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

[FrankSG]

I never believed Elon and always knew he was being over dramatic. Tesla had access to capital if needed and would not have gone bankrupt.

I think he mostly used this as an illustration of how tough the year 2018 was for him personally. According to the Third Row podcast both him and Kimbal said it was much worse than 2008, which we all know was brutal for Elon in terms of both SpaceX and Tesla almost going bankrupt, on top of a divorce, on top of his now ex-wife publicly writing about him, on top of a number of other "Tesla death watch" blogs, etc. I quite frankly couldn't imagine a year worse for Elon than 2008, but apparently 2018 was just that.

 

[FrankSG]

I have discussed valuation allowance and recognizing differed tax losses with someone who has been at the center of such determinations. Much of what has been previously discussed here is true. I am not an expert on the area but what I gleaned from my conversation is as follows

‘The decision to do so has to be backed by the auditor. This person believes with enough pressure that the PCW partner managing the account could be influenced enough to support it. It’s not an issue the IRS cares about and would not review. However, the SEC could issue a letter to ask about it. Now we all know the short sellers would not stoop so low as to try to influence the Short sellers Enrichment Commission to investigate the decision. The SEC could with an adverse decision force tesla to restate the earnings report. But we all know that the SEC has been so supportive of Elon that this would not be an issue. Is it worth the risk? We will find out. If it’s not done with q4 then it probably not be done till q3 or q4 the qtr where these decisions are usually made

I think this is an excellent post, and it also reflects my sentiment. I think there is a chance, but I think Elon has learned from the past and is taking things slower now. It really seems like he's gotten on board with under promise and over deliver. Not rushing the S&P 500 inclusion, not creating a (short-term) inflated SP, and just going for more steady growth, seems to me to be the path they will take.

Me and my $800 21 Feb calls wouldn't mind being wrong though

 

[Quesder]

Confirmed:
Shanghai to extend the vacation to Feb 10

 

[theschnell]

Yes, I think Q1 will be profitable: even with GF3 break-even there's both ZEV income expected from the FCA deal, and FSD deferred revenue recognition, plus there's the deferred tax asset.

Regarding the deferred tax asset: based on the Twitter precedent I'd expect Tesla to not recognize the deferred tax assets in Q4 yet, or at most only a smaller portion. That's what Twitter has done too, they have recognized them in two subsequent quarters.

I could be wrong on both expectations though.

On the flip side, if its more likely than not that they will be profitable from Q3 2019 forward, first principles would suggest its time to at minimum estimate 2020 profitability and pull in the deferred tax assets now.

However, being more conservative is an approach I would prefer. I'm sure Q1 profitability will be pretty tight regardless. Maybe wait until that's in the books and then start pulling those tax assets in... I don't see how they wait longer than Q1 if Q1 is profitable and everything is only looking stronger from that point forward...

 

[FrankSG]

The biggest question for me for the Q4 earnings report is how much of the current price levels are bullish sentiment and fair valuation vs. potentially unrealistic expectations for Q4 S&P 500 inclusion or mega-profits

I could be wrong, because I am not the market, but I believe it to be the former.

To get an answer to this, I think an update in TSLA's largest institutional holders will be more telling than the Q4'19 earnings. If it shows that there are a few big funds that accumulated very large TSLA positions during Q4 at prices in the high 300s, and 400s, I'd argue that these are more likely long term investments based on Tesla's improved fundamentals and Giga Shanghai + MY ramps, than speculative plays on strong Q4 earnings.

A lot of swing traders and hyped up longs have definitely jumped on board too, and these may take profits or just jump ship if Q4'19 disappoints or is just good. But I believe there must also be funds that are still on the fence about heavily investing in TSLA, because H1 2019 is still fresh in their memory, they believe Q3'19 could've been a fluke, and there were some one-time tailwinds (FSD deferred revenue, $85M in other income) in Q3'19.

My belief is that if Q4'19 (and Q1'20 / Q2'20) results are just good but no more than that, smart institutional investors will continue to jump on board. Q3'19 really was that good of a quarter in terms of cost reductions and margin improvements (in my opinion TSLA's best quarter ever). It's put Tesla on track to be a very profitable company, and even more so after Giga Shanghai and MY ramps. As long as they don't disappoint and miss targets, I think SP should continue to go up.

Personally, I'm expecting Tesla to beat expectations in 2020, potentially by quite a big margin. If things go really well, I think they could deliver as many as 650k vehicles, book $4B+ in EBIT, and have $20+ Non-GAAP EPS. If that happens, maybe we could see a SP of $1,500-$2,000 in 12 months.

None of this is advice, just my opinion on things, which could turn out to be wrong.

 

[Buckminster]

I think this is an excellent post, and it also reflects my sentiment. I think there is a chance, but I think Elon has learned from the past and is taking things slower now. It really seems like he's gotten on board with under promise and over deliver. Not rushing the S&P 500 inclusion, not creating a (short-term) inflated SP, and just going for more steady growth, seems to me to be the path they will take.

Me and my $800 21 Feb calls wouldn't mind being wrong though

What are the benefits of being conservative and delaying taking the DTAs? More importantly, what would happen if they take them and then aren't profitable in a future quarter / year? Are we just talking about credibility?

Is the metric "more likely than not" referring to all future quarters or the next 4 quarters or the next financial year?

 

[hobbes]

Confirmed:
Shanghai to extend the vacation to Feb 10

Do we know if GF3 is actually affected by this? It is called GF Shanghai, but is in a special trade zone...

 

[FrankSG]

Has anyone tried to figure out what it could mean financially for Tesla if they went from selling FSD to not selling it and instead using a subscription model?

Almost every software company in the world has or is trying to switch to a subscription service. Adobe probably being the most prominent (financial) success. Those that still haven't almost all make you pay again every time there is a version with significant upgrades which I think Tesla want to avoid. But they also don't want to give free upgrades for maybe 20 years.

Even when robotaxi fleets exist I believe Tesla would sell/subscribe you FSD for private use for something similar to the current price. If you want to have it join the fleet the price will be much higher.

I can see a number of cases where owners might actually prefer to subscribe while it would also be more profitable for Tesla. $7k is a lot of money to pay at once even if you can afford a $40k car. Even if you take out a loan it will increase your downpayment and might get you a higher rate or even being denied a loan if the total is deemed to high for you income/credit score.

If you are selling to get a new car you'll have to worry about being able to find a buyer that will get you a significant part of those $7k back. If you are buying a used car without FSD you would probably not want to pay $7k if your car is already say 10 years old. For Tesla I think it means they won't sell FSD to hardly any car that is over 5 years old or so. Assuming a 20 year lifespan you would only get 15 years of value compared to 20 when bought new. Older cars even less.

There is also the insurance issue. I've already seen articles about insurance companies not wanting to reimburse FSD in certain situations.

Here's my take on the numbers.

If you let owners subscribe to FSD when it's fully available so that you can sit and read or watch video while in the driver seat I think almost everyone would subscribe if the cost was $50 a month. Even those that will eventually drive a 20 year old Tesla worth maybe $5k then would pay that in most cases.

So for a 20 year lifespan Tesla would get 240 months x $50 = 12k

They could obviously also have different levels with some higher levels getting extra perks and if Elon is looking to expand the life of Teslas, for environmental reasons for example, they could have a slightly higher price for new cars and a little lower for old ones. Also a little less per month the longer you signed op for.

With the correct price point, which I think would be around $50/month, they might get a 90% take. So 10.8k average per car.

I don't think we really know what percentage has paid and obviously have even less idea about how many will pay once it's available but I'm thinking something like 50% at best at a one time $7k fee.

With those numbers Tesla would make something like 3.5k per car on average compared to 10.8k

Lets say Tesla gets to 3 million cars sold per year in the not to distance future. That's only 6 gigafactories. That would mean a difference of 8.5k x 3 million = $21.9 BILLION extra in almost pure profit every year compared to selling it outright. Even if the $7k price got the same 90% take which I think is impossible a $50 dollar/month model would still pull in an extra $11.4 billion.

Granted, it's better to get payment today than spread out over 20 years average but that's a big difference. And just like leasing contracts Tesla could sell those off if they needed the money sooner. Plenty of pension funds that would buy those against just a few interest points.

Either my 3 am math is way off or Tesla will obviously already have figured this out. In that case FSD could be much more valuable than I think almost anyone have figured.

Anyone have any factual numbers or ideas that would change my estimates?

I think too many people look at FSD from an individual consumer standpoint. Zachary said on the Q3'19 conference call that:

Martin Viecha -- Senior Director, Investor Relations

Okay. Thank you. And the last question from institutional investors is, can you provide an update on FSD package attach rates? As FSD attach rates improve, will you let the financial benefits manifest in higher gross margins for company and shareholders or will you lower the price to drive delivery volume?

Zachary Kirkhorn -- Chief Financial Officer

I don't think we're going to need to lower the price of FSD. I expect the price of FSD to increase slowly as the functionality and capability improve. That's -- that is unchanged.

Prices are going to continue to increase, and this should come as no surprise. A robotaxi can easily make a few thousand dollars per month, so there is simply no way they would offer a $50 subscription to FSD. Simple supply and demand indicates that it would be much more expensive, because everybody and their uncle would be buying up Teslas to start their own FSD vehicle fleet, if FSD only cost $50 per month.

Although I could be wrong, I think they will not pivot to a subscription model in the foreseeable future, for the simple reason that cash is too valuable to Tesla right now, because it's still in hyper growth mode. And therefore, I believe that if Tesla solves FSD in the near future and further increases prices to perhaps $20k or more, a lot more vehicles will be sold to fleet operators, and a lot less to individual consumers. Fleet operators can easily pay tens of thousands more for their vehicles if they are autonomous, because they will easily make this within a few years of operation. Consumers however, will have a harder time affording the higher up-front costs, and will therefore be more likely to simply use an autonomous taxi for their transportation needs, because these will be much cheaper. Likely cheaper than private vehicle ownership today.

 

[Buckminster]

Poll closing shortly:
What words will be mentioned in either the update or call?
This poll will close on Jan 28, 2020 at 7:25 AM.

1. 
   Taking deferred tax profits
   7 vote(s)
   23.3%
2. 
   Sold call profits
   0 vote(s)
   0.0%
3. 
   FCA payments
   9 vote(s)
   30.0%
4. 
   Date for powertrain and battery day
   21 vote(s)
   70.0%
5. 
   Feature complete date
   16 vote(s)
   53.3%
6. 
   New giga location
   4 vote(s)
   13.3%
7. 
   Alien dreadnought
   1 vote(s)
   3.3%
8. 
   Model Y delivery date
   29 vote(s)
   96.7%
9. 
   #Cybertruck preorders
   15 vote(s)
   50.0%
10. 
    Solar roof ramp to 1000/week date
    20 vote(s)
    66.7%
11. 
    Project Dojo
    6 vote(s)
    20.0%
12. 
    Recognition of FSD payments date
    5 vote(s)
    16.7%

ER Bingo

 

[FrankSG]

What are the benefits of being conservative and delaying taking the DTAs? More importantly, what would happen if they take them and then aren't profitable in a future quarter / year? Are we just talking about credibility?

Is the metric "more likely than not" referring to all future quarters or the next 4 quarters or the next financial year?

The "more likely than not" refers to 50%+ chance of being able to use the DTAs. So that depends on the expiration date of the DTAs in question. @The Accountant had a nice graph ~100 pages back, but iirc most of Tesla's DTAs don't expire until the late 2020s or even early 2030s. This goes to show how different the rules for accountants/auditors are, because of course there is no way management believes they are not going to be profitable within that time frame.

If they reduce their VA because they believe they'll more likely than not be able to utilize their DTAs, and then in a subsequent quarter this evaluation changes, they simply have to increase their VA again, and book a large tax loss on the P&L in that quarter. Basically the opposite would happen of what happens when they reduce their VA. You ideally don't want this to happen, because just like reducing the VA signals to the market that your expectations of future profits have improved, increasing VA usually signals to the market that your expectations of future profits have worsened.

The benefit of being conservative is not pumping up the stock price too much too quickly (which S&P 500 inclusion this early probably would do), not being under scrutiny of shorts and SEC, and saving up some good news for later in the year if Q4'19 is already very strong in and of itself. This all assumes that Tesla has a choice in all of this. It's entirely possible that a VA reduction from an accounting perspective is simply too early and cannot be reasoned for to auditors, or that a VA reduction at this point is so obvious that Tesla couldn't delay it even if it wanted to.

 

[Fact Checking]

Confirmed:
Shanghai to extend the vacation to Feb 10

This was announced by the Shanghai government yesterday already, together with a two week extension of the school vacation:

Update, this just got announced by the Shanghai government:

Global Times on Twitter

"Enterprises in Shanghai should not resume work before 12 pm on February 9 and all kind of schools including universities, high schools, primary schools, vocational schools, kindergartens and nursery schools should not start the new semester until February 17: Shanghai Government"​

I suspect "enterprises" includes GF3 too.

The Lunar New Year ends on February 2, so this is an at least one week extension for businesses, and an at least two weeks of shutdown of schools, kindergartens and universities.

Next steps would be restrictions of road traffic (long distance bus traffic got stopped yesterday already: this is the cheapest and most common form of transportation used by migrant workers), and the banning of inter-provincial travellers from entering Shanghai.

Again, like in Beijing, these are well choreographed, aggressively proactive containment measures - very different from the SARS reaction which was slow and reactive.

China's primary strategy appears to be to ride it out in Wuhan via a full quarantine, and to slow the spread elsewhere via clever use of the Lunar New Year, where people are at home among family and friends in relative safety. By prolonging the "vacation" they take the edge off the disruption and also make sure people relying on wages to sustain themselves aren't trapped in big cities without sources of income.

Previously I didn't understand why China waited for people to travel for the new year festivities (because this was a transmission risk) - now I'm reasonably certain it was intentional to depopulate big cities voluntarily while infection levels are low, and move workers back home to relative stability, and that most of this was part of a systematic, proactive response.

But I could be wrong, and it would take time for the markets to realize this and stop panicking, so this is not advice.

 

[Fact Checking]

To get an answer to this, I think an update in TSLA's largest institutional holders will be more telling than the Q4'19 earnings. If it shows that there are a few big funds that accumulated very large TSLA positions during Q4 at prices in the high 300s, and 400s, I'd argue that these are more likely long term investments based on Tesla's improved fundamentals and Giga Shanghai + MY ramps, than speculative plays on strong Q4 earnings.

While I kind of agree, I think @neroden was correct in observing it eons ago that the Tesla "institutional investors" are the actual short-term swing-traders and "weak longs", while retail investors are the long term holders ...

ARK and a handful of other long-term institutional investors are the exception to the rule really. The big fall to $179 last summer was mostly institutional investors selling plus shorting activities - it was mostly Tesla retail investors who were absorbing the shares.

I believe more long term institutional investors are going to arrive with S&P 500 inclusion and credit rating upgrades by Moody's and S&P, I believe.

 

[FrankSG]

While I kind of agree, I think @neroden was correct in observing it eons ago that the Tesla "institutional investors" are the actual short-term swing-traders and "weak longs", while retail investors are the long term holders ...

ARK is the exception to the rule really.

The true long term investors will arrive with S&P 500 inclusion and credit rating upgrades by Moody's and S&P, I believe.

I plan to do more research into this and write a blog about it sometime soon after there has been an update to changes in institutional ownership during Q4, but I don't agree with this.

From what I've been able to tell so far, there are definitely swing trading institutional investors (Deutsche Bank, Renaissance Technologies LLC), but there is also a large number that (based on their history of ownership) is smart money in it for the long haul (Baillie, ARK, BlackRock, many others).

 

[DragonWatch]

From the mouths of babes ~ Grandson, eight; while riding in our Model X last weekend, he said and I almost got the quote right, “we do not see many Tesla’s, but now days we see roughly ten per day.” He still uses a booster in the backseat. I will make a forward observer of life out of him yet.

Folks, if Olympia can do it ~ a town/city near you can do it.

Journaled shares last night, RMD, had the cash for taxes ~ why not.

 

[Fact Checking]

TSLA is currently up to €513 ($564) in Frankfurt trading, on light volume.

I believe this is mostly following the now somewhat optimistic macro indices which bounced back in Asian trading.

 

[Remus]

Do we know if GF3 is actually affected by this? It is called GF Shanghai, but is in a special trade zone...

Definitely.

 

[Fact Checking]

I plan to do more research into this and write a blog about it sometime soon after there has been an update to changes in institutional ownership during Q4, but I don't agree with this.

From what I've been able to tell so far, there are definitely swing trading institutional investors (Deutsche Bank, Renaissance Technologies LLC), but there is also a large number that (based on their history of ownership) is smart money in it for the long haul (Baillie, ARK, BlackRock, many others).

I found Neroden's post about this:

TSLA Market Action: 2018 Investor Roundtable

"So this is my analysis:
-- 170 million shares outstanding + 28 million shares created by short-sellers
-- 42 million shares insiders
-- 51 million shares "strong" institutional holders (Bailie Gifford and the like)
-- 52 million "weak" institutional holders
-- leaves 53 million shares in individual hands -- higher than you might expect. I will guess these are actually mostly pretty hard-core believers, much less likely to sell out than the institutions."​

I take back my "ARK is the exception to the rule" claim: there's plenty of long term institutionals, and they make up roughly half of Tesla institutional investors. But during dips these institutional investors are selling a lot more than long term institutional holders are buying, and the rest is being picked up by retail long term investors.

So the big swings during the large drops were I believe mostly driven by weak institutionals, not by weak retail investors or super short term traders. This is further reinforced by proxy metrics of retail holders, such as Robintrack:

If you check the June 2019 bottom of the price line you'll see that retail as a group had incredibly strong hands: Robinhood users more than doubled their holdings in 2019.

All other things equal institutional investors, as a group, reduced their holdings significantly during the big drop of 2019. (Maybe @ReflexFunds has additional insight here.)

This is possibly one of the reasons why Wall Street analysts have such a big effect on TSLA price action: institutional investors are listening to them.

 

[Tslynk67]

Morning gang.

Nasdaq Futures currently up 0.9% - looking like a rebound day, barring any sudden turns.

 

[Rande]

Allow me one post on the Coronavirus outbreak (which may save many posts in future).

You can follow along the outbreak by bookmarking this map by Johns Hopkins University which depicts confirmed cases of infection and their location:
Wuhan Coronavirus (2019-nCoV) Global Cases (by Johns Hopkins CSSE)

It is updated once or twice a day using raw data from respectable sources such as WHO, CDC, etc.

 

[jeewee3000]

I found Neroden's post about this:

TSLA Market Action: 2018 Investor Roundtable

"So this is my analysis:
-- 170 million shares outstanding + 28 million shares created by short-sellers
-- 42 million shares insiders
-- 51 million shares "strong" institutional holders (Bailie Gifford and the like)
-- 52 million "weak" institutional holders
-- leaves 53 million shares in individual hands -- higher than you might expect. I will guess these are actually mostly pretty hard-core believers, much less likely to sell out than the institutions."​

I take back my "ARK is the exception to the rule" claim: there's plenty of long term institutionals, and they make up roughly half of Tesla institutional investors. But during dips these institutional investors are selling a lot more than long term institutional holders are buying, and the rest is being picked up by retail long term investors.

So the big swings during the large drops were I believe mostly driven by weak institutionals, not by weak retail investors or super short term traders. This is further reinforced by proxy metrics of retail holders, such as Robintrack:

View attachment 505021

If you check the June 2019 bottom of the price line you'll see that retail as a group had incredibly strong hands: Robinhood users more than doubled their holdings in 2019.

All other things equal institutional investors, as a group, reduced their holdings significantly during the big drop of 2019. (Maybe @ReflexFunds has additional insight here.)

This is possibly one of the reasons why Wall Street analysts have such a big effect on TSLA price action: institutional investors are listening to them.

I remember that post from neroden. It still holds up but in the meantime the share of "strong" institutional holders has increased IMO (in the latest rally for example, part of the buying must have been done by institutional holders given the many upgrades. Some of these are strong, others are considered weak).

I often see the Robintrack graph pulled up here to prove an argument, but aren't the Robinhood traders just a drop in the ocean (of TSLA shares)?

I don't see it as representative for the direction of the stock, or the mindset of retail longs. Maybe it's an indication towards USA retail sentiment, but the world is a little bigger than that .

Either way, time will tell all.