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

[uscbucsfan]

To (over)use the iPhone example... only recently have iPhone sales surpassed Android (Samsung & Co.). But even when Apple was #2 in sales, they were differentiated in a way that made them extremely profitable. Tesla feels very similar, with the caveat that Elon is not all about pure profit... he recognizes companies must be profitable to survive, but they (and that $$$) are a means to an end. And that end is transitioning the world to sustainable transport and energy.

Clarification. Apple passed Samsung, not Android. Andorid as a platform is still the number 1 selling platform in the world. It has a 70% market share, but that spans multiple companies.

 

[scaesare]

Clarification. Apple passed Samsung, not Android. Andorid as a platform is still the number 1 selling platform in the world. It has a 70% market share, but that spans multiple companies.

Ahh, thanks. I admittedly went by memory of a headline. Hopefully it still makes the point... if anything it strengthens the idea that you don't have to dominate the entire market, to be dominant in many aspects...

 

[SOULPEDL]

When the stock was over 400 I think we were in an EV bubble that quickly burst

EV Bubble? IDK...

I look back on that TSLA run-up as meteoric rise induced by newbie Robinhood investors who discovered Diamond Hands (social movement) no experience, and no trading fees. I don't see TSLA "overshooting" quite like that again without some significant new shock factor (like Optimus folding shirts and pants /s ). 420 for a day! But then Shawn Fain will show up once again, while the rotten half of Congress freaks out.

 

[Mengy]

When the stock was over 400 I think we were in an EV bubble that quickly burst

I wonder if we'll experience a humanoid bubble within the next few years? Might be prudent to watch for a day when our PE overshoots itself far too high for it's own good again, like what happened in 2021.

 

[Knightshade]

Unless we are thinking folks shorting the stock are only making 1 cent in profit per share I'm not sure a 1 cent dividend does anything useful.

Ahh, thanks. I admittedly went by memory of a headline. Hopefully it still makes the point... if anything it strengthens the idea that you don't have to dominate the entire market, to be dominant in many aspects...

Yeah but the area Apple is dominant in is... profit margin.

Apple has (very roughly) 20% of phone market share, but 80 percent of all profits from phone sales.

When Tesla was looking very much like it was going that direction we were at ATHs. Now not so much. Some folks in here believe it'll be margins on energy (though I'd expect the same peak and then rapid decline in GM as Tesla scales back margins for volume in service to the mission there too as they scale up-- why WOULDN'T they once they can if they had reason to for cars?), FSD, and/or and robots that get us back there

 

[Artful Dodger]

The more I think about it, the more I love the idea!

If I haven't miscalculated, a one-cent surprise dividend only costs Tesla 32 million.

Believe it or not, the FUD, the short interest, even the phantom shares are not TSLA's biggest problem (and yes, I mean challenges to the SP, not problems for Tesla, who are fine). The biggest problem is Elon's 2018 CEO comp package, and what happens when he exercises his stock options. I've written here exhaustively on the topic, so I'll just summarize here:

• Elon controls ~301M shares via vested stock options; he must exercise b4 exp. 04/28
• Depending on the SP at the time of Excercise, Elon will owe either a huge or a gargantuan income tax bill, payable immediately
• Unless Elon has cash to pay his income taxes, he's forced to sell ~53% of new shares. He also needs cash to pay Tesla the excercise price (EDIT: he could pre-sell older TSLA shares while paying a lower long-term capital gains tax rate to get that cash)
• Selling shares to excercise Elon's 2012 Comp plan took the SP down a hundred bucks in a few days back in Dec 2022. That was just ~10% of the shares granted in the 2018 plan
• a further drag on the SP is that Tesla will owe payroll taxes for Elon's stock compensation (to be reported on the next Qtrly results), which again was large in Q4-2022 (paging @The Accountant for an estimate of payroll taxes due when 2018-plan shares are executed; specifically confirmation that the amnt depends on the SP at time of exercise)

So the situation is that shortzes know Elon has to sell a fistful of shares, the SP will drop precipitously when he does (assisted no doubt by more naked shorting), then they can buy HALF of his new shares (~160M) on the open Market at fire sale prices, thus profiting from their years of perpetual shorting. Boo-yah!

It's an even worse dynamic in this one way, the interests of these shortzes and Elon are somewhat aligned: if the SP is lower, Elon pays less income tax (see the Starlink/FCC hatred for motivation #42 to give less $$ to the Federal Gov't). Bonus: Tesla pays less payroll tax.

Shortzes live in hope for this day (again which is NLT April 2028 or just over 4 years). They can cover, make back all the money they lost since the 5:1 split was announced on Aug 11, 2020. Phantasy League Shortsville.

Tesla is self-funding now, and isn't likely to ever need to go back to the Market to raise capital. Elon/Zach directed Tesla to use cash to pay down debt, thus removing their vulnerability to the Market attacks. This means there's only two sources of legitimate shares (not phantom/naked short shares):

1. Elon's new shares being sold to pay taxes ( perhaps 160M shares to be sold), or
2. Retail shareholders pannick sell (the puffins in the seagulls sights)

Point No. 2 explains the FUD attacks since CT delivery day in Nov 2023. They NEED your shares, and want to get them CHEEP. They're willing to spend big on a FUD campaign to get as many Retail shareholders as possible to pannick sell. And if certain comments on this forum are to be believed, it works (but public forums are rotten with trolls and eggplants).

Questions:
Could the hot air shareholders manage and pay the dividend without batting an eyelid?

Given my assessment above, I see 4 possible scenarios how this could play out:

1. Elon sells his shares on the Open Market; SP tanks; Elon and Tesla pay minimum taxes; Retail 'weak-hands' pannick-sell and lose out on future gains (and a likely rapid recovery). Elon owns more TSLA after all this, but that's not cash for his City on Mars, which will require moar SELLING later, ad nauseum. Shortzes are the BIG WINNERS,
2. Elon finds cash to exercise his shares outside selling TSLA (maybe why the 'G' won't fund rural Starlink, and other Musk Industries?) He still benefits from a lower SP though, so I don't seen him 'pumping' the SP until he's finished exercising his stock options. Big Winner: FATHER TIME since this could take until April 2028 to grind out the cash. (I rate this possibility as the least likely of these 3 options), and
3. Elon let's the shortzes swing (see: "Henry Ford" since Aug 2018 | Arttful Dodger on TMC): Elon threatens to take his ball and go home, the SP tanks, Elon exercises his options on the cheap (and pays cash). SHORTZES get nothing, retail HODLers eventually recover ('weak' hands and Options 'gamers' are rekked), and Tesla pays miniumum payroll taxes. I rate this as a phantasy scenario, but we are taking Elon here...
4. Elon and the Tesla Board create some sort of novel 'Shares-for-Votes' swap for his next CEO comp. plan: Elon said what he cares about is having ~25% of Tesla voting shares to guide the future of AGI at Tesla (a dubious thesis IMO). Would Elon be willing to trade some or all of his 2018 shares to get that? It'd be $10s of Billion$ to shareholders if he did, so may be accepted in a shareholders vote. Result is SHORTZES lose their exit plan, but have no real enforcement action which causes them to close their perpetual shorts/phantom shares. And the Game goes on... but hopefuly the Board learns that they created all these problems with the terms of their 2018 CEO comp. and will NEVER DO IT AGAIN!

Which do I think is most likely? #1. Which scenario would I prefer? #3. What will Elon do? WFKNs!

Thank you in advance (also to and on behalf of Lodger)!

You're Welcome! and Thank-you, too!

Cheers to the longs

P.S. I inserted an edit above that Elon could pre-sell some of his existing shares to obtain the cash he needs to pay income taxes. This could be done as part of a 10b5-1 plan (like other Tesla Executives) with just 90 days notice, and be timed so that are stock options are exercised by April 2028. I truly hope the Board is thinking about exit ramps like this, as I await comments from @mongo

New SEC Insider Trading Rules for Executives Trading in Company Stock | steel-eye.com (Mar 31, 2023)

 

[mongo]

Elon controls 301M shares via vested stock options; he must exercise b4 exp. 04/28

304M (303,960,630) and January 20, 2028.

 

[wtlloyd]

Well, the most ignorant question I can think up to ask is, can Tesla do a stock buyback of Elon's shares, thereby avoiding any market pricing effect, and giving Elon the tax money he will need?

 

[Snerruc]

Has anyone considered that just because Mr Musk has all these opions, he doesn’t have to exercise them? I know, not the usual way to think of them, but thinking outside the box is not unusual for him. Mr Musk has a strong altruistic streak, and might not want to wreck millions of people.

 

[SOULPEDL]

Believe it or not, the FUD, the short interest, even the phantom shares are not TSLA's biggest problem (and yes, I mean challenges to the SP, not problems for Tesla, who are fine). The biggest problem is Elon's 2018 CEO comp package, and what happens when he excercises his shares. I've written here exhaustively on the topic, so I'll just summarize:

• Elon controls 301M shares via vested stock options; he must exercise b4 exp. 04/28
• Depending on the SP at the time of Excercise, Elon will owe either a huge or a gargantuan income tax bill, payable immediately
• Unless Elon has cash to pay his income taxes, he's forced to sell ~53% of shares. He also needs cash to pay Tesla the excercise price
• Selling shares to excercise Elon's 2012 Comp plan took the SP down a hundred bucks in a few days back in Dec 2022. That was just ~10% of the shares granted in the 2018 plan
• a further drag on the SP is that Tesla will owe payroll taxes for Elon's stock compensation (to be reported in the next qtly results), which again was large in 2022 (paging @The Accountant for an estimate of 2018 payroll taxes; specifically confirmation that the amnt depends on the SP at time of exercise)

So the situation that this has created is that shortzes know Elon has a bunch of shares to sell, the SP will drop precipitously when he does, and they can buy HALF of those shares on the open Market at fire sale prices to cover their years of perpentual shortzes.

It's even a worse dynamic in this way: the interests of these shortzes and Elon are somewhat aligned: if the SP is lower, Elon pays less income tax (see the Starlink/FCC hatred for motivation #42 to give less $$ to the Federal Gov't). Tesla pays less payroll tax.

Shortzes live in hope for this day (again which is NLT April 2028 or just over 4 years). They can cover, make back all the money they lost since the 5:1 split was announced on Aug 11, 2020.

This is important. Tesla is self-financing now, and isn't likely to ever need to go back to the Market to raise capital (Elon has used cash to pay down debt to remove Tesla's vulnerability to the Market). This means there's only two sources or legitimate shares (not phantom/naked):

1. Elon's stock grants being sold to pay taxes (~160M shares to be sold), or
2. Retail shareholders (the puffins in the seagulls sights)

Point No. 2 explains the FUD attacks since CT delivery day in Nov 2023. They NEED your shares, and want to get them CHEEP. They're willing to spend big on a FUD campaign to get as many Retail shareholders as possible to pannick sell. And by certain comments on this forum are to be believed, it works (but public forums are rotten with trolls and eggplants).


Given my assessment above, I see 4 possible variations on how this could play out:

1. Elon sells his shares on the Open Market; SP tanks; Elon and Tesla pay minimum taxes; Retail 'weak-hands' pannick-sell and lose out on future gains (and a likely rapid recovery). Elon owns more TSLA after all this, but that's not cash for his City on Mars, which will require moar SELLING later, ad nauseum. Shortzes are the BIG WINNERS,
2. Elon finds cash to exercise his shares outside selling TSLA (maybe why the 'G' won't fund rural Starlink, and other Musk Industries?) He still benefits from a lower SP though, so I don't seen him 'pumping' the SP until he's finished exercising his stock options. BIG WINNER: father time since this could take until April 2028 to grind out the cash. (I rate this possibility as the least likely of these 3 options), and
3. Elon let's the shortzes swing (see: "Henry Ford" since Aug 2018 | Arttful Dodger on TMC): Elon threatens to take his ball and go home, the SP tanks, Elon exercises his options on the cheap (and pays cash). SHORTZES get nothing, retail HODLers eventually recover ('weak' hands and Options 'gamers' are rekked), and Tesla pays miniumum payroll taxes. I rate this as a phantasy scenario, but we are taking Elon here...
4. Elon and the Tesla Board create some sort of novel Shares-for-Votes swap deal for his next CEO comp. plan: Elon said what he cares about it having (what he thinks is) 25% of Tesla voting shares to guide the future of AGI at Tesla (a dubious thesis IMO). Would Elon be willing to trade some or all of his 2018 shares to get that? It'd be $10s of Billion$ to shareholders if he did, so may be accepted in a shareholders vote. Result is SHORTZES lose their exit plan, but have no real enforcement action which causes them to close their perpetual shorts/phantom shares. And the Game goes on... but hopefuly the Board learns that they created all these problems with the terms of their 2018 CEO comp. and will NEVER DO IT AGAIN!

Which do I think is most likely? #1. Which scenario would I prefer? #3. What will Elon do? WFKNs!


You're Welcome! and Thank-you, too!

Cheers to the longs

What's wrong with #4? Couldn't some or all of it get resolved here shortly? I like trades - Options for Voting Power!

 

[Knightshade]

[*]Elon controls 301M shares via vested stock options; he must exercise b4 exp. 04/28

True!

[*]Depending on the SP at the time of Excercise, Elon will owe either a huge or a gargantuan income tax bill, payable immediately

NOT true... cap gains taxes are never "due immediately"

[*]Unless Elon has cash to pay his income taxes, he's forced to sell ~53% of shares. He also needs cash to pay Tesla the excercise price

UNCLEAR- but likely at least PARTLY false.

The highest federal tax bracket is 37%, not 53%. The difference last time was California residency- which Elon gave up circa 2020. SOME of the options would've been "earned" while a CA resident, but lots of them would not. His net rate across the whole package should be significantly less than 53%, though how close to 37% it turns out is unclear.

[*]Selling shares to excercise Elon's 2012 Comp plan took the SP down a hundred bucks in a few days back in Dec 2022. That was just ~10% of the shares granted in the 2018 plan

But it was also done in the dumbest possible way if your concern is the share price during the sale of the shares. There are far more ordered, and less destructive, and harder for MMs to front run, ways to sell shares for tax bill purposes.

This is been covered pretty extensively by Gary Black among others.

So the situation that this has created is that shortzes know Elon has a bunch of shares to sell, the SP will drop precipitously when he does, and they can buy HALF of those shares on the open Market at fire sale prices to cover their years of perpentual shortzes.

Which is a perfect illustration of why Elons selling method last time was so dumb.

 

[unk45]

Agree
Just my opinion based on my experience working on Discounted Cash Flow (DCF) models for over 30 years with Merger & Acquisition (M&A) departments at 3 large global companies. Academia and Wall Street Analysts often arrive at poor DCF valuations (usually too low but sometimes too high) because their inputs (assumptions) are flawed. Academia and Wall Street DCF modelers lack insights into confidential company plans and having never worked in a consumer products company are unable to properly assess 'go to market' strategies, revenue/cost synergies, etc . . . so they often input 'reasonable' numbers based on what they can see. . . .growth will be this, inflation will be that, pricing will be this, market share will be that, etc. These modelers usually face 3 challenges:
1. A lack of visibility into a companies commercial market strategic plans
2. A lack of visibility into the companies current R&D activity and future R&D plans
3. A lack of understanding of synergies: revenue synergies,, talent synergies and cost synergies planned.

When looking to acquire a company (usually a division of a larger company), the M&A department would start with a DCF valuation with only public available information. Once we were given access to the targeted company's Data Room where we had access to confidential financial, marketing, R&D and talent data, the DCF model would often change significantly.

Many on wall street are aware of their disadvantages and that is why you will often hear on earning calls questions such as:
How should I be modeling xyz?
How should I be thinking about abc?

Wall Street uses DCF to arrive at share price targets. For Tesla, this is not an easy task.

After I read your post I went over my stored files. I found >50 merger/aquisition cases in which I have been responsible for some or all the analysis, including DCF, of course. By memory, not exhaustive analysis, I do not recall a single case of pre-due-diligence modeling that came within 25% of post due diligence evaluation. In a tiny proportion, that is to say, three (3) cases, post acquisition results were approximately the actual results after achieved.

With Tesla it is much harder than in most because the rapid evolution and newness of both the company and it's products make conventional analysis pretty useless beyond a quarter or two.

A clearly relevant example is the hand-held-calculator. My former employer is a famous research outfit that has been responsible for many huge technological achievements. They had a contract with an equally famous company that made many innovations. They had developed a hand-held calculator, but had no idea if it might sell so asked my employer to evaluate the market. Conclusion: negligible market because slide rules were more capable and engineers all used them, and only engineers might be customers. The actual results were somewhat different.

yield the
That example is analogous to that of TSLA, which came from nowhere with a product nobody wanted with a too high price anyway. That even continues today with even intelligent people here on TMC thinking the market may be stagnating and Tesla is making bad decisions. Posters here bewail the tragic lack of isight that makes Tesla resist, for example: 1. mass market advertising (subset: Super Bowl), 2. Immediately broaden car and truck offerings because the market is saturated for the existing models. 3. Stop allowing non-Tesla to use Superchargers because Tesla is giving away to the only advantage they have. 4. and more. Those sort of simplistic solutions spawn the 'cleverest gems' (/S) which are: 1. Buy back shares and/or 2. pay dividends now.

All of those self generated FUD are the sort of actions that could almost immediately stop the innovation that has brought such success to date.

All of those are the seemingly reasonable thoughts of people who have only superficially looked at the company and its prospects. None of us actually have the inside information that could inform really wise decisions or likely future developments. The best we can do is educated guesses, but most fo us seems to igore the 'educated' part and then use only WAGs.

The reason why I never prognosticate about future results is because i know I do not have the information to make such efforts useful. It is enough to realize that some countries that have zero Tesla presence today are building infrastructure right now to support mass adoption fo EV and renewables. Were we to examine events today in Indonesia, Brazil, India and other countries with similar situations we would realize that they, by themselves will support huge BEV, energy storage, renewables and grid services right now.

Any notion that Tesla faces any near term market limitations is a reflection of inadequate assessment. As we ar regularly told, Tesla limitations are lack of supply and need for reduced costs. Almost all of us, including Elon and certainly me, are very attracted by 'shiny objects' so keep applauding now inventions. That, not coincidently is exactly how Tesla, Space X etc redefine the actual goals by always thinking what could be, rather than what is. Tesla calls that First Principles, a really good name.

Tomorrow we will hear about Q4 2023 results. Whatever they say, they will not really give us clear insight about 2026 and beyond. I'll listen carefully, but it's very unlikely that a single quarter or year will make me alter anything. On the other hand, if some of those stupid ideas become adopted, I'll know it's time to take my >10 times gains at present prices, sell, and pay the tax bills. I do not expect to sell.

 

[Unpilot]

What say you chartoligsts to the recurring morning climb followed by day long slide?

 

[DarthPierce]

What say you chartoligsts to the recurring morning climb followed by day long slide?

Apparently the MMD got too predictable.

 

[Usain]

Has anyone considered that just because Mr Musk has all these opions, he doesn’t have to exercise them? I know, not the usual way to think of them, but thinking outside the box is not unusual for him. Mr Musk has a strong altruistic streak, and might not want to wreck millions of people.

What do you mean by "wreck millions of people"? Who are these people? Do you mean shareholders?

Elon wants to save the world, not the shareholders.

Elon will definitely exercise his shares precisely because he believes that the things he will do with the money are altruistic.

 

[M|S|M MYP]

Was wondering when the was gonna say something before earnings:

https://www.barrons.com/articles/tesla-ev-stock-valuation-6a2a794c?siteid=yhoof2

In case anyone has been living under a rock for the last 10 years:

 

[KBF]

Was wondering when the was gonna say something before earnings:

https://www.barrons.com/articles/tesla-ev-stock-valuation-6a2a794c?siteid=yhoof2

View attachment 1011530

View attachment 1011529


In case anyone has been living under a rock for the last 10 years:

View attachment 1011533

There are 500 Wall St analysts *worse* than him??

 

[philw1776]

After I read your post I went over my stored files. I found >50 merger/aquisition cases in which I have been responsible for some or all the analysis, including DCF, of course. By memory, not exhaustive analysis, I do not recall a single case of pre-due-diligence modeling that came within 25% of post due diligence evaluation. In a tiny proportion, that is to say, three (3) cases, post acquisition results were approximately the actual results after achieved.

With Tesla it is much harder than in most because the rapid evolution and newness of both the company and it's products make conventional analysis pretty useless beyond a quarter or two.

A clearly relevant example is the hand-held-calculator. My former employer is a famous research outfit that has been responsible for many huge technological achievements. They had a contract with an equally famous company that made many innovations. They had developed a hand-held calculator, but had no idea if it might sell so asked my employer to evaluate the market. Conclusion: negligible market because slide rules were more capable and engineers all used them, and only engineers might be customers. The actual results were somewhat different.

yield the
That example is analogous to that of TSLA, which came from nowhere with a product nobody wanted with a too high price anyway. That even continues today with even intelligent people here on TMC thinking the market may be stagnating and Tesla is making bad decisions. Posters here bewail the tragic lack of isight that makes Tesla resist, for example: 1. mass market advertising (subset: Super Bowl), 2. Immediately broaden car and truck offerings because the market is saturated for the existing models. 3. Stop allowing non-Tesla to use Superchargers because Tesla is giving away to the only advantage they have. 4. and more. Those sort of simplistic solutions spawn the 'cleverest gems' (/S) which are: 1. Buy back shares and/or 2. pay dividends now.

All of those self generated FUD are the sort of actions that could almost immediately stop the innovation that has brought such success to date.

All of those are the seemingly reasonable thoughts of people who have only superficially looked at the company and its prospects. None of us actually have the inside information that could inform really wise decisions or likely future developments. The best we can do is educated guesses, but most fo us seems to igore the 'educated' part and then use only WAGs.

The reason why I never prognosticate about future results is because i know I do not have the information to make such efforts useful. It is enough to realize that some countries that have zero Tesla presence today are building infrastructure right now to support mass adoption fo EV and renewables. Were we to examine events today in Indonesia, Brazil, India and other countries with similar situations we would realize that they, by themselves will support huge BEV, energy storage, renewables and grid services right now.

Any notion that Tesla faces any near term market limitations is a reflection of inadequate assessment. As we ar regularly told, Tesla limitations are lack of supply and need for reduced costs. Almost all of us, including Elon and certainly me, are very attracted by 'shiny objects' so keep applauding now inventions. That, not coincidently is exactly how Tesla, Space X etc redefine the actual goals by always thinking what could be, rather than what is. Tesla calls that First Principles, a really good name.

Tomorrow we will hear about Q4 2023 results. Whatever they say, they will not really give us clear insight about 2026 and beyond. I'll listen carefully, but it's very unlikely that a single quarter or year will make me alter anything. On the other hand, if some of those stupid ideas become adopted, I'll know it's time to take my >10 times gains at present prices, sell, and pay the tax bills. I do not expect to sell.

Another example from the 70s I was a Principal Engineer at DEC, Digital Equipment Corporation, a minicomputer star of that era. Doing Business School nights at Babson I ran an Oracle decision making experiment that was supposed to converge opposing opinions on good results after iterations totally went awry because every single DEC employee I surveyed stuck by their initial response that microprocessors (INTEL 8008 forthcoming) were no threat and had limited low profit future vs mainframes and minicomputers.
Later DEC also eschewed PCs and were late limp entrants to that market. I was chagrined both times.
Supposedly smart people cognizant of the technology at the time can be blind to innovation and make fatally dumb shortsighted business decisions.
This includes this writer when it came to portals like Google as I did not understand the advt revenue model & potential.

 

[Featsbeyond50]

The more I think about it, the more I love the idea!

If I haven't miscalculated, a one-cent surprise dividend only costs Tesla 32 million. Ok, the additional administrative costs will certainly be disproportionately high in the 7 figure range or higher, but it's still at the "Tesla petty cash level". If this exposes the hot air shareholders and drives them to expense or even madness, that would be great! Plus, I could use the payout to treat my SO to a delicious vegetarian ramen with fried tofu and bamboo shoots (small portion to go).

Questions:
Could the hot air shareholders manage and pay the dividend without batting an eyelid? Or would the action lead to the desired result, namely the identification of genuine shares and subsequently the bursting of the hot air shares? Assuming plausibility, who of you has a channel to Robin or Vaibhav and could launch the project?

Thank you in advance (also to and on behalf of Lodger)!

I like the idea too but I don't think Elon or the board see any benefit. Elon actively hated the shorts when they were adversely affecting Tesla's ability to do business. They no longer do so there's no motivating factor to motivate Elon in that direction. He simply can't be bothered with stuff that doesn't move the mission forward.

 

[Artful Dodger]

Well, the most ignorant question I can think up to ask is, can Tesla do a stock buyback of Elon's shares, thereby avoiding any market pricing effect, and giving Elon the tax money he will need?

They'd have to do this at Market (aren't allowed to pay less); so again Game Theory tells us that their interests align with a lower SP.