Short-Term TSLA Price Movements - 2016

[SBenson]

I'm trying to better understand how "Depreciation and amortization" works in accounting.

Here is Tesla's latest 10Q. As per Note 5 section in the document:

"Depreciation and amortization expense during the three months ended March 31, 2016 and March 31, 2015 was $99.2 million and $52.1 million."

Looking at Statement of Operations, the "Net loss" line doesn't seem to include any depreciation explicitly. Is it accounted under SG&A or somewhere else? Given that it is a sizable figure at 99 million, shouldn't it be explicitly listed? In any case, does depreciation affect New income or not? and how does it reconcile with the statement of operations?

 

[McRat]

Lol wow. So your strategy is "optimize the stock price" instead of "optimize the companies future." If you haven't figured it out yet, this isn't the company for you if you feel that way. You are reminding me of the joke with the new season of silicon valley "our product isn't the platform, our product is the sick price."

Every suggestion you just made mortgage the long term future for short term stock gain, or otherwise charges customers more for the same thing, thereby slowing adoption of EVs.

I'm saying 'optimize the business'. Fk the stock prices. Lots of very successful businesses are privately held.

Right now, TSLA is bleeding cash, and cannot fix that by ramping up production.

So you do things that are blasphemy to fix it.

Tesla Motors cannot survive in the long term by ignoring technical data.

It's time to attack the failures, not time to bury Tesla Motors.

Live blissfully unaware of how things are made and how money works, and let the Tesla dream die.

Your choice.

 

[GregRF]

Note that 1000 parts per hour is slow. You cannot make money on small parts at 1000 pph. State of the art is 100,000 parts per hour,

What part of a car is made in the 100,000 parts per hour?

 

[Fallenone]

There is definitely a theme amongst some of the ardent Tesla critics that if Tesla can't make a profit on a $80-100k car, how can they make the Model 3 at a profit? I believe that is the central crux of their bear thesis these days. And there is definitely cause for alarm. On top of that, some Tesla suppliers/contractors and ex-suppliers/contractors have chimed in to cast Tesla in a negative light. I get that Tesla's manufacturing operation probably looks terrible compared to a highly efficient Toyota operation. The major automakers are cost optimizing down to pennies. Hence GM is willing to kill people over $0.57. To the bears, it is case closed that Tesla cannot make the Model 3 at a profit and therefore they will hit a brick wall - the more Model 3's they make, the more money they lose and hence they hasten their bankruptcy. BMW can then pick them up for pennies on the dollar.

However, when it comes to BEVs, the conventional wisdom is not accurate.

First, I acknowledge that Tesla's manufacturing operation is probably the worst run as compared to the likes of Toyota, Nissan, BMW, etc. However, that doesn't ensure that Tesla can't make money on the Model 3. There are very highly cost optimized supply chains for the ICE powertrain. These do not exist on the BEV side. The production of battery cells, the battery pack integration, the production of the motors, the power electronics like the inverters and the chargers, the various new systems electronics and so forth are not made in high volume. In many cases, Tesla is actually the volume leader of these critical and high cost components.

If 25-30% of your COGS is wrapped up in the battery pack cost, and Tesla can make that component for almost 35% cheaper than the next best manufacturer, we're talking lots of room to be bad at other things. Let's look at battery cost. GM's ex-chief engineer of the Volt, Jon Bereisa, estimates that the Bolt's battery pack costs $215/kWh, or $12,900 for 60 kWh. While he probably has great insight on GM's costs, he has terrible understanding of Tesla's costs and Tesla IR person calls in to correct him on Tesla's current battery costs. Likely Tesla's current costs are around $185/kWh at the pack level and the Model 3's pack level cost is aimed at $150/kWh. Therefore, with a 55 kWh battery, the Model 3 pack cost is more like $8,250, a $4,650 cost differential on mid $30k vehicles. And that's just the battery.

The Model 3 is likely to have a longer real world highway range than the Bolt even with a substantially smaller battery pack. The efficiency gain is in the design.

Another illustration... the Clipper Creek EVSE's are well known, well thought of J1772 charging stations. The Tesla HPWC likely has a very large share of the EVSE market, but at what extent we don't know. We do know that Tesla charged $1,295 for the HPWC and it is capable of 80A. Clipper Creek charges over $2,000, but likely the volume of that product is small. But Tesla lowered the price of the HPWC twice... it is now $550 for the long cord model. Clipper Creek charges $565 for their 32A model. This is where Tesla is wringing the costs out of the EV supply chain, leveraging their higher volume and scale.

If we go through each component of a long range BEV drivetrain, it is likely that Tesla's version has both higher specifications and lower cost. So maybe Tesla isn't able to get the best seats at the best price. Or the highest quality leather at the cheapest price. But the BEV drivetrain, power electronics and media electronics which likely dominates 50-65% of the COGS is where Tesla is likely the highest volume and the lowest cost. If they can wring a cost advantage of $6,000 to $7,500 out of that part of the COGS, they have a lot of slop in the rest of the car where other automakers likely have an advantage.

As for overall profit, right now the company is carrying very high fixed costs spread over a pretty small sales volume. The Model 3 fundamentally changes that.

I agree the BEV drivetrain is the most important part of BEV just like the engine is the most important part of ICE. And Tesla very likely is the leader of both quality and cost in this department. But the cost for these in the total COGS would be no where near 50%. Otherwise you are basically having Tesla as cost efficient as the other legacy auto manufacturers in terms of labor and the glider, which is highly unlikely. For example, a basic Model S 70 is priced at $71.5k. It would have a gross margin of about 23%, leaving COGS $58.1k. If drive train costs 50%, that leaves about $29k for labor and glider. A BMW 7 series starts at $84.3k. Taking out 15% for dealer and 25% for BMW, COGS is $60.2k. Average ICE drive train costs $7.5k. BMW 7 is a high end ICE so let's say its drive train costs $20k. That leaves $40.2k for labor and glider, which is much more than Tesla's cost on these items. So in reality, I think the BEV drive train would cost Tesla about $58.1k - $40.2k = $17.9k at most, which is less than 30% of their COGS. Note that JB made a comment on the battery pack is about 30% of their COGS in 2014 but at that time, the battery cost was likely in the $250/kWh area (I believe it was also this comment that lead a lot of people assuming their battery pack cost). However, they managed to bring it down to sub $190/kWh. Motors and inverters are not expensive.

 

[ludicrousspeed]

http://finance.yahoo.com/news/tesla-eyes-3b-equity-raise-172720706

I can't believe that analysts and authors like this get paid to cover Tesla. The total cost, whether it's less than or more than $3 billion, simply will not be raised all at once. Tesla has never raised more than $750M at one time but he thinks they're currently "eyeing" a $3B equity raise in Q2 alone? Speculating that the shares could be diluted 11% misleads the readers. They've clearly stated that it will be a combination of debt and equity. Plus, people seriously underestimate Elon's commitment to his reputation of only having up rounds.

If the share price remains at these levels I'll bet they close a debt deal before going to public equity markets. GM will make a more compelling EV before Tesla dilutes shares by 11% at once.

 

[stef]

Not sure whether this was picked up already, but may be a first indication that the ball is starting to roll

Hankook Tire picked as main supplier for Tesla's Model 3

 

[tander]

I'm trying to better understand how "Depreciation and amortization" works in accounting.

Here is Tesla's latest 10Q. As per Note 5 section in the document:

"Depreciation and amortization expense during the three months ended March 31, 2016 and March 31, 2015 was $99.2 million and $52.1 million."

Looking at Statement of Operations, the "Net loss" line doesn't seem to include any depreciation explicitly. Is it accounted under SG&A or somewhere else? Given that it is a sizable figure at 99 million, shouldn't it be explicitly listed? In any case, does depreciation affect New income or not? and how does it reconcile with the statement of operations?

So the full amount of cash goes out when buying an asset, the full value of the asset is put on the balance sheet, but only a portion of the cost is reflected because it is "depreciated" by dividing the cost by however long the asset is expected to last. So a depreciation "schedule" is created and then that portion is deducted from the asset each accounting period. So your spreading the cost out of the useful life of the asset, which will eventually be zero on paper at least.

This is a little more in-depth:http://seekingalpha.com/article/389...of-ip-accounting-a-look-at-research-in-motion

 

[eloder]

Are you actually interested, or are you just somebody who knows nothing about how objects are made and wants to pretend they know?

Honest question, why not invest in GM instead of Tesla? They're making a long-range EV, and they've already implemented 100% of your suggestions while doing so.

Those suggestions are purely for short-term gain, and as others mentioned on the timescale of maybe a couple quarters at best. Tesla, like Apple several years ago, is thinking long-term.

 

[McRat]

What part of a car is made in the 100,000 parts per hour?

M6 x 1.0 nuts.

 

[SBenson]

So the full amount of cash goes out when buying an asset, the full value of the asset is put on the balance sheet, but only a portion of the cost is reflected because it is "depreciated" by dividing the cost by however long the asset is expected to last. So a depreciation "schedule" is created and then that portion is deducted from the asset each accounting period. So your spreading the cost out of the useful life of the asset, which will eventually be zero on paper at least.

This is a little more in-depth:http://seekingalpha.com/article/389...of-ip-accounting-a-look-at-research-in-motion

Thanks. That explains how it is accounted on the Balance Sheet. So it has no impact on Statement of Operations(Income Statement) at all?

 

[The Blue Owl]

I'm trying to better understand how "Depreciation and amortization" works in accounting.

Here is Tesla's latest 10Q. As per Note 5 section in the document:

"Depreciation and amortization expense during the three months ended March 31, 2016 and March 31, 2015 was $99.2 million and $52.1 million."

Looking at Statement of Operations, the "Net loss" line doesn't seem to include any depreciation explicitly. Is it accounted under SG&A or somewhere else? Given that it is a sizable figure at 99 million, shouldn't it be explicitly listed? In any case, does depreciation affect New income or not? and how does it reconcile with the statement of operations?

From what I've been reading while trying to understand this better, D&A can in general be included either under COGS or operating expenses, depending on the particular business. For businesses like Tesla, most likely it should be part of COGS according to a schedule, since the capex is mainly for assets that are productive for a longer term.

Someone more knowledgeable will hopefully correct me if I got it wrong.

 

[Fallenone]

From what I've been reading while trying to understand this better, D&A can in general be incleded either under COGS or operating expenses, depending on the particular business. For businesses like Tesla, most likely it should be part of COGS according to a schedule, since the capex is mainly for assets that are productive for a longer term.

Someone more knowledgeable will hopefully correct me if I got it wrong.

The D&A for tooling on the production line goes to COGS. The rest goes to SG&A. And the tooling is at the rate of over 250k cars produced. While the rest uses years (mostly over 10 years, except computer and software for 3 years)

 

[GregRF]

M6 x 1.0 nuts.

Nut really unique to automotive manufacturing, nor a part that Tesla would be in-sourcing. Which parts that Tesla makes today or may plan on making do you think that they should not be?

 

[techmaven]

I agree the BEV drivetrain is the most important part of BEV just like the engine is the most important part of ICE. And Tesla very likely is the leader of both quality and cost in this department. But the cost for these in the total COGS would be no where near 50%. Otherwise you are basically having Tesla as cost efficient as the other legacy auto manufacturers in terms of labor and the glider, which is highly unlikely. For example, a basic Model S 70 is priced at $71.5k. It would have a gross margin of about 23%, leaving COGS $58.1k. If drive train costs 50%, that leaves about $29k for labor and glider. A BMW 7 series starts at $84.3k. Taking out 15% for dealer and 25% for BMW, COGS is $60.2k. Average ICE drive train costs $7.5k. BMW 7 is a high end ICE so let's say its drive train costs $20k. That leaves $40.2k for labor and glider, which is much more than Tesla's cost on these items. So in reality, I think the BEV drive train would cost Tesla about $58.1k - $40.2k = $17.9k at most, which is less than 30% of their COGS. Note that JB made a comment on the battery pack is about 30% of their COGS in 2014 but at that time, the battery cost was likely in the $250/kWh area (I believe it was also this comment that lead a lot of people assuming their battery pack cost). However, they managed to bring it down to sub $190/kWh. Motors and inverters are not expensive.

Well, on a $35k car, the battery pack + motor + gearbox + drive electronics + inverter + charger + infotainment system is a much larger part of the car than in a $70k or $100k vehicle.

Look at the Chevy Bolt for instance. Start with the Buick Encore, which is $24k MSRP, likely wholesale cost is around $20k (sans dealer markup, marketing, incentives, etc). Margin is about 10%, so cost is $18k. Delete the ICE portion and add in the motor + inverter + charger for an equal cost for the moment and assume that's $4k. Then add in the cost of the battery pack at $13k. So drivetrain cost is $17k and the rest of everything is $14k, which includes the infotainment stack. The infotainment/driver interaction and connectivity costs on the Bolt are higher than the Encore, assume another $2k. So that's $33k at cost for the Bolt. Assume zero gross margin but add marketing, dealer incentives, dealer freight charge and dealer markup and we're at the $37,500 MSRP. Assume all profit comes from ZEV credits. So without the infotainment/driver interaction stack, we're likely at over 50% of the COGS to wholesale price just for the BEV drivetrain.

What I'm saying is that the glider cost of for Tesla is higher than GM, but the BEV drivetrain, infotainment/driver interaction costs are lower and that's over 50% of the COGS before we get to the "dealer" aspect of costs. Tesla obviously owns their own dealerships, but with much higher cost per vehicle due to lower volume.

So on the $17k drivetrain cost on the Bolt EV drivetrain, if Tesla can do the drivetrain for, say, $11k which is a $6k savings, they have about $6k of costs to "waste" on the glider side to match costs against the Bolt. $6k is ~20% of COGS, so that's a large amount of slop. So if Tesla can build the Model 3's glider for $22k versus GM's $16k for the Bolt, the costs end up being the same.

That waste is currently seen as the inability for Tesla to match up... but with a much lower cost on the drivetrain side, they can have higher waste on making the rest of the vehicle as they learn to scale.

 

[Zhelko Dimic]

That explains their trouble with Li Ion battery fires.

It is very hard to design properly operating and optimized system, while subcontracting parts of it and treating each part as a black box for the supplier to figure out.

Tesla is all about optimization, which, at the level they demonstrated, is not possible with outsourcing.

That is one of the reasons they were able to build compelling EV, while common wisdom at the major auto manufacturers (amazingly even now) that it is not really possible. They know their s... it indeed is not possible with the approaches they are taking!

Agreed with this. Outsourcing is great in principle, but has its limitations. If you have time, great way to think about this, coming from software world, is an old, old article from Joel on Software: Law of Leaky Abstractions, The Law of Leaky Abstractions - Joel on Software
In this case, I'd draw parallel between software abstractions on one side, and outsourcing and black box approach to components on the other.
If you're not from the software world, points may be lost on you (but here is digestible taste: windshield wipers are meant to abstract away the rain, yet they can never fully do that, because of risk of hydroplaning, or too strong of a rain that can't be removed fast enough etc...)

 

[FredTMC]

Not that simple. Tesla still has a lot of suppliers:

Funny, but all these suppliers look well known. Windshield, seat & FWD mechanism and seals were they only suppliers with issues (that we know of).

For Model 3, I gotta believe most of these will be the same/similar suppliers. They should be highly motivated given the model 3 volumes. Like was said on call, almost all suppliers do well. It's a few that end up causing an issue and it's impossible to know which will let you down.

 

[Fallenone]

Well, on a $35k car, the battery pack + motor + gearbox + drive electronics + inverter + charger + infotainment system is a much larger part of the car than in a $70k or $100k vehicle.

Look at the Chevy Bolt for instance. Start with the Buick Encore, which is $24k MSRP, likely wholesale cost is around $20k (sans dealer markup, marketing, incentives, etc). Margin is about 10%, so cost is $18k. Delete the ICE portion and add in the motor + inverter + charger for an equal cost for the moment and assume that's $4k. Then add in the cost of the battery pack at $13k. So drivetrain cost is $17k and the rest of everything is $14k, which includes the infotainment stack. The infotainment/driver interaction and connectivity costs on the Bolt are higher than the Encore, assume another $2k. So that's $33k at cost for the Bolt. Assume zero gross margin but add marketing, dealer incentives, dealer freight charge and dealer markup and we're at the $37,500 MSRP. Assume all profit comes from ZEV credits. So without the infotainment/driver interaction stack, we're likely at over 50% of the COGS to wholesale price just for the BEV drivetrain.

What I'm saying is that the glider cost of for Tesla is higher than GM, but the BEV drivetrain, infotainment/driver interaction costs are lower and that's over 50% of the COGS before we get to the "dealer" aspect of costs. Tesla obviously owns their own dealerships, but with much higher cost per vehicle due to lower volume.

So on the $17k drivetrain cost on the Bolt EV drivetrain, if Tesla can do the drivetrain for, say, $11k which is a $6k savings, they have about $6k of costs to "waste" on the glider side to match costs against the Bolt.

That waste is currently seen as the inability for Tesla to match up... but with a much lower cost on the drivetrain side, they can have higher waste on making the rest of the vehicle as they learn to scale.

For the glider, I'm not sure if we should start from the Encore or Bolt. A BMW 3 series should be more appropriate. I did some speculations on the cost for basic Model 3 a few weeks ago and would welcome comments Model 3 Margins

My major point is, if the BEV drive train still consists of over 50% of the COGS for Model 3, the Model 3 will be enjoying huge gross margins. But it would also mean Tesla is much more cost efficient than other auto makers which is unlikely the case.

 

[The Blue Owl]

Agreed with this. Outsourcing is great in principle, but has its limitations. If you have time, great way to think about this, coming from software world, is an old, old article from Joel on Software: Law of Leaky Abstractions, The Law of Leaky Abstractions - Joel on Software
In this case, I'd draw parallel between software abstractions on one side, and outsourcing and black box approach to components on the other.
If you're not from the software world, points may be lost on you (but here is digestible taste: windshield wipers are meant to abstract away the rain, yet they can never fully do that, because of risk of hydroplaning, or too strong of a rain that can't be removed fast enough etc...)

An easier comparison would be directly to the practice of outsourcing in software development. Sometimes it works, but the more complex and innovative the product, the higher the communication and integration costs are. Even more straightforward projects often fail miserably because of those factors, or end up being more expensive than doing it in-house in the first place.

Selecting suppliers and maintaining good communication with them has its own costs. Also, flexibility and agility are diminished and mistakes become harder to fix. Politics and imperfectly aligned interests are also harder to deal with once they rear their ugly heads, as often happens after failures. Outsourcing is not always the clear winner it is assumed to be.

 

[techmaven]

For the glider, I'm not sure if we should start from the Encore or Bolt. A BMW 3 series should be more appropriate. I did some speculations on the cost for basic Model 3 a few weeks ago and would welcome comments Model 3 Margins

My major point is, if the BEV drive train still consists of over 50% of the COGS for Model 3, the Model 3 will be enjoying huge gross margins. But it would also mean Tesla is much more cost efficient than other auto makers which is unlikely the case.

Interesting... I get to $22k also.

I guess I'm looking at it from the Bolt side to the Model 3. On a Bolt, the EV drivetrain is likely 50-55% of the COGS to wholesale price. On a Model 3, it's 45%, including the fact that there is direct sales rather than a dealer in the middle.

 

[tander]

Thanks. That explains how it is accounted on the Balance Sheet. So it has no impact on Statement of Operations(Income Statement) at all?

From what I've been reading while trying to understand this better, D&A can in general be included either under COGS or operating expenses, depending on the particular business. For businesses like Tesla, most likely it should be part of COGS according to a schedule, since the capex is mainly for assets that are productive for a longer term.

Someone more knowledgeable will hopefully correct me if I got it wrong.

The journal entry is a debit from the asset on the balance sheet and the credit goes to depreciation expense in COGS/OPEX on the income statement.