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

[EVNow]

Now we can estimate the market value of the 60,000 May 1 2024 calls at $309 that Tesla owns: time to expiration increases to 1,565 days, which gives a per share option value of $289, and a market value of $1.74b of the lower leg of this bull spread.

Several things come to mind.

- The basic idea of the hedge was to make sure Tesla can pay the bond holders if the SP went above $309.
- If they unwound the long call, they would have to unwind the short call too which would reduce the profit (not sure by how much - should be easy to calculate). Or they may buy $409 calls instead and bank $100.
- If they unwind or roll the hedge, how should the profit be considered ? @The Accountant or others may know this better - but they may need to just put it as a reserve. Afterall when the bond expires, Tesla may have to pay those bond holders.

It would make sense to do it only if they want the cash. Otherwise its not useful.

ps : I read what @The Accountant and others are saying. They think it goes to equity and not to P&L at all since originally it went to equity account. Bottom-line, I don't think this will impact P&L - even though there may be ways some other company might have tried to bring it to P&L. I doubt Tesla will try that kind of creative accounting.

 

[The Accountant]

Am I missing anything? Has Elon managed to hide the short squeeze of the century in plain sight?

A Path to S&P Inclusion ....NOW:
@Fact Checking - your comment above was related to the potential that Tesla's Call options gains could bring sufficient GAAP profits in Q4 to ensure S&P inclusion with the Q4 filing. In a separate post I commented that the gains would not likely be counted as income.
However:
There is an obscure item on Tesla's Balance Sheet that could bring huge upside to Q4....enough to achieve full year 2019 GAAP Profits and inclusion into the S&P. I have hesitated to bring this up in the past because it could easily be a big Nothing Burger and also because it is a very technical tax accounting issue. But since this is the weekend and your post touched on early S&P inclusion, I thought I would share it.

TL;DR: Tesla has deferred the recognition of $1.8B in tax benefits on the P&L because they could not conclude it was likely that they would have income in the future to take advantage of these benefits. Once profitability is likely (and supported by the auditors), this $1.8B (or a portion thereof) gets recognized immediately to GAAP profits. If Tesla concludes now that profitability is likely in 2020 and thereafter, $1.8B (or a portion) gets included in Q4 profits.

The Long Version
When a company incurs a loss, they record a tax benefit because they can reduce taxes in the future by offsetting future tax income with these tax losses. It's called a "Net Operating Loss Carryforward" (a Tax Asset).
So you would typically see a P&L as such:

$(100,000) - Pretax Income (Loss)
$ 30,000 - Tax Benefit (Expense)
$ (70,000) - Net Income (Loss)

However, the accounting rules state that you can only record this benefit if "it is more likely than not" that you will be able to use this benefit (tax asset) in the future.
Tesla has not recognized any of these benefits over the past 15 years because they could not confidently conclude and support to the auditors that profitably in the future was "more likely than not".
Here is Tesla's wording from the 2018 10K:

As of December 31, 2018, we recorded a valuation allowance of $1.81 billion for the portion of the deferred tax asset that we do not expect to be realized.....Management believes that based on the available information, it is more likely than not that the U.S. deferred tax assets will not be realized, such that a full valuation allowance is required against all U.S. deferred tax assets.​

You can see this deferred benefit (valuation allowance) on their deferred tax asset schedule from the 2018 10K below:

Tesla's position on this tax accounting is correct.

Here is the important point: As soon as Tesla can support to the auditors, that "it is more likely than not", that profitability will be achieved in 2020 and beyond, this tax benefit comes back to earnings immediately. If not all of the $1.8B a substantial amount would.

Points Against Recognition in Q4

• Since Tesla has never had a full year profit in its history, they and their auditors may take a conservative approach and deem future profits unlikely.
• Despite 2 profitable Qtrs in 2018, Telsa still concluded (as seen in the 2018 10K) that it was "more likely than not" they would not be able to recognize the tax benefits with future profits.

Points For Recognition in Q4

• Tesla has been profitable in 4 of the last 6 Qtrs
• With Model 3 fully ramped, GF3 producing vehicles and Model Y entry assured for 2020, profitability is "more likely than not".
• Elon will likely state during the Q4 earnings call that Tesla expects a full year profit in 2020. Telsa can't state this publicly while simultaneously stating in the 2019 10K that future profits cannot be assured for taking the tax benefits.
• Generally Accepted Accounting Principles (GAAP) needs to be applied consistently. You can't take the position: "profits are more likely than not but let's not take the earnings benefit just to be conservative". Profits are either "more likely than not" or they're "more unlikely than not". If it is the former, you take the benefit to earnings.

I'm not sure which way this will go. If the huge benefit is not taken in Q4 2019, it's certain we'll see it in 2020.
My brain tells me that they will take the huge benefit in Q4 2019 but my gut says they won't.

TeslaQ has been all over the Balance Sheet pushing questions on Warranty Reserves, Accounts Receivables, etc.......but they're not talking about this one.

Let's see how this plays out.

 

[gerebgraus]

Derivatives aren't company equity. Microsoft made about 10% of their total profits in the 1990s buying and selling derivatives on MSFT.

Ask yourself, if Tesla wasn't allowed to do this, the how did they buy the 60,000 CALLS in the first place back in May 2019?

Yeah, its allowed.

Cheers!

My wild hunch that it is insider trading of some sort. Insider trading is allowed with conditions and with reasonably short time reporting requirements. Are you sure that in this form this is allowed? I am pretty sure they did not do anything like that before the last days of December and they certainly have not reported it. I emphasize again that I do not know the relevant laws this is only my hunch.

 

[Prunesquallor]

Weekend OT (visualize orange text).

I got a text from Tesla Mobile Service that they wanted to come to my house to proactively address an issue I didn’t know I had (potential loose contact pins in the charge port, took 45 seconds to fix).

What kind of car company, without the threat of a government-mandated recall, comes to your house to fix a potential future issue?

I need to find more dry powder...

 

[RobStark]

The sales team probably should t have let the naked man take the car for a test drive.

If that became Tesla policy then how would @SpaceCash get a test drive?

 

[dw4ngg]

A Path to S&P Inclusion ....NOW:
@Fact Checking - your comment above was related to the potential that Tesla's Call options gains could bring sufficient GAAP profits in Q4 to ensure S&P inclusion with the Q4 filing. In a separate post I commented that the gains would not likely be counted as income.
However:
There is an obscure item on Tesla's Balance Sheet that could bring huge upside to Q4....enough to achieve full year 2019 GAAP Profits and inclusion into the S&P. I have hesitated to bring this up in the past because it could easily be a big Nothing Burger and also because it is a very technical tax accounting issue. But since this is the weekend and your post touched on early S&P inclusion, I thought I would share it.

TL;DR: Tesla has deferred the recognition of $1.8B in tax benefits on the P&L because they could not conclude it was likely that they would have income in the future to take advantage of these benefits. Once profitability is likely (and supported by the auditors), this $1.8B (or a portion thereof) gets recognized immediately to GAAP profits. If Tesla concludes now that profitability is likely in 2020 and thereafter, $1.8B (or a portion) gets included in Q4 profits.

The Long Version
When a company incurs a loss, they record a tax benefit because they can reduce taxes in the future by offsetting future tax income with these tax losses. It's called a "Net Operating Loss Carryforward" (a Tax Asset).
So you would typically see a P&L as such:

$(100,000) - Pretax Income (Loss)
$ 30,000 - Tax Benefit (Expense)
$ (70,000) - Net Income (Loss)

However, the accounting rules state that you can only record this benefit if "it is more likely than not that you will be able to use this benefit (tax asset)" in the future.
Tesla has not recognized any of these benefits over the past 15 years because they could not confidently conclude and support to the auditors that profitably in the future was "more likely than not".
Here is Tesla's wording from the 2018 10K:

As of December 31, 2018, we recorded a valuation allowance of $1.81 billion for the portion of the deferred tax asset that we do not expect to be realized.....Management believes that based on the available information, it is more likely than not that the U.S. deferred tax assets will not be realized, such that a full valuation allowance is required against all U.S. deferred tax assets.​

You can see this deferred benefit (valuation allowance) on their deferred tax asset schedule from the 2018 10K below:
View attachment 501942

Tesla's position on this tax accounting is correct.

Here is the important point: As soon as Tesla can support to the auditors, that "it is more likely than not", that profitability will be achieved in 2020 and beyond, this tax benefit comes back to earnings immediately. If not all of the $1.8B a substantial amount would.

Points Against Recognition in Q4

• Since Tesla has never had a full year profit in its history, they and their auditors may take a conservative approach and deem future profits unlikely.
• Despite 2 profitable Qtrs in 2018, Telsa still concluded (as seen in the 2018 10K) that it was "more likely than not" they would not be able to recognize the tax benefits with future profits.

Points For Recognition in Q4

• Tesla has been profitable in 4 of the last 6 Qtrs
• With Model 3 fully ramped, GF3 producing vehicles and Model Y entry assured for 2020, profitability is "more likely than not".
• Elon will likely state during the Q4 earnings call that Tesla expects a full year profit in 2020. Telsa can't state this publicly while simultaneously stating in the 2019 10K that future profits cannot be assured for taking the tax benefits.
• Generally Accepted Accounting Principles (GAAP) needs to be applied consistently. You can't take the position: "profits are more likely than not but let's not take the earnings benefit just to be conservative". Profits are either "more likely than not" or they're "more unlikely than not". If it is the former, you take the benefit to earnings.

I'm not sure which way this will go. If the huge benefit is not taken in Q4 2019, it's certain we'll see it in 2020.
My brain tells me that they will take the huge benefit in Q4 2019 but my gut says they won't.

TeslaQ has been all over the Balance Sheet pushing questions on Warranty Reserves, Accounts Receivables, etc.......but they're not talking about this one.

Let's see how this plays out.

need to also consider portion of DTA attributed to pre-2018 taxable losses as those have expiration, and so you would also need to forecast sufficient taxable income by a certain date as well, albeit the pre tax cuts and jobs act NOL Carryfoward expiration period is 20 yrs

 

[davepsilon]

A Path to S&P Inclusion ....NOW:
@Fact Checking - your comment above was related to the potential that Tesla's Call options gains could bring sufficient GAAP profits in Q4 to ensure S&P inclusion with the Q4 filing. In a separate post I commented that the gains would not likely be counted as income.
However:
There is an obscure item on Tesla's Balance Sheet that could bring huge upside to Q4....enough to get full year 2019 GAAP Profits and inclusion into the S&P. I have hesitated to bring this up in the past because it could easily be a big Nothing Burger and also because it is a very technical tax accounting issue. But since this is the weekend and your post touched on early S&P inclusion, I thought I would share it.

TL;DR: Tesla has deferred the recognition of $1.8B in tax benefits on the P&L because they could not conclude it was likely that they would have income in the future to take advantage of these benefits. Once profitability is likely (and supported by the auditors), this $1.8B (or a portion thereof) gets recognized immediately to GAAP profits. If Tesla concludes now that profitability is likely in 2020 and thereafter, $1.8B (or a portion) gets included in Q4 profits.

The Long Version
When a company incurs a loss, they record a tax benefit because they can reduce taxes in the future by offsetting future tax income with these tax losses. It's called a "Net Operating Loss Carryforward" (a Tax Asset).
So you would typically see a P&L as such:

$(100,000) - Pretax Income (Loss)
$ 30,000 - Tax Benefit (Expense)
$ (70,000) - Net Income (Loss)

However, the accounting rules state that you can only record this benefit if "it is more likely than not that you will be able to use this benefit (tax asset)" in the future.
Tesla has not recognized any of these benefits over the past 15 years because they could not confidently conclude and support to the auditors that profitably in the future was "more likely than not".
Here is Tesla's wording from the 2018 10K:

As of December 31, 2018, we recorded a valuation allowance of $1.81 billion for the portion of the deferred tax asset that we do not expect to be realized.....Management believes that based on the available information, it is more likely than not that the U.S. deferred tax assets will not be realized, such that a full valuation allowance is required against all U.S. deferred tax assets.​

You can see this deferred benefit (valuation allowance) on their deferred tax asset schedule from the 2018 10K below:
View attachment 501942

Tesla's position on this tax accounting is correct.

Here is the important point: As soon as Tesla can support to the auditors, that "it is more likely than not", that profitability will be achieved in 2020 and beyond, this tax benefit comes back to earnings immediately. If not all of the $1.8B a substantial amount would.

Points Against Recognition in Q4

• Since Tesla has never had a full year profit in its history, they and their auditors may take a conservative approach and deem future profits unlikely.
• Despite 2 profitable Qtrs in 2018, Telsa still concluded (as seen in the 2018 10K) that it was "more likely than not" they would not be able to recognize the tax benefits with future profits.

Points For Recognition in Q4

• Tesla has been profitable in 4 of the last 6 Qtrs
• With Model 3 fully ramped, GF3 producing vehicles and Model Y entry assured for 2020, profitability is "more likely than not".
• Elon will likely state during the Q4 earnings call that Tesla expects a full year profit in 2020. Telsa can't state this publicly while simultaneously stating in the 2019 10K that future profits cannot be assured for taking the tax benefits.
• Generally Accepted Accounting Principles (GAAP) needs to be applied consistently. You can't take the position: "profits are more likely than not but let's not take the earnings benefit just to be conservative". Profits are either "more likely than not" or they're "more unlikely than not". If it is the former, you take the benefit to earnings.

I'm not sure which way this will go. If the huge benefit is not taken in Q4 2019, it's certain we'll see it in 2020.
My brain tells me that they will take the huge benefit in Q4 2019 but my gut says they won't.

TeslaQ has been all over the Balance Sheet pushing questions on Warranty Reserves, Accounts Receivables, etc.......but they're not talking about this one.

Let's see how this plays out.

Some portion of that 1.8B would have expired in 2019? Crazy that this is an even bigger pot than FSD revenue.

 

[The Accountant]

need to also consider portion of DTA attributed to pre-2018 taxable losses as those have expiration, and so you would also need to forecast sufficient taxable income by a certain date as well, albeit the pre tax cuts and jobs act NOL Carryfoward expiration period is 20 yrs

Good Point - Agree - this tax topic is very complicated. The Deferred Tax Asset with the Valuation Allowance relates to the US NOL, so we would need to understand US income (separate from foreign income) which leads to Transfer Pricing, etc, etc, etc
That's why I stated this could be Huge or a BIG Nothing Burger.

 

[Thumper]

I'm sorry, meaning no offense, I don't really believe your Robotaxi numbers more than I believe Dave's or Cathie's. I mean, I see you put a tremendous amount of work into this model, and I don't want to make light of that. I don't really want to dispute it -- I can't point to a fact that says it's not right -- I just don't happen to believe it myself.

In order for 80% of Tesla owners to put their car on a Robotaxi network (which I see in your chart for 2030), there would have to be an almost unfathomable change in attitude toward vehicles. If you ask any 100 people "how would you feel about strangers riding in your car" (you know, hot sex in the back seat, hopping a Robotaxi at last call and vomiting in the car, just being an angry kid and slashing the seats, even just swimming in a muddy creek and then hopping a Robotaxi, let your imagination run wild) -- I can't see 80% of people agreeing. That is, until what you have to offer to pay them gets way out of control. And there's going to be a limit to what riders will pay (here in the Philly suburbs today, Uber is uneconomical for daily commute and errands -- so there's an upper limit right there).

Maybe if there's UrgentDetailingAsAService and SeatReplacementAsAService that's covered by the RobotaxisAsAService network... and everyone does this with the car they don't actually care to drive, this second car which they can somehow afford despite FSD fees just going up up up... And nobody actually wants to drive themselves any more or else human driving is just plain outlawed... I'm not saying it's impossible, I'm saying 80% Robotaxis is a world I just don't recognize any more. And I can't put any confidence in *anyone's* prediction of when that's going to happen and what the economics are going to be. (The alternative, where giant fleets run by companies with their own maintenance and detailing divisions do all the Robotaxiing seems more likely to me, but appears to differ from the models where massive numbers of "regular Tesla owners" put their cars on the network.)

And all of that still assumes that driverless Robotaxis actually arrive in the not-too-distant future (e.g. by 2024). I wouldn't argue against a model where there's a driver who's not required to pay attention unless the car requests it, but I remain deeply skeptical of the model where nobody on board needs to have a drivers license.

So I'm with the analysts on that one -- I can't envision the end result or a path to get there, so I throw up my hands and assign it zero value for now. (I just couldn't defend any specific value, any why put numbers down that I don't really believe in?)

To be clear, I am confident there's actual value in FSD progress -- all the incremental FSD features delivered as time goes on make Tesla vehicles more attractive, lead to a higher rate of FSD uptake and/or a higher charge for it, all leading to more revenue per vehicle on average, also multiplied by the larger number of vehicles delivered as time goes on -- there's plenty of value there, just not I think the same thousands-per-share shown by Robotaxi models. I have not bought FSD but will be sorely tempted when navigate on autopilot on city streets comes out, even when it's still hands-on-the-wheel.

So -- bottom line -- for the moment I'm actually more interested in the Tesla Energy models. I will look at the Energy part of your model in more detail, though at first glance it looks like you have it as substantially smaller than either Automotive or Robotaxis -- suggesting you don't really believe Elon about the size of the opportunity there. (Which... seems odd.)

I have been having almost identical thoughts about robotaxis.

 

[madodel]

Or trade in her Tesla for a car with more sedate acceleration.

Like an E-tron.

There's Chill Mode. People that can't handle the full acceleration should use that. Or just buy a Bolt.

 

[George Marley]

A fair amount of higher-end cars do have foam strips, but the "whompy wheels" thing has nothing to do with wheel/tire balance.

It's one person who's been going around trying to claim that Tesla suspension is flawed and wheels are falling off of Teslas left and right, and has been fraudulently submitting NHTSA complaints.[/QUOTE

Why hasn't that guy been charged yet?
Tesla -Whompy Wheels

 

[The Accountant]

Some portion of that 1.8B would have expired in 2019? Crazy that this is an even bigger pot than FSD revenue.

Losses incurred before 2018, expire in 20 years. Thus losses from Tesla's first year in 2003, would expire in 2023 if not used.
Losses in 2018 and later have no expiration dates.

 

[generalenthu]

Good Point - Agree - this tax topic is very complicated. The Deferred Tax Asset with the Valuation Allowance relates to the US NOL, so we would need to understand US income (separate from foreign income) which leads to Transfer Pricing, etc, etc, etc
That's why I stated this could be Huge or a BIG Nothing Burger.

I was thinking 2020 profits would be a slam dunk with the monies from the FCA deal. But, that may be tied up in Europe. So couple of questions for you.

1. How much flexibility do you think is there between recognizing income in US vs Europe, by adjusting the transfer price
2. Given most of the R&D and SG&A is in US, can they allocate this to the European or Chinese entities, or will they have to continue recognizing this in the US entity.

 

[FrankSG]

So -- bottom line -- for the moment I'm actually more interested in the Tesla Energy models. I will look at the Energy part of your model in more detail, though at first glance it looks like you have it as substantially smaller than either Automotive or Robotaxis -- suggesting you don't really believe Elon about the size of the opportunity there. (Which... seems odd.)

@ammulder , @Thumper

Before I address your robotaxi concerns, let's start with this. I don't believe Elon's claim that Tesla Energy has the potential to be bigger than its automotive business because:

1. I'm not that optimistic about Tesla's non-Solar Roof solar business. Unlike batteries, Tesla/Panasonic does not make the world's best solar modules. It's a much older technology ((around since 1880s, used in space applications since 1950s) and is much more commoditized.
2. Projections for energy storage growth by 2040 show that it's not going to be nearly as big of a market opportunity as EVs. 3TWh per year for storage, vs say 100KWh per vehicle per 50M vehicles (conservative) is 5TWh per year for EVs. Furthermore, energy storage are basically just batteries with some inverters and software, whereas EVs are much more than just batteries and sell for much more $/KWh than energy storage does.
3. Solar Roof could be pretty big, but according to my calculations does not have as big a market potential as energy storage.

A monopoly (aka total market potential) of a 3TWh energy storage market at $200k / MWh (Powerwall 2 is $480k / MWh today, utility scale likely much cheaper) is worth $600B in annual revenue.

A monopoly of a global 25M roofs per year Solar Roof market at $20k avg cost per roof (about 50% of today's prices, assuming technology improvements) would be worth $500B in revenue per year. This is if every single roof worldwide will be a solar roof, which might or might not happen.

The potential of a 50M vehicles per year EV market at an ASP of $40k would be $2T in annual revenue. Even at an ASP of $30k, it would still be $1.5T, which is still more than the $600B + $500B = $1.1T of the combined energy storage + solar roof markets.

I'm sorry, meaning no offense, I don't really believe your Robotaxi numbers more than I believe Dave's or Cathie's. I mean, I see you put a tremendous amount of work into this model, and I don't want to make light of that. I don't really want to dispute it -- I can't point to a fact that says it's not right -- I just don't happen to believe it myself.

No offense taken! I understand your skepticism.

In order for 80% of Tesla owners to put their car on a Robotaxi network (which I see in your chart for 2030), there would have to be an almost unfathomable change in attitude toward vehicles. If you ask any 100 people "how would you feel about strangers riding in your car" (you know, hot sex in the back seat, hopping a Robotaxi at last call and vomiting in the car, just being an angry kid and slashing the seats, even just swimming in a muddy creek and then hopping a Robotaxi, let your imagination run wild) -- I can't see 80% of people agreeing. That is, until what you have to offer to pay them gets way out of control. And there's going to be a limit to what riders will pay (here in the Philly suburbs today, Uber is uneconomical for daily commute and errands -- so there's an upper limit right there).

I understand your viewpoint which is based on what car ownership is like today. However, car ownership is going to be vastly different from what it is today when full autonomy arrives. When Tesla has an FSD system that is safer than a human and gains regulatory approval, I expect them to bundle this as standard on every single vehicle just like they've done with autopilot. I also expect the price of this FSD system to be significant. Elon has talked about $100k+ in the past, but even if it just costs costs a lot less like $20k, up front costs of vehicle purchases will increase significantly, while at the same time robotaxis will reduce the price of transportation on demand significantly.

As a result, car ownership will change drastically from what it is today. Many more people will simply rely on robotaxis for transportation, because it will be cheaper than private car ownership is today. Private car ownership today is about $0.60 per mile, but transportation by robotaxi is likely to be similar or cheaper (in my model it's $0.33). If the increased up front costs of cars increases the cost of private car ownership from $0.60 to say $0.70 or $0.75 per mile, while at the same time a robotaxi costs $0.50 per mile, simple economics indicate that most people will no longer own a car without renting it out as a robotaxi. And probably most cars will be bought by fleet operators rather than individuals.

Maybe if there's UrgentDetailingAsAService and SeatReplacementAsAService that's covered by the RobotaxisAsAService network... and everyone does this with the car they don't actually care to drive, this second car which they can somehow afford despite FSD fees just going up up up... And nobody actually wants to drive themselves any more or else human driving is just plain outlawed... I'm not saying it's impossible, I'm saying 80% Robotaxis is a world I just don't recognize any more. And I can't put any confidence in *anyone's* prediction of when that's going to happen and what the economics are going to be. (The alternative, where giant fleets run by companies with their own maintenance and detailing divisions do all the Robotaxiing seems more likely to me, but appears to differ from the models where massive numbers of "regular Tesla owners" put their cars on the network.)

I agree with a lot of this. I think most of Tesla's customers after full autonomy is here will be fleet operators/companies rather than individuals. And I think Tesla's vertical integration of insurance and service is going to come in extremely handy. Also, don't forget the inward facing camera that will record people who really vandalize a vehicle.

And all of that still assumes that driverless Robotaxis actually arrive in the not-too-distant future (e.g. by 2024). I wouldn't argue against a model where there's a driver who's not required to pay attention unless the car requests it, but I remain deeply skeptical of the model where nobody on board needs to have a drivers license.

The model isn't supposed to give a pin-point accurate prediction of the future, but rather to help understand the potential economics of the Tesla Network AMaaS business. Full FSD not being here in 2024 would shift the numbers around a little bit, but not by that much, because it's a simple software update that Tesla has to send out to its vehicles. The biggest impact on these numbers far and away are Tesla's production numbers. If Tesla produces significantly more or less vehicles than the estimations in this model (that is a little aggressive btw), that'll impact the numbers quite a bit.

More details on this model, the assumptions, and reasoning behind it, can be found in my blog:

My Tesla Investment Thesis 2.0: Tesla's Monopoly Potential

 

[Ameliorate]

A Path to S&P Inclusion ....NOW:
@Fact Checking - your comment above was related to the potential that Tesla's Call options gains could bring sufficient GAAP profits in Q4 to ensure S&P inclusion with the Q4 filing. In a separate post I commented that the gains would not likely be counted as income.
However:
There is an obscure item on Tesla's Balance Sheet that could bring huge upside to Q4....enough to achieve full year 2019 GAAP Profits and inclusion into the S&P. I have hesitated to bring this up in the past because it could easily be a big Nothing Burger and also because it is a very technical tax accounting issue. But since this is the weekend and your post touched on early S&P inclusion, I thought I would share it.

TL;DR: Tesla has deferred the recognition of $1.8B in tax benefits on the P&L because they could not conclude it was likely that they would have income in the future to take advantage of these benefits. Once profitability is likely (and supported by the auditors), this $1.8B (or a portion thereof) gets recognized immediately to GAAP profits. If Tesla concludes now that profitability is likely in 2020 and thereafter, $1.8B (or a portion) gets included in Q4 profits.

The Long Version
When a company incurs a loss, they record a tax benefit because they can reduce taxes in the future by offsetting future tax income with these tax losses. It's called a "Net Operating Loss Carryforward" (a Tax Asset).
So you would typically see a P&L as such:

$(100,000) - Pretax Income (Loss)
$ 30,000 - Tax Benefit (Expense)
$ (70,000) - Net Income (Loss)

However, the accounting rules state that you can only record this benefit if "it is more likely than not that you will be able to use this benefit (tax asset)" in the future.
Tesla has not recognized any of these benefits over the past 15 years because they could not confidently conclude and support to the auditors that profitably in the future was "more likely than not".
Here is Tesla's wording from the 2018 10K:

As of December 31, 2018, we recorded a valuation allowance of $1.81 billion for the portion of the deferred tax asset that we do not expect to be realized.....Management believes that based on the available information, it is more likely than not that the U.S. deferred tax assets will not be realized, such that a full valuation allowance is required against all U.S. deferred tax assets.​

You can see this deferred benefit (valuation allowance) on their deferred tax asset schedule from the 2018 10K below:
View attachment 501942

Tesla's position on this tax accounting is correct.

Here is the important point: As soon as Tesla can support to the auditors, that "it is more likely than not", that profitability will be achieved in 2020 and beyond, this tax benefit comes back to earnings immediately. If not all of the $1.8B a substantial amount would.

Points Against Recognition in Q4

• Since Tesla has never had a full year profit in its history, they and their auditors may take a conservative approach and deem future profits unlikely.
• Despite 2 profitable Qtrs in 2018, Telsa still concluded (as seen in the 2018 10K) that it was "more likely than not" they would not be able to recognize the tax benefits with future profits.

Points For Recognition in Q4

• Tesla has been profitable in 4 of the last 6 Qtrs
• With Model 3 fully ramped, GF3 producing vehicles and Model Y entry assured for 2020, profitability is "more likely than not".
• Elon will likely state during the Q4 earnings call that Tesla expects a full year profit in 2020. Telsa can't state this publicly while simultaneously stating in the 2019 10K that future profits cannot be assured for taking the tax benefits.
• Generally Accepted Accounting Principles (GAAP) needs to be applied consistently. You can't take the position: "profits are more likely than not but let's not take the earnings benefit just to be conservative". Profits are either "more likely than not" or they're "more unlikely than not". If it is the former, you take the benefit to earnings.

I'm not sure which way this will go. If the huge benefit is not taken in Q4 2019, it's certain we'll see it in 2020.
My brain tells me that they will take the huge benefit in Q4 2019 but my gut says they won't.

TeslaQ has been all over the Balance Sheet pushing questions on Warranty Reserves, Accounts Receivables, etc.......but they're not talking about this one.

Let's see how this plays out.

Tsunami of pain? No.....

More like,

Meteor of extinction!


Shorts worth quite a bit at 14B, Elon's worth about 30B. They might've poked the bear one too many times. He has a lot more cards to play this time. "No we aren't recalling any vehicles, in fact we're letting loose a bunch of model Y's!" Just one of many examples.

 

[The Accountant]

I was thinking 2020 profits would be a slam dunk with the monies from the FCA deal. But, that may be tied up in Europe. So couple of questions for you.

1. How much flexibility do you think is there between recognizing income in US vs Europe, by adjusting the transfer price
2. Given most of the R&D and SG&A is in US, can they allocate this to the European or Chinese entities, or will they have to continue recognizing this in the US entity.

These are tough questions; I am not a tax accountant/attorney.
Regarding your first question, profits can be shifted to the US with higher transfer prices to Tesla's foreign entities in addition to Royalty charges on IP. Royalties are important because if GF3 one day sources 100% of its materials from outside the US, there is no transfer prices - so to get profits back to the US, it would be a Royalty (a % of sales). If Tesla wants to increase "US Source" Income they can take some aggressive stances on Transfer Pricing and Royalties. I am sure they have top tax attorneys working for them.

On your 2nd Question, the way to get SG&A and R&D expenses charged out to foreign entities to increase US Income is through the transfer price and royalties I mentioned above. Another way is to move some functions outside the US like what we see with the Design center in China and potential engineering capabilities in German with GF4.

 

[Artful Dodger]

Here's a Youtuber discussing the possibility of a coming Tesla short squeeze:

Investing For The Future - From the Introduction:

"Tesla stock has had a big run since the mid 2019 lows. Many people are asking for comparisons between the run-up in the price today versus what happened in 2013. I take a look at what drove the run-up in 2013 and how it compares to the situation today from a fundamental and a technical standpoint. I also compare the Tesla situation to the VW short squeeze in 2008 and spend some time going over the events that led up to the 2008 event. The VW situation was much different. A very popular hedge fund trade involved arbitraging the value of different share classes in Europe. For example, the ordinary shares of a company might trade at a premium to preference shares in the same company because the preference shares carried no voting rights. I'll dig into how this dynamic affected the trading of VW."

TIME STAMPS:

• 0:23 - On the phone with a billionaire
• 4:45 - Elon makes less than minimum wage
• 5:25 - What happens to TSLA stock if Elon delivers on his targets?
  Analyzing Elon's 2012 vs. 2018 CEO incentive packages
• 10:10 - The story of how Volkswagen became the most valuable company in the world (for one day!)

Cheers!

 

[kcveins]

I thought you were a Bull...1.0-1.50 seems a bit low

In the US we use 1,500.00
In most of the rest of the world, it is 1.500,00

 

[StealthP3D]

... or, Tesla could have used some of the $2.4B net cash they received from the equity offer in May 2019 to buy more derivatives. Any such purchase wouldn't be listed on the SEC documents regarding the share issue.

At the time, Elon said something like 'we might just keep the cash'. Perhaps Zach whispered in his ear there's some place else we could PUT it. CALL me hopeful.

I can't imagine Tesla could buy significant quantities of derivatives without disclosing them in a timely manner.

 

[hacer]

(Cc: @ReflexFunds, @The Accountant, @EVNow, @KarenRei and @Doggydogworld.)

So let me attempt to quantify the value of Tesla's 60,000 contracts large $309-$606 bull spread. The hedging transaction Tesla entered into is:

• buy 60,000x 2024/May calls at $309,
• sell 60,000x 2024/May calls at $607.

If we take yesterday's closing price of $510 and the 2021 March 19 LEAPs at $310 which are trading for $225, we can calibrate the rough Black-Scholes options pricing parameters:

https://goodcalculators.com/black-scholes-calculator/

Spot Price: $510
Strike Price: $310
Time to expiration: 425 days
volatility: 49%
risk-free interest rate: 2%​

Which gives $224.9 in the calculator - close enough.

Now we can estimate the market value of the 60,000 May 1 2024 calls at $309 that Tesla owns: time to expiration increases to 1,565 days, which gives a per share option value of $289, and a market value of $1.74b of the lower leg of this bull spread.

Even if we reduce IV a bit, this is still insanely high, and that's just one of Tesla's three bull spreads.

Am I missing anything? Has Elon managed to hide the short squeeze of the century in plain sight?

These probably are non-standard contracts so they may well have terms that we don't know; for example perhaps they can't exercise early etc.