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

[Krugerrand]

The China deal still worries me. China already makes most of the worlds EVs. What they might want is access to autonomous tech. They chased Uber out of china quite successfully. I still don't understand why the Chinese let Tesla have a WOFE. Something about this still makes me nervous.

I’m choosing to believe that the Chinese realize *this* requires a group effort. So what if they want autonomous tech? Good! That means when FSD comes online, Tesla will have a country ready to embrace it and lead by example.

Never mind the fact that Elon is a seriously convincing talker via sincerity, honesty, determination and a very clear message that ‘I’m for everyone benefiting’.

Here’s why you need not be nervous; it’s out of your control so wasted energy worrying about it and you won’t be around if it all goes bad and the Chinese take over the world. That might not even be a bad thing since clearly when they put their minds to something, they don’t mess around. That kind of decisiveness and knowledge that this has to be fixed now rather than later is to be admired and encouraged.

 

[StealthP3D]

I know a Norwegian who did just that - and swapped the Tesla for a Jag. Thought the iPace looked really cool. So they exist. Some favour style and looks over function. And others just want to be different.



Not all. But a few might. Having a Tesla in Norway is not a way to stand out in a crowd. You need an iPace or e-Tron to do that. But soon they will be too common too. So then you need a Taycan.

For some people these things matter.

That's fine, it helps the EV movement when you have fashion conscious people flipping new cars every year as it brings more good used cars to market at (slightly) lower price points.

Unfortunately, the effect is pretty weak because used Tesla have been holding their value far better than ICE cars do. If you go to a "For Sale" forum you can see there are people actively trying to push down resale values of used Tesla (it makes them angry they hold their value so well).

Once a new listing is posted they get attacked by these cretins who claim they are asking too much. This seems odd to me, I mean the car is going to sell for whatever it sells for. If you want it, and you think it's priced too high, make an offer, don't belittle the seller and tell them how stupid they are for asking so much! If you don't want it, then why do you care what the asking price is?

For a while I thought these people wanted to buy the car at a lower price but, after watching this play out time and time again, I realized it was a concerted and repeated effort (by many of the same people) to damage the resale price of used Teslas. And a similar dynamic plays out in other Tesla Owner forums with people who are trying to make owners less happy with their new purchase. They will try to drum up resentment if Tesla lowered the price recently or included some feature than other owners might not have got for free. They will try to make owners dissatisfied with their purchase any way they can. Because Tesla has the highest owner satisfaction rating of any car brand (and this bugs the hell out of these forum cretins). They want to see dissatisfied owners, not gleefully happy ones! That just pisses them off.

 

[jbcarioca]

Maybe I'm just naive, but does it really matter if Tesla is profitable as long as they have positive cash flow? I'm not an accountant, but from what I understand there are a lot of accounting details (eg depreciation) that impact profit but do not impact cash flow. To me, the important thing is that their cash balance keeps increasing so they don't have to raise more money and can fuel innovation and growth.

In my view the major reason that GAAP profits are important together with growth is not about funding Tesla. It is more providing proof to well meaning but reluctant policy-makers that BEV production can be and is as profitable as is ICE.

One point often ignored is that Tesla would have signification GAAP profits today were it not growing. Despite large capital outlays that are capitalized there are major expenses related to growth that must be recognized as expenses in the current reporting periods. Such adjustments to reflect what results would be without the large growth are quite difficult and a bit arbitrary. It seems few have made a serious attempt to do so for Tesla. I have not.

In one of my former activities I evaluated fast-growing companies as acquisition and financing targets. A major component of our evaluation was making those adjustments. For Tesla specifically there are some factors that render any such calculations to be more complex. In past posts these haev been stated a few times by several people, each with a slightly different perspective. Here is my view:
1. Direct distribution (part one)- as a rule of thumb the total dealer distribution for cars typically costs around 25-30% of MSRP and nearly all the capital costs are off-balance sheet for the manufacturer. That is, in high growth there is very modest manufacturer costs in distribution system growth.
2. Distribution system (Part two)- most manufacturers recognize income when legal title changes (NOT registration to end purchaser) so once a dealer or distributor assumes responsibility the manufacturer recognizes income. Tesla recognizes income when the end purchases has paid and changes vehicle registration.
3. Tesla vertical integration is the highest since probably the Ford Model T. That means much of every single type of growth-related expense enters current-period P and L. That is one reason why aircraft and car manufacturers are rarely highly integrated.
4. Much of R&D does not fit neatly in capitalizable categories so causes higher current expenses that would be needed in steady state.

Having done this type of analysis numerous times in myriad industries these issues of distribution system, vertical integration and R&D always appear. Each one will certainly seem to improve magically if growth rate diminishes. I sincerely hope that does not happen!

FWIW Wall Street implicitly understand this but anytime a growth rate is very high FUDsters abound and legitimate growth-related risks are amplified. That is why high growth rates are highly rewarded when markets are optimistic and are penalized when markets are pessimistic. Thus, high growth is volatile.

 

[MarcusMaximus]

Thanks for your response. Yeah, I up-voted your comment as 'Helpful'.

Let's do some quick math. Say Tesla produces 0.4M cars in 2019, and continues to grow production at 50%/yr. We need to displace every other car/truck/ice-burner on the roads, say 100M/yr total.

How many years does that take? Some quick maths says 14 years:

0.4M * 1.5^14 > 100M​

That's around 2033, which might be okay, but here's the problem: Say Tesla's CAGR drops to a paltry 40%/yr. Then it takes 17 years. Slow to 30% CAGR? Then its 21 Yrs.

Climate studies show we likely don't have 20+ yrs to achieve net-zero emissions in terrestrial transport (add 10 yrs to displace the ICE fleet).

Now, is it a safer bet that Tesla can achieve growth of 30% year after year without fail for 2 decades, or that ICEmakers could convert their production to EVs in that same time frame?

I don't know the answer. But I know if they see that Tesla isn't profitable, the ICEmakers won't even try to switch. And that inevitably risks national governments stepping in to artifically prolong the life of these failing ICEmakers, and their pollution continues.

It's a genuine dilemma, one that long-term investors need to reconcile as we struggle to chose the best path forward. IMO, the over-arching goal must be to choose the way forward that reduces fossil fuel use as fast as possible.

Someone once said "If you want to go fast, go alone. If you want to go far, go together." Society's shared problem now is that we need to go far, and fast! But some people don't think they need to change at all, or worse, they think it doesn't matter what they do.

As always, I say its best to lead by example. Let's show them a better way.

Cheers!
Lodger

Hmm, I think you missed something in my post: I suggested letting the old guard die, but *not* Tesla going it alone. Between Rivian, Bollinger, BYD, NIO, etc, there’s plenty of companies devoted to EV’s to join in.

Not to mention, these are not independent variables. If every gas car company goes out of business entirely, demand for those old, unsupported cars evaporates, dramatically increasing demand for the remaining companies, all of which produce EV’s. That increases ASP, increasing cash flow, and allowing faster expansion.

 

[jerry33]

SO... while I completely agree with your view Tesla has to get the service/repair delays worked out because of how the "system" works in the US. I guess Tesla could just setup a really large budget to start paying off.... I mean start donating to politicians... I mean campaigns. I'd rather have that money go to service improvements.

When did I say that? I'm guessing you mean other's posts when they experienced poor service. The poor service I've experienced as always been at a franchised dealer (and didn't start with the Leaf).

Donating to politicians doesn't work unless you can donate more than your opposition, and even then it might not work because the politician might have investments that would go down in value.

Right now the service problem appears to be the phone system is overloaded (or perhaps poorly programmed) and sometimes parts are a problem. What we don't know is what percentage of the time it occurs, and is it regional or not. Those who complain about service are very vocal--not that they don't have a right to be--but there is no way to tell on this forum what percentage of the total phone calls/service appointments/actual servicing that might be.

 

[jerry33]

In my view the major reason that GAAP profits are important together with growth is not about funding Tesla. It is more providing proof to well meaning but reluctant policy-makers that BEV production can be and is as profitable as is ICE.

The short version is that GAAP works well for mature industries but poorly for growth industries.

 

[Cosmacelf]

The China deal still worries me. China already makes most of the worlds EVs. What they might want is access to autonomous tech. They chased Uber out of china quite successfully. I still don't understand why the Chinese let Tesla have a WOFE. Something about this still makes me nervous.

What’s a WOFE?

But I know what you mean, dancing with China is a one way ticket to getting your products copied and counterfeited. BUT Elon is not dumb, and he well knows this. He has a strategy with China. It could be as simple as innovate faster than the Chinese can copy.

 

[Pezpunk]

I’m choosing to believe that the Chinese realize *this* requires a group effort. So what if they want autonomous tech? Good! That means when FSD comes online, Tesla will have a country ready to embrace it and lead by example.

Never mind the fact that Elon is a seriously convincing talker via sincerity, honesty, determination and a very clear message that ‘I’m for everyone benefiting’.

Here’s why you need not be nervous; it’s out of your control so wasted energy worrying about it and you won’t be around if it all goes bad and the Chinese take over the world. That might not even be a bad thing since clearly when they put their minds to something, they don’t mess around. That kind of decisiveness and knowledge that this has to be fixed now rather than later is to be admired and encouraged.

i think the Chinese are completely sincere about wanting to transition to EVs, and generally sincere when they say they want to partner with and help Tesla be a part of that transition. But at the same time, we also know how that country works. It's a given that intellectual theft will occur. But in Tesla's case, I don't really think it will matter much. Elon has always said the only real moat is pace of innovation. Copying what Tesla is doing now and trying to imitate it in the future will only ensure that you're always a step behind them.

Plus, i don't really think the neural net / FSD tech is transferable, anyway. If Tesla's approach does indeed prove to trump the rest of the industry (as i believe it will), then it will still take at least 5+ years for anyone else to build a similar system, and that's not five years from today. It's five years from whenever they finally admit defeat. It has NOT been easy, and can't be copy-pasted even if you have access to Tesla's IP.

 

[tinm]

What the heck is this building anyway? Always been curious about this separate structure at GF3.

 

[Artful Dodger]

I wasn't claiming "losing" nearly a billion dollars in a quarter was rough. Nor was I claiming it wasn't. Point being made was you didn't lose that money and have no idea how Tesla feels. Because you know... The money didn't just evaporate into the ether. They're growing massively and massive growth requires investment. And I reckon that level of growth and seeing the fruits of their labour feels pretty damn good for Tesla actually. It's really quite simple.

Yes, Q1 was primarily a 'GAAP artifact'. Hmm, let's review that $702M GAAP loss:

• $188M of non-recurring charges (cost cuts which will pay for themselves by Q4)
  
• >$100M in deferred profits (from the 10.6K cars in transit which were delivered early in Q2)
• $121M in "assumed forecasted return rates for cars sold under our Residual Value Guarantee and Buy Back Guarantee programs" which aren't a cash expense, and may in fact NEVER materialize* (see comment below)

In Q2, we get most of that back, plus the ~$90M GAAP revenue boost from the Maxwell acquisition. FCF will be amazing.

Telsa's fine, and growing like gang-busters (or ICE-busters).

*NOTE: (from the Tesla Q1 2019 Letter)

"As a result of the pricing actions, we adjusted our sales return reserve for cars sold with a Resale Value Guarantee or Buy Back Guarantee. This one-time adjustment had a negative revenue impact of $501 million with a corresponding decrease in automotive cost of goods sold impact of $409 million resulting in a $92 million reduction in gross profit."​

Note that all these cars are HW2+ vehicles. If they owners want to sell them back, Telsa gets to buy more cheap robotaxis. That's buying a revenue generating asset, not a loss.

Cheers!

 

[StealthP3D]

One point often ignored is that Tesla would have signification GAAP profits today were it not growing.

Exactly! The big three American automakers fight tooth and nail for every little percentage point of market share they can get. Sometimes they lose a little market share to a competitor, sometimes they gain one percent (or maybe 1/2 a percent). Then, along comes Tesla, growing at rates well above 50% growth, it's like the ENTIRE car market could be theirs for the taking. Then they will announce their pick-up truck. Of course the other OEMs are running scared.

As long as Tesla continues to have strong profit margins on units sold, and they continue to rapidly gain market share, GAAP profits don't matter! That's why growth companies don't need to pay dividends, the "profit" is the annual increase in enterprise value.

That said, I agree with those who think Tesla should temper growth just enough to show enough profit for two quarters to gain inclusion into the S&P500. It's a tricky needle to thread because tempering growth now could have big costs (in terms of smaller profits and market share) in three to six more years. But the stability that will come with inclusion in the SP500 is probably worth it. This is something TSLA investors should be looking forward to and I hope TSLA can pull it off. I think they can.

 

[Cosmacelf]

View attachment 429527

What the heck is this building anyway? Always been curious about this separate structure at GF3.

In another video, a similar structure was identified as an electrical sub station. I don’t know if this is that same building, but the size is similar.

 

[StealthP3D]

View attachment 429527

What the heck is this building anyway? Always been curious about this separate structure at GF3.

I believe that's the power sub-station to support the massive industrial/manufacturing park that Chinese authorities expect to develop around G3 to support it.

 

[Chunky Jr.]

In my view the major reason that GAAP profits are important together with growth is not about funding Tesla. It is more providing proof to well meaning but reluctant policy-makers that BEV production can be and is as profitable as is ICE

Thank you for that post. Really interesting and super helpful.

 

[jerry33]

In my view the major reason that GAAP profits are important together with growth is not about funding Tesla. It is more providing proof to well meaning but reluctant policy-makers that BEV production can be and is as profitable as is ICE.

Doesn't this assume that they can't see Tesla's gross margins and figure it out for themselves? It doesn't take fifty rocket scientists to figure out that if Tesla did not invest in growth they would have a boatload of GAAP profits. Of course, if Tesla were to slow down growth, then they would get called out for lack of demand. There's no way to please those who will find any excuse to find fault.

 

[Sudre]

What the heck is this building anyway? Always been curious about this separate structure at GF3.

Another few idea's... waste water management, clean water proceeding, or very unlikely but maybe steam generation. OR all the above.
I highly doubt it's a flood pump house but there is a rare chance they thought that far ahead.

 

[DragonWatch]

Home safe from little red ridding hoods visit of her mom/dad’s home in Minden, NV ~ soon to be sold to support their assisted living.

The last leg of the trip was a fanboys dream from Ashland, OR to Olympia. Olympia let me down by the way. As usual we were enjoying the beauty of the forests and rivers as we drove north counting all the Tesla’s within our view/wild that were not in our blind spots. Blind spots were highways separated by trees or obstructed by hills or just our conversation and other distractions. Bottom line we counted forty-eight Tesla’s Friday ~ the last day, That beat our number of 42 on Monday heading south. And of course TSLA closed up green too.

First, as we were pulling into a rest stop ~ for Sadie our rescued dog. Even though my wife rescued her from near death along I-90 near Mosses Lake, WA back in 2013 ~ she is my dog Bottom line, as we were driving into the pit-stop our eyes popped out of our heads, making it hard to steer the Tacoma; was a truck loaded with Tesla’s (2 Xs, 2 Ss, and 3 3s). I wanted to run up and hug the driver, or offer to buy him a coffee from Starbucks or ensure his GPS worked

Second, and this was a first, a truck load of 3s were headed south from Seattle, I believe, since it was near the north end of Portland or border between Oregon and Washington. My best “wild a**” guess is that it was a re-balancing operation.

Last, Olympia let me down Friday evening as we only counted one Tesla, where we typically count an average of five. If we had been able to add them, we would have had a record day of 52 or 3:-(

 

[wipster]

View attachment 429527

What the heck is this building anyway? Always been curious about this separate structure at GF3.

That's the restroom...

 

[Artful Dodger]

Maybe they're just stalling until Neuralink Personalized Customer Service (™) comes online and obviates the need for humans

You read my mind.

 

[Artful Dodger]

What’s a WOFE?

Wholly Foreign-Owned Enterprise - Wikipedia