Hi, I'm a "short" (a student with only peanuts I can afford to lose at stake, a very small fraction of the position size most of you likely have).
I come in peace! I'd like to have respectful conversations, ask questions about the current bull line of thinking, and provide answers about the current bear line of thinking if anyone would like to know. I hope that's OK.
More specifically, I had one question in mind about revenues. Since deliveries are up YoY, do bulls generally expect revenue also to be up? I've seen some chatter and modeling suggesting revenues to be around $6.5B, which would be below 2018 Q3. I have no idea if this is going to be correct or not; just offering what I'm reading on my feed. Any thoughs on whether this is possible, expected, or unlikely would be appreciated.
Hi MFranc. Thanks for the respectful intro, and welcome from the other side of the pond.
First off, I think you seem to have a misconception on hand: that the reaction to a quarterly report should be based on whether it's good or bad news. That's not how it works. The reaction to any news is (at least in theory) based on whether it's worse or better than
what people already expect. Now, that's theory at least, and reality can differ. But, at least
in theory, if bad news is expected, it should already be factored in. Your investment choices should be relative to
how much better or worse you think it's going to be than what's expected.
The big money already expects a revenue drop YoY, and generally a lot more concerned with QoQ regardless. And they're always much more focused on profits than revenue. The focus on profit is IMHO is rather silly; its FCF that determines Tesla's ability to keep the lights on as it grows production, release new products and expands into new markets, which in the long-term outgrows the liabilities side of the profit equation). And it's cash on hand that determines their ability to weather adverse events. Tesla can at any point cut growth to boost profit, but investors prefer the opposite - drowning the liabilities side of the profit equation by growing future revenue. But I digress.
Most people aren't dumb enough to not understand why revenues are down YoY. A year ago Tesla was almost exclusively burning off years of accumulated reservations; today it's almost entirely new reservations. A year ago Tesla had a $7500 tax credit in its largest market; today it's $1875. Price cuts were obviously essential - and indeed, the very goal (I find it amusing to see the same shorts criticize Tesla for cutting prices, who previously were condemning them for not having released the $35k Model 3). Additionally, a year ago Tesla didn't have Model 3 competing with S&X in most of the world; now it self-competes almost everywhere.
The key figure to watch is COGS. Because the simple fact is that COGS has been declining rapidly every quarter, which is how margins are almost as high today - despite the price cuts - as they were in Q3, with its much higher prices. The COGS reductions are virtually inherent with Tesla expanding its production. Do you see any new buildings at GF1? There've been no new cell lines for quite a while. At Fremont, there's no new stamping lines. No new body lines. No new paint shops. No new GA lines. Only minimal hiring. Yet they're making far more vehicles now, with a given amount of infrastructure. This means an
inherent reduction in COGS.
Now even if production ceases scaling at Fremont (news flash: it won't, and the trend and permit filings should make that clear), Tesla now has a brand new Gigafactory coming online. It contributed zero in Q3 - just a money sink. How much it contributes in Q4 is up in the air. But soon it's going to be producing 3k vehicles per week. What do you think that's going to do to revenue, FCF and profits? And if you think that the markets are blind to this fact, think again; they simply time-discount it relative to their assessments of timing and risk. The more progress they see, the more they adjust their revenue estimates up, and the higher they value the company.
Thus we invariably circle back to demand. Tesla shorts always predict "demand peaks", and they've done it every single quarter of Tesla's history. Which - spoiler alert - not only hasn't happened, but the opposite keeps happening. They'll obsess over any given market, without looking at the bigger picture, which is that "good market changes" are just as likely as "bad market changes", the overall global EV market grows dramatically every year, and
even still, despite expanding into new markets each quarter, Tesla
still hasn't moved into a number of the world's largest auto markets (Russia, Saudi Arabia, Brazil, India, etc etc). Until you hear something like "Tesla expanded into Rwanda this quarter", the expansion is still continuing unabated. FYI, you're talking to a person who's still sitting on a years-old reservation waiting for Tesla to expand into my market.
Markets go through phases.
1) Backlog builds
2) Tesla starts delivering, and there's a flood of deliveries
3) Tesla fills the backlog, and the market becomes weak
4) New demand starts to build, and deliveries increase again - not up to flood levels, but to sustained levels (which A) will still show seasonal variations, will B) on average grow YoY alongside the overall global EV market, but C) respond highly positively or negatively to government policies - which again, may be more pro-EV or more anti-EV than previous policies).
On that last point, let me remark that some of the largest potential EV markets - US, Germany, I'm looking at you - have rather weak incentives for Tesla at present, so there's a
lot of potential upside from future policy changes.
The various markets that Tesla operates in are in various phases. For example, the US is in stage #4 - backlog built, got filled, fell weak, then recovered - and now will fluctuate seasonally and follow the overall EV growth trend. Some markets like the UK and Australia went into #2 last quarter (still in #2, but should be filled by the end of this quarter). Some new large EV markets, like South Korea, are going into #2 this quarter, and will probably continue suchly into Q1. Norway could be argued to be in #3; we'll have to see how it evolves next quarter. And so on. But it's never a story of an individual market - it's the
overall global picture that matters.
Do realize that the overall picture for Tesla is
inherently noisy. Tesla does not maintain significant amounts of inventory (vs. traditional automakers which have months of inventory). Tesla has to forecast every single quarter how much demand will show up in that quarter, for each model and each configuration, because of how long shipping takes. It has to then decide on which markets to expand into that quarter and what pricing to set on each market (a complex optimization problem, balancing out the one-time and ongoing costs of expansion vs. potential reduced revenue from lower pricing in existing markets). If any part of Tesla's forecasting is wrong, it can totally mess over the company's numbers for that quarter (Q1 is a great example of this). Tesla's sensitivity to forecast accuracy will decline significantly once it has a Gigafactory in each market, as shipping times will be greatly reduced. We'll be seeing one level of this soon with the opening of GF3.
Note that we're only talking about the basic aspects of the company and discounting the potential value of FSD, grid-scale storage, solar roofs, etc - each one of which, if it were to become
widespread, could justify a market cap of hundreds of billions to trillions of dollars
on their own. Also keep in mind exactly how expansive Tesla's scale goals are for vehicle production: they're working toward the production of 2TWh/yr. Try running some numbers on how many vehicles that works out to. And remember that Tesla is, unlike most automakers, highly vertically integrated (and becoming moreso) - e.g. it keeps much more of the profit from a sale for itself.
Tesla is a growth company. These inherently mean high long-term revenue projections, but high discounting for risk. Their valuation thus changes dramatically and rapidly as the risk picture changes. When you take a long or short position, remember this fact. Even mostly "bad news" can actually increase the value of the company simply by retiring downside risk - for example, 97k deliveries this quarter was below "average" market projections, and there was a short-term selloff, but it also eliminated the fear of demand weakness. And now look at the stock price vs. before the deliveries report.
One final thing. And I know you'll be tempted to discount this, but beware of the "TSLAQ Bubble". They love blocklists (their Twitter blocklist blocks out almost all bull accounts) and insulating themselves from contrary information in general. Always look out contrary information that questions your views (I always try to), and look for your own blind spots.
Happy shorting. We'll be here on the other side of the pond.
