TSLA Market Action: 2018 Investor Roundtable

[mrdoubleb]

Elon's timelines/guidance should always be understood in the following context:

• "If that job was done by clones of Elon Musk, working 24/7, sleeping on a couch, and if absolutely everything went well, then we'd be ready in that time frame. Perhaps."

Elon cannot make any other estimates: he has no real notion about the distance in capability between himself and others, and he certainly doesn't assume or expect failure, because he usually sees the path forward on a first principles basis. The farther out the end of a project is, the worse his estimates are usually.

But it doesn't matter - just multiply all his estimates by at least 2x. What matters is that Elon gets the really difficult aspects of his job right: he knows in which direction to go and he knows whether something is possible with the resources available.

That ability of Elon is really uncanny: it was amazing to see how within 10 short years he effectively threaded the needle with similarly fanatic people at SpaceX and pulled off something that a planetful of literal rocket scientists genuinely found to be somewhere between "impossible", "unfeasible" or "uneconomical": launching and then landing commercial scale liquid fuel orbital boosters able to launch huge geostationary satellites, financed as a side R&D project of a regular launch system. There was very little FUD: it was the absolutely honest, informed opinion of most of them that it's not worth going there.

Similarly, he knew the Model 3 would be a hit and could be made. This is what a CEO needs to be able to do, and screw timelines, that's only something you know after the fact anyway, for any reasonably complex high-tech project. Any manager who says they can keep timelines is either lying or is wasting money.

One of the things people keep forgetting is that the reason we can call Tesla out on missing targets is because they give us those targets in the first place.

That new Mercedes EQ 400 or the BMW iX3 concept... which week or month are those coming out? They gave us target years. How many will be produced weekly and what's the progression of the weekly ramp? Oh, they didn't even disclose annual targets. Even the Audi e-tron that is coming out soon(ish) and appears to be the closest to production of these 3... the only reason we are thinking they probably plan 50k of those per year is because that's the capacity of the Hungarian electric motor factory. But we don't know the ramp or any other component bottlenecks.

And every other Tesla Killer already in production, even the ones actually good like the iPace, the Kona, the Leaf 2, even the Bolt. Just as we have been saying all along seem to be heavily battery supply limited in production. Jag is limited to like 20k per year but deliveries are delayed. Hyundai is struggling to make the Kona, they made 2200 in June and 1800 in July - that's 3 days (!) of Model 3 production for you in a month (!). The Leaf 2 has several months long wait lines over here in Europe and the Bolt has all but disappeared outside the US - and even there they've only delivered about 2-2,5 weeks (!) worth of Model 3 production in 8 months (!).

 

[Artful Dodger]

While there might be margin improvements available by tweaking the battery design for SR, simply not including some cells is enough for now. Most of the cost is in the cells, and taking out 1/3 of the cells should work just fine for now.

Most of the PROFIT is in the cells too. If we assume a high price of $130 per kWh for cells purchased from panasonic in Q3, the extra 25kWh of battery cells costs $3,250 but Tesla charges $9,000 for the LR battery option.

So selling a SR when that car could have been sold as a LR foregoes $5,750 in gross margin. At 15% forecast GM, that's over 75% of the gross margin on a bare-bones $49K Model 3. Not a good business decision.

 

[cheshire cat]

Uhh, here in Denver they bought a vacant BMW dealership last year. Now it's a fantastic location for them--gallery, service center (much larger and more capable than their former location, which now serves as mobile service HQ), separate delivery building, and a reasonably large amount of parking.

Rather than call the idea novel, I'd suggest that they are being opportunistic with expansion and grabbing significant real estate improvement when they can do so at reasonable cost.

I think our local SC was Ex Jaguar with large service area attached and presumably ready to use lifts etc

 

[Fact Checking]

This is FUD.

By 2019 Tesla will have a better handle on the cost structure. The will be some lower-price trims sold... but if the S and X are indicators of anything, it's that the ASP will continue to be high. Tesla should have a solid billion per quarter in operating cash flow by first quarter of 2019, which is plenty to pay off the bonds.

The most important factor: right now Tesla's positive cash flow is masked by absolutely brutal ~$700m/quarter outflows for billions of dollars of Model 3 expansion capex, because vendors shipping hundreds of industrial robots expect to be paid as contracted.

This will continue into Q3 and Q4 (and Tesla will probably be cash flow positive despite that), but should go down significantly during 2019.

Put differently: right now capex payments are out of phase with revenue, but in 2019 not only is revenue going to be much higher, but capex payments will go down. All the Model 3 equipment will be paid off in full, and is going to generate cash for 5-10 years at minimum.

This is going to improve Tesla's cash flow brutally, even without any increases in efficiency anywhere else. This is why the big shorts who are able to reason rationally want to break Tesla before that. Hence their obsession on the March 2019 convertible notes - it's then or never.

(My guess is that it's very likely "never", but this is not investment advice. )

 

[Ludalicious]

Shot straight up thus far in FRA

 

[Mich]

Shot straight up thus far in FRA

Please tick to reality ;-)

FRA is up 1.7% compared to it's closing price at 276 USD (FRA is in a different time zone!)
TSLA at FRA is now at 280,74 USD, up about 1 USD compared to the after hours at Nasdaq.
Volume at FRA is now 23 shares!

Looking at FRA before premarket is mostly useless.

 

[Artful Dodger]

Whether it makes better business sense (i.e. increased profits), it makes terrible PR sense. I'm pretty sure you have a significant amount of folks on that reservation list that reserved in order to get the $35K model...

I don't think this is really that complicated. Let's break it down:

• Tesla's current capacity at Fremont is about 5,500 LR Model 3s per week
• Panasonic/GF1 is running 10 battery cell lines to produce those cells
  
• Fremont will have Model 3 capacity of 8,000 / wk by the end of Q4 2018
• Panasonc/GF1 will have 3 new battery cell lines running by the end of 2018
• that's 30% more cells in packs 2/3rds the size, so enough for 2,500 SR packs/wk
• Telsa Grohmann Engineering is shipping those SR pack robots in Sep/Oct 2018
  
• So by Q1 2019, Tesla will have the capacity for 5.5K LR AND 2.5K SR per week
• None of those lines/robots will be idle, so that will be roughly Tesla's product mix too
• tl;dr Tesla will have 8K/wk Model 3 production capacity in Q1 2019

Initially, all SRs will go to US customers to satisfy demand while the Federal EV tax credit is in effect. Overseas deliveries will begin in 2019 Q1 as US demand for LR Model 3s reaches a steady state and the EV credit is reduced.

AWD and Performance Model 3 portions of LR production continue to pad Model 3 GMs while front motor production is scaled up, but never limiting demand for total cars sold.

Rinse and repeat with Model Y program beginning with the big reveal in March 2019. Then GF3/ Shanghai in 2020. Grohmann is going to be hopping. As will TSLA.

Cheers!

 

[Artful Dodger]

Shot straight up thus far in FRA

I think there's rules against short selling in Frantfurt (correct me if I'm wrong). We saw a graphic example on Monday how short selling affects TSLA. Down a few pennies in New York at the start of the pre-market session.

 

[Buckminster]

21mins in - Elon focusing on deliveries - new bottleneck?

 

[Tslynk67]

Noumea analyst Romit Shah on Bloomberg tv right now

Calls Tesla “uninvestable”. Has downgraded stock to neutral. “Because tweets”

Then proceeds to say:

“Fundamentals of the company have never been better.”

Then says “the resignation of the CAO was the tipping point for me”

But then says:

“I don’t believe there to be any accounting shenanigans, everything is fine accounting wise”

???

Thanks - I stole these quotes for Twitter

 

[Tslynk67]

The big players are shipping about 2 million new 2019 units around the U.S. this month to Tesla's 20-25,000. I fail to see how a comparison of their staging lots matters.

Let's get to 31/12/2019 and see how many the "big players" ship... First of all I don't see any new models to be launched by then, other than the ECQ, which will maybe sell a few 1000's as a second car for school-run. Secondly, even if there was a new wave of EV's, there's not the battery capacity world-wide to make that many cars.

So I call this total BS.

 

[Tslynk67]

Tesla taking over a former Volvo dealership. What a novel idea. There are empty dealerships all across the country begging for tenants but instead Tesla has gone into expensive mall and shopping centers with no service capability. Maybe they have finally hired someone with an automotive background to do site selection who could convince management of the value of all-in-one locations. Bravo!

Now can we send that person to Raleigh, NC please?!

Tesla had/has a strategy to put cars in malls to get them under the noses of people where there's a lot of passing foot-traffic, that's a sound strategy. For instance, here in Brussels we have a Gallery on one of the most up-market streets in the the city, lots of people get to see it, that has space for one car, a skateboard and a bit of merchandise - it's tiny. Then for the service/sales centre, they took over an existing facility built by another manufacturers, no-doubt for a very good price - this is located out-of-town in the area where the traditional dealers are located, which also makes sense.

I predict many more prime-location dealer premises being vacated in the coming years and Tesla snapping them up for a pittance...

 

[Fact Checking]

The convertibles are another matter; it would make a lot of financial sense to buy them back below par, even at the expense of delaying capital investments. Both in order to avoid the stock dilution, which could amount to a truly large loss to shareholders, and because they're going to mature a lot sooner -- the difference between losing a source of capital which lasts 7 more years and one which lasts 2 more years is significant.

But of course the convertibles are trading above par.

Tesla has the unconditional option to buy back the convertibles for cash when they get converted. Elon indicated at the last conference call that this is their intention:

Elon: "We do not – we will not be raising any equity at any point, at least that's – I have no expectation of doing so, do not plan to do so."
Deepak: "Yeah, we're executing on an operating plan that keeps us sufficiently self-funded despite our CapEx needs and our debts maturing, and still keep a very healthy balance on our balance sheet."
Elon: "Yeah, our default plan is we pay – we start paying off our debts. I don't mean refi-ing them, I mean paying them off. For example, there's a convert that's coming due soon, a couple hundred million, $900 million, something like that. We expect to pay that off with internally generated cash flow."​

Note that back when those notes were issued in 2014 Tesla also purchased 'hedges' for several tens of millions of dollars, which hedges would fund any excess cash payments Tesla would have to perform if stock price exceeds the $359.62 conversion rate.

So for example if in Q1 2019 the $TSLA stock price is at $460 and all note holders elect to convert to shares, Tesla can still elect to pay in cash, and avoid dilution - and Elon said that they would. They'll pay $920m from their own cash, and the hedges provide the other $256m of cash needed to pay the note holders who expect the cash equivalent of ~2.55 million shares. (The actual mechanics disclosed in the prospectus are a lot more complex and difficult to parse, but this is the gist.)

This also applies to the $1.38b of 2021 notes, convertible to 3.8m shares.

I.e. no dilution by 6.3 million shares under any circumstance other than a WWIII class force majeure event.

I don't think this small detail of the 2019 convertible notes, combined with Elon's no-dilution promise, has been priced into the stock price yet.

 

[Tslynk67]

Please tick to reality ;-)

FRA is up 1.7% compared to it's closing price at 276 USD (FRA is in a different time zone!)
TSLA at FRA is now at 280,74 USD, up about 1 USD compared to the after hours at Nasdaq.
Volume at FRA is now 23 shares!

Looking at FRA before premarket is mostly useless.

Frankfurt $TSLA just mirrors NASDAQ normally. The opening variation is just catching up on the delta from the previous day, then it falls in-line with NASDAQ pre-market.

At least that's how I've read it over the years...

 

[oneday]

I.e. no dilution by 6.3 million shares under any circumstance other than a WWIII class force majeure event.

I didn’t get this strong of a message regarding the convertibles. They did say they would pay them back. But I could see a couple reasons other than WWIII that could make Tesla want to let them convert.

 

[avoigt]

Great info from Gali who has an valuable input on the smart guys around making P&L calculations for the future:

The production increase from 5k/w 3s to 10k/w is planned to have zero incremental labour costs (Minute 18)

The impact on margin will be therefore huge even if they manage to do the 100% increase with just 10% labor cost increase

 

[replicant]

I'm a huge Tesla bull. But reality is Elon is terrible at giving guidance and timelines. Completely terrible. He often shares what is theoretically possible as guidance. He really ought to not be on the quarterly conference calls because it's gotten to a point where all the analysts just roll their eyes when Elon talks about guidance. Except maybe Trip Chowdry.

Is he terrible at giving guidance in general or short term guidance? His oldest guidances (regarding, say, 2018 production goals set in 2013) are pretty accurate, aren't they?

 

[Matias]

Tesla needs to redesign their battery pack to get costs down for the standard range version.

I would like to hear more about this.

 

[gora321]

Please tick to reality ;-)

FRA is up 1.7% compared to it's closing price at 276 USD (FRA is in a different time zone!)
TSLA at FRA is now at 280,74 USD, up about 1 USD compared to the after hours at Nasdaq.
Volume at FRA is now 23 shares!

Looking at FRA before premarket is mostly useless.

Where u see 23 shares?
New glasses needed?

 

[Matias]

Tesla employees can use all the acronyms they want.

As long as they have been approved by Elon himself.

Hmmmm.