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

[Mike Smith]

Seems they regret that decision.

"First of all, I’ll say that I think we f***ed up by publishing an article on this topic that lacked important context and included misleading framing."

That NHTSA Tesla "Sudden Unintended Acceleration" Petition? Created By A TSLA Short Seller Who Doesn't Own A Tesla | CleanTechnica

He wrote this after seeing my comment in the original article, so I claim part kudos! It amazed me that nobody in the media bothered to check what Tesla had said when they investigated a lot of these cases in the first place - that they have the data showing that every single case they investigated was the result of pressing the wrong pedal. I'm guessing they actually did find this out, but the truth isn't nearly as entertaining so they chose to keep it to themselves.

 

[FrankSG]

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.

Here is an article about valuation allowances from an investor in a different much smaller company called Perceptron Inc. (PRCP) and how it impacted its finances. Credit for this find goes to @Rande .

Valuation allowances - an explanation for investors

The most interesting part is this:

Factors likely to influence management

The official criteria is that the potential benefit from NOLs should stay out of the valuation allowance if it’s more likely than not that the NOLs will be used before they expire. In other words, if the chance of NOLs expiring before being offest against tax is 50% or more, the potential benefit goes into the valuation allowance.

In practice I think managements’ attitude matters a lot. Some managers might set the valuation allowance too low (or not have one), because they are too optimistic, or even to deceive. There’s probably more motivation to avoid increasing the valuation allowance (and decreasing the net Deferred Tax Assets) because it sends a signal that prospects aren’t good. Other managers will want to cover their backs, in which case they might believe that prospects are good, but they’ll assess the tax assets based on objective criteria, mainly recent results and maybe conservative short term expectations, so they don’t look guilty of being too optimistic if future results are not as good as they expect. Management would probably not look great if they reversed the adjustments too often, for example a big increase in the valuation allowance in Q1 followed by a big decrease in Q2. Being reluctant to keep switching, or to change if the change might need to be reversed, could lead to not following the 50% chance rule, in some cases. Perceptron say –

“We assess the realizability of the NOL’s and tax credit carryforwards based on a number of factors including our net operating history, the volatility of our earnings, our accuracy of forecasted earnings for future periods and the general business climate at the end of fiscal 2016. As of June 30, 2016, we have been in a three-year cumulative loss position, therefore, we have determined that it is not more likely than not that any of our deferred tax assets will be realized as benefits in the future. Accordingly, we have established a full valuation allowance against our U.S. net deferred tax assets.” (10-K for 2016)

Sounds like Tesla definitely could lower their valuation allowance in its Q4'19 financials if it wants to. It just needs to be able to prove that the chance of being able to use the NOLs before expiration is more than 50%, which shouldn't be too hard at this point.

 

[RobStark]

"What about the big Teslas?" - you might ask, well the Model S scored 114 units, while the Model X had 89 deliveries, far from the 964 registrations of the Mercedes E300e/de, or the 253 units of the Porsche Cayenne PHEV, but like the Volvo XC90 PHEV, they are playing in one of the most difficult foreign fields, so it would be surprising if they could beat the local heroes, which highlights even further the outstanding performance of the Model 3 in Germany in 2019.

In the brands ranking, BMW (22%, +1%) won its 5th manufacturers title, ahead of Tesla (10%), and the #3 Smart (9%), with the French manufacturer resisting the advances of the #4 Mercedes (8%).

EV Sales: Germany December 2019

 

[Artful Dodger]

(Jan 17 2020) One week later is Chinese New Year, GF3 is still stepping up construction -- 32 min ago

 

[UnknownSoldier]

I wrote about this awhile ago

So what you're saying is wait a year before joining Tesla Network if you plan on it so the vomitors get weeded out.

But then who will join right away if everyone waits a year?

 

[Green Pete]

So what you're saying is wait a year before joining Tesla Network if you plan on it so the vomitors get weeded out.

But then who will join right away if everyone waits a year?

I strongly suspect Tesla will have a rewards program to incentivize early adopters. Free supercharger miles, free rides, discounts on future vehicle purchases, factor tours etc.

 

[Mike Smith]

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.

Remember the leaked email from the Tesla Truck Team last week. It included:

“Greetings again from the Tesla Truck Team! We recently wrapped up a great year, in which we achieved record production and deliveries, GAAP profitability, completed Gigafactory Shanghai ahead of schedule, launched new solar and energy products, and confirmed that we are on track to produce limited volumes of the Tesla Semi in the second half of 2020.”

Everyone assumed they must be talking about the quarterly gaap profit in Q3, but that makes no sense. It wasn't the first gaap profitable quarter - they were also gaap profitable in Q3 2018, so why would that be listed as an accomplishment? And besides if you're talking about a quarterly profit, you'd say that. Saying 'gaap profitability' when describing the year means gaap profitability for the whole year. It seems to me that someone just screwed up and spilled the beans, thinking it was fine because the year was over and not having much knowledge about financial reporting. We don't know who wrote the email but it wasn't Elon.

It certainly jives with this new theory from our Accountant...

It also jives with the mysteriously skyrocketing stock price...

 

[CorneliusXX]

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.

Thanks for the great comment.

When you show the following increase in the Tax Benefit. It's calculated based on the losses made in the period.

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

Wouldn't the reverse be true when Tesla starts making money, that Tesla could only recognise the Tax Benefit to the value of any tax payable in that quarter?

Or is there an accounting rule that which ignores profits in the period and they can just decide profitability is more likely than not from now on, take the whole amount to P&L, and just pay tax on future profits?

 

[Artful Dodger]

Remember the leaked email from the Tesla Truck Team last week. It included:

“Greetings again from the Tesla Truck Team! We recently wrapped up a great year, in which we achieved record production and deliveries, GAAP profitability

There is no possible way the the Tesla Truck Team (if the email was even legitimate, which is in doubt) would have early access to Tesla's full year accounting results. This would be the 2nd most closely held secret in the entire company.

Spoiler: And the 1st is...

when/where the next Gigafactory will be built

Cheers!

 

[⚡️ELECTROMAN⚡️]

Less than 9 mths. Singapore parkade pre-refresh Model S. Video dropped on a Sunday. SP dropped on the Monday.

View attachment 502006

Looks like a pretty typical day to me.

 

[Tslynk67]

The thing about the coronavirus is this.

The virus has been going on for a while. You hear of the virus arriving in other countries. Yet the Chinese never confirmed the virus appearing anywhere else other than Wuhan.

The logical conclusion to infer from this is that it has already spread to other places in China and the government is suppressing the info out of economic concern.

Or you can always believe that they manage to contain all the people. Like they did with the African swine fever.

The airports should be monitoring all flights from China for the virus.

Or maybe it's just not that contagious?

 

[Tslynk67]

A clever mash-up of two current $TSLAQ rants

 

[Tslynk67]

So I could be wrong about this, but if Tesla is able to recognize income from these options as "Other Income", that goes straight into GAAP income at 100% margins. If they get Q4 GAAP income beyond around ~$970m then 2019 will be profitable as a year and February S&P 500 inclusion is possibly secured...

One counter-argument is that if Tesla did this, then the investment bank who underwrote those calls and warrants would sure know about it, and the TSLA share price would have catapulted up starting around end of December, when Tesla potentially sold the calls for around $200 when the TSLA price hit $400. Wait a minute ...

Warning: Not advice, I might be wrong, and even if I'm right, Tesla might have good reasons not to do any of this.

Dumbass question, but would Tesla finance be well aware of this option, is this the kind of things that they would even see, or is it just popping-up as a consequence of a group of smart people chewing the fat on this forum?

I exclude myself from the above statement, of course...

 

[Fact Checking]

The basic idea of the hedge was to make sure Tesla can pay the bond holders if the SP went above $309.

While @The Accountant already addressed the GAAP income possibility, the idea of the hedge was not to be "able to pay the bond holders".

These are convertible notes, which means convertible to shares. If a note holder elects to convert, Tesla has the discretion to pay back purely in newly registered shares. The millions of new shares were registered with the SEC years ago already, already as part of the convertible notes offerings, and Tesla can issue them at zero cost.

The purpose of the hedges is to reduce dilution to shareholders. Nothing more, nothing less. Selling the hedges for cash sooner than the notes mature simply realizes part of the $1.7b dilution protection funds earlier. It doesn't change Tesla's ability to pay back the convertibles with shares.

The cost of selling the hedges before note maturity, at significantly lower value than the max hedging income would be higher dilution effect once the notes mature. But once the hedges reach a market value higher than say 80% of the maximum, it's in the interest of shareholders to convert the hedges to shares, if say Tesla's growth in the next 4 years to 2024 maturity is expected to be higher than 20%: in that case it's better for Tesla to utilize the cash and not store it derivatives.

This will be particularly true once the share price is consistently above $607: the derivatives position will reach its maximum possible value and there will be no economic reason to not convert it to cash immediately. A deep in the money bull spread becomes a cash equivalent.

 

[Tslynk67]

Off Topic ridiculous frivolity

I engaged with TeslaQ Gustavo (why?! lol) on twitter and he brought up “millions in stolen copper”

here is our silly exchange: Scott on Twitter

But, but, but battery-swap! Fwaud!!

 

[Artful Dodger]

Looks like a pretty typical day to me.

It was an issue of discussion here on Apr 22 ie: #43397 and over the prior weekend.

Of course, CNBC didn't miss the opportunity to make a story out of it:

https://finance.yahoo.com/video/heres-why-think-tesla-explosion-124205646.html
(find it yourself on CNBC; I won't give them clicks)

TSLA was down $5 in the Pre-market, then shortzes jumped on it immediately at the Opening. TSLA closed down $13 vs the previous session. That's $2.2B drop in Mrkt Cap for those of you counting:

TL;dr Fires have been used as the trigger to launch bear attacks at least as recently as 9 mths ago. Anything thing to pounce on FUD, the story does not matter. Shortzes only care about getting their price cut.

 

[Tslynk67]

Just a thought, but to be fair why don't both of you change your names? You to Lord V ELECTROMAN and him to electroman the wise? You've both been valuable members for a long time, each with a lot of posts. This way no one's feelings get hurt and we can go back to making fun of shorties!

Or one of you take surgery and become ElectroGirl!

 

[Fact Checking]

If a Call Option is treated as a "derivative" instrument, gains and losses go to the P&L. If it is not a derivative, gains/losses go straight to the balance sheet within the Equity accounts. When Tesla originally incurred costs for the Calls, they deemed the Calls not to be derivatives and charged the costs of the Calls to Equity and not the P&L. So my thinking is that any gain on these Calls would not go to the P&L but rather to the Equity account (specifically the account named: "Additional Paid in Capital").

Could Tesla, in principle, re-classify some of the hedges as Derivatives, recognize the purchase costs of the hedge as expenses and count them against any income from selling them, generating net GAAP income on the P&L sheet?

In particular the $309-$607 5-year bull spread purchased in May of 2019 when the stock price was around $240 was a ridiculously profitable trade, even with all costs included.

(@KarenRei, who is using leveraged bull spreads, might be able to chime in on this.)

Selling them would generate very real income, so it's not "accounting games" but clever financing and hedging that earned them some real cash. (Assuming they can be sold, which they might not be. Tesla might have agreed to non-transferability in exchange of lower hedging costs. Maybe @ReflexFunds has an idea about how financing rounds via convertibles are usually structured? Maybe the convertibles SEC filings contain some clues? We don't even know the counterparties ...)

 

[Tslynk67]

I just noticed its January 18 and still no inventory in the US.
Only 10 vehicles and all are demo's.

All on boats, at the pier or on trucks heading there...

 

[hobbes]

Hoping for your stock to go up and profiting from it when it happens isn't insider trading.

Isn´t what you describe the point of any trade? I would think that the difference here is that it is not an individual profiting personally from insider info but the company itself profiting.