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

[Fact Checking]

Interestingly, today the IV was flat - but lower compared to last week. It shot up last Friday with the big SP drop - but has slowly dropped. Some of the calls I bought yesterday at around 390 are at the same level or even lower today when the SP is at 397 !

This is typical, the IV of options shoots up after fast rises or fast drops - this was pointed out real-time by @shlokavica22 on the day of the big drop.

The reason for high IV:

• The quick drop was either due to negative changes in fundamentals, which could have signaled further drops - or a quick bounce-back if the drop was an overreaction. Both possibilities signal more volatility - hence the higher IV.
• The typical trading flow of options is for them to be bought and to be held very close to expiry. Open interest for most strike prices increases almost monotonous fashion, with less than 10% rollover. This means that unlike for the underlying stock price which is set via selling and buying, option prices are usually set by market makers, especially after a big drop. Market makers won't immediately offer cheap calls after a big drop, it takes a few days of price stability for the new price levels to establish themselves in the options market as well.
• This increases the prices of both calls and puts, as both are typically originated (written) by market makers.
• If a price drop is perceived by market participants to be excessive and they are "buying the dip" by buying calls, this will further increase prices: market makers see the increase in transactions and happily adjust prices higher.

The conclusion is that there are two pricing advantages here:

• If you have enough cash or shares then you can write new (covered) options right after a big drop or rise, and take advantage of the I.V.
• If you hold options long (both puts and calls) a quick price transient allows them to be sold, and rolled forward either immediately, or with a few days holding cash if you think the price remains flat. (The risk is if volatility continues.)

At least these are my observations - maybe others want to correct or extend these suggestions?

 

[Tslynk67]

This is standard operating procedure among all automotive OEM, and apparently other industries as well.

Watch when a new car release happens, all the automotive youtubers release their review within 24 hrs most within a couple of hours.

Well I've had it myself when I've been involved with reviews of major album releases, but I get the impression here that Bjørn wasn't told in advance he would have an embargo, so he'd pre-communicated that he would be doing the test to his followers, then had to explain why no info.

I don't honestly see why there should be this sort of constant any way. Much better to spread reviews, if they're positive then you get a continual flow of good news for weeks, if they're bad...

 

[Cobos]

This is standard operating procedure among all automotive OEM, and apparently other industries as well.

Watch when a new car release happens, all the automotive youtubers release their review within 24 hrs most within a couple of hours.

Yeah embargo on reviews is nothing special but a month long embargo is a bit more strange. If they have production ready cars why not go on release the reviews and not the least the cars to owners?

 

[KarenRei]

What Audi has more to worry about is its specs vs. its pricing. I'm still trying to find where in Audi's information it states this, but it's being reported that it only does 0-100kph in 6,6s (only half a second better than a Hyundai Kona). Given how low power its motor is (265kW) vs. its weight (2565kg), I wouldn't be surprised surprised (similar power to a Model 3 AWD, but 40% heavier). WLTP range is reported as "359.0-417.0 km" (not sure why there's 2 figures); the shortest WLTP Tesla offers on any vehicle in Europe (Model X P100D) is 480km. WLTP (very optimistic) energy consumption "26.1-22.6 kWh / 100km" (again not sure why there's 2 figures) = 420-364 Wh/mi, meaning slower trips even if you can find (working) 175+kW chargers en route and charge at ~150kW on them. Only a 5-seater; dimensions roughly similar to a Model S. Starting price 80,9k EUR. Most of the tech and interior features they've been plugging are optional extras that cost 2,6-4k EUR per package.

I'm sure they'll sell to some customers who want an Audi and have negative perceptions about Teslas. But those are not competitive stats. The worst to me is that acceleration, at that price point; it almost feels like they're deliberately trying to avoid undercutting sales of their ICE vehicles.

 

[dhrivnak]

What ICEv that is comparable to a Model 3 gets 35 mpg?

Many Camry and Accord buyers are buying Model 3 as are Prius owners who get 50 MPG. Yes the Model 3 is better in most respects but for many people they just want a reliable car. Not a performance car.

 

[Tslynk67]

A lot of talk this morning about charging issues and lack of facilities for non-Teslas.

Just pause for a moment and imagine the difference to for the e-Tron or the i-Pace if either company had partnered with Tesla to use the Superchargers. Would be transformational!

What a missed opportunity...

 

[SebastianR]

What Audi has more to worry about is its specs vs. its pricing. I'm still trying to find where in Audi's information it states this, but it's being reported that it only does 0-100kph in 6,6s (only half a second better than a Hyundai Kona). Given how low power its motor is (265kW) vs. its weight (2565kg), I wouldn't be surprised surprised (similar power to a Model 3 AWD, but 40% heavier). WLTP range is reported as "359.0-417.0 km" (not sure why there's 2 figures); the shortest WLTP Tesla offers on any vehicle in Europe (Model X P100D) is 480km. WLTP (very optimistic) energy consumption "26.1-22.6 kWh / 100km" (again not sure why there's 2 figures) = 420-364 Wh/mi, meaning slower trips even if you can find (working) 175+kW chargers en route and charge at ~150kW on them. Only a 5-seater; dimensions roughly similar to a Model S. Starting price 80,9k EUR. Most of the tech and interior features they've been plugging are optional extras that cost 2,6-4k EUR per package.

I'm sure they'll sell to some customers who want an Audi and have negative perceptions about Teslas. But those are not competitive stats. The worst to me is that acceleration, at that price point; it almost feels like they're deliberately trying to avoid undercutting sales of their ICE vehicles.

I think this is a key point: What I'm missing is an EV that either matches Tesla's specs and beats them on price - or alternatively an EV that just blows Tesla out of the water (spec wise) at - whatever (much higher) price - or - an EV that outsells the most sold Tesla EV. Neither exists to my knowledge

All I find are EVs that are either lower costs at much worse specs or EVs that match Tesla's 2014 performance at a price more than a 2019 Tesla.

(Note that I do see the market for a Kona, Leaf, Zoe, iPace, eTron etc. it is just that they don't compare to Tesla as per the above)

Help me out and burst my filter bubble if you can - thanks!

 

[KarenRei]

And remember that Tesla just killed off its low margin S and X. These are now very high margin vehicles it's selling. It could easily cut margin on them if they ever felt the need to improve the price point.

 

[KarenRei]

Returning to Musk's layoff letter - the news that set in motion this slide:

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.

Someone had earlier pointed out the point that Musk commented that in Q3 they made a four percent profit. If he's talking about "less than Q3" in terms of percentages, that could even be a larger profit in EPS. But let's pretend he's speaking in dollars when he says "less than Q3". I'd like to draw a comparison that stood out to me in this readover:

"...we were able to make a 4% profit. While small by most standards..."
"...less than Q3."
"This quarter ... will hopefully allow us, with great difficulty, effort and some luck, to target a tiny profit."

One of these things is not like the other. The statement about Q1 has a lot more pessimism wrapped up in it than in Q4. Lots of hyperbolic terms. But about this quarter? Simply "less than Q3".

Musk is clearly trying to sound a pessimistic tone, as has been repeatedly observed on this site. So... if Q4 was a tiny profit, would Musk have not said "tiny profit"? I mean, it's not like there's no point to trying to sound a pessimistic tone everywhere in the letter except in that line. If he wanted to sound pessimistic, and Q4's profit was, say, half the size of Q1's, would he not have said "much less than Q3"?

Perhaps I'm mistaken. Or perhaps this is wishful thinking. But I have trouble reconciling the deliberately-pessimistic-for-the-sake-of-employees tone of the email with a terrible Q4. If he wanted an "I'm sorry but I had no choice but to lay you off!" sense to the email and Q4 profits actually were bad (significantly worse than Q3), I have trouble imagining that he wouldn't have used stronger language than "less than Q3". And the excuse that comes to mind - "He can't give away details about Q4 before the ER" seems inherently negated by the fact that he's already giving a clue about it ("less than Q3")

Just some tea leaf reading, to add to the more concrete factors (e.g., such as how clearly they've not been going on a spending spree (chargers, service, etc), how they've been clearly focused on margins rather than volume, etc)

 

[Fact Checking]

What Audi has more to worry about is its specs vs. its pricing. I'm still trying to find where in Audi's information it states this, but it's being reported that it only does 0-100kph in 6,6s (only half a second better than a Hyundai Kona). Given how low power its motor is (265kW) vs. its weight (2565kg), I wouldn't be surprised surprised (similar power to a Model 3 AWD, but 40% heavier). WLTP range is reported as "359.0-417.0 km" (not sure why there's 2 figures); the shortest WLTP Tesla offers on any vehicle in Europe (Model X P100D) is 480km. WLTP (very optimistic) energy consumption "26.1-22.6 kWh / 100km" (again not sure why there's 2 figures) = 420-364 Wh/mi, meaning slower trips even if you can find (working) 175+kW chargers en route and charge at ~150kW on them. Only a 5-seater; dimensions roughly similar to a Model S. Starting price 80,9k EUR. Most of the tech and interior features they've been plugging are optional extras that cost 2,6-4k EUR per package.

I'm sure they'll sell to some customers who want an Audi and have negative perceptions about Teslas. But those are not competitive stats. The worst to me is that acceleration, at that price point; it almost feels like they're deliberately trying to avoid undercutting sales of their ICE vehicles.

Firstly, I'm not sure the 6.6s 0-100 acceleration is true, the German press is reporting "less than 6 seconds":

Audi e-tron (2018): Reichweite, Preis, Test, Infos, Fahrbericht - autobild.de

"Zwei E-Maschinen mit insgesamt 300 kW (408 PS) und bis zu 660 Nm Drehmoment sollen den Audi e-tron in weniger als sechs Sekunden auf 100 km/h beschleunigen. Die Höchstgeschwindigkeit liegt bei 200 km/h. Bei entspannter Fahrweise treibt die hintere der beiden Asynchronmaschinen den e-tron an, beim Segeln sind die beiden Motoren frei von Schleppmomenten. Rekuperiert der e-tron, dann werden beide E-Maschinen zum Aufladen der Batterie benutzt. Dabei wird der Energiespeicher sowohl beim Gaswegnehmen als auch beim Bremsen befüllt. Per Elektronik entscheidet der Audi, ob ein Bremsvorgang über die konventionelle Bremse oder über die beiden Generatoren erfolgt – diese speisen die Batterie bis zu einer Verzögerung von 0,3 g. Darüber helfen die elektrohydraulisch betätigten Radbremsen mit. Der Rekuperationsgrad lässt sich in drei Stufen am Lenkrad einstellen. Anzeigen im Kombiinstrument informieren den Fahrer, sobald er seinen Fuß vom Gaspedal nehmen kann, um Energie zu sparen. Berechnet werden diese Hinweise durch Streckendaten, Radarinfos, Kamerabilder und Car-to-X-Informationen."

(Slightly edited Google translation

"Two drive units with a total of 300 kW (408 hp) and up to 660 Nm of torque are expected to accelerate the Audi e-tron to 100 km / h in less than six seconds. The top speed is 200 km/h. In relaxed driving, the rear of the two asynchronous motors drives the e-tron, while cruising, the two engines are free of drag torque. When the e-tron recuperates, both drive units are used to recharge the battery. In this case, the energy storage is filled both when taking the foot from the accelerator and when braking. Via electronics, the Audi decides whether to brake using the conventional brake or via the two generators - these feed the battery up to a delay of 0.3 g. The electrohydraulically operated wheel brakes help with this. The recuperation rate can be adjusted in three steps on the steering wheel. Indicators in the instrument cluster inform the driver as soon as he can take his foot off the gas pedal to save energy. These indications are calculated by route data, radar information, camera images and car-to-x information."​

If top speed is indeed only 200 km/h then this means that acceleration might already be somewhat painful at 140-150 km/h - but this depends on the exact gearing they are using.

The worst part of that is that this will perform somewhat poorly at highway speeds, overtaking and simply cruising on mountainous terrain. Especially on the German Autobahn you WANT to overtake dynamically even if you are driving only at ~120-140 kmh, because there's always very fast cars you don't want to get in the way of, and there's always slower trucks as well that force you into the inner lane, cruising at 80-90 kmh.

Does anyone know what the e-tron's true actual acceleration is at German highway speeds, compared to the Model 3 and the Model X?

So unless the 6,6s is sandbagged and the real number is something like 5.5s I'm not sure what Audi's game plan is there:

• If Audi wants to position the e-tron as a 'city car' then the form factor and price is wrong (too large, too expensive),
• if Audi wants to position the e-tron as a family car good for road trips then the acceleration and range is probably a bit too low for that weight class.

Maybe they are simply trying to position it slightly cheaper than the entry price Model X, which is currently 109,500€ for the entry level Model X 100D. In that sense the e-tron's 80,000€ entry price is more than competitive, especially if it's list MSRP that leaves a few thousand Euros of negotiation space.

But the Model Y would kill it dead, and maybe even a Model X with a 95k € entry price. It's very interesting that Tesla decided to pull the 75D exactly when competitors are introducing new models in that price range. I'm not sure what Tesla's game plan is there.

 

[FrANce]

Well thats likely because I am in Europe

You are repeatedly missing my point. I live in Europe too, but unlike you, I don’t take my personal energy consumption as a basis for predicting Model 3 European demand.

If I’d do, it would read like this: I power my Model S with sunshine and zero electricity costs…. That’s incredible. Any questions about demand in Europe?

 

[KarenRei]

Firstly, I'm not sure the 6.6s 0-100 acceleration is true, the German press is reporting "less than 6 seconds":

..."Two drive units with a total of 300 kW (408 hp) and up to 660 Nm of torque are expected to accelerate the Audi e-tron to 100 km / h in less than six seconds.

Straight from the order page:

Linien & Pakete > Audi e-tron > tron > Audi Deutschland

265kW. Not 300kW. Straight from the order page.

ED: Got the acceleration:

Now, any clue why there's 2 WLTP ranges and 2 WLTP efficiencies? ED: Given the above, and the two WLTP numbers, I think we have the answer: the two numbers were city and highway, and this is combined. So we have:

WLTP City: 417km
WLTP Combined: 381km
WLTP Highway: 359km

That would mean that WLTP city energy consumption is 226Wh/km (364Wh/mi) and highway energy consumption is 261 Wh/km (420Wh/mi), and combined something like 247Wh/km (398Wh/mi)

EPA will be more pessimistic. Looks like peak charging rates (distance-per-minute-charging) even on a 175kW charger will be half that of a Model 3. And on a 50kW charger? Lol, I hope you brought a book...

 

[avoigt]

Greta is, great! Showing more leadership on the subject than all the politicians of the world combined.

I keep trying to get my kids to follow her as a role-model instead of the vapid pop-stars they idolise.

She has a very positive and great effect on German pupils who demonstrated now in Germany regularly getting out of coal asap. School authorities do not punish pupils going on streets and demonstrating which is very positive. That has helped to find a compromise in Germany to fix an end day of coal usage for energy generation in the 2030s. A compromise how to exit coal has been reached and needs now to be put into action.

More important this generation declared rightfully that this is about them as we old chaps will be dead when the consequences of global warming will hit hard. Thats right!

Finally this kids have now learned they can make a difference and will be advocates of carbon emission reduction measures in the future and more than likely future buyers of BEVs hopefully, speaking as an investor, Teslas.

 

[avoigt]

German Study confirms BEVs to be in the upper car class €20,000 lower in total costs of ownership:

https://www.handelsblatt.com/politi...finanzielle-vorteil-von-e-autos/23895054.html

 

[RobStark]

Many Camry and Accord buyers are buying Model 3 as are Prius owners who get 50 MPG. Yes the Model 3 is better in most respects but for many people they just want a reliable car. Not a performance car.

Still not comparable.

2019 Honda Accord with tiny 4 cylinder and CVT transmission gets 30 mpg.*

If I own a motorcycle or an ebike should the comparison be 60 to 100 mpg?

We all know a Prius Eco gets 60 MPG and is both a slug and a wet noodle.

If all you want is the most efficient 4 door possible get a Hyundai Ioniq EV which gets 136 MPGe.

Tesla is not competing in that micro niche segment.

Tesla is aiming for the mass market.


* Accord gets "up to" 30 city and 38 highway per EPA. Turbocharged engines notoriously do well in EPA test and much worse in real life. My brother in law owns the exact 2018 version and like most owners gets 30 MPG in real life.

 

[Tslynk67]

She has a very positive and great effect on German pupils who demonstrated now in Germany regularly getting out of coal asap. School authorities do not punish pupils going on streets and demonstrating which is very positive. That has helped to find a compromise in Germany to fix an end day of coal usage for energy generation in the 2030s. A compromise how to exit coal has been reached and needs now to be put into action.

More important this generation declared rightfully that this is about them as we old chaps will be dead when the consequences of global warming will hit hard. Thats right!

Finally this kids have now learned they can make a difference and will be advocates of carbon emission reduction measures in the future and more than likely future buyers of BEVs hopefully, speaking as an investor, Teslas.

This is what I'm saying to my kids when I see them creating waste, not switching off lights, buying unnecessary crap, etc. It's their problem, not mine. I'm going to be dust before the main impacts happen, and although I want my kids (and everyone else) to inherit a peter future, the change is likely to come from them, not old, white men.

I say old, I'm 52 and actually fitter and healthier than when I was 20, so I may see it, but you get my point.

This is the only benefit I have seen from the Brexit and Trump disasters, and now climate action. Young people are becoming more engaged in politics the ever before. The new, young faces in the US senate and their diversity gives me some hope for the future yet, but we need a lot more of them.

 

[avoigt]

You are repeatedly missing my point. I live in Europe too, but unlike you, I don’t take my personal energy consumption as a basis for predicting Model 3 European demand.

If I’d do, it would read like this: I power my Model S with sunshine and zero electricity costs…. That’s incredible. Any questions about demand in Europe?

You obviously misread my posts. What I tried to point out is that using an BEV in particular a Tesla in Europe is given the high costs of energy lower in TCO versus an ICE.

I made my math 2 years ago and decided to phase out of using ICEs in the future for environmental and cost reasons.

My personal situation in terms of energy consumption and driving cars is not different from many friends and relatives, co-worker I know and have therefore it will be for them equally cheaper. That does not mean for everybody but there are many people out here in Germany where it applies to. With Tesla going step by step to lower cost models (MR,SR) the group of people to whom that applies to is increasing and therefore the demand in Germany will increase for this vehicles.

Somehow it sounds like you disagree that BEVs are lower in total costs.

Maybe it helps to read the lastest German study that declares that in the upper class you save about € 20k in TCO if you buy a BEV. What happens to the premium car level today will happen to the mid costs level once the MR and SR are available.

So, the movement will in the future still be supported by environmentally conscious people but the really big switch is happening because people do save money while driving an BEV.

That by the way has been a part of my investment thesis.

https://www.handelsblatt.com/politi...finanzielle-vorteil-von-e-autos/23895054.html

 

[Fact Checking]

Perhaps I'm mistaken. Or perhaps this is wishful thinking. But I have trouble reconciling the deliberately-pessimistic-for-the-sake-of-employees tone of the email with a terrible Q4. If he wanted an "I'm sorry but I had no choice but to lay you off!" sense to the email and Q4 profits actually were bad (significantly worse than Q3), I have trouble imagining that he wouldn't have used stronger language than "less than Q3". And the excuse that comes to mind - "He can't give away details about Q4 before the ER" seems inherently negated by the fact that he's already giving a clue about it ("less than Q3")

Just some tea leaf reading, to add to the more concrete factors (e.g., such as how clearly they've not been going on a spending spree (chargers, service, etc), how they've been clearly focused on margins rather than volume, etc)

On the pessimistic side of the tea leaf reading, these are the known and suspected downsides/headwinds in Q4:

• China tariffs: impact was guided $50m in Q3, but probably that was adjusted to Q3 production levels.
• Opex: for example they purchased an entire trucking company to improve their logistics.
• Stock compensation: $TSLA price levels were much higher during much of Q4 than during much of Q3. This means that the $200m stock comp in Q3 might have ballooned to $300m in Q4. That's $100m straight out of GAAP profits right away.
• Depreciation and amortization: we have only vague guesses about the depreciation and amortization schedules of Tesla, they are not obligated to disclose them precisely. What we know is that D&A grew in 2018: $416m (Q1), $485m (Q2) and $503m (Q3). Most estimates project a slight drop (@luvb2b is projecting $494m for Q4), but in principle it's possible that in Q4 they started some new capex projects like China, with the first depreciation already occurring in Q4, which would increase D&A levels in Q4. Any such increase would come straight out of GAAP profits. Note that I agree with luvb2b's guess that Q3 was probably the D&A peak of the big Model 3 capex spree started in 2016-2017, but there's no guarantee and negative surprises are possible.
• Reduction in Model 3 ASP: this too is difficult to guess: we don't know the exact mix an trim level of Medium Range sales, we don't know how many employees got an inventory car at the end of Q4 with a ~$11k ASP reduction. @luvb2b estimates a $1k drop, while @ReflexFunds guesses more of a $4k drop in Q4 ASP. Here I agree more with @ReflexFunds, I think we'll see a bigger drop in Model 3 ASPs - and every $1k drop in the Model 3 ASP reduces GAAP profits by ~$40m. This creates a large spread in GAAP profits.
• Lower ZEV credits sales: due to the Trump EPA uncertainty and increasing EV production by other carmakers the ZEV market might have shrunk in 2018. Tesla might also have decided to save up ZEV credits, in the hope of being able to sell them later, if the next U.S. administration is more friendly towards ZEV credits.

As you can see if we add up all the error sources it can easily go up to $500m if everything went wrong in Q4, turning Q4 into a 'tiny profit' quarter ...

Also, if ASP reduction is deep enough, revenues could create a negative surprise as well: Wall Street is 'expecting' around $7.1b, and quarterly revenue below $7.0b would surely be seen as a big miss and would be FUD-ed heavily.

On the optimistic side here are potential upsides/tailwinds for Q4 GAAP profits:

• Higher ZEV credits sales: this scenario is actually possible too - maybe Tesla gave some ICE maker some irresistible offer and there's a $200m ZEV windfall. I find this less probable than the negative scenario, but it's a possible tailwind.
• Deferred revenue recognition: Tesla has about half a billion dollars in deferred revenue, some of it allocated to AutoPilot feature delivery milestones. If Tesla wanted to they could probably recognize $100m from this source, as V9 and NoA was clearly a big step forward in terms of feature completeness of EAP.
• Tesla Energy surprise: seasonally TE revenue is at a low, solar panels aren't selling that well in the winter. But Panasonic was probably producing about twice as many storage cells in Q4 as in Q3, which could counter-act some of the seasonality and might even have increased revenue. Tesla has apparently a ridiculously crowded storage order book, with wait times for industrial installations in the 6-12 months range. Since margins are positive, this would be a GAAP profit contribution too. I wouldn't hope too much from this - the real ramp-up will be in Q1 and Q2 I believe.

Note that two of the upsides are basically discretionary managerial decisions by Tesla (they decide whether to sell ZEV credits, and they decide whether to recognize deferred revenue), and I think since Elon's email already placed Q4 as a so-so quarter and Q1 as the big question mark, Tesla might have decided to save up all those rainy day funds for Q1 instead.

To add more to the tea leaf reading side, I also think that there would be somewhat of a backlash if Q4 GAAP profits were significantly higher than Q3 GAAP profits, but marginally lower in percentage. I really think Q4 profits are probably at best in the $300m range - but more likely in the $150m-$250m range.

Anyway ... I think the very high Implied Volatility to expiries afterr Q4 earnings are justified, as there's both place for a negative and a positive surprise.

 

[FrANce]

You obviously misread my posts. What I tried to point out is that using an BEV in particular a Tesla in Europe is given the high costs of energy lower in TCO versus an ICE.

I made my math 2 years ago and decided to phase out of using ICEs in the future for environmental and cost reasons.

Somehow it sounds like you disagree that BEVs are lower in total costs.

Maybe it helps to read the lastest German study that declares that in the upper class you save about € 20k in TCO if you buy a BEV.

https://www.handelsblatt.com/politi...finanzielle-vorteil-von-e-autos/23895054.html

Sigh. I love the fact that a Model 3 is 10x cheaper to run than an ICE car. However, I don't think it's necessary to embellish this to 16x (based on your gas guzzling Porsche) and base European demand on this personal data point. Embellished arguments are more vulnerable to be taken apart by FUDsters etc, which does not help the cause.

I'm a committed Tesla fan and Model S driver, our house is running on solar energy and I would never drive an ICE car again. Not sure which part of my replies made you think I disagree that BEVs are lower in total costs. Because I certainly don't.

 

[KarenRei]

On the pessimistic side of the tea leaf reading, these are the known and suspected downsides/headwinds in Q4:

• China tariffs: impact was guided $50m in Q3, but probably that was adjusted to Q3 production levels.
• Opex: for example they purchased an entire trucking company to improve their logistics.
• Stock compensation: $TSLA price levels were much higher during much of Q4 than during much of Q3. This means that the $200m stock comp in Q3 might have ballooned to $300m in Q4. That's $100m straight out of GAAP profits right away.
• Depreciation and amortization: we have only vague guesses about the depreciation and amortization schedules of Tesla, they are not obligated to disclose them precisely. What we know is that D&A grew in 2018: $416m (Q1), $485m (Q2) and $503m (Q3). Most estimates project a slight drop (@luvb2b is projecting $494m for Q4), but in principle it's possible that in Q4 they started some new capex projects like China, with the first depreciation already occurring in Q4, which would increase D&A levels in Q4. Any such increase would come straight out of GAAP profits. Note that I agree with luvb2b's guess that Q3 was probably the D&A peak of the big Model 3 capex spree started in 2016-2017, but there's no guarantee and negative surprises are possible.
• Reduction in Model 3 ASP: this too is difficult to guess: we don't know the exact mix an trim level of Medium Range sales, we don't know how many employees got an inventory car at the end of Q4 with a ~$11k ASP reduction. @luvb2b estimates a $1k drop, while @ReflexFunds guesses more of a $4k drop in Q4 ASP. Here I agree more with @ReflexFunds, I think we'll see a bigger drop in Model 3 ASPs - and every $1k drop in the Model 3 ASP reduces GAAP profits by ~$40m. This creates a large spread in GAAP profits.
• Lower ZEV credits sales: due to the Trump EPA uncertainty and increasing EV production by other carmakers the ZEV market might have shrunk in 2018. Tesla might also have decided to save up ZEV credits, in the hope of being able to sell them later, if the next U.S. administration is more friendly towards ZEV credits.

As you can see if we add up all the error sources it can easily go up to $500m if everything went wrong in Q4, turning Q4 into a 'tiny profit' quarter ...

Also, if ASP reduction is deep enough, revenues could create a negative surprise as well: Wall Street is 'expecting' around $7.1b, and quarterly revenue below $7.0b would surely be seen as a big miss and would be FUD-ed heavily.

On the optimistic side here are potential upsides/tailwinds for Q4 GAAP profits:

• Higher ZEV credits sales: this scenario is actually possible too - maybe Tesla gave some ICE maker some irresistible offer and there's a $200m ZEV windfall. I find this less probable than the negative scenario, but it's a possible tailwind.
• Deferred revenue recognition: Tesla has about half a billion dollars in deferred revenue, some of it allocated to AutoPilot feature delivery milestones. If Tesla wanted to they could probably recognize $100m from this source, as V9 and NoA was clearly a big step forward in terms of feature completeness of EAP.
• Tesla Energy surprise: seasonally TE revenue is at a low, solar panels aren't selling that well in the winter. But Panasonic was probably producing about twice as many storage cells in Q4 as in Q3, which could counter-act some of the seasonality and might even have increased revenue. Tesla has apparently a ridiculously crowded storage order book, with wait times for industrial installations in the 6-12 months range. Since margins are positive, this would be a GAAP profit contribution too. I wouldn't hope too much from this - the real ramp-up will be in Q1 and Q2 I believe.

Note that two of the upsides are basically discretionary managerial decisions by Tesla (they decide whether to sell ZEV credits, and they decide whether to recognize deferred revenue), and I think since Elon's email already placed Q4 as a so-so quarter and Q1 as the big question mark, Tesla might have decided to save up all those rainy day funds for Q1 instead.

To add more to the tea leaf reading side, I also think that there would be somewhat of a backlash if Q4 GAAP profits were significantly higher than Q3 GAAP profits, but marginally lower in percentage. I really think Q4 profits are probably at best in the $300m range - but more likely in the $150m-$250m range.

Anyway ... I think the very high Implied Volatility to expiries afterr Q4 earnings are justified, as there's both place for a negative and a positive surprise.

Indeed, good commentary. A couple notes:

* Lower ASP is guidance. Guidance is also to maintain margins at 20% despite the lower ASP. Model 3 margins is of course the billion dollar question here.

* Anything "discretionary" by Tesla these days seems to be about maximizing FCF, in order to build up enough cash that the markets stop worrying about the March convertibles. Our little "windows" into discretionary spending, like superchargers, service centres, etc shows very little in terms of new outlays.

* The AP testing programme announced in late September was for 100-200 employees.

But yes, there's too much unknown to precisely pin things down. I was more focused on the simple issue that: If Musk was trying to strike a pessimistic tone, and profit was halved, I really would have expected him to emphasize it more than just saying "less than Q3". He certainly rubbed in the pessimism everywhere else, didn't he? Yet no "significantly less" remark, no "tiny profit" remark, etc.

I too agree that it's unlikely we'll see a "technical increase" in profit due to the "percentage vs. absolute dollars" issue - that would be looked upon as misleading. Then again, so was Musk's email to employees at the end of Q3: "We are very close to achieving profitability and proving the naysayers wrong, but, to be certain, we must execute really well tomorrow (Sunday). If we go all out tomorrow, we will achieve an epic victory beyond all expectations". I really can't believe for a second that he didn't already know that they had blown Q3 out of the park.