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The coming Tesla cash cow and the short burn of the century

Discussion in 'TSLA Investor Discussions' started by DaveT, May 4, 2018.

  1. DaveT

    DaveT Searcher of green pastures

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    Alright guys, help me out with my thinking here.

    The key figure in Q1 earnings that was overlooked is how operating expenses are barely increasing.

    Q1 2018 operating expenses = $1.05B

    Compared to a year ago Q1 2017 = $925M

    So in the course of a year, Tesla’s quarterly operating expenses grew just $125M. And this is while going from zero model 3s per week last year to 2000 model 3s per week at end of Q1.

    q1profitloss.jpg

    So it looks like scaling Model 3 production ramp has little do to with operating expenses. The ramp consists of capital expenditures, which affects cash flow and affects cost of revenue as depreciation over x years. The ramp also costs of hiring labor to assemble/oversee production. However, this cost is also included in the cost of revenue and not operating expenses.

    So, to make this simple we can divide Tesla into two parts… but this is just for a thought exercise. Tesla CORE is the part of Tesla that goes into the operating expenses, namely R&D and SG&A. According to Tesla, this is as follows:

    Research and development (“R&D”) expenses consist primarily of personnel costs for our teams in engineering and research, manufacturing engineering and manufacturing test organizations, prototyping expense, contract and professional services and amortized equipment expense.

    Selling, general and administrative (“SG&A”) expenses consist primarily of personnel and facilities costs related to our stores, marketing, sales, executive, finance, human resources, information technology and legal organizations, as well as fees for professional and contract services and litigation settlements.

    Ok, so let’s call this Tesla CORE and this makes up 100% of operating expenses.

    Let’s call the second part of Tesla, Tesla MANUFACTURING. Now Tesla manufacturing consists of all the folks working at the factory assembling cars and overseeing the production.

    (Note: there are other parts of Tesla like Tesla SERVICE and Tesla ENERGY) which would include service center folks, but we won’t talk about that at the moment.)

    So, here’s what’s going on. Model 3 ramps from zero/week to 2000/week in the course of a year (Q1 2017 to Q1 2018), and operating expenses stay relatively flat (increase just 13.5%). What this shows is that in order to ramp Model 3 production, Tesla CORE doesn’t need to increase in size (or just a tiny bit). All the people Tesla is hiring to ramp production of the Model 3 go into Tesla MANUFACTURING and their associated costs are factored in to cost of revenue for auto sales.

    So why is this important?

    As Model 3 revenue scales and gross margins incase, the gross profit will soon offset operating costs. Once that happens, it’s difficult for me to see how Tesla CANNOT become increasingly profitable in quarters to come because gross profit will grow substantially as revenue grows, but operating expenses will increase only a little.

    Even with Model Y ramp in 2010, most all the spending will go into capital expenditures and not operating expenses. The capex gets depreciated over x years under cost of revenue. So, Tesla will remain very profitability even during Model Y ramp.

    The key to Tesla is basically this…

    Tesla has got to reach a point where their gross profit (margin from revenue) can cover their Tesla CORE expenses (which are operating expenses). Currently they are about $1.05B per quarter. In addition to this Tesla needs about $75M per quarter (Tesla has about $150M in interest expense, but about $75M in net loss attributable to non-controlling interests that are added to their profit).

    So Tesla needs about $1.125B per quarter to cover their costs. If they can get there, then they can eek out a profit. But once they get there, as Model 3 revenue and gross profit ramps, the profit will only grow.

    So how and when does Tesla get to a point where they can cover the $1.125B in Tesla CORE expenses (plus interest expense)?

    If Tesla can sell ~25,000 Model S/X cars for roughly $2.5B and with a gross margin of 27%, they can have $625M gross profit.

    And if Tesla can sell 65,000 Model 3 (13 weeks of 5,000 cars production, average selling price of $50k), that would be $3.25B and with a gross margin of 18%, that would be $585M is gross profit.

    So $625M + $585M = $1.21B in gross profit, which will cover the $1.125B in operating expenses and interest expense. Net profit of $85M.

    Now this is just the beginning.

    As production ramps from 5000 to 10000 Model 3s/week, the numbers only get better… and this is all because operating expenses aren’t increasing much while gross profit is rapidly increasing due to rapidly increasing revenue.

    At an average of 7000 Model 3/week (for 13 weeks, average selling price of $47k), here’s what it looks like:

    Revenue = $4.78B
    If gross margin increases to 22%, then gross profit would be $941M.
    Add on the $625M in gross profit from Model S/X.
    That equals $1.566B in gross profit.
    Let’s say operating expenses have increased $100M from Q1 2018 (assuming this quarter is Q1 2019), then operating expenses and interest expense would be $1.225M.
    Net profit is 341M.

    So let’s say Q3 2018 squeeks out a profit, and Q4 2018 Tesla reaching $85M in profit, and Q1 2019 Tesla reaching 341M in profit.

    Now it really gets better.

    Let’s say Tesla reaching 10,000 Model 3s/week by end of 2019 (average selling price $45k, over 12 weeks).
    Revenue would be $5.4B
    If gross margin reaches 25%, then gross profit about be $1.35B.
    Add on the $625M in gross profit from Model S/X.
    That equals $1.975B in gross profit.
    Let’s say operating expenses have increased $100M from Q1 2019, then operating expenses and interest expense would be $1.325M.
    Net profit is 650M.

    650M profit in Q4 2019. That’s not for the year, that’s just for a quarter. So, annual profit run rate would be $2.6B a year.

    Can you imagine if Tesla reported Q4 2018 with $650M profit, and then guided for over $3B in profit in 2020?

    Anyway, case in point.

    We are at a historic turning point in Tesla’s history.

    Most everyone is missing what’s going on.

    Once Tesla is able to cover their operating expenses, it’s welcome to Tesla the cash cow.

    And this turning point is going to happen in Q3 of this year, according to Elon.

    Thus the reason for Elon’s tweet this morning, “short burn of the century coming soon”. Now, I don’t think we can predict exactly when and how the stock will react to things. All I know is that if Tesla continues to execute as they have been doing, Tesla become increasingly profitable every quarter… until they’re making billions of dollars in profit in 2020.

    It’s going to be fun ride.
     
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  2. MikeC

    MikeC Active Member

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    Does it feel like 2013 again to anyone else?

    Tesla has an awesome new car that is not yet understood by the market and the stock is being punished for production delays. Short interest is crazy high. Elon is tweeting ominous threats to shorts. And now a super bullish DaveT megapost. I love it.
     
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  3. DaveT

    DaveT Searcher of green pastures

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    I hate how I can't go back and edit my post on this site.

    Anyway,
    "650M profit in Q4 2019. That’s not for the year, that’s just for a quarter. So, annual profit run rate would be $2.6B a year.

    Can you imagine if Tesla reported Q4 2018 with $650M profit, and then guided for over $3B in profit in 2020?"

    Should obviously be "Can you imagine if Tesla reported Q4 2019 with $650M profit..."
     
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  4. Xenoilphobe

    Xenoilphobe Active Member

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    F'em all. I can't wait to see the roads flooded with Model 3's everywhere. The game is already over, but the Sheepeople continue to drone over to gas station to fill up.. I pass them everyday and smile... not only is my car faster, but while they are busy filling up, they are not congesting the road in front of me...

    Wait until they optimize revenue on the superchargers, and the huge multimedia screen that remains "app-less" - can you say Ching Ching bling bling...

     
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  5. Johann Koeber

    Johann Koeber Active Member

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    DaveT: Your point is well taken.

    Just thinking that as soon as profit is in the books, there will be an incentive to spend more. R&D for new projects are a good example. Tesla has so many ideas in the pipeline. They are clearly in cost reduction mode right now, looking to become profitable, to become a 'real' company.

    Once achieved, the floodgates for financing new projects will be open. Let's call it an investment in the future.
     
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  6. ktrivedi70

    ktrivedi70 Member

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    Correct me if I’m wrong, but I don’t think your model takes into account revenue coming in from the energy storage/generation part of the company. That is increasing at a substantially higher rate than the automotive part. That should give a little extra wiggle room in the short term ( to hit the Q3 and Q4 goals) and then substantially add to the long term numbers.
     
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  7. mongo

    mongo Well-Known Member

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    Along with 2019 predictions:

    What will happend when Karpathy cracks FSD? How much will pre-paid and new upgrades provide in pure 100% profit? 100k cars in 2017 x 50% take rate x 4 k = 200 million. 250k cars in 2018 another 500 million, plus those waiting on a really solid EAP... upwards of a billion dollar adder (not all at once, of course). Then increased take rates going forward...
     
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  8. DaveT

    DaveT Searcher of green pastures

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    Yes, I purposely left out Tesla Energy because it's tough to project. But it looks like it will add profit, and increasingly so.
     
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  9. DaveT

    DaveT Searcher of green pastures

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    Yeah, I agree. Elon will find endless ways to spend more to birth new products and businesses. I really like how he's created Tesla AI as not just a division under Auto but something separate that can contribute to all areas of Tesla. Similar to how Tesla Glass seems to be it's own group. Tesla Energy, Tesla Auto, etc... all these different groups can collaborate to create some introducing new products for the future.
     
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  10. DaveT

    DaveT Searcher of green pastures

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    Yeah once Tesla has FSD then they should be able to increase margin. However, I'm skeptical as to the timeline. I don't see FSD happening until 2021-2022.

    Also, I highly doubt the take rate is 50% right now... maybe more like 5-10%.
     
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  11. mongo

    mongo Well-Known Member

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    My 50% was people upgrading, not current owners who pre paid. If it hits in 2021 that could be one million plus cars on the road that could upgrade... 30% update take rate would be 1.2 billion profit. Less impressive compared to their revenue at that time, but a nice bump.
     
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  12. DaveT

    DaveT Searcher of green pastures

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    Thanks for explaining. Makes sense.
     
  13. RedMS

    RedMS Member

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    @DaveT I hope (well, I believe) you are right because I’m putting all powder into TSLA. Smart not to diversify? Perhaps not, but no risk no reward ;)
     
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  14. Matias

    Matias Active Member

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    #14 Matias, May 4, 2018
    Last edited: May 4, 2018
    Thanks you for a very interesting post. I think the uncertainty is about the success of the Model 3 manufacturing. Meaning its gross margin.
     
  15. UnknownSoldier

    UnknownSoldier Unknown Member

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    I'm fairly certain if that if Elon had $3 billion in quarterly revenue he could figure out a way to spend $4 billion that quarter. He's got a lot of stuff he wants to do. Re-investing into Tesla alone to build more Gigafactories, launch Model Y, Semi, Roadster 2, pickup, etc. would easily eat up many more billions alone, let alone expanding Energy and Solar. Let's also not forget Elon's long term goal of financing a Mars colony, that's easily $100 billion in spending if Elon wanted to do it. So counting money now when it comes to Tesla seems counterproductive. The money isn't being made so Elon can be rich, it's being made so Elon can spend it trying to save our species from extinction.
     
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  16. Matias

    Matias Active Member

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    I agree with you except the Mars colony : )
    Colonization of Mars is not Tesla’s business division :)
     
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  17. Singer3000

    Singer3000 Member

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    Hi Dave,

    I agree that at this point the story is almost all about operating leverage and Q1 was hence quietly encouraging.

    No one sensible doubts that the M3 ramp will at some point be completed. Even if the shorts’ dream of a further delay and a forced capital raise comes to pass, this still doesn’t do much to dent long term EPS if you believe in underlying demand and gross margin assumptions anywhere close to guidance. Demand should speak for itself and the path for gross margin seems clear enough to me, with excellent track record on past models giving me confidence that +20% will be achieved, more or less as guided.

    So we’re left with operating leverage. Seems to me that management have decided it’s time to prove their capability here and let the bottom line catch up with the top for two quarters, at the expense of a delay in MY, Semi etc... This would allow further capital raises to accelerate growth from a position of stock price strength and with an improved credit rating. No doubt this wasn’t Plan A but needs must. Once they are cashflow positive, there’s a strong product pipeline from past R&D ready to be exploited, potentially at a far superior ROI if the boasts of future manufacturing efficiency are even halfway true.

    I wasn’t a huge fan of Elon’s attitude on the call but all the same, I find the high level of short interest a mystery. The risks from being short at this point just seem too high for the potential payoff, given the logic of your maths above. Once we set aside doubts on Demand and Gross Margin, the bet seems to be that operating leverage is impossible, due to some combination of tricky R&D accounting and escalating service centre/supercharger costs. We should have a fair idea in only 3 months who is right.
     
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  18. Beckler

    Beckler Member

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    It seems like he's telling us something on Twitter tho, almost like he knows something we don't. Oh wait he does. :D Anyway feels like twitter inside trading - hope SEC not on here.
     
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  19. dw4ngg

    dw4ngg Member

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    I would just focus on operating margin and cash flow from opex.

    Even if Tesla spends as much as they earn, they will still be earning, and capex is depreciated over time anyway. Any future capex without cap raise that results in lower GAAP income is still a positive in my eyes.

    Bears are literally betting on timing of events, M3 demand or some form of external sabotage.. for the most part.
     
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  20. Reciprocity

    Reciprocity Active Member

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    Model Y and pickup are the final nails in the coffin of competitors. These are the two most popular vehicle types in the US and also very popular world wide. Pickups make up the lastest number of vehicles $50k and above. I expect Tesla to aggressively invest until these goals are meet because they have a two fold effect on the mission. They are very popular/profitable and they will put pressure on the competition to react with EVs the way the S3X have.

    China and Europe expansions could be funded with profits, partnerships like Panasonic and even some government incentives. Because they will be replicating much of what will have been proven successful in Fremont and Nevada. Much of the capex costs are due when equipment is up and running. Funding is much easier if you are just copying proven assets when compared to the unknown of model 3s initial ramp. Would love to see both Europe and China announced at the same time.
     
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