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

[neroden]

See but this is what I was curious about when I came to this forum.


Everything the majors have mastered, from supply chain vs vertically integrated, to freaking braking, to mass production, to panel alignment, to quality control, to not releasing buggy features:


Your (not you specifically, general you) response: Oh Tesla will figure it out super soon, don't be ridiculous



Flip it around


Buggy App to unlock doors that Tesla uses:


Your response: THE MAJORS WILL NEVER CATCH UP!!!!!!


***


It is weird to me, a lot of people on this forum seem like very intelligent successful people, but how do you not see how biased this view is?

Still in denial? You seem to be deflecting, engaging in whataboutism, and not responding to my points.

It does not matter how screwed up Tesla is as long as they are better than gas cars, which they are. Every other electric car will sell as many as they produce too -- Ioniq, Bolt, Leaf, etc....-- but they just won't produce many; they refuse to. So they leave bulk production to Tesla. For years.

 

[mongo]

Still in denial? You seem to be deflecting, engaging in whataboutism, and not responding to my points.

It does not matter how screwed up Tesla is as long as they are better than gas cars, which they are. Every other electric car will sell as many as they produce too -- Ioniq, Bolt, Leaf, etc....-- but they just won't produce many; they refuse to. So they leave bulk production to Tesla. For years.

Elon mentioned previously that he didn't understand why assembly lines run so slow, why they aren't limited by friction through the air.

It may be because no other car company has such a high demand for their vehicles to need that level of output.

Every other OEM has dealer lots filled with cars you can drive home today. Running their lines faster would just add to the 60+ day surplus of vehicles.

Tesla has delivery centers with one week turn around on deliveries and can barely keep car around for demos/ loaners. (Plus a negative 100 to 600 day backlog depending on model)

So (at least for the next couple years) Tesla can sell anything they produce as fast as they can produce it. Efficiency leading to greater margin.

Others have peaked, if they run their lines faster, it just means more weeks of plant shut down. They are not going to shift the demand needle via factory efficiency reducing sales price enough to cover the production increase.

 

[Mario Kadastik]

I’m expecting a squeeze when the China gf and funding are announced

I doubt that would lead to any significant price action that triggers margin calling on shorts to actually start a squeeze. I think this will just be a steady rise in the shareprice like we’ve seen before. For a squeeze a substantial rise triggering an exodus (forced and voluntary) of shorts is needed. I don’t see the GF in china being such. Actually disproving the short thesis through profitability in conjunction with substantial share price upwards pressure from S&P inclusion however does provide such a state perfectly.

 

[Krugerrand]

I too love innovation, but i also love working brakes and a car that doesnt go to the service station every 40 miles


I think you mistake novelty with value

Disingenuous at best.

 

[bhzmark]

Did the short squeeze start yet? Asking for a friend

Odd comment. It's only to your benefit to share a persuasive short thesis to start the unraveling sooner rather than later. SO why not simply start posting the facts and evidence and reasons that support your short thesis?

Why engage in playground insults? Show your math.

 

[NicoV]

I’m trying to figure out if the addition to the S&P 500 could be the trigger of the mother of al short squeezes.
According to Passive investing is changing the stock market in ways investors don’t realize passive funds own 17% of each S&P 500 company. If Tesla is added to the S&P 500, those passive funds will cause buying pressure in a short period of 17% of the Tesla shares. We known what the buying pressure of 5% of Tencent did some time ago, and that was over a longer period. There may not even be enough parties (weak longs) willing to sell their shares to reach that 17%.

 

[bhzmark]

There may not even be enough parties (weak longs) willing to sell their shares to reach that 17%.

Just have to be more shorts to sell naked. Helping the indexers get in at a reasonable price -- that's so nice of them.

 

[winfield100]

I’m trying to figure out if the addition to the S&P 500 could be the trigger of the mother of al short squeezes.
According to Passive investing is changing the stock market in ways investors don’t realize passive funds own 17% of each S&P 500 company. If Tesla is added to the S&P 500, those passive funds will cause buying pressure in a short period of 17% of the Tesla shares. We known what the buying pressure of 5% of Tencent did some time ago, and that was over a longer period. There may not even be enough parties (weak longs) willing to sell their shares to reach that 17%.

Well, it's not much, BUT if you look at the A/D line (accumulation/Distribution), there have been a net ~200 million shares bought at slightly higher prices than sold at lower prices, to me indicating upward pressures, so something is keeping lid on upwards rise in prices it seems, since the "Speigel bottom" of Nov 2016
im accumulating a few shares meself

 

[smorgasbord]

Elon mentioned previously that he didn't understand why assembly lines run so slow, why they aren't limited by friction through the air.

It may be because no other car company has such a high demand for their vehicles to need that level of output....

Others have peaked, if they run their lines faster, it just means more weeks of plant shut down. They are not going to shift the demand needle via factory efficiency reducing sales price enough to cover the production increase.

Um, you might want to research the Ford F-150. For instance, Making the Trucks Run on Time: A Visit with Ford’s F-150 Launch Manager .

one truck comes off the line every 53 seconds, in one of 650,000 buildable combinations. Truck bodies ride assembly lines, roller-coaster style, up several stories and are then lowered by robots to meet their frames below in a satisfying (and surprisingly quiet) mashup.

or

“We build a lot of trucks. A lot of trucks. The cab that we’re building here is also built at Kentucky truck plant, Kansas City and Ohio assembly plant. We’re talking nearly a million cabs a year, and I am the lead launch manager.

 

[mongo]

Um, you might want to research the Ford F-150. For instance, Making the Trucks Run on Time: A Visit with Ford’s F-150 Launch Manager .

or

“We build a lot of trucks. A lot of trucks. The cab that we’re building here is also built at Kentucky truck plant, Kansas City and Ohio assembly plant. We’re talking nearly a million cabs a year, and I am the lead launch manager.

So across the 4 plants mentioned, Ford makes sub one million cabs a year. F series sales (including 150, 250, 350, and 450) in 2017 were 897k. Meaning the average plant is only running at a sub 250k rate (from Forbes, Dearborn and Kansas total about 60k/ month). Tesla is shooting for a 600k rate from one plant (500k 3 and 100k S/X) (two plants total including GF1). And that is frame and assembly (plus motors and battery packs), not just cab and supplied frame.

I will walk back the demand as basis part, Tesla could meet demand with more, slower, lines, but maximizing the production from the least lines maximizes profit.

 

[neroden]

I’m trying to figure out if the addition to the S&P 500 could be the trigger of the mother of al short squeezes.
According to Passive investing is changing the stock market in ways investors don’t realize passive funds own 17% of each S&P 500 company. If Tesla is added to the S&P 500, those passive funds will cause buying pressure in a short period of 17% of the Tesla shares. We known what the buying pressure of 5% of Tencent did some time ago, and that was over a longer period. There may not even be enough parties (weak longs) willing to sell their shares to reach that 17%.

Oh, wow, that's a lot higher than I would have calculated: just looking at the most famous S&P funds I only got to 2.3%. There must be a lot of tiny S&P funds.


However, reading the article carefully, that's 17% in all passive funds. Some passive funds are (for example) NASDAQ or Russell 2000 or "Total Stock Market" trackers, and those *already* own TSLA. (Vanguard passive funds are already some of the largest Tesla shareholders.)

They also said that 1/7 of 4.2 trillion in passive ETFs was in S&P 500 ETFs specifically, which is a flat $600 million. I'd say about that much is in passive mutual funds (not quite the same as ETFs), so I'd guess 1.2 trillion. "Closet indexers" might double that.

This is a change from my estimate of 0.5 trillion in ETFs/index funds (maybe 1.1 trillion including closet indexers). It's twice as high. So when TSLA is added to the S&P, instead of 2.3-4.6% of TSLA being bought, it'll be 5% - 10% based on these numbers.

There will be enough weak longs to supply that; I suspect it'll be mostly quants and instititional investors selling out.

 

[DaveT]

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.

View attachment 298785

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 2019 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.

Well, we know that Elon jumped the gun and was wrong with his timing on the short squeeze.

But re-reading my initial post on this thread, looks like we are headed into some good times.

 

[generalenthu]

It's friggin about time.

 

[DaveT]

Just wanted to update this thread since Tesla reported Q3 earnings this afternoon.

So, the key figures are the following:

1. Revenue for auto sales is $5.88B in Q3 (compared to $3.1B in Q2)

2. Gross profit is $1.5B in Q3 (compared to $619M in Q2)

3. Total Operating Expenses is $1.1B in Q3 (compared to $1.24B in Q2)

4. Net income (GAAP) is $311M in Q3 (compared to -$717M in Q2)

So, here’s what happened. (Note: read the first post in this thread where I lay out this argument more in full)

Basically, Tesla’s operating expenses are not increasing that much, even though they’re ramping Model 3 production. In Q3 2017 (they basically didn’t produce much if any Model 3s), they’re operating expenses were $984M. And now in Q3 2018, they produced 53,000 Model 3s but they’re operating expenses only increased to $1.1B. Basically it went up only 10%.

How is this possible?

This is because production workers all are expensed under cost of revenue and not under operating expenses.

So, in other words, the 25% gross margin Tesla achieved in Q3 2018 includes all the salaries of production/line workers.

Then, Tesla can use that 25% gross profit to cover their operating expenses, which are expenses not related to production.

This is basically operating leverage. As revenue increases, your expenses don’t increase as much, thus you increase your leverage to make profit.

Tesla has entered this transition in Q3 2018, and that’s why they’ve surprised with strong profits and cash flow. And this should be the beginning of a new era for Tesla.

I posted some more thoughts on this at see DaveT on Chatstarter: "The coming Tesla cash cow - part 2"

 

[EinSV]

While I was expecting to see strong operating leverage this quarter, I was surprised that Tesla managed to actually reduce operating expenses by 5% over Q2 (excluding one-time items) while increasing revenues by 70 percent. Those are just staggering numbers.

The restructuring in Q2 obviously played a big role in this and we cannot necessarily expect a repeat but what they achieved is quite remarkable and very promising for the long-term.

Good call flagging this trend earlier this year:

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.

 

[DaveT]

While I was expecting to see strong operating leverage this quarter, I was surprised that Tesla managed to actually reduce operating expenses by 5% over Q2 (excluding one-time items) while increasing revenues by 70 percent. Those are just staggering numbers.

The restructuring in Q2 obviously played a big role in this and we cannot necessarily expect a repeat but what they achieved is quite remarkable and very promising for the long-term.

Good call flagging this trend earlier this year:

Exactly. If someone understands this operating leverage and believes in the demand for Model 3 and Y, I can't imagine them being short on TSLA.

 

[Xenoilphobe]

Wait until the truck comes out....

 

[electracity]

The restructuring in Q2 obviously played a big role in this and we cannot necessarily expect a repeat but what they achieved is quite remarkable and very promising for the long-term.

Tesla would have also loaded up other expenses in Q2 to have a better Q3. But with another billion to the top line in Q4 Tesla no longer has to play games with expenses.

It's madness to hold a short position hopping that somehow Q4 will go badly.

When car battery pack supply from the gigafactory is stabilized at 7K or so per week they can presumably continue to grow revenue by meeting Tesla Energy demand. I'm sure that Tesla Energy has been not only starved for cells but also production energenerring and direct labor. With the price increase, 5 or 6 powerwall sales probably produce the same margin as a car.

 

[neroden]

I’m trying to figure out if the addition to the S&P 500 could be the trigger of the mother of al short squeezes.
According to Passive investing is changing the stock market in ways investors don’t realize passive funds own 17% of each S&P 500 company. If Tesla is added to the S&P 500, those passive funds will cause buying pressure in a short period of 17% of the Tesla shares. We known what the buying pressure of 5% of Tencent did some time ago, and that was over a longer period. There may not even be enough parties (weak longs) willing to sell their shares to reach that 17%.

I'm glad I looked at this thread again -- I was trying to dig up that number.... so in the near future...


Short-sellers have fabricated shares amounting to 19.9% of shares outstanding, so there are 119.9% of shares held by longs. Institutional holdings are 62.5% of the shares outstanding. This doesn't count Tencent or Saudis. Add 19.7% for Musk, 4.8% for Tencent, 4.6% for the Saudis, and 1% for insiders, and you get to 92.6% of the shares outstanding, leaving 27.3% of the shares for "other retail" holders -- such as Larry Ellison, or us.

I actually suspect that the vast majority of the "other retail" holders are long-termers who won't sell for anything, Karen and tivoboy aside. Now, let's try to figure out who's holding their shares long-term:

~27.3% miscellaneous retail holders (I'm going to guess for now that they're all long-termers, despite tivoboy and Karen).

~19.7% Musk
~4.8% Tencent
~4.6% Saudis
~1.0% other insiders like JB Straubel

~7.7% Bailie Gifford
~4.0% Vanguard indexes
~2.5% Jennison Associates
~1.0% Ron Baron

To which we will add:
~17.0% S&P indexes

Then if there are as much as 10.4% of shares outstanding held by other institutions who are long-termers, this means there aren't enough shares for short-sellers to cover with.

Capital World holds 3.5%, Blackrock holds 3.5%, Fidelity holds 12%, T Rowe Price holds 7.0%, but none of them are consistent long-termers (Capital World maybe, but not sure). However, they hold the stock in multiple funds, and some of the funds *might* be consistent long-termers. There are other funds out there, but ARK, for instance, has less than 2/10 of 1%.

"American Funds" appear to be from Capital World. I might guess that American Funds New Perspective (1.53%), Growth Fund (1.31%), IS Growth Fund (1.06%) are long-termers; this actually adds up to more than the total at Capital World (!?!?) -- to avoid double-counting I'll just assume Capital World is a long-termer.

It looks like T Rowe Price Growth (2.07%), T Rowe Price Blue Chip Growth (0.76%) are long-term holders, but I dunno about other T Rowe funds.

Invesco QQQ Trust is another index with 0.84% of the shares.

This still requires 3.23% to be held by long-termers which I haven't identified (maybe some of the Fidelity funds?), as well as more for any retail holders who aren't long-termers... but that seems... quite possible?

Of course, higher prices will probably shake out some of the long-termers. And I expect that the larger holders will continue to lend shares to the short-sellers indefinitely, so the short-sellers can keep this up until they get margin-called.

But for the first time I'm thinking a genuine squeeze is actually possible. Though still unlikely. Short-sellers need to get out before the S&P addition or they may find themselves competing with S&P funds to buy shares -- with not enough shares available for both.

Even if they do get out, I'm not entirely sure who the S&P funds are going to be buying shares from. Someone has to sell them shares, and I don't think the long-term holders I've listed will sell at anything less than, say, $600.

S&P funds are allowed to use tricks to try to match the indexes, so they could fool around with options and single-stock futures to avoid actually buying shares, I guess...

 

[mongo]

I'm glad I looked at this thread again -- I was trying to dig up that number.... so in the near future...


Short-sellers have fabricated shares amounting to 19.9% of shares outstanding, so there are 119.9% of shares held by longs. Institutional holdings are 62.5% of the shares outstanding. This doesn't count Tencent or Saudis. Add 19.7% for Musk, 4.8% for Tencent, 4.6% for the Saudis, and 1% for insiders, and you get to 92.6% of the shares outstanding, leaving 27.3% of the shares for "other retail" holders -- such as Larry Ellison, or us.

I actually suspect that the vast majority of the "other retail" holders are long-termers who won't sell for anything, Karen and tivoboy aside. Now, let's try to figure out who's holding their shares long-term:

~27.3% miscellaneous retail holders (I'm going to guess for now that they're all long-termers, despite tivoboy and Karen).

~19.7% Musk
~4.8% Tencent
~4.6% Saudis
~1.0% other insiders like JB Straubel

~7.7% Bailie Gifford
~4.0% Vanguard indexes
~2.5% Jennison Associates
~1.0% Ron Baron

To which we will add:
~17.0% S&P indexes

Then if there are as much as 10.4% of shares outstanding held by other institutions who are long-termers, this means there aren't enough shares for short-sellers to cover with.

Capital World holds 3.5%, Blackrock holds 3.5%, Fidelity holds 12%, T Rowe Price holds 7.0%, but none of them are consistent long-termers (Capital World maybe, but not sure). However, they hold the stock in multiple funds, and some of the funds *might* be consistent long-termers. There are other funds out there, but ARK, for instance, has less than 2/10 of 1%.

"American Funds" appear to be from Capital World. I might guess that American Funds New Perspective (1.53%), Growth Fund (1.31%), IS Growth Fund (1.06%) are long-termers; this actually adds up to more than the total at Capital World (!?!?) -- to avoid double-counting I'll just assume Capital World is a long-termer.

It looks like T Rowe Price Growth (2.07%), T Rowe Price Blue Chip Growth (0.76%) are long-term holders, but I dunno about other T Rowe funds.

Invesco QQQ Trust is another index with 0.84% of the shares.

This still requires 3.23% to be held by long-termers which I haven't identified (maybe some of the Fidelity funds?), as well as more for any retail holders who aren't long-termers... but that seems... quite possible?

Of course, higher prices will probably shake out some of the long-termers. And I expect that the larger holders will continue to lend shares to the short-sellers indefinitely, so the short-sellers can keep this up until they get margin-called.

But for the first time I'm thinking a genuine squeeze is actually possible. Though still unlikely. Short-sellers need to get out before the S&P addition or they may find themselves competing with S&P funds to buy shares -- with not enough shares available for both.

Even if they do get out, I'm not entirely sure who the S&P funds are going to be buying shares from. Someone has to sell them shares, and I don't think the long-term holders I've listed will sell at anything less than, say, $600.

S&P funds are allowed to use tricks to try to match the indexes, so they could fool around with options and single-stock futures to avoid actually buying shares, I guess...

How much for Ellison?