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

[Singuy]

Helping MamaBoomer Tesla with her fight by providing the best analogy I could think of...
An analogy... Moody's Rating is flawed because. Any business sector is like a slow-motion horse race. And Moody's thinks that betting on more horses is better than picking the horse that is the fastest and healthiest horse with the Best jockey (I was taught to bet the jockeys).

Moody's is like a bookie that disregards the track times of the horses in the race.... and determines how well the horses in the race will do based on how many horses are in their stable.

I'm going to give these rating agencies a pass on this one. Tho their criteria doesn't make any sense for Tesla, we must realize that those criteria were derived after more than half a century of auto manufactures that came and went (99% of them went). There were absolutely car manufactures that went under because they didn't provide enough product breathe (ie. Delorian) or other car manufactures that never made it out of the U.S. I will not fault credit agencies for making their criteria so strict because any new auto should have less than 10% chance of success. Knowing this, you can expect them giving any new car company that stamp of approval of not "junk grade" with extra scrutiny.

Tesla is changing the rules on how autos should be profitable(aka making them profitable on the factory floor, not after service sales) and how model changes are introduced (reiterate constantly). These are not baked into the rules made by moody/s&p because everything here is new after decades of what is known.

Please go and watch the this video if you haven't. The person from S&P found many aspect of Tesla that goes completely against the grain of what is known facts from the industry. This is all just so new to them that they are proceeding with caution because it may just be a fluke, or can't be replicated again.

 

[snellenr]

Both Ford’s and GM-Cadillac’s moves leave me completely confused. The Chinese Wall between auto manufacturers and dealerships not only has been in place in the US for just about a century, but it is what has been flummoxing Tesla, as all here are consistently aware, in its attempts to have direct sales in all 50 states.

The relationship is comparable to that of McDonald's Corp. and its franchisees. A restaurant doesn't *have* to serve the McRib sandwich, but if they do it has to be sourced and prepared as McDonald's demands.

What has Tesla (semi-)flummoxed is the offending states' imposition of this franchise business model as the *ONLY* legal relationship between an auto manufacturer and the customer-facing sales/service provider and then codifying a lot of requirements (parts stocks, etc) into that relationship. It might have made sense 100 years ago in the days of fly-by-night manufacturers and dealers and a less-developed consumer protection infrastructure, but it's idiotic to apply it to Tesla.

 

[2daMoon]

The person from S&P found many aspect of Tesla that goes completely against the grain of what is known facts from the industry. This is all just so new to them that they are proceeding with caution because it may just be a fluke, or can't be replicated again.

Rob Maurer made a good point on his Friday segment illustrating how Tesla has only been profitable for a couple of years. A reasonable amount of caution by a ratings agency seems appropriate on any newly profitable player.

Though, I'd rather Moody's and S&P had mentioned this as part of their thesis for not upgrading if that is the case. (would have made more sense than what they did offer)

 

[Gigapress]

Yes I do have a per model etc breakdown that yields this.

Would you share it with us?

It is what drives the tables I put up, and it is substantially more pessimistic re pricing than yours, hence the 'snap' to a significantly lower ARPV in the near future. It may or may not be absurdly pessimistic but I think that nevertheless I am still more optimistic than mainstream fund managers.

The absurd pessimism statement was in regard to what would need to happen for a $43k ARPV to occur in 2024. That is a 25% price drop from Q2 ‘22. Maybe your per-model breakdown will reveal something I’m missing but by my math it would require something like:

• S3XY+Cybertruck delivery growth screeching to a halt at ~2.3M per year
• ~$4k lower average prices of S3XY+C from where were already were in Q2 ‘22
• The cheap model arriving to market for some reason, contrary to direct management guidance that it’s not coming soon and they’re focused on growing the existing lineup
• The cheap model having an ARPV of $30k even in the first year of production
• Factories to build the cheap model arising from out of nowhere and scaling to almost 2M per year between now and 2024, becoming almost half of global delivery volume.

The result would be ARPV = ($53k*2.3M + $30k*1.8M)/4.1M = $43k​

​

These numbers can be tweaked but there exists no combination of them that avoids some absurdly extreme change happening in order to reach ARPV of $43k.​

​

If professional analysts actually think something like this will happen then 1) they should find another profession and 2) they are in for a rude awakening next year.

(It is arguably more optimistic than you in one respect, in that it assumes a 2/Z and van/etc product coming to market sooner than you are projecting, which is another element of the difference between our forecasts, as I assume cheaper models earlier than you do.

That’s not a matter of optimism or pessimism, but rather just prioritization. I invite you to review management’s comments on the last few earnings calls, the Cyber Rodeo keynote, etc. Every comment about affordability or new cheap models comes back to overwhelming demand, robotaxi for 2024, and minimizing complexity.

For example on the Q4 ‘21 and Q2 ‘22 calls:

Elon Musk -- Chief Executive Officer and Product Architect

…The fundamental focus of Tesla this year is scaling output. So both last year and this year, if we were to introduce new vehicles, our total vehicle output would decrease. This is a very important point that I think people do not -- a lot of people do not understand. So last year, we spent a lot of engineering and management resources solving supply chain issues, rewriting code, changing our chips, reducing the number of chips we need, with chip drama central.

And there were not -- that was not the only supply chain issue, so -- just hundreds of things. And as a result, we were able to grow almost 90% while at least almost every other manufacturer contracted last year. So that's a good result. But if we had introduced, say, a new car last year, we would -- our total vehicle output would have been the same because of the constraints -- the chips constraints, particularly.

So if we'd actually introduced an additional product, that would then require a bunch of attention and resources on that increased complexity of the additional product, resulting in fewer vehicles actually being delivered. And the same is true of this year. So we will not be introducing new vehicle models this year. It would not make any sense because we'll still be parts constrained.

We will, however, do a lot of engineering and tooling, whatnot to create those vehicles: Cybertruck, Semi, Roadster, Optimus, and be ready to bring those to production hopefully next year. That is most likely. But like I said, it is dependent on are we able to produce more cars or fewer cars? So in terms of priority of products, I think the -- I think actually the most important product development we're doing this year is actually the Optimus humanoid robot. This, I think, has the potential to be more significant than the vehicle business over time.

…

Martin Viecha

Thank you very much. Let's go to the Q&A from the investor side. The first question was on 4680 cells, which we already answered, so let's go to the second question. How is the progress of the $25,000 compact car? Can you give an update?

Elon Musk -- Chief Executive Officer and Product Architect

Well, we're not currently working on the -- on a $25,000 car. We -- you know, at some point, we will, but we have enough on our plate right now, too much on our plate, frankly. So, you know, at some point, there will be. I think that's sort of a question that -- it's sort of the wrong question, really. It's -- really the thing that overwhelmingly matters is when is the car autonomous? I think, at the point in which it is autonomous, the cost of transport drops by, I don't know, a factor of four or five.

Emmanuel Rosner -- Deutsche Bank -- Analyst

Yeah. Thank you so much. I have a question on your vehicle demand and then a quick follow-up on supply. First, on the demand side.

Are you seeing any sort of pressure in the order book or the pace of new order or any sort of like slowdown as a result of the pressures that the consumer is experiencing? Are you worried about it in light of your view of the risks to the economy that I think you expressed, Elon?

Elon Musk -- Chief Executive Officer and Product Architect

Well, right now, our problem is very much production. So we've long leads on -- as anyone can tell, if they order our car, you order Model Y, it'll arrive sometime next year. So this is clearly not an issue for many months for us. Our problem is overwhelmingly that of production.

So yeah.

Zachary Kirkhorn -- Chief Financial Officer

OK. Maybe just two things to add. Specifically on your question, are we seeing a macroeconomic impact on our demand? Not that I can tell. Maybe a little.

Elon Musk -- Chief Executive Officer and Product Architect

Some maybe.

Zachary Kirkhorn -- Chief Financial Officer

But it's not material. The second thing to Elon's point about backlogs, we have a very long runway with very long lead times here. I mean, certainly, the world is uncertain, and we'll have to see where things go with commodity prices, how quickly we're ramping production, what the state of the road looks like at some point next year. But the demand is not something we spend really any time talking about.

Elon Musk -- Chief Executive Officer and Product Architect

Yeah. I think it's -- maybe just one thing worth mentioning the -- that there is surface between value for money and fundamental affordability because sometimes people say, "Well, if you got all this demand. Why don't you just raise the price to some -- double the price or something?" And this is usually expressed by somebody who's rich. But there's -- even if you rail value for money to infinity, if somebody does concerns, do not have enough money to buy it, even a product where the desirability is rail to infinity, they basically cannot buy it.

So, this is why you kind of just raise prices to some arbitrarily high level because you pass the affordability boundary and then the demand falls off a cliff. So, I do feel like we've raised our prices or we raise the price quite a few times. They're frankly at embarrassing levels. But we've also had a lot of supply chain and production trucks and as we've got crazy inflation.

So, I'm hopeful, this is not a promise or anything, but I'm hopeful that at some point, we can reduce the prices a little bit.

…

Toni Sacconaghi -- Bernstein -- Analyst

Yes. Thank you for taking my question. I have two as well. In response to the question around demand, I think, Zach, you said maybe a little, and Elon, you said maybe some indication that you might see some pressure on demand.

And I'm wondering if that is really just speculation or whether there's any empirical data that you saw in the last month, whether it be cancellations or order lead times that led you to make that comment. I think anecdotally, if you squint, the lead times have gotten a little lower over the last four months in both China and the U.S. That's really the only visibility investors have. So I'm wondering if you could maybe elaborate on whether that's really just you're sort of anticipating there could be some impact because of high prices or whether they're something anecdotally or quantitatively that you could point to, please?

Elon Musk -- Chief Executive Officer and Product Architect

No. I mean, I think we've said this now for many years, I know has proven true. Tesla does not have a demand problem, we have a production problem. And we've almost always had it's a very rare exception it's always been a production problem.

I think that will remain the case.

Toni Sacconaghi -- Bernstein -- Analyst

So there's a denominator and a numerator and like, you increase production?

Elon Musk -- Chief Executive Officer and Product Architect

Yeah, absolutely. As we increase production, more demand is needed obviously.

Drew Baglino -- Senior Vice President, Powertrain and Energy Engineering

No, it's more just like you can't look at the backlog and state much about demand because we're doing a lot on the other side to change the production.

Elon Musk -- Chief Executive Officer and Product Architect

But we're trying to make the backlog lower, not longer.

Unknown speaker

Building factories and building --

Elon Musk -- Chief Executive Officer and Product Architect

We don't want a long backlog. That's annoying. It'd be like go to a restaurant and you order a burger and you have to wait three hours and like, that's annoying. You want to get your burger right away.

Same with the car. So we want that lead times to reduce.

Toni Sacconaghi -- Bernstein -- Analyst

OK. Now I was just trying to follow up on the fact that you both said that maybe we're seeing demand be impacted a little bit, and that was the spirit of the question.

Elon Musk -- Chief Executive Officer and Product Architect

We don't have like -- like because we see daily orders from around the world for our cars, it's actually -- it is like a mood barometer of people's confidence in the economy. But one can't read too much into it because things can vary a great deal from one day to the next. Consumer sentiment is all over the map. So it's -- manage price, frankly.

But we have so much excess demand. That is really just not an issue for us. It might be an issue for some other companies but it is not an issue for us.

How do you propose that in a matter of less than two years from today we will have a $14k drop in ARPV when Elon and Zach just reiterated 6 weeks ago that “our problem is overwhelmingly that of production”, “the demand is not something we spend really any time talking about”, and “I'm hopeful that at some point, we can reduce the prices a little bit”??

Tesla explicitly told us that they’re not even working on a $25k car right now, yet you’re projecting it will come out of nowhere to be a big portion of Tesla deliveries by 2024. I’m not convinced that’s even physically possible, let alone likely.

If Tesla is in fact going to slash prices in the near future and start scrambling to produce Model 2s with a factory they don’t even have yet, then that means Tesla management is either totally clueless or flat-out lying in response direct questions about demand, pricing and new models.

 

[Gigapress]

Tesla does not have *any* material credit risk. This is obviously true and therefore any entity claiming otherwise is using blatantly faulty credit risk evaluation methods.

Credit risk comes down to the risk of not being able to repay borrowed funds according to the specified payment schedule. What could possibly happen that would cause Tesla to default or be delinquent on debt payments???

• $19B cash and cash equivalents
• $0.066B recourse debt (not a typo)
• Operating expenses of $7B per year
• $1T market cap and demonstrated ability to sell equity for more cash without crashing stock price
• $7B free cash flow TTM despite aggressive investment in expanding production
• Backing from the richest person in the world who could—and would if necessary—infuse tens of billions of dollars by borrowing against his other assets including SpaceX equity

Imagine that tonight Elon announces that Tesla employees need a nice long vacation, so effective tomorrow all the factories will be shut down and production employees will be laid off but Tesla will continue paying for operating expenses to keep the core of the company running while everybody hangs around goofing off and smoking 420 all day. Tesla could keep this going until mid-2025 just by drawing down their existing cash and cash equivalents balance. They don’t even need positive cash flow because they have savings!

*It’s not quite this simple in reality because Tesla has a lot of Accounts Payable liabilities and also assets like inventory and leased vehicle, but it still comes out to Tesla having roughly $20B available.​

Tesla could issue billions of dollars worth of corporate bonds or take on billions worth of loans and be sure of paying them back just with the existing cash balance, and this fact is the biggest reason makes Moody’s excuses about “qualitative” analysis and needing multiple models are utterly ridiculous. Tesla has no other debt liabilities competing for that cash balance in case of a liquidity emergency.

Despite this absence of any need for cashflow to repay hypothetical debt, Tesla actually has huge cashflow, it’s growing exponentially, and they make 30% gross margin on their core products so their cash flow is not very vulnerable to possible loss of pricing power. It is high-quality cashflow from a risk standpoint.

Prior to 2021, a reasonable argument could be made that Tesla had a risky financial picture and nontrivial probability of bankruptcy. Now, a reasonable argument could be made that Tesla has the least risk of bankruptcy of any large company in history.

 

[SmokyPeat]

I'm going to give these rating agencies a pass on this one. Tho their criteria doesn't make any sense for Tesla, we must realize that those criteria were derived after more than half a century of auto manufactures that came and went (99% of them went). There were absolutely car manufactures that went under because they didn't provide enough product breathe (ie. Delorian) or other car manufactures that never made it out of the U.S. I will not fault credit agencies for making their criteria so strict because any new auto should have less than 10% chance of success. Knowing this, you can expect them giving any new car company that stamp of approval of not "junk grade" with extra scrutiny.

Tesla is changing the rules on how autos should be profitable(aka making them profitable on the factory floor, not after service sales) and how model changes are introduced (reiterate constantly). These are not baked into the rules made by moody/s&p because everything here is new after decades of what is known.

Please go and watch the this video if you haven't. The person from S&P found many aspect of Tesla that goes completely against the grain of what is known facts from the industry. This is all just so new to them that they are proceeding with caution because it may just be a fluke, or can't be replicated again.

It was a lack of investment that doomed DeLorean Motors much moreso than a lack of product breadth. They were only really in production on the DMC12 for about a year. Limited demand for the vehicle probably also contributed, but Tesla Motors started out on a very similar flight path. It was John DeLorean's desperation for investment that made him an easy target for entrapment by US DEA agents who originally presented themselves as investors, then lured him into a drug smuggling sting operation. That pretty much ended DMC.

 

[Electroman]

No need to kick the can. They will want Tesla to have a minimum of 20 different model cars. If they achieve that level then they will want at least 8 different models of energy storage cells.

The real reason I am being told is that Tesla only offers 4 colors, whereas other superiors automakers offer 20 different colors

 

[Usain]

The real reason I am being told is that Tesla only offers 4 colors, whereas other superiors automakers offer 20 different colors

Then they are even more misinformed than I thought!

 

[Electroman]

Yeap, irrelevant much like Consumer Reports, JD Power, the list goes on and on. This Pay To Win scheme needs to die.

Whoever runs the TMC twitter account, can they explain this? Supposed to be a joke, maybe?

 

[Singuy]

Tesla does not have *any* material credit risk. This is obviously true and therefore any entity claiming otherwise is using blatantly faulty credit risk evaluation methods.

Credit risk comes down to the risk of not being able to repay borrowed funds according to the specified payment schedule. What could possibly happen that would cause Tesla to default or be delinquent on debt payments???

• $19B cash and cash equivalents
• $0.05B recourse debt (not a typo)
• Operating expenses of $7B per year
• $1T market cap and demonstrated ability to sell equity for more cash without crashing stock price
• $7B free cash flow TTM despite aggressive investment in expanding production
• Backing from the richest person in the world who could—and would if necessary—infuse tens of billions of dollars by borrowing against his other assets including SpaceX equity

Imagine that tonight Elon announces that Tesla employees need a nice long vacation, so effective tomorrow all the factories will be shut down and production employees will be laid off but Tesla will continue paying for operating expenses to keep the core of the company running while everybody hangs around goofing off and smoking 420 all day. Tesla could keep this going until mid-2025 just by drawing down their existing cash and cash equivalents balance. They don’t even need positive cash flow because they have savings!

Tesla could issue billions of dollars worth of corporate bonds or take of billions worth of loans tomorrow and be sure of paying them back just with the existing cash balance, and this fact is the biggest reason makes Moody’s excuses about “qualitative” analysis and needing multiple models are utterly ridiculous. Tesla has no other debt liabilities competing for that cash balance in case of a liquidity emergency.

Despite this absence of any need for cashflow if repaying debt, Tesla actually has huge cashflow, it’s growing exponentially, and they make 30% gross margin on their core products so their cash flow is not very vulnerable to possible loss of pricing power. It is high-quality cashflow from a risk standpoint.

Prior to 2021, a reasonable argument could be made that Tesla had a risky financial picture and nontrivial probability of bankruptcy. Now, a reasonable argument could be made that Tesla has the least risk of bankruptcy of any company in history.

There are many new companies that had extremely good balance sheets but went south (lots of them was actually due to competition..you should check out Fitbit's perfect balance sheet prior to the first Apple watch).

I'm not saying this will happen to Tesla, but I do understand why rating companies need more than just a perfect balance sheet for credit ratings.

 

[The Accountant]

Tesla does not have *any* material credit risk. This is obviously true and therefore any entity claiming otherwise is using blatantly faulty credit risk evaluation methods.

Credit risk comes down to the risk of not being able to repay borrowed funds according to the specified payment schedule. What could possibly happen that would cause Tesla to default or be delinquent on debt payments???

• $19B cash and cash equivalents
• $0.05B recourse debt (not a typo)
• Operating expenses of $7B per year
• $1T market cap and demonstrated ability to sell equity for more cash without crashing stock price
• $7B free cash flow TTM despite aggressive investment in expanding production
• Backing from the richest person in the world who could—and would if necessary—infuse tens of billions of dollars by borrowing against his other assets including SpaceX equity

Imagine that tonight Elon announces that Tesla employees need a nice long vacation, so effective tomorrow all the factories will be shut down and production employees will be laid off but Tesla will continue paying for operating expenses to keep the core of the company running while everybody hangs around goofing off and smoking 420 all day. Tesla could keep this going until mid-2025 just by drawing down their existing cash and cash equivalents balance. They don’t even need positive cash flow because they have savings!

Tesla could issue billions of dollars worth of corporate bonds or take of billions worth of loans tomorrow and be sure of paying them back just with the existing cash balance, and this fact is the biggest reason makes Moody’s excuses about “qualitative” analysis and needing multiple models are utterly ridiculous. Tesla has no other debt liabilities competing for that cash balance in case of a liquidity emergency.

Are you ready for this?

Along with the 19B in cash at June 2022 . . . Tesla will:
- generate $4.0b in cash in Q3 2022
- generate $5.5b in cash in Q4 2022
- generate $6.0b in cash in Q1 2023
- generate $7.0b in cash in Q2 2023
- leaving them with about $42b in cash at June 2023

. . . .and by using Moody's "qualitative" metric . . if the Cybertruck has not yet launched by June 2023 . . . .Tesla debt will still be rated junk.

 

[StarFoxisDown!]

There are many new companies that had extremely good balance sheets but went south (lots of them was actually due to competition..you should check out Fitbit's perfect balance sheet prior to the first Apple watch).

I'm not saying this will happen to Tesla, but I do understand why rating companies need more than just a perfect balance sheet for credit ratings.

The main difference though is that Fitbit was competing with a company that had a monumental war chest and brand power.

Tesla isn't dealing with either and as @The Accountant just pointed out, Tesla will be the automakers with the most cash/war chest in just a years time. Tesla also has by far the best gross/operating margin in it's industry which further gives Tesla a leg up on all the competition. Tesla could compete in a price war with any legacy auto maker and cripple them if they wanted to.

 

[TN Mtn Man]

"Dubbed Artemis I, the mission will marks the first flight for both the SLS rocket and the Orion capsule, built under NASA contracts with Boeing Co and Lockheed Martin Corp." Setbacks are to be expected. This is rocket science after all.

"NASA has also awarded contract to SpaceX, which is scheduled to land NASA's Artemis 3 mission on the lunar surface in 2025 or 2026 — the first crewed moon touchdown since Apollo 17 in 1972. The company will use its huge, reusable Starship vehicle for the job."

"Google Search"

Can't wait to see Artemis boosters and main stage land tail on the launch pad (or drone ship) for reusable operation.

/s

 

[Singuy]

The main difference though is that Fitbit was competing with a company that had a monumental war chest and brand power.

Tesla isn't dealing with either and as @The Accountant just pointed out, Tesla will be the automakers with the most cash/war chest in just a years time. Tesla also has by far the best gross/operating margin in it's industry which further gives Tesla a leg up on all the competition. Tesla could compete in a price war with any legacy auto maker and cripple them if they wanted to.

If the competition is a metal box that takes you from point A to B, I distinctly remember Tesla had plenty of competition with huge war chest and branding power. To even make it more difficult, there were zero repair service or fueling service infrastructure while the competition has over half a century of support.

Fit bit had it easy in comparison. Imagine if fit bit didn't have any electrical plugs that support their charging because Apple owns the standard. And if the device is broken you can't use local ifixit or any shipping company to ship the product back for warranty service.

 

[The Accountant]

Why does Moody's deserve Investment Grade status?

FCF = Free Cash Flow
TTM = Trailing Twelve Months

 

[Buckminster]

Can a pension holder (with investments in a fund that has rules that they don't invest in junk stocks) sue the fund or Moodys / S&P for disqualifying TSLA unfairly in the event of loss of fund growth?

 

[Gigapress]

There are many new companies that had extremely good balance sheets but went south (lots of them was actually due to competition..you should check out Fitbit's perfect balance sheet prior to the first Apple watch).

I'm not saying this will happen to Tesla, but I do understand why rating companies need more than just a perfect balance sheet for credit ratings.

Apple Watch came out in 2015. In Dec 2014 here’s what Fitbit’s annual financials looked like:

https://www.sec.gov/Archives/edgar/data/1447599/000119312515176980/d875679ds1.htm#INDEX

• $140M net assets
  • $200M cash and cash equivalents
  • $130M long-term debt
  • Cash-to-debt ratio of 1.4
• $200M operating expenses
• $140M net income
• $20M net operating cash flow
• $40M debt repayments

So, to continue running their business back then Fitbit needed about $240M per year to cover their OpEx plus debt payments. If Fitbit lost the ability to generate cash from operations it would’ve run out of savings in less than a year before needing even more debt or yet another equity offering.

In 2014 Fitbit had looming competition from Apple on the horizon, which as @StarFoxisDown! pointed out was an obvious problem since Apple had a demonstrated track record of trampling everyone who tried to compete with them in small personal electronics. This market is much more subject to fads than the car market, and it has drastically lower barriers to entry. Fitbit’s gross margin was good at ~50% but they were barely selling enough volume to cover operating expenses, and they clearly needed to spend a lot on sales and marketing to generate demand growth, so there was little prospect of their financial position getting sturdier any time soon.

As it turned out, operating expenses kept on inflating faster than gross profit, and after 2015 the company ran negative net income until merging with Google. The only thing that kept them solvent was raising almost a billion dollars in their June 2015 IPO shortly before they started losing money. After that they steadily drew down on their cash and working capital every year.

Tesla’s financial strength is in a whole other universe than Fitbit’s before the reveal of the Apple watch. Tesla has negligible amounts of recourse debt, small amounts of non-recourse debt for cars and solar panel leases, tons of cash, very strong income, and a clear path for continued income growth without substantial OpEx growth. Moreover, Tesla ultimately has financial backing from Elon freaking Musk who has vowed to go down with the ship, who demonstrated that insane level of commitment in 2008 when he sacrificed his marriage and every last dollar he had to keep the company solvent, and who owns ~45% of another company with private market valuation of $127B for ~$60B equity.

Moody’s and S&P are giving ratings that make no sense at all. Maybe it’s due to malice, or maybe incompetence. By now, bonds from Tesla would probably be almost as safe as US Treasury bonds. Hell will freeze over before Tesla misses a debt payment.

 

[Singuy]

Apple Watch came out in 2015. In Dec 2014 here’s what Fitbit’s annual financials looked like:

https://www.sec.gov/Archives/edgar/data/1447599/000119312515176980/d875679ds1.htm#INDEX

• $140M net assets
  • $200M cash and cash equivalents
  • $130M long-term debt
  • Cash-to-debt ratio of 1.4
• $200M operating expenses
• $140M net income
• $20M net operating cash flow
• $40M debt repayments

So, to continue running their business back then Fitbit needed about $240M per year to cover their OpEx plus debt payments. If Fitbit lost the ability to generate cash from operations it would’ve run out of savings in less than a year before needing even more debt or yet another equity offering.

In 2014 Fitbit had looming competition from Apple on the horizon, which as @StarFoxisDown! pointed out was an obvious problem since Apple had a demonstrated track record of trampling everyone who tried to compete with them in small personal electronics. This market is much more subject to fads than the car market, and it has drastically lower barriers to entry. Fitbit’s gross margin was good at ~50% but they were barely selling enough volume to cover operating expenses, and they clearly needed to spend a lot on sales and marketing to generate demand growth, so there was little prospect of their financial position getting sturdier any time soon.

As it turned out, operating expenses kept on inflating faster than gross profit, and after 2015 the company ran negative net income until merging with Google. The only thing that kept them solvent was raising almost a billion dollars in their June 2015 IPO shortly before they started losing money. After that they steadily drew down on their cash and working capital every year.

Tesla’s financial strength is in a whole other universe than Fitbit’s before the reveal of the Apple watch. Tesla has negligible amounts of recourse debt, small amounts of non-recourse debt for cars and solar panel leases, tons of cash, very strong income, and a clear path for continued income growth without substantial OpEx growth. Moreover, Tesla ultimately has financial backing from Elon freaking Musk who has vowed to go down with the ship, who demonstrated that insane level of commitment in 2008 when he sacrificed his marriage and every last dollar he had to keep the company solvent, and who owns ~45% of another company with private market valuation of $127B for ~$60B equity.

Moody’s and S&P are giving ratings that make no sense at all. Maybe it’s due to malice, or maybe incompetence. By now, bonds from Tesla would probably be almost as safe as US Treasury bonds. Hell will freeze over before Tesla misses a debt payment.

Yes we know Tesla ran way ahead, faster than anyone could have imagined. This story is not the same just 2 years ago in which we were trying to defend Teslas market cap with a story and not profitability.

Credit agencies see legacy auto to be a risk for Tesla as they could be what Apple did to fit bit. It will take some time for them to realize it's not going to happen. But because this kind of thing happened many many times before, they are not going to discount the risk to be negligible.

If everyone saw teslas dominance as a sure thing, then everyone would have invested and we will have a lot of rich teslanaires running around but we don't. The majority of people believes in the competition story and daily look for demand softness.

 

[bigsmooth125]

All of this whining about Moody's reminds of the nerdy kids who complain that the cool kids won't let them sit at the cool kids' table. If you think Moody's is wrong, then exploit this wrong decision. If you don't know how to, sit down and let the big boys play.

 

[Singuy]

So .69.1.1 does exist