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

[Green Pete]

so, given Tesla is ARKKs largest holding, and they trade it actively, why is holding ARKK not a better choice than holding TSLA directly

 

[StarFoxisDown!]

Nowadays I don't really care bout the profit or loss and everything I read through the earnings report and conf call was positive in my book. Good thing most of our time horizons are at least 2 years out for most of us here because it's more and more evident that tesla and Elon are thinking long term marketshare and production capabilities.

The only thing that I wish Elon would have done is temper expectations for the loss on this quarter. There is a narrative that elon and Tesla have moved the goalpost for future profits and/or losses ever since Q4 guidance. Whenever Tesla does get enough scale that profitability is stable, I'd rather them stabilize profits at exactly $1 GAAp every quarter and use whatever is excess of that for reinvestment

 

[neroden]

Obviously I didn't explain myself well. In a stable state company like Ford or GM, GAAP works very well to show the financial position. In a growth company, many items that GAAP shows as expense are more like capital outlays because their value is only realized in future periods. I don't know of any accounting system that can measure this correctly. The point is that for growth companies you have to be aware of GAAP's steady state bias.

You can measure this correctly using a custom version of accrual accounting with custom assumptions, and when you are making business plans and financial projections in business plans, this is exactly what you do. It's sometimes called management accounting, and it's different from GAAP accounting in many ways -- it tends to have custom character depending on the exact nature of the business, rather than one-size-fits-all depreciation schedules or expensing rules.

 

[Singuy]

So do you guys think there will be semi and roadster product launches in 2020? It seems like all eyes are focused on Model 3 ramp up at giga 3 + model Y ramp up at Fremont. To me this is two separate S curves for 2020. Will there be more? Can Tesla afford to have more?

 

[neroden]

Tesla still has no scaled up competitor.

BYD and BAIC are close, but Tesla is racing to keep ahead.

I can imagine a "big three".

 

[neroden]

So kind of an embarrassing question but what is causing them to still lose money? Is it just they need to produce more cars and thus more money in and lower cost per unit?

In my opinion, yes, the primary reason they are not showing GAAP profits yet is that they just need to produce more cars. Others may disagree.

 

[neroden]

Speculation

Looking at the supercharger map of existing and planned, there’s a crap ton of SC stations planned in already dense areas.
I don’t get why having such a large SC network, especially in suburbs, is really that important besides it being a form of advertising.

Oh, I think it's mostly to solve the "California problem" of overcrowded Superchargers. Wouldn't make sense in any place where they weren't overcrowded.

 

[Carl Raymond]

Realistically the only likely reason Tesla wouldn't be profitable following the Y ramp would be from a recession, which is always possible, but would hit every company regardless.

I don’t think there will be a recession. We’re on the cusp of a new industrial revolution, powered by (almost) free energy, i.e. unstoppable.

Perhaps a two speed economy that may look like a recession if you are trapped in an old fossil tech backwater, but not a global recession. There will be plenty of people getting rich from cleantech, buying Tesla products and keeping the transition self sustaining.

 

[jerry33]

In my opinion, yes, the primary reason they are not showing GAAP profits yet is that they just need to produce more cars. Others may disagree.

Yes, it's either more cars or less growth. I know which one I would choose.

 

[Remus]

Tesla certainly promotes this narrative, but I'm extremely skeptical.

R&D at carmakers both large and small tends to run about 5-6% of revenues. Tesla was 5.1% in Q2. R&D is the #1 example of "opex that's actually an investment", but you need some level of "maintenance R&D" just to stay competitive. Tesla is still spending on "growth R&D", mostly Model Y, but they've underspent on S&X maintenance R&D. And it's coming back to bite them in the form of lower S/X sales and margins. I don't expect R&D to drop below 5% and I'd consider it a bad sign if it does.

Carmaker SG&A also tends to run in the mid single digits. At 10% it seems Tesla has lots of headroom. But other carmakers don't maintain their own sales and support infrastructure. That runs 4-5% of gross revenue at large premium car dealers. So Tesla is already at parity, more or less.

Tesla is experimenting with ways to lower sales and support costs. So far the results have been mixed (just ask @neroden, ha). And Musk's thoughts on ways to grow sales yesterday were mostly about...…. adding infrastructure.

Tesla added a huge chunk of opex (especially SG&A) in 2016 when they bailed out SCTY. They've gradually eliminated most of that SG&A over the past 18 months. This gives the illusion of "fixed opex". But growth in Auto-related opex has been masked by the SCTY wind down.

I expect opex to grow more or less in line with sales from here on out. If Musk is right about 3/Y doing 2 million units/year then I'll be wrong about this. We'll see.

It's one thing not to believe in Tesla's forward looking statement, as they tends to down play the risks.

It's completely another to accuse of them lying about facts that are stated in the financial statements.

If you believe they're bunch of crooks who cook the book why are you still spending so much time on Tesla, since if they lie about this important part of their financial, what else can you still trust them?

 

[neroden]

Growth companies lose money (in GAAP) because they are investing in plants, equipment, and expertise, which are either direct expenses or deprecating items. A steady state company has many assets that they still use but are fully deprecated

Note for reference: this is considered a failure of the depreciation schedule, under accrual accounting. The goal is for assets to become worthless and need replacement at *exactly* the time when they are fully depreciated. Management accounting attempts to get the depreciation schedule exactly right, though it is forward-looking guesswork.

Unfortunately, GAAP prescribes standardized schedules and so depreciation schedules are almost always wrong under GAAP. Worse, dishonest management can play all kinds of games with deliberately dishonest depreciation schedules -- this is how the fracking companies have pretended to be profitable for years when they're actually all losing money (and have been continuously cash-flow-negative).

and spend little on R&D or new facilities. Cash flow is the main indicator for growth companies, not GAAP profits.

 

[Thekiwi]

The article is sloppy - e.g. he doesn't separate leasing out when calculating ASP. But his two main themes are on target:

1. Margin compression. 25% was once the floor with Musk talking about a 30% future. Now we need even more cost cuts to maintain 18-19% as ASP pressure continues.

2. Unit Opex. He says opex is stuck at 11k/unit. I recall an old SA article claiming Tesla was doomed because Model 3 gross profit of ~10k/unit would never cover 20k/unit opex. That article was obviously incorrect, as I explained in the comment section. But opex does have a floor, and you can make a good case it's somewhere around 9-11k/unit.

As I said in April, there's a reason Musk wants to change the narrative from S3XY profits to Robotaxis. The car business is hard.

"But opex does have a floor, and you can make a good case it's somewhere around 9-11k/unit."

I disagree, I don't think there is a "good case" of a 9k-11k opex average floor per unit. for one thing the R&D portion of OpEx has ZERO relation to units shipped. it doesn't matter whether they ship 100k or 200k per quarter, Total R&D cost for Tesla in OpEX would remain the same. and in regards to SG&A, it is not directly a per unit expense, and generally SGA gets cheaper on a per vehicle average as volume increases.

 

[neroden]

1. Margin compression. 25% was once the floor with Musk talking about a 30% future. Now we need even more cost cuts to maintain 18-19% as ASP pressure continues.

They'll get back to 20%, IMO; that's a cut of about $650 per car in production cost, or rise in price. Cost cuts are continuous, and (if comms problems are fixed) pricing power will rise. Being conservative I figured 20% when he said 25%.

2. Unit Opex. He says opex is stuck at 11k/unit. I recall an old SA article claiming Tesla was doomed because Model 3 gross profit of ~10k/unit would never cover 20k/unit opex. That article was obviously incorrect, as I explained in the comment section. But opex does have a floor, and you can make a good case it's somewhere around 9-11k/unit.

Hmmmm. Let's see about this.

Let's suppose the warrantied life of a Tesla car is 4 years, and the mean time in service is once per year, for, say, 24 hours worth of labor per visit. (Perhaps excessive.) Plus, say, 4 hours in sales. (Delivery is included in gross profit.) So that's 100 hours. Let's suppose fully loaded pay is $50/hr including benefits. (Perhaps excessive) Maybe an embedded SG&A cost of $5000/unit then, though that may be excessive. Part of this is in warranty reserve, after all.

The rest of SG&A is not proportional to number of cars on the road. It's proportional to other things, like geographic territories covered by sales, which is why it has to go up by a lot now, but it's not proportional to number of cars on the road.

So I'd like to see your case for 9-11k/unit as a floor. Because I don't buy it. It's too high.

At $5k/unit, it would imply a need for pretty darn high volume to overcome fixed costs -- if we use this model, then each additional Model 3 only nets out roughly 5k against fixed costs, so to get past the current $400 million hump to quarterly GAAP profit, that's another 6150 cars/week, i.e. they'd need to get Model Y into mass production. But I don't buy 9-11k/unit.

 

[neroden]

But when do you stop "growth mode"? When every car on the planet is a BEV?

That's the mission. Expect it.

 

[EVDRVN]

[

I don’t think there will be a recession. We’re on the cusp of a new industrial revolution, powered by (almost) free energy, i.e. unstoppable.

.

Yes, it will be called the Russian Revolution, look for it coming soon to a neighborhood near you.

 

[elasalle]

BYD and BAIC are close, but Tesla is racing to keep ahead.

I can imagine a "big three".

Yes for China.
However based on brand value, easier for high end brand to get business of lower cost models, but difficult the other way around. ...

 

[neroden]

I have never seen either a good argument or financial evidence to explain that SG&A should have a significant variable component. What exactly needs to increase if Tesla sells another 0.5 million/ 1 million cars?

Essentially, certain aspects of warranty support don't make it into the warranty reserve and end up in SG&A, and those are variable. Certain aspects of sales, likewise.

My HIGH estimate for those would be $5000/car, but I think that's far too high.

I think the evidence is extremely strong that SG&A is not variable

I agree that the vast bulk of SG&A is not variable.

and Tesla can scale volumes on its current global infrastructure,

Tesla actually can't, but it's not really *per car*, it's *per geographic coverage*. Tesla has to do one big boost to service centers. It's one-time, though. You don't have to expand Chevy dealerships proportional to Chevy sales, you have to expand them proportionally to number of cities where Chevys are bought.

Referral fees and sales bonuses -are variable SG&A, but I think these are minor per car on average.

• Delivery infrastructure has to scale with volume - but this is paid for in Auto COGs.
• Service infrastructure has to scale with volume - But this is paid in warranty reserve in Auto COGs and in Service COGs.
• Call centre support staff will likely come under SG&A and this is something which should scale with volume, but likely hasn't happened so far. In any case it shouldn't be a huge expense.

I believe a fair bit of service infrastructure and support ends up in SG&A, and some of that is variable (but a lot of it is actually fixed).

• Data connectivity costs scale with volume - but this is paid with deferred revenue
• The supercharger network should scale with fleet size - but this should be self funding in the future.

Also, the Supercharger network doesn't scale with fleet size; it is slightly slower. Geographic coverage comes first. Then it has to be sized for "Thanksgiving travel" demand, which is only loosely proportional to fleet size. In many areas, such as North Dakota, it is likely that the first Supercharger deployment in each city will be all that is needed forever. Only in higher-density travel areas will the Supercharger needs scale up with fleet size, and to the extent that the "Thankgsiving travel" demand is not proportional to fleet size, this will be even less true.

 

[neroden]

How do you feel about EBITDA as a metric for TSLA?

Dislike. Interest is far too important for a capital-intensive, leveraged company. EBDA with maintenance depreciation added back would work better.

 

[neroden]

Anyone have an idea what’s going behind the scenes with their PV retrofit business?

I know they had serious issues during transition of taking over SC. (The group I work with for solar PV installs is mostly ex-SC/Tesla installers).

But, now, with even undercutting the bigger names, why is deployment almost half of the previous record low? They’re down to about 10% of what they did just 3 years ago.

Edit: are they de-prioritizing PV and putting all resources into PW?

(1) Yes
(2) Standard PV (not Solar Roof) is becoming an extremely tight margin business -- much lower than the gross margin of 18-20% for Tesla Autos. And other companies are doing just fine at making it happen. So Tesla have no interest in doing it unless they're bundling it with Powerwalls or Powerpacks.
(3) Tesla's current strategy for remaining competitive in the solar retrofit market is to kill customer acquisition costs (and site inspection costs!) which is basically a "lower volume" strategy.

 

[neroden]

I expect opex to grow more or less in line with sales from here on out. If Musk is right about 3/Y doing 2 million units/year then I'll be wrong about this. We'll see.

Oh, I think I get what you're thinking. You're thinking that opex grows in proportion to number of different models, which might be correct to some extent. So if 3/Y manage to be extremely high volume models, then you'll be wrong about this because the volume of sales will go up faster than the number of models.

OK, yeah. I agree that I am assuming that Tesla will be able to get very large sales out of a very small number of models: the 1910 Ford Motor Company business plan. If they have to make more models to increase sales, it increases their R&D costs. It probably increases their logistics costs too (more variants to keep in inventory, more parts to keep in inventory).

Did I get your thinking right?