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

[FrankSG]

I found Neroden's post about this:

TSLA Market Action: 2018 Investor Roundtable

"So this is my analysis:
-- 170 million shares outstanding + 28 million shares created by short-sellers
-- 42 million shares insiders
-- 51 million shares "strong" institutional holders (Bailie Gifford and the like)
-- 52 million "weak" institutional holders
-- leaves 53 million shares in individual hands -- higher than you might expect. I will guess these are actually mostly pretty hard-core believers, much less likely to sell out than the institutions."​

​

I am going to do an update on this soon-ish, after Q4 holdings have been updated. I'm interested to see how it has changed.

I take back my "ARK is the exception to the rule" claim: there's plenty of long term institutionals, and they make up roughly half of Tesla institutional investors. But during dips these institutional investors are selling a lot more than long term institutional holders are buying, and the rest is being picked up by retail long term investors.

I agree. The big funds move the SP, and retails have limited effect on it.

So the big swings during the large drops were I believe mostly driven by weak institutionals, not by weak retail investors or super short term traders. This is further reinforced by proxy metrics of retail holders, such as Robintrack:

Also completely agree.

All other things equal institutional investors, as a group, reduced their holdings significantly during the big drop of 2019. (Maybe @ReflexFunds has additional insight here.)

Yeah, I think a lot of people (including institutions like Baillie) were disappointed with H1 2019, and I found some long term institutional investors that reduced their positions during that time period (Price T Rowe).

The thing is that the institutions who have been long Tesla for years are not going to sell (much) from a moderate increase in stock price. To invest in Tesla in the 200s or 300s, and hold for years through some of the sh*t from the past few years takes somebody who is very bullish on the company long term. I reckon many of these funds (like us) will not be selling at current SP of ~$500, but will be holding onto the majority of their stake until SP is well into the 1000s.

At the same time, I bet there are a lot of funds just now coming into Tesla, because it seems to have finally turned profitable for good now, and a lot of the bear arguments of the past few years are clearly dissipating. There's also the shift to sustainability in general with the BlackRock announcement.

Just looking at the stock movement over the past few months I think it's obvious that there has been a sentiment shift among institutional investors. You don't get a run up like this without some big buyers.

But the point I'm trying to make is that I think these big buyers are more likely to be in it for the long term because of improving fundamentals and profits, than they are to be making a bet on an outstanding Q4'19 at a SP that is 50% higher than the ATH was just one month ago.

 

[JHoff90]

A very quick note to everyone who attempts such lottery tickets: right now there's an about $20 post-Q4-ER price move priced in both calls and puts, in both directions. This means that almost immediately after earnings the "Implied Volatility Crush" will reduce the value of all options with short term expiries. For the above $750-$800 spread to be profitable the realistic break-even price after earnings is $620-ish - i.e. if you aren't as bullish about the price action anymore you'll still need a good move up to be able to exit the position.

If the TSLA price remains around the current $560 or moves lower then the bull spread almost immediately loses about 60%-70% of its value or more, and the break-even price will get progressively worse as expiry draws closer. Even a mild bounce at around $600 would probably only move the bull spread into break-even for very short periods of time.

I.e. this is a true binary lottery ticket for a decisive break above $600, with few of the usual benefits of bull spreads.

Vanilla $600-$630 long calls or $650-$700 spreads will have a flatter risk profile in terms of allowing an exit strategy around failed $600 break-throughs, at the price of lower leverage - while still being an almost instant complete loss if the price stays flat at $560 or moves lower.

Another viable strategy to leverage up for earnings, if you have dry powder left and are considering to buy 100-ish shares, is to write a cash-covered put contract in the $500-$550 range and use the premium ($15-$35 per share) to buy multiple leveraged lottery ticket long call contracts in the $650-$750 range with a February 21-ish expiry.

If the price stays mostly flat until earnings then there's basically two main outcomes:

• A drop in the price, in which case your call option goes down to zero and the PUT gets exercised at the strike price you chose. You'll have the 100 shares you wanted to buy before earnings anyway (and you'll be sitting on TSLA paper losses), but you'll receive them sometime in February instead. This is the worst-case in terms of asset value.
  
• A rise in the price, in which case your lottery tickets might generate more returns than the 100 shares would have. You'll also keep your cash to use in the future.
• (Note that there are a number of middle-of-the-road outcomes as well, such as the price not dropping to exercise your put but not rising fast enough for the calls to generate returns, and there's weird outcomes too such as the price dropping before earnings. There's no free lunch, but at least you'd partly finance your directional bet from the other side's volatility premium.)

I.e. in the two main primary outcomes you get a "free" lottery ticket from writing the put, if you'd otherwise be willing to buy those shares at today's prices anyway.

The biggest question for me for the Q4 earnings report is how much of the current price levels are bullish sentiment and fair valuation vs. potentially unrealistic expectations for Q4 S&P 500 inclusion or mega-profits.

TL;DR: all of these are very risky option bet lottery tickets and it's not advice.

hi fact checking, could you help me understand a similar explanation for jan 31 $580 calls? wondering if I should swap them out for 2/14’s instead — worried about decay leading up to ER and what price would be implied to reap 3-digit returns on it. thanks kindly for your help in advanced.

 

[Fact Checking]

hi fact checking, could you help me understand a similar explanation for jan 31 $580 calls? wondering if I should swap them out for 2/14’s instead — worried about decay leading up to ER and what price would be implied to reap 3-digit returns on it. thanks kindly for your help in advanced.

I think @KarenRei's explanation in the grandparent comment outlines the problems with the January 31 expiry pretty well: just 2 trading days for the price to move and a lot of incentives for market makers and big options writers to attempt to control the price and the narrative. I think most calls offer a pretty uniform risk/reward profile, I couldn't recommend any particular strikes other than noting that for large market cap equities it usually makes little sense to buy short-term strikes beyond $700-$800 unless your thesis is an overnight gap-up to those price levels or a buyout, etc.

You can try out losses/returns at various strikes and expiries at:

Long call calculator: Purchase call options​

(After choosing a particular contract don't forget to click on 'Manual entry options' and set IV from the current high levels to 45%-50% to model the IV crush after the earnings call.)

Standard warning: not advice and long calls across highly anticipated earnings releases are often a total loss. It's the unexpected results like in Q3'2019 that cause the biggest price movements.

But who knows, Tesla has issued no 2020 guidance yet and there might be ER call surprises as well ...

 

[ggr]

The "more likely than not" refers to 50%+ chance of being able to use the DTAs. So that depends on the expiration date of the DTAs in question. @The Accountant had a nice graph ~100 pages back, but iirc most of Tesla's DTAs don't expire until the late 2020s or even early 2030s. This goes to show how different the rules for accountants/auditors are, because of course there is no way management believes they are not going to be profitable within that time frame.

If they reduce their VA because they believe they'll more likely than not be able to utilize their DTAs, and then in a subsequent quarter this evaluation changes, they simply have to increase their VA again, and book a large tax loss on the P&L in that quarter. Basically the opposite would happen of what happens when they reduce their VA. You ideally don't want this to happen, because just like reducing the VA signals to the market that your expectations of future profits have improved, increasing VA usually signals to the market that your expectations of future profits have worsened.

The benefit of being conservative is not pumping up the stock price too much too quickly (which S&P 500 inclusion this early probably would do), not being under scrutiny of shorts and SEC, and saving up some good news for later in the year if Q4'19 is already very strong in and of itself. This all assumes that Tesla has a choice in all of this. It's entirely possible that a VA reduction from an accounting perspective is simply too early and cannot be reasoned for to auditors, or that a VA reduction at this point is so obvious that Tesla couldn't delay it even if it wanted to.

Yeah, funnily enough a probability decision doesn't really have error bars. It's really a binary decision, and if I was making it, they are likely to use the tax credits some time in the next 18 years.

 

[FrankSG]

Allow me one post on the Coronavirus outbreak (which may save many posts in future).

You can follow along the outbreak by bookmarking this map by Johns Hopkins University which depicts confirmed cases of infection and their location:
Wuhan Coronavirus (2019-nCoV) Global Cases (by Johns Hopkins CSSE)

It is updated once or twice a day using raw data from respectable sources such as WHO, CDC, etc.

Thanks for sharing this.

However, keep in mind that this map only lists spread per country, and in the case of China per province.

In the case of Malaysia, it shows the infections in the capital Kuala Lumpur, but actually the only cases in Malaysia so far have been in Johor Bahru which borders on Singapore. And these cases are all related to the first Chinese national who infected Singapore.

Wuhan virus: Malaysia confirms first 3 cases; all patients related to Chinese national who was Singapore's first case

EDIT: Looks like it does list per city/state for the US as well. Maybe it's just the Malaysian data that's not so precise.

 

[avoigt]

A total of €14,5bn in fines are expected for the top 14 auto manufacturers in Europe in 2021 according to PA consulting.

SUVs are selling better than expected and BEVs don't sell that well in addition to production issues and supply shortages they have with batteries and issues to integrate all the new suppliers in time.

Be it demand or supply they sell less BEVs. Plug Ins may go good for companies like BMW but its still not enough to compensate.

As I don't see the supply issues they have to decrease and software issues rather increase which will temper demand 2021 may look even worse. 2022 will likely cost them even more as I still don't believe that the BEVs they intend to produce will find the demand as consumers will compare to Tesla.

To be fair there are rules in place that enable them to avoid a portion of that fines but it will be still severe.

VW Group €4,5bn
FCA €2,4bn
Ford €1,4bn
Renault-Nissan €1,0bn
Daimler €997m
PSA €928bn
Mazda €877
Hyundai Kia €797m
BMW €754m

https://www2.paconsulting.com/rs/526-HZE-833/images/PA-CO2-Report-2019_2020.pdf

 

[RobStark]

A total of €14,5bn in fines are expected for the top 14 auto manufacturers in Europe in 2021 according to PA consulting.



Mazda €877

Mazda only sells ~240k vehicles per year in Europe so this figure seems extremely high.

Mazda doesn't sell BEV/PHEV but they are supposed to have some of the most efficient ICE in the industry.

 

[Fact Checking]

VW Group €4,5bn
FCA €2,4bn
Ford €1,4bn
Renault-Nissan €1,0bn
Daimler €997m
PSA €928bn

PSA is €928m I suspect.

Interestingly the PSA fines appear to be lower in this estimate than in @Prunesquallor's?

By 2021 the PSA-FCA merger will probably have closed already, so Tesla's EU ZEV credits pool might increase to 2.4+0.93=€3.33b - or $3.6b.

Even if FCA revives the Fiat500e for the "supercredits", that's still a substantial pool for Tesla to deliver into.

 

[FrankSG]

Mazda only sells ~240k vehicles per year in Europe so this figure seems extremely high.

Mazda doesn't sell BEV/PHEV but they are supposed to have some of the most efficient ICE in the industry.

Look at this:

Either we're going to hear some profit warnings during Q4'19 earnings of a lot of manufacturers, or investors in these companies are going to be in for a nasty surprise come Q4'20 earnings.

 

[lklundin]

Here is part three of recent, short videos showing stamping inside GF3:

Edit: It's not much, but through the windows one can catch a glimpse of the actual stamping and materials being moved by the robots...

 

[Thekiwi]

Here is part three of recent, short videos showing stamping inside GF3:

mostly just a big wall with lots of construction noise. I'm waiting for a giant wooden rabbit to appear.

 

[lklundin]

Seems like the protests against Giga 4 may be dissolving amid strong local support and more information from Tesla/Elon :

Anti-Tesla protesters at Giga Berlin throw in the towel after TSLA supporters hold 2nd rally

Not wanting to belittle the information provided by Tesla/Elon Musk, the anti-GF4 protests fell apart mostly after the environmentally concerned demonstrators realized that many participants were from AfD, a right-wing, populist party (in favor of diesel cars and other non-sense).

Ein herber Schlag für die AfD

 

[Green46]

As a long-term investor, I'm not really bothered by the level of institutional vs retail investors.

What is way more important imo is management, vision, engineering talent, risk appetite, and execution levels. These are the crucial factors that then determine what is then easily measured as competitive advantages, moats, earnings, growth, FCF, .....

A few mistakes aside, Tesla has always been a top leader in these crucial aspects. Great results are inevitable with current set-up.

 

[KarenRei]

As an illustrative case, I decided to make a graph comparing 3 different options strategies over the same timeperiod with roughly the same cost basis (you may need to enlarge it to see the details). I've added guidelines and extra colour enhancements to help amplify the differences.

The reason I like call spreads is the shape of the curve. Note the white line for breakeven - it stays low the longest (closer OTM / NTM spreads show this effect even more pronouncedly, and in particular in general spreads for where the upper end and lower end are closer together; when they're far apart, the spread starts to more resemble pure calls). Basically, the theta burn on the upper end of the spread helps offset your theta burn on the lower end. On this front, obviously the 2x $955 calls are the worst, while the 1x $780 call is closer to the spread.

The main downsides to the spreads is how much you profit on near-term price movement. Indeed, I would have profited a lot more on our recent Spiegel's Toothbrush pattern had I been in pure calls - even the 1x $780 call has more potential rise than the 2x $800-1000 spread. But the call spread is the "safer" option; I had no way to know if this spike was going to collapse, and apart from a couple recent lotto calls, I prefer to place a bet on "long-term performance". The other disadvantage is that call spreads also have a capped max profit.

The way to reduce - but not eliminate - both of these disadvantages is to roll spreads up as the stock moves. The further up you go on your spread, the sooner, the less your potential upside. Rolling resets to your initial curve. You can roll in several ways (I do a combination of them):

• Roll to profit: Roll both the upper end and the lower end to higher strikes. Take out the difference as cash (which I put into stock). Decreases leverage.
• Roll to a later strike: Roll both the upper end and the lower end to both higher strikes and a later expiry. Decreases leverage.
• Roll to raise upper-end strikes: Like roll-to-profit, you roll the lower and upper end to higher strikes. With the extra cash, you raise the upper end on some of your existing strikes. This is useful when the stock is spiking quickly. Increases leverage.
• Roll to buy more spreads: Like roll-to-profit, but the profit is put back into buying more spreads. Increases leverage.

 

[jerry33]

Has anyone tried to figure out what it could mean financially for Tesla if they went from selling FSD to not selling it and instead using a subscription model?

One of the great things about owning a Tesla is that although the initial price isn't low, driving it is practically free. Having a subscription model for FSD means that you're paying through the nose forever. (I stopped using Adobe too, there is plenty of other software out there.)

 

[Prunesquallor]

PSA is €928m I suspect.

Interestingly the PSA fines appear to be lower in this estimate than in @Prunesquallor's?

By 2021 the PSA-FCA merger will probably have closed already, so Tesla's EU ZEV credits pool might increase to 2.4+0.93=€3.33b - or $3.6b.

Even if FCA revives the Fiat500e for the "supercredits", that's still a substantial pool for Tesla to deliver into.

The FCA numbers are in the ballpark, but they do not seem to think the pooling with Tesla will have much effect
"Our analysis suggests its pooling agreement with Tesla will have minimal impact on its ability to meet its targets, with PHEV and BEV sales making up around six per cent of its portfolio in Europe by 2021." Six per cent of a 700,000 car fleet (2018 number) is only 42,000 PHEV/BEVs.

I must go back and look at my PSA-FCA numbers again. Something is seriously off.

 

[KarenRei]

can there be some more pre-earnings sale today or tomorrow? I missed it yesterday, but still want to add some pre earnings.

I wouldn't mind another a bit of a sale. Bought a couple contracts in the morning, but I had planned to buy more later in trading... but then the stock almost went green!

Lots of people seem to be in "buy the dip" mode.

 

[Artful Dodger]

Yeah, funnily enough a probability decision doesn't really have error bars. It's really a binary decision, and if I was making it, they are likely to use the tax credits some time in the next 18 years.

Lol, the AIs in the autopilot will be old enough to vote by then. #YANG2040?

Cheers!

 

[avoigt]

PSA is €928m I suspect.

Interestingly the PSA fines appear to be lower in this estimate than in @Prunesquallor's?

By 2021 the PSA-FCA merger will probably have closed already, so Tesla's EU ZEV credits pool might increase to 2.4+0.93=€3.33b - or $3.6b.

Even if FCA revives the Fiat500e for the "supercredits", that's still a substantial pool for Tesla to deliver into.

Yes of course. Got it wrong twice in that list...

Interesting is also that the they predict 2.5 Million BEVs are needed to compensate and as we all know, at least hear at TMC, no one will ever have the batteries to produce them in 2020 so we can expect they will try all tricks to avoid those fines and of course will find ways.

As its a EU rule it will be hard for Germany to change but in order to avoid early layoffs I would not be surprised if we see "compromises".

 

[SO16]

Yes of course. Got it wrong twice in that list...

Interesting is also that the they predict 2.5 Million BEVs are needed to compensate and as we all know, at least hear at TMC, no one will ever have the batteries to produce them in 2020 so we can expect they will try all tricks to avoid those fines and of course will find ways.

As its a EU rule it will be hard for Germany to change but in order to avoid early layoffs I would not be surprised if we see "compromises".

Exactly. I question if many of these fines even come to fruition. With almost every other car company other than Tesla facing fines, I think there will be a lot of pressure to delay those fines. It negatively affects too many companies/workers/voters.