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

[Fact Checking]

FCF was $881M last quarter, not sure what his corresponding projection for Q4 is. I see his projection of $4.1 billion of cash & cash equivalents. That was $3.0 billion last quarter.

@luvb2b's free cash flow is not listed separately, but is easy to calculate: it is the "net cash from ops" line minus "pp&e purchases" (i.e. capex cash outflows), which for Q4 is $1,981m-$700m, i.e. $1,281m.

Note that the $700m capex in Q4 is estimated from the annual capex guidance Tesla gave for 2018: they could have spent a bit more or a bit less in Q4, which makes most of these cash projections highly uncertain.

My estimates: I think @luvb2b's model is using too high Model 3 ASP and the Q4 results will be roughly $50m lower:

• revenue would be around $6,950m,
• net cash from operations of $1,900m,
• free cash flow (FCF) of around $1,200m,
• GAAP profits of around $200m,
• GAAP earnings per share (EPS) of around $1.8

Note that there's two big "wildcards" that could increase cash generation in Q4 by up to $500m (!), and one of them could increase free cash flow by ~$300m (the receivables line).

There's also a potential for a downwards surprise, but not more than -$200m I think, even under the most pessimistic scenarios. So better free cash flow in Q4 than Q3 looks pretty certain at this stage, IMHO.

I could be wrong, not advice, etc.

 

[ReflexFunds]

@VGrinshpun raises a good point on Twitter. Elon's email discusses profit in % and not $ value, it is possible profit could reduce in margin terms but increase in absolute terms.

Elon can be extremely deliberate with his choice of words & definitions at times and he always tailors his message to his audience. I can definitely see Elon thinking to himself, how can I present this QoQ profit growth in a way which will cause least backlash against a 7% staff cut. I still think a reduction in absolute net profit QoQ is most likely, but I couldn’t rule out higher profit with lower margin and I don't think that would be inconsistent with Elon's email.

 

[Buckminster]

My guess is that either Tesla screwed up (totally possible), or that they were informed that the layoff plan leaked and would be released during the day to create a drop for the January 18 expiries, so on short notice they decided to release it sooner than planned.

The pattern for past layoffs was usually during the week: the 2018 June 12 9% layoffs announcement was given on a Tuesday.

As it happened Elon's email created an even bigger drop than a leak of the layoffs would have created, due to the narrowing of the profitability guidance and the downbeat tone, and the resulting investor uncertainty...

Tesla and execution, still not best friends.

Elon has given up creating a bear trap. He is tempting them down a path so long, no bear will have the energy to fight when they realise what has happened to them.

We shall call this; "the honey trap".

 

[SteveG3]

To be fair to the NYT, the position of "public editor" was pretty unique in U.S. journalism, you won't find it at the Wall Street Journal or the Washington Post - nor at the big international independent newspapers. When the political right radicalized in the U.S. and went on their current anti-science and anti-fact crusade they started using the public editor's findings against the NYT, which made it pretty predictable that they'd eliminate it.

BTW., Margaret Sullivan, NYT's former public editor, is now writing for the Washington Post.

I believe it's generally a hit-and-miss: John Broder and David Gelles are bad, while many other journalists at the NYT have high journalistic integrity.

I'm not convinced this position having existed at the NYT was "pretty unique," or even uncommon, so I'm not cutting the NYT slack on that one ; )

From looking into this a little now, some papers refer to essentially the same role as an ombudsman position. WSJ had one of those... until 2013, when they eliminated the position. I wouldn't be surprised if such a public advocate/internal journalistic quality watchdog is becoming less common today, whether referred to as a public editor, ombudsman, or any other name.

 

[Fact Checking]

@VGrinshpun raises a good point on Twitter. Elon's email discusses profit in % and not $ value, it is possible profit could reduce in margin terms but increase in absolute terms.

Elon can be extremely deliberate with his choice of words & definitions at times and he always tailors his message to his audience. I can definitely see Elon thinking to himself, how can I present this QoQ profit growth in a way which will cause least backlash against a 7% staff cut. I still think a reduction in absolute net profit QoQ is most likely, but I couldn’t rule out higher profit with lower margin and I don't think that would be inconsistent with Elon's email.

Interesting point.

Note that the embedded image is not visible on desktop browsers, here's the text of the Tweet and the relevant section from Elon' email converted to text:

Vladimir Grinshpun on Twitter

Market reaction to $TSLA RIF email from Elon was decidedly bearish, but there is a good chance that the "< than Q3 profits" part was actually misinterpreted. The email discussed profit in %, not $ value. It is actually possible to have smaller Q4 profit in %, but not $.

"In Q3 last year, we were able to make a 4% profit. While small by most standards, I would still consider this our first meaningful profit in the 15 years since we created Tesla. However, that was in part the result of preferentially selling higher priced Model 3 variants in North America. In Q4, preliminary, unaudited results indicate that we again made a GAAP profit, but less than Q3. This quarter, as with Q3, shipment of higher priced Model 3 variants (this time to Europe and Asia) will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit."​

(Second highlight was added by me.)

If Elon was thinking in terms of profit percentages, then indeed with higher revenue they could have made similar or slightly higher GAAP profits.

I still think that GAAP profit is possibly lower: there was an 8% increase in deliveries, but probably an 5-10% reduction in average sales price for the Model 3 - plus the extra 50 million dollars of China tariffs and a number of other potential headwinds.

Also, there's so many moving parts that's it's IMHO basically impossible to reliably place Q4's GAAP profit relative to the $312m profit in Q3 - so the best we can do is to use conservative assumptions - a positive surprise is never a big problem.

 

[WarpedOne]

Elon's goal is still 600B company before 2028.
I will not bet on him failing.

 

[bhtooefr]

So how do I short $SECQ ?

You can short their parent organization: How To Short The U.S. Bond Market

 

[cricketman]

@VGrinshpun raises a good point on Twitter. Elon's email discusses profit in % and not $ value, it is possible profit could reduce in margin terms but increase in absolute terms.

Right, the important thing here is the context of the 4% profit against what Elon's aims are for Tesla profit margins. In earnings calls he has spoken about 20-25% profit margins for the Model 3, and remember that his 10 year compensation plan includes huge EBIT milestones

In this context then 4% is indeed tiny

Again, the share drop is much fuss about nothing.

I have thought long and hard about whether to buy any more shares and have decided against it. Over the past 2 years I have used every spare penny to buy over 1,000 shares so any new spare cash I have is going to be used to actually buy things that improve my life in the short term. I am very confident that within 3 years, the Tesla share price will be at $1,000 and over $3,000 in 7-10 years. I am not selling any until we hit $1,000.

 

[SteveG3]

Right, the important thing here is the context of the 4% profit against what Elon's aims are for Tesla profit margins. In earnings calls he has spoken about 20-25% profit margins for the Model 3, and remember that his 10 year compensation plan includes huge EBIT milestones

In this context then 4% is indeed tiny

Again, the share drop is much fuss about nothing.

I have thought long and hard about whether to buy any more shares and have decided against it. Over the past 2 years I have used every spare penny to buy over 1,000 shares so any new spare cash I have is going to be used to actually buy things that improve my life in the short term. I am very confident that within 3 years, the Tesla share price will be at $1,000 and over $3,000 in 7-10 years. I am not selling any until we hit $1,000.

20-25% was gross margins for Model 3.

net margin goal I think is ~10-12%, but Tesla is in rabid growth mode and that 10-12% might not be meaningful until they are in a much more mature state.

 

[Carl Raymond]

Several comments above wondering why Elon wrote such an email to employees, knowing that it would affect the share price, on such a date.

Elon does care about the share price, but he cares about his employees more. All we have to do is imagine Elon and one of his harder working (though redundant) employees having this conversation face to face. Of course Elon is going to choose his words to soften the blow “sorry, it’s not about you, the mission is at stake”.

The timing is also self evident. He can’t talk the company up at the earnings call and then talk about survival a week later. It had to be sequenced as down before up. He also didn’t want to ruin Christmas, hence mid January layoffs.

imho

 

[Fact Checking]

Right, the important thing here is the context of the 4% profit against what Elon's aims are for Tesla profit margins. In earnings calls he has spoken about 20-25% profit margins for the Model 3, and remember that his 10 year compensation plan includes huge EBIT milestones

Apples to oranges: while in Q3 Tesla achieved 4% GAAP profit margins, but generated about 31.6% of gross margin from Model S/X sales and 20.5% gross margin from Model 3 sales.

Their 20-25% target is for Model 3 gross margins, not for GAAP profit margins.

GAAP margins are much lower due to a lot reinvestment going into future products plus a lot of "virtual" fictive non-cash expenses like stock compensation - but they have no bearing on and have no relation to how profitable Tesla's existing products are.

In fact successful growth companies generally try to manage their GAAP earnings to not be too high, and reinvest the maximum into future cash flows.

 

[ReflexFunds]

Apples to oranges: while in Q3 Tesla achieved 4% GAAP profit margins, but generated about 31.6% of gross margin from Model S/X sales and 20.5% gross margin from Model 3 sales.

Their 20-25% target is for Model 3 gross margins, not for GAAP profit margins.

GAAP margins are much lower due to a lot reinvestment going into future products plus a lot of "virtual" fictive non-cash expenses like stock compensation - but they have no bearing on and have no relation to how profitable Tesla's existing products are.

In fact successful growth companies generally try to manage their GAAP earnings to not be too high, and reinvest the maximum into future cash flows.

Also, most of Tesla's SG&A costs are fixed or semi fixed, and it will take GF3 production and new car model releases to fully leverage the cost base and reduce SG&A per car. Global & regional HQ costs shouldn't increase significantly with car volume, and nor should all the software team costs. Store, sales and customer service costs will increase in absolute terms with higher volume, but will reduce as a % due to greater economies of scale and greater sales densities.

 

[jbcarioca]

...

Nearly all the so-called bears with any kind of platform, from Seeking Alpha and Twitter, to air time on CNBC and in the NY Times, rely on this recipe... Lutz, Speigel, etc., included, ie, I'm pretty confident they are aware they are aggressively marketing falsehoods.

I don’t wish to choose your post specifically for my comment since it applies to many posts here and elsewhere, but it is just now that I no longer could tolerate all this without comment.

In social psychology there is an enormous body of research ( I’m quoting none of it intentionally because many of us should do our own research on this subject) about self- reinforcing beliefs that are spread by choosing only other opinions that reinforce ones own opinions. Everyone is subject to that confirmation bias, including newspeople.
https://www.amazon.com/True-Believer-Thoughts-Movements-Perennial/dp/0060505915/ref=nodl_
The link is to a 1951 book written by Eric Hoffer, whose biography is the source of legends. Lest we think much has changed, just think.

Today much of science has suddenly become a matter of faith, not evidence. Politics probably always has been.

For both TSLA bulls and bears it is much easier to demonize than to understand. We seem predestined to demonize those who disagree simply because understanding them is hard work. Of course it is very easy to dismiss people such as Bob Lutz, mostly because the future is intolerable for heroic figures of the now-distant past. Anybody who without question accepts a given position is almost certainly wrong.

As mostly longs, including me, it is easy to dismiss very legitimate serious questions and risks. We do ourselves no favors by being myopic.

Right now we have gigantic global headwinds in everything from China, E.U. to US domestic, to trade wars and political disarray in EVERY major country. We have not seen this much instability almost everywhere for decades.

In the face of all that we have ultra-right rollback of environmental standards and promotion of discredited power sources such as coal and nuclear while depressing solar and wind power.

So, facts stand in the way of unqualified Tesla wins in the face of all comers anywhere because Tesla/Elon are our messianic saviors. That is equally ridiculous.

End of diatribe: we are meant to be investors. That means we should carefully and deliberately evaluate positive and negative points.

Note : as anybody who knows me knows I am long TSLA and a disciple of Ben Graham updated for 21st century.

 

[ReflexFunds]

Electrek reporting that internal service documents now include AP3 hardware, Tesla denied it is already in production but re-iterated Bannon's late October guidance (which suggested March release). Looks like AP3 hardware is on track to me.

"A source told Electrek that Tesla updated the Model 3 wiring diagrams in its internal service documentation on January 9 to include the new Autopilot 3.0 computer as the new standard ECU in Model 3:

We contacted Tesla about the new diagram for Model 3 to ask if it means that the Autopilot 3.0 computer is now being installed in new Model 3 vehicles.

The company denied that it’s currently in production and reiterated Bannon’s timeline – though it couldn’t explain why they released the diagram for Model 3."

 

[Fact Checking]

Right now we have gigantic global headwinds in everything from China, E.U. to US domestic, to trade wars and political disarray in EVERY major country. We have not seen this much instability almost everywhere for decades.

True - although I'd expect the economic self-interest of the ruling class to prevail here too. They got the tax cut they wanted, they'll get the next boom cycle and a recovery of their portfolios as well. Republicans also certainly don't want to go into the elections next year with a recession on voter's mind. They already suffered a historic defeat in the 2018 midterms at the height of an economic boom cycle (!).

So while the doom scenarios are very real, and the market reaction them them is justified - none of the conflicts appears to be fundamental like some of the old conflicts were. Each of these conflicts is literally one common-sense deal away from being ended.

Reportedly Trump is keenly watching U.S. stock indices and appears to judge his own success as a president by the progress of the stock market. I do think he will remove all of the macro obstacles within weeks maybe, months definitely.

In the face of all that we have ultra-right rollback of environmental standards and promotion of discredited power sources such as coal and nuclear while depressing solar and wind power.

True - although next year's U.S. elections will likely put an end to that trend too: 56% of U.S. voters feel 'strongly' that they will absolutely not vote for Trump - and this is a metric that was reliable in the past.

Also, Tesla is in the process of isolating themselves form this vulnerability in their 'home market', by establishing a second 'home market' in China, in the fastest growing EV market on the planet - with production planned to start later this year.

So while the macro risks are real, I do not share the view that these macro risks are permanent.

 

[Fact Checking]

Electrek reporting that internal service documents now include AP3 hardware, Tesla denied it is already in production but re-iterated Bannon's late October guidance (which suggested March release). Looks like AP3 hardware is on track to me.

"A source told Electrek that Tesla updated the Model 3 wiring diagrams in its internal service documentation on January 9 to include the new Autopilot 3.0 computer as the new standard ECU in Model 3:

We contacted Tesla about the new diagram for Model 3 to ask if it means that the Autopilot 3.0 computer is now being installed in new Model 3 vehicles.

The company denied that it’s currently in production and reiterated Bannon’s timeline – though it couldn’t explain why they released the diagram for Model 3."

Just to recap, here's what Peter Bannon, Tesla's Director of Hardware Engineering said about the progress of HW3 on October 23 (~3 months ago):

Peter Bannon

Hi, this is Pete Bannon. The Hardware 3 design is continuing to move along. Over the last quarter, we've completed qualification of the silicon, qualification of the board. We started the manufacturing line, in qualification of the manufacturing line. We've been validating the provisioning flows in the factory. We built test versions of Model S, X and 3 in the factory to validate all the fit and finish of the parts and all the provisioning flows.

So we still have a lot of work to do. And the team is doing a great job, and we're still on track to have it ready to go by the end of Q1.

Elon Musk

Great. And that will be on it roughly 1000% increase in processing capability compared to the current hardware. And so, it's obviously giant improvement despite being a - it costs about the same. Cost, volume and power consumption are approximately the same as the current hardware, but it's a ten-fold improvement in frames per second.

Peter Bannon

That's right.

Elon Musk

Yeah, and improved redundancy as well. But very importantly - it's very important emphasize is that the only thing that needs to change between a car that's produced today and a car, let's say, produced in the two second quarter of next year is swapping out the Autopilot computer. And this is a simple change that takes less than half-an-hour in service to upgrade the computer. And so, anyone will be able to upgrade their computer to full self-driving capability or upgrade their car to full self-driving capability with a simple service visit.

So we expect all cars with a Hardware 2 sensor suite, basically anything made in the last roughly two years will be upgradeable to full self-driving.

Peter Bannon

Yeah. In fact, a lot of the cars we're using for testing today have in fact been upgraded from Hardware 2.

Elon Musk

Right, so it's very important to emphasize, like people shouldn't - but 5% people who would want to wait until that comes out. But there is no need to wait till it comes out, because it's just a very simple plug-and-play change to get to the full self-driving. And anyone who is compatible with self-driving option will just get it done for free. And anyone who still wants to order full self-driving at this point, it's just an off menu item, you can still order it.

But the - we took it off the order menu, just because there are - it was really creating a lot of friction in the sales process and people didn't understand the difference between Enhanced Autopilot and full self-driving. So just to simply the order process, we took that off. But anyone who asks for it can certainly get it. And it really ends up being a discount of future capability.

But to be clear, there is definitely no need to wait until Q2 to order a car. It's - we want to make it just completely seamless process, so there is no advantage ordering now versus Q2. Andre, do you want to…?

Andrej Karpathy

Yeah, certainly. Hi, everyone. My name is Andrej Karpathy. I'm the director of AI here at Tesla. And my team trains all of the neural networks that analyze the images streaming in from all the cameras for the Autopilot. For example, these neural networks identify cars, lane lines, traffic signs and so on. The team is incredibly excited about the upcoming upgrade for the Autopilot computer which Pete briefly talked about.

This upgrade allows us to not just run the current neural networks faster, but more importantly, it will allow us to deploy much larger, computationally more expensive networks to the fleet. The reason this is important is that, it is a common finding in the industry and that we see this as well, is that as you make the networks bigger by adding more neurons, the accuracy of all their predictions increases with the added capacity.

So in other words, we are currently at a place where we trained large neural networks that work very well, but we are not able to deploy them to the fleet due to computational constraints. So, all of this will change with the next iteration of the hardware. And it's a massive step improvement in the compute capability. And the team is incredibly excited to get these networks out there.

Elon Musk

Great, thank you. Again - actually I've said this before, what I think - just talking a bit about the kind of long-term future, we absolutely see the future as kind of - as sort of a shared electric autonomy. So that you'll be able to do ride-hailing or share your car anyway, sort of long-term model that's some combination of like Uber, Lyft and Airbnb. There will be Tesla dedicated cars for ride-hailing and there will be - and any customer will be able to share their car at will, just like you share your house in Airbnb. So it's a combination of those two models. I think, it's pretty obviously where things are headed long-term.

The advantage that Tesla will have is that we will have millions of cars in the field with full autonomy capability, and no one else will have that. So I think that puts us - that will end up putting us in the strongest competitive position long-term.​

So the timeline is to have it ready to go by the end of Q1, i.e. start installing HW3 in all new cars manufactured in early April.

If Elon does his big product announcements at around March 15 then maybe an announcement about HW3 could be part of that presentation too.

 

[SteveG3]

I don’t wish to choose your post specifically for my comment since it applies to many posts here and elsewhere, but it is just now that I no longer could tolerate all this without comment.

In social psychology there is an enormous body of research ( I’m quoting none of it intentionally because many of us should do our own research on this subject) about self- reinforcing beliefs that are spread by choosing only other opinions that reinforce ones own opinions. Everyone is subject to that confirmation bias, including newspeople.
https://www.amazon.com/True-Believer-Thoughts-Movements-Perennial/dp/0060505915/ref=nodl_
The link is to a 1951 book written by Eric Hoffer, whose biography is the source of legends. Lest we think much has changed, just think.

Today much of science has suddenly become a matter of faith, not evidence. Politics probably always has been.

For both TSLA bulls and bears it is much easier to demonize than to understand. We seem predestined to demonize those who disagree simply because understanding them is hard work. Of course it is very easy to dismiss people such as Bob Lutz, mostly because the future is intolerable for heroic figures of the now-distant past. Anybody who without question accepts a given position is almost certainly wrong.

As mostly longs, including me, it is easy to dismiss very legitimate serious questions and risks. We do ourselves no favors by being myopic.

Right now we have gigantic global headwinds in everything from China, E.U. to US domestic, to trade wars and political disarray in EVERY major country. We have not seen this much instability almost everywhere for decades.

In the face of all that we have ultra-right rollback of environmental standards and promotion of discredited power sources such as coal and nuclear while depressing solar and wind power.

So, facts stand in the way of unqualified Tesla wins in the face of all comers anywhere because Tesla/Elon are our messianic saviors. That is equally ridiculous.

End of diatribe: we are meant to be investors. That means we should carefully and deliberately evaluate positive and negative points.

Note : as anybody who knows me knows I am long TSLA and a disciple of Ben Graham updated for 21st century.

There are a number of us here who are as reliable to challenge the hyperbolically bullish (TT007, and VA for most of her stay come to mind) as the disingenuously bearish. To be sure, far more volume of challenges of the latter... but there are just so many more actors pumping that stuff out.

That said, at times there can be some echo chamber buildup among some less informed posters. I hardly ever see anything approaching “because Elon/Tesla are our Messianic saviors.” Far more than most places in real life or online, I find this to be a place where some broad claim thrown without supportive facts and reasoning, much less proclamations of blind faith, is going to be met with a stream of unapologeticly challenging responses. There are times where Elon takes a pretty strong critical lashing as well.

Finally, speaking for myself, I consciously make an effort to try to see facts and reason and not ‘vilify’ or ‘glorify,’ or claim ‘certainty.’ I’m sure I am not ‘perfect’ at this, but it is in the forefront of my mind when critiqueing those making bearish statements, media coverage, etc. I’ll point out what I see as falsehoods, and intellectual dishonesty, but you will not see me referring to any ‘lies,’ ‘outrages,’ ‘scumbags,’ ‘wrongs,’ ‘cheats’ etc. Similarly, I’ll talk about probabilities, levels of confidence, some X or some Y, but, I rigorously avoid use of words such as ‘all,’ ‘certain,’ ‘completely,’ ‘total,’ etc. except to say something like near ‘certain’ on occasion.

 

[Dan Detweiler]

True - although I'd expect the economic self-interest of the ruling class to prevail here too. They got the tax cut they wanted, they'll get the next boom cycle and a recovery of their portfolios as well. Republicans also certainly don't want to go into the elections next year with a recession on voter's mind. They already suffered a historic defeat in the 2018 midterms at the height of an economic boom cycle (!).

So while the doom scenarios are very real, and the market reaction them them is justified - none of the conflicts appears to be fundamental like some of the old conflicts were. Each of these conflicts is literally one common-sense deal away from being ended.

Reportedly Trump is keenly watching U.S. stock indices and appears to judge his own success as a president by the progress of the stock market. I do think he will remove all of the macro obstacles within weeks maybe, months definitely.



True - although next year's U.S. elections will likely put an end to that trend too: 56% of U.S. voters feel 'strongly' that they will absolutely not vote for Trump - and this is a metric that was reliable in the past.

Also, Tesla is in the process of isolating themselves form this vulnerability in their 'home market', by establishing a second 'home market' in China, in the fastest growing EV market on the planet - with production planned to start later this year.

So while the macro risks are real, I do not share the view that these macro risks are permanent.

Not trying to take this even further into the political realm...just to reply to part of your statement. In regards to the US elections next year. If there is one thing that the last Presidential election should teach us it is that polls and pollsters have little impact on actual voting practices anymore. Whatever impact political races have on the market, I wouldn't bet the farm that anything drastic is going to change any time soon. Could it happen? Sure. But, I wouldn't base my opinion on polls as reported in the news media.

Dan

 

[Huskyf]

I just saw the shema on Electrek about AP3
- Primary radar OK
- Secondary radar ??? On Tesla cars actually they have it only one front radar no ?

 

[ReflexFunds]

I just saw the shema on Electrek about AP3
- Primary radar OK
- Secondary radar ??? On Tesla car actually they have it onléy one front radar no ?

Great spot, looks like Tesla might also be ready to release their new in-house developed radar.