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

[Zhelko Dimic]

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.

Firstly, it's only 15-18 pennies, if you use the scale that pennies were used for

Secondly, there are savings if you can reconfigure car on the fly to sell where demand is, rather than nail the demand distribution just right. There is also smaller saving in having less production process variation to develop and execute.

Most importantly though, I don't understand breadth of your disagreement? Are you disagreeing only with the notion that MR and LR are the same? I am uncertain of that too, I'd give it 40% they're the same, just because Tesla likes playing long game, and software unlock offers way to recapture that money.

Or are you disagreeing that MR and SR+ are the same? That one, range difference is too small for me to believe it's different battery. That would be couple KWh diff, absolutely not worth re-engineering, writing different software configurations for charge curve, battery output power to the motor curve, QA-ing all that, dealing with extra SKUs in design, production, storing, replacement catalog etc... While price diff is $3K, cost difference to produce them if separately engineered, would be prob $500. And if battery is the same, it's a bit of a software fiddling to disable subwoofer (+1 other speaker 12 instead of 14), disable satellite view of the map, lower battery output curve, and ta-da, you have SR+ made out of MR, i.e. market segmentation at its best.
(Also please note, it's easier to lower battery curve output that you already know is safe for the battery, than it's to develop the most optimal battery curve for slightly smaller battery)

 

[omarsultan]

Both features are software, so 100% margin.

That is not how how accounting works for software. There is a staff of software engineers and associated management that design, develop, implement, and support those AP/FSD features. That represents COGS that must be backed out of the price to determine margins. Depending on how Tesla chooses to allocate the expense, there is also the COGS of the hardware (sensors, radar, cameras, CPU) that must be accounted for somewhere.

 

[omarsultan]

Perhaps we’re in the minority, but many on TMC, based on what I’ve read, are in the same position. In my case, I wasn’t interested in buying a new car. Being retired and not having to commute more than a few feet to my office, my old ICE was fine.

Actually, never even heard of Tesla until I started hearing about it on, of all places, CNBC a few years ago. Researched online, saw the stock swing wildly with all the earlier problems, then saw Tesla address and resolve them.

Went to a gallery, sat in a pre refresh S and fell in love with it. Still couldn’t justify it, but never forgot it. Also couldn’t justify TSLA as I (foolishly) didn’t grasp the valuation and the importance of the mission. Then the refresh S was released. Still not sold or needed a new car. Then AP2 was revealed, and a few weeks later my order was placed.

Drove home after picking it up, which was the first time driving a Tesla, and I finally got it. A few weeks later I started building a position in TSLA and the rest is history.

Never needed to ask any questions when I picked the S up. Thanks to scouring TMC for months was all the answers I needed. In fact, TMC posters were a major factor in my making the jump. Reading the owners manual in mytesla acct was all I needed to know about the car, more than the good folks whose job it was to deliver it. The only question I had was, are we done yet?

While I can appreciate some people need hand holding and emotional support, the real emotions don’t surface until you own and drive a Tesla.

Pretty spot on. My only caution is to assume that TMC is representative of the broader Tesla community or the larger car-buying population.

 

[ReflexFunds]

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?

This is a great point on marginal cost, though I disagree that the base model isn't gross profit positive on an accounting basis currently. I posted in more detail earlier, but my best estimate current COGs is $32.5k to $34.5k and current gross margins of 1% to 7% per car on the $35k base model (I would guess closer to 1% than 7%).

For example if they are demand limited at 5k per week, I think marginal gross profit is likely $7-10k higher than reported gross profit on the additional 2k cars if supply & demand are ramped to 7k per week. All depreciation and the majority of staff costs are removed if you are looking at marginal cost - it should just be a case of speeding up the line and increasing productivity with the same production line staff.

Another point is cash flow per car is significantly higher than reported gross profit per car. To get to cash flow you add depreciation, add back deferred revenue and add back warranty reserve. The deferred revenue and warranty reserve are similar to new long term debt which are amortised (paid back weekly) over 4-5 years.

 

[omarsultan]

Resistance is futile. Welcome to the brave new world. You can dig your heels in all you want, you will be assimilated.

It’ll work. After all these years, we still have longs who doubt. Tsk. Tsk. And if by chance Tesla sees it’s not working, they’ll simply change direction again. No biggie.

Long != Kool-Aid drinker

Sometimes the company does dumb things. It's OK to point that out. A little skepticism is healthy for everyone involved. I am long on TSLA because Elon & Co tend to learn and adapt.

 

[EVNow]

That is not how how accounting works for software. There is a staff of software engineers and associated management that design, develop, implement, and support those AP/FSD features. That represents COGS that must be backed out of the price to determine margins. Depending on how Tesla chooses to allocate the expense, there is also the COGS of the hardware (sensors, radar, cameras, CPU) that must be accounted for somewhere.

Anyone knows how Tesla accounts for software development - r&d ? Most companies I know of treat it as expense. But those are highly profitable companies.

 

[mongo]

That is not how how accounting works for software. There is a staff of software engineers and associated management that design, develop, implement, and support those AP/FSD features. That represents COGS that must be backed out of the price to determine margins. Depending on how Tesla chooses to allocate the expense, there is also the COGS of the hardware (sensors, radar, cameras, CPU) that must be accounted for somewhere.

Hardware is included by default (so constant variable cost baked into base margin). Design may be under R&D, but even if you amortize the development cost, it is a fixed (not variable) cost, so EAP and FSD sales flow directly to bottom line (minus missing feature liabilities).

 

[jerry33]

Long != Kool-Aid drinker

Sometimes the company does dumb things. It's OK to point that out. A little skepticism is healthy for everyone involved. I am long on TSLA because Elon & Co tend to learn and adapt.

You can't do new things without making some mistakes.

 

[Krugerrand]

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

Oh, he’s the dude with 3 hotels on every property, eh? The point in the game you’re happy to sit in jail and not collect $200 because safe zone.

 

[22522]

The first time I read about a crash like this, it blew my mind. I'd never even considered that there was any first world country that did not have those guards. I just see them as part of a trailer. All the people who whine about their safety concerns re exploding batteries and autopilot should grab this really obvious low hanging fruit (as if those people give a damn about safety really...).

Who said the US is a first world country?

 

[Krugerrand]

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?

That hurt your head, didn’t it? I stopped thinking about it 5 years ago.

Answer: No

 

[EnzoXYZ]

Actually, I would prefer just the opposite. I paid $5500 for EAP on my Model 3 (after the sale), but really only wanted the TACC and AP1 features. But, I'm not going to pull a "FRED" and go crying to Tesla that I want my $2000 back. All total, my L3MUR would be $8,000 less if I ordered it today ($4250 with difference in tax credit), but that's life. My timing at car buying seems to be as good as my timing on buying Tesla stock.

Anyone coin “pull a Fred” yet?

 

[UnknownSoldier]

Anyone coin “pull a Fred” yet?

I feel like it should be a thing. Fred should be ashamed of his words and deeds.
Also I want $5,000 back. But I see that Fred is nowhere to be found when it's other people who want refunds.

 

[EVNow]

Long != Kool-Aid drinker

Sometimes the company does dumb things. It's OK to point that out. A little skepticism is healthy for everyone involved. I am long on TSLA because Elon & Co tend to learn and adapt.

Yes, we should be sceptical of anyone who says EM and co don't make any mistakes and of people who think they have better information than Tesla about what it should do.

 

[Unpilot]

I am so MAD! I just got back from a drive AFTER buying FSD....the car DID NOT drive itself?!?
WTF Elon....I am going to DEMAND my money back!

Bankwrupt any day for sure!

 

[Sean Wagner]

Regarding information, the following has come up already, but I felt it's worth pointing out in this context:

[2017 Data]
Source [December 12th, 2018]: "EV Sales Capital Of The World" Is Shanghai | CleanTechnica

I always wondered how Tesla was going to counter VAG's enormous dealer network and their millions of customer leads. However, not sure the virtual approach works so well for luxury vehicles. As others have pointed out, Tesla and Elon Musk adapt.

As an aside, Changsha had 7.432 million inhabitants in 2015. VAG has become the world's #1 automotive manufacturer due to their success in China - where they are being forced to step up to the EV plate.

 

[BornToFly]

Based on the transcript that was posted many pages back, I think the closing of stores is over blown. It sounds like many will be converted to galleries so there will still be a brick and mortar presence, which is all we have had in Utah, and Teslas are literally everywhere here. My family alone has bought 5 since 2013 without a single "store" in the state. Switching to galleries just solves the dealer franchise problem.

 

[KarenRei]

This is a great point on marginal cost, though I disagree that the base model isn't gross profit positive on an accounting basis currently. I posted in more detail earlier, but my best estimate current COGs is $32.5k to $34.5k and current gross margins of 1% to 7% per car on the $35k base model (I would guess closer to 1% than 7%).

Musk outright stated - twice, in response to two separate questions - in the call that the base version has a positive gross margin (just not in a nice, concise soundbite - he twice used past tense concerning reaching positive gross margins on the vehicle). He also made it clear what sort of margin they expect to reach on it- 14,3% (he said that they "need to" get to an average part/labour/depreciation cost of $3/part, for 10k parts, aka $30k for a $35k car, aka 14,3% margin). The things that aren't clear in the call are:

• Where exactly they stand now?
• When exactly do they expect to hit that 14,3% margin?

Your 1-7% sounds right in the range that I'd expect at launch. Remember that in December it was $38k to make the base car, and they've had a 7% layoff and 5-6% store-closure-savings since then. And they're making the cars faster, so lower depreciation. And there've surely been some parts savings as well. Given how much Tesla charges for options, pretty much any options added to that - paint, EAP, wheels, SR+, etc - would put that margin into quite a respectable range.

 

[electrichapp]

Currently on CNBC:

View attachment 382176

This truly is f*d up *sugar*.
How can the estimate be 0.52 for 1q19?

 

[ReflexFunds]

That is not how how accounting works for software. There is a staff of software engineers and associated management that design, develop, implement, and support those AP/FSD features. That represents COGS that must be backed out of the price to determine margins. Depending on how Tesla chooses to allocate the expense, there is also the COGS of the hardware (sensors, radar, cameras, CPU) that must be accounted for somewhere.

Tesla software costs are in SG&A, not COGs, so gross margin should be essentially 100% for EAP and FSD. In reality, part of the revenue from EAP and FSD is not booked upfront, but instead registered as deferred revenue and booked to the P&L over several years - this is a reserve for future software development commitments. This means that the actual revenue booked upfront is less than 100% of the amount paid by a customer, but this is still at 100% gross margin. The deferred revenue is also gradually booked at 100% gross margin, but offsets SG&A costs.

The hardware is the same for all cars. AP hardware costs are in the base COGS for every car whether or not you have bought the software upgrade.