Short-Term TSLA Price Movements - 2016

[vgrinshpun]

With all the talk about cash flow and profitability, there is one wild card that does not attract much attention, as Tesla's policy was to downplay ZEV credits, emphasizing that their business model does not rely on them. ZEVs, however, have a potential to put serious cash on the table. According to this Fortune article Tesla gets 4 credits per each Model S sold in the 10 states participating in the program, with each credit bringing $3,000 - $4,000.

"But the Toyota Mirai and the Honda Clarity will pay off handsomely in credits — nine of them for each sale, compared to four credits the state now gives a Tesla Model S or the three it gives a Nissan Leaf.

The credits are currently worth about $3,000 to $4,000 each, according to a source with knowledge of the private credit-trading market among automakers."


If we assume MX/MS sales at about 100K units per year with about 55% of sales in US, and 10 state's sale share at 60% of the total US sales (a WAG, probably conservative), the potential annual sales of the credits could bring $396M to $528M - a serious chunk of cash.

I have to acknowledge that I do not follow regulatory developments closely, so may be somebody can chime in on whether we can expect Tesla starting to sell the credits again, as this income seem to be relatively low over last few quarters, but it seems that there is a significant potential of ZEV income going forward.

 

[GoTslaGo]

With all the talk about cash flow and profitability, there is one wild card that does not attract much attention, as Tesla's policy was to downplay ZEV credits, emphasizing that their business model does not rely on them. ZEVs, however, have a potential to put serious cash on the table. According to this Fortune article Tesla gets 4 credits per each Model S sold in the 10 states participating in the program, with each credit bringing $3,000 - $4,000.

"But the Toyota Mirai and the Honda Clarity will pay off handsomely in credits — nine of them for each sale, compared to four credits the state now gives a Tesla Model S or the three it gives a Nissan Leaf.

The credits are currently worth about $3,000 to $4,000 each, according to a source with knowledge of the private credit-trading market among automakers."


If we assume MX/MS sales at about 100K units per year with about 55% of sales in US, and 10 state's sale share at 60% of the total US sales (a WAG, probably conservative), the potential annual sales of the credits could bring $396M to $528M - a serious chunk of cash.

I have to acknowledge that I do not follow regulatory developments closely, so may be somebody can chime in on whether we can expect Tesla starting to sell the credits again, as this income seem to be relatively low over last few quarters, but it seems that there is a significant potential of ZEV income going forward.

Why 9 for hydrogen and 4 for bev?

 

[3Victoria]

Others only buy the credits if they need them to fulfil their regulatory requirements. They can do that with the limited number of low emission vehicles, even if they lose money on each.

 

[vgrinshpun]

Others only buy the credits if they need them to fulfil their regulatory requirements. They can do that with the limited number of low emission vehicles, even if they lose money on each.

Actually, my understanding is that starting at certain point (2018? - Once again I have not been following this topic closely - may be somebody can chime in) auto manufacturers will NOT be able to satisfy requirements just by selling low emission vehicles; certain (pretty high if I remember correctly) percentage of credits will have to come from sales of 100% emission free vehicles, so manufacturers will not be able to get by just by selling low emission vehicles.

 

[vgrinshpun]

Why 9 for hydrogen and 4 for bev?

Because the system is, unfortunately, rigged.

Elon recently expressed his frustration with watering down CARB requirements.

 

[Fallenone]

With all the talk about cash flow and profitability, there is one wild card that does not attract much attention, as Tesla's policy was to downplay ZEV credits, emphasizing that their business model does not rely on them. ZEVs, however, have a potential to put serious cash on the table. According to this Fortune article Tesla gets 4 credits per each Model S sold in the 10 states participating in the program, with each credit bringing $3,000 - $4,000.

"But the Toyota Mirai and the Honda Clarity will pay off handsomely in credits — nine of them for each sale, compared to four credits the state now gives a Tesla Model S or the three it gives a Nissan Leaf.

The credits are currently worth about $3,000 to $4,000 each, according to a source with knowledge of the private credit-trading market among automakers."


If we assume MX/MS sales at about 100K units per year with about 55% of sales in US, and 10 state's sale share at 60% of the total US sales (a WAG, probably conservative), the potential annual sales of the credits could bring $396M to $528M - a serious chunk of cash.

I have to acknowledge that I do not follow regulatory developments closely, so may be somebody can chime in on whether we can expect Tesla starting to sell the credits again, as this income seem to be relatively low over last few quarters, but it seems that there is a significant potential of ZEV income going forward.

Given we saw no meaningful ZEV in Q2 and Elon's angry tone expressed during the Q2 ER CC, I would say we won't see any ZEV in the future. It was not Tesla hoarding on ZEV (as they did in Q3 2015), but not being able to sell them due to a new change by CARB this year.

 

[Subhuman]

Why 9 for hydrogen and 4 for bev?

I think it has to do with "fast refueling". Elon made a play to get 9 for the model S by calling the battery swap fast refueling. However CARB did not except it since no station existed at the time and it currently is not widely available. One could also argue that hydrogen refueling is also not widely available.

 

[vgrinshpun]

Given we saw no meaningful ZEV in Q2 and Elon's angry tone expressed during the Q2 ER CC, I would say we won't see any ZEV in the future. It was not Tesla hoarding on ZEV (as they did in Q3 2015), but not being able to sell them due to a new change by CARB this year.

I do not believe you have enough information to support your conclusion. If ZEV credits would not be sellable, the price would be zero, but it clearly is not as according to the link I provided the price is $3,000 to $4,000 per credit. The fact that Tesla did not see any income from ZEV recently could be something to do with whether Tesla sees current market undervaluing the ZEVs or not. As far as I remember, back in 2013 ZEVs were sold at more than $5,000 per each credit.

 

[Oil4AsphaultOnly]

I do not believe you have enough information to support your conclusion. If ZEV credits would not be sellable, the price would be zero, but it clearly is not as according to the link I provided the price is $3,000 to $4,000 per credit. The fact that Tesla did not see any income from ZEV recently could be something to do with whether Tesla sees current market undervaluing the ZEVs or not. As far as I remember, back in 2013 ZEVs were sold at more than $5,000 per each credit.

No, Fallenone is right. ZEV has close to zero value on the open market now. They're still "worth" $3000-$4000" to Toyota and honda, because each credit permits that much in profit in their regular gas vehicles.

Here's the source for the ZEV credit value (California's zero-emission vehicle program is stuck in neutral):

"Toyota and other automakers have amassed stockpiles of credits through past ZEV sales or by purchasing credits from competitors that produce more zero-emission cars, such as Tesla Motors (TSLA.O) or Nissan Motor Co. (7201.T) Some automakers have enough credits to satisfy state mandates for years without selling a single zero-emission vehicle, according to a new analysis from the Natural Resources Defense Council."

 

[Drivin]

Elon made a play to get 9 for the model S by calling the battery swap fast refueling. However CARB did not except it since no station existed at the time and it currently is not widely available. One could also argue that hydrogen refueling is also not widely available.

How many battery swap stations are available?
Seems that had 1 experiment that didn't work out in mid 2015.

In NorCal, there are 5 hydrogen stations with 3 more scheduled within 6 months.

Seems some are more "widely available" than others.

 

[Fallenone]

I do not believe you have enough information to support your conclusion. If ZEV credits would not be sellable, the price would be zero, but it clearly is not as according to the link I provided the price is $3,000 to $4,000 per credit. The fact that Tesla did not see any income from ZEV recently could be something to do with whether Tesla sees current market undervaluing the ZEVs or not. As far as I remember, back in 2013 ZEVs were sold at more than $5,000 per each credit.

ZEV Worth's far less than 3k. Read the transcript of Q2 ER CC. "Pennies on the dollar".

 

[vgrinshpun]

No, Fallenone is right. ZEV has close to zero value on the open market now. They're still "worth" $3000-$4000" to Toyota and honda, because each credit permits that much in profit in their regular gas vehicles.

Here's the source for the ZEV credit value (California's zero-emission vehicle program is stuck in neutral):

"Toyota and other automakers have amassed stockpiles of credits through past ZEV sales or by purchasing credits from competitors that produce more zero-emission cars, such as Tesla Motors (TSLA.O) or Nissan Motor Co. (7201.T) Some automakers have enough credits to satisfy state mandates for years without selling a single zero-emission vehicle, according to a new analysis from the Natural Resources Defense Council."

That is not what this article says. The quote indicates that value is determined based on private credit-trading market. My interpretation is that value is based on what these credits currently bring on the market.

Here is the complete quote again: "The credits are currently worth about $3,000 to $4,000 each, according to a source with knowledge of the private credit-trading market among automakers."

So I am not sure why you think that the credits are worthless - that is not what this article says.

 

[vgrinshpun]

ZEV Worth's far less than 3k. Read the transcript of Q2 ER CC. "Pennies on the dollar".

Come on, this is figurative speech - are you seriously using this to conclude that credits are "far less than $3,000", when article quotes a person familiar with the market saying that it is between $3K - $4K?

If anything the quote you referred to confirms what I posted - that the reason for low ZEV sales is that Telsa thinks that they are currently undervalued.

In fact, Elon did not answer the question on whether the "revenue process going away", instead emphasizing that CARB was weak in its application of ZEVs, which is in his view responsible for these credits being undervalued.

Here is the complete quote:

Patrick Archambault - Goldman Sachs & Co.

Got it. That's helpful. And I think it'll be helpful for just the users of financial statements as well. The ZEV credits, you mentioned that they weren't material. I feel like it's been written that there was kind of a glut of supply on those. And I don't know, is that just the lumpiness of it or is that a revenue process of going away?

Elon Reeve Musk - Chairman, Product Architect and CEO

Well, yes, actually if I could say something and I'd really want to emphasize this quite strongly and I hope it does get picked up in the media is that the California Air Resources Board is being incredibly weak in its application of ZEV credits. The standards are pathetically low. They need to be increased. There's massive lobbying by the big car companies to prevent CARB from increasing the ZEV credits mandate, which they absolutely damn well should. It's a crying shame that they haven't. And as a result, you can barely sell the ZEV credit for pennies on the dollar.

 

[FredTMC]

Where's the autopilot blog post? Elon postponing again ?

Not that I blame him with all on his plate

 

[Fallenone]

Come on, this is figurative speech - are you seriously using this to conclude that credits are "far less than $3,000", when article quotes a person familiar with the market saying that it is between $3K - $4K?

If anything the quote you referred to confirms what I posted - that the reason for low ZEV sales is that Telsa thinks that they are currently undervalued.

In fact, Elon did not answer the question on whether the "revenue process going away", instead emphasizing that CARB was weak in its application of ZEVs, which is in his view responsible for these credits being undervalued.

Here is the complete quote:

Patrick Archambault - Goldman Sachs & Co.

Got it. That's helpful. And I think it'll be helpful for just the users of financial statements as well. The ZEV credits, you mentioned that they weren't material. I feel like it's been written that there was kind of a glut of supply on those. And I don't know, is that just the lumpiness of it or is that a revenue process of going away?

Elon Reeve Musk - Chairman, Product Architect and CEO

Well, yes, actually if I could say something and I'd really want to emphasize this quite strongly and I hope it does get picked up in the media is that the California Air Resources Board is being incredibly weak in its application of ZEV credits. The standards are pathetically low. They need to be increased. There's massive lobbying by the big car companies to prevent CARB from increasing the ZEV credits mandate, which they absolutely damn well should. It's a crying shame that they haven't. And as a result, you can barely sell the ZEV credit for pennies on the dollar.

So, is "razor close to profitability" also figurative and should not be taken seriously? And why does one credit worth 3000~4000? Because it would allow an ICE sale and the net profit is on that level. But if other OEM have enough credits themselves, ZEV from Tesla will worth nothing. That's the root of Elon's frustration in the CC and he himself doesn't appear to think this will change soon.

 

[Drivin]

Where's the autopilot blog post? Elon postponing again ?

He said "Finishing Autopilot blog postponed to end of weekend"

1. He said nothing of when he would publish the blog, only when he would finish it.
2. He didn't say which weekend.
3. It is only Monday, there is still another 6 days to the end of a weekend.

 

[Fallenone]

Come on, this is figurative speech - are you seriously using this to conclude that credits are "far less than $3,000", when article quotes a person familiar with the market saying that it is between $3K - $4K?

If anything the quote you referred to confirms what I posted - that the reason for low ZEV sales is that Telsa thinks that they are currently undervalued.

In fact, Elon did not answer the question on whether the "revenue process going away", instead emphasizing that CARB was weak in its application of ZEVs, which is in his view responsible for these credits being undervalued.

Here is the complete quote:

Patrick Archambault - Goldman Sachs & Co.

Got it. That's helpful. And I think it'll be helpful for just the users of financial statements as well. The ZEV credits, you mentioned that they weren't material. I feel like it's been written that there was kind of a glut of supply on those. And I don't know, is that just the lumpiness of it or is that a revenue process of going away?

Elon Reeve Musk - Chairman, Product Architect and CEO

Well, yes, actually if I could say something and I'd really want to emphasize this quite strongly and I hope it does get picked up in the media is that the California Air Resources Board is being incredibly weak in its application of ZEV credits. The standards are pathetically low. They need to be increased. There's massive lobbying by the big car companies to prevent CARB from increasing the ZEV credits mandate, which they absolutely damn well should. It's a crying shame that they haven't. And as a result, you can barely sell the ZEV credit for pennies on the dollar.

You can learn more on the ZEV from CARB's website. They have some slides explaining it https://www.arb.ca.gov/msprog/zevprog/zevtutorial/zev_tutorial_webcast.pdf

Bu basically, each OEM requires only less than 4.5% of ZEV for their total sales in CA in 2018. All popular PHEV (Prius, Volt) average out about 1 ZEV. The low requirement of ZEV and the low bar of earning ZEV makes the value of ZEV very low. The reason why Tesla has been able to benefit from ZEV in the past years is the past and current ZEV requirement is above 10%. CARB decreased a lot of the ZEV requirement in the future and thus collapsed the ZEV market.

 

[racer26]

The thing with the ZEV credits is simple. The majority of the credits required can be produced by PZEVs or SULEVs (and most of the automakers now have a hybrid or PHEV that fits the definition). Only a handful have to come from true ZEVs. Most of the automakers build just enough crappy compliance cars, and sell them exclusively in CARB-alliance states, like the Honda Fit EV to make the benchmark.

While the credits are 'worth' 3-4k (as their value is tied to the monetary penalty for failing to generate them), everybody is easily enough generating their own because of the lax rules on their generation. Tesla is sitting on piles of credits, but nobody is buying anymore.

I think CARB should mandate that limited release vehicles do not count, and that if you want ZEV credits for a vehicle, it must be available in all 50 states, for unlimited production.

 

[Oil4AsphaultOnly]

That is not what this article says. The quote indicates that value is determined based on private credit-trading market. My interpretation is that value is based on what these credits currently bring on the market.

Here is the complete quote again: "The credits are currently worth about $3,000 to $4,000 each, according to a source with knowledge of the private credit-trading market among automakers."

So I am not sure why you think that the credits are worthless - that is not what this article says.

Gold is valued at ~$1000 / oz at the moment, but if no one is buying it, then it's worthless.

As of 2014, most of the major manufacturers are running a surplus of zev credits: Zero Emission Vehicle Credits

GM has 20k, honda has 30k, and Toyota has 51k. The 2018 requirement says that they have to sell a minimum of 2% pure zero-emission-vehicles, but 4.5% worth of ZEV credits. That means over 95% of their sales can be of the polluting kind. For Toyota, that means that they have enough credits to sell 950k non-hybrid/non-ZEV vehicles and still meet regulations in 2018. Since they do sell hybrids, they can sell 980k non-ZEV vehicles and still meet regs in 2018, rolling the extra credits over to the next years.

We know that Tesla sold some ZEV credits in 2015, so the credit balance is probably higher now. The big players don't need to buy any more credits from Tesla for the forseeable future, as they'll be releasing their token EV's by then. Keep in mind that the plug-in prius earns a ZEV credit as well!!

Musk is right, CARB is playing into the manufacturers hands if they don't raise the requirements instead of keeping it "as-is". The major manufacturers have already sandbagged the playing field.

ZEV credits are worthless at this point, unless CARB ups the ante.

Edit: seems I was too slow. The others have said essentially the same thing.

 

[trentxintong]

I absolutely think Tesla will deliver a record number of vehicles in Q3. My model says 21,125 which beats the previous record of 17,400 in Q4 2015.

Based on Elon's email, I am concerned that he believes Q4 and future quarters will be weak or flat -- until the M3 ships in large quantities. His email says it was Tesla's last chance to show profitability. As a reader, this suggests to me that he thinks expenses will continue to grow ahead of revenue growth. Which makes a lot of sense since Tesla needs to ramp it's operating expenses in advance of the M3. To support 10x the number of vehicles being delivered per year, Tesla needs to invest an enormous amount of dollars into new service centers, more sales, more superchargers, and yes more admin. It also needs to ramp its spending on development to get the M3 to reality. Some of these costs can be capitalized, but many cannot. Thus I agree with Elon this is probably the last quarter Tesla could possibly show a non-GAAP profit, until M3 is shipping in large quantities which may not occur until sometime in mid-2018 (not talking about the first few deliveries to friends & founders).

What worries me more is: What if Elon believes Q3 DELIVERIES will actually be the high for the year? Is he concerned that Q4 deliveries will be LOWER than Q3? If so I'm worried. As someone rooting for the success of Tesla, I cannot understand why deliveries would be flattening or declining if the future is so bright. Hopefully I am just worried about nothing, but his email sounds like the words of a man that wants to sell billions on stock on good news (presumably Q3) before the bad news arrives (Q4).

Please help me see the bright side of this email. Previously I thought Q3 would be 20K and Q4 25K. Now I think Q3 is a little better (21K) but Q4 as low as 20K.

Totally separately, has anyone been following the Google sheets data? Q3 Model S deliveries look good. But mix looks to have shifted substantially to 60/60D. Doesn't this suggest that average pricing will be way down?

I think its going to be more than 21125. Lets assume they can produce and deliver 1800 cars per week, he actually said TSLA is producing ~2000 cars per week by end of Q2. I gave it a 90% discount, you cant this this guy word 100% =) There are 13 weeks in this quarter, so 13*1800 = 23400. There are ~5200 cars in transition at the beginning of Q3, so I assume there will be 5200 cars in transition at the end of Q4. This is a very reasonable and conservative assumption IMO. So TSLA is likely to deliver 23000+ cars in Q3.