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

[kbM3]

Yep. This is just a really quick and easy way to lower the morale of employees and investors (due to stock plunge.) As smart as Elon is, does he really not understand this? Or is it that he truly just doesn't care? We have had ongoing cuts in our company that have hit employee morale. Management keeps doubling down on the cuts, at times using insensitive/offensive wording that just keeps lowering morale further. Now, employees are leaving in droves and it has become difficult to hire people into this environment. This has created a bigger problem than they started with. There is a better way to accomplish cutting expenses without the jarring impact to employee morale, and in Tesla's case, the impact to investor morale. I wish Elon cared more about this. Just a few small edits to the letter would accomplish the same thing in terms of communicating the need to continue to be extremely frugal with expenses without body slamming morale.

It is neither. Elon neither misunderstands nor doesn’t care.

I believe Elon wants Tesla on a war footing. Max effort, max output.

 

[mongo]

Max effort,

12 O'clock High? Hope it doesn't get that bad for him.

 

[WarpedOne]

I believe Elon wants Tesla on a war footing. Max effort, max output.

And yet what he managed to do is to reverse Tesla into february 2014 and UNDO all the accomplishments of the last 4 years.
Perception (image) is everything.

What happened to Model 3 being a money printing machine?
What exactly is Tesla "burning money" today on?

I ain't no care bear but the writing is on the wall, there is no money to be made with TSLA.
Elon does not need his TSLA to reach mars.

 

[Krugerrand]

No, but it would be nice if they can confirm the cost savings. They don’t have to pass along the savings to the consumer. They can say that it will increase gross margins by x% by 2021 or whatever

Why? You wouldn’t believe him anyway. Credibility problem. Remember?

 

[Krugerrand]

Until a Tesla Semi tries to drive under another semi's trailer crossing the road

<ducking>

Would make an epic John Wick scene.

 

[ggies07]

There's a toooonnnnnnn more to that story than that simplistic version, trust me. (I've spent 2 hrs talking to Martin.)

 

[azaz]

Just read the full Elon letter.


One of two things, either the Model 3 costs more to make than estimated (@DaveT theory) or S/X demand is closer to 75k a year than 100k.

 

[tinm]

Really? How many people died in an Explorer because of CO poisoning this week, or Boeing autopilot error bacause they were too cheap to include the AOA warning? What about all the MB/Ford/GM fire hazard recals? Because 2 Teslas caught fire and there have been 2 under tractor trailor AP deaths. AP HW 2.5 can’t do 3D mapping. AP 3 can, so this issue will be temporary. Tesla is working as fast as it can to fix what is not possible today to make a better tomorrow. The real story should be ALL of the under tractor trailor deaths and adding side protection to protect ALL motorists, as well as the upcoming 3D mapping that HW 3 will do to prevent this.

All that is well and good, but you haven't provided any evidence that publishers are deliberately instructing editors who in turn are deliberately instructing reporters to write only Tesla hit pieces simply because the publication or broadcaster is not getting any advertising money from Tesla, which is what I was addressing in my posting. I look forward to your producing such evidence, and I would gladly change my mind if the evidence were convincing. The clock is ticking.

 

[tinm]

Wait for my book.

 

[Krugerrand]

At Poker game yesterday. Of course, Tesla came up because I drive two of them. Educated GEN Xers for the most part. Their take:

Tesla stock is overvalued. (Still?)
Nice cars.
Elon is crazy and unreliable.
Tesla demand is falling because they had to close their overseas factory. (What? They have never even had on overseas factory to close.). Heard it on 1010 Wins. Don’t remember which country. (I have followed Tesla from the beginning and I do not know of any overseas factory outside of the one they are building in China right now.). China? Don’t know anything about that. But yeah no one wants these cars anymore.
Fossils will always be needed.
Autopilot is foolish and dangerous.
Tesla cars explode.

Blank looks when I mentioned dominant positions in BEVs, battery productions and new China factory coming online by the end of year. Mentioned how China, the largest car market in the world, is banning non EV sales by 2030. yeah that is a long time away. No one cares about stuff twenty years from now does not matter now.

How much money have you lost in the stock, giggles.

Sigh....

But did you whoop their butts at the table?

BTW, it’s 2019. 2030 is not twenty years away. Guess they also suck at maths besides being informed.

 

[neroden]

Just read the full Elon letter.


One of two things, either the Model 3 costs more to make than estimated (@DaveT theory) or S/X demand is closer to 75k a year than 100k.

Disagree with both. I've been convinced that S/X price per car is going to be permanently somewhat lower than before, and this will only partially be compensated by cutting S/X production costs with Raven.

 

[sparcs]

In 2008 Elon kicked out Martin Eberhard because Tesla was in financial chaos.

Who is going to kick out Elon now for exactly the same reason?

Under Elon, they are cutting costs and extracting efficiencies in production. S/X refreshed. They are unwinding the wave deliveries for Model 3. They launched the Model 3 standard range which allows them to build more vehicles with fewer battery cells. Energy storage is poised to boost production now that the two cell lines have shifted back towards storage. Solar is poised to start some real production.

What exactly would Tesla do differently with Elon not there? We may not like the narrow Quarterly view, but Tesla is making all the right changes for a longer term view.

 

[EVNow]

I was reading some autonomous car related articles about various companies plans. Funny thing is just couple of years back so many of them said they will have robotaxis/AVs on the roads in 2020. Of course EM said it this year.

So whatever happened to all those promises by virtually all major OEMs and Google etc ?

 

[mongo]

Just read the full Elon letter.


One of two things, either the Model 3 costs more to make than estimated (@DaveT theory) or S/X demand is closer to 75k a year than 100k.

Elon is staying ahead of the issue that comes with a windfall:
Here's why lottery winners go broke

 

[dww12]

All that is well and good, but you haven't provided any evidence that publishers are deliberately instructing editors who in turn are deliberately instructing reporters to write only Tesla hit pieces simply because the publication or broadcaster is not getting any advertising money from Tesla, which is what I was addressing in my posting. I look forward to your producing such evidence, and I would gladly change my mind if the evidence were convincing. The clock is ticking.

Not exactly how I think it would go down. I think almost all stories would start negative, but then depending on “advertiser support” get revised or removed. Since Teslas does no advertising it would be open season for any headline or story. I doubt there would be a paper trail of such things without a whistleblower but I’ll check for you. I think everyone depending on a paycheck knows you don’t *sugar* where you eat.

 

[Krugerrand]

Please, do share (seriously).

You’ll have to buy the book.

 

[EinSV]

This is a good question since it’s clearly on investor’s minds so i think it's worth answering in detail.

To start with, I think it’s important to note that cash flow breakeven is much more important than profit and I think Tesla can get Q2-Q4 to cash flow breakeven even with disappointing demand.

• Cash flow is difficult to adjust into a run rate format, but in Q1 free cash flow was very close to zero excluding 1) working capital movements 2) one off cash/deferred revenue received from FCA and FSD special offer and 3) one off cash exceptional restructuring costs. This is the cash flow Tesla would make if it maintained production & deliveries at 51k Model 3 and 12k S&X on a long term basis (working capital is only a significant cash flow item if production and deliveries do not match and if volume is increasing or decreasing significantly quarter on quarter).
• So this is the baseline we are starting with, and clearly several key variables will change run rate free cash flow from this current level of 0 including: 1) change in car volume (likely to increase from Q1 levels), 2) change in cash gross profit per car, 3) change in opex, 4) change in capex (likely to increase from Q1 levels) and 5) will production and deliveries not match (this will cause a one off inventory change in the cash flow, but Tesla will reduce production rather than continue building inventory indefinitely).
• To build GF3 and start installing Model Y equipment, Tesla Is guiding for capex of $2-2.5bn in 2019. This implies c.$0.6-0.7bn per quarter in Q2-Q4 or c.$0.4bn higher than Q1 capex. So adjusting for the increased pace of growth investment but maintaining deliveries flat with Q1, Tesla is on track to reduce cash balance by $0.4bn per quarter in Q2-Q4.
• In addition to this, Tesla intends to continue to end the wave of deliveries at quarter end – they have already made a significant inventory investment towards this already (partly by accident through delayed Q1 deliveries) but this may require another $0.5-1bn inventory investment over the next two quarters. This does have the benefit of making quarter end cash balance much closer to intra-quarter minimum cash balance – which means Tesla’s quarter end liquidity can potentially reduce to as low at c.$0.5-1bn.
• So in total we have Tesla investing $1.7bn to $2.2bn cash balance over Q2-Q4 2019 if all else is kept equal with Q1. This would leave them with $2.2-2.7bn cash balance at year end together with $1bn undrawn bank lines – so $2.2bn to $3.2bn excess liquidity.
• So even with this worst case of no improvement from Q1 will leave Tesla with enough cash to get GF3 into production and likely also Model Y, at which point positive cash flow and profit becomes extremely easy.

But, is it reasonable to assume Tesla deliveries do not improve from 51k Model 3 and 12k S&X over Q2-Q4? This seems extremely unlikely.

• On Model S/X demand side Q1 was impacted by 1) tax credit demand pull forward, 2) discontinuation of the most popular base models for most of the quarter, 3) Customers waiting for a highly rumoured refresh, 4) unfavourable auto market seasonality. In Q2 none of these are still issues (the limitation is mostly ramping production back up to speed), in addition to benefits from lower pricing.
• On Model 3 side – Now Tesla has 1) SR+ availability increasing affordability, 2) SR+ availability meaning current limited cell supply can produce more cars, 3) lower pricing, 4) faded tax credit demand pull forward impact, 5) much better charging speeds, 6) availability in more countries.
• And higher deliveries will also mean higher cash gross profit for each car due to operating leverage benefits on production staff costs. This will however be offset to some degree by reduced ASP now SR+ is available.
• Cash profit per car is also heavily dependent on FSD take rate. Whether or not you believe in Robotaxis, it seems almost guaranteed that Tesla’s new HW3 and recent pace of progress will lead to significantly upgraded FSD functionality this year which is very likely to lead to a higher FSD take rate.
• So all together, these changes vs Q1 should comfortably take Q2-Q4 cash flow to breakeven, even without tesla getting close to their 360-400k delivery guidance. This is why Tesla Is guiding for positive free cash flow in all remaining quarters this year, even despite the delivery wave unwind.

But this does not mean demand is not an issue at all.

• I think Tesla is most likely going to be able to sell full production this year without any significant actions.
• But it is definitely true that demand is significantly lower than justified by Tesla's product/price superiority due to 1) lacking public awareness of the TCO of EVs, the performance and price of Tesla’s and the huge number of people killed by ICE emissions and 2) heavy PR and FUD attacks against Tesla trying to create a misleading impression of poor quality, fire danger, crash danger, insolvency risk, range anxiety etc.
• Whether Tesla demand would be 1.5x or 5x current production if the whole world was well educated about Tesla vehicles, I don’t know, but to some extent I'm sure Tesla is negatively impacted by this.
• My guess is this is currently impacting Tesla’s pricing power and Tesla would raise prices if people were better educated and demand far outpaced supply.
• But It is also possible that this public ignorance and miseducation will lead to Model 3 demand levels below production capacity. If this scenario plays out Tesla may choose to make some of the more drastic changes you are referring to.

What can Tesla do in the (unlikely given current information in my view) scenario that Model 3 demand does fall below production capacity?

• The first short term move will be to move Model 3 from three to two shifts of production. Most if not all parts of the production line should be able to produce at 4.5k per week on two shifts. This will prevent production outpacing supply and prevent inventory cash outflows.
• Tesla can raise more capital (within 24 hours) if they decide they need more cash to bridge to Model Y production.
• Elon will be forced to finally accept that advertising is a necessary evil for the greater good. If Tesla spends money to better educate people about the benefits of EVs and specs of Teslas Tesla will definitely get incremental demand.
• Tesla could partner with a dealership to open up another new sales channel. FCA in Europe seems an obvious partner given FCA reduces its emissions penalties by $10k for every extra car Tesla sells in Europe next year.
• Tesla could form a JV with an auto company using Tesla’s leading EV powertrain and battery technology. I’m sure many companies would be willing to partner on this given how far ahead Tesla is on technology – it will be Tesla holding out to go it alone at the moment. If Tesla puts its technology into a new brand, it can sell its technology through a new sales channel without comprising on its core Tesla business model.

What about after 2019?

• Tesla’s struggle to get to profitability and positive cash flow is entirely due to operating leverage and lack of scale. Most auto competitors have far lower gross profit per car relative to Tesla, but they need to sell 5 million to 10 million cars per year to leverage their fixed opex costs. Tesla is designing a more efficient business model that is close to breakeven with only c0.25 million cars per year.
• Tesla’s battle gets far easier when they have more factories and more car models. The gross profit from each new factory flows straight through to Tesla’s bottom line and will very rapidly turn Tesla profitable. GF3 will without a doubt increase China demand beyond current levels with lower production costs. Model Y and Semi will without a doubt plug significant new gross profit into Tesla’s largely flat fixed cost base. So in 2020 Tesla’s battle gets far easier, and its very difficult to see a scenario where their current cash balance does not bridge them to Model Y production and positive free cash flow.
• In addition, our best information is that Tesla will get around $0.6bn yoy increase in profit in the EU in 2020 from increased emissions pooling payments.
• Of course, if Tesla does deliver on Robotaxis as Elon expects, all profit and cash flow questions will be answered for good overnight.

Great post -- very helpful. For cash balance calculations I think you also may want to include the $566M convertible note repayment due in November 2019. (Unless we hit $760/share, which seems unlikely.) Doesn't technically affect cash flow but still has to be paid.

 

[tinm]

Please, do share (seriously).

Sorry, I can't yet. Also, note there are multiple authors working on Tesla books, and some of these authors (including me) are going very very deep, so I suspect there's going to be some fun juicy reading in 2020. (Note, I do not include Niedermeyer's LUDICROUS book, coming out I believe in August, in this grouping -- from all indications, including execs at Tesla, it is expected to be, as they described it to me, a "hit piece.")

 

[⚡️ELECTROMAN⚡️]

We have had ongoing cuts in our company that have hit employee morale. Management keeps doubling down on the cuts, at times using insensitive/offensive wording that just keeps lowering morale further. Now, employees are leaving in droves and it has become difficult to hire people into this environment. This has created a bigger problem than they started with. There is a better way to accomplish cutting expenses without the jarring impact to employee morale, and in Tesla's case, the impact to investor morale.

Are you referring to the company you work for? Not Tesla?

 

[JohnDinger]

I was reading some autonomous car related articles about various companies plans. Funny thing is just couple of years back so many of them said they will have robotaxis/AVs on the roads in 2020. Of course EM said it this year.

So whatever happened to all those promises by virtually all major OEMs and Google etc ?

To be fair, Elon made those same promises.

I think they all realized that autonomous driving is harder than they'd imagined. You can't just be 99.9% effective - need to be 99.9999999%

It's hard to solve obscure corner cases with today's modeling and AI learning strategies. Even for Tesla.