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

[DRAW]

WOW. Upgraded my initial "funny" vote to "love".
On the face of it, the Tweet is about how the Model X will not sell, when in fact it now sells 50k per year. However if you look a bit closer, there is another gem in there. Tesla is often criticized for missing deadlines. Well, that Audi Q6, that became the e-tron SUV, was originally targeted for Q2 2018 production and it still has not started deliveries now in Q1 2019. The only thing that matches is the price promised, but of course the real life range is less than a comparable Model X`s.

According to this article they (slowly) started delivering the E-tron last month.
"Tesla Killers" Lookin' ... Totally Tame — CleanTechnica Sales Charts | CleanTechnica

 

[ReflexFunds]

In my view the single most important development which will impact Tesla's earnings, volume and mission in 2019 is progress with reducing the cost of production of a base $35k Model 3.

This is what drives their ability to launch non premium and short range car options, which is the largest factor in whether Tesla can achieve sustainable demand of 7k Model 3s per week. This cost reduction progress is also what impacts their ability to maintain Model 3 gross margin above 20% and progress towards its 25% target.

Significant progress has been made in 2018, with a $29.1k reduction in average cost between Q1 and Q4 2018 on my estimates. Excluding the impact of spreading fixed depreciation costs over higher car volume, cost reduction achieved was $17.2k. I think Tesla likely exited 2018 with a cost of c.$37.5k.

Implied Tesla average COGs for a $35k base car:

• 1Q18 $67.6k ($53.2k ex depreciation).
• 2Q $49.0k ($42.3k ex depreciation).
• 3Q $40.1k ($37.4k ex depreciation).
• 4QE $38.5k ($36.0k ex depreciation).

To get to 25.0% average margin on my long term option mix estimates (50% EAP, 50% Premium interior, 50% US, 50% SR, 15% MR, 10% LR, 20% LR AWD, 5% AWD P) Tesla needs to reduce this cost by another $5.5k to $32.0k. Elon has previously stated a target of reducing this cost to $30k, which should correspond to an average margin closer to 30%.

Much of the easy work on cost reduction has now been done, so it is going to be a significant challenge to make further progress.
Roughly I think this $5.5k cost saving could be achieved by:

• Production ramp from 5k/week to 7/k week, which could reduce depreciation by c.$0.5k per car and staff costs by c.$1.5-2k per car.
• New more efficient battery module and pack designs: $0.5-1k per car
• $10-20/kwh reduction in Panasonic cell purchase cost: $0.5-1k per car
• Cancellation of referral program (I'm not sure how this is accounted for, but it may reduce deferred revenue by c.$0.5k)
• Cancellation of Trump's China tariffs: $0.5-1k per car.
• Other supplier cost savings with negotiations and purchasing scale: $0.5-1k
• Other car design improvements: $0.5-1k
• Better production quality to reduce scrap, rework and warranty costs: $0.5-1k

Does anyone have any views on whether these potential savings look realistic?

A further comment on all this.

I estimate if Tesla ramped to 7k/week & opened orders for all options (including the $35k base) at the start of Q1, then Q1 model 3 gross profit would be down $30-40m & SG&A up $10-20m vs producing 5.5k/week with current available options.

This would still be enough for a positive FY19 profit and $3-4bn cash generation before expansion capex and debt repayments. Releasing all car options in all markets is basically guaranteed to sustain demand for 7K model 3s a week all year in my view. So absent Model S/X demand falling significantly below 100k, I think it is already in Tesla's control to achieve discretionary cash generation of $3-4bn in 2019, of which likely only $2-2.5bn needs to be invested in GF3/other expansion. So the days that releasing the $35k Model 3 would bankrupt Tesla are over.

There are a few reasons why Tesla is not releasing all car options immediately:

• Although Model 3 would be profitable on average, the unoptioned $35k would still be unprofitable at this stage, particularly outside the US without GHG credits.
• This could lead to negative profits in 1Q19 and 2Q19 (but likely still positive profits in 2H19 and positive for the full year).
• Delaying ramp to 7k/week buys more time to fix service business issues before ramping fleet size further.
• New AP3 hardware is due in March/April and Tesla may wish to wait for this to be ready before ramping production to 7k/week, to limit retrofits.
• It makes sense to save release of lower price options for the US tax credit step downs. This allows them to sell the narrative to customers/press that Model 3 has continued to get cheaper despite the tax credit cut.

 

[mrdoubleb]

According to this article they (slowly) started delivering the E-tron last month.
"Tesla Killers" Lookin' ... Totally Tame — CleanTechnica Sales Charts | CleanTechnica

Oh I'm sorry. I stand corrected. /s

 

[Chickenlittle]

A further comment on all this.

I estimate if Tesla ramped to 7k/week & opened orders for all options (including the $35k base) at the start of Q1, then Q1 model 3 gross profit would be down $30-40m & SG&A up $10-20m vs producing 5.5k/week with current available options.

This would still be enough for a positive FY19 profit and $3-4bn cash generation before expansion capex and debt repayments. Releasing all car options in all markets is basically guaranteed to sustain demand for 7K model 3s a week all year in my view. So absent Model S/X demand falling significantly below 100k, I think it is already in Tesla's control to achieve discretionary cash generation of $3-4bn in 2019, of which likely only $2-2.5bn needs to be invested in GF3/other expansion. So the days that releasing the $35k Model 3 would bankrupt Tesla are over.

There are a few reasons why Tesla is not releasing all car options immediately:

• Although Model 3 would be profitable on average, the unoptioned $35k would still be unprofitable at this stage, particularly outside the US without GHG credits.
• This could lead to negative profits in 1Q19 and 2Q19 (but likely still positive profits in 2H19 and positive for the full year).
• Delaying ramp to 7k/week buys more time to fix service business issues before ramping fleet size further.
• New AP3 hardware is due in March/April and Tesla may wish to wait for this to be ready before ramping production to 7k/week, to limit retrofits.
• It makes sense to save release of lower price options for the US tax credit step downs. This allows them to sell the narrative to customers/press that Model 3 has continued to get cheaper despite the tax credit cut.

So how do you know margin? Relative take on different models or capex as only some issues. Nonsense projection are useless

 

[scaesare]

Indeed, lots of negative processes will start once EVs start denting crude oil sales (currently they are on the verge to be a factor):

• There's going to be social stigma attached to gas cars. Those who could afford an EV: "Why are you still polluting and gassing people like a Nazi VW Execitive?".

Fixed that for you.

 

[Chickenlittle]

And let’s be honest, M3 reservation actually meant nothing in the end, well except perhaps a print of the final design...

Huh? Doubt I would have gotten my first car exactly a year ago without reservation

 

[Krugerrand]

I do. (I'm a safety man.)

 

[mrdoubleb]

A further comment on all this.

I estimate if Tesla ramped to 7k/week & opened orders for all options (including the $35k base) at the start of Q1, then Q1 model 3 gross profit would be down $30-40m & SG&A up $10-20m vs producing 5.5k/week with current available options.

This would still be enough for a positive FY19 profit and $3-4bn cash generation before expansion capex and debt repayments. Releasing all car options in all markets is basically guaranteed to sustain demand for 7K model 3s a week all year in my view. So absent Model S/X demand falling significantly below 100k, I think it is already in Tesla's control to achieve discretionary cash generation of $3-4bn in 2019, of which likely only $2-2.5bn needs to be invested in GF3/other expansion. So the days that releasing the $35k Model 3 would bankrupt Tesla are over.

There are a few reasons why Tesla is not releasing all car options immediately:

• Although Model 3 would be profitable on average, the unoptioned $35k would still be unprofitable at this stage, particularly outside the US without GHG credits.
• This could lead to negative profits in 1Q19 and 2Q19 (but likely still positive profits in 2H19 and positive for the full year).
• Delaying ramp to 7k/week buys more time to fix service business issues before ramping fleet size further.
• New AP3 hardware is due in March/April and Tesla may wish to wait for this to be ready before ramping production to 7k/week, to limit retrofits.
• It makes sense to save release of lower price options for the US tax credit step downs. This allows them to sell the narrative to customers/press that Model 3 has continued to get cheaper despite the tax credit cut.

Also, they should only release options they are ready to produce. Imagine they release non-premium, but their supply chain is not caught up with those parts. Or they release SR, but the new pack design is delayed by a month or the new Panasonic lines take 5 weeks longer to install. If the remaining 200k+ reservation holders all start configuring at once and then they also have to wait months, the backlash would be huge.

 

[ReflexFunds]

So how do you know margin? Relative take on different models or capex as only some issues. Nonsense projection are useless

Projections are by nature uncertain and without a doubt will be incorrect, but that doesn't make them useless. Best guess assumptions based on all known available data and that reconcile to previously reported accounts and future guidance are far more useful than saying the future is uncertain therefore there is no point trying to anticipate it. It is always worth stressing a model with changes to your key assumptions though, rather than believing in an arbitrary base case.
My base production costs, option cost and historic take rates are reconciled to reported accounts and also use survey data and several other common sense cost assumptions. Tesla has given capex guidance. My future take rate assumptions are above and are mostly based on addressable market sizes, relative value, a guess at Tesla sales focus, and a model of how many US reservation holders are still waiting for lower price options. Feel free to disagree with them and I can plug your numbers into my model.

 

[mrdoubleb]

Elon said he is not sure they will do reservations for Model Y.

Outside North America there was not that much advantage to having a reservation for almost 3 years vs ordering January 2019. It remains to be seen whether there will be much advantage for Americans wanting a SR Model 3 or a base stripper $35k Model 3.

They did reservations to gauge demand.

They can now extrapolate Model Y demand based on Model 3 demand.

Giving new set of customers and circumstances, Model Y reservations might be underwhelming. Actual demand will not be underwhelming, just a greater percentage of people will wait to just place orders directly without a reservation once configurator opens to the general public.

I also see Model Y reservations as a double edged sword.

Model 3 reservations were insane. Sure, the Y has the potential to be a highly successful car, maybe even surpass Model 3 demand, but are we sure reservation numbers would top Model 3? Especially from overseas where, as you correctly state, the advantage is not even clear.

Now what would be the media headlines, if Model Y does not do 120k pre-orders sight unseen like 3 did? Say it only does 80k? Or it does not do 450k within the first month. say it only does 300k. We would know the rational explanation has nothing to do with the car`s potential, but can you imagine the headlines?

 

[scaesare]

it's not clear why continuing U.S. demand for high margin versions should decline as steeply as it has

How do you know the initial U.S. demand for high margin versions of the car?

 

[Curt Renz]

Reuters - this morning: Tesla's Model 3 gets green light in Europe | Reuters

 

[SebastianR]

A further comment on all this.

I estimate if Tesla ramped to 7k/week & opened orders for all options (including the $35k base) at the start of Q1, then Q1 model 3 gross profit would be down $30-40m & SG&A up $10-20m vs producing 5.5k/week with current available options.

This would still be enough for a positive FY19 profit and $3-4bn cash generation before expansion capex and debt repayments. Releasing all car options in all markets is basically guaranteed to sustain demand for 7K model 3s a week all year in my view. So absent Model S/X demand falling significantly below 100k, I think it is already in Tesla's control to achieve discretionary cash generation of $3-4bn in 2019, of which likely only $2-2.5bn needs to be invested in GF3/other expansion. So the days that releasing the $35k Model 3 would bankrupt Tesla are over.

There are a few reasons why Tesla is not releasing all car options immediately:

• Although Model 3 would be profitable on average, the unoptioned $35k would still be unprofitable at this stage, particularly outside the US without GHG credits.
• This could lead to negative profits in 1Q19 and 2Q19 (but likely still positive profits in 2H19 and positive for the full year).
• Delaying ramp to 7k/week buys more time to fix service business issues before ramping fleet size further.
• New AP3 hardware is due in March/April and Tesla may wish to wait for this to be ready before ramping production to 7k/week, to limit retrofits.
• It makes sense to save release of lower price options for the US tax credit step downs. This allows them to sell the narrative to customers/press that Model 3 has continued to get cheaper despite the tax credit cut.

Thanks for your estimates. I can't find a fault with them. But then again, don't listen to me on that topic.

A few considerations why / why not to release the SR / non-PUP model today: Bob Lutz (and really the whole car industry) have taunted Tesla that the Model 3 at 35k is a money losing proposition. (And they are right since THEY can't produce a car at that price point profitably. See Bolt, see VW statements on the I.D. etc.).

So Tesla can do two things:
1) Release an unprofitable Model 3 SR/non-PUP today (make a loss, have the cash flow ok and not go bankrupt)
2) Wait and release a (barely) profitable Model 3 SR/non-PUP later this year (and continue to be modestly profitable and be killing it in terms of cash flow)

If we believe that Tesla is a 100% mission driven company the decision between 1) and 2) lies in the time it takes to get SR/non-PUP ready for the market:

Option 1) will make customers happy but will convince the rest of the car industry that EVs are bad for the wallet and will not make them accelerate their EV projects. In fact, it will lead to a lot of "I told you so" from Bob & Co. Yet this would still be a better option than not releasing the SR at all since it would put competitive pressure on legacy car makers who might be forced to develop their own "loss leader EVs"

Option 2) is frustrating to early reservation holders. But really, that damage is already done; Once released would send a massive, massive shockwave through the industry (if it happens this year). Today Tesla is profitable. Lots of naysayers say it is either fraud or a one-time fluke. If Tesla posts even one USD of GAAP profit per quarter from here on out and get even the tiniest of profits the quarter after they start selling the 35k SR; every legacy car maker would be under immense pressure to accelerate their own plans. This would not be optional, this would be simply a matter of survival. Which is in line with the Tesla mission statement.

I believe that Wall St. would rather see hyper-growth even if Tesla makes losses and would not mind capital raises etc. I think the ones that could impact on advancing sustainable transport (i.e. other car companies) would be more moved by massive margins, profits and a very affordable $35k car that's eating their lunch and forcing them to sell existing cars at diminishing margins. (also see the definition of "Peak ICE as the moment when no profits can be made in the sale of ICE cars" by @jhm and @neroden in the Shorting Oil thread)

 

[Oil4AsphaultOnly]

CCS not allowing adapters has been "known" for some time, but Tesla has actually stated they will make Type 2 CCS adapters available for existing Type 2 (non-CCS) S/X vehicles.

Tesla confirms Model 3 is getting a CCS plug in Europe, adapter coming for Model S and Model X



So I would gather that Tesla has found away around the restriction, perhaps by getting the rules changed, or perhaps with some novel interpretation of the rules... but in either case, I would no longer be so certain an adapter can't happen when they've officially stated it's coming.

OT, but just wanted to clear up any confusion.

The "adapter" is more of a second cable than an attachment to the primary CCS cord. So it's not inconsistent. Pictures: First look at Tesla’s new dual connector CCS Supercharger

 

[sundaymorning]

Ford Exits Detroit Car Show in More Trouble Than When It Went In

“Management could t say when the electric F-150 would be available.”

Another “myth, legend, tale” of the future Tesla killers.

 

[M3Rider]

And let’s be honest, M3 reservation actually meant nothing in the end, well except perhaps a print of the final design...

I got free LTE for life of the car. That was not available for people shopping without a reservation. Couple other prices went up shortly afterwards - paint & delivery fee.
So, I saved more than my reservation was worth.
This probably doesn't apply outside N.A.

But in a general sense, ordering with a reservation should get you ~1-3 months quicker delivery compared to someone ordering w/o a reservation on the same day, at least initially. Still a nice perk.
With SRs that time may be even greater due to longer SR lines.

 

[Curt Renz]

Aurora Beacon-News (Chicago Tribune suburban subsidiary) - this morning:
With little space for solar farms, suburbs are finding creative ways to embrace renewable energy

 

[avoigt]

https://www.handelsblatt.com/untern...r-plan-fuer-das-autonome-fahren/23887612.html

The BMW-Daimler-Plan for autonomous driving


No mention of tesla

Thats true. I have a hard time to find any mentioning of Tesla AP in terms of autonomous driving. Its is like there is Waymo and nobody else which is of course nonsense.

Journalists may believe that Tesla is just looking for a good drive assist system but does not go into autonomous driving which is really a joke if you look what Waymo has versus Tesla.

If you would try to send a Waymo car to any other street that is not mapped by Waymo and compare it to a Tesla AP on the same road you would easily see how much ahead Tesla really is.

 

[CorneliusXX]

I also see Model Y reservations as a double edged sword.

Model 3 reservations were insane. Sure, the Y has the potential to be a highly successful car, maybe even surpass Model 3 demand, but are we sure reservation numbers would top Model 3? Especially from overseas where, as you correctly state, the advantage is not even clear.

Now what would be the media headlines, if Model Y does not do 120k pre-orders sight unseen like 3 did? Say it only does 80k? Or it does not do 450k within the first month. say it only does 300k. We would know the rational explanation has nothing to do with the car`s potential, but can you imagine the headlines?

Agreed. In addition to your comment, there could be quite a few early adopters who just wanted a cheap Tesla buried in the 3 reservation numbers . I am an example of that. If the Y launched first I would have put a deposit on that one, but I have no need for both.

 

[brian45011]

Tesla set their ER date very predictably for the past two years, except Q3'18 which was moved to a one week earlier date. Moving the earnings date earlier is generally associated with better results. (For any stock, not just Tesla.)

Hence the big price reaction for the Q3'18 date announcement and no big reaction for the other quarters.

Note that Q4'18 was announced one week earlier as well: Wall Street expectations were for February 6, date was set to January 30.

So in principle this should be bullish - but maybe this time it will be nullified by the weak guidance Elon released on the day before. It's also a possibility that the early earnings report signals profitability - but we know that already. So it's hard to tell.

VWAP valuation for 50/50 early conversion on 2019 notes starts on 1/29 and ends 2/26.