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

[printf42]

Teslas market cap is 800+ billion.

But market cap is the wrong value here.


Teslas cash and liquid assets which they'd have used for this purchase were just under 20 billion..... so this is about 8% of their "cash on hand"

Bitcoins not going to 0 or anything, so it's pretty academic... but if Tesla suddenly announced they'd lost 1.5 billion in cash equivalent I suspect the share price would drop somewhat quite a bit more than 0.2%


Which of course would be a great buying opportunity

Simple thought experiment, if BTC crash to 0 tomorrow, Tesla could announce a 1.5B offering, and the cash balance would be back where it were, TSLA got 0.2% delusions as the result.

 

[Tim S]

I interrupt the current BTC programming to share my thoughts after reading through the 10-K. I think there are some very interesting comments laced through the disclosures, as well as some subtle tweaks to language from prior years.

TL;DR:

1. Market underappreciates the year over year Gross Margin improvement as well as how much operating leverage Tesla has achieved;
2. Deferred Tax Asset Valuation Allowance saga continues, and will continue to snowball in size. Compounded with operating leverage, this is a significant future unlock of net operating margins;
3. Stock based compensation is impacting multiple expenses categories (cost of goods sold, R&D, and general operating expenditures); this directly impacts a number of the standard ratios and metrics analysts use to value financial health and valuation of companies and makes Tesla very difficult to compare against "peers";
4. Tesla intends to establish its own ride-hailing network - this is no longer just speculation or inference from a robo-taxi blue sky presentation from years ago - they explicitly state it for the first time in their 10-K;
5. I am expecting announcements of at least two new factories in 2021;

---

Gross Margins (GM): Margin expansion was actually stronger than it appeared. 2019 had a downward revision ($451M) to Cost of Goods Sold (COGS) due to management having increased the likelihood of resale guarantee utilization (remember that program where Tesla guaranteed a certain percentage of resale values?). If estimates are that more people will exercise that option, then Tesla buys back the vehicle and gets to resell it (assumed at a gain, as they would tack on full FSD on re-sale). Management had increased their estimate utilization of that program, so they decreased the COGS related to vehicles subject to those options so as to account for the potential future gain on resale. This made 2019 GM higher (and likely was what they needed to keep margins above the 20% threshold).

Moreover, Tesla had $213M of idle capacity charges (i.e., you still incur costs relating to your factory even if its not producing anything - those costs get charged to COGS - essentially increasing the overall COGS per unit produced from that factory in the year), relating to factory shut downs due to pandemic. So, if you add $451M to 2019 COGS and remove $213M from 2020 COGS, you actually get to a 2019 GM of 19.1% (vs. 21.2%) and a 2020 GM of 26.4% (vs. 25.6%). That's impressive GM growth and shows the power of localized manufacturing (e.g., Shanghai) and equally highlights the benefits of Model Y cost structure being similar to Model 3, yet priced at a premium. I would not be shocked to see Tesla pushing 30-40% GM in the near future, especially if FSD take rates improve at all.

For transparency, estimates around the resale options as well as warranty reserves are two HIGHLY subjective areas and would be one area that management can pull a lot of accounting levers to achieve desired outcomes. In fact, this is fully disclosed in PwC's audit report as critical areas of the audit. This essentially is a cover-your-*** statement from PwC should the actual resales value program utilization or actual warranty expenses vary materially from current management estimates.

Deferred Tax Asset (DTA) and Valuation Allowance (VA): Tesla has been accumulating tax losses and tax credits for many years. Generally, when an entity accumulates these losses and credits, they effectively are building DTAs, assets that they will be able to apply against taxes payable in future years due to future profitability. From a financial reporting perspective, entities can only show this as an asset on their balance sheet if there is a "more likely than not" (generally >50%) probability that they will actually consume the assets in the foreseeable future. Tesla has yet to agree with their auditors as to the likelihood of utilization of some of these DTAs. As such, they have applied a VA against their DTA. Fancy way of saying they are valuing the DTA as $0 for reporting purposes.

If and when they release that VA, it will be a $3B+ boost to Net Income and a significant lift to Operating Margin %s. I would estimate we see all or part of that VA be released over the next 1-3 years. The reason for the range (rather than my taking the stance that 2021 WILL be the year of release of VA) would be that Tesla currently generates significant tax deductions due to their stock-based compensation (SBC) plan with Elon, and to a lesser extent, most of their employees. As those shares/options vest, Tesla gets significant tax write-offs relative to their Financial Statement Net Income. As long as those write-offs are sufficient to off-set immediate taxes payable, Tesla may not release the VA on their accumulated DTAs. Though at current market cap and operational milestone pace, it's likely that the CEO compensation package is fully taken in to account within the next 1-2 years which, compounded with continued growing profitability, would culminate in a release of the VA in that 1-3 year window.

R&D Expense: Increased $148M year over year, $62M related to materials testing (could be prototype equipment, could be testing different raw materials for battery chemistry or manufacturing processes, either way - its a lot of something), and $61M due to SBC on R&D staff.

SG&A: More than 100% of growth in SG&A expenses was from... you guessed it... SBC. SG&A would have otherwise decreased, which again confirms the theory that Tesla is now at the point in their growth journey of unlocking MASSIVE operating leverage. In other words, Tesla's rate of generating sales far outpaces its rate of incurring operating expenses, meaning incremental vehicle sales will continue to disproportionately increase Net Income, and thus Net Operating Margin %, and thus EPS. I would not be surprised to see double digit Net Operating Margin in the next 2-3 years (from the current 2.2%) especially when you consider the potential release of VA on DTAs. This is a significant potential unlock to valuation of Tesla as analysts get comfortable with that reality.

FSD: This is the first time I've seen Tesla explicitly state that "We intend to establish in the future an autonomous Tesla ride-hailing network, which we expect would also allow us to access a new customer base even as modes of transportation evolve."; I checked their 2019 10-K and most recent 10-Q and there is no mention of that intention. This will add fuel to the revenue streams that analysts will be forced to consider in their own valuation models and again solidifying a significant portion of Tesla's valuation.

Engineering: Similar to FSD, Tesla has made a new statement in this 10-K "As we increase our capabilities, particularly in the areas of automation, die-making and line-building, we are also making strides in the simulations modeling these capabilities prior to construction." Making the machine that makes the machine. Tesla's product road map is as much factory design and building as it is the products those factories build. I would not be shocked to hear of several new factory announcements this year and equally not be shocked if we see the ramp in Berlin and Texas to be significantly faster than Shanghai.

---

Conclusion: Anyone selling off because of BTC is forgetting that this is still just the beginning for Tesla.

Wow, thanks for going through all that for us. This is not just Bullish AF... this is More Bullish Than F.

Time to buy back my covered calls and add more LEAPS.

 

[Johnny Ma]

I have forborne earlier today from commenting on Tesla's Bitcoin move. I will be the first to admit that it is likely many participants are more knowledgeable of Bitcoin than I am and I've happily read some good, many interesting, some dodgy and a few off-the-wall comments today. Some small observations come to mind - the first...just a little off the wall.
*SNIP*

I snipped, but everyone should go back and read this post. And read it again. And again. *This* is how you should think as an investor of any company. And especially as an investor in Tesla.

 

[MC3OZ]

It’s not fair to judge BTC based only on the portions of the business model that have high energy usage when other portions use zero or near zero.

Another consideration is BTC mining is not the only human activity that consumes energy and may little to progress mankind.
Lots of electrons are spent, watching TV, playing computer games, displaying fancy advertising screens, street lighting when no one is around, making plastic toys that keep a child amused for 5 minutes etc...

I would prefer a model where cryptocurrency creation consumed less energy, and did more to drive real human progress, but it is unfair to single out BTC on this basis.

If coins are mined in China with dirty power, that will not last long, because clean power will be cheaper.

 

[st_lopes]

Of course it's several years later and still no actual details since FSD still doesn't work, but they've been mentioning the FSD rideshare network operated by Tesla for a long long time right in plain sight

Subtle differences in language. One is a network where you or I could use our vehicle to generate revenue. The other is a Tesla owned and operated autonomous fleet. I interpret the language in 10-K more so to be Tesla owned and operated, but either way, buried in FSD caveats versus in an SEC filing is a step change.

 

[insaneoctane]

Forget about sales tax. If someone can buy a Tesla straight with BTC, they won't have to sell the BTC or pay capital gain tax on it. I wonder how that's going to work out.

Is there ANY question that the US government will create rules that will effectively tax this transaction in a manner that gives them the capital gains tax? Really?

 

[buttershrimp]

Is there ANY question that the US government will create rules that will effectively tax this transaction in a manner that gives them the capital gains tax? Really?

I see what you’re sayin’.... I got pretty cocky with a little thing called “Napster” back in the day, “music is gonna be free man”... the way God (and broke college kids) intended!
Well, Metallica ruined that little dream of mine. Enter sandman indeed.

 

[JustMe]

Is there ANY question that the US government will create rules that will effectively tax this transaction in a manner that gives them the capital gains tax? Really?

The check is in the etherium!

 

[Chunky Jr.]

I interrupt the current BTC programming to share my thoughts after reading through the 10-K.

That was really helpful and interesting analysis. Thank you for summarizing that for us.

 

[Silent Ludicrosy]

Bitcoin payments would make more sense for things currently paid for by credit card, like supercharging, monthly data service, and in the future robotaxi rides. It will save Tesla 1-2% in credit card processing fees.

It could work for subscription services. It would be too slow for anything time critical though. This is my main problem with bitcoin, it’s not build for speed and you have to pay extra to go to the front of the line. How Long Bitcoin Transactions Take (2021 Updated)

 

[insaneoctane]

I thought Saylor was joking when he said he was a "Rocket Scientist". I ASSumed he meant Emojis going to the moon, or some other WSB tendie provider He is a legitimate Rocket Scientist.

[Saylor]He graduated from MIT in 1987, with a double major in aeronautics and astronautics; and science, technology, and society.

Him and Elon have better pedigrees and accomplishment than any of us here And we have "computer programmers" here who mined some crypto thinking they know something and have special insight in crypto and why this is "bad". They have no clue.

Anyone complaining here about BTC is regurgitating and copying facts/data they truly don't understand. Go where the puck is headed, not where the puck is at.

I am expecting Tesla to do amazing cryptographic products with their cars using proof of stake mechanisms that don't require the energy that proof of work uses:

Proof of Stake (PoS)

The Tesla cars you own are your PoS validators. Everyone who owns a Tesla gets to participate. The limits of win here is boundless. Crypto is evolving much like EVs and autonomy.

Saylor and Musk have 4D thinking. People who want to be obstinate about Tesla's BTC play, I wish they had a chance to opt out. I WANT THOSE PREFERRED SHARES AND ALL THE RISK/UPSIDE THAT COMES WITH IT. Sell the stock to me if the potato is too hot.

Are you calling my Tesla a POS?

 

[Singuy]

Simple thought experiment, if BTC crash to 0 tomorrow, Tesla could announce a 1.5B offering, and the cash balance would be back where it were, TSLA got 0.2% delusions as the result.

Negative. If BTC crashes to zero tomorrow, everyone would dump all their Tsla for BTC and may just break the internet.

 

[Buckminster]

Any new battery not only needs to be better than what was revealed at Battery Day, it needs to be cheaper, scale just as fast for the same capex and have the same level of backing.

Exactly - time to roll out my controversial thread again:
Is Tesla accelerating and decelerating transition to renewables?
How many OEMs were months away from releasing their tech/EV and have now had to go back to the drawing board?

 

[Buckminster]

Anyone who invests in a S&P 500 tracking fund now owns Bitcoin.

Unless you have in invested in a BM fund...

 

[MC3OZ]

Exactly - time to roll out my controversial thread again:
Is Tesla accelerating and decelerating transition to renewables?
How many OEMs were months away from releasing their tech/EV and have now had to go back to the drawing board?

I hope they release their EVs anyway, demand probably exceeds what Tesla can supply.

IMO Tesla is probably accelerating the transition, because any slowdown from others is more than compensated for by looming increased Tesla production. And we are well past the point where anyone can afford to slow down.

In terms of the only race that counts, Berlin should take a peak over it's shoulder, Austin is finishing strong and fast, the robots are getting restless.

 

[AudubonB]

I snipped, but everyone should go back and read this post. And read it again. And again. *This* is how you should think as an investor of any company. And especially as an investor in Tesla.

Thank you for the more than kind words. If anyone wants to skip to the juicy stuff, read only from my #4 onwards. You’ll miss the set of logical steps leading to why crypto...===> leads to Martian development, but you can fill in the gaps yourself.

 

[Mo City]

I interrupt the current BTC programming to share my thoughts after reading through the 10-K. I think there are some very interesting comments laced through the disclosures, as well as some subtle tweaks to language from prior years.

TL;DR:

1. Market underappreciates the year over year Gross Margin improvement as well as how much operating leverage Tesla has achieved;
2. Deferred Tax Asset Valuation Allowance saga continues, and will continue to snowball in size. Compounded with operating leverage, this is a significant future unlock of net operating margins;
3. Stock based compensation is impacting multiple expenses categories (cost of goods sold, R&D, and general operating expenditures); this directly impacts a number of the standard ratios and metrics analysts use to value financial health and valuation of companies and makes Tesla very difficult to compare against "peers";
4. Tesla intends to establish its own ride-hailing network - this is no longer just speculation or inference from a robo-taxi blue sky presentation from years ago - they explicitly state it for the first time in their 10-K;
5. I am expecting announcements of at least two new factories in 2021;

---

Gross Margins (GM): Margin expansion was actually stronger than it appeared. 2019 had a downward revision ($451M) to Cost of Goods Sold (COGS) due to management having increased the likelihood of resale guarantee utilization (remember that program where Tesla guaranteed a certain percentage of resale values?). If estimates are that more people will exercise that option, then Tesla buys back the vehicle and gets to resell it (assumed at a gain, as they would tack on full FSD on re-sale). Management had increased their estimate utilization of that program, so they decreased the COGS related to vehicles subject to those options so as to account for the potential future gain on resale. This made 2019 GM higher (and likely was what they needed to keep margins above the 20% threshold).

Moreover, Tesla had $213M of idle capacity charges (i.e., you still incur costs relating to your factory even if its not producing anything - those costs get charged to COGS - essentially increasing the overall COGS per unit produced from that factory in the year), relating to factory shut downs due to pandemic. So, if you add $451M to 2019 COGS and remove $213M from 2020 COGS, you actually get to a 2019 GM of 19.1% (vs. 21.2%) and a 2020 GM of 26.4% (vs. 25.6%). That's impressive GM growth and shows the power of localized manufacturing (e.g., Shanghai) and equally highlights the benefits of Model Y cost structure being similar to Model 3, yet priced at a premium. I would not be shocked to see Tesla pushing 30-40% GM in the near future, especially if FSD take rates improve at all.

For transparency, estimates around the resale options as well as warranty reserves are two HIGHLY subjective areas and would be one area that management can pull a lot of accounting levers to achieve desired outcomes. In fact, this is fully disclosed in PwC's audit report as critical areas of the audit. This essentially is a cover-your-*** statement from PwC should the actual resales value program utilization or actual warranty expenses vary materially from current management estimates.

Deferred Tax Asset (DTA) and Valuation Allowance (VA): Tesla has been accumulating tax losses and tax credits for many years. Generally, when an entity accumulates these losses and credits, they effectively are building DTAs, assets that they will be able to apply against taxes payable in future years due to future profitability. From a financial reporting perspective, entities can only show this as an asset on their balance sheet if there is a "more likely than not" (generally >50%) probability that they will actually consume the assets in the foreseeable future. Tesla has yet to agree with their auditors as to the likelihood of utilization of some of these DTAs. As such, they have applied a VA against their DTA. Fancy way of saying they are valuing the DTA as $0 for reporting purposes.

If and when they release that VA, it will be a $3B+ boost to Net Income and a significant lift to Operating Margin %s. I would estimate we see all or part of that VA be released over the next 1-3 years. The reason for the range (rather than my taking the stance that 2021 WILL be the year of release of VA) would be that Tesla currently generates significant tax deductions due to their stock-based compensation (SBC) plan with Elon, and to a lesser extent, most of their employees. As those shares/options vest, Tesla gets significant tax write-offs relative to their Financial Statement Net Income. As long as those write-offs are sufficient to off-set immediate taxes payable, Tesla may not release the VA on their accumulated DTAs. Though at current market cap and operational milestone pace, it's likely that the CEO compensation package is fully taken in to account within the next 1-2 years which, compounded with continued growing profitability, would culminate in a release of the VA in that 1-3 year window.

R&D Expense: Increased $148M year over year, $62M related to materials testing (could be prototype equipment, could be testing different raw materials for battery chemistry or manufacturing processes, either way - its a lot of something), and $61M due to SBC on R&D staff.

SG&A: More than 100% of growth in SG&A expenses was from... you guessed it... SBC. SG&A would have otherwise decreased, which again confirms the theory that Tesla is now at the point in their growth journey of unlocking MASSIVE operating leverage. In other words, Tesla's rate of generating sales far outpaces its rate of incurring operating expenses, meaning incremental vehicle sales will continue to disproportionately increase Net Income, and thus Net Operating Margin %, and thus EPS. I would not be surprised to see double digit Net Operating Margin in the next 2-3 years (from the current 2.2%) especially when you consider the potential release of VA on DTAs. This is a significant potential unlock to valuation of Tesla as analysts get comfortable with that reality.

FSD: This is the first time I've seen Tesla explicitly state that "We intend to establish in the future an autonomous Tesla ride-hailing network, which we expect would also allow us to access a new customer base even as modes of transportation evolve."; I checked their 2019 10-K and most recent 10-Q and there is no mention of that intention. This will add fuel to the revenue streams that analysts will be forced to consider in their own valuation models and again solidifying a significant portion of Tesla's valuation.

Engineering: Similar to FSD, Tesla has made a new statement in this 10-K "As we increase our capabilities, particularly in the areas of automation, die-making and line-building, we are also making strides in the simulations modeling these capabilities prior to construction." Making the machine that makes the machine. Tesla's product road map is as much factory design and building as it is the products those factories build. I would not be shocked to hear of several new factory announcements this year and equally not be shocked if we see the ramp in Berlin and Texas to be significantly faster than Shanghai.

---

Conclusion: Anyone selling off because of BTC is forgetting that this is still just the beginning for Tesla.

What is the reason for your comment #5? Most of us probably expect one announcement this year. Considering the properties at Berlin and (esp) Austin are years away from being fully developed, Tesla would truly be shifting into "plaid mode" in their expansion if 4 areas were under construction at the same time.

I fully realize human resources are the limiting factor, not cash. Do you have particular locations in mind? I strongly believe Indonesia will happen. Another China factory would make sense. Don't see anything else likely in the near-term.

We know Tesla won't pay dividends or just let their cash pile grow into a mountain. They will put it to work.

 

[Buckminster]

55 mins in - apparently Tesla confirmed that the Plaid+ will have 4680s.

 

[insaneoctane]

It’s not fair to judge BTC based only on the portions of the business model that have high energy usage when other portions use zero or near zero. Digital currency offers the possibility of a significant net energy reduction vs other traditional currency platforms (think buildings & paper statements alone). It’s like judging Tesla’s carbon footprint of their battery pack production vs the 12V battery in an ICE. You really need to judge BTC not just for mining costs, but for total energy used per transaction or per $100 transacted.

Well I read this article referenced a few pages back and found this information which is contrary to my above reply:

BTC 660 kWh/transaction
VISA 0.00149 kWh/transaction

This is supported via “According to VISA, the company consumed a total amount of 740,000 Gigajoules of energy (from various sources) globally for all its operations....VISA processed 138.3 billion transactions in 2019.”

Maybe VISA isn’t exactly a digital currency, but the contrast is pretty staggering nonetheless.

 

[heltok]

Well I read this article referenced a few pages back and found this information which is contrary to my above reply:

BTC 660 kWh/transaction
VISA 0.00149 kWh/transaction

This is supported via “According to VISA, the company consumed a total amount of 740,000 Gigajoules of energy (from various sources) globally for all its operations....VISA processed 138.3 billion transactions in 2019.”

Maybe VISA isn’t exactly a digital currency, but the contrast is pretty staggering nonetheless.

Banks and ATMs consume a lot of energy also. Hopefully Bitcoin will solve scaling, if not other crypto currencies will. And as inflation goes down then the profitability of converting energy into mining power will also fall. (I am not invested in Bitcoin, only Ethereum)