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

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Major assumptions in OP's model:
  • Tesla has a sustainable 5k/week demand for the Model 3 and won't have to invest in marketing.
I think this is a pretty weak assumption. Tesla still hasn't given us any idea of conversion or take rates for the Model 3. It seems a little farfetched that 65,000 people are going to spend over $35,000 to buy a car every quarter with no marketing expenses for Tesla.
  • Tesla will achieve an 18% gross margin for the Model 3.
This seems pretty unlikely, especially given recent changes (more humans, more factory shifts, fewer robots) and just the general uneasiness around Tesla's accounting for warranties, superchargers, etc.
 
Major assumptions in OP's model:
  • Tesla has a sustainable 5k/week demand for the Model 3 and won't have to invest in marketing.
I think this is a pretty weak assumption. Tesla still hasn't given us any idea of conversion or take rates for the Model 3. It seems a little farfetched that 65,000 people are going to spend over $35,000 to buy a car every quarter with no marketing expenses for Tesla.
  • Tesla will achieve an 18% gross margin for the Model 3.
This seems pretty unlikely, especially given recent changes (more humans, more factory shifts, fewer robots) and just the general uneasiness around Tesla's accounting for warranties, superchargers, etc.
They still have 450,000 orders on the books. It's at least a year and a half before they can deliver those.
 
Shorting comes with strings attached ... daily interest, deadline to return (buy), margin account with funds that cover possible raise in prices..

Do you know how long the deadlines typically are? Seems like there's been a lot of short interest for quite some time. The shorts eventually have to cover.

VW went up 3000% in about 3 years. Peaked in 2008. Then went back down. That's how a major short squeeze works.

The coming Tesla rally should be similar percentage wise, even without a short squeeze. Future earnings will support the rally.

In my view, Tesla's growth in the next 10 years will be the main story. Short squeeze or not, is only side note.


Regardless of how much money I might personally make on this, watching such a squeeze unfold to teach the TSLA-shorters a lesson would interest me about as much the maiden flight of FH. That's a lot.

Totally agree! Yes, i'd like to cash out and buy a few toys at the top, but the rest is going right back in when the price is good...and staying there for good. I feel like many shareholders feel the same. After the short squeeze, i think the stock price should calm down with "the good guys" holding way more shares.


Another thought (against our interests);
Considering the short interest in Tesla isn't just because people don't believe, but also to undermine and sabotage, its possible that the squeeze will be minimized by deep pocket shorts who have all the money in the world to burn (creating C02) just to see Tesla struggle and to keep their ICEhole businesses alive a bit longer.
 
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Just a note on short selling. Big hedge funds with good prime broker relationships can get a borrow at a few percentage points per year. Jim Chanos used to talk about making money by putting the sales proceeds into treasuries, interest rate on treasuries being higher than borrow rate on shares sold short. This obviously wouldn’t apply to the avg. retail short seller, however.
 
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They are having to build out service infrastructure in advance of the Model 3... and thus there's low utilization/high overhead. Once that's largely built out and amortized over 10X as many vehicles it's reduced substantially, right?

Except that infrastructure costs themselves should go into capital expenses not in to opex. Tesla added a number of service centers, true, but nothing out of the ordinary. Marginal costs on those are mouse nuts anyway : a lease, electricity, gas and some drinks to stock the fridge. Nor did Tesla hire an incredible number of additional workers based on stock based compensation layouts. And added service load itself was marginal. Q1 added 10k Model 3's to a pool of 300k cars that should be more costly and difficult to service anyway. Remember we are talking huge numbers here : we need to explain a loss of $120M. D&A for the company total was $400M. And that includes the FAR FAR more costly investments into Fremont, the Gigafactory 1&2, sales infrastructure and R&D equipment. What's a plausible spend for you there? How would you get to $120M losses in 'overhead due to underutilized infrastructure' for service and maintenance? Honestly, unless they are using golden wrenches I have a difficult time with those numbers.
 
The service and other explanation is just one I’m not buying. I don’t believe the service centers are underutilized, judging by the long wait times noted right here in the forums. Also the service center expansion plans would be capex, not operating expenses.
I just think the poor results are due to the “goodwill repairs”
 
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The service and other explanation is just one I’m not buying. I don’t believe the service centers are underutilized, judging by the long wait times noted right here in the forums. Also the service center expansion plans would be capex, not operating expenses.
I just think the poor results are due to the “goodwill repairs”
Outside of California, wait times are minimal. Just about anytime I ask for something, they ask if I can come in that day or the next.
 
I am having a hard time with that as well. Why the sudden increase right now for example? And where is the real spend then? $120M is an awful lot of man hours at the regular service technician rate. Like 10 000 full time positions.
I think it’s a combination of labor and parts. To be fair though, it doesn’t affect my short thesis at all. It’s just worth noting that Services & Other should be included along with auto sales and auto leases when analyzing the segment. When you look at all 3 together, it doesn’t matter what costs are in what bucket.
 
We have no idea how many of those 450,000 people will actually convert to a Tesla owner. Elon Musk ignored the question about this on the most recent conference call.
I think your statement is just silly. Who would pay $1000 (or more, in other countries) to reserve a car that they subsequently wouldn't order? Sure, some, but certainly not all. We have anecdotal evidence of reservation holders actually converting to S and X owners. And Tesla has now delivered what, 20000 or so Model 3s? So you would expect the reservation list to have shrunk, but it hasn't... it's now up to 450,000 according to the last call. Now, Musk chose not to answer the question about conversion rates. I think this was very smart. For one thing, it's proprietary information, since any proper answer would give away information about how many were waiting for a more expensive configuration (me) or how many are holding out for a cheaper version (my friend). Why give such information to your competitors? Anyway, any answer would feed the bear argument: either "cheaper versions mean ASP down, so GM down" or "expensive versions mean smaller market". The reality is, by definition and the Mean Value Theorem, somewhere in between, which is a fine answer.
 
I think your statement is just silly. Who would pay $1000 (or more, in other countries) to reserve a car that they subsequently wouldn't order? Sure, some, but certainly not all.

Well, I think that a lot of those people might want their deposit returned as they can't wait for another car. Or, as they get closer to purchase, do more research and find things aren't what they expected. A lot of them might also be waiting for the $27,500 car (35k minus the tax credit), which they might never get (Tesla's cash position is forcing them to sell higher ASPs for the foreseeable future).

We also don't know how many of them actually have deposits. If you get your deposit refunded, do you still have an active "reservation"?

Maybe we can get a YouTube analyst to ask on the next call: "How many people have at least $1000 deposit with Tesla for a Model 3?"
 
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We also don't know how many of them actually have deposits. If you get your deposit refunded, do you still have an active "reservation"?
Yes we do. If you didn't pay the $1000, you don't have a reservation. (Someone above corrected me for calling them deposits... when you actually finalize the configuration, you top up to $2500, and that's a non-refundable deposit.) If you cancel your reservation you get back (after some delay) the $1000. So unless you're again going to assert that Elon is lying, we know that all of those 450,000* people have $1000 on the line.

(*) actually only 449,999 people, since I have two reservations totaling $2200, because the second one is for Australia and was more expensive :).
 
I think it’s a combination of labor and parts. To be fair though, it doesn’t affect my short thesis at all. It’s just worth noting that Services & Other should be included along with auto sales and auto leases when analyzing the segment. When you look at all 3 together, it doesn’t matter what costs are in what bucket.
So it boils down to you (& @schonelucht ) both:

- not believing the explanation for the current expenditures, nor the guidance

- believing that "hidden" expenditures are due to something that will scale with additional sales such that it will largely nullify the GM made per car


I disagree with your take on both of these, and am not sure I've seen either of you present anything compelling that demonstrates to any degree of certainty that those will indeed increase in that manner in the future. You've pointed out the trend up to this point, and there certainly some degree of validity to those numbers.

But I have to say, it sure feels like you are placing a pretty big bet on Elon & Co. either being deceitful, or not understanding what those numbers are, with your willingness to dismiss what he's stated pretty explicitly.