Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[MP3Mike]

Please correct me if I am wrong. I believe most new car buyers are shopping on monthly payment as much as price. Wouldn't leasing open up as many (more?) people at this moment than the introduction of 35K car AND allow Tesla to still maintain profitability...then introduce the 35K?

Other than leasing is really bad for their financial reporting. So to stay GAAP profitable they need to delay leasing as long as possible.

 

[Zhelko Dimic]

Tesla just delivered the Five Point Palm Exploding Heart Technique to the other automakers. They are dead, Wallstreet just doesn't know it yet. The CEOs at BMW, Audi, Mercedes, Volvo, Jaguar, GM, etc., probably wanted to jump off a bridge last night. While the price cuts probably do mean that there wasn't enough demand at the higher prices, Elon did say that they will probably be profitable in Q2 with these lower prices (and demand will be sustainable now). This means they have found ways to save money. Not only can the other auto makers not match Tesla's new prices on their EVs, but their ICE sales are in BIG trouble now too. Even the slower thinkers on Wallstreet are going to start figuring this out, and the SP will reach new highs. I just have no idea how long it will take for them to put 2 and 2 together....

Agreed.
Another point that many miss...
There is a difference between making car profitably vs. marginal cost of the car. One involves depreciations and other factors, while later is the cash outlay to make one more unit.
I doubt that Tesla can make $35K SR profitable at this moment, and they're probably concerned how they're going to be judged on that. However, I'm rather certain their marginal cost is under $35K, which means even lowly SR contributes to a positive cash flow, eventhough it may be 'unprofitable'.

At this time, I feel Tesla had to make a decision between playing defence or playing offence. Defence would mean to slow down manufacturing rate, nurture demand carefully, preserve prices and exclusivity to protect profits at lower production level.

Offence is what they chose instead: 1. introduce SR, 2. drop prices of the rest of the M3 range to actually increase blended average sales price, (comp to if SR only was introduced alone into the existing range) 3. drop prices on the rest of the range; first 3 steps all going for a serious volume while 4. lower cost on a retail front and 5. suck the oxygen out of the room for the other manufacturers.

Hence, strategy is increase volume and lower price (cost too, as time permits) - I feel this is announcement of nuclear war against other manufacturers, esp. luxury brands.

Remember, while profits are nice, Tesla needs to worry only about cash flows in order to stay in business, and higher volumes help with it, as long as marginal cost is under the sale price.

I feel this is a return to a bias for growth strategy vs. profits. I wish Elon didn't mentioned higher prod. volumes that he anticipates, as they won't buy him any credit now, and will be the new measuring stick used to judge results. He really can't keep to underpromise/overdeliver eh?

 

[AlMc]

Other than leasing is really bad for their financial reporting. So to stay GAAP profitable they need to delay leasing as long as possible.

I admit that I am not a corporate finance person and did not stay at a Holiday Inn Express last night but don't they package these leases up and sell them OR get a bank to underwrite them (if possible).

It would, except that leasing is a very poor deal for consumers. The reason is that things can change unexpectedly. For example, new job, much longer commute so now you pay a fortune in mileage. Your lease is up, but you've just become unemployed and are now without a car. Leases are good if you can write them off as a business expense because then there is no question about the amount written off, unlike depreciation. However, the majority can't write them off.

Admit leasing is bad for the consumer in most instances but it would (might) be good for Tesla in that it opens up the market to people shopping for monthly payment amount and not total dollar cost for their >35K model 3s that carry a higher GM.

 

[brian45011]

Leases are good if you can write them off as a business expense because then there is no question about the amount written off, unlike depreciation.

The "crumbs" tax code revisions in 2018 significantly changed bonus depreciation for Section 179 vehicles so the write-off is generally greater in early years than lease payments:

If you claim 100 percent bonus depreciation, the greatest allowable depreciation deduction is:

• $18,000 for the first year,
• $16,000 for the second year,
• $9,600 for the third year, and
• $5,760 for each later taxable year in the recovery period.

How to Get a Tax Deduction for Buying a Vehicle for Business

 

[jerry33]

The "crumbs" tax code revisions in 2018 significantly changed bonus depreciation for Section 179 vehicles so the write-off is generally greater in early years than lease payments:

If you claim 100 percent bonus depreciation, the greatest allowable depreciation deduction is:

• $18,000 for the first year,
• $16,000 for the second year,
• $9,600 for the third year, and
• $5,760 for each later taxable year in the recovery period.

How to Get a Tax Deduction for Buying a Vehicle for Business

Right, but come audit time...

 

[Zhelko Dimic]

Wow, so you're thinking both the MR and SR+ could be software limited versions of LR and can be upgrade later?

BTW, I've been thinking about the value software limited batteries could have for leases. A particular risk of leasing or renting is that the battery will be abused as the lessee does not have a in interest in the residual value of the battery. Software limiting can protect the battery from excessive overcharging or running SOC to low. So it protect the residual value of the leased vehicle. Additionally, the returned vehicle can be sold as a full range vehicle. So the residual value is actually determined by that of the full range vehicle, not the software limited version. So these are some unique opportunities for a lease contract that can appropriately value these advantages.

I agree with everything you said, but you said it, I didn't. I.e. I'm not sure if LR/MR/SR+ are all the same. They may be. But I continue believing strongly that SR+/MR are the same.
LR is around 80KWh, MR is around 65KWh, SR around 54KWh. It may be worth to Tesla to build MR as LR, sync $1500-$1800 of extra battery cells, in order to simplify production process and allow later software unlock, as you elaborated. But price difference btw. SR+ and LR makes me uncertain this is the case.

I feel SR is a bridge too far for this strategy, especially it has different seats, so I think that's truly orphaned car they're (currently) trying hard not to sell at all, but they know there will be 10% people on the financial edge that can barely afford even that one and will go for it.

I would wonder if that car could potentially go away soon after original reservations are fulfilled; but I feel that goes against Tesla's decision to go for volumes, so I think it's a real fork in production with different production process. It may be a Tesla's secret weapon in driving price further down in certain markets, once they further lower marginal production cost.

 

[ZachF]

Meanwhile in the US auto market.

BMW tightens US luxury race as Mercedes plunges

Daimler AG’s Mercedes, the U.S. leader for the last three years, saw sales slide 13 percent in February as almost all crossover and sport-utility-vehicle models slumped. BMW’s namesake brand eked out a 0.2 percent gain, thanks to a big bump from the X3 compact crossover.

Volkswagen AG’s Audi, which saw its 16-month growth streak snapped last October, logged a fifth consecutive month of declines. Sales tumbled 12 percent, marred by a 15 percent drop in Q7 SUV deliveries.

Life is going to get tough for the Germans when the Y comes out....

 

[VValleyEV]

I guess SP won’t move until Q1 numbers are out. I read lots of optimism for long term here but pessimism about SP for short term, even after Q1 numbers. Trying to wrap my head around why.

So, let’s see, the negative narratives from analysts might be:

• If Q1 shows a loss that is anything other than tiny, shouts of doom of course.
• if Q1 shows close to break even and only modest sales and production, same shouts of doom.
• if Q1 shows close to break even but strong sales and production, see they can’t make money on the 35k M3
• If inventory goes up, will be argued due to demand drop rather than new pipeline of cars in transit to overseas.
• If order backlog increases, will be argued they are rationing M3 SR production because it loses money, and they are just putting off doomsday.
• If Q1 shows a small but real profit that surprises, will be somehow attributed to creative accounting that just defers the final day of reckoning.

Is there any Q1 outcome that we think is both possible and would convert some analysts to the buy side?

 

[jerry33]

Is there any Q1 outcome that we think is both possible and would convert some analysts to the buy side?

Sure, all Tesla has to do is to start advertising on the talking head's station and finance more capital through WS. Just like politicians, they do what they get paid to do. Pretty much it's, "You have a nice little car business there. Too bad if anything were to happen to it".

 

[CorneliusXX]

I admit that I am not a corporate finance person and did not stay at a Holiday Inn Express last night but don't they package these leases up and sell them OR get a bank to underwrite them (if possible).





Admit leasing is bad for the consumer in most instances but it would (might) be good for Tesla in that it opens up the market to people shopping for monthly payment amount and not total dollar cost for their >35K model 3s that carry a higher GM.

They do package and sell the leases which mitigates a decent amount of the cashflow impact, however GAAP only realises the individual lease payments in a given time period as revenue for the P&L - hence a big hit to profits. The spreading of the recognition of revenue is where the major issue lies.

 

[ggies07]

Did you order yours? I seem to recall you were waiting patient-ishly for the SR.

Haha, yes, got a MR back in November.

 

[SO16]

What I find interesting about this move to close stores and lower prices is that Tesla is setting themselves up to be the lowest fixed cost manufacturer of EVs on the planet.

He’s left the American manufactures in the dust, lapped the Europeans and now gunning for Toyota.

The Tesla stores were necessary to begin with. Now there are enough Teslas out there along with enough owners happy to talk to prospective buyers, Tesla can scale back the brick and mortar. I hope this works out well. If it does, it’s an absolutely brilliant way to go.

 

[SO16]

Why is the report of a 50% shares/ 50%cash setlement election by Tesla during the Early Conversion period even being questionned? Five years ago in the prospectus, Tesla commited to give note holders notice of how conversions during that period would be settled:

All conversions of 2019 notes occurring on or after December 1, 2018 (the applicable Free Conversion Date for the 2019 notes) will be settled using the same relative proportion of cash and/or shares of our common stock as all other conversions occurring on or after December 1, 2018. We will inform holders of the settlement method we elect for any conversions occurring on or after December 1, 2018 no later than December 1, 2018.
​

The report of Tesla's 50/50 election was reported in early December. In late November shares were trading around $350, then rising above the conversion ratio in early December.

And now.....none of this matters because it’s been PAID!!!!!

 

[brian45011]

Right, but come audit time...

If the IRS wastes audit resources challenging depreciation of Section 179 vehicles it will be perpetually understaffed, never find real cheats and no wonder Koskinen and Lerner rose in that bureaucracy.

 

[EVNow]

LR is around 80KWh, MR is around 65KWh, SR around 54KWh. It may be worth to Tesla to build MR as LR, sync $1500-$1800 of extra battery cells, in order to simplify production process and allow later software unlock, as you elaborated. But price difference btw. SR+ and LR makes me uncertain this is the case.

When you are fighting a "game of pennies" you don't just waste thousands of dollars. The volumes are now large enough to make different battery sizes worthwhile.

 

[Joe F]

I took 3 test drives before pulling the trigger on my 2016 S90D. The first was soon after the first CR review. The second was to show my son the car. He now owns an early M3. The last was to get my wife into the car. There's no way I would spend 100k on a car without her buy in. She took the test drive without me and walked back in the showroom and said "buy it ". I ordered that day from the showroom. It helped having the paint and interior samples to look at and a few cars on the lot to look at. If I were looking to buy today, I would be willing to order on-line, but only because of what I've been through. As a first time buyer, I would be leery.

I found it overwhelming remarkable in my early days on using TMC to research Tesla that the number of folks had such high praise for their Tesla. Not that I’ve checked, but I don’t believe I’d have found anything close to those numbers in any other car site. That sealed the deal for me, and I personally found nothing that I needed to see other than what the Tesla web site had to display when it came time to order. I know what I like and didn’t feel the need to spend time kicking tires. But that’s just me. I understand that others may not feel the same.

 

[2virgule5]

Can't keep up with all the posts but my personal summary of last two days: I was wrong (again) with some of the 'announcement speculation. No BH takeover/JV/money infusion ( EM elephant reference), No EU GF (EM 'Tusk' reference). UGH

On the one hand I am happy to see the promise fulfilled with the 35K car announcement and pushing closer to 'mission statement complete'.

On the other hand, giving up potential Q1 profitability and 'maybe' Q2.....*as an investor*...is tough.

Investor side of me (head) says..why now..get financially stronger and release it in late 2019. The 'help the planet/people' (heart side) says 'well done'

interesting head/heart debate....anyone else?

Looking at it this way, I don't think head & heart are that far apart. From the pov of Tesla/Elon, all is about being successful enough to bring the mission to life as soon as possible given the state of the planet. Now that the company is under no existential threat, stock price is secondary to everything else that can move the auto market to the realization that they need to speed up greatly.

In that respect Feb 28 may be remembered as the inflection point of an industry that has been sleeping way to long on their polluting cash cows. The declining numbers of ICE sales are no seasonal fluke, this market is now shrinking and will do so at an exponential rate very soon.

TSLA will continue to be manipulated and repressed in a large number of ways for at least few quarters until profit & FCF are back to Q3/Q4 '18 levels and inclusion to SP&500. Given the great ingenuity of some shorts and the vast interests at stake it may even last longer than that (up to after Model Y launch?). "If you don't like volatility, don't buy our stock". Invest accordingly

 

[Words of HABIT]

What I find interesting about this move to close stores and lower prices is that Tesla is setting themselves up to be the lowest fixed cost manufacturer of EVs on the planet.

He’s left the American manufactures in the dust, lapped the Europeans and now gunning for Toyota.

Here are some photos of Dealerships in my neck of the woods. Who pays for these self serving monuments? If you think OEM Dealers you are wrong. All costs are past on to OEM car buyers for the privilege of owning their brand.

Thanks Tesla, so that all my M3 funds are going back into Tesla to make a better, more economical product to support the Mission of sustainable transportation.

 

[Lessmog]

.

Or a good journalist.

The Woodward/Bernstein ticket? Oookay.
But since all (well, almost; ok, some) prosperous candidates are legal eagles, how about a ticket with Avenatti? Street cred and all. Surely he can hook up with a female front with the political connections, but ISTM he's killing it on vice. Seriously -- he did nail Mike Cohen.

 

[Silent Ludicrosy]

And people didn’t think he was serious those years ago back in Norway? when he told a group of owners (paraphrased), if they (OEMS) won’t join us, we’ll make them or they’ll die.

Welcome to the road to Hell, boys and girls. Last call for alcohol. It’s about to get hot in here.

Tesla just bought the rest of the Monopoly board with the 35k Model 3 release. Won't be long before players start rage quitting.