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

[Fact Checking]

Thanks for this. Does that hit their profits though? Not good at accounting.

Paying back debt has no effect on revenues and profitability - only interest paid on debt is accounted as an expense - but the interest on these was really low (partly due to their convertible nature).

So paying these back around March 1 with $920m of cash, regardless of where the stock price is going to be, will be no problem for Tesla, and I believe this will be abundantly clear from the cash flow statement of their Q4 earnings report.

 

[anthonyj]

Yeah, he is kicking out 7% of his people just for the kicks.

No, but he may be wording the letter poorly in order to cook some bears.

 

[Fact Checking]

No, but he may be wording the letter poorly in order to cook some bears.

I don't think Elon cares much about short term volatility one way or another - if he sees reason to act he is acting. In terms of TSLA stock price this is a weakness - in many other regards it's a strength.

I think the removal of the 75D was a clear attempt to further improve S/X margins, and so was the cutting of the referral program.

 

[ReflexFunds]

Volatile year for Tesla headcount, this latest cut takes them back to the level prior to the June-18 cut. It looks like 7k net employees were hired in 2H18.

Tesla employees:
Dec31-17: 37.5k
June-18: 46k
June-18 post cut: 42k
Oct-18: 45k
Dec31-18: 49k
Jan-19 post cut: 46k

The 30% 2018 headcount growth was higher than I expected and hiring in Q4 may have been a big contributor to weaker profits vs my forecasts (together with likely lower AWD mix, higher production costs and less regulatory credit sales).

I'd be surprised if there was huge hiring in Auto COGs in Q4 because production volume didn't increase significantly. So i think extra costs may have been mostly in Service business, SG&A and possibly solar roof manufacturing.

I wonder how many new employees have been hired in China ahead of GF3. GF3 will be a drain of cash as well as P&L costs until it is up and running.

 

[avoigt]

About the letter:

Pos:

• 2018 most successful year in history
• Focus now on cost cutting
• Reducing 7% of workforce while having added 30% last year is still growing the workforce and increasing productivity
• Reiterating that costs need to go down in order to deliver $35K model
• Q4 GAAP Profit again ( 2 Q in a row!)
• Target a tiny profit for Q1 with hard work, luck and efforts
• In May to deliver at least (!) the MR 3
• Many engineering improvements in the coming months

Neg:

• Tesla need to work harder to survive
• Up against massive entrenched competitors
• Profit in Q3 mainly because of high sales of premium M3 in NA
• Less profit in Q4 then in Q3
• Target just a tiny profit in Q1
• Mid Range 3 needs to be delivered to keep demand high enough
• Need to go for lower cost models even more important after incentives drop again in July

So in a nutshell Tesla announced to reduce 23% of the workforce they added last year continue to increase the output in order to improve profitability and reduce costs to roll out the MR and SR in Q2/Q3.

By doing all of that they are pretty sure they hit a profit in Q4 and will in Q1.

For me this are positive news unless you did expect a massive profit in Q4 and Q1 which is now rather a moderate one. Clearly bears will paint their negative picture again but I cannot really find a big negative in the letter other than they did what they did before which is growing and increasing productivity in waves to move to a situation where they can roll out low cost cars for a profit.

Profit expectations will be low after that letter and looking what happened in Q3 that could be helpful to surprise at ER.

 

[Chocochip]

Agreed. Let's not forget his letter to employees right before the end of Q3 where he talked about how they were struggling to try to turn their first sustainable profit: "“We are very close to achieving profitability and proving the naysayers wrong, but, to be certain, we must execute really well tomorrow (Sunday)"

Of course, they didn't just eke out a profit thanks to some one-day push; they blew it entirely out of the water.

Except that when that statement was made before the end of Q3, it wasn't accompanied by a big layoff. We really have no good reason to believe Elon is aware of some major profits but seriously understating the company's financials. Also, how would you think about a CEO that decides to lay off 7% of the company's workforce just to maximise profit? This is about long-term survival and increasing chances of said survival. Elon is fine with firing one or two incompetent employees, but he's not fine laying off thousands in one fell swoop.

 

[Fact Checking]

I happen to agree that it's not advisable for Elon to just say they'll make great profits in Q1 before he actually knows how things turn out, but in this case I believe he isn't just overly cautious. They're letting go of a lot of people as a result of the financials and of what they can see in terms of outlook. This is not great news no matter how you look at it, and it doesn't help to be too positive in these circumstances.

While I agree that it's (obviously) not good news, I disagree regarding the headcount: they grew the headcount by 30% last year alone - so reducing that by 7% is still 23% headcount growth while revenue doubled.

The point I tried to make is that today Elon disclosed most of the bad news I could think of in terms of Q4 and Q1. So once the bad news is realized in the price I still see upsides. Downsides are possible too - macro is still lousy for example, and there was a big drop in tech stocks - which probably has some effect on California centric demand as well.

 

[KarenRei]

About the letter:

Pos:

• 2018 most successful year in history
• Focus now on cost cutting
• Reducing 7% of workforce while having added 30% last year is still growing the workforce and increasing productivity
• Reiterating that costs need to go down in order to deliver $35K model
• Q4 GAAP Profit again ( 2 Q in a row!)
• Target a tiny profit for Q1 with hard work, luck and efforts
• In May to deliver at least (!) the MR 3
• Many engineering improvements in the coming months

Neg:

• Tesla need to work harder to survive
• Up against massive entrenched competitors
• Profit in Q3 mainly because of high sales of premium M3 in NA
• Less profit in Q4 then in Q3
• Target just a tiny profit in Q1
• Mid Range 3 needs to be delivered to keep demand high enough
• Need to go for lower cost models even more important after incentives drop again in July

So in a nutshell Tesla announced to reduce 23% of the workforce they added last year continue to increase the output in order to improve profitability and reduce costs to roll out the MR and SR in Q2/Q3.

By doing all of that they are pretty sure they hit a profit in Q4 and will in Q1.

For me this are positive news unless you did expect a massive profit in Q4 and Q1 which is now rather a moderate one. Clearly bears will paint their negative picture again but I cannot really find a big negative in the letter other than they did what they did before which is growing and increasing productivity in waves to move to a situation where they can roll out low cost cars for a profit.

Profit expectations will be low after that letter and looking what happened in Q3 that could be helpful to surprise at ER.

All I want to hear right now is, "Earnings will be reported on X" where X is a date before 15 feb. :Þ Rolling options just got expensive.

 

[j6Lpi429@3j]

I think this looks like a huge market over-reaction.
Don't forget this letter is for the employees (who will lose jobs) not investors. I get the impression elon knows TSLA is going to be 100% profitable forever now and doesn't care about wall streets view any more. His concern there was not to appear to harsh to people who will be losing their jobs.

Look at it this way: this is the company obsessed with automation, whose CEO fantasizes about a fully automated factory with...obviously very few employees. They have a culture of continual improvement, optimisation and efficiency.
Now, after churning out a lot of cars and seemingly fixing some bug bottlenecks in Q3... they are letting 7% of the workforce go.,

Good.

This is what was supposed to happen. The costs will dome down, because, as ever on elon-time, they are still trying to build 'the machine that builds the machine'.

Just like with the roadster, the S, the X, the model 3... everything is going exactly as elon said it would, albeit maybe slowly. What did people expect? for tesla to continue to keep the same number of employees on a production line forever, even though bottlenecks get eliminated and efficiency is increased. hell no.

This bodes well. A slightly lower profit for Q4 is a bit disappointing, but not much. We used to dream of a time when TSLA would have a single profitable quarter, now 2 are locked in, and it seems this is the new normal.
I'm holding everything.

 

[Fact Checking]

I'd be surprised if there was huge hiring in Auto COGs in Q4 because production volume didn't increase significantly. So i think extra costs may have been mostly in Service business, SG&A and possibly solar roof manufacturing.

I think another possible effect would be a higher drop in Q4 ASP:

• Medium Range might have attracted a lot of $44k orders from people who could barely afford a Tesla and who wanted to take advantage of the $7,500 tax credit,
• The price of Performance was reduced,
• There were possibly a couple of thousand $5,000 "refunds" - the "Fred tax",
• There was also the end of year discount to hundreds of Tesla employees at a ~$11k discount. This lowered ASP as well.

If so then revenue could have been a miss too - maybe even lower than Q3's $6.8b?

 

[NicoV]

Elon, you are really an idiot with words like "hopefully", "great difficulty", "luck", "tiny profit". fuuck off

He has to. Otherwise the shorts rephrase it as ‘Elon promised this’ and ‘Elon promised that’.

 

[shlokavica22]

The point I tried to make is that today Elon disclosed most of the bad news I could think of in terms of Q4 and Q1. So once the bad news is realized in the price I still see upsides. Downsides are possible too - macro is still lousy for example, and there was a big drop in tech stocks - which probably has some effect on California centric demand as well.

That's the tricky part though isn't it? How far and how long it will take to be realized.

 

[watteau]

...they grew the headcount by 30% last year alone - so reducing that by 7% is still 23% headcount growth...

21%, not 23%

 

[Fact Checking]

That's the tricky part though isn't it? How far and how long it will take to be realized.

Heh.

So what I tried to say is that I think we now might know most of the bad news about Q4 and Q1 earnings. (Edit: once those are digested they define a bottom from which there's probably more upsides than downsides.)

And to qualify that a bit: I think in terms of the Q4 earnings report there's now a question about Q4 revenues. If those are lower than the $6.8b in Q3 then we'd probably see another drop and gloom-and-doom FUD continue into Q1.

 

[Fact Checking]

He has to. Otherwise the shorts rephrase it as ‘Elon promised this’ and ‘Elon promised that’.

Not just the shortz, he as the CEO has to be careful about such statements - and he cannot know the results ahead of getting them.

 

[Analyst007]

I do not see any reason why Tesla should go over 350 again in the coming 6 months. This was it. This one letter killed it.

 

[AlexS]

I should point out: "Profit less than Q3" is the market consensus for Q4. What was the average estimate, something like an EPS of $2,24?

2,26 it was rising for few weeks started from 2,09

Maybe this is the case why Elon made this e-mail in such tone, to lower the expectations, and stop analysts to hike the EPS estimates. To have a nice surprise. Probably I am just delusional.

Because you could also write in different tone and then the workforce cut would be seen as very bullish and stock price would have jumped over 360.

 

[Chocochip]

I think the removal of the 75D was a clear attempt to further improve S/X margins, and so was the cutting of the referral program.

This. The layoffs are the third step they took to improve financials, and probably the most unpleasant. Keep in mind we may not be done yet.

 

[shlokavica22]

Heh.

So what I tried to say is that I think now might know most of the bad news about Q4 and Q1 earnings.

And to qualify that a bit: I think in terms of the Q4 earnings report there's now a question about Q4 revenues. If those are lower than the $6.8b in Q3 then we'd probably see another drop and gloom-and-doom FUD continue into Q1.

My thinking exactly. It might not be just a short 10% drop for a day and then quick rise to where we are now.

 

[anthonyj]

I do not see any reason why Tesla should go over 350 again in the coming 6 months. This was it. This one letter killed it.

Lol oh please. It will ping pong between 290 and 360ish a few times during the next 6 months. Time to start playing the game the same way everyone else is

I really think Tesla will surprise us though. Maybe a SpaceX merger, partnership with Mercedes for a van, who knows. I will keep core shares and swing this damn ping pong ball