TSLA - Tesla Motors

[black-dog]

Yeah. I'm not sophisticated enough with options to contemplate how to get to a bet that they're headed to near-zero on the cheap. I'd considered what's the probability that they limp into reasonable Model 3 production as their dreams get discounted to zero (did a ton of math on what that valuation's like) and if you feel like it's likely someone would step in and buy the producing-cars but structurally-bankrupt future version of the company, suddenly the long-term bonds become interesting (though I wonder if as a buyer you'd want Tesla to have defaulted/be in bankruptcy so you don't have to assume that debt)

[SmallCap]

First Quarter production of model 3

 

9766 (8180 delivered)made over the 13 weeks of the quarter

2020 produced in the final week

7746 produced in the first 12 weeks of the quarter

645  Average produced over the first 12 weeks

 

That last week was a dramatic push involving long hours and people pulled off other lines and (conjecture here) I wouldn't be surprised at some unfinished cars being held back from the previous weeks, all done to  "prove haters wrong" but more realistically in order to give them a number to lead with in the headlines.

 

I know that production is ramping up and should pass the 2500 count sometime soon but what do you think production will be for week 1 of 2Q

 

[black-dog]

I'd bet it's a huge lull -- if it's 1500 I'd be shocked.

 

Can I recommend https://www.bloomberg.com/graphics/2018-tesla-tracker/ ?

 

[randomep]

First Quarter production of model 3

 

9766 (8180 delivered)made over the 13 weeks of the quarter

2020 produced in the final week

7746 produced in the first 12 weeks of the quarter

645  Average produced over the first 12 weeks

 

That last week was a dramatic push involving long hours and people pulled off other lines and (conjecture here) I wouldn't be surprised at some unfinished cars being held back from the previous weeks, all done to  "prove haters wrong" but more realistically in order to give them a number to lead with in the headlines.

 

I know that production is ramping up and should pass the 2500 count sometime soon but what do you think production will be for week 1 of 2Q

 

I asked this thread how Tesla could be worth its stock price and someone said 100k 3s in 2018, I thought that's as likely as me seeing a kangaroo in my backyard.....

[black-dog]

I asked this thread how Tesla could be worth its stock price and someone said 100k 3s in 2018, I thought that's as likely as me seeing a kangaroo in my backyard.....

 

100k in 2018? Wow.

 

As part of thinking about potentially shorting it, I did a lot of napkin math on this. If you assume they can't raise capital, and that means they can't go above 5k/week (their letters and statements on this are (probably intentionally) difficult to make sense of), and they can get to 25% gross margins on their cars, and the average selling price is $42,000 (Elon tweet), and they keep selling 100k of the S & X, with the same margins, at a P/E of 15 that's 2x what other car manufacturers demand, on a EPS basis if they carried no debt or other businesses you'd value them at ~$400/share.

 

(I'm valuing the semi at zero, which is generous, and not valuing a potential next model after the 3)

 

The problem being their accounting is effffffed. There's all kinds of shenanigans on where they're sticking costs, for instance -- a lot gets swept under the marketing rug. They need to massively build out their service network, avoid a recall on the new model (which having skipped testing and from early reports on build quality seems risky). They have the advantage of not having a dealer network for margin, but 25%? There's some good analysis on Seeking Alpha (Kevin Wenck) that argued persuasively they're not going to get to 10%. They're carrying eye-popping debt and trying to figure out how they're capitalizing it gave me a headache and I had to go lie down.

 

And then... anyway, there's a lot rotten.

 

To return to the question -- if they got 100k Model 3s out the door in 2018 rolling out at least 5k/week, while hitting their gross margin on it (and the Model S/X sell at current rates and their margins improve), still not worth it, but at that point they've achieved a series of miracles so valuing them at a very high growth multiple starts to be defensible.

[Spekulatius]

^ The above is true,  it Tesla is more a religion or cult than a stock. religions and cults may last longer than you would think and who knows what can happen between now and the time they finally end recapitalizing. Shorting is so dependent, even if you are correct about the final destination, you can go broke in between.

 

Maybe ther is a sma way to play this like shorting their bonds (where he upside is limited) or credit default swaps. I am not certain these even exist for Tesla.

[Dynamic]

Thanks for fleshing out what it would take in your opinion to justify that sort of price from a value perspective, black-dog. Definitely not a stock I'm tempted to buy for valuation despite my admiration for what the company is doing.

 

But I agree with Spekulatius that I think this company engenders an enthusiasm or pseudo-religious fervour (Ben Graham's Voting Machine) that can support a stock price far above where I'd have sold on overvaluation, and can support it for an enormously long time, potentially. For that reason I'm very wary of taking any short position reliant on its stock price falling too.

 

I think magnitude of likely price falls and the time that might be required to realise profits from going short may well be skewed to produce very modest expected returns and potentially not fast enough to offer an enticing annualized return.

 

[black-dog]

Dyanimic:

 

I think magnitude of likely price falls and the time that might be required to realise profits from going short may well be skewed to produce very modest expected returns and potentially not fast enough to offer an enticing annualized return.

 

Yes. This.

 

Let's say you entirely reasonably believe Tesla's in deep trouble, and like me you do a bunch of valuations and think if they dig themselves out of this production hole they're worth $150 maybe, but that'll take some time to play out... when I did the math a couple days ago, a Jan 2019 put at 250 was $39, and one at 200 was $22.  And if you want a longer time frame to let it pay out, Jan 2020s at the same strike prices were $58 and $37, respectively.

 

That's crazy town. Options are so expensive that you're still underwater on a strike price basis on a substantial correction towards a rational valuation (though obviously the price of the options would go up substantially).

 

Yeah, I just look at the whole thing and wish I was as sure of a stock being this overvalued but where way fewer people were engaged in religious debates about whether or not it was going to transform the world or not. But then, how likely is it a company would be this overvalued without that debate?

[oddballstocks]

You have to assume this is a binary, either their capital structure gets them or it doesn't.  When the wind goes out of the sail it falls like VRX.

 

With that you need to buy the long dated lower stuff.  What's the floor? $100/50/25? Who knows.  When volatility is low that's when you buy.  People are selling far OTM puts because "it'll never fall like that."

 

The back of the napkin is rough.  Someone did a workout showing if they were valued at 50% higher productivity than Toyota they'd be worth about $20/share.

 

Take a look through the strikes, some offers a 10x return profile.

 

On Twitter today someone was dredging up lawsuits where they weren't paying vendors.  The more this stuff comes out the more it compounds, and without a solid BS who knows what happens.  They're flying on confidence, that's not a great place to be.

 

 

[walt373]

I agree with oddballstocks that this is basically a binary situation so that makes options a lot more interesting. 2020 $90 strike put is selling for about $9. You only need to believe the chance of bankruptcy is > 10% for this to be a positive EV bet.

[benhacker]

I agree it's binary in some sense (they make it or they don't), but I'm not sure why binary leads you to puts.  Short is plentiful, cheap, and upside / bubble risk seems limited.  Were one to want to bet against it, a short with the proceeds put to better ideas would seem to be a very attractive proposition... not sure way OOM Puts are needed.

 

My 2 cents.

[black-dog]

oddballstocks:

Take a look through the strikes, some offers a 10x return profile.

 

Where do you think that sweet spot is? I'd love to talk through what your reasoning is.

 

In the larger sense, both you and wait373 are right in that options pricing has a known hole when it comes to binary events like this.

 

On Twitter today someone was dredging up lawsuits where they weren't paying vendors.

 

Yeah, that made the news, actually. And while legal action's just an extension of negotiation in the corporate world, it does take a lot for a supplier to sue for non-payment, and for the supplier to have let it get to that point.

 

benhacker:

Short is plentiful, cheap, and upside / bubble risk seems limited

 

Here's the problem with the options being so expensive, though -- if I short it at $300/share, and I think maybe if everything goes right it's worth $150, but I don't know when the market'll come to its senses and at the same time I'm worried they'll announce presales on a new model for a capital injection, or another event'll happen... so I want to buy call options to cap my loss at, say, $50/share... the 2020 call option at 350 is $55 (!), and the Jan 2019 call is $30.

 

That's rough.

 

I've actually been pricing out buying their bonds as a hedge. Their long-term debt's barely worth the electricity it takes to display its price on your monitor, but if you're worried that Tesla's going to be able to keep kicking the can down the road and be viable in a year, two years, then that's debt that'll get paid off and you've made a ton of money. My Excel sheet trying to work this out is insane.

 

I wish I could just flat bet someone that Tesla will either be bankrupt and toast or be bought out by someone else by 2020, dodge paying the time value on the options.

 

Weirdly this whole conversation is making me want to get off the sidelines and put money on it. Skin in the Game, as the cantankerous trader/philosophers say.

[Dynamic]

Makes me think of Longbets, but I don't imagine that's viable.

 

Spread betting CFDs etc seem too short term and would probably be priced similarly to equivalent options. 18 September 2018 - just over 5 months is the longest term bet I've seen in a City Index demo.

 

I suspect a deep bear market as well as decent execution by the company would be required to bring Tesla to a Value Investor's buy price, and even then there might be enough true believers to support the stock.

 

Personally I hope Tesla succeeds in all it does and catalyzes the rapid switch to cheaper, greener, safer vehicles across the market, and cheaper, greener, more reliable energy too. I'm sure the technologies behind the switch will change over time, but Tesla, whether it offers worthwhile economic returns to its shareholders or not, is a playing a big part in accelerating the cost reductions and making electric vehicles desirable. Compliance cars from major automakers might have got there eventually but possibly 5-20 years behind the current curve.

[walt373]

I agree it's binary in some sense (they make it or they don't), but I'm not sure why binary leads you to puts.  Short is plentiful, cheap, and upside / bubble risk seems limited.  Were one to want to bet against it, a short with the proceeds put to better ideas would seem to be a very attractive proposition... not sure way OOM Puts are needed.

 

My 2 cents.

 

That might change in the future. Available shares are dwindling and in the last few days IB had no borrow sometimes. The borrow cost has spiked in the past, so I wouldn't count on it being low. And I expect the short to get more crowded if it really starts falling. This is a nice site for borrow info: https://iborrowdesk.com/report/tsla.

 

Also, as mentioned by black-dog, due to the binary nature of the situation, the far otm strikes are underpriced imo. The implied volatility doesn't compensate enough for the possible volatility of what we recognize may happen to the company in real life. When you say "not sure way OOM Puts are needed", that to me implies that the puts are at best a necessary evil and you'd prefer to short the stock if possible. I disagree with that sentiment. I think puts have a much different and possibly better risk/reward profile than short stock. But of course that depends on price. In some cases I'd rather short the stock and maybe even sell a far otm put against it.

[black-dog]

(as they continue to bounce up) -- if you want to minimize paying for time value, and put a stake in the ground that their next earnings release will be a catalyst if nothing else is, the May 11 put options at 300 are $21, where the Jan 17 2020 ones are $75.

 

I'm no options expert, but even at 4x it seems such a wildly safer bet that the story's going to come apart by Jan 2020. Tesla's pretty adept at this point at kicking the can of worms just down the road.

 

Still, buying put options (or shorting) feels strange to me. Instead of looking for cigar butts on the sidewalk, I'm slapping an exploding cigar out of a plutocrat's face, knocking his monocle clean off, and hoping he realizes I saved him and tips me out of gratitidue for my pluck.

[black-dog]

Following up on the news that the Model 3 production's halted (and that they're working 24/7 and that they need both more robotics and more people, depending on what Tesla tidbit we're tea-leaf reading on) -- stock naturally up -- I have a more general question:

 

Is there a historical comp for Tesla that has ended well? A company with this kind of consistent production problems paired with debt, strange spin-offs and buy-backs of related business, weasel-y corporate communications, the whole deal?

 

I've been searching for comparable cases to look to for "how long does this last" and "what's the chance they pull out" and I'm not finding any.

[Voodooking]

Elon's recent email to all staff at Tesla is pasted below. I certainly wouldn't want to bet against a guy like this. In my opinion the world needs more people who approach things with this type of logic and passion, not less. Makes me proud to be a 'Long'.  :)

 

Progress, Precision and Profit

 

Elon Musk

 

Everybody

 

Progress

 

First, congratulations are in order! We have now completed our third full week of producing over 2000 Model 3 vehicles. The first week was 2020, the second was 2070 and we just completed 2250 last week, along with 2000 Model S/X vehicles.

 

This is more than double Tesla’s weekly production rate last year and an amazing feat in the face of many challenges! It is extremely rare for an automotive company to grow the production rate by over 100% from one year to the next. Moreover, there has simultaneously been a significant improvement in quality and build accuracy, which is reflected in positive owner feedback.

 

Starting today at Giga and tomorrow at Fremont, we will be stopping for three to five days to do a comprehensive set of upgrades. This should set us up for Model 3 production of 3000 to 4000 per week next month.

 

Another set of upgrades starting in late May should be enough to unlock production capacity of 6000 Model 3 vehicles per week by the end of June. Please note that all areas of Tesla and our suppliers will be required to demonstrate a Model 3 capacity of ~6000/week by building 850 sets of car parts in 24 hours no later than June 30th.

 

Any Tesla department or supplier that is unable to do this will need to have a very good explanation why not, along with a plan for fixing the problem and present that to me directly. If anyone needs help achieving this, please let me know as soon as possible. We are going to find a way or make a way to get there.

 

The reason that the burst-build target rate is 6000 and not 5000 per week in June is that we cannot have a number with no margin for error across thousands of internally and externally produced parts and processes, amplified by a complex global logistics chain. Actual production will move as fast as the least lucky and least well-executed part of the entire Tesla production/supply chain system.

 

By having a Model 3 subsystem burst-build requirement of 6k by the end of June, we will lay the groundwork for achieving a steady 6k/week across the whole Model 3 system a few months later.

 

As part of the drive towards 6k, all Model 3 production at Fremont will move to 24/7operations. This means that we will be adding another shift to general assembly, body and paint. Please refer anyone you know who you think meets the Tesla bar for talent, drive and trust. Between Fremont and Giga, Tesla will be adding about 400 people per week for several weeks.

 

Precision

 

Most of the design tolerances of the Model 3 are already better than any other car in the world. Soon, they will all be better. This is not enough. We will keep going until the Model 3 build precision is a factor of ten better than any other car in the world. I am not kidding.

 

Our car needs to be designed and built with such accuracy and precision that, if an owner measures dimensions, panel gaps and flushness, and their measurements don’t match the Model 3 specs, it just means that their measuring tape is wrong.

 

Some parts suppliers will be unwilling or unable to achieve this level of precision. I understand that this will be considered an unreasonable request by some. That’s ok, there are lots of other car companies with much lower standards. They just can’t work with Tesla.

 

Profit

 

A fair criticism leveled at Tesla by outside critics is that you’re not a real company unless you generate a profit, meaning simply that revenue exceeds costs. It didn’t make sense to do that until reaching economies of scale, but now we are there.

 

Going forward, we will be far more rigorous about expenditures. I have asked the Tesla finance team to comb through every expense worldwide, no matter how small, and cut everything that doesn’t have a strong value justification.

 

All capital or other expenditures above a million dollars, or where a set of related expenses may accumulate to a million dollars over the next 12 months, should be considered on hold until explicitly approved by me. If you are the manager responsible, please make sure you have a detailed, first principles understanding of the supplier quote, including every line item of parts & labor, before we meet.

 

I have been disappointed to discover how many contractor companies are interwoven throughout Tesla. Often, it is like a Russian nesting doll of contractor, subcontractor, sub-subcontractor, etc. before you finally find someone doing actual work. This means a lot of middle-managers adding cost but not doing anything obviously useful. Also, many contracts are essentially open time & materials, not fixed price and duration, which creates an incentive to turn molehills into mountains, as they never want to end the money train.

 

There is a very wide range of contractor performance, from excellent to worse than a drunken sloth. All contracting companies should consider the coming week to be a final opportunity to demonstrate excellence. Any that fail to meet the Tesla standard of excellence will have their contracts ended on Monday.

 

Btw, here are a few productivity recommendations:

 

– Excessive meetings are the blight of big companies and almost always get worse over time. Please get of all large meetings, unless you’re certain they are providing value to the whole audience, in which case keep them very short.

 

– Also get rid of frequent meetings, unless you are dealing with an extremely urgent matter. Meeting frequency should drop rapidly once the urgent matter is resolved.

 

– Walk out of a meeting or drop off a call as soon as it is obvious you aren’t adding value. It is not rude to leave, it is rude to make someone stay and waste their time.

 

– Don’t use acronyms or nonsense words for objects, software or processes at Tesla. In general, anything that requires an explanation inhibits communication. We don’t want people to have to memorize a glossary just to function at Tesla.

 

– Communication should travel via the shortest path necessary to get the job done, not through the “chain of command”. Any manager who attempts to enforce chain of command communication will soon find themselves working elsewhere.

 

– A major source of issues is poor communication between depts. The way to solve this is allow free flow of information between all levels. If, in order to get something done between depts, an individual contributor has to talk to their manager, who talks to a director, who talks to a VP, who talks to another VP, who talks to a director, who talks to a manager, who talks to someone doing the actual work, then super dumb things will happen. It must be ok for people to talk directly and just make the right thing happen.

 

– In general, always pick common sense as your guide. If following a “company rule” is obviously ridiculous in a particular situation, such that it would make for a great Dilbert cartoon, then the rule should change.

 

If there is something you think should be done to make Tesla execute better or allow you to look forward to coming to work more (same thing in the long term), please send a note to [redacted]

 

Thanks for being such a kickass team and accomplishing miracles every day. It matters. We are burning the midnight oil to burn the midnight oil.

 

Elon

[Liberty]

Interest how bears read this email and see a ton of negatives and longs read this email and see a ton of positives. This man and company truly are rorschach tests.

[Jurgis]

I like Musk and I wish him and Tesla well.

 

From his message though, I think that he's fighting battles in numerous fronts at the same time, which usually does not work well.

I hope it does work out this time.

 

Dum vivimus vivamus and all that.  8)

[JRM]

"I have been disappointed to discover how many contractor companies are interwoven throughout Tesla. Often, it is like a Russian nesting doll of contractor, subcontractor, sub-subcontractor, etc. before you finally find someone doing actual work. This means a lot of middle-managers adding cost but not doing anything obviously useful. Also, many contracts are essentially open time & materials, not fixed price and duration, which creates an incentive to turn molehills into mountains, as they never want to end the money train."

 

How does one get so out of touch with their company that they are just now figuring this out?  Seems pretty basic. 

 

As an aside, I find it mentally taxing to hear him talk about "first principles".

[Spekulatius]

I don’t think I would like to work there.

 

I am quite surprised that they are not running 24/7 schedules currently. That is pretty much a standard in the car industry or any other Capex heavy industry for that matter.

[Dynamic]

To take the other side of this for your consideration, black-dog, and before having read Elon's email...

 

How much of it is production 'problems' versus simply optimistic targets that they'll eventually reach, just later than their optimistic timescale, an optimism that investors make allowances for as 'motivational' and 'aspirational' not a promise to investors.

 

The Model X was roughly a year late and after the initial batch they continued to alter how they did the falcon-wing doors and various other things to improve producability. In retrospect they made things a little too complicated, but they got there in the end, and do seem to be able to make a margin on Model S and Model X at their premium price points. They are, however, also spending a lot on building out new superchargers.

 

Yes, the panel gaps and some of the fit and finish aren't quite as high end as some of their luxury competitors consistently, but the minimalist design and the performance is appealing to a lot of customers.

 

To put the other side still, perhaps debt at current low interest rates is quite possibly manageable, especially if they do reduce cash burn to zero or even become cash generative as production ramps up towards the end of this year.

 

Even if this is not true, it might be the sort of thinking among numerous holders that will prevent the stock price from crashing down as you foresee it ought to, or at least as soon as you foresee.

 

This certainly isn't a vaporware company with no products of customers. Perhaps they'll pull it off and become as large as Ford in the end. As someone with no financial interest either way, I hope they do.

[oddballstocks]

Dynamic,

 

The issue with cutting cash burn to zero is how do you do that?  When you enter into a contract with a supplier in any B2B transaction there is a term involved, either one-time, or over some duration.  Typical contracts include severability clauses, if you just call your suppliers and say "we're done this afternoon" you will be sued to the moon.

 

The email was interesting.  The item that stood out to me was the approval for any items over $1m.  When I've been at failing companies that sort of 'tell' always happened.  Suddenly simple purchases, planned purchases can't be approved anymore.

 

The issue with Tesla is their liabilities.  They wanted to grow too fast and went nuts.  If they wanted to be a niche electric car company financed by equity then great.  But they planned this giant roll-out, couldn't scale and have cash obligations coming due.

 

Regarding build quality, the term hasty comes to mind.  Things just seem rushed and that's why there are QA issues.  But they're in a catch-22.  If you wait years for a product you expect it to be worth the wait, but because they are behind they're rushing.  So people are waiting and then disappointed.  To my issue earlier, if they wanted to be niche, focused on quality etc that's not a problem.  Bentley isn't trying to mass produce vehicles, and the quality is evident.

 

I don't know the dynamics at the plant, but my guess is Musk is commander-ing the place around.  The classic fire drill response.  Time will tell whether they can figure this thing out.

[DTEJD1997]

"I have been disappointed to discover how many contractor companies are interwoven throughout Tesla. Often, it is like a Russian nesting doll of contractor, subcontractor, sub-subcontractor, etc. before you finally find someone doing actual work. This means a lot of middle-managers adding cost but not doing anything obviously useful. Also, many contracts are essentially open time & materials, not fixed price and duration, which creates an incentive to turn molehills into mountains, as they never want to end the money train."

 

How does one get so out of touch with their company that they are just now figuring this out?  Seems pretty basic. 

 

As an aside, I find it mentally taxing to hear him talk about "first principles".

 

Subcontractors & sub-subcontractors?

 

I would submit that is a way to shirk responsibility OR enabling shady stuff to go on by being able to say something like:  "We didn't mistreat our employees, it was subcontractor "two dudes from Staten Island!". 

 

There have been stories of Tesla subbing out their paint department to Eastern European subs who were paying the workers something like $6/hour, working them longer than permitted, and in unsafe working conditions:

 

https://www.theguardian.com/technology/2016/may/16/elon-musk-tesla-wages-apology

 

Another company that does this is AMZN.  They squeeze the workers as hard as they can and then get rid of them. 

 

Hiring subs is a way of keeping your corporate hands clean.  Have the subs do the dirty work, then you get rid of them.

 

http://www.wbur.org/onpoint/2017/12/17/amazon-delivery-exploited-op

 

 

[Cardboard]

If it wasn't for the "emotion" and comments like: "I hope that they succeed." and all that, I think that some people on this board would look at this very differently. Or be more rational.

 

Tripling production in less than 3 months: Well, in most businesses this is extremely hard to do, even doubling. Now we are talking about building cars and lots of complexity...

 

Quality issues and dealing with suppliers: While Musk may have created some internal religion about employees sacrificing everything to realize Musk's dreams and promises, I doubt this will be effective outside the firm.

 

I like these comments:

 

"Some parts suppliers will be unwilling or unable to achieve this level of precision. I understand that this will be considered an unreasonable request by some. That’s ok, there are lots of other car companies with much lower standards. They just can’t work with Tesla."

 

"There is a very wide range of contractor performance, from excellent to worse than a drunken sloth. All contracting companies should consider the coming week to be a final opportunity to demonstrate excellence. Any that fail to meet the Tesla standard of excellence will have their contracts ended on Monday."

 

Who do you turn to when you have terminated most of them?

 

Adding a shift: Now how this works? Is this a night shift? Are you going to put people on rotation? Are these new people earning a prime if on nights and who is going to shift to supervise them?

 

Training: Programming robots, doing quality control, even repetitive assembly work require training, coaching and time. If not mistakes are made or people don't know what to do.

 

Cut meetings: I have heard that multiple times at a previous organization that was running into a mini-crisis, technical issues. You know what? It did not work out. Communication especially in time of crisis is key. You need good managers to make it happen.

 

I could go on and on. Bottom line is that the guy is way over his head and made a significant mistake by trying to go mainstream with his cars. Niche market or luxury would have been profitable. Tesla owners of the Model S were proud because of performance, handling AND quality.

 

Now, this looks like it will end up making more cars but, with much less pleased owners. This could really hurt Tesla's brand. Chevy and Nissan know how to deal with the issues above.

 

Cardboard