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

[Tslynk67]

My take, today's massive changes were a hyper-growth move again:

• Price models of all the competitors are now in disarray: E-Tron, I-Pace, Taycan all need to reduce prices. Specs comparison got even worse: OTA range and power upgrade was a masterstroke.
• The income from the physical store selling can be invested,
• the price drops and new trims will utilize all manufacturing supply, allowing small price increases and bundling moves when it creates a bottleneck,
• I expect Tesla to still stay Free Cash Flow positive the whole time, (@ReflexFunds, do you agree?),
• lots of discretionary capex, which allows FCF management and continued deleveraging and capital structure improvements,
• the current Model 3 VIN allocations are crazy: 109.2k VINs in Q1 so far, which with the 85% estimate suggests Q1 production of 92.8k Model 3's (!!). With the SR I can see that rise further...
• GAAP profits don't matter to growth as long as Tesla is FCF positive.
• After tomorrow's $920m notes repayment the next really big debt repayment will only be due in March 2021, in two years. Tesla is free to grow.
• FSD is here! This might improve margins: NoA, Summon and Autopark now part of FSD. Costs $8k now what used to be $5k EAP.

Stock price is hard to predict - with GAAP profit guidance further lowered but revenue and growth should go up. Buckle up in any case.

All the right moves to grow quickly yet safely, IMO.

Not advice.

Couldn't they just sell a load of ZV credits to get $0.01 in profit?

 

[schonelucht]

Indeed, we are the owners of the company.

They also didn't release the transcript for the Gigafactory reveal. They should, but somehow they get away with releasing material financial information in private to a hodgepodge of automotive reporters. Highly annoying.

 

[Fact Checking]

I think their talk about 350k+ 2019 production is a bit of a bluster, possibly even a cover up. They are not going to spend that cap ex if the excess demand is at the bottom price and that is where it would be.

Huh? There's no extra capex of any significance. They are already at demonstrated 7k/week at both Fremont and GF1.

So they'll do 364k Model 3's in 2019 if they just keep constant at last December's rate ...

But there's more:

• There's a new 'football field sized Grohmann machine' at the Gigafactory, making SR battery packs. So 7k/week is the MR/LR capacity, SR capacity comes on top of it.
• The simplifications in the SR interior likely allow faster assembly at Fremont. As long as the body shop and the paint shop can hold up they can probably go well beyond 7k/week.
• "Evercore ISI", an independent automotive expert firm audited the Fremont factory last year and found that that probably less than $100m of minimal capex is required to get Fremont up to close to 10k/week production rates, but certainly to the 8k-9k/week range.

All of this puts us firmly within Model 3 production capacity of 10k/week in the U.S. only. The China Gigafactory might start scaling up in September, which might add another 3k/week by the end of the year or early next year.

All of this adds up to 400k-500k Model 3's made in 2019, maybe more with a bit of luck.

Not bluster, at all.

 

[schonelucht]

I also expected one of the term loans to be ended, but they seem to be kicking it forward a few months at a time, now expiring April 2019.

Any guess on why these very short term extensions? IIRC it was by one month first to January and then 3 months to April.

 

[Fact Checking]

Couldn't they just sell a load of ZV credits to get $0.01 in profit?

They could, but why bother? ZEV credits will probably go up in value in the future, so they are a good rainy day fund.

Q1 is not a rainy day: GAAP profits are a secondary concern now, cash margins and being cash flow positive (when taking vehicles in transit into account) is the important feature to maximize organic growth and to deleverage the balance sheet, IMHO.

 

[Fact Checking]

Any guess on why these very short term extensions? IIRC it was by one month first to January and then 3 months to April.

I'd guess it was a combination of several factors:

• worse than expected interest rates in 2018 in a rising rates Fed environment,
• combined with the increasing credit risk Tesla was seen to be in 2018,
• combined with Tesla's high cash generation rate and deleveraging effort: Tesla knew they'd deleverage (deactivate credit lines, pay off loans), but they didn't know the timing,
• combined with large error bars on 2019 production levels: a bigger production and delivery pipeline might require bigger credit lines to buffer the big quarterly swings in liquidity.

This unfavorable environment and the uncertainties of the 2019 economy caused Tesla to roll forward loan agreements with relatively short duration.

Now that the Fed is more dovish and Tesla is robustly FCFP I'd expect much better deals, plus they are now expanding more aggressively so they could do larger credit lines at even better rates.

I'd expect them to use free cash for expansion capex, at this point it makes a lot of sense to keep these credit lines open.

 

[srius]

It makes Q2 (i.e. August/September-ish) inclusion much more probable and Q1 (June) inclusion a low probability event, which would require $360m+ Q1 profits, which very likely won't happen.

I have to eat crow for my "90%+ May/June S&P 500 inclusion" expectation a couple of months ago.

Does the expected Q1 loss refer to GAAP or non-GAAP? It seems to be GAAP as various one-time charges are the main contributors for the expected loss. But most tech companies use non-GAAP figures when talking about profitability.

 

[Fact Checking]

Does the expected Q1 loss refer to GAAP or non-GAAP? It seems to be GAAP as various one-time charges are the main contributors for the expected loss. But most tech companies use non-GAAP figures when talking about profitability.

S&P 500 inclusion requires GAAP profits I believe.

 

[Singer3000]

The news yesterday was in my view quite wonderful and will prove in time to be a key milestone in the company's history. Far from being a negative indicator on demand, the lower price points and larger addressable market puts armour plating on Tesla's ability to withstand the fire of a global recession.

I see there's some healthy skepticism on what the launch of SR might mean for margins. To that I can only refer to the track record. A short while back I re-read the transcripts of every conference call ever. Of all the various pieces of financial and operational guidance made by management over the years, gross margins are the one that stand out as being most accurately forecast by management (both in terms of level and timing). Only four weeks ago Tesla reaffirmed a gross margin target of "25% non-GAAP for Model 3 sometime in 2019", even after launching SR. The sensible conclusion would be to take that statement as the base case:

The note of caution is that in the leaked email to sales staff last night, Elon implied that the decision to close the physical sales network was inextricably linked with the ability to reduce the price of their vehicles. This is interesting as it implies that the gross margin target may slip but greater operating leverage is targeted to compensate for it:

Of course one hopes that actually what we'll see is the maintenance of the hitherto healthy gross margins AND improved leverage of SG&A expenses. The Q1 letter and call will be fascinating to see in what ways we should be recalibrating our assumptions on volume, gross margins and opex.

 

[Artful Dodger]

Same deal with the white interior, only I'm going to say 40% since I think a lot of people will not want straight black.

There's no indication that the while interior will be available for either the Std or the Partial-PUP interiors. Futher, the PUP interior is definately NOT going to be available on either the SR or the SR+ and 'White' has been a futher upgrade to 'PUP'.

So knock off ~$400 on your estimate, which takes the SR's ASP back to ~$37K. I think that's a good estimate, and a level at which it will be profitable. Remember, 2 different groups (Munro, German Industry) have previously est'd the M3 cost to build at around $28K, and that's before these savings on materials and equipment with the SR.

Finally, Tesla now owns some of the trucking capacity it uses, so at least some of the profit embedded in that $1K Delivery+Documentation fee will stick to them, and that's over the entire S3X fleet, not just the SR.

So I'm gonna guess reaching a 25% profit margin on the M3 SR will happen by the end of 2019 (w.10K/wk production). Then it'll get even better in 2020 as GF3/Shanghai ramps up production.

Cheers!

 

[Fact Checking]

So I'm gonna guess reaching a 25% profit margin on the M3 SR will happen by the end of 2019 (w.10K/wk production).

Another important point: the 25% is the "GAAP margin" that includes fictive non-cash costs like stock compensation, amortization/depreciation, over-cautious warranty reserves and some over-cautious deferred revenue as well for things like connectivity plans.

The "cash margin" is probably already significantly positive for even the $35,000 base trim, today.

@ReflexFunds might have better estimates, but I think +$3k of cash on every $35k delivery is realistic even today, and production costs will eventually reach the $27k cost Sandy Munro is estimating, with $8k cash generated by every $35k Model 3 sold.

Every new Tesla also generates continuous additional revenue and income, not included in the cash margin:

• Supercharger income,
• deferred AutoPilot purchases,
• maintenance service plans,
• body shop income: accidents and small mishaps do happen,
• later service income once out of warranty. ICE carmakers and dealers generate significant income from a mature fleet where a lot of cars are out of warranty. Tesla is still growing this part of their business.
• financing income: a $35k bought via a loan will probably give Tesla another $1k-$2k income.

I.e. there's no real risk with the introduction of the SR, there's no "race" to reach positive margins - every Tesla sold already improves Tesla's cash flow.

This is a really important point to keep in mind I believe.

 

[Tslynk67]

As annoying as it's going to be for the next couple of months with the media claiming that there's no demand every time Tesla lowers their price..……….now that we finally have arrived to the 35k model there shouldn't be anymore price drops for a very long time. So tired of that narrative.

It is pretty disappointing to hear Musk say Tesla definitely won't be profitable in Q1 and only likely profitable in Q2. Only 4-5 months ago on the Q3 earnings, Musk was so confident that every quarter going forward was going to be profitable. It's pretty hard for me to understand how Q2 will not 100% be a profitable quarter.

Also, Musk might be waiting until Q1 earnings to talk about 35k Model 3 margin but sure would have been nice to hear him say they're at least break even right now

I hit disagree on this because although I'm also disappointed with that, appeasing the short-term desires of us shareholders is nothing compared to the importance of The Mission in the longer term.

Patience.

 

[lklundin]

Is this post a joke?

Yeah, I REALLY love the personal connection I develop with a car salesman as he tries to scam me for a rustproof undercoating I don’t need.

So this must be you:

 

[phil0909]

How about:

Every participant in this forum place an order, amounting to several thousand orders, for the new Roadster.

Founders Edition, that is.

That oughta help.

kthxbye

It would not help. Orders do not produce profit. Sales do.

 

[ReflexFunds]

I'm quite sure it is being sold for a marginal profit. I believe the "new pack line" is up and running, which was stated to be needed to sell the $35k model at a profit. I don't think the gross profit margin on the base model is anywhere near the 25% targeted at this point, though. If you have lower fixed costs (fewer salespeople) you can afford lower profit margins... though they're still not desirable.

Elon previously said he eventually targets $30k cost for the $35k base model which suggests 14.3% margin on the base. I previously estimated this would correspond to 30% average gross margin for model 3 factoring in my estimated mix of ranges and options. Now it look like Tesla are planning to trade some lower gross margin for lower SG&A, so maybe a $30k base production cost will correspond to closer to 25% average gross margin on the current pricing structure.

I think the base model almost certainly now has a positive gross margin, and cash flow will be significantly higher given non cash depreciation and deferred revenue & warranty expense which are initially non cash.

 

[Carl Raymond]

Yes

Perhaps, but unlikely, says @factchecking

Only relevant if they would have hit an annual profit at end of Q1, which was only ever an outside chance.

 

[PaulRocket]

Vincent on Twitter
According to this tweet, Model S and X Performance versions saw a price drop of 40 and 50k in China. I think they are trying to sell as many as possible before the refresh in April.

 

[Tslynk67]

So...WTF was Tusk all about?

Elephant in the room, I think.

 

[Artful Dodger]

Do you have a list of all Tesla debts upcoming handy?

Tesla Inc Total Long Term Debt (Quarterly) (TSLA)

 

[Tslynk67]

Fixed (need to be more careful with image copying)

You need to wait until the spinner on the top right of the page has stopped, then submit. Even then the images often don't upload and you need to retry several times. Seems to be a new feature fo 2019...