TSLA Market Action: 2018 Investor Roundtable

[Artful Dodger]

If I own 10 donuts and want to keep them long term, but bob takes 10 of them without me knowing and sells them to jane he is soaking up demand that would have caused the price to rise. Sure, he puts them back later, but for now, he is depressing the price of other peoples donuts because the demand was filled by someone who really didn't purchase them.

I own my truth. Well, some shares in my truth.

 

[Fact Checking]

I think there was a YouTube video out there showing Teslas being dipped in some sort of bath. Try youtube.

Found this one:

Based on this recent tweet by @Tesla. Couldn't find the YouTube video showing the bath process itself.

 

[Steve m]

If I own 10 donuts and want to keep them long term, but bob takes 10 of them without me knowing and sells them to jane he is soaking up demand that would have caused the price to rise. Sure, he puts them back later, but for now, he is depressing the price of other peoples donuts because the demand was filled by someone who really didn't purchase them.

Unless Bob is a baker Bob would have to buy 10 donuts to replace the ones he borrowed. Thus the demand would be neutral. And no impact on the value of donuts.

But when shorting stock unless you have a naked short and a fail to deliver there are no new shares. And if you do have a fail to deliver that isn't the responsibility of the company. They wont pay dividends to those fake shares and they wont let them vote.

The only agency that can legally create new shares is the company. Any naked shorts have to get covered pretty quickly and do most of the time.

Decreasing the stock price is not the same as diluting the shares. Yes shorting may effect stock price both up and down depending if the short sellers are selling short or buying to cover previous shorts.

I tend to view covered shorts as a moderating influence on stock prices. When a stock price shoots up as there are more buyers then sellers, shorts limit the up swing. When there are more sellers then buyers and stock prices are dropping then shorts covering helps slow the falling stock price.

Where I have problems with shorts is when they try to effect stock prices through miss leading or dishonest statements.

I personally believe hedge funds that engage in shorting should be held as accountable for their statements about companies as the companies are for their statements.

I also support putting pressure on the SEC to reign in naked short sells. I think the shorts should have to pre borrow the shares before they sell them. In the few cases where naked shorting is justified it should only be done with the companies permission. I think an example has to do with ipos and 2ndary offerings and then controlled by the investment banks the company is working with.

 

[Artful Dodger]

Couldn't find the YouTube video showing the bath process itself.

Tesla doesn't post much on Youtube (restrictions, transparency, yada yada). Here's that video on Instagram: (best 12 sec i spent today)

Tesla on Instagram: “Model S starts the paint process”

 

[ThereAre4Cars]

Extremely unlikely IMHO: we do know that the Standard Range battery pack is finished, and that the new Grohmann machines are being installed to make them. The SR battery pack is lower weight and cheaper to build - both of which help margins.

Note that a lot of urban car use doesn't need medium or long range, and by offering Standard Range Tesla allows those customers to spend their money on other, higher margin options instead, such as AutoPilot which as a software product has a fixed development cost in the billions, but near 100% profit margin for every new unit sold.

It would also free up cell capacity to make more units, and to expand the Tesla Storage business.

In fact due to the mass reductions of the Standard Range battery pack we might even see lower capacity at introduction (50kWh instead of the 55kWh), which would further increase margins and would also allow an entry price below $35k.

Lowering the entry price would give Tesla protection against price based discrimination that many ICE-captured legislators are using to exclude Tesla from various incentives programs. (This is done in Germany, but also Connecticut, etc.)

Note how much demand expands in the new car market in advanced western economies by offering a lower entry price:

In the $30k-$45k range there's an average of 0.5%-2.5% improvement in demand for every $1k reduction of the base price (!).

If we interpret that histogram then the effect on demand is huge:

• For example by Lemur reducing the base from $49k to $45k the sustainably addressable market probably expanded by about ~4% of all car sales - plus a burst of pent-up demand probably twice that much. In the U.S. that's 4% of ~16m sales, i.e. 600K annual.
  
• By reducing the entry price from $45k to $39k demand will increase by ~8% (!) - and note the very high jump of 1.25% (note: that percentage is of the total population, not all of whom buy a new car every year) at $40k - the effect of $39,999 sticker prices ... That would be about a market of 1,200K new car sales.
  
• Going from $39k to $34k would unlock a demand bonanza: about +12% of demand unlocked. That's a price-accessible market of 1,800K units per year (!).
• Note that the existing addressable market of Tesla, i.e. demand for all $49k+ sales combined is about ~20% of the total market. I.e. Lemur alone expanded Tesla's price-addressable market by about 20% (from 20% to 24%), and a $34,999 base model would double Tesla's addressable market from 20% to ~40%.

Even if we factor in that half of the consumers won't buy a sedan but want a SUV, that's very large numbers in the U.S. alone, and with the introduction of the Model Y Tesla it's going to get really crazy.

(Another factor is that as Tesla walks down the demand ladder at every significant reduction of the entry price a huge amount of pent-up demand is unlocked as well.)

Also note another effect: if we weigh sales by unit value, then revenue and profits market share of Tesla increases from 40% to about 60-70% of all sales (!). People think that most money is made at the lower value, higher unit count cars, but that's wrong - ~80% of the profits are generated with the $30k+ sales.

(Maybe this new car sales price distribution chart and its effects on Tesla's addressable market could be included in one of the nice charts of @ZachShahan? The chart is from the U.K. and was done in 2013 - but it more or less applies well to today's U.S. market too, because it's centered around the current $35k average new car transaction price in the U.S., and because median income distribution is similar between the U.K. and the U.S.)

I.e. by reducing the entry price from $49k to $34k Tesla can probably increase its addressable market to over 40% of all sales, which is meaningful price-competition with 6.4 million units per year sustained - and if they can capture a meaningful percentage of it like they did in all the higher price segments, they won't run out of demand for a decade if all they do is to sell in the U.S. ...

I.e. Tesla not introducing the SR would be a huge mistake, IMO.

That histogram is giving me a headache.

1) The precision is so narrow it's noisy (high,low,high,low)
2) It suggests a correspondence of income to car price that may not be aligned as shown. i.e. the income distribution doesn't look to be the income distribution of people buying cars. In an extreme case the top 20% could be the only ones buying, and then the sales distribution still look like that. (That may not add up but that's the idea)
3) Presumably it's including used sales (edit: no -- it starts at just under 20k$ so must be new)

Here's the vid of that pic:

Watch As Tesla Model S Enters Paint Process

edit: seems like it would be useful to have a cumulative e.g integral of that graph so that you could calculate total percentage of sales under 30k$, under 40k$ much easier.

 

[Brando]

SR 0-60 5.6.
No problem with demand.
Tesla can't drop it. Dropping it would kill the mission, and killing the mission would kill the company.,

Thanks @Fact Checking - now that I see the MR is in fact ~15 kWh from the LR - the MR makes more sense to me.

@ItsNotAboutTheMoney - What I was trying to infer -
Tesla could - for perhaps competitive reasons or continuous improvement - replace the SR with the MR at the same price of the SR.

Economy of Scales continues and as costs of batteries inch down, Tesla could pass along the cost benefit to the customers and at the same time make sure Tesla offers the best product. This is of course part of Tesla advantages:

- quick market/competition response - agile I think is the buzzword Madison Ave. likes to use.
- build to actual orders
- offer the best - range/quickness of any competitors

You get the idea, right? Tesla has a lot of flexibility/options to keep the wheels turning.
plus PowerWall and soon the SEMI and in the not to distant future Model Y.
Continuous Improvement - key to staying competitive.

 

[Singuy]

I can't get over the irony of paying an actor to talk about how your company is "all work no talk".

Meanwhile the competitor they are trying to deride has basically no advertising budget because they spend every dollar on building products.

This is good freaken news. They only attack you if they feel threatened. If Tesla was a nobody and taking no one's sales, no one would spend any money attacking that company. They would spend as much money attacking a nobody Tesla as my attacking 2 year old daughter.

 

[Fact Checking]

The only agency that can legally create new shares is the company. Any naked shorts have to get covered pretty quickly and do most of the time.

That's wrong: if a retail client's shares get lent out by the brokerage and sold by a short seller, then both the original retail client and the new owner are longs. In fact that new retail long's shares could be lent out again, and again - almost infinitely. There's actually historic examples of short interest in excess of 100% (!) on certain instruments.

If we sum up all the shares owned by various people and institutions for Tesla we come to a number of over 200 million - even though the number of common stock is only 170m.

(And no, it doesn't require 'naked shorting' which is a short-term and mostly technical phenomenon largely under control these days.)

I.e. shorting has diluted the pool of people who are long Tesla, and has put pressure on the price: if you think that short selling 33 million shares of TSLA has no significant cumulative effect on the price I've got a bridge to sell to you ...

Note that there's a couple of other negative effects from diluting TSLA shares:

• When a short sells to a new long they are usually doing it while the price is dropping - i.e. the buy pressure from the new long is less visible.
• When a long is selling to another (new) long the price is usually marked up - i.e. buy pressure is visible.
• The TSLA float is only 127m shares, so the 33 million shares short have a larger relative effect on average price discovery behavior
  
• By increasing the pool of longs the number of shareholders who can be spooked into selling is increased as well
• By increasing the pool of longs without increasing the price the pool of future longs is decreased as well.
• Shorts also frequently engage in derivatives trades (PUT options in particular), to such an extent that the percentage of PUT options is often in the 70% range, only 30% of the options are CALL options. This has the negative effect of magnifying downside volatility of TSLA, when options market-making firms scramble to neutralize the delta risk of the PUT options they have written to short sellers. We've seen this effect on last Friday (2018/Oct/19 expiry) for example.

But there's more, short sellers are also engaging in very aggressive marking down of the price, as documented by @Papafox. The price features he calls 'icicles' and which I call 'spike-selling' are aggressive pressure-sales tactics that no genuine seller of shares would employ. Those features of the TSLA price action disappeared when the anti-short 'uptick rule' was in effect for ~4 trading days recently, so the correlation is very strong - and the SEC certainly has access to all data they need to determine that it was indeed performed by short sellers.

Such pressure selling tactics were used in the 4th of July week 'bear raid' that marked down the price from $370+ to below $300 ...

And note that nobody but short sellers have a motivation to actively mark down the price (even large, bearish investors who are cashing out don't want to hit the price too hard, so they can sell their stake at better average prices) - so this kind of artificial selling pressure, the amplification of negative news, the creation of self-fulfilling negative news by marking the TSLA price down would be largely absent without short sellers...

Also note that these 'icicles' are usually intraday phenomena and don't in themselves increase the short interest significantly - i.e. they are a 'hidden' cost of short-sellers and the cumulative trading volume generated by these attempts is probably well in excess of the 33m shares of short interest. The way short-sellers can do this without increasing short interest is by selling in aggressive, highly visible way, but then covering much more passively after having market down the price. Rinse, repeat. Often short sellers also seem to be coordinating with negative news releases.

TL;DR: The extensive level of shorting that is done with TSLA where over 25% of the float is short has numerous negative side effects to the TSLA price and to volatility.

 

[Artful Dodger]

Tesla could - for perhaps competitive reasons or continuous improvement - replace the SR with the MR at the same price of the SR.

The SR is a better car than the LR or even the MR for people who don't need more daily range than the SR allows. SRs will wear though brakes and tires more slowly due to lower mass. SRs will use less energy per mile as well especially in the city, since only a certain fraction of kinetic energy is recoverable with regen braking.

And in the larger picture, less resources and raw materials consumed to do the same job. It's not JUST about money. Cheers!

 

[Xpert]

John had 10 shares.

John rents 5 shares out to Bob.

John now has 5 shares and a promise from Bob to return 5 shares later.

Bob sells the 5 shares to Sam.

Now.

John has 5 shares and a promise from Bob to return 5 more shares later.

Sam has 5 shares.

There are still just 10 shares.

Is this really that hard to get?

So when stock price goes up bigly, sam keeps his 5 shares. Bob now freaks out or got margin call by his broker and has to scramble to buy 5 shares from market to cover, pushing price up even more bigly. Bob’s other short friends also need shares to cover but noone wants to sell to them, creating an epic short squeeze. This is what will happen to TSLA at Q4 ER

 

[Steve m]

That's wrong: if a retail client's shares get lent out by the brokerage and sold by a short seller, then both the original retail client and the new owner are longs. In fact that new retail long's shares could be lent out again, and again - almost infinitely. There's actually historic examples of short interest in excess of 100% (!) on certain instruments.

If we sum up all the shares owned by various people and institutions for Tesla we come to a number of over 200 million - even though the number of common stock is only 170m.

How many of these shares have voting rights?

When earnings or losses are calculated how many shares are used for the calculation?

How many of these longs have their shares registered.

For those longs whos shares are held in margin accounts haven't they allready transfered the rights to the brokers to loan out their shares?

In short is an IOU to a long who has their shares loaned out the same as a share?

 

[Zaxxon]

Whelp, Tesla's plan to use LeMR to pull forward SR buyers into Q4 appears to be backfiring. I have a friend who's been sitting on a Model 3 reservation for some time, waiting for the SR. Today we chatted about the new MR, he decided it was probably time to buy to ensure he gets the full tax credit, and we then caravaned over to the Tesla gallery to compare the colors he was considering.

During that drive I, uhh, took a spirited tack in my 3 thus ensuring that he in his 4Runner couldn't quite keep up.

Long story short, he didn't bite on the MR.

But I've got another referral and my buddy has a Performance 3 incoming in 4-8 weeks...

 

[ThereAre4Cars]

That histogram is giving me a headache.

1) The precision is so narrow it's noisy (high,low,high,low)
2) It suggests a correspondence of income to car price that may not be aligned as shown. i.e. the income distribution doesn't look to be the income distribution of people buying cars. In an extreme case the top 20% could be the only ones buying, and then the sales distribution still look like that. (That may not add up but that's the idea)
3) Presumably it's including used sales (edit: no -- it starts at just under 20k$ so must be new)

Here's the vid of that pic:

Watch As Tesla Model S Enters Paint Process

edit: seems like it would be useful to have a cumulative e.g integral of that graph so that you could calculate total percentage of sales under 30k$, under 40k$ much easier.

Regarding the analysis, COGS is an essential part of the equation since if for example the 35k$ model is 0$ marginal net profit then even infinite volume is useless (aside from crushing competitors), and there is going to be some shifting operation where it's better to raise price and sell fewer. No precise analysis of the SR model 3 can be done without far better precision in the COGS number which we have almost no access to right now with their guidance.

 

[dandurston]

...we do know that the Standard Range battery pack is finished, and that the new Grohmann machines are being installed to make them.

I think the new Grohmann machines are for the new module design, which is for any pack, not just the SR pack. The modules in general will get lighter and cheaper.

 

[Steve m]

I think in the past i have discussed shorts engaging market manipulation. Yes bear raids do occure and if enough weak longs have stop loss orders in place you can get an avalanche effect.

In the short term these effect stock prices and may effect a companies ability to raise additional capital. But if the company is performing then these will be short term effects.

I also think we should stick to standard definitions for terms that we use. Stock dilution occures when a company issues more shares.

 

[Fact Checking]

That histogram is giving me a headache.

1) The precision is so narrow it's noisy (high,low,high,low)
2) It suggests a correspondence of income to car price that may not be aligned as shown. i.e. the income distribution doesn't look to be the income distribution of people buying cars. In an extreme case the top 20% could be the only ones buying, and then the sales distribution still look like that. (That may not add up but that's the idea)

edit: seems like it would be useful to have a cumulative e.g integral of that graph so that you could calculate total percentage of sales under 30k$, under 40k$ much easier.

I found it very useful because it's the only such publicly available histogram for an advanced economy that I could find. (For some reason central banks seem to be very coy about properly summarizing and visualizing transaction level data.)

I'd say some of the noise in the data is possibly not due to lack of precision, but due to psychological levels in car purchase data - and this has to be back-calculated to GBP price levels in 2013. The sales-volume-weighted average GBP/USD was around 1.6 that year, so some of the peaks possibly correspond to £34,999, £39,999, £44,999 and £49,999, etc.

Also, for the relatively large $5k jumps I used a lot of the noise averages out. Admittedly I eyeballed most of the percentages, so it could be off significantly - but the trends are clear: as we get closer to $35k the incremental increase in demand goes up significantly. Also, the jump in addressable market size from ~$80k entry prices of the Model S/X to the $49k Model 3 was already huge.

Here's the full paper:

http://iopscience.iop.org/article/10.1088/1748-9326/10/6/064008/meta​

The data is available in an Excel table at:

The effectiveness of policy on consumer choices for private road passenger transport emissions reductions in six major economies -- dataset​

and the paper was written by authors at the "Cambridge Centre for Climate Change Mitigation Research (4CMR), Department of Land Economy, University of Cambridge" and was peer reviewed, so I presume their data source is pretty good.

(Note that some of the other, lower resolution images are showing sales data beyond $100k levels as well.)

 

[Artful Dodger]

Long story short, he didn't bite on the MR.

You Sir are Tesla's best salesman. Thank you, and everyone else that spreads the word.

 

[Fact Checking]

I also think we should stick to standard definitions for terms that we use. Stock dilution occures when a company issues more shares.

This is why I prefer to use the term "short selling has significant dilutive effects". In fact through some of the price channels I listed "significant short selling" (which 25% of the float certainly is) creates much worse effects than pure stock dilution...

Also note that Tesla probably won't pay dividends for at least 10 years, so for the next couple of years short selling has very close effects to true equity dilution.

I'd exchange 25% short barnacles for 25% of stock dilution anytime: the latter is a one time drop of maybe $70, followed by a huge cycle of investments that will grow the value of the company way below that 25% drop. The former is continuous parasitic damage to the brand, to demand, to the financing environment, to regulator behavior, to employee morale, to top end talent retention rates, etc. etc. - in addition to all the direct negative effects on price and on investor behavior they have.

 

[Drumheller]

The SR is still coming. Just two days ago the official Tesla twitter account confirmed that.

Tesla on Twitter

 

[Fact Checking]

Regarding the analysis, COGS is an essential part of the equation since if for example the 35k$ model is 0$ marginal net profit then even infinite volume is useless (aside from crushing competitors), and there is going to be some shifting operation where it's better to raise price and sell fewer. No precise analysis of the SR model 3 can be done without far better precision in the COGS number which we have almost no access to right now with their guidance.

That's true to a certain extent - but we do have the guidance from Tesla that they prefer to keep margins of all products at around 25% (with a 30% target), so them releasing it is a sign that they probably see the path towards those levels of margins.

And no, it's no true that $35k at $0 margin is useless: the entry price is actually one of the least bought variants for any car company and Tesla won't be different. The entry price is often just marketing, but there will be a lot of people who buy a $40k car: $35k base + $5k AutoPilot, which will already by a nice incremental margin even if the margin is zero at $35k.

Also, how many bare-bones $35k units are sold is entirely up to Tesla: they could increase the wait time to reduce demand for that variant. That's what car dealers throughout the U.S. are doing: it's actually pretty hard to buy a new car at the entry price, they are almost never in inventory ...