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

[CitizenKane]

You still can't order S & X in Europe.

Yes you can, at least in Sweden. But very long waiting times.

 

[unk45]

At an 11% discount rate, I get a share price of $1,865 at Dec 2022. This is the NPV of Cash Flow 2023 - 2042.
It's important to go out 20 years and then add a terminal value in year 21 ( I use 3 times year 20).
This is a lot of work and I short cut it a bit by doing a detailed 10 year forecast and then growing cash flow in years 11-20 by 10% tapering down to 5% as I get to year 20.

Thanks for reminding us of just how important it is to have analytic discipline. The best thing about that is that it is quite easy to understand when something goes wrong. IMHO anyway.

 

[Prunesquallor]

https://twitter.com/x/status/1550995927296614402

Crank up the volume.

 

[dhanson865]

Used car sales show up in Service Revenue, right? This part may be a welcome, but only temporary boost.

Last I heard used cars continue for years after new cars sales. Why do you expect them to stop? Why not expect them to increase? Like maybe the chart below shifted to the right by a few years.

 

[Matias]

Yes you can, at least in Sweden. But very long waiting times.

Well, they don't tell you price or when it will be delivered. So you can order it the same way as Cybertruck.
To my understanding, after the new model S/X they haven't delivered any in Europe.

 

[UncaNed]

While that is certainly possible to switch Model S/X to 4680s, it doesn't necessarily mean a structural pack and front and rear castings.

I would like to see Model Y built at Fremont with a 4680 structural pack, and I would love to see a Model 3 with a 4680 structural pack at some stage.

If 4680 cells save money, they save more money in the higher volume models, that may face more price competition.

IMO regular LR Model S/X could remain as 18650s or even move to 2170s, if 4680s delivered a real advantage moving Plaid to Plaid+ would be the priority.

If Plaid+ required front and rear castings, that means the whole exercise requires a lot more engineering resources.

Going the lazy way carrying the pack as cargo means Model S/X can't tap the same weight reductions. But it does mean a slower more incremental evolution, with less downtime, at least no long stretches of downtime or line duplication.

But there are other ways of reducing weight, higher strength steel and aluminium, multi-piece castings. carbon fibre, higher voltage. A top of the range higher priced model can incorporate some new ways of reducing weight, even if the raw materials are a bit more expensive.

I do remember a Twitter post from Soylent Brown along the lines of "Tesla is making 4680s, but not making the bigger size at this time". I can't link it, we will need to trust my memory, or pass it off as my imagination. At the time I wondered if the Roadster and the Plaid+ were intended to use this bigger cell size.

So overall I recon seeing the Plaid+ is a coin toss. But if we see it, it will arrive with the Roadster.

Perhaps the refreshed S & X are already designed to easily replace a big pile-o'-currently stamped parts with a casting or two as soon as another IDRA machine or two become available; seems like a logical engineering plan to have followed.

 

[StarFoxisDown!]

Using your table one can see service has only been positive in one previous quarter, so that is welcome. But the energy business shows very inconsistent results in your table. I wouldn't bank on energy staying positive from this trend, but agree it would be nice. I expect it will happen, I'm just not sure when...

There is a pretty logical and quite rational reason to think Energy has either turned the corner or is about to turn the corner where it comes to sustained growth and especially margin growth.

The Megapack factory was completed in April. Energy growth has been stalled simply because they didn’t have the supply to ramp it. Ramping storage should be quite simple and logistically much easier than auto manufacturing. Tesla has stated multiple times now that they have plenty of battery capacity coming in.

Since Energy has been capped from further growth, any solar expansion causes a hit on margins. Once the Megapack lines are running at capacity, energy storage is going to dwarf solar and solar negative margins won’t hit overall energy margins anymore in any meaningful way

 

[StarFoxisDown!]

Used car sales show up in Service Revenue, right? This part may be a welcome, but only temporary boost.

Not really. If it’s used car sales, it’s likely all of the model 3’s that are just starting to come off their 3 year lease. This dynamic will actually increase, and be sustainable for not just a couple quarters but at least a couple years, since this was just the start of the model 3 ramp. In fact this “benefit” won’t level out until Tesla stops ramping current production and flatlines for at least 1-2 years

Tesla determined the residual value of these 3’s and soon to be Y’s 2-3 years ago. Since then the value of used 3/Y’s skyrocketed and are much higher than the residual value Tesla estimated 3 years ago. We’re talking double the residual estimated value

 

[thesmokingman]

https://twitter.com/x/status/1550995927296614402

Crank up the volume.

lol, they just showin' off!

 

[Darkfox021]

Not really. If it’s used car sales, it’s likely all of the model 3’s that are just starting to come off their 3 year lease. This dynamic will actually increase, and be sustainable for not just a couple quarters but at least a couple years, since this was just the start of the model 3 ramp. In fact this “benefit” won’t level out until Tesla stops ramping current production and flatlines for at least 1-2 years

Tesla determined the residual value of these 3’s and soon to be Y’s 2-3 years ago. Since then the value of used 3/Y’s skyrocketed and are much higher than the residual value Tesla estimated 3 years ago. We’re talking double the residual estimated value

Yes, the model 3 leasing started just over 3 years ago and the timing is very fortunate, because used car prices are at absurd levels. Profitability on this line item may end when used car prices return to normal.

 

[StarFoxisDown!]

Yes, the model 3 leasing started just over 3 years ago and the timing is very fortunate, because used car prices are at absurd levels. Profitability on this line item may end when used car prices return to normal.

Used cars prices……or more specifically Tesla used car prices, would have to drop over 60% for this to stop being a benefit to earnings. That’s not going to happen.

You have to remember it’s the residual value that Tesla estimated for the end date of the lease.

 

[Gigapress]

Margins on both the Energy and Service segments were record breaking this quarter.
This is not getting enough attention by the media (surprise, surprise).
Look at those numbers ! 11.2% margin for Energy . . . .3.8% margins for Service. This is a big deal if it's sustainable.

View attachment 832277

As @insaneoctane pointed out, Energy margins have been at 11% in a quarter in 2020 per your data here and the variance in the quarterly numbers are high so this result from Q2 isn’t statistically significant by itself.

Do we know why margins were temporarily at 11% last time and why it went right back down after that?

Also do we know why energy margins jumped up this quarter? One hypothesis is that Lathrop is starting to scale production with a better factory line than what’s at Giga Nevada but I’m not sure.

 

[dhanson865]

Yes, the model 3 leasing started just over 3 years ago and the timing is very fortunate, because used car prices are at absurd levels. Profitability on this line item may end when used car prices return to normal.

FSD prices continue to rise. All they have to do is force FSD on every used car and the prices will continue to increase (or at least the profits will).

 

[AndrewZ]

I'd cringe at 3 new factories breaking ground at the exact same time right now with Berlin and Austin not fully ramped (Done with the initial ramp period)**.

What’s really crazy is that Giga Berlin and Austin are ramping while Elon also seems to have hit the intermediate part of the Gaga Musk ramp S-curve, although there’s always a lot of uncertainty around that section of the graph

 

[AudubonB]

I WAS enjoying the weekend -

A half-dozen or more of you: you expect titillating garbage belongs here - why?

 

[The Accountant]

As @insaneoctane pointed out, Energy margins have been at 11% in a quarter in 2020 per your data here and the variance in the quarterly numbers are high so this result from Q2 isn’t statistically significant by itself.

Do we know why margins were temporarily at 11% last time and why it went right back down after that?

Also do we know why energy margins jumped up this quarter? One hypothesis is that Lathrop is starting to scale production with a better factory line than what’s at Giga Nevada but I’m not sure.

Here is my working hypothesis:

Q4 2020, had a double whammy impacting margins: Tesla was aggressively ramping their energy infrastructure (costs up) and they launched a "low cost solar strategy" (revenues down). This resulted in margin losses in Q4 2020 and Q1 2021 - see yellow boxes below.
Here is commentary in the 2020 10k:

"Gross margin for energy generation and storage decreased . . . . due to a higher proportion of Solar Roof in our overall energy business which operated at lower gross margins as a result of temporary manufacturing underutilization during product ramp. Additionally, there were lower gross margins in our solar cash and loan business from reduced average selling prices as a result of our low cost solar strategy . . . .."

In March 2021, Tesla started to reprice solar installation (higher) using a "complexity factor" even changing the price for customers with signed contracts.
See this article here: Tesla Roof Pricing Change

With pricing now adjusted coupled with a more efficient operation, it appears that $800m in sales is the breakeven. See orange boxes above.
I know there can be a mix issue between solar and storage (they have different margin rates) but if we assume mix stays about the same, sales north of $800m should show a profit.

The Q2 10Q may provide some insights when published and Q3 results may help me validate this hypothesis.

 

[dhanson865]

https://twitter.com/x/status/1550995927296614402

Crank up the volume.

Google search and a re-listen seems like it includes this portion of the song lyrics. :

Se Acabo (which means "It's Over", that is subtle, most English speakers wouldn't get the message)

Free drinks on the house, word
Everybody drinkin tonight
Por ahi viene el perro, por ahi viene
Cae la gorda por
Yo check it out

Swing a bat on you like the devil himself
Put it on us, sickness or health
Makin you could only breathe wit help
I ain't playin, you don't wanna hear what you sayin yourself
Hit the street wit incredible beats
We reknowned for tearin it down
Never have you heard a similar sound
Like a drop off

cut there by Telsa because the next part of the lyric is where they start using obscenities.

 

[MABMAB]

At an 11% discount rate, I get a share price of $1,865 at Dec 2022. This is the NPV of Cash Flow 2023 - 2042.
It's important to go out 20 years and then add a terminal value in year 21 ( I use 3 times year 20).
This is a lot of work and I short cut it a bit by doing a detailed 10 year forecast and then growing cash flow in years 11-20 by 10% tapering down to 5% as I get to year 20.

OK, my questions for you all working on valuation models.

1. What modeling does wall street use? How far out? How do they value? What discount rate? Why for each of these things.

2. If different, why do you use your chosen method, time frame, and discount rate?

Feel free to direct me to a link explaining #1 if you wish.

I ask, because it just seems like going 20 years out is ridiculous (not a critique of anyone, just not how I think of it). When I was changing my own investing from the futures markets, day trading, and short term trading, I struggled with these things as I started groping with TSLA as an investment. I do not recall any texts that I read that discussed such things and could not find in person or online mentors to help me understand. What I did do, was look at statements TSLA made, figured on them capturing some percentage of the market at profit points they aimed for (I recall 10% margin on the unyet named model 3). I played around with earnings per share to come up with a price point we have long since passed. I discounted 20% per year for a present value.

I really felt brilliant doing such things by myself but you all amaze me with how thorough you all are (Rob Maurer also)

 

[mongo]

This service profit thing is actually a really good example of Elon changing his mind on something over time:

Strong disagree.

First, Elon's stance hasn't charged, as he reiterated:

We will try. Preferable for Tesla too, as they last so long. Unlike other makers of cars, our goal is *not* to profit from service. Best service is not needing service in the first place.

https://twitter.com/x/status/1419571113076695040

Second, your 2018 quote is out of context. The discussion was "service and other". Break even non-warranty service covers more fixed costs allowing the profitable used cars and merch to shine through.
Tesla Motors Inc (TSLA) Q3 2018 Earnings Conference Call Transcript | The Motley Fool

James Albertine -- Consumer Edge -- Analyst
Understood, and I appreciate that clarification, sort of just trying to get at even running a negative gross margin in services and other for several quarters now and wanted to get a sense for when that could maybe drop and start to turn a corner and to generate some profit for you, I understand there's a lot of building out going on for sales, service and charging infrastructure. But if you could give us some kind of clarification there that would be I think helpful. And if you're willing maybe to provide an update on where you stand today in terms of battery costs. I know your goal sort of parity with ice vehicles, but maybe an update if you're willing to provide and where you stand in that trajectory? Thanks.

Deepak Ahuja -- Chief Financial Officer

I think over time every quarter impressively we will see an improvement in the service and other business, as our revenue continues to grow. And as the size for fleet grows is as simple as that.

Elon R. Musk -- Co-Founder, Chairman, Chief Executive Officer & Product Architect

Yeah, long-term I'd expect service to be a significant revenue item and to be a positive margin contributor. And it's going to be a function of our fleet size and (multiple speakers), yeah exactly we're under warranty, it is like a lot of surplus on warranty. But as the warranty expires, so there is like non-warranty items then we expect service to positive gross margin.

Deepak Ahuja -- Chief Financial Officer

Yeah, and that also includes our used car sales. And our used car sales has been hitting to go and they have a healthy margin. And so that overall business for matured companies is in some cases more profitable than new products, I'm not just having brought OEMS, auto OEMs. And we are at the early stage of our growth and as our fleet size grows there are just so many opportunities in that business that -- actual time as simply say.

Third (2.5?): service and other includes:

Services and other revenue consists of non-warranty after-sales vehicle services, sales of used vehicles, retail merchandise, sales by our acquired subsidiaries to third party customers and vehicle insurance revenue.

 

[Darkfox021]

Used cars prices……or more specifically Tesla used car prices, would have to drop over 60% for this to stop being a benefit to earnings. That’s not going to happen.

You have to remember it’s the residual value that Tesla estimated for the end date of the lease.

Yes, I understand that Tesla gets the car back based on the residual value that was established at the beginning of the closed-end lease. I am sure they will continue to sell lease returns for a profit for a long time. However, we are currently in a time where they are able to secure a much higher profit than normal, due to the current used car market. Perhaps Teslas will maintain this premium while the rest of the market returns to more historic pricing, but I would expect used Teslas to eventually return to a price that is less than a new Tesla at some point in the future. It's possible this won't happen until they've reduced lead times to less than 6 months, but it's pretty crazy to assume that used Teslas will sell for as much, or more, than new Teslas long into the future.

Based on your comment, I assume you've modeled this 60% figure, the profits generated by used cars and how they relate to overall Service cost and revenue. I would happy to see your model.

Some discussion on this concept:

Near-future quarterly financial projections

@Maarten provided this bit of data below a while back. Perhaps we will soon have enough information to model this properly. It's still very difficult as Tesla discloses very little in the 10K/10Q. Elon's Tweet gave us something. cc: @jbcarioca That is helpful. Nobody I can find seems to...

teslamotorsclub.com