TSLA Market Action: 2018 Investor Roundtable

[BioSehnsucht]

From luvb2b's modeling, do they even need to sell the guestimated 100k in ZEV credits? It seems like they could be profitable with 0 ZEV sales forever going forward? (which would essentially make any ZEV sales free money, and also remove the potential bear argument that ZEV credits are a critical but unreliable thing propping up Tesla)

 

[The Blue Owl]

Hey, I'm supposed to be on your ignore list - or was that a lie too?

Apropos lies, you wrote another big one here:



Huh? Gross margin very much does not include fixed costs.

The link you googled doesn't explain it properly, but this one does:

Here Are the Reasons Why Gross and Contribution Margins Are Different​

Reasons Why Gross and Contribution Margins Are Different

[...]

"Excluded from both ratios are a company's fixed costs -- among them costs associated with salaried employees and executives and other costs associated with its physical plant."​

Another piece of incontrovertible evidence that you are just bullshitting in this thread.

Actually, after doing some more reading, it looks like both of you are correct, depending on which fixed costs we are talking about. Some fixed costs, like executive salaries, are not included, as you say above, but other fixed costs, like salaries of the production line workers, are included in the cost of goods manufactured (and therefore impact gross margin), because they are directly related to producing the widgets. Same goes for rent (the rent on the factory, for instance, must be included under absorption costing as part of factory overhead, while rent for stores isn't (that one goes to SG&A).

Bird is also correct on contribution margin. Only variable costs enter into its calculation, as explained in the link.

The links seem authoritative to me.

"Steven Bragg, CPA, is the founder of AccountingTools, Inc. He is the author of more than 100 business books and courses, including the best sellers Cost Accounting Fundamentals, The CFO Guidebook, Closing the Books, Payroll Management, and The GAAP Guidebook."​

 

[Fact Checking]

Investopedia says gross profit does not include fixed costs, but then in the same paragraph says GAAP requires absorption costing, which includes the fixed costs.

It includes some fixed costs, but in the case of Tesla the majority of the fixed costs (R&D, SG&A) are outside the gross profit calculation. See this more detailed answer where I try to estimate some of the components that are included - but @luvb2b can correct me if something's off.

If that estimate is accurate then at a 55k/quarter delivery rate there's maybe $100m of fixed costs distributed among all Model 3 units, which is a ~3% margin reduction, there's a temporary extra labor component that Tesla disclosed which is probably another ~4%, plus there's the per unit depreciation cost that is around ~1.5% fixed - this is how at a 4.3k/week delivery rate the Model 3 gross margin is ~16% as in @luvb2b's model, while at the 10k/week rate sometime in 2019 is will be ~25% like the Model S/X.

But in terms of cash flow analysis, the non-cash costs can be excluded, so if we take 15% gross margin as the cash generation capability that is probably under-estimating the true cash generation capability by at least ~3% and leave some room for unexpected opex increases as well.

This is why FireBirdAlpha's comments are inane: he is essentially arguing to raise the cash flow estimate, which would be further hurting his bankwuptcy argument.

 

[The Blue Owl]

It includes some fixed costs, but in the case of Tesla the majority of the fixed costs (R&D, SG&A) are outside the gross profit calculation. See this more detailed answer where I try to estimate some of the components that are included - but @luvb2b can correct me if something's off.

Thanks, we cross-posted in agreement.

I get the cash-flow argument, and I think you are correct on the larger point. I was just trying to understand the definitions, so I went reading.

 

[oneday]

From luvb2b's modeling, do they even need to sell the guestimated 100k in ZEV credits? It seems like they could be profitable with 0 ZEV sales forever going forward? (which would essentially make any ZEV sales free money, and also remove the potential bear argument that ZEV credits are a critical but unreliable thing propping up Tesla)

ZEV credits are estimated at $100,000,000. And Net Profit is estimated at $10,000,000. So yes, they would still need ZEV's and we will hear the shorts and media focus on it like its the only reason Tesla is alive and they're not doing anything else right. But I think this is the last quarter they'll be able to use that argument.

Non-GAAP net income is estimated at $260,000,000 so they wouldn't need ZEV's to post a non-GAAP profit.

 

[aubreymcfato]

BMW comes out of the closet says the obvious.

This is incredible: they write an article about BMW and Tesla, and make a graph without Tesla sales in it!

 

[elasalle]

That's false, your calculation makes a series of basic accounting mistakes in (under-)estimating Q3 cash flow improvements:

• Not only did the margin increase to 15%, but it increased for all Model 3's delivered due to economies of scale, not just the 'incremental' ones. I.e. the 15% margin applies to all 55,840 Model 3's delivered, which is +$502m of cash flow instead of Q2's break-even.
• But it gets better: compared to Q2 Tesla delivered 5,360 more Model S+X vehicles, which at an average ASP of $104k and a profit margin of 28% adds another +$156m cash flow.
  
• But it gets better: inventory levels got lower, Tesla added 517 Model 3's to inventory, and delivered 4,533 Model S+X vehicles from inventory. This added approximately +$340m of cash flow.

All of these factors add +998 million dollars of free cash flow in Q3 alone, compared to the Q2 baseline. (These are quick estimates: see luvb2b's model updated with today's delivery numbers for the details.)

Tesla will likely be able to pay back much of the 2019/March convertibles of $920m from its Q3 free cash flow alone... (!)

But there's Q4 free cash flow and much of Q1/2019 free cash flow as well - which will be useful to finance the Chinese Gigafactory capex, Model Y capex and a lot of other nice Tesla growth projects that will make the (remaining) shorts squirm.

If true, Couldn't 2019/March convertibles of $920m be paid off before Q3 earnings (the Fed loans were paid off years in advance)? Wouldn't this be better than OOP tweet

 

[tander]

If true, Couldn't 2019/March convertibles of $920m be paid off before Q3 earnings (the Fed loans were paid off years in advance)? Wouldn't this be better than OOP tweet

That would be big.

 

[dc_h]

Can't believe we had to revert to sausage analogies. Anyway I would assume this means that's another $500m in positive cash flow (based on 40% of the car on favorable payment terms) from September, bringing current cash balance to ~$3.5b based on luvb2b's numbers. Wait for a surprise on ZEV credits ontop too.

In other words, totally bankwupt.

We shouldn’t get too carried away with this idea. They still have cars in transit and some cars take 4 or even 8 weeks from factory to garage. Getting a fleet of electric semis might help reduce delivery time and improve cash flow.
I think the sales push this week is going to make this cash flow concept work pretty well this quarter, but may be tougher in future quarters.

 

[EVNow]

This is incredible: they write an article about BMW and Tesla, and make a graph without Tesla sales in it!

View attachment 340220

Because Tesla doesn’t announce monthly sales ? It’s high time Tesla started releasing monthly sales. Everyone can then see they are beating Merc & BMW.

 

[Fact Checking]

Bird is also correct on contribution margin. Only variable costs enter into its calculation, as explained in the link.

Well, there's some weird cases - for example there are some 'fixed costs' such as tooling depreciation expenses, that are, via specific depreciation methods, turned into a 'variable cost' that scale from quarter to quarter depending on the exact unit count.

Is thus depreciation a variable cost or a fixed cost? "It depends".

So the best path is to explain exactly what you are including, which FireBirdAlpha didn't do - he just tried to hide the plain fact that he posted a bogus calculation that arrived at about 30% of the real probable cash flow improvement in Q3 ... i.e. his calculation is off by a factor of 3 ...

All which was done to support his lie that Tesla is about to go bankwupt.

 

[andrewt3000]

They need 1.4B in unrestricted cash in the bank on January 1st in order to be in compliance with their ABL agreement (900M March debt + 500M minimum cash balance)

FactChecker is on my ignore list, but I hit that "Show Ignored Content" button just for you.

For starters, I'm talking about cash metrics. Gross Margin is not a cash metric because it includes depreciation. Gross contribution is the cash metric, and it's generally much weaker when it comes to "economies of scale."

Stopped reading after that.

As a side note, I think FactChecker is just a ValueAnalyst clone account because he can't post original content under that pen name while charging for his SeekingAlpha pro subscription.

He's going to remain on my ignore list. His analyses are frequently grossly incompetent.

Here is the tell with people like this... an unnatural mixture of investing and accounting knowledge mixed with naiveté. Just like when they says Tesla looses money on every car they sell... are we supposed to believe these hedge fund managers don't understand gross margins? so then the question is what is their motivation? To spread misinformation and FUD. If they can do that... they can destroy companies that depend on financing. As they put it... it becomes a self fulfilling prophecy.

Ignore!

 

[shootformoon]

Please, do not argue with the shorts. This is a TSLA INVESTOR thread. By definition, short sellers are not tsla investors. The time of our real tsla investors is priceless.

BTW, every time you guys mention Bob Lutz, Baghdad Bob's images flash.

 

[MTL_HABS1909]

Please, do not argue with the shorts. This is a TSLA INVESTOR thread. By definition, short sellers are not tsla investors. The time of our real tsla investors is priceless.

Exactly! People who pollute this thread arguing with obvious trolls have no right to be upset when Elon does the same thing on Twitter!

 

[Fact Checking]

If true, Couldn't 2019/March convertibles of $920m be paid off before Q3 earnings (the Fed loans were paid off years in advance)? Wouldn't this be better than OOP tweet

Not sure they can be paid off in advance, and buying them back would require a debt tender, with needs to be announced 20 days in in advance or so (IIRC).

Owners of the notes might also refuse to sell, if the stock price rises near $360.

I think Tesla accumulating cash in a visible fashion (increasing 'cash and cash equivalents' line in the Q3/Q4 reports), and paying off the ~$400m debt due in Q4 will make the point that they can pay their debt.

 

[Krugerrand]

This is incorrect. This is the first delivery report in a while that does not mention financial guidance or the reservation list.

Q2 Deliveries Report:

We also reaffirm our guidance for positive GAAP net income and cash flow in Q3 and Q4

The remaining net Model 3 reservations count at the end of Q2 still stood at roughly 420,000
​

Q1 Deliveries Report:

Net Model 3 reservations remained stable through Q1.

laying the groundwork for Q3 to have the long-sought ideal combination of high volume, good gross margin and strong positive operating cash flow.​

Net working capital is at negative 2.6 billion.

They had 2.2B in cash at the start of the quarter. However, Accounts Payable - Accounts Receivable was -2.5B. All of these are included in net working capital.

Another way to look at it:

2.2B in cash
- 3B accounts payable
+ 500M accounts recievable
- 300M due in November
- 500M minimum cash balance
- 900M due in March
- 1.2B in committed CapEx
= 3.2B cash needed before Jan 1st



They need 1.4B in unrestricted cash in the bank on January 1st in order to be in compliance with their ABL agreement (900M March debt + 500M minimum cash balance)

Please tell me your profession is that of a Gardener or Pet Salon Fashion Consultant.

 

[oneday]

Not sure they can be paid off in advance, and buying them back would require a debt tender, with needs to be announced 20 days in in advance or so (IIRC).

Owners of the notes might also refuse to sell, if the stock price rises near $360.

I think Tesla accumulating cash in a visible fashion (increasing 'cash and cash equivalents' line in the Q3/Q4 reports), and paying off the ~$400m debt due in Q4 will make the point that they can pay their debt.

Also, as @neroden has pointed out, the March convertibles are currently trading above par, so yeah, probably safe to assume owners of the notes would refuse to sell.

 

[dandurston]

That's false, your calculation makes a series of basic accounting mistakes in (under-)estimating Q3 cash flow improvements:

• Not only did the margin increase to 15%, but it increased for all Model 3's delivered due to economies of scale, not just the 'incremental' ones. I.e. the 15% margin applies to all 55,840 Model 3's delivered, which is +$502m of cash flow instead of Q2's break-even.
• But it gets better: compared to Q2 Tesla delivered 5,360 more Model S+X vehicles, which at an average ASP of $104k and a profit margin of 28% adds another +$156m cash flow.
  
• But it gets better: inventory levels got lower, Tesla added 517 Model 3's to inventory, and delivered 4,533 Model S+X vehicles from inventory. This added approximately +$340m of cash flow.

All of these factors add +998 million dollars of free cash flow in Q3 alone, compared to the Q2 baseline. (These are quick estimates: see luvb2b's model updated with today's delivery numbers for the details.)

Tesla will likely be able to pay back much of the 2019/March convertibles of $920m from its Q3 free cash flow alone... (!)

But there's Q4 free cash flow and much of Q1/2019 free cash flow as well - which will be useful to finance the Chinese Gigafactory capex, Model Y capex and a lot of other nice Tesla growth projects that will make the (remaining) shorts squirm.

Perhaps I'm mistaken as usual, but I don't think Tesla added Model 3 to inventory.

Production was 53,239 while deliveries were ~55,840 so Tesla drew Model 3 inventory down by 2600 cars.

That's a difference of 3100 cars from your math (+517 vs -2600) which is another +186 million of cash flow (at 60k/car). Thus about 1.2 billion total.

EDIT: Then again, I don't see 4600 S + X from inventory as deliveries were only ~800 cars over production.

 

[TrendTrader007]

Purely from technical standpoint $TSLA shorts are on the fence and fighting a losing battle:
Short term hourly and 2 hrly charts show excellent support right here at $300
Double bottom on weekly chart
Island reversals twice on daily chart within the last month
Much more significantly potential island reversal on monthly chart aka morning star like candlestick pattern
$TSLA shorts making a last ditch effort in vainly attempting to push SP sub $300 but their likelihood of success is even lower than Trump getting a second term
In short expect SP to rally fiercely tomorrow or within the next few days and shorts being soundly vanquished

 

[The Blue Owl]

Please, do not argue with the shorts. This is a TSLA INVESTOR thread. By definition, short sellers are not tsla investors. The time of our real tsla investors is priceless.
.

Certain arguments should be analyzed and debunked if incorrect (which is almost always), especially those that mix half-truths or true but irrelevant elements with the lie in order to make it more effective. There are many readers out there who don't even have accounts but take their info from here. Obviously stupid arguments like "demand is dropping" should be ignored, especially after having been debated to death, but the more neutral- or authoritative-sounding ones that seem somewhat plausible on the surface should be responded to. Feel free to skip over the post(er)s you don't care about.