Tesla, TSLA & the Investment World: the Perpetual Investors' Roundtable

[Gigapress]

Yes we know Tesla ran way ahead, faster than anyone could have imagined. This story is not the same just 2 years ago in which we were trying to defend Teslas market cap with a story and not profitability.

Credit agencies see legacy auto to be a risk for Tesla as they could be what Apple did to fit bit. It will take some time for them to realize it's not going to happen. But because this kind of thing happened many many times before, they are not going to discount the risk to negligible.

Right but the point is that Fitbit actually had debt and operating expenses that were high relative to their cash balance. They had less than a year of runway if gross profit dried up to zero. That’s a material risk and I would not characterize their 2014 balance sheet as “perfect”. They weren’t in severe danger but it was certainly risky.

Tesla has almost three years of runway and no debt obligations to worry about. Tesla has even more runway than that when you consider that a bunch of their R&D expenses are for speculative new ventures like FSD, Optimus, energy stuff, and presumably some secret stuff. Tesla could shrink or eliminate those discretionary programs if needed to solve liquidity problems. Also they could easily generate $10B in cash almost overnight if Elon uses margin credit on his SpaceX stock or if they do 1% dilution of their trillion-dollar market cap. Even if competition from legacy auto entirely wipes out Tesla’s free cash flow to $0, Tesla still has ways to get money for probably at least 10 years before running out, depending on how much the market cap dropped in that scenario.

Assuming this is not just corruption at play, I would challenge Moody’s to stop hand waving vaguely about product diversity and qualitative factors and come up with even one plausible scenario where Tesla takes out debt right now and fails to repay it.

 

[willow_hiller]

So .69.1.1 does exist

I'm also guessing that since 69.1.1 went out to employees starting around yesterday, that the "wide Beta" 69.2 may not come out on Monday. But my question is whether the $15,000 price increase will still happen on Monday as planned, or be delayed to coincide with 69.2.

 

[Singuy]

Right but the point is that Fitbit actually had debt and operating expenses that were high relative to their cash balance. They had less than a year of runway if gross profit dried up to zero. That’s a material risk and I would not characterize their 2014 balance sheet as “perfect”.

Tesla has almost three years of runway and no debt obligations to worry about. Tesla has even more runway than that when you consider that a bunch of their R&D expenses are for speculative new ventures like FSD, Optimus, energy stuff, and presumably some secret stuff. None of this is required spending so Tesla could eliminate those programs if needed to solve liquidity problems. Also they could easily generate $10B in cash almost overnight if Elon uses margin credit on his SpaceX stock or if they do 1% dilution of their trillion-dollar market cap. Even if competition from legacy auto entirely wipes out Tesla’s free cash flow to $0, Tesla still has ways to get money for probably at least 10 years before running out, depending on how much the market cap dropped in that scenario.

Assuming this is not just corruption at play, I would challenge Moody’s to stop hand waving vaguely about product diversity and qualitative factors and come up with even one plausible scenario where Tesla takes out debt right now and fails to repay it.

I don't think you can discount negative feedback loops when a business starts to go south. You begin to find companies over spend to get them out of the hole, trying 5 different things that most don't pan out, and start drawing all sorts of line of credit to increase liquidity. This happens all while share price tanks and shorts start raiding. Lets pretend China stops all raw material exports and ban them from being put into non-chinese made EVs tomorrow. This type of black swan event can trash a pristine balance sheet in no time.

Credit agencies asses RISK...like what will happen if everything goes bad, and not make assumptions that the sky is blue indefinitely. The more Tesla diversity, the less risky they become even tho their balance sheet is perfect.

 

[petit_bateau]

If professional analysts actually think something like this will happen then 1) they should find another profession and 2) they are in for a rude awakening next year.

It is not every day I'm called a lazy good for nothing bum who should find another sidewalk

For each of your critiques of my position on this I can add a few more. I am a harsher critic of my own views than you will ever be, but history has taught me the hard way that stuff happens.

I have actually previously posted my model. If you look back in the 'best of' thread you'll find some stuff from me and if you spin around those dates a bit you'll be able to find the rest here on TMC in this thread, with odd updates from time to time. It is just a plain vanilla P&L model as that is imho where 90% of the action is taking place (though I have huge respect for TheAccountant and his exemplary work on the BS and CF).

I'll have a review of where I am currently. I know I did a quick'n'dirty revision a while back. It is possible that something went awry in the plumbing at that point - model maintainability is always a problem, especially for a hobbyist bum on a sidewalk.

I do pay attention to the Tesla quarterly mge Q&A. My own personal opinion is that nothing they are saying is in total contradiction with anything I am saying, at least not after one has paid attention to the context, the nuances, and the totality of the evolving message. Rough edges do indicate a growth in centrality of 3/Y; slippage of 2/Z + Robotaxi + CT + FSD + Energy; and most especially slippage of 4680 ramp which is vital as cell supply is the critical constraint; and better margins than they dared hope for. All of which roughly balances out for now.

In any case the real issue (as investors) is not what we think the shareprice should be, but what the shareprice actually will be after considering all aspects. At the moment my best stab for the 31-Dec-22 shareprice is $1500/3 = $500. What is yours ?

 

[Artful Dodger]

Tesla does not have *any* material credit risk. This is obviously true and therefore any entity claiming otherwise is using blatantly faulty credit risk evaluation methods.

Credit risk comes down to the risk of not being able to repay borrowed funds according to the specified payment schedule. What could possibly happen that would cause Tesla to default or be delinquent on debt payments???

• $19B cash and cash equivalents
• $0.066B recourse debt (not a typo)
• Operating expenses of $7B per year
• $1T market cap and demonstrated ability to sell equity for more cash without crashing stock price
• $7B free cash flow TTM despite aggressive investment in expanding production
• Backing from the richest person in the world who could—and would if necessary—infuse tens of billions of dollars by borrowing against his other assets including SpaceX equity

Imagine that tonight Elon announces that Tesla employees need a nice long vacation, so effective tomorrow all the factories will be shut down and production employees will be laid off but Tesla will continue paying for operating expenses to keep the core of the company running while everybody hangs around goofing off and smoking 420 all day. Tesla could keep this going until mid-2025 just by drawing down their existing cash and cash equivalents balance. They don’t even need positive cash flow because they have savings!

*It’s not quite this simple in reality because Tesla has a lot of Accounts Payable liabilities and also assets like inventory and leased vehicle, but it still comes out to Tesla having roughly $20B available.​

Tesla could issue billions of dollars worth of corporate bonds or take on billions worth of loans and be sure of paying them back just with the existing cash balance, and this fact is the biggest reason makes Moody’s excuses about “qualitative” analysis and needing multiple models are utterly ridiculous. Tesla has no other debt liabilities competing for that cash balance in case of a liquidity emergency.

Despite this absence of any need for cashflow to repay hypothetical debt, Tesla actually has huge cashflow, it’s growing exponentially, and they make 30% gross margin on their core products so their cash flow is not very vulnerable to possible loss of pricing power. It is high-quality cashflow from a risk standpoint.

Prior to 2021, a reasonable argument could be made that Tesla had a risky financial picture and nontrivial probability of bankruptcy. Now, a reasonable argument could be made that Tesla has the least risk of bankruptcy of any large company in history.

Nominated for "Moderators' Choice: Posts of Particular Merit". Thank-you.

 

[PeterJA]

...The majority of people believes in the competition [is coming] story and daily look for [Tesla] demand softness.

Not for long.

FSD will destroy the "competition is coming" story, likely soon.

A car that can drive itself nearly anywhere, at any time of day, at any legal speed, with zero human interventions and greater-than-human safety... will be major news that trumpets around the world. Every media outlet will repeat it, and ask which competitors are close to delivering the same capability. The answer will be no one.

How many buyers of new cars will want one without this capability? Not many.

When will this nuclear bomb hit the auto industry? The man who supervises Tesla engineers says this year.

 

[Gigapress]

I don't think you can discount negative feedback loops when a business starts to go south. You begin to find companies over spend to get them out of the hole, trying 5 different things that most don't pan out, and start drawing all sorts of line of credit to increase liquidity. This happens all while share price tanks and shorts start raiding. Lets pretend China stops all raw material exports and ban them from being put into non-chinese made EVs tomorrow. This type of black swan event can trash a pristine balance sheet in no time.

Credit agencies asses RISK...like what will happen if everything goes bad, and not make assumptions that the sky is blue indefinitely. The more Tesla diversity, the less risky they become even tho their balance sheet is perfect.

So the professional credit risk appraisers, who are supposed to be the best experts in the world at this one task, are worried that somehow something like this will happen?

1. Tesla’s cash flow from operations will evaporate instead of growing 50-100% annually.
2. Then Tesla will wastefully blow through all of its $20B of cash reserves trying to fix the problem, but Tesla’s attempts will fail completely and they still won’t have positive cash flow.
3. While this is happening, Tesla’s market cap will collapse by 99% from $1T to $10B in the most spectacular stock meltdown of all history, precluding any reasonable possibility of salvation from equity financing.
4. The TSLA stock crash and accompanying FUD frenzy from bloodthirsty short sellers will cause Tesla employees and customers to lose confidence and quit/cancel orders en masse, accelerating the aforementioned waste of $20B cash. The crash also sparks a market meltdown and causes Great Depression 2.0, killing demand for premium cars.
5. Meanwhile, SpaceX competition will show up with rapidly reusable orbital rockets, making the Falcon 9 no longer a reliable cash cow, and Starship development will end in failure, and thus Elon’s $60B stake will collapse in value and he won’t be able to save Tesla from insolvency.
6. Bankruptcy.

Edit: Moreover, if the risk appraisers are so concerned about Tesla having this kind of risk, then how do they justify having other companies rated higher than Tesla, including other automakers with lots of debt, declining revenue and earnings, lower market caps, lower gross margins and higher operating expenses?

This is the same rating organization that gave Lehman Brothers, Bear Sterns and AIG A2 investment grade ratings in 2008, in Lehman’s case just five days before filing for bankruptcy.

 

[betstarship]

Yikes

https://twitter.com/x/status/1566178437697458176

 

[cab]

I have to admit, one of the encouraging things about the various financial models you guys are presenting is that they are less "good vs. bad" than they are "awesome vs. just great"...indeed, most are more about "when" the awesomeness hits vs. "if".

Of course all of this begs the question "What are the big risks?". From my perspective, I can't help but think "Elon leaves" is an ugly strategic risk. Tesla the auto company likely continues fine w/o him, but the push for FSD, robots, etc...I could see that suffering. Beyond that, there are a number of more tactical items I suppose like another variant that shuts down China, etc. Ironically, most of the same risks Tesla might face would ALSO impact their competitors (and most likely even more so) so those risks just seem to be more about "delaying" Tesla's success a bit vs. stopping it. Still...it will be nice to see Texas and Berlin ramp-up and those darn 4680s too!

 

[Singuy]

So the professional credit risk appraisers, who are supposed to be the best experts in the world at this one task, are worried that somehow something like this will happen?

1. Tesla’s cash flow from operations will evaporate instead of growing 50-100% annually.
2. Then Tesla will wastefully blow through all of its $20B of cash reserves trying to fix the problem, but Tesla’s attempts will fail completely and they still won’t have positive cash flow.
3. While this is happening, Tesla’s market cap will collapse by 99% from $1T to $10B in the most spectacular stock meltdown of all history, precluding any reasonable possibility of salvation from equity financing.
4. The TSLA stock crash and accompanying FUD frenzy from bloodthirsty short sellers will cause Tesla employees and customers to lose confidence and quit/cancel orders en masse, accelerating the aforementioned waste of $20B cash. The crash also sparks a market meltdown and causes Great Depression 2.0, killing demand for premium cars.
5. Meanwhile, SpaceX competition will show up with rapidly reusable orbital rockets, making the Falcon 9 no longer a reliable cash cow, and Starship development will end in failure, and thus Elon’s $60B stake will collapse in value and he won’t be able to save Tesla from insolvency.
6. Bankruptcy.

No I was saying you can't just point to a good balance sheet and expect it to be good even when execution is in question. I said credit rating agencies price in negative feed back loops which absolutely exist.

Positive feed back loop is where Tesla is at today so their balance sheet is bias to the upside. Their execution prowess led them to have unlimited money practically just by using their market cap if needed. Remember when Jonas upgraded Tesla 2 years ago solely because they now have access to cash through equity raises?

 

[betstarship]

Anyone seen this? Have this?

SPAN® | The smarter electrical panel

Lower your energy bill with SPAN smart electrical panels - advanced features and intelligent design save you money and energy.

www.span.io

 

[Artful Dodger]

Tesla does not have *any* material credit risk. This is obviously true and therefore any entity claiming otherwise is using blatantly faulty credit risk evaluation methods.

S&P rates De Beers as BBB- / Long-term & A-3 Short-term. That's 3 notches above Tesla, and rated as 'low-medium' Investment Grade. Remind me again how many products they make?

S&P: ANGLO AMERICAN’S OUTLOOK STABLE, CREDIT RATINGS RAISED - Israeli Diamond (2020)​

Next let's do Ferrari. Fitch's Agency rates Ferrari's long-term debt as BBB+/Stable (also investment grade). Ironic for a company that makes no EVs whatsoever, with the EU about to ban ICE cars. And how many models does Ferrari make? Answer is Eight models. But they only make about 10K cars total per year. Giga Shanghai does that volume in about 3 days. Ratings are obviously not about the number of models, or the volume. So is it Gross Margin then? No, both Ferrari and Tesla make about 30% automotive G.M. But Tesla Inc. has at least 2 other business lines (Energy, Insurance) which are completely ignored by Ratings Agencies.

Recall, Moody's most recently revised their Tesla credit rating 2 days before 2021 Q4 results were announced (Jan 26, 2022). Now, in Sepember 2022, Moody's quote their own outdated (and obviously wrong) position from way back then.

It was obvlous (and I said so in #321,175 on Jan 27, 2022) that the purpose of Moody's credit rating released 2 days before 2021 Q4 financial results was to provide themselves cover for dragging their feet on re-rating Tesla to "Investment Grade". And their analyst did precisely that in their email to Tesla Boomer Mama on Sept 2nd. The real unknown is motive for this foot-dragging.

And now we find out that the largest shareholder of Moody's (over 14%) is Bershire Hathaway (fossil fool Warren Buffet). Feet of clay? Feat of carbon. Word.

The world has changed, Moody's has not. They are irrelevant.

Chairs!

 

[woof]

Anyone seen this? Have this?

SPAN® | The smarter electrical panel

Lower your energy bill with SPAN smart electrical panels - advanced features and intelligent design save you money and energy.

www.span.io

Yep, been following them for years. There's a thread on them here: SPAN - Smart Electrical Panel

Have two sitting in my basement ready to be installed "any day now".*

*New construction...never know when the electricians will show up.

 

[Artful Dodger]

Apple Watch came out in 2015. In Dec 2014 here’s what Fitbit’s annual financials looked like:

Cool. Now do Wuling Hongguang (No. 1 competitor in China by units sold) when Giga Shanghai opened.

*Note: you can also fit a lotta fitbits in one of those lil' clowncars suckers...

Chairs!

 

[ZeApelido]

Apple is gonna make Tesla the Fitbit of cars.

 

[Usain]

Not for long.

FSD will destroy the "competition is coming" story, likely soon.

A car that can drive itself nearly anywhere, at any time of day, at any legal speed, with zero human interventions and greater-than-human safety... will be major news that trumpets around the world. Every media outlet will repeat it, and ask which competitors are close to delivering the same capability. The answer will be no one.

How many buyers of new cars will want one without this capability? Not many.

When will this nuclear bomb hit the auto industry? The man who supervises Tesla engineers says this year.

I think we need to dial it down a bit. Elon only said FSD will be safer than a human this year. It probably already is as a level 2 driver assist system. He did not say it will be able to "drive itself nearly anywhere, at any time of day, at any legal speed, with zero human interventions and greater-than-human safety".

Ashok's presentation was very impressive. And I'm greatly looking forward to trying 10.69 myself. But if you just watch the 10.69 videos you will see that while FSD keeps improving, it still makes some bad mistakes. I just watched it run an occluded stop sign in one of Chuck's videos. It knew it had seen the sign too late, but it didn't slam on the brakes, so Chuck had to do it. That's something I thought was fully solved.

FSD is going to still be a driver assist system for quite awhile longer. We are still looking at a few years time before the trumpets sound.

 

[Artful Dodger]

Elon only said FSD will be safer than a human this year. It probably already is as a level 2 driver assist system. He did not say it will be able to "drive itself nearly anywhere

Elon said FSD beta is on pace to be in general release by the end of this year. That means anyone in N. America who has purchased FSD (or leases it monthly) can have access to the current beta w/o any safety scores, or other pre-qualification.

This is the milestone which triggers recognition of the ~$1B in differed revenue which Tesla now holds in escrow, but has not claimed in its Income Statement. This will be a nice windfall, and a big tailwind going forward as 100% of (increasing) FSD sales can be recognized in the quarter in which they occurred. Also huge increase in gross margins.

FSD beta will continue officially as a Level 2 driver assist feature. You will still have to pay attention, you will still be the driver, you will not be able to go in the back and sleep. This will not prevent FSD beta from saving even more lives, reducing frequency of accidents, and furthering the Mission. It's important.

Robotaxi is a different story, which will likely start ~ Jan 2025 (2 years after Tesla starts on the next Gigafactory). I believe it will be in Shanghai, on the lot immediately on East side of the existing factory, and producing Robotaxis using CATL batteries (made at their new plant now under construction just 3 km away):

【Sept.02.2022】Update into September Flying in typhoons and heavy rain \CATL shanghai\4K # 018

Chairs!

 

[SageBrush]

I would challenge Moody’s to stop hand waving vaguely about product diversity and qualitative factors

I would challenge Moody's to successfully start and turn a start-up auto company into a trillion dollar enterprise, before they declare how it best be run. Honestly, what are their counter-examples ? GM, living on the Government teat ? Ford, drowning in debt ? Chrysler, a shell ?

Yeah, I can see how model multiplication would appear to be a key move to success. NOT

I can accept one tangent to this, at least as a hypothetical: consumer taste is finicky, and perhaps the love affair with the Model Y will turn to golf carts tomorrow. But what is good for the goose is good for gander -- Moody's should derate Detroit to junk for only having trucks as a profitable line. Moreover, the appropriate follow-up question should then be whether Tesla is nimble enough to pivot to a different design. I think the obvious answer is yes, in part because it has few models to deal with.

 

[Gigapress]

No I was saying you can't just point to a good balance sheet and expect it to be good even when execution is in question. I said credit rating agencies price in negative feed back loops which absolutely exist.

Positive feed back loop is where Tesla is at today so their balance sheet is bias to the upside. Their execution prowess led them to have unlimited money practically just by using their market cap if needed. Remember when Jonas upgraded Tesla 2 years ago solely because they now have access to cash through equity raises?

Sure, but Moody's isn't even saying Tesla's execution is in question and they bring up none of those type of risks.

In their rationale for the last rating in January, they described a high-quality investment-grade company, and then inexplicably slapped a Ba1 junk rating on it. Moody's:

• Stated flat-out "Moody's anticipates liquidity to remain very good".
• Acknowledged Tesla's "positive outlook", "swiftly expanding presence", upcoming "steep increase in vehicle deliveries", high cash balance, high and increasing cash flow, and rapidly declining financial leverage.
• Predicted rising EBITA margin, "prudent" financial policy, and Tesla capitalizing on "robust growth in global demand for battery electric vehicles".

The only concerns provided were:

1. Declining ZEV credit revenue and EV competition in 2023 being risky for margins due to remaining "narrowly reliant on primarily two models"
2. Limited availability on Tesla's $2.3 billion asset-based revolving credit facility

As of this week, we can now add:

3. Vague qualitative factors (i.e. "because we feel like it")​

This is either gross incompetence or corruption. Even regarding their main point, they neglect to mention the upcoming future models and the fact that Tesla has successfully deployed 4 total vehicles models which were all category-killers by a huge margin. Model Y is the best-selling car in the world by revenue already. It's not a big stretch to assume Tesla can leverage its advantages across other vehicle form factors. Tesla is making EVs with a skateboard architecture, so having different cabin shells on top of the skateboard is relatively easy. Plus, Tesla's biggest competitive advantages are in motors, batteries, software and user interface, which would be exactly the same if they started making vans, compact hatchbacks, minivans, large boxy SUVs, etc. Only the size and the shell on top really changes much.

This matters because:

• Many potential investment funds are being sidelined by requirements for good credit ratings.
• Big portions of the economy depend on having effective credit rating agencies. This is a systemic risk affecting all of us. People in power need to do a better job and be called on on BS when they publish it. A big factor in the Great Financial Crisis of '07-'08 was the utter failure of credit rating agencies such as Moody's to properly weigh risks of subprime mortgage-backed securities and other related "assets", and this failure hurt all of us.
• Artificially depressing the TSLA price makes shareholders get diluted more by stock-based compensation expenses.
• If Tesla does want to raise money in the future to fund e.g. full-throttle growth of a Robotaxi fleet or in-house virtual power plants, it will cost more due to worse terms on corporate debt or worse dilution from an equity offering.

RATINGS RATIONALE

The Ba1 corporate family rating reflects Moody's view that Tesla will maintain its position as the leading manufacturer of battery electric vehicles with a swiftly expanding presence in the US, Europe, and China. Moody's anticipates that Tesla will deliver nearly 1.4 million vehicles in 2022, up from approximately 936,000 in 2021. Considerable investments in new production facilities in Berlin and Austin enable the steep increase in vehicle deliveries, along with an increase in production capacity in its existing plants in Fremont and Shanghai. To date, Tesla's product offering remains narrowly reliant on primarily two models, however.

Tesla's growing scale, regional production facilities and efficient manufacturing processes support Moody's expectation of an increase in EBITA margin to 16% in 2022, up from 12% in the last 12 months ended September 2021. While the margin contribution from the sale of regulatory emission credits will likely decrease, the sale of the credits added approximately 330 basis points to margin in the 12 months ended September 2021. Moody's expects that a more competitive offering of battery electric vehicles by other automakers could start to exert some pressure on margins in 2023.

Moody's expects Tesla's financial policy to be prudent. Financial leverage steadily declined as earnings accelerated and Tesla repaid about $5 billion of debt in the last two years. Moody's estimates that debt/EBITDA dropped below 1 time at year-end 2021 and will remain at that level in 2022.

Moody's anticipates liquidity to remain very good. Tesla had a cash balance of $16 billion as of September 30, 2021. Furthermore, Moody's expects free cash flow to increase considerably in 2022, from an estimated $3.1 billion for 2021. Availability under Tesla's $2.3 billion asset-based revolving credit facility is very limited, however, because the unpaid principal balance was $1.9 billion as of September 30, 2021.

The positive outlook reflects Moody's expectation that Tesla will continue to capitalize on robust growth in global demand for battery electric vehicles as a steep increase in manufacturing capacity comes online in 2022.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Tesla successfully expands its global footprint, maintains a strong competitive global presence as other automakers offer an increasing number of battery electric models, and improves its product breadth. Tesla's ability to sustain an EBITA margin of at least 7% (measured excluding the contribution from emission credits), and a consistent, prudent financial policy are also important considerations for higher ratings. Further, Tesla will need to maintain very good liquidity, including ample cash and considerable committed availability under its revolving credit facility.

The ratings could be downgraded if demand for Tesla models softens amid an expanding offering of battery electric vehicles by other automakers, or if Tesla is unable to sustain EBITA margin above 5% (measured excluding the contribution from emission credits). A material shift in Tesla's financial policy that signals a greater tolerance for financial risk could also cause a ratings downgrade, including if debt/EBITDA is greater than 3 times or if the amount of cash and committed revolver availability decreases considerably from current levels.

 

[hacer]

Why does Moody's deserve Investment Grade status?

View attachment 848653

FCF = Free Cash Flow
TTM = Trailing Twelve Months

Because they offer 21 "models": C, Ca, Caa3 ... Ba1, Baa3 ... Aa1, Aaa
They can always be relied on to repay their debts because they offer so many choices for their customers.