Also this isn't very complicated or obscure math so it is unlikely that serious institutional investors would miss it. Saying that the margin picture which fundamentally determines profitability is disappointing and has lead to disappointing stock performance seems superior to just claiming it is vicissitudes in a bull market.
I might have missed your reply among the many responses, but could you outline this "disappointing" Model 3 SR+ margin story in actual numbers, I simply don't think it's there at all:
Model 3 COGS have held pretty steady for three quarters. Musk called it "Game of Pennies", not game of low hanging fruit. And there's only about $2k of fixed depreciation per car.
Yeah, so, firstly:
- Going from ~4,700/week to ~7,000/week alone will reduce per unit depreciation from ~$1,970 to ~$1,320, a difference of -$650. (This assumes $120m/quarter fixed depreciation costs.)
- Once GF3 capacity of 3,000/week is online, depreciation will drop to somewhere around $1,080. (This is estimated with the extra GF3 capex taken into account: $140m/quarter fixed depreciation costs.) That's a difference of -$890.
This is
NOT a game of pennies even in the GAAP space.
But secondly and more importantly,
why are we even talking about non-cash costs of goods components such as depreciation? Arguably it matters to GAAP income and EPS, but Tesla's growth is defined by the Model 3 (and Model Y) cash generation ability and cash margin, which as Q3 and Q4 established and Q1
reaffirmed, i.e. it has been fantastic for the Model 3 for the past 3 quarters, non-stop.
The good cash story is admittedly buried deep in the Q1 results, it's masked by the dis-economies of scale and payables contraction caused by the sudden halt in Model S/X deliveries from Q4 to Q1 - from tailwind-from-heaven season to headwinds-from-hell season, magnified by the tax credit cliff, the leak of the Raven refresh plus it was exacerbated by the cell supply constraints on the Model 3 side which kept it from counter-balancing the S/X drop.
We can approximate the "real" Model 3 margin by starting from Model 3 GAAP CoGs:
- minus depreciation
- minus stock compensation expenses
I.e. it's the raw cash margin plus probabilistic future expenses included such as warranty reserves.
I.e. there's a significant gap between GAAP CoGs and 'real' CoGs, of around ~$4,000.
Put differently: when Elon's leaked email said $38k CoGs for the Standard Range model? Real margin was more like $34k. Still not good enough for a $35k entry model and it's prudent they are emphasizing the SR+, but very good for a $40k ASP entry model, it defines a minimum Model 3 margin of ~17%, and this was 6 months ago, without additional improvements in efficiencies included.
(Also, Model 3 didn't have any significant recalls that I'm aware of, chances are that its current warranty reserves are possibly overly cautious. That too might add another couple of hundred dollars in margin improvements over time as Tesla establishes the warranty expense baseline.)
Put differently: Model 3 production would be fully sustainable even if
all sales were at exactly the minimum ASP of $40k and if the production rate got stuck at 5k/week forever - but they aren't stuck there: Zach said in the conference call that ASP's started rising again after the SR+ rush, and I think there's good reasons to believe that Fremont production is probably somewhere between 6k-7k/week, with GF1 having in excess of 7k/week production capacity - which will be needed to keep Shanghai supplied with battery packs.
Obsessing over GAAP CoGs and smoothly pivoting from 'cash burn' fearmongering when it suits them to GAAP CoGs expense overcharging is really what TSLAQ does every time they want to distract how much inherent cash generation ability the Model 3 has even at 5k/week production rates - let alone at 7k/week and 10k/week rates.
(Not advice though, I've been wrong before and will be wrong in the future as well.)
