TSLA Market Action: 2018 Investor Roundtable

[dc_h]

Regarding stock buyback: I think Tesla can get a similar result buying back about 250 million of the bonds coming up next year. They are discounted so they can buy them for less now. It will signal intent and ability to pay off the full ~1 bn and have minimal impact in cash reserves. I think a stock buyback would be seen as a scheme, more market manipulation by fraud boy. End of Q4 as cash builds up, buy another 250 million. If sales and cash flow are on track, the rest of the bonds will convert to stock. You’ve effectively done a stock repurchase, but done so in a way to appease Wall Street and the debt market.
I think Tesla and Elon need to be cautious about any potential manipulation meme, fair or not. The tweet was a mistake.

 

[dc_h]

Regarding board of directors:

They still need a big hitter on the board, who will be proactive with the clout to talk to congress. Eric Schmidt is the most logical, with shared friends and gravitas in Washington and no chance he will ever run for office. Al Gore would be good, but I think too polarizing. Sheryl Sandburg is probably too busy, but maybe an Indra Nooyi would be interested. She’s relentless and environmental, but the Sculley history thing could be an issue.

 

[EVNow]

Quick question: around when can we expect Q3 deliveries numbers?

Q2 numbers came out on July 2nd, first Monday of the month. So, expect Q3 numbers on 1st of Oct (next Monday).

Tesla Q2 2018 Vehicle Production and Deliveries | Tesla, Inc.

 

[Fact Checking]

Quick question: around when can we expect Q3 deliveries numbers?

I went back several years and checked the reports, and Tesla never released the results on a first day of a month, it was always the 2nd or 3rd.

So October 2nd or 3rd is the most likely date, before or after NASDAQ market open, in pre-market or in after-market hours - so there's an immediate price reaction.

 

[Intl Professor]

Quick question: around when can we expect Q3 deliveries numbers?

October 2nd?

 

[EVNow]

I went back several years and checked the reports, and Tesla never released the results on a first day of a month, it was always the 2nd or 3rd.

Interesting - so even when 1st was a Monday ?

BTW, rest of the industry will start reporting on Oct 2nd.

 

[dc_h]

Regarding capex:
Some commentary that some costs are only organic miss the point. Organic or not, are still incremental. Saving as they move up the S-curve hopefully will reduce incremental capex, and that seems true now in GF1 and Fremont. Sales centers and updated charging stations should be cheaper than the original investment, but still substantial and across a much larger infrastructure. GF3 in Shanghai should indeed cost less and require little internal funding outside of retained earnings in China. Scaling up GF1 is going to require some bigger investment in 2019 as the building is approaching mex density. They also need some facility to build the semi. I think a tent seems possible, if not likely. If they outsource stamping, or can leverage Fremont and Lathrop, they can build a semi assembly facility for less than 1bn and even with a slow ramp be cash flow positive by the end of the first year. Tesla Energy is not ramping to ability due to demand for model 3 and Panasonic is probably a little gun shy following delayed ramp of the 3 and ongoing delays at GF2/Buffalo. With all the investments and SEC crap, I think it’s essential to pay down bond debt and retain cash as much as possible. Use debt for specific collatoralized activities, like building GF3, but keep that isolated from any general lien against the rest of the company. That will do more to prop up the stock than any short term parlor tricks.

 

[Krugerrand]

Actually not rhetorical. Maybe it’s irresponsible to let 2 young drivers drive a Model 3. OTOH, if they ever get hurt driving the Prius, I will blame myself for not replacing it with a Tesla that could have saved them.

Chill mode and set top speed. Tell them if they change it and don’t die, you’ll kill them yourself.

 

[Fact Checking]

Here in Iceland, while we have the second highest EV adoption rate in the world (after Norway), few people buy Teslas because the nearest service centre is a week's round trip ferry ride away.

You just can't have such a low density of service centres if you want to become a true international mass market car. Its just not acceptable. Tesla needs to keep expanding its market, and to do so, it needs to expand service.

To address your and @neroden's arguments, I believe an important observation is that Tesla is using the density of Stores and Service Centers to manage demand, in part.

The location of service centers is not a secret, and owners self-select depending of whether the nearest service center is close enough.

In that sense I think the primary parameter that Tesla "has" to scale up is not density primarily, but capacity and waiting time. Those are mostly opex and not capex costs.

Once Tesla thinks they want to scale up the addressable market, they'll increase service center density as well - but until demand is so strong this is an optional thing to do.

It will happen eventually, I'm sure - I'd expect a big expansion push in mid 2019, but I wanted to point out the significant difference between service center "capacity" and "density".

 

[Tslynk67]

Still I'd urge caution.

ZEV credits:

• ZEV credits are a "buyer's market" and ZEV credits were trading at about 50% of their face value due to an oversupply of ZEV credits and an unwillingness of ICE carmakers to transfer money to Tesla (even if it causes losses for them)
• The current total annual ZEV market is estimated to be around $400m-$500m and given that ICE automotive is shrinking, the ZEV market is shrinking as well.
• ICE carmakers have brought out a lot of 'compliance' cars like the Bolt, to harvest ZEV credits. This further reduces the effective ZEV market available to Tesla.
• The recent Seeking Alpha article by a Tesla short turned temporarily Tesla long of over 1 billion dollars in ZEV credits is thus extremely out to lunch - which is not overly surprising from a Tesla short if we think about it for a minute.

I.e. getting $100m from ZEV credits would be a good result and $200m would be fantastic - but don't count on it.

Higher margins:

• Higher per unit Average Selling Price and margins help obviously, but we need to be realistic: the Q2 ASP of $57k increased to maybe $60k according to Troy. So if there are 55k Model 3 sales that's a revenue improvement of $3k per unit, or +$165m of revenue. The gross profit improvement, if these are high margin options mostly with say a 30%-50% margin would be $50m-$80m improvement. Not a "huge" number - but enough to make a real difference.
• Tesla does have a track record of creeping up operating expenses: SG&A and R&D and stock based compensation in particular. These expenses all reduce any 'net income' line directly. As to how much stock based compensation expenses could be: $TSLA in Q3 started beyond $350, and had a nice run-up in August as well, spending several days over $350. So stock compensation expenses, if employees decided to exercise options in those times, would be higher than in Q2 - and Q2 was already high.
• There's a few things going against Q3 income: China tariffs are brutal for example.

Yet there's several possibilities for a positive surprise, but it's much better to be realistic and be surprised positively, than to have false expectations and then get surprised negatively.

Tesla meeting the very optimistic Q3 guidance of 50-55k production and slightly higher deliveries, combined with profitability and positive cash flow would be a huge result in itself. Since most Street estimates expect worse results currently, meeting guidance should cause a nice pop in the stock price already.

I also observe that the Supercharger roll-out has all but stopped for the moment, so I would assume they've stopped most discretionary capex expenditure.

 

[Zhelko Dimic]

What are you showing us? The numbers don’t match with Tesla’s SP. It isn’t down 19%, 33% and 31% over a period of 1M, 3M and 12M.

Maybe you want to think about it a little, and read my sig?
Hint: It's one of my accounts, which I tried to position to replace perceived loss of ability to hold TSLA in my other registered accounts after going private twit. Holding private TSLA would have been impossible in Canada in registered accounts.

I do appreciate that you disagreed with my statement that -35% from Aug 6 is doing awesome, obviously it's not. Thanks for noticing, appreciated!

BTW, I'm not complaining (I was aware it may go this way) - just pointing to stupidity and insensitivity of OP's comment. Telling others all is fine is beyond insensitive...

 

[Fact Checking]

Actually not rhetorical. Maybe it’s irresponsible to let 2 young drivers drive a Model 3. OTOH, if they ever get hurt driving the Prius, I will blame myself for not replacing it with a Tesla that could have saved them.

IIRC chill mode and speed limit can be locked down with a PIN code? That would solve the "teen driver dilemma", right?

I'd absolutely go for the Model 3: beyond active and passive safety features the Prius only weighs 1.2-1.3 tons, while the Model 3 is 1.7 tons, which is a significant advantage in vehicle to vehicle collisions not captured in any of the safety ratings...

Selfish it may sound, but in a vehicle to vehicle collision, all other things equal, you want to sit in the heavier one.

 

[Krugerrand]

Quick question: around when can we expect Q3 deliveries numbers?

Always the same; 1-3 days post end of quarter.

 

[dc_h]

Regarding org structure:

With focus moving from 3 production hell, does Tesla have the Human Resources to get Tesla solar back on track without slowing down the semi, roadster and Shanghai plant? Hopefully the reorg is going to help. More traditional Corp structure may be needed going forward to provide more self contained business objectives. You risk the loss of integration, but some of these Alfred Sloan concepts are needed to scale to the next level, or even sustain the current level.
I think the recent change should only be the first step. Move AI and automated driving into an operating unit. It could help valuation by creating discrete business units with values comparable to other companies. A Karpathy lead business group could be worth 15 or 50 billion, based on Intel’s purchase of Mobileye and the value of Waymo. This also puts names over businesses and makes Tesla less Elon Inc. If he ever wanted/needed to take a few months off to focus on spacex or Neuralink or play baseball with Michael Jordan, it would limit the impact on the stock short term and help dilute the short thesis about Elon and potential fake numbers. Building institutional structures to address the fraud claims and emasculating the Elon haters are two sides of the same coin and reflect the post bet the farm company that should emerge post Model 3 ramp.

 

[mongo]

List of things Tesla needs capital for:

1) Finishing Fremont scaleup for Model 3
2) Finishing Giga 1 scaleup for Model 3 and other battery devices
3) Getting Giga 2 up to meeting its obligations
4) Giga 2 scaleup
5) Giga 3 (Shanghai)
6) Giga 4 (Europe)
7) Model Y
8) Semi
9) Roadster
10) Increasing density of stores
11) Increasing density of service centres
12) Converting service centres to also be body shops
13) Major expansion of the mobile service fleet
14) Massive expansions to the supercharger network in its current locations, which will increasingly outgrow its capacity as the flood of vehicles continues
15) Expanding stores, service centres and superchargers into new markets all over the world.
16) Lowering margins (for example, undoing some of their recent Model 3 options price hikes)
17) Opening up lower margin Model 3 variants
18) Eventually, advertizing
19) "The $25k Tesla"
20) "Future products" (smart home integration hardware, electric aircraft, etc)
21) More gigafactories
22) Dramatically expanded production of grid products

But oh no, we're supposed to support dumping cash in order to make options traders happy...

Hey, where's my pickup?

 

[Tslynk67]

I fully agree. In an attempt to put a dollar figures to future capex needs, my current estimates for all those items are the following:

1. Fremont Model 3 scale-up to "8k or beyond" was estimated in the 'incremental capex in the tens of millions'
2. Giga 1 scale-up capex is largely spent already, via Grohmann expenses and the 3 Grohmann machines that are arriving this year and which will increase Model 3 battery module throughput to beyond 10k/week. This spending is probably included in their ~650m/quarter capex cash outflow they guided for Q3 and Q4 already.
3. Giga 2 is mostly finished I believe, but Energy/Storage mothballed as it's hard to originate long term leases which solar requires while being downgraded. It would explode after a Moody's upgrade, possible later this year or early next year. (They might be waiting for Tesla to pay the March 2019 convertible notes first.) Storage growth depends on Giga 1 2170 output. No significant capex needed there I believe.
   
4. Giga 2 (solar) scale-up will be self-financing I believe, i.e. conditional on the previous items.
5. Giga 3 will be financed via non-recourse local loans secured against the factory I believe - i.e. only a fraction of the $2b guided total capital will be required to be provided by Tesla. The $680m capital Tesla registered with their Shanghai company recently is very close to a third of $2b - i.e. they might already have financing lined up for the whole $2b, once their provide their own capital as skin in the project.
6. Giga 4 Europe seems less advanced as Giga 3, but I suspect Tesla will attempt a similar local financing construct.
7. Model Y: I'd not be surprised if Grohmann built their robotic lines for the Y.
8. Semi: I think this will be a surprisingly low capex project which re-uses as many components from the 3/Y flow as possible. The much lower unit count output will allow a larger proportion of manual labor and a lower count of assembly stations.
   
9. Roadster 2 is a prestige project, with no mass manufacturing needs, with very little capex expected.
10. Store expansion: I think this will happen organically and in a self-financing fashion as Model 3 sales spread and grow. Note that the U.S. market is currently overwhelmed, the rate of sales will be lower once this initial storm is over and sales spread globally.
    
11. Service center density: while some of this will be necessary, it's already been done to a certain degree as a preparation for the Model 3 and can now be utilized. Service center problems seem to be concentrated on a few geographical hot-spots. I also think that Model 3 service intensity might be lower than expected.
12. Body shops: I actually think this is a new business segment which should generate income with healthy margins, while increasing customer satisfaction. The biggest capex would be painting facilities and any space expansion.
13. Expansion of the mobile fleet: see #11, but this too can grow as the fleet grows.
    
14. Supercharger contention will I think be managed via the idling fees and via Supercharger pricing. I'd expect big Supercharger 3 announcements later this year, which could further speed up the charging on modern battery packs, and reduce average stall time, with only incremental capex.
15. See #10.
16. Tesla is still, and is going to be for years, the owner of a natural monopoly, the luxury EV market. Price hikes and reductions purely balance revenue against income. In that sense Tesla uses options pricing not to increase/decrease absolute demand mainly, but to shift demand between models and options, to maximize margins.
17. Lower margin Model 3's might turn out to generate sales of near 100% software options and might improve margins. The key I believe is a convincing demonstration of self-driving features using the Tesla AI chip NN platform. So I'd expect a big surprise in this area, the economics might turn out to work against conventional wisdom.
18. I don't think Tesla will advertise for years to come, except the occasional Superbowl ad perhaps - they have utilized social media effects perfectly so far.
19. The $25k Tesla might never happen as a new car platform, instead we could see a gradual reduction in Model 3 base pricing to perhaps $30k or $29k. Lower mass cars have trade-offs in safety, and I'm not sure Tesla should be making compact cars.
    
20. "Future products": I'd expect these to flow out from the massive free cash flow Tesla is going to generate by the beginning of 2019.
21. More Gigafactories: if Tesla can leverage local versus self-financing in a 80%:20% degree then that won't require nearly as much capital as their existing Gigafactories.
22. Grid products: if you mean Storage products then yeah, but I think this is mainly gated on 2170 cell output, storage is not nearly as capital intensive like automotive. I.e. marginal cost of grid storage solutions of 125%-150% of the cell cost should be achievable. For automotive the Model 3 marginal cost is like 300%-400% of the marginal cell cost... I.e. I don't see very high capital costs, unless Tesla wants to start making their own cells. (Which I'd advise against - they should buy/merge Panasonic instead.)

I.e. overall the future capex requirements are surprisingly low - but I do agree that Tesla should use all free cash to expand, and I think they will do so.

Holy *sugar*, FC, you are some poster! Quality AND quantity - wondering WTF we did before you were around...

 

[Tslynk67]

Great - after hours is good for me. I'm time-shifted from NYC and my broker is only available during local business hours, so after hours means I can plan out sell points to set for the next day Doesn't really matter which day, so long as it's after hours.

What's this "broker" thing? I do all my trades, well just buying actually, on an app. Seems a bit last century...

 

[Zhelko Dimic]

Short term traders trying to make a quick buck for doing nothing.....and then complaining when it doesn’t work out for them. Sorry, I don’t feel sorry for them.... at all.

I'm afraid you make a lot of assumptions without thinking or trying to understand.
I'm however done on this subject.

 

[ValueAnalyst]

All this argument against buybacks is reason why Apple has hundreds of billions of unproductive cash just sitting on its balance sheet.

We all agree that TSLA is deeply underpriced, and that Tesla will soon turn profitable, if it hasn't already. I expect $1B in GAAP profits and $2B in free cash flow in 2H18, and I do not expect ASP's to decline much, as production increases throughout 2019 and Tesla starts international deliveries of higher priced variants.

Given the above, it makes no sense to not buy back stock now at $300, and go for it after the short squeeze at much higher prices.

Tesla's growth is limited, not by lack of capital, but by non-financial factors (e.g. lack of electricians as Elon noted on the last call). He's not avoiding to raise capital just to stick it to WS; that would be emotional, personal, and dumb. He's not raising capital, because more capital does not automatically translate to quicker growth, as Elon himself explicitly said on the last call, and the excess cash would just sit there, like Apple.

 

[SO16]

I'm afraid you make a lot of assumptions without thinking or trying to understand.
I'm however done on this subject.

Fine by me!

Perhaps you should change your moniker from “careful bull”.