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

[Doggydogworld]

Are there any US ZEV/GHG/CAFE credits apart from the CARB ones... which as of late have been yielding almost nothing? Isn't the FCA deal predominantly EU? Wasn't FCA's US dealings with Tesla primarily in the form of buying CARB ZEV credits? Or am I remembering that wrong?

GHG and CAFE are federal, not CARB. Tesla makes money selling GHG credits, this report (PDF) has Model Year 2017 credit transaction and balance info starting on page 115. FCA seemed to be OK thanks to a huge credit purchase, mostly from Honda.

 

[Fact Checking]

In the spirit of navel gazing, what do you think Tesla would need to give up to achieve regular GAAP profitability?

No "sacrifice" required for consistent GAAP profits I believe: Tesla might already be borderline GAAP profitable if not for FSD deferred revenue, and ~15k higher organic demand for the Model 3/Y combo or a bit higher Model S/X organic demand (say 21k instead of 17k) would already turn them consistently GAAP profitable.

The reason is that they already have decent baseline production and organic demand established, which covers all the fixed expenses - and the actual marginal GAAP income per every extra unit produced (assuming total fixed costs are fixed) is closer to 30% than 20%.

Next year there will also be various tailwinds:

• The automotive industry is facing ~36 billion Euros of annual CO2 expenses in Europe starting in 2021. Tesla is in a very lucrative position to reduce those expenses for other carmakers, via ZEV pooling.
• Model Y ramp-up in Q3-Q4 will provide several quarters of high ASP units - while the ramp-up costs will be much lower than for the Model 3.
• China will start ramping up early next year.
• FSD revenue recognition will improve with HW3 based FSD activation.

Subject to black swan event, global recession headwinds and any operational mistakes by Tesla.

The big question is, IMHO, timing. Not advice.

 

[KarenRei]

GHG and CAFE are federal, not CARB.

I know that. I didn't feel like breaking them down and just wrote "US".

Tesla makes money selling GHG credits, this report (PDF)

That lists Tg, not $. Do you know what that's worth, in dollars?

 

[The Accountant]

In the spirit of navel gazing, what do you think Tesla would need to give up to achieve regular GAAP profitability?

Putting aside SolarCity and Energy and only focusing on Tesla Autos, Tesla can only cut in 2 areas: R&D and SG&A.
R&D is about $1.2B a year and SG&A is $2.3B per year.
It's difficult to cut SG&A as you grow due to the need for service centers, back office administration, etc. Cuts in R&D. although discretionary, mortgages the future (what do you cut? Autonomous Driving, Semi, Pick Up, 1M mile Battery, etc/)

The best way to get profitable is to increase the margins on the car sold and sell more of them to cover fixed costs in SG&A. They are aiming to grow Gross Margin Dollars faster than growth in R&D & SG&A dollars. This will come faster than people think, Once Model Y is into it's 2nd Qtr of deliveries, I believe Tesla becomes profitable each quarter. Higher pricing for FSD will also add to profitability and that's icing on the cake.

 

[HG Wells]

DONT LOOK

 

[Dan Detweiler]

I'm not a big Model Y fan - I consider it more of a 3 variant than truly separate model - but sharing so many parts between 3/Y will help financially. I see Fremont production and margins dipping in Q1/Q2 as they start and ramp the Model Y line, but margins should be great for a couple quarters after that because they'll only sell high trim Model Ys at first.

Longer term I see 3+Y combined settling into a ~500k/year sales rate. I realize that's far below Musk's 2 million/year and grounds for excommunication from this board, but that's my base case. Upside could come from:

- Norway-style incentives in larger countries
- ICE bans catching on in cities
- Large COGS reductions allowing ASPs of 40k vs. 50k
- Real FSD (i.e. sleep during your commute)​

I don't expect any of these in the next few years, but many here do. We'll see how it goes.

Oops, good catch. I guess they'll amortize the ground lease into automotive COGS. It's only $2.8m per year, so even at Phase 1 3k/week run rate that's less than 20 bucks per car!

Page 105 of the 10-K says:

Construction in progress is primarily comprised of tooling and equipment related to the manufacturing of our vehicles and a portion of Gigafactory 1 construction. Completed assets are transferred to their respective asset classes, and depreciation begins when an asset is ready for its intended use.
​

I believe they capitalize training expenses, but don't quote me on that.

Most carmakers don't put a line into service until they can run at a pretty high rate. They make hundreds of cars during training and manufacturing validation stages, but they don't sell those cars to the public so the expenses don't count against income. Tesla historically sells the very first cars they make, so they have a couple quarters when they have to charge full labor and depreciation expense against relatively few cars made in the period. It seems they'll do this with Shanghai, hurting Q4 results

7 seats?
True hatch?
More room?
Higher ride height?
Potential battery improvements?

New model for sure.

Dan

 

[KarenRei]

7 seats?
True hatch?
More room?
Higher ride height?
Potential battery improvements?

New model for sure.

Dan

Same platform. Overwhelmingly the same parts. I'm in the "Model 3 variant" camp. I mean, different variants of the X have different numbers of seats, different amounts of room, etc.

Potential battery improvements? No. They clearly share the same packs. If one gets a battery improvement, so does the other.

 

[Dan Detweiler]

Of all business leaders, Musk seems to suffer the least from the sunk cost fallacy. He gave up on battery swap when it didn't make sense, gave up on the alien dreadnaught (for now), gave up on propulsive landing for Dragon v2, radically changed the design of Starship a few times, his whole basic philosophy is that every design is guaranteed to be wrong, and they are just trying to be less wrong over time.

Edit: also eventually got rid of the "work of art" second row seats that didn't fold flat. Probably forgetting a bunch more examples.

Battery swap made no sense.
Who owns the battery? How do you manage all those batteries out there? Do you regain your original battery at some point? How do you know the condition of the battery you got? Was it abused by previous users? What about on a long trip? Do you have to go back through the same station to get your original battery?

With faster Supercharger speeds the battery swap became an out of date, cost ineffective, obsolete concept.

Dan

 

[ReflexFunds]

New orders taken in during the month were 110,000 with 97,000 vehicles delivered. Some of the delivered autos came from the 110,000 new orders while others from prior backlog. In the end, backlog has grown 13,000 units (110k-97k=13k). In my opinion, this is a sign that demand is exceed Tesla's ability to produce (production constraint) and will change with production in China this Qtr. IIRC, one analyst commented that he thought Tesla held back production because orders were slowing but that's FUD.

I understand why Tesla doesn’t disclose the exact numbers, but I would prefer Tesla to publish net new orders each quarter, in addition to deliveries and production.

The real health of the business is measured best in terms of net new orders and total production. Deliveries numbers are driven much more by short term timing/ inventory mismatch and don’t really signal much about the health of the business. Deliveries are however the driver of quarterly P&L (and hence short term net income also isn’t a particularly useful measure - gross margin is much more important.)

 

[SO16]

I agree that becoming marginally profitable is key to gaining confidence in market. And market is important, just this year Tesla had to raise equity/debt.

every quarter? Maybe not, but definitely on a trailing 12 month basis profitable.

Netflix and Amazon have shown that you can grow, invest, and innovate even with marginal profit. Tesla just need to find its cash cow. Maybe the margin from model 3/Y produced in Fremont, while they grow in China and Europe and across product.

It took Amazon decades before it consistently showed profits.

 

[jeewee3000]

Top tip for anyone who has ordered a Model Y in Europe...

I noticed that the price in the Model Y configurator is EUR3,000 cheaper than the purchase price that shows in my tesla account from when I ordered the Model Y shortly after the launch event. So, I clicked on "Modify Design" and chose the same options, confirmed and then the price gets updated to the current configurator price i.e. EUR3,000 cheaper

I actually also decided to remove the Full Self Driving option. I have enhanced autopilot on my Model 3 and here in Spain it doesn't work very well at all due to the EU rules of having to reconfirm all the time. I will purchase it later if and when EU regulations catch-up

Tried this out, but with different results:

my original order price of 64.450 EUR would increase to 65.430 EUR. So of course I pressed cancel

 

[elasalle]

Same platform. Overwhelmingly the same parts. I'm in the "Model 3 variant" camp. I mean, different variants of the X have different numbers of seats, different amounts of room, etc.

Potential battery improvements? No. They clearly share the same packs. If one gets a battery improvement, so does the other.

Model Y could potentially get new efficient wiring and new battery tech ...

.. if decisions were with EM from prior years, yes M3 could also get these immediately, but I think lessons have been learnt. M3 will be left alone. ~
If there is a big break through in cost savings - it could happen over time.

cheers!!

(How about a S/X complete refresh ...first)

 

[kengchang]

GF3 is just for "Greater China" (China, Hong Kong, Macau, Taiwan, possibly Singapore). But yes, it's a massive amount of ships that can be redirected to other markets. They'll still be loading ships - GF3 doesn't create new demand in North America. But their current European markets are backlogged, they're opening to new markets in Europe, in the Middle East, in Asia, etc, so it lets them send those vehicles elsewhere.

China clearly planned on the possibility of exports; GF3 is located in a free trade zone.

Taiwan can't import fully assembled vehicles from China. Taiwan will be US built for a long time if not forever

 

[Fact Checking]

Taiwan can't import fully assembled vehicles from China.

Even from one of the Free Trade Zones, which the GF3 is built in?

Tesla is in the unique position of owning a factory that is both on mainland China (counts as a domestic carmaker) and in a FTZ (not subject to any export tariffs).

 

[KarenRei]

Model Y could potentially get new efficient wiring and new battery tech ...

Which then Model 3 would simultaneously get.

They're the same platform. You ruin your economies of scale when you do some things with one and not the other.

How about a S/X complete refresh ...first

Tesla does not do "complete refreshes". Some updates are bigger than others, mind you. Tech will keep migrating in from the 3/Y platform. Again, improving economies of scale and unifying the underlying platforms as much as possible, rather than diversifying them.

Musk's biggest regret with the X was how little it shared with the S. He's not going to make that mistake twice.

The next new platforms we're seeing (apart from Semi) are Roadster and Pickup. But even in those cases... the drive units for both are sourced from the 3, and recently we learn that Roadster's 3-motor plaid powertrain setup will also be shared with S and X. Pickup really has its own sorts of needs in terms of structure (abuse-tolerant) that other platforms don't, while Roadster needs to go light even in ways that would cost too much for Tesla's other platforms to do. But still, expect some continuous technology transfer. Because that's what Tesla does, with its Agile development model.

 

[Dan Detweiler]

I fully expect Model 3 sales to drop with the Model Y rampup (unless there's some sort of major market expansion at the same time, such as moving into a country like India or new tax credits in the US). But I simultaneously fully expect total volume to continue to climb. And Model Y to yield higher margins than Model 3 to boot.

Totally agree with this statement, but it brings up another possibility. Do you think that Tesla will be willing to give a higher trade in value for people trading in Model 3s for Ys? After all. these cars can either be resold or put into the rideshare fleet, assuming that comes to pass. This would directly benefit me as I plan on doing just that.

One can dream, right? lol

Dan

 

[Fact Checking]

Which then Model 3 would simultaneously get.

They're the same platform. You ruin your economies of scale when you do some things with one and not the other.

Agreed, Tesla might eventually switch all their Model 3 lines to the new wiring harness (it's currently mostly manual work, so removing it would reduce costs and free up employees to expand elsewhere) - but IMO they won't create such a serious permanent deviation in the Model 3/Y platform.

That was the SpaceX product strategy as well: they'd rather send up a vastly overpowered Falcon 9 with a minor load to LEO than create some special variant for smaller payloads.

 

[Wooloomooloo]

It took Amazon decades before it consistently showed profits.

This is a common narrative but it's partially wrong and actually misleading in the context you're using it.

Amazon posted losses from 1995 - 2003, which is almost a decade. They then posted profits from 2004 - 2011, albeit extremely small earnings Vs revenue (2004 being the exception). They then had a number of years of pretty much breaking even, a deliberate growth and tax avoidance strategy

However they were not burning capital anywhere near the rate Tesla is, and certainly not posting $500m - $750m in quarterly losses so I am not sure where you're going with this comment.

 

[mongo]

Which then Model 3 would simultaneously get.

They're the same platform. You ruin your economies of scale when you do some things with one and not the other.

The solid harness is also the ~48V networked electrical architecture. It would require new Y type modules for the 3. This cuts the total parts the 3 vendors expected to make and would likely result in additional contractual costs (service pat supply would still need to exist also).

Tesla can gain the efficiencies of robotic install and the volume of the Y (higher than 3). 3 will still have the pricing it already does. Both are large scale.

 

[SoGA Fan Club]

Battery swap made no sense.
Who owns the battery? How do you manage all those batteries out there? Do you regain your original battery at some point? How do you know the condition of the battery you got? Was it abused by previous users? What about on a long trip? Do you have to go back through the same station to get your original battery?

With faster Supercharger speeds the battery swap became an out of date, cost ineffective, obsolete concept.

Dan

I was always in love with the idea of [having the option of] not buying a battery when you purchased your car, and just join a battery swap club for a monthly fee, plus a per swap fee (or instead of a per swap fee, a mileage fee).

Then all the folks who rant and carry on about how much the battery will cost to replace one day would be silenced. Plus, you'd always have a non-degraded battery for the life of your vehicle.

I think the cost and complexity of the swap stations really made Tesla work hard to poo-poo on the battery swap idea. It truly would have been incredibly cumbersome to build-out, and expensive beyond imagination. It might happen one day - but only if one of these 2 things DON'T happen - 300 mile charge times fall to less than 15 mins OR range increases above 500 miles (most people rarely drive over 500 miles in a day so you essentially eliminate the need to charge while traveling, and even when traveling over 500 miles in a day, only a 20 or 30 minute stop would be needed, assuming today's charge times, to make a 800 or 900 mile trip in a day).