2017 Investor Roundtable: TSLA Market Action

[Curt Renz]

With the Model 3 initial ramp, the priority appears to be making certain that highly reliable cars come off the assembly line. Accelerated production will undoubtedly occur in due course. The reliability of the Model 3 should be considered more important than speed of delivery at this early stage to the more than half million people who have placed reservations. It's what should lead to the positive word-of-mouth that can greatly multiply the already existing demand. Once production moves into the steep portion of the S-curve, it should come much more closely in line with demand.

Wise investors should also see this in the same positive sense. A dip in Tesla shares at the opening tomorrow may present a welcome buying opportunity.

 

[Turing]

What were they supposed to do? Refuse to work until he gave them a reasonable timeline? They would have been gone at that point rather than after. I get the sense that Elon gives the deadlines, not the other way around.

His top production people should have said it was impossible if that is what they believed and tendered their resignations if necessary, we're not talking about low level workers here with limited opportunity to take another high paying job. Wouldn't they be better off leaving before *sugar* hits the fan? Maybe they also bought into the hubris?

 

[AnxietyRanger]

We're not privy to the details here, but if his top production people went along with it and told Musk they could meet those deadlines then they were also part of the problem.

I think the AP2 case is proof (engineers surprised that he offered FSD) that Elon probably doesn't listen too much to lower-level input when important announcements are made...

He should know better, but still he continues being overly optimistic. Thee Occam's razor is he knows what he is doing and is doing it on purpose, IMO. That is speculation and Occam's razor is not always right, but it seems that way. A lot of staff may not agree, who knows.

Model X also had a very optimistic-outwards ramp-up but in reality a tediously slow and problematic first year. As did Model S in its time... and so forth and so forth...

The staff could resign of course. In the case of AP2, a lot of it actually did.

That said, discounts helped with a nice Q3/2017 otherwise. Good job there. Product updates will hopefully help Q4.

 

[SBenson]

From Q2 letter

"The combined non-GAAP gross margin for Model S and Model X in Q3 will decline slightly from Q2, driven primarily by mix shift."

Somehow everyone seems to have forgotten this.

Two implications:
1. Financials won't be as great as some of you seem to think.
2. Deliveries were boosted through lowering prices.

S/X is good. But not as great as it appears.

On the other hand if there is an imminent refresh and if deliveries go up on stable or increased prices then I will consider it bullish.

 

[dc_h]

We're not privy to the details here, but if his top production people went along with it and told Musk they could meet those deadlines then they were also part of the problem.

I'm January- March. Ordered online day 1.

 

[racer26]

From Q2 letter

"The combined non-GAAP gross margin for Model S and Model X in Q3 will decline slightly from Q2, driven primarily by mix shift."

Somehow everyone seems to have forgotten this.

Two implications:
1. Financials won't be as great as some of you seem to think.
2. Deliveries were boosted through lowering prices.

S/X is good. But not as great as it appears.

On the other hand if there is an imminent refresh and if deliveries go up on stable or increased prices then I will consider it bullish.

Lowering prices? Prices didn't lower in 3Q at all.

Instead the cheapest S went discontinued. Some inventory cars were discounted to match the price changes that came at the end of 2Q, but there was not widespread lowering of prices.

 

[Waiting4M3]

I'm not arguing against this either...

The whole point of management warned of lower GM guidance for Q3 was early 3 production cost. This cost is unlikely to be significantly lower just because they produced 260, not 1500+ as they guided because most was fixed cost planned months ago. This cost is more than likely to overshadow one or two thousands additional S/X otherwise it wouldn't warrant a lower guidance on overall GM to begin with.

I agree that the fixed cost for M3 is already sunk, based on this sentence from Tesla's announcement:

Although the vast majority of manufacturing subsystems at both our California car plant and our Nevada Gigafactory are able to operate at high rate

This to me indicates that most of their production tooling are already deployed.

However, I think selling extra MS/X can go a long way in mitigating this impact of delayed M3 sales. If they were targeting to sell close to 1500 M3, but instead they only sold 220 M3, the difference is 1300 M3, at $50K ASP, that's $65M total revenue missing. Lets assume the worst case scenario Tesla already paid for all the parts for 1500 cars, then this whole $65M hits the automotive profit.

Now lets look at what Tesla gained on the MS/X side. If Tesla's internal target is 25K MS/X, they sold extra 1,150 MS/X, at $100K ASP, 30% margin, this gives them extra $35M profit.

So combined the two, Tesla is short $30M. Their automotive revenue should be >$2.5B, so this $30M shortfall is maybe a 1% hit, at most. I'm not saying that Q3 GM will be good, but these missing M3 sales wouldn't make it much worse that what Tesla originally expected a couple of months ago.

 

[techmaven]

Don’t forget that FX should help significantly with a weaker dollar.

 

[Lump]

His top production people should have said it was impossible if that is what they believed and tendered their resignations if necessary, we're not talking about low level workers here with limited opportunity to take another high paying job. Wouldn't they be better off leaving before *sugar* hits the fan? Maybe they also bought into the hubris?

I remember a production guy getting fired by Elon at a meeting, didnt the story go something like the two weren't agreeing on MX production issues so they stepped out of the room & Elon fired him on the spot.

 

[Waiting4M3]

Problem: It would seem that most people who don't go along with EM's *suggestions* don't last very long at Tesla.

Well, if they're not part of the solution, in the boss's eyes, ....

 

[dc_h]

Lowering prices? Prices didn't lower in 3Q at all.

Instead the cheapest S went discontinued. Some inventory cars were discounted to match the price changes that came at the end of 2Q, but there was not widespread lowering of prices.

I thought the base 75 declined in price when they cut the 60. This may be margin neutral, more 75 sales, with better margins then the 60 and more volume.
They should have some bonus margin due to a falling dollar. Maybe you are right, but I think 4000 extra sales and no 60 in the mix will help margins. Higher X sales could help too, with the X production rate picking up. X margins had been worse, but production was closer to half S and now 2//3s.

 

[ValueAnalyst]

I agree that the fixed cost for M3 is already sunk, based on this sentence from Tesla's announcement:



This to me indicates that most of their production tooling are already deployed.

However, I think selling extra MS/X can go a long way in mitigating this impact of delayed M3 sales. If they were targeting to sell close to 1500 M3, but instead they only sold 220 M3, the difference is 1300 M3, at $50K ASP, that's $65M total revenue missing. Lets assume the worst case scenario Tesla already paid for all the parts for 1500 cars, then this whole $65M hits the automotive profit.

Now lets look at what Tesla gained on the MS/X side. If Tesla's internal target is 25K MS/X, they sold extra 1,150 MS/X, at $100K ASP, 30% margin, this gives them extra $35M profit.

So combined the two, Tesla is short $30M. Their automotive revenue should be >$2.5B, so this $30M shortfall is maybe a 1% hit, at most. I'm not saying that Q3 GM will be good, but these missing M3 sales wouldn't make it much worse that what Tesla originally expected a couple of months ago.

This. Agreed 110%.

One could not have made this argument during Model X debacle.

 

[Fallenone]

However, I think selling extra MS/X can go a long way in mitigating this impact of delayed M3 sales. If they were targeting to sell close to 1500 M3, but instead they only sold 220 M3, the difference is 1300 M3, at $50K ASP, that's $65M total revenue missing. Lets assume the worst case scenario Tesla already paid for all the parts for 1500 cars, then this whole $65M hits the automotive profit.

Now lets look at what Tesla gained on the MS/X side. If Tesla's internal target is 25K MS/X, they sold extra 1,150 MS/X, at $100K ASP, 30% margin, this gives them extra $35M profit.

So combined the two, Tesla is short $30M. Their automotive revenue should be >$2.5B, so this $30M shortfall is maybe a 1% hit, at most. I'm not saying that Q3 GM will be good, but these missing M3 sales wouldn't make it much worse that what Tesla originally expected a couple of months ago.

You have to consider the fixed cost here and it doesn't matter how many 3's were sold. It is likely in the order of hundreds of millions (Model X one-time tooling fix was about 300M IIRC). so the 35M extra profit from a thousand S/X is negligible when calculating the overall GM across S/X/3. Same for the parts cost for the one thousand 3.

 

[Curt Renz]

For what’s it’s worth - I’m a Day one reservation holder and my delivery estimate of oct -
Jan has not changed.

I too made an in-store reservation for a Model 3 during the first possible morning. The Tesla website estimates for delivery of my Model 3 also have remained the same for quite a while.

 

[AnxietyRanger]

Instead the cheapest S went discontinued. Some inventory cars were discounted to match the price changes that came at the end of 2Q, but there was not widespread lowering of prices.

Disagree. In my estimation Tesla has been lowering inventory prices for several quarters now, beyond any direct depreciation formula AND that inventory has been built for the purpose, not some leftovers.

IMO they just like to be a bit coy about it.

 

[Skryll]

I remember a production guy getting fired by Elon at a meeting, didnt the story go something like the two weren't agreeing on MX production issues so they stepped out of the room & Elon fired him on the spot.

This would be concerning, except I am driving a Model X 90D since end of May 2016 and it is superawesome every day so... Go Elon !

 

[ValueAnalyst]

You have to consider the fixed cost here and it doesn't matter how many 3's were sold. It is likely in the order of hundreds of millions (Model X one-time tooling fix was about 300M IIRC). so the 35M extra profit from a thousand S/X is negligible when calculating the overall GM across S/X/3. Same for the parts cost for the one thousand 3.

You're talking about capital expenditures, which do not hit the income statement until the car is delivered.

The "hundreds of millions" you mentioned will show up on the balance sheet, not on COGS.

Same with parts costs. That will show up in inventories, not COGS, until cars are delivered.

3Q17 gross margin will be better than previously guided, because of the delivered extra Model S and Model X cars.

 

[Waiting4M3]

You have to consider the fixed cost here and it doesn't matter how many 3's were sold. It is likely in the order of hundreds of millions (Model X one-time tooling fix was about 300M IIRC). so the 35M extra profit from a thousand S/X is negligible when calculating the overall GM across S/X/3. Same for the parts cost for the one thousand 3.

My post was under the assumption that the M3 cost is already sunk. The extra MS/X for sure is peanuts compared to the production ramp cost of the M3. But so is the missing revenue from not being able to sell 1500 M3. Missing that bag of money doesn't make the entire Q3 margin that much worse either. Emphasizing my last sentence in my previous post.

I'm not saying that Q3 GM will be good, but these missing M3 sales wouldn't make it much worse that what Tesla originally expected a couple of months ago.

 

[Lump]

This would be concerning, except I am driving a Model X 90D since end of May 2016 and it is superawesome every day so... Go Elon !

Your lucky, the first 6 months of production had some real lemons.

 

[Fallenone]

You're talking about capital expenditures, which do not hit the income statement until the car is delivered.

The "hundreds of millions" you mentioned will show up on the balance sheet, not on COGS.

Same with parts costs. That will show up in inventories, not COGS, until cars are delivered.

3Q17 gross margin will be better than previously guided, because of the delivered extra Model S and Model X cars.

Some of it hits back as depreciation. And since they started production of Model 3. Those depreciation hits COGS starting Q3. I don't know how big it is, but big enough to make management think Q3 overall margin would dip below 20%. I doubt product mix of S/X alone would have such huge impact as all the base S/X should have over 20% gross margins.