TSLA Market Action: 2018 Investor Roundtable

[Fact Checking]

0001564590-18-026353 | 10-Q | Tesla, Inc.

Another nice part of the Q3 10-Q is that they have given 2019 and 2020 capex guidance for the first time, they re-confirm that Fremont needs minimal capex, and they re-confirm that they are not planning to raise equity or even issue corporate bonds to finance the Shanghai Gigafactory:

"In 2019, we expect to continue to increase the Model 3 production rate in our Fremont factory while needing only limited additional capital expenditures. As we continue to expand our existing manufacturing capacity, introduce new products, expand our retail stores, service centers, mobile repair services and Supercharging network, we will continue to utilize our increasing experience and learnings from past and current product ramps to do so at a level of capital efficiency per dollar of spend that we expect to be significantly greater than historical levels. Considering the pipeline of new products planned at this point, and consistent with our current strategy of using a partner to manufacture cells, as well as considering all other infrastructure growth and expansion of Gigafactories 1, 2 and 3, we currently estimate that capital expenditures will be between $2.5 to $3.0 billion annually for the next two fiscal years. Moreover, we expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources. For example, we expect that much of our investment in Gigafactory 3 will be funded through indebtedness arranged through local financial institutions in China. As always, we continually evaluate our capital expenditure needs and may decide it is best to raise additional capital to fund the rapid growth of our business."​

This level of capex is actually lower than expected - while revenue and cash flow will increase. I'd expect them to reinvest those extra funds, but that will be discretionary spending.

 

[neroden]

Best advice ever.

Really gave me a well rounded approach. Been considering it since reading.

My current thought:

Absolutely use inconvenient parking spaces.

Ev owners pay per kWh.

The only reason not to do this is the expense of installing metering and tracking usage. (Which is actually the original reason why Tesla didn't; Tesla chargers are cheaper to install than many because they don't have payment or usage tracking in the chargers.)

Sometimes it's significantly easier, at installation time, to not meter it at all. You can do pay-per-hour on the honor system, which is substantially less capital-intensive. And since you don't really care whether it's accurate -- the price is a deterrent to overuse, not a profit center -- the honor system is OK. Works well as long as there's *someone* at the front desk willing to handle the payments/check-in/check-out.

I like the pay per hour approach but costly to implement. Maybe 50% pay split due to low EV adoption in region. Raise that slowly to 80%. I see the problems with free and for me this is not about cost savings, more about improving community and building for long term success.

And then convince company to provide new EV owners with a $ “voucher” for the program. First $500 on us. This way no matter when or if you try ev you get the same benefit. A year of “free gas”

That way I accelerate the transition but build stable program.

 

[Fact Checking]

0001564590-18-026353 | 10-Q | Tesla, Inc.

This 10-Q details their plan to get to 7,000/week in Fremont, and to get to a 3,000/week target in their Shanghai Gigafactory, for the first time:

"We are continuing to work to increase Model 3 production to approximately 10,000 units per week. At the Fremont Factory, we expect to continue to increase our Model 3 production rate to approximately 7,000 units per week. Moreover, in China, we are developing plans to start producing approximately 3,000 Model 3 vehicles per week for the local market in China in the initial phase of our Gigafactory 3, which will have progressively increased levels of localization through local sourcing and manufacturing."​

I.e. I believe it was @KarenRei who speculated that they might be shipping some of their new paint shop lines over to Shanghai and reach 10k/week that way?

From the wording it appears to me the first Model 3's will be rolling of the Shanghai factory in 2019 already?

Edit #1:

Also, Gigafactory 1 producing the initial cells and modules for China confirmed:

"that we will be able to continue to expand Gigafactory 1 in a timely manner to produce high volumes of quality lithium-ion cells to be integrated into battery modules and finished battery packs and drive unit components for Model 3, including to support production in China as the level of local sourcing and manufacturing there progressively increases, all at costs that allow us to sell Model 3 at our target gross margins;"​

This explains how they are able to speed up the Shanghai Gigafactory so quickly: if it starts as a final assembly line in essence then they might be able to roll off Model 3's next year already, made from chassis, parts and modules shipped in from the U.S.

This will already avoid most of the tariffs.

Edit #2:

Their revenue in China dropped from $527m in Q2 to $409m in Q3 - which is impressive given the punishing tariffs of ~65% IIRC.

This was probably in part voluntary shifting to higher margin markets - i.e. the limited supply was taken up by the European and U.S. market. By ramping up the Shanghai Gigafactory faster Tesla will be able to resume China growth in 2019.

 

[neroden]

That's actually my average for the last two winters.
But my commute is 5km (3miles), so majority of energy is spent on warming up the battery, twice a day...

Oh yeah, the "turn it on, drive for half a mile, let it get cold-soaked again, repeat" usage cycle. I managed to get 1100 kwh/mile when I did that on even shorter trips than yours during a cold snap. Of course it didn't matter because I was only driving around town and didn't need range.

 

[neroden]

OP commented on those keeping options and being leveraged. Neither of you two guys seem to understand what being leveraged means. But one consequence is that you are at mercy of time, and while directionally you could be 100% right, pace of change may mean you lose everything, or come close to it. Been there, done that. Never again.

Agreed with Zhelko -- being on the wrong side of time decay is dangerous and being leveraged is very dangerous.

I am technically leveraged, but I've been super conservative about it -- I'm using some of my leverage capacity to back selling deep out of the money puts. This means I don't pay interest, I'm on the correct side of time decay, and the worst case means I end up selling my other stocks at inconvenient times to buy a bunch of TSLA at low prices, in which case I won't be leveraged but I will be more concentrated. But more likely the puts just expire.

 

[mongo]

Scroll up.

Post in topical thread y'all, and save us from spoilers.
Thanks!
Elon Musk Recode Interview 2018

 

[neroden]

I'm sure someone smarter than me already did some analysis on here a while back. But not all the short position is betting on a price fall. Some of it will be hedging by market makers, arbitrage plays on convertibles and risk covering by margined equity-loan financiers (Elon's personal liquidity line for instance).

* There will be a closeout of the arbitrage plays on the 2019 convertibles soon; could be up to 2 million shares unwound.
* I think I read an estimate of the market maker hedging numbers -- I can't remember it accurately. I think it was in the neighborhood of 8-10 million shares.

Of those that are betting on a price fall, not all are "Tesla Is a Zero" die-hards. Some will be short term valuation plays,

That's a mug's game; I've read many long-standing Wall Street shorters state that you never make a valuation short, you only make a fundamentals short. Of course there are always a lot of mugs. :sigh:

others will be focused on Tesla's high beta.

Tesla's beta, technically, means nothing at all and is just noise, given that Tesla's R^2 is essentially 0. You could make a volatility play on TSLA; but you'd do that with options, not with short-selling. Someone would have to be not merely mistaken or malicious, but genuinely confused, to short-sell based on Tesla's beta.

You'd expect the smarter ideological bears to be gradually exiting in the coming months/quarters. There will be a portion that are ready to go down with the ship.

Agreed. I expect Spiegel to go down with the ship.

Will be interesting to see what short volume is by say 05 July 2019, once Q2 delivery report is out.

 

[neroden]

The ~32 million shares short interest is actually surprisingly accurate:

• Hedging by options market makers is simply a proxy for the current short position of dominantly short bets in the options market. I.e. this is just as representative of short exposure and losses.
• There's no real arbitrage plays on the convertibles yet:

• I'm going to stop you right there. Apparently, according to what I've read from people who've been inside Wall Street banks at convertibles desks, most professional convertibles traders *immediately* run arbitrage plays on them.
• Specifically, they treat the convertible as a call option + a bond, and then sell calls mated with the embedded call option. Because the premiums on the market-traded calls are higher than the effective premium on the embedded call option in the convertible, they profit.
  
• (Obviously the market makers who sell them the call options have to go long on the stock to compensate -- unless they can sell the calls to someone else, which they probably can.)
  
• Given that the convertibles maturity dates are generally way out past where LEAP options are offered, they have to actually do something more complicated at first -- selling shorter-term calls, for instance, with the intention of rolling them, or using different strike prices. This means it's not a pure arbitrage, but their attitude is still one of arbitrage trading, and they attempt to hedge out all other movements.
• As the expiration date gets closer, they can switch to a purer arbitrage strategy, and I expect that by now the 2019s and 2020s are mostly hedged by calls sold against them.

• [*] there were less than 10 trading days over $360, and even a very lucky $380-ish short against convertibles is only a 5% gain - quickly wiped out by holding a short position for years. The biggest chunk of convertibles are 2020/2021/2022 maturities - far out to hold for a 5% gain. The 2019 $920m convertibles might serve as cheap call option protection against real short positions - but those short positions will still be real, just capped at ~$360 plus holding costs until March 1 2019. Note that these are only ~2.5 million shares worth - and it's very, very unlikely that the majority of convertibles owners are using them to short TSLA. The obvious convertibles play is to use them as a long position for gains above $360, with a guaranteed principal amount. I believe this is the purpose Soros bought a chunk of them for. I also think that locking down profits on the convertibles will start happening in the $450 range - at that point it will be a very healthy +25% gain.
  
  [*]I'm not sure I understand the personal liquidity line reference. The overwhelming majority of shorts on the market are hedge funds. While the veil of secrecy is seldom pierced, for a rare glimpse just look at the VW short squeeze litigation: 20+ billion dollars in losses and all the litigants appear to be NY hedge funds. Private banking and financing tend to be of a different class of psychology and typically won't go short the very, very high value individual they are financing. Think about the consequences if Elon finds out - I'm sure he'll be able to find another bank to bank with, and he won't execute that switch in Elon time. Think about the raised eyebrows of billionaire friends of Elon if they find out... I'm also pretty sure that Elon went the extra mile to assure that the stock he has put up as collateral doesn't get lent out or otherwise used against his company.

I do agree that until the stock price hits $360 most convertible holders would not be arbitraging with short sales; arbitraging with the sale of call LEAPS makes much more sense.

 

[KarenRei]

Took the time to transcribe the tunneling part:

Elon: So, what I discovered is that there are massive improvements possible in tunnelling technology. I always look at things from a 'fundamentals of physics standpoint'; if you apply physics first-principles to any given endeavour you can sort of envelope the possibilities. And what I discovered from talking tothe engineerings heads of the tunnelling companies was that they actually did not know, had no idea what the true potential of tunneling was. Because the first question I'd ask was, "Is the tunneling machine power limited or thermally limited?" And not one of them could answer the question. And I was like, "Well, this is not a good sign." And the answer is, everything is power limited within the framework of how much you can transfer heat away from the face with some sort of liquid cooling system. But we're so far away from that, crazy far away from that, of being anywhere near the thermal limit. Things like increasing power is relatively easy, but then you get to the point where you're melting the drill head. So, you have to put a lot of effort into cooling the drill head so you don't melt it, or go with advanced ceramics, and you still have to cool the bearings and the bearing housings, so... I'm used to a lot of the stuff from rocket engine design; the turbopump in the Merlin engine goes 36k RPM, it's got 10k horsepower, in ways...

Kara: So applying rocket technology to what you're doing with tunnels.

Elon: Essentially taking rocket technology and automotive technology and applying it to drilling technology.

Kara: Right. So the problem is it's too hot.

Elon: No. We need to massively crank up the power to the drillhead, then we need to cool it. But the first step is jacking up the power like crazy and then automating the placement of the tunnel reinforcements.

Kara: So that you don't have to continue going slowly to build it.

Elon: Right now tunneling machines will drill for a bit, and then they'll stop, and people will very slowly put in the reinforcements. So tunneling machines basically go at about half speed.

Kara: I think of that a lot about house construction. Why is house construction so slow?

Elon: Well, you can make house construction crazy fast if you're in a factory. Construction in general is... I think there's a lot of potential for disruption, and for entrepreneurs to enter construction in general... I think there's a tremendous amount of opportunity. Anyway, massively cranking up the power of the drill. And second, making it battery powered. If you don't make it battery powered, you have to have this massive cable. And then the cable, in order to be manageable at all, has to be like an 11kVa, 11 thousand volt cable, and even then it's thick. And then you've got to have step-down transformers for the drill head, because the drill head is going to operate at like 480 volts or thereabouts... so you've got these massive transformers, this crazy cable length...

Kara: So slow.

Elon: So it's very slow. And this is what blew my mind, they're using a diesel locomotive. The standard practice is to use a diesel locomotive to transport the tunneling segments to the drillhead and transport the dirt back out. And one way.

Kara: Like an old coal mine.

Elon: Yeah, it's so weird. So if you have a diesel locomotive in a tunnel then you've got to put this massive effort into blowing clean air into the tunnel and getting...

Kara: So how else would you get the dirt out?

Elon: We just use an electric car. So we took a Model 3 chassis and converted that into a train. Model 3 powertrain...

Kara: So you don't need to worry about the rest of the stuff.

Elon: It's not consuming oxygen and spewing noxious fumes. This was a big improvement.

 

[Boomer19]

You're right, I misspoke I sell puts deep in the money (strike $440), not 'far out of money'. Idea is to capture some SP rise in addition to time-value. Of course, potential is limited, and if we blew up to $1000, I would get only initial selling price, i.e. some $120 (assuming $20 is time value)

don’t you worry about the long side exercising their ITM put, for whatever reason - i guess this probability is reduced the father out you are from exp - but when i used to process options in my clearing job many a moon ago, i saw some pretty dumb or just questionable stuff go on lol. people exercising OTM stuff, for example (blowing right through the exercise by exception disclaimer, fat fingering, etc) or stuff waaaay far out from exp.

edit - ok, @Alphacrux beat me to it

 

[KarenRei]

I.e. I believe it was @KarenRei who speculated that they might be shipping some of their new paint shop lines over to Shanghai and reach 10k/week that way?

Yep They laid out pretty much the exact same scenario I did. But I mean, isn't that the obvious path?

* Ramp everything to the max that you can in Fremont and Giga without having to interrupt production or build new lines (design spec = 10k)
* Some lines (namely, GA and paint) apparently can't ramp to 10k in their current forms - only to 7k. So you have the potential for 3k "surplus" from everything else at Fremont, and pretty much unlimited capability at Giga 1.
* So you instead build the new paint and GA lines as your first stage in Giga 3, and import your surplus from Fremont and Giga. Then as time and capital allows, you progressively localize production.
* This localization frees up 3k of surplus back at Fremont, which can then be used to repeat this exact same process for Giga 4.

 

[neroden]

A large power module exactly fitting into a standard shipping container would have obvious advantages, and they'd also be the ideal disaster relief quick-reaction assets.

What would the capacity and mass of a container full of 2170 cells be?

Worth noting that there are multiple different sizes of standard shipping containers. There is one width; there are two heights (the shorter height is the better choice); and there are a *lot* of lengths. Since batteries are heavy, I think the short container (20 foot) would be the way to go.

 

[mongo]

Took the time to transcribe the tunneling part:

Elon: So, what I discovered is that there are massive improvements possible in tunnelling technology. I always look at things from a 'fundamentals of physics standpoint'; if you apply physics first-principles to any given endeavour you can sort of envelope the possibilities. And what I discovered from talking tothe engineerings heads of the tunnelling companies was that they actually did not know, had no idea what the true potential of tunneling was. Because the first question I'd ask was, "Is the tunneling machine power limited or thermally limited?" And not one of them could answer the question. And I was like, "Well, this is not a good sign." And the answer is, everything is power limited within the framework of how much you can transfer heat away from the face with some sort of liquid cooling system. But we're so far away from that, crazy far away from that, of being anywhere near the thermal limit. Things like increasing power is relatively easy, but then you get to the point where you're melting the drill head. So, you have to put a lot of effort into cooling the drill head so you don't melt it, or go with advanced ceramics, and you still have to cool the bearings and the bearing housings, so... I'm used to a lot of the stuff from rocket engine design; the turbopump in the Merlin engine goes 36k RPM, it's got 10k horsepower, in ways...

Kara: So applying rocket technology to what you're doing with tunnels.

Elon: Essentially taking rocket technology and automotive technology and applying it to drilling technology.

Kara: Right. So the problem is it's too hot.

Elon: No. We need to massively crank up the power to the drillhead, then we need to cool it. But the first step is jacking up the power like crazy and then automating the placement of the tunnel reinforcements.

Kara: So that you don't have to continue going slowly to build it.

Elon: Right now tunneling machines will drill for a bit, and then they'll stop, and people will very slowly put in the reinforcements. So tunneling machines basically go at about half speed.

Kara: I think of that a lot about house construction. Why is house construction so slow?

Elon: Well, you can make house construction crazy fast if you're in a factory. Construction in general is... I think there's a lot of potential for disruption, and for entrepreneurs to enter construction in general... I think there's a tremendous amount of opportunity. Anyway, massively cranking up the power of the drill. And second, making it battery powered. If you don't make it battery powered, you have to have this massive cable. And then the cable, in order to be manageable at all, has to be like an 11kVa, 11 thousand volt cable, and even then it's thick. And then you've got to have step-down transformers for the drill head, because the drill head is going to operate at like 480 volts or thereabouts... so you've got these massive transformers, this crazy cable length...

Kara: So slow.

Elon: So it's very slow. And this is what blew my mind, they're using a diesel locomotive. The standard practice is to use a diesel locomotive to transport the tunneling segments to the drillhead and transport the dirt back out. And one way.

Kara: Like an old coal mine.

Elon: Yeah, it's so weird. So if you have a diesel locomotive in a tunnel then you've got to put this massive effort into blowing clean air into the tunnel and getting...

Kara: So how else would you get the dirt out?

Elon: We just use an electric car. So we took a Model 3 chassis and converted that into a train. Model 3 powertrain...

Kara: So you don't need to worry about the rest of the stuff.

Elon: It's not consuming oxygen and spewing noxious fumes. This was a big improvement.

Please?
Elon Musk Recode Interview 2018
Really want to listen to the show, not watch the movie via trailers...

 

[HG Wells]

Interesting points about new products in the Kara Swisher's interview:

"We’re gonna have some other exciting announcements on the stationary storage front. ...We have a large product on the stationary storage side that I think will be very compelling for utility customers."

Miguel PeraIv0 on Twitter

"On the pickup truck:"Well I can’t talk about the details, but it’s gonna be like a really futuristic-like cyberpunk, “Blade Runner” pickup truck. It’s gonna be awesome, it’s gonna be amazing. This will be heart-stopping. It stops my heart. It’s like, oh, it’s great"

Miguel PeraIv0 on Twitter

Boss Short:

I am finding it very difficult to find anything bad about Tesla right now.
Elon has also been on his best behaviour.

Perhaps we could use an Elon quote "It stops my heart. It’s like, oh, it’s great" as a medical problem ?

Your Partner in Crime
Chief Editor
Shortsville Times

 

[neroden]

From the Recode interview:

Elon Musk: "It was ... like, we had the legal team delivering cars in Q3. Todd [Maron] is great. There was a lot of people ... Everyone had to basically go hardcore to solve the ramp."​

That was a fun tidbit!

Funny. I suspect Mr. Maron is better at delivering cars than he is at his day job, given Tesla's history of legal losses.

 

[KarenRei]

Worth noting that there are multiple different sizes of standard shipping containers. There is one width; there are two heights (the shorter height is the better choice); and there are a *lot* of lengths. Since batteries are heavy, I think the short container (20 foot) would be the way to go.

Hmm, good point - I did a volume comparison, but a mass comparison would be better.

 

[Fact Checking]

Agreed. I expect Spiegel to go down with the ship.

Agreed, I don't think he has any options but to go down with the ship or capitulate: I believe he went all-in on super leveraged 2020 PUTs, and there's very little way to lever up any more than that with a non-margin short bet.

 

[Electroman]

"On the pickup truck:"Well I can’t talk about the details, but it’s gonna be like a really futuristic-like cyberpunk, “Blade Runner” pickup truck. It’s gonna be awesome, it’s gonna be amazing. This will be heart-stopping. It stops my heart. It’s like, oh, it’s great"

My God. He sounds like Trump. Like all the hype.

 

[Ellec]

Agreed with Zhelko -- being on the wrong side of time decay is dangerous and being leveraged is very dangerous.

I am technically leveraged, but I've been super conservative about it -- I'm using some of my leverage capacity to back selling deep out of the money puts. This means I don't pay interest, I'm on the correct side of time decay, and the worst case means I end up selling my other stocks at inconvenient times to buy a bunch of TSLA at low prices, in which case I won't be leveraged but I will be more concentrated. But more likely the puts just expire.

Agree if you are talking short duration options, but longer term options can be rolled on every spike. You don't sit and watch it decay to zero for 6 months. Tesla is a volatile stock so you are bound to get a spike up within 6 months where you can lock in profits.

 

[Boomer19]

Agreed with Zhelko -- being on the wrong side of time decay is dangerous and being leveraged is very dangerous.

I am technically leveraged, but I've been super conservative about it -- I'm using some of my leverage capacity to back selling deep out of the money puts. This means I don't pay interest, I'm on the correct side of time decay, and the worst case means I end up selling my other stocks at inconvenient times to buy a bunch of TSLA at low prices, in which case I won't be leveraged but I will be more concentrated. But more likely the puts just expire.

yep, i’ve sold some jan 20 200p myself - i like that angle to supplement as well