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

[Artful Dodger]

S&p doesn’t filter out income from non operating activities when considering potential inclusion??

GAAP Profitability is their standard.

 

[FrankSG]

They bought and wrote calls as part of a convertible offering. I believe Microsoft bought a huge position of calls as well in their own stock in the past few years and won big, IIRC.

I believe it's also legal for companies to sell cash covered puts for stock buyback purposes: they either get the stock a bit cheaper, and can keep the options premium.

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

But please keep in mind that my thinking here might be bogus: maybe they cannot recognize this as income, or don't want to give up the hedge.

Btw., I'm wondering who the convertible hedge options writers are. Could it be Morgan Stanley? Or Credit Suisse? Both notoriously bearish and FUDdish.

I love the research you're doing, but I highly doubt they'd make 2019 GAAP profitable this way.

To me it doesn't seem in the company nor the shareholders' best interest to sell these contracts so early, and make S&P 500 inclusion happen three months earlier.

What's the rush? And if their Q4 profits are over $266M and they strongly guide for Q1 to be profitable as well, that anticipation of S&P inclusion after Q1 could be more beneficial than the actual early inclusion?

I own a very small amount of 21 Feb $800 Calls, so it's probably better for me if I'm wrong, but I feel like spreading all this great news out a bit more, and having a slightly more gradual run up to like $1,000 per share in June would be better than a huge double/triple to $1,000-$1,500 per share in Feb from a crazy squeeze and S&P 500 inclusion.

 

[Fact Checking]

You can exercise the option at any time, but I don't know of any reason to exercise before expiration.

Deep in the money options are frequently exercised before expiry, because they are very illiquid most of the time.

The spread can be extreme, and thus if delta is close to 1 and theta almost zero, the theta lost due to the early excercise is smaller than the loss on the spread.

Another consideration is timing: on a good intraday runup you can enter a matching short position at the top of your choosing, locking in the good price, and exercise your deep in the money call which will net out your short position once the shares arrive.

Friday closing price on the other hand is very often a return-to-mean price as liquidity dries up late Friday.

 

[wipster]

Doesn't look that out of hand to me, but everyone has a different perspective on things. It would be nice if you guys would respect my perspective even if you don’t agree. I think it’s pretty selfish that you would expect me to change my name that I have had for almost four years. It’s not my fault that I was allowed to use the name that I use for this and other accounts. Now the mods are telling me I have to change my name. I think that’s pretty unfair and heavy handed. Life’s not always fair so whatever. Not much I can do about it. Like when I was gang raped in prison. I just had to take it.
View attachment 501893

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!

 

[Fact Checking]

What's the rush? And if their Q4 profits are over $266M and they strongly guide for Q1 to be profitable as well, that anticipation of S&P inclusion after Q1 could be more beneficial than the actual early inclusion?

Tesla's motivation wouldn't be the S&P 500 inclusion, but to profitably sell the time value of one leg of their bull call spread.

The benefit is a significant chunk of additional cash, gained 4 years earlier than any hedge payout in 2024. This cash can be used to expand faster.

S&P 500 inclusion is just a happy side effect.

 

[StealthP3D]

And Unintended Donuts

Donuts are the result of uncontrollable acceleration with a skilled and alert driver who is determined not to crash.

Because stepping on the brake doesn't work.

 

[Tyler34]

So I think what @Fact Checking is alluding to is that if Tesla had, say, sold all 60,000 of their $310 Strike CALLS on (again, just say) Fri, Dec 27, 2019 when the Closing SP was $430, then we could estimate the value of those CALLS once more using the Black Scholes Calculator:

View attachment 501874
So the cash payout on Dec 31, 2019 (which IS in 2019Q4 wrt Tesla's Financial Reporting period) would be:

$157.58 * 60,000 * 100 = $945,480,000​

Yes, that's a pool of up to $945 million dollars, from which Tesla could choose (at its discretion) to add to its 'Other Income' line for 2019Q4, with these effects:

• securing a net profit for FY2019 (net profitable over last 4 qtrs, and profitable in the last)
  
• meeting the last outstanding requirement for TSLA to be listed on the S&P 500 (February?)
  
• likely exploding the last of the Shortzes ICE-bergy-bits, triggering a short squeeze.

So yeah, its is kinda a METEOR incoming, spelling DOOM for the DINOSOURS. Or variations thereof. I think that was the jist of the comment that there has been an 'unexplainable' rise in TSLA from $430 at the end of Dec 2019 to $545 early last week. Somebody at a large brokerage knows if Tesla redeemed a large number of those CALL contracts:



Further, Tesla would only redeem enough to make 2019 a profitable year as a whole. FI, if Tesla already knew they had $345M in profits for 2019Q3, then they'd only need to cash in $625M of those CALLS. That would still leave Tesla with over 20,000 CALL contracts at the $310 Strike expiring on Mar 19, 2021. Glorious.

Subtracting known losses for the 1st 3 qtrs of 2019, then adding back in the number of CALLS redeemed also then gives that Brokerage effective early information as to Tesla's likely profitability for Q4.

Knowledge is (TRADING) Power.

Cheers!

By doing this they would go from an effective position of short 600 calls to a position of short 300 calls and short 600 calls. And by doing it, it would push the stock price up, screwing themselves down the line. I don't see this happening unless the thought was to sell the calls on Dec 31st to secure sp500 inclusion then buy them right back on Jan 1st. This would give us a very negative q1 which the shorts would love.

 

[Unpilot]

I own a very small amount of 21 Feb $800 Calls, so it's probably better for me if I'm wrong, but I feel like spreading all this great news out a bit more, and having a slightly more gradual run up to like $1.000 per share in June would be better than a huge double/triple to $1.000-$1.500 per share in Feb from a crazy squeeze and S&P 500 inclusion.

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

 

[FrankSG]

Tesla's motivation wouldn't be the S&P 500 inclusion, but to profitably sell the time value of one leg of their bull call spread.

The benefit is a significant chunk of additional cash, gained 4 years earlier than any hedge payout in 2024. This cash can be used to expand faster.

S&P 500 inclusion is just a happy side effect.

What do they need additional cash for though? The #1 question I would like to ask Tesla on the next conference call is what they are planning to spend all their cash on in the next few years. They're currently sitting on ~$6B, have recently become cash flow positive, and with the Giga 3 and Model Y ramps about to take off in combination with increased CapEx efficiencies, they're only going to accumulate cash faster and faster.

Excluding CapEx, my model has Tesla's cash position increasing by $5-7B by the end of 2020, and by $10-18B by the end of 2021. Even if they're going to spend $1B on CapEx each quarter for the next two years (which seems like a lot), that'd increase their cash position by $1-3B by the end of 2020, and by $2-10B by the end of 2021.

Furthermore, I think it should've been obvious to most people that these call spreads would see a significant further increase in value at the end of Q4'19 when SP was at $430. It just seems to early to sell them.

Something that I think would've made much more sense is to sell part of the lower end of the spread, to buy back the entire higher end of the spread, so that they won't have to dilute as much in 2024.

 

[AZRI11]

I believe Tesla would not have logs, unless they were contacted by owner right after the issue and the owner asked to investigate. I believe when parts are ordered for repair work tesla uploads the logs from your car for analysis. They are covering their asses
I had myself a "reduced

When I had a service appointment with them over a month later on a different subject, I asked them if they could provide details on what happened back then and they said no, the logs only stick around for the latest 2-3 weeks. I forgot the exact length of time.

But if shorts collected rumors about unintended acceleration for several years and then passed on to NHTSA, then no, Tesla will not have this data.

I believe when airbags are deployed the logs uploaded immediately and sent to tesla engineers. Minor accidents have their logs uploaded overnight. When parts are ordered due to an accident tesla uploads logs to cover their butt and to analyze said accident.

 

[M3Rider]

I believe when airbags are deployed the logs uploaded immediately and sent to tesla engineers. Minor accidents have their logs uploaded overnight.

Maybe. Assuming they had an accident. If they didn't, I assume no logs.

 

[Krugerrand]

I think Tesla Battery and Powertrain Investor Day will show Buffett that Tesla doesn't just have a moat, they're on an island in the middle of the ocean.

But not on *my* island.

 

[Fact Checking]

What do they need additional cash for though? The #1 question I would like to ask Tesla on the next conference call is what they are planning to spend all their cash on in the next few years. They're currently sitting on ~$6B, have recently become cash flow positive, and with the Giga 3 and Model Y ramps about to take off in combination with increased CapEx efficiencies, they're only going to accumulate cash faster and faster.

Excluding CapEx, my model has Tesla's cash position increasing by $5-7B by the end of 2020, and by $10-18B by the end of 2021. Even if they're going to spend $1B on CapEx each quarter for the next two years (which seems like a lot), that'd increase their cash position by $1-3B by the end of 2020, and by $2-10B by the end of 2021.

Furthermore, I think it should've been obvious to most people that these call spreads would see a significant further increase in value at the end of Q4'19 when SP was at $430. It just seems to early to sell them.

Something that I think would've made much more sense is to sell part of the lower end of the spread, to buy back the entire higher end of the spread, so that they won't have to dilute as much in 2024.

A good deal of the $5.3b cash and cash equivalents position at the end of the quarter is used as working capital, which capital requirements scale up with production and gets drained during the quarter, until deliveries and customer payments pick up in the final month of the quarter.

This money must finance most of the CoGs of the end of the previous quarter, which arrives with 50-60 days delays, must pay much of the fixed costs and opex of the quarter.

Plus there's always more projects to spend on.

Managing the call spread in some other way, like @KarenRei does, makes sense too, I was asking whether it makes sense to trade them as a call spread instead of a fixed, limited dilution hedge.

 

[FrankSG]

A good deal of the $5.3b cash and cash equivalents position at the end of the quarter is used as working capital, which capital requirements scale up with production and gets drained during the quarter, until deliveries and customer payments pick up in the final month of the quarter.

This money must finance most of the CoGs of the end of the previous quarter, which arrives with 50-60 days delays, must pay much of the fixed costs and opex of the quarter.

You're right, but they did this with half the cash they have now ($2-3B) at the start of 2019, so I don't think they need anywhere close to $5.3B for this. Although Q1'19 probably came super uncomfortably close to not being enough, because of the EU logistics problems.

Also, they should get paid for MiC M3s before they have to pay suppliers, just like with US deliveries. So Giga 3 should add to their cash position, not subtract from it.

 

[ammulder]

I have.

If you're confused about how this model works exactly, please check out my blog. The explanation of this model is somewhere at the very bottom in the last "Financials - AMaaS" section.

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.)

 

[HG Wells]

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

 

[gerebgraus]

Paraphrasing: A friend, who’s a fan of Warren, told me that Buffet has stated he doesn’t like to invest in tech stocks because he doesn’t understand them. When asked about Apple, he stated he now views them as more of a utility company, because of their captive customer base.

Just my recollection. I did Google it and could not find the quote however.

He’s also stated you should not invest in things you don’t understand. Many TSLA shorts are a great example of having a fairly good understanding of finance, balance sheets, steady state companies, but no comprehension of the insane power of hi-tech and hi-growth stocks. They should never short, (nor invest in) such companies.

Bit OT: Buffett is an extremely successful investor. I do prefer investors whose investments do not concentrate on companies harmful for humanity. Junk food, polution, etc. Otherwise Buffett fully owns or major investor in large number of companies directly compete with Tesla, BYD, car dealerships, insurance, fossil fuel (although he has invested in solar as well.) rail road, etc.

 

[Ratanpara]

So how exactly this not insider trading? Seems like if Tesla knows their financials and demand, they can just buy calls or puts based on that information no?

I don’t think Tesla do much financial engineering

but at some point they should, I remember Dell Computers used to sell Put options in old days.

 

[Prunesquallor]

Radical idea, hear me out:
Follow this woman home and take away her keys.

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

Like an E-tron.

 

[damocles11]

Accounting for Derivatives and Hedging is complicated, it's not my area of expertise.
However, this is my opinion....if there is another accountant in this forum that can confirm or correct my answer, please do so.

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").
It's still a Cash gain but it won't be included in profits.
Again - I may be wrong on this.
Here is wording from Tesla's 10k stating that the Calls are not accounted for as Derivatives:

Taken together, the purchase of the convertible note hedges and the sale of the warrants are intended to reduce potential dilution from the conversion of the 2018 Notes and to effectively increase the overall conversion price from $124.52 to $184.48 per share. As these transactions meet certain accounting criteria, the convertible note hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost incurred in connection with the convertible note hedge and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet.
​

I used to be a financial statement auditor for a long time. I never dealt with hedging transactions, so I am also not completely sure, however I also believe this to be the case. My understanding is that Tesla would not get free cash from this, but rather any potential gains from these hedging transactions would be used to offset the shares that they must provide to the noteholders upon conversion, thus preventing further dilution of current stockholders when the notes eventually convert.