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Hey, I'm Steven and this is Solving The Money Problem.
If you're new, welcome. If you're not, welcome back.
Tesla reports Q4 earnings on the 29th January and many of you have been asking for my thoughts.
Will Tesla post a profit or not?
What will the stock do after earnings?
Should I buy the stock before earnings or sell?
I can't see into the future but I do have a brain and an internet connection so, while
I can't say what WILL happen, I can look at some clues about what MIGHT happen.
With sentiment on Wall St shifting dramatically in recent weeks from “Tesla sucks” to
“Hmm, maybe Tesla doesn't suck”, the stock has been on a tear.
I expected this shift in sentiment as analysts began to wake up.
In fact, I predicted it in December in my video “Waiting For Tesla Stock To Dip? (good
luck).
In it, I confidently laid out the reasons why I believed Tesla stock was likely to trend
up over time.
Many of those reasons have come to pass and the stock is up more than $200 since I posted
the video.
With commentary like this, is it any wonder?
[He is the new face of an auto executive. With just--that your car becomes an exciting
place to be. I love sitting in a Tesla. My daughter loves the flatulence seat. She kept
sitting on it, pressing the button--I mean, I know it's a little odd--but the Tesla
is the place, it's the third place to be. People love to be in it. And they've got
autonomous driving--oh my it's so exciting]
[You--just put numbers around it. Let's call today 360-370,000 in terms of units.
China could be an incremental 150-200k. That's why the bull thesis, Chinas worth another
$300 per share. That's how you get to that sort of uber-bull thesis on Tesla]
[Mr Deiss a very, very interesting time for the auto industry. If you take a look at Tesla's
market value surging past VOlkswagen. I mean, how do you explain why investors are putting
money in a company like Tesla which is uh, not making money yet. Compared to a company
like Volkswagen. I mean, Tesla's burning cash. You're making money]
[Ya. You know, the market evaluation tells you something about the future--you know--future
expectations. And Tesla is--is having a product which basically describes the future of the
auto industry. Now fully connected, electric car and so into--there's a lot of evaluation
about the future car and I think Tesla is paving the way there. It's--it's uh, modelling
something new for the industry. I think we are close to follow, ya. And um, so, uh we
are quite optimistic that we still can keep the pace with Tesla and uh, also, at some
stage,probably overtake]
Today, all eyes are Tesla. Automakers are watching.
Wall St is watching. Investors are watching.
Is the stock getting ahead of itself?
Is it overvalued now?
What will Q4 bring?
In my opinion, this may be Tesla's most important quarter ever in terms of Wall St
sentiment.
If Tesla knocks it out of the park, it may add enough momentum to widely shift perceptions
from “Tesla is doomed” to “Tesla might win this”.
Let's dive in.
Records
Record deliveries and production have already been confirmed. This was painfully obvious
leading in to the end of 2019 yet most of Wall St missed it.
What's also obvious is that record deliveries and record production are VERY GOOD THINGS.
Profitability & Product Mix
Unless there's an extraordinary, unexpected event--or I'm way dumber than I think--it's
all but certain Tesla will post a net profit.
For one, Tesla has continually found new efficiencies and steadily increased automotive margins
on like-for-like vehicles.
The exact same Model 3 being sold today is more profitable than the same Model 3 being
sold a year ago.
Or 6 months ago.
Or 3 months ago.
This is why Q3 surprised most of Wall St.
Yes, the product mix has changed.
Q4 2018 saw many more performance Models 3s sold, and higher numbers of S & X which have
much higher margins.
But Tesla's continuous optimization means margins on low-spec version are growing.
Tesla delivered 90,996 vehicles in Q4 2018 and 112,000 in Q4 2019 - 23% increase.
Admittedly, these are lower margin vehicles but 23% more of them is HUGE.
Bonus Vehicles
Tesla delivered 7,109 more vehicles than it produced in Q4.
Why does that matter?
At $50,000 a pop, that's an extra $350,000,000 in revenue, many of whose costs have already
been accounted for in previous quarters.
These revenue on these 7,000 vehicles will effectively be VERY high margin.
I think this alone may compensate for the lower-spec mix of vehicles sold.
Cash On Hand
Tesla ended last quarter with over $5 billion in the bank.
No doubt some of it has made its way into Gigafactory Shanghai, some into new supercharging
infrastructure and other areas of the business but I expect Tesla to remain flush with cash
moving forward as they're becoming exceptionally resourceful with capital expenditure.
FSD Revenue
Tesla has around half a billion dollars in “deferred revenue” from the sale of full
self-driving. As new features are rolled out, more of this revenue is recognised.
How much will fall in Q4 is anyone's guess but it will be more than $0 and because it's
pure margin, it will go straight to the bottom line.
Performance Upgrades
In late December, Tesla announced a $2,000 “acceleration upgrade” for Long-range
all-wheel-drive Model 3 owners.
How many owners opted for this over-the-air upgrade in the final days of 2019 is unknown
but what I do know is that every one of those upgrades is almost pure profit for Tesla.
Imagine 10,000 owners upgraded.
That would be an extra $20,000,000 to the bottom line.
Premium Connectivity
Also in December, Tesla announced a $9.99 monthly premium connectivity service to enable
features like live traffic, netflix and YouTube.
While I don't believe any of this revenue will fall into Q4 due to the billing cycle,
Tesla is likely to share details of the take rate on this service and that could have a
positive impact on the stock price as it will give us clues about what's in store next
quarter and beyond.
ZEV Credits
It's a low chance but we may see surprise revenue from the sale of Zero Emission Vehicle
credits.
As we know, Fiat-Chrysler has an agreement to purchase more than $2 billion in ZEV credit
from Tesla between now and 2021, with about 80% of those expected to be in 2020.
Whether or not any credits were purchased in Q4 is unknown but in either case it's
good news.
Either Tesla had a bunch of unexpected net income in Q4 2019 OR that income rolls into
Q1 and beyond.
$2 billion is a staggering sum of free money--enough to build a Gigafactory--and a huge boon for
the bottom line.
China
I'm turning into a broken record.
Gigafactory Shanghai was built absurdly fast--in record time.
Muddy field to production vehicles in less than a year.
In Q3 Tesla confirmed that the Model 3 lines in China were built for 65% less capex per
unit of capacity than the US model 3 lines.
This matters.
Moreover, production ramped so fast that even Tesla bulls were surprised.
Expect Tesla to share more info on China.
We may hear about current and future production rates, planned expansion, order numbers and
most importantly, I suspect Tesla will announce their plans to begin manufacturing Model Y
almost immediately.
Germany
I'll be surprised if we see the Berlin Gigafactory completed before year-end but we'll probably
hear a bit more on Tesla's European plans during the Q4 call. Anything other than “we
have been delayed” will be good news.
Model Y
Rumors are swirling that US Model Y deliveries will commence any day.
I'll be shocked if Tesla doesn't announce this on the call by sharing an expected timeline
for first Model Y deliveries.
We may also hear the first insights around demand.
Model Y is way, WAY ahead of schedule.
No one was expecting this.
Most of Wall St still have no f***king idea that the Y is about to begin deliveries.
If you can't read between the lines, too bad.
As I've said elsewhere, the Model Y will make tesla billions.
The global SUV market is about 30,000,000.
The Y is poised to take a nice slice of this.
Battery and Powertrain Investor Day
I'll also be surprised if Tesla doesn't announce a date for their upcoming Battery
and Powertrain Investor Day and drop a few hints as to what's in store.
I actually think--from an investor's point of view--this event will be one of the most
important in the history of Tesla.
We know Tesla's current battery and powertrain technology is absurdly far ahead of everyone
else.
It truly is embarrassing.
Of course, Tesla isn't standing still.
Their acquisitions of Maxwell Technology and Hibar Systems shows that they're taking
the necessary steps to remain in the lead and more importantly, to scale annual battery
output to multiple terawatt hours.
Tesla will tell us how they plan to do this at the investor day.
My guess?
They're going to licence/sell their battery and powertrain technology to other automakers.
They may also partner with them to build gigafactories together or licence the gigafactory design
to other automakers.
Any clues we hear about this will be good news.
Solar Deployments
In early December, the following email from Elon Musk starting Tesla's top priorities
was leaked:
"The first is making sure all cars are delivered to their customers before end of year,”.
"The second, just as important, is that we immediately increase the rate of solar deployments
by a significant degree.”
We know Tesla hit the first priority out of the park.
What about solar deployments?
We'll have to wait and see but that's the point.
We already know Tesla's automotive business nailed Q4.
Any growth in solar deployments will be good news, and help the bottom line.
Battery Deployments
Tesla's battery business is by far it's lumpiest, in part due to its relatively small