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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

size and in part due to the nature of its batteries which range in use from powering

single homes to powering entire islands.

Tesla's grid-scale Megapack was announced in mid 2019 and it wasn't long before we

heard about its planned use in a number of new projects including the replacement of

some fossil-fuel peaker plants.

Big batteries = big revenue.

Convertible Debt

[So one of the theses for the bears is the balance sheet but when we look more closely

at the balance sheet they've got 3 tranches of convertible debt that have actually started

to really trade up very sharply since the stock has moved so much. The reason is because

these bonds convert into equity. And so, you have $4 billion of three different tranches

of convertible bonds. One converts net year--that's $1.4 billion, then $1.8, then another $1 billion.

So it's $4 billion that will convert if the stock is about $350 or higher over these

various points of the next 4 years.

So when you think about the balance sheet, that's $4 billion of debt that won't be

there anymore. Now there will be $4 billion of--we don't know exactly how much [equity]

of equity--but equity. It's as if they're selling stock at the various strike prices

of these converts so if one of the bear's thesis of--you know, “we've got a real

balance sheet issue” isn't there anymore, it seems to be that the target value, when

you look at the upside, downside and bear case, you've gotta think that it's higher

now.

Now at $460, I don't know there'd be a buyer but I think the risk of the balance

sheet really being a problem has gone down significantly.]

Many analysts seem to be overlooking this.

It's unlikely to be a focal point of the earnings call but if it comes up, expect many

investors who have no idea about the convertible debt to grow more bullish.

It looks pretty likely that $4 billion of debt Tesla is carrying will effectively vanish

in the coming years. That's helpful.

There's STILL Hasn't Been A Short Squeeze

Despite enjoying a stellar run recently, short interest in Tesla stock still remains extraordinarily

high.

At some point, a chain reaction is bound to happen as short are forced to cover their

positions in quick succession.

I'm not suggesting this WILL happen after Q4 results.

But, it is a possibility I have to acknowledge.

Let's sum it up.

First, I have no idea what numbers Tesla will report or what questions will be asked.

There's too many variables to have any certainty.

BUT.

Looking at the available evidence, it seems to me that Tesla will be reporting a tsunami

of very good news, loads of records and very strong financial results.

Tesla has reached a tipping point.

They've shown profitability in 3 of the last 5 quarters and I suspect Q4 will make

it 4 of the last 6.

Wall St sentiment is shifting but some analysts are slower than others, as are many retail