divided by 9.3 million time multiple of 40 equals equals $4.30 a difference of 28% in the value of your stock with equivalent earnings.

Equivalent earnings?
Are these shares given away as incentives, or sold to raise capital?
For this discussion I presume the later so isn't the example too simple in that it ignores the increase in earnings that the infusion of capital enables?

 

[EinSV]

Not sure if this has been answered already but stock price is ultimately a function of earnings per share, see Warren Buffet, so to use the above numbers and a hypothetical eps of $1 to keep things simple, $1 divided by 6.7 million shares times a multiple of say for sake of argument 40 equals stock price valued at 5.97, but $1 divided by 9.3 million time multiple of 40 equals equals $4.30 a difference of 28% in the value of your stock with equivalent earnings. add however many zeros to these numbers but the percentages remain the same so please have no allusions that dilution is not a significant event. Whatever the percentage of dilution is impacts stock price (eventually), by whatever the market multiple of earning per share is.

This 'analysis' would be correct IF the capital raise were converted into paper money, gasoline was poured over it and it was lit on fire.

Assuming management puts the capital to good use -- and Tesla has been very efficient in deploying capital -- profitability on a per share basis should increase. But you already know that.

 

[Zhelko Dimic]

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 if this was answered in a satisfactory way, but here is my theory. TSLA is geared for full scale production, including employees, while production just trickled in in Q1. This is throwing their revenue/expenses out of whack.

Let's assume cost of 1. material/energy and 2. labor is about 50-50 in Model X production, and Tesla has to pay all employees (no wiggle room with number of hours). If they have labor for 7200 Model X, and produce 2400, they just spent twice as much per every model X (200% of what was expected), so gross margin on Model X could be -60% to -100%. Of course this is very temporary, but they wouldn't want to let go of trained employees, hence problem achieving FCF+ in Q1.

 

[nienco2]

This 'analysis' would be correct IF the capital raise were converted into paper money, gasoline was poured over it and it was lit on fire.

Assuming management puts the capital to good use -- and Tesla has been very efficient in deploying capital...??? -- profitability on a per share basis should increase. But you already know that.

OK, so with due respect I'm assuming you and others here are savvy investors, I was only trying to answer a question for someone who seemed to genuinely want to know the impacts of share dilution and might get a painful surprise. My response is simply math with no pretense to know how the capital is deployed. We can all have different perspectives, perhaps you have never gotten burned badly in the market, I have and if I can offer some food for thought, and caution, feel it remiss not to. There seems to be ample positive sentiment on this forum but share dilution should not be so blithely dismissed imho.

 

[vgrinshpun]

OK. One last try to help you (and possibly other readers) understand what is being reported and why you are misinterpreting it. We agree the relevant language is:

"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. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person." (My emphasis)

Note: the antecedent for the last quoted sentence is singular not a class of people as you assert. The purpose of the proxy's table is to show investors the approximate ownership share of the officers and directors. It has to be approximate because it has a time cut off and some O&Ds may exercise some of their vested options and others may not. So it uses the shares outstanding as of the cut-off date (12/31/15) as the denominator in all percentage calculations and each individual O&D's shares and exercisable (within 6 months) options as the numerator for that individual's ownership percentage approximation.

Take Elon as an example. The table show his contribution to the 38,711,940 shares you cite as being owned by O&Ds is 37,193,974 shares at 12/31/15. Agreed? As I pointed out earlier the footnote explains: "8,822,632 shares [are] issuable to Mr. Musk upon exercise of options exercisable within 60 days after December 31, 2015" i.e. are deemed outstanding

On 1/27/16, Elon filed a form 4, Tesla Motors - Statement of Changes of Beneficial Ownership, showing he had acquired an additional 532,000 shares by exercising some vested options, increasing his total from the 28,371,342 shares shown in the proxy footnote as owned by is revocable trust to 28,903,342 after the transaction. Note: If your interpretation were correct wouldn't his form 4 show 37,725, 974 post transaction???

The proxy shows the shares outstanding at 12/31/15 as 131,424,866. The 10k filed in February shows shares outstanding at 1/31/16 as 132,056,338 for a difference during the month of January of 631,472. Most of the increase in shares outstanding is from Elon's exercise during the month.

I hope the foregoing contributes to your understanding, but regardless have a nice day.

We seem to be talking past each other a bit. You repeatedly go back to emphasizing what the Ownership summary clarifies as being included in the count of shares "beneficially Owned" by Elon Musk. As I posted before, in response to your first clarification, I agree with this and, in fact, was fully aware of this at the time of original post.

As I noted in my response to your first clarification, I believe that all of the numbers listed in my original post are on the same basis i.e. the 8,822,632 shares issuable to Mr. Musk upon exercise of options exercisable within 60 days after December 31, 2015 are included in both the count of shares beneficially owned by Elon Musk AND the 131,424,866 shares of Tesla’s common stock outstanding at December 31, 2015. This is the basis of my insistence that the original calculation included in my post was correct.

My interpretation that exercisable by Elon Musk options are included in the count that Proxy Statement deemed as outstanding shares is based on the following parts of the statement that we keep quoting, highlighted below:

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. 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.

Note that word "outstanding" does not commonly refer to the shares beneficially owned by a person, but is used in conjunction with definition of outstanding shares for a company. So above highlight, in my opinion, clarifies what is included in the shares listed as outstanding at the end of the quoted statement in addition to what is included in the number of shares beneficially owned by a person

My belief that my interpretation is correct notwithstanding, since I think that it is important to establish what is actually meant by subject statement from the Proxy, I emailed request for the clarification to VP of Tesla IR, Jeff Evanson. I will share his response to my email.

As far as the last sentence in your post, I fully acknowledge that you are free to talk down to others, and slam the door as well, but it contributes very little to the discussion, and was completely unnecessary.

 

[vgrinshpun]

This isn't the game the large institutions play. They have a mutual relationship with the shorts (especially the large players). They make interest off lending shares which they plan to hold onto for a long time anyways. At the same time, the shorts make money in the fluctuating stock price. So it's really a mutual relationship where both sides make money. Also, a short squeeze doesn't help institutions at all... it's not like they're planning to sell.

I agree that large institutions do not trade daily and do not trade often, but they most definitely plan to sell when stock hits their targets and do sell. The proof that large institutions do sell shares to trim their positions could be found on the institutional ownership page of NASDAQ.

As far as interest goes, they do make money on it, and they also do adjust this interest, including on shares that were borrowed in the past, without much advanced warning. This alone can trigger a short seller's margin call. And margin calls for short sellers can definitely provoke a squeeze, which, incidentally, could be way more lucrative to institutions than the interest. Not to mention that at the top of a hypothetical squeeze, there will be other shorts lining up because ... TSLA is so overvalued. There is no way they can loose in case of a short squeeze.

Additionally, based on the recommendation of their risk assessment departments, they establish, and can change at any time, margin requirements. Increasing margin requirements can force a short seller to cover at least part of the short position.

So yes, there is at least an appearance of potential conflict of interest.

 

[vgrinshpun]

But the buyer of those shares can lend out 70% of them, which is another 49% of the original shares... and so on.
From the formula for a geometric series, the maximum is actually 1/(1-.7), which is 3.33x.

A agree on the formula to for calculating sum of geometric series, but not sure that it applies to short selling.

I am actually not sure if shares bought from the short selling transaction can be lent again.

 

[ggr]

A agree on the formula to for calculating sum of geometric series, but not sure that it applies to short selling.

I am actually not sure if shares bought from the short selling transaction can be lent again.

They are indistinguishable from real shares. In fact, for the last purchaser in the chain, they ARE real shares... it's the lenders, brokers, and short sellers who are putting up capital assets to guarantee the delivery of the shares when the time comes.

 

[Johan]

OK, so with due respect I'm assuming you and others here are savvy investors, I was only trying to answer a question for someone who seemed to genuinely want to know the impacts of share dilution and might get a painful surprise. My response is simply math with no pretense to know how the capital is deployed. We can all have different perspectives, perhaps you have never gotten burned badly in the market, I have and if I can offer some food for thought, and caution, feel it remiss not to. There seems to be ample positive sentiment on this forum but share dilution should not be so blithely dismissed imho.

I agree with your view on this. To say simply "you get a smaller piece of pie of a larger pie" so it all evens out, is too simple and wrong. The way I think about it, that I think makes sense is this: The current market cap of Tesla, or any other growth company, results from the market's expectations for further grow and future profits that can be returned to shareholders. Now, while Tesla seems to be on a very favorable path to achieve this everyone agree there needs to be a lot of further growth still in order for TSLA to keep its value and to keep appreciating. In other words, if Elon came out tomorrow and said: "we're scrapping all our plans for expansion and growth, we'll settle here selling 150k X+S per year, our focus now is to return money to shareholder through dividends", then TSLA's market cap would plummet.

So when "the market" assigns a market cap to TSLA it does so expecting further growth. And when part of that further growth requires capital raises that's perfectly natural. However, those of us already invested in TSLA must accept the fact that dilution (i.e. the division of the pie in to smaller pieces) is negative for us on a net basis, since the sum of all models giving TSLA its current market cap are unable to fully incoorporate the effects of dilution.

 

[mejojo]

I was only trying to answer a question for someone who seemed to genuinely want to know the impacts of share dilution

"Dilution" seems to imply a negative....a decrease in value of your shares. If $1B is raised, no matter the number of shares, but SP increases so as to to make market cap increase by $3B, it seems that in this case dilution means something good has happened.

 

[Johan]

"Dilution" seems to imply a negative....a decrease in value of your shares. If $1B is raised, no matter the number of shares, but SP increases so as to to make market cap increase by $3B, it seems that in this case dilution means something good has happened.

This is true, but it would have been even better if the same growth could be achieved without dilution (from the perspective of current shareholders).

 

[jesselivenomore]

I know both Jesselivenomore and Fallenone are very bright, so I won't waste lots of words here. There's something I don't understand about this discussion but would like to understand. If we're talking about Free Cash Flow from 7,000 Model Xs in Q1 why is Gross Margin being used in the computations? Gross Margin is appropriate if money was not spent on cost items such as labor, 3rd party parts, etc., but most of the costs for the Model X vehicles that weren't delivered had already been incurred (workers were already on the payroll, 3rd party parts had already been delivered, aluminum already purchased, etc.). The shortfall from fewer Model X vehicles delivered in Q1 would be much greater than any number that has been multiplied by GM. The revenue from selling those extra Model Xs seems to me to be the issue, not the revenue from selling the Model Xs after being multiplied by GM.

Not sure if this was answered in a satisfactory way, but here is my theory. TSLA is geared for full scale production, including employees, while production just trickled in in Q1. This is throwing their revenue/expenses out of whack.

Let's assume cost of 1. material/energy and 2. labor is about 50-50 in Model X production, and Tesla has to pay all employees (no wiggle room with number of hours). If they have labor for 7200 Model X, and produce 2400, they just spent twice as much per every model X (200% of what was expected), so gross margin on Model X could be -60% to -100%. Of course this is very temporary, but they wouldn't want to let go of trained employees, hence problem achieving FCF+ in Q1.

So idle workers and materials already get factored into GM I believe. In the Q4 ER they blamed their lower GM on "unfavorable labor and overhead allocations associated with lower than planned Model X production volume". If that's the case, we have enough variables to be able to back out the current Model X gross margins.

Q1 deliveries: 2400 model X 12410 model S

Automotive rev = $1.48B - $57M zev = $1.423B

We know that avg Model X is currently 30% more expensive than Model S. So from the deliveries number and total revenue we can get the selling price:

avg Model S $91,629
avg Model X $119,117

We know from Q4 that Model S GM was 25%, price went up 1.4% in Q1 so assume 26.4%. Total automotive GM excluding ZEV was 20% in Q1. So from all that we know Model X gross margin is -5.5%. This number takes into account the idle workers and materials.

Had it been a nominal X ramp and this GM was 20%, on 7,000 units, it would've added $183M to cash flow. That would have cut the $466M in negative FCF down, but still not close to breakeven.

Fallenone is saying a further cut of $100M from Capex, and an additional $100M in Zev would have gotten us there. I am still a bit hesitant. Capex was already cut down to $217M, I am not sure they could cut it down an additional $100M. And Zev was already at $57M, I am not sure they could have sold an additional $100M. Perhaps the answer is just that they would have missed Q1 FCF+ no matter what, which isn't the end of the world.

I guess my next question would be, what GMs and delivery numbers are needed for FCF+ right now? (excluding the accelerated Model 3 ramp costs)

 

[ludicrousspeed]

Here's my two cents on share dilution: (Again, just my opinion, with a completely hypothetical scenario)

Since Tesla isn't valued on an EPS basis right now, you shouldn't use that metric when describing share dilution. This is because it's impossible to know when Tesla will slow down their spending on growth and truly maximize their potential for profits, and what multiples the market will be willing to pay for those profits.

Another way to express the impact of dilution is based on market cap. For example: you expect Tesla's market cap to be $100B in 2020. With today's share count (131.5M for simplicity), that's $760 per share. Between now and then, they issue 8 million shares for capital raises. They've also added a little over 3 million shares annually between 2013-105 in convertibles and options. That would leave Tesla with about 155M shares outstanding in 2020 - a very reasonable estimate - assuming no splits. That same market cap now implies a $645 share price.
That takes 17.9% of the top of your return, but it the total return is dramatically impacted by your average cost per share. If you bought in at $100 per share, the increased number of shares made your ROI 545% instead of 660%. If you buy in at today's prices (~$215), the dilution decreased your ROI from 253% to 200%. As you buy in at higher prices along the way, the impact is more limited.

In the end, share dilution should not be an issue for investors. They do an amazing job at deploying capital efficiently and will see a substantially higher return on this raised capital vs. money raised by virtually any other company. Investors should be willing to let them raise as much as they need and understand that this is a very capital intensive business. Plus, Tesla will abandon reckless growth and fail to meet future expectations without raising money. Even if that were not the case, the impact on return is fairly minimal. In the case above, investors buying in at today's prices will still see their TSLA position triple in the next 4-5 years. That type of appreciation would surely beat market as a whole, even with a substantially larger float.

 

[MitchJi]

This article makes Elon's ramp plan sound reasonable:
Tesla Motors, Inc.'s 500,000 Unit Build Plan: Realistic or Not? -- The Motley Fool

 

[Oil4AsphaultOnly]

Taken from Seeking Alpha, because I couldn't find a link to the source:

Morgan Stanley cuts 2016 EPS estimates for Tesla (NASDAQ:TSLA) to -$0.02 vs. $0.68 prior. Cuts 2017 estimates to $0.35 vs. $1.14 prior.

Delivery estimates are largely unchanged; ~70k units in 2016 (vs. the reiterated guidance of 80-90k shipments), composed of ~16k Model X and ~54k Model S units. By 2018, ~108k units, vs. the updated target of 500k.

Target price of $333 remains unchanged. Implied upside 55%.

Interestingly, their price target didn't change.