TSLA - Tesla Motors

[Liberty]

A year of brain damage for both longs and shorts, to end up in basically the same spot...

[Grant]

A year of brain damage for both longs and shorts, to end up in basically the same spot...

This is why my strategy is to sell covered puts on a short common stock position. In 2019 my data may indicate a straight short is a better idea, but until then all shorts have to hope for is Elon doing something really stupid or getting arrested.

[SHDL]

A year of brain damage for both longs and shorts, to end up in basically the same spot...

 

Indeed.  I think it was either Soros or Druck who said something like “good investing is boring investing; you’re doing it wrong if you’re having too much fun.”  Now I’m not sure if I totally agree with that, but a nice thing about investing is that you can always find a nice quote for any given occasion. 

[Jurgis]

I think it was either Soros or Druck who said something like “good investing is boring investing; you’re doing it wrong if you’re having too much fun.”  Now I’m not sure if I totally agree with that, but a nice thing about investing is that you can always find a nice quote for any given occasion.

 

LOL. And now we have a nice quote about nice quotes.  8)

[rkbabang]

I think it was either Soros or Druck who said something like “good investing is boring investing; you’re doing it wrong if you’re having too much fun.”  Now I’m not sure if I totally agree with that, but a nice thing about investing is that you can always find a nice quote for any given occasion.

 

LOL. And now we have a nice quote about nice quotes.  8)

 

 

"One day some years ago while reading Dombey and Son I came to Chapter 15, where, in the midst of the story, there were six words of exhortation and command: 'When found, make a note of.' I reached for my notebook and made a note of Dicken's note to make a note of what I had just found." --Helen Smith Bevington , When Found, Make a Verse Of

 

 

Following the advice of Helen Bevington's quote about her note of Dicken's quoted note to make a note, I'm going to make a note of the nice quote about nice quotes.

 

[SHDL]

I'm glad you guys got the joke.  8)

[tytthus]

A witty saying proves nothing.

 

-Voltaire

[SHDL]

A witty saying proves nothing.

 

-Voltaire

 

Sounds like I was a few centuries late.

[Jurgis]

A witty saying proves nothing.

 

-Voltaire

 

Sounds like I was a few centuries late.

 

Ah those French. They did everything better. In the past.

[Haasje]

It was Soros. Also look at Druckenmillers portfolio  :o

[Liberty]

https://www.recode.net/2018/11/2/18049504/elon-musk-tesla-spacex-kara-swisher-interview-recode-decode

 

Podcast interview with Kara Swisher. I haven't listened yet, so don't know if it's good.

[Grant]

From the 10-Q:

 

ZEV credits sales were $52.3 million and non-ZEV regulatory credits sales were $137.2 million in the three months ended September 30, 2018 ...

 

In the recent past, non-ZEV regulatory credit sales had been disclosed in the quarterly update letters. Not so for Q3. These credits account for a lot of the unexpectedly high margins in Q3.

 

Automotive Regulatory Credits

 

California and certain other states have laws in place requiring vehicle manufacturers to ensure that a portion of the vehicles delivered for sale in that state during each model year are zero-emission vehicles. These laws and regulations provide that a manufacturer of zero-emission vehicles may earn regulatory credits (“ZEV credits”) and may sell excess credits to other manufacturers who apply such credits to comply with these regulatory requirements. Similar regulations exist at the federal level that require compliance related to greenhouse gas (“GHG”) emissions and also allow for the sale of excess credits by one manufacturer to other manufacturers. As a manufacturer solely of zero-emission vehicles, we have earned emission credits, such as ZEV and GHG credits, on our vehicles, and we expect to continue to earn these credits in the future. We enter into contractual agreements with third-parties to purchase our regulatory credits. Payments for regulatory credits are typically received at the point control transfers to the customer, or in accordance with payment terms customary to the business.

 

We recognize revenue on the sale of regulatory credits at the time control of the regulatory credits is transferred to the purchasing party as automotive revenue in the consolidated statement of operations. We had no deferred revenue related to sales of automotive regulatory credits as of September 30, 2018 or December 31, 2017.

 

I'm trying to derive their quarterly regulatory credit sales from their filings.

[SHDL]

I'm still digesting the 10-Q, but here's an interesting observation:

 

From Q2 to Q3, warranty costs incurred went from 50 m to 54 m (8% increase) while revenue went from 4.0 b to 6.8 b (70% increase).  This alone seems to have given them something like a 2 percentage point boost in gross margins. 

 

I can see how a change in product mix could generate such an effect, but its magnitude here really does surprise me. 

[SHDL]

I’m done digesting the 10-Q.  Some comments:

 

1. Red flags?

 

I don’t really see any.

 

I’m still not sure about their warranty reserves (see my previous post), but that’s the only number I find questionable, and at ~30 m it’s not a huge deal.

 

2. Earnings sustainability

 

The company reported 255 m in net income for the quarter.

 

But like Grant pointed out above, this number was boosted by a 189 m sale of regulatory credits, and given its lumpy nature (189 m in Q3, 54 m in Q2, 80 m in Q1), it is probably a good idea to (at least) do some smoothing over time.  For example if I replace the 189 m with the YTD average of 108 m, pre-tax income drops by 81 m.

 

With this and some other rudimentary adjustments (amortization of intangibles, legal fees, and income taxes), my guess is that they can probably maintain around 180 m in quarterly net earnings even if the business does not grow from here.

 

3. Liquidity

 

Given the above and how much cash they already have (plus all the other levers they can pull to improve their short term liquidity), it doesn’t look like the company is going to default on its debt any time soon.

 

4. Near term projections

 

Management says they expect their Model 3 production to go from the 4,300/week they achieved this quarter to 7,000/week at Fremont with limited additional capex. 

 

If that really happens, I can see how their annual net income could get to somewhere in the 1.4 b to 4.3 b range (depending on how much operating leverage they get) before too long. 

 

On the other hand, this management team does have credibility issues.

 

5. Valuation

 

The stock is obviously not cheap but it doesn’t look particularly bubbly either if you believe the company has a reasonable shot at achieving their stated goals above.

 

6. Conclusions

 

I’m still on the fence, but I’m starting to think that I might actually go long at some point. 

[Grant]

SHDL, I agree there were no red flags. Might we call the lack of disclosure regarding supplier rebates a yellow flag? The $TSLAQers are saying the language regarding a a single "entity" comprising 10% or more of accounts receivable is strange, and might represent supplier rebates.

 

Regarding sustainability, consider:

 

- Tax credits get cut in half for all cars delivered after Dec 31st. At 83,500 quarterly deliveries, that's $313M fewer subsidies.

 

- Average regulatory credit sales over the last 2 years have been $98M, $91M fewer than Q3. There's been a lot written on how ZEV credits aren't going to be worth much in 2019. I'd imagine as other manufacturers ramp up BEV production, the same will be true of GHG credits?

 

- Tesla lowered the price of the RWD Model 3 shortly into Q4. A $3,000 discount for 13 fewer kWhs. It's been said the MR uses the LR pack with fewer cells, implying a $1,300 lower cost if we assume $100 per kWh cell cost. Per Troy Teslike's data, 42% of Model 3s in Q3 were RWDs. If these had've instead been MRs, this would've cost ~$40M less in gross income.

 

- FSD is no longer an option. In Troy Teslike's data, 23.1% of purchasers bought this $3,000 option. If we extrapolate this to all 83,500 orders, that is $58M of gross income lost.

 

- The performance upgrade package is now included in Performance Model 3s. 11.9% of all Model 3s delivered in Q3 included this upgrade, so including this for free knocks out $33M in gross income.

 

- Then of course there's the $71M one-time opex discount Deepak mentioned on the call.

 

- SG&A actually dropped. Tesla had customers helping sell Model 3s, as well as engineers and mechanics. Sales experiences were anecdotally horrible. It takes longer to sell a Tesla than a normal car, because of all the abnormal features people aren't familiar with. It stands to reason sales costs per delivery will increase in the future, though this may be offset by continued liquidation of Solar City.

 

- Tesla had every incentive to juice this quarter as much as possible, so they can start converting bonds into stock in the beginning of 2019. Keep in mind they've juiced numbers before. The last time Tesla posted a GAAP profit was 2016 Q3. They also sold an unusually large value of regulatory credits ($168M). SG&A as a percentage of revenue dropped from 25.3% down to 14.7% that quarter, only to go back up again in subsequent quarters (don't read too much into this though, since the SCTY merger went through in Q4).

 

So If try to "normalize" Q3's results for Q4, I get at least $293 less net income. For Q1 that could be $606M. European sales could make all this moot, even at the lower Model 3 options / ASPs we now see, but there's also the upcoming Service Hell to consider.

 

I continue to hold a short position in the common stock, which covers my short position in near-term puts. It's highly unlikely the cash flow is fake. With a near-term cash crunch off the table, I'll gladly keep selling $TSLAQers extremely expensive puts.

[Grant]

I have been going over the NY registration data.

 

Wow does Tesla do a lot of their sales at the end of each quarter! Perhaps this is one reason why their sales expenses seem so high? All the capital and manpower needed to handle the burst of deliveries at the end of each quarter doesn't look like it's put to good use the rest of the time. Here's a table:

 

week of Q	"new" registrations
1		124
2		159
3		190
4		177
5		190
6		167
7		200
8		238
9		299
10		325
11		473
12		522
13+		966

 

"New" is in quotes because I don't actually know which cars being registered are new. I just guess they are if they're made in the same year they're being registered in. Data goes back to the start of 2017.

[treasurehunt]

I'm still digesting the 10-Q, but here's an interesting observation:

 

From Q2 to Q3, warranty costs incurred went from 50 m to 54 m (8% increase) while revenue went from 4.0 b to 6.8 b (70% increase).  This alone seems to have given them something like a 2 percentage point boost in gross margins. 

 

I can see how a change in product mix could generate such an effect, but its magnitude here really does surprise me.

 

Page 42 of the 10-Q says that cost of automotive sales revenue includes reserves for estimated warranty expenses. I interpret "reserves for estimated warranty expenses" as the provision for warranty costs in the quarter, not the actual warranty costs incurred. I think this makes sense as warranty costs in a quarter don't have much to do with cars sold during that quarter, whereas the provision is an estimate of warranty costs for cars sold.

 

The provision for warranty was about $188 million in Q3 and $119 million in Q2. Looks fairly reasonable.

[SHDL]

Grant,

 

“Yellow flag” sounds appropriate to me re: no mention of supplier rebates, though I’m not entirely sure if it’s something that really matters in the end for investors (see below).

 

I generally agree with the risk factors that you mentioned with regard to pricing.  The fact that this is a new product with a lot of pent-up demand makes this a difficult thing for me to quantify.  On one hand their customers don’t strike me as particularly price sensitive, but on the other hand that may change quickly as they gain more market share.

 

What happens with the regulatory credits to me is a complete coin toss — we may get looser or tighter environmental regulations going forward depending on who gains how much political power.  I think this is a good example of when as an investor you need to be careful to distinguish between what you think should happen and what you think could happen. 

 

As for the one-time reduction in opex that the CFO talked about, my understanding is that he was referring to the reduction in “restructuring and other” expenses between Q2 and Q3.  After reading the discussion on p. 35 of the 10-Q I came away more or less convinced that this was, for the most part, genuinely one-time stuff, and so I estimated the company’s normalized earnings for the quarter accordingly. 

 

Stepping back from the details for a moment, my general sense here is that a ~100 m difference in normalized quarterly net earnings may not be all that relevant from an investment perspective.  A near-term liquidity crunch seems unlikely either way.  If the company manages to hit its stated production/delivery goals for the Model 3, then their incremental profits from that will probably be in the billions, dwarfing any such differences.  And if the company fails to get anywhere close to achieving their stated goals, the stock is likely overpriced regardless. 

[SHDL]

I'm still digesting the 10-Q, but here's an interesting observation:

 

From Q2 to Q3, warranty costs incurred went from 50 m to 54 m (8% increase) while revenue went from 4.0 b to 6.8 b (70% increase).  This alone seems to have given them something like a 2 percentage point boost in gross margins. 

 

I can see how a change in product mix could generate such an effect, but its magnitude here really does surprise me.

 

Page 42 of the 10-Q says that cost of automotive sales revenue includes reserves for estimated warranty expenses. I interpret "reserves for estimated warranty expenses" as the provision for warranty costs in the quarter, not the actual warranty costs incurred. I think this makes sense as warranty costs in a quarter don't have much to do with cars sold during that quarter, whereas the provision is an estimate of warranty costs for cars sold.

 

The provision for warranty was about $188 million in Q3 and $119 million in Q2. Looks fairly reasonable.

 

Thank you very much, treasurehunt, this makes perfect sense. 

[Grant]

“Yellow flag” sounds appropriate to me re: no mention of supplier rebates, though I’m not entirely sure if it’s something that really matters in the end for investors (see below).

 

Historically SG&A per delivery has exceed gross profit, so to the extent rebates affect either of these two things I think they're very relevant in the long-term.

 

The fact that this is a new product with a lot of pent-up demand makes this a difficult thing for me to quantify.  On one hand their customers don’t strike me as particularly price sensitive, but on the other hand that may change quickly as they gain more market share.

 

October was a terrible month in the NY data. Here's a table of NY registrations I believe are newly-sold cars:

 

month		all	S	X	3
1/1/2018	13	1	0	12
2/1/2018	43	21	5	17
3/1/2018	276	122	136	18
4/1/2018	73	5	8	60
5/1/2018	163	46	10	107
6/1/2018	363	129	115	119
7/1/2018	240	26	46	168
8/1/2018	447	84	58	305
9/1/2018	800	124	114	562
10/1/2018	197	21	30	146

 

My belief is Tesla saw October sales sucking, and decided to lower prices via the MR and inclusion of the Performance Upgrade package.

 

What happens with the regulatory credits to me is a complete coin toss — we may get looser or tighter environmental regulations going forward depending on who gains how much political power.  I think this is a good example of when as an investor you need to be careful to distinguish between what you think should happen and what you think could happen.

 

In my default "no change" scenario, Tesla loses almost all of its subsidies by 2020. At this point I think it's hard to justify extending the tax credits, even for a democrat-controlled congress. The worst I would think could happen here is they get pulled and ICE manufacturers don't have the benefit of them (which would be a big blow to the short thesis). This said my understanding of contemporary politics is nil, which is why I assume no change.

 

As for the one-time reduction in opex that the CFO talked about, my understanding is that he was referring to the reduction in “restructuring and other” expenses between Q2 and Q3.  After reading the discussion on p. 35 of the 10-Q I came away more or less convinced that this was, for the most part, genuinely one-time stuff, and so I estimated the company’s normalized earnings for the quarter accordingly.

 

Gotcha, thanks.

 

Stepping back from the details for a moment, my general sense here is that a ~100 m difference in normalized quarterly net earnings may not be all that relevant from an investment perspective.  A near-term liquidity crunch seems unlikely either way.  If the company manages to hit its stated production/delivery goals for the Model 3, then their incremental profits from that will probably be in the billions, dwarfing any such differences.  And if the company fails to get anywhere close to achieving their stated goals, the stock is likely overpriced regardless.

 

I think what matters is how much money they can make selling Model 3s. To estimate that we need to know just how juiced Q3 was.

[JRM]

I think Tesla is un-investible long or short.  I don't understand the morbid fascination with trying to justify a long position here.  The last CFO didn't make it one month.  Just in time to make sure his name was not on the audited financials.  Management turnover is insane for any company.  Competition is still coming.  Legacy auto makers can afford to subsidize a money-losing EV with higher margin trucks and SUVs.  It is not a level playing field.

 

Why is Jim Chanos wrong?  I'm not saying he can't be wrong.  I disagreed with him on LNG.  His short thesis was comical (he still counts it as a winning short, btw).  I was happy to go long after an interview with him saying that export facilities would corrode faster in the salt water environment than what was accounted for in the standard depreciation of PPE.

 

I'm sure Enron's 10Q looked pristine, too, right before everything blew up. 

 

I'm not saying this is a 0, but I think there are better places to spend one's time.

[ERICOPOLY]

I don't understand the morbid fascination with trying to justify a long position here.

 

I haven't seen anyone here with a long position, nor trying to justify one.

[ERICOPOLY]

My belief is Tesla saw October sales sucking, and decided to lower prices via the MR and inclusion of the Performance Upgrade package.

 

They lowered the price $1,000 of the less popular real-wheel drive midrange. (their production bottleneck is battery cells)

 

They raised the price $1,000 of the dual-motor long range, their highest-volume configuration which consumes the most battery cells (their production bottleneck is battery cells)

[rkbabang]

I don't understand the morbid fascination with trying to justify a long position here.

 

I haven't seen anyone here with a long position, nor trying to justify one.

 

I was just about to post the same.  I see people trying to justify short positions and others saying that a short position is risky for one reason or the other.  It seems simply not being short or thinking that there is a possible future (however unlikely) where Tesla succeeds, is so unthinkable here that it is worthy of a knee jerk reaction.

 

[Grant]

They lowered the price $1,000 of the less popular real-wheel drive midrange. (their production bottleneck is battery cells)

 

The MR is hardly even shipping. Of the 213 MR orders on Troy Teslike's spreadsheet, only one is reported as delivered. It's also a lower-priced car compared to the LR RWD it replaced - the model they've sold the most of.

 

They raised the price $1,000 of the dual-motor long range, their highest-volume configuration which consumes the most battery cells (their production bottleneck is battery cells)

 

The LR AWD uses the same battery pack as any LR Model 3.

 

The Model 3 AWD started at $54,000. A few weeks later it dropped to $53,000, then in August it went back to $54,000 (source, electrek). Now it's $53,000 again.