Judging by your forward look it looks like Elon has 6ish months for one last pump (energy+cyber+model refresh...+who knows) sell a load of shares and then step down. Let someone else oversee the end of high auto GM so he can snipe from the sidelines saying they're doing it all wrong.
New pivot to AI plus his clear obsession with the bird app suggest Tesla may be losing its shine for him.
Further musings on the financials - do you think the raw materials costs above spot price could be booked to hedging losses or similar to reduce the cost/car?
Also, what on earth are they doing to do with all the idle factory capacity, surely they should be able to comfortabley make >2m cars per year but this year will stagnate with prices dropping?
The Model Y global production capacity is 54% of the 2022 worldwide market for SUVs priced between $45K-$70K. They might need to close Fremont if demand for the Y falls further.
I don't think there's any way to "spin" lower demand and they know that, which is why they continue to cut prices to keep the factories running. At some point, it won't work and they'll have to face the music.
Material costs are mainly lithium and nickel, as discussed in the report. It's impossible to know what Tesla's average cost of lithium is as their suppliers are in long-term fixed contracts. Many are being reset to current spot prices this year and next. They were made pre-2022 spike in lithium prices, so could lead to higher costs. But whatever they source in the open market is cheaper than 2022 now. Nickel prices continue to rise, so that's a cost headwind.
In Q1, the new factories in Austin & Germany hit 85% capacity utilization in the last week of the quarter, while Fremont was at 100% & China was at 85%. As they need to keep the new plants above 85%, this will lead to lower rates at Fremont & China, as they simply have too much capacity given the current demand. That's why they'll continue to cut prices.
China is a huge risk as 40% of its output was exported to the EU, which now can source cars from the German factory. So it's going to become an increasingly tough year for Tesla.
Thank you for your article. I got question regarding your P&L modelling: I have not seen anywhere the R&D line, do you include the figure into the variable cost?
Thank you for pointing out the obvious for me:-). I should have spotted that by myself, just by looking at their 10K report.
Either way, you have made my weekend miserable. I was hoping (not good investment strategy indeed), that the 20%+ price cut and lower volume of S/X would make bigger hole into the Q1 P&L.
I'm sure I could quibble some of these points, but I don't think you are too wrong on some of the details. What's mainly wrong is the points you're NOT making, the ones you're leaving out. For starters you're getting hung up on the financials but Tesla was never a financial company first and foremost it's about the mission. In the near term money is completely inconsequential as long as they are positive cash flow to continue growing and funding the great ambitions laid out over the years and most recently in Master Plan 3.
Even if your dour prediction of 1.7 million comes true, that will be due to the Biden recession which has really killed all automakers. Tesla has fared by far the best through these trying times.
The other thing is you ONLY talk about cars. Tesla has so many areas with higher TAMs than cars. Energy is a huge industry and Tesla is growing extremely rapidly there see the new China news. With X company growing Tesla may become more and more one entity with SpaceX, which is competing in what will someday be a MASSIVE market. And most importantly of course our kids and grandkids may mainly know Tesla as a humanoid company, Optimus is essentially competing with the largest market: the labor market.
Brad I really appreciate the effort and time you put it in getting into some details of car selling, but with Tesla that's like trying to look at a forest with your eyes a couple inches from a solitary trunk. Take a step back. I highly advise starting with the MP3 white paper.
I'd write more about Megapacks if Tesla actually disclosed more data. How can anyone analyze/forecast the Megapack business with the limited numbers Tesla discloses? There were only 3 mentions on the last earnings call and hardly any detail on it on IR Day.
In terms of the "mission", that has zero relevance to anyone who buys or shorts Tesla, so I have no interest in covering it. And with regards to Master Plan 3, it's another "pie in the sky" outlook of Elon Musk which can't be forecast and will probably turn out as accurate as his other missed forecasts in Master Plan 1 & 2.
If you don't mind wasting your time, another "layman" question: do you have any idea, how is the 2nd hand Tesla cars market going? Meaning, do people really buying used Teslas? I am pretty much in that market myself, for private use, I buy 3-4 years old, used ICE car, because I don't really care that much about "status symbol" and find these cars to be better value, especially if the previous owner was picky and polish the car more than did actual driving.
Anyways, i just wonder, how this market works in case of EVs (ie Tesla) , I would be really scare to do so, because such car is half way trough the warranty and an problem with the battery (which I see very likely between 8-10 year) means the end of the car, despite the fact that there would still be relatively high residual value on the car.
Do people really buy them or does Tesla stores them somewhere out of the sight?
Used Tesla prices are dropping by 20%-30% depending on age. In the UK, 1yr old Model 3/Ys are dropping by 25% vs their prices last September (link below).
Since the battery packs only have a lifetime of around 7yrs, it's not worth buying used EVs in my opinion, unless they have very little mileage used.
"How will Tesla book subsidies from America’s new Inflation Reduction Act (IRA) for its battery packs? Given that it’s a subsidy or “credit”, it should be booked along with regulatory credits that Tesla earns."
Bingo! That's a question that I toiled with for a couple of weeks before writing the report.
But given the fact that Zach committed to "above 20%" Auto gross margins (ex-leases & ex-credits), I figured there was no way that they wouldn't book it anywhere else but Auto Revenues.
If they did, they'd risk missing that target. And it's unclear whether Zach guided that for only Q1 or the full year, as they slashed prices more since that commitment was made on Jan-25th.
1. it would be somewhat scammy but I can totally believe it would happen. The situation is much more different heading into this ER . After april price cuts, EM won't be able to get away with comments like "demand is 2X production".
2. I also think that China price cuts are coming shortly, probably after the earnings
3. I think the fact that M-Y price had to be dropped again in US says it all. This is supposedly the strongest market for this model.
4. Also, lower sales of M-X and M-S as well as huge price cuts in this segment will drag the profitability down big time (deliveries dropped from 17K in Q4 to <11K units in Q1, this alone shall be a drag of $500M+)
5. Kimball selling $20M happened right before the april price cut. He has a good timing when it comes to selling local top
6. EM responded to SMR thread on tesla stock with something like "Buy when others panic, sell when they’re irrationally exuberant". If you can read b/w the lines, this is very telling. EM expecting stock to get another beating
Thanks for the analysis, very interesting.
Judging by your forward look it looks like Elon has 6ish months for one last pump (energy+cyber+model refresh...+who knows) sell a load of shares and then step down. Let someone else oversee the end of high auto GM so he can snipe from the sidelines saying they're doing it all wrong.
New pivot to AI plus his clear obsession with the bird app suggest Tesla may be losing its shine for him.
Further musings on the financials - do you think the raw materials costs above spot price could be booked to hedging losses or similar to reduce the cost/car?
Also, what on earth are they doing to do with all the idle factory capacity, surely they should be able to comfortabley make >2m cars per year but this year will stagnate with prices dropping?
Worldwide inventory is nearly 100K cars. To survive, they need more idle production capacity, since they've built out twice as much as they can sell.
The Model Y global production capacity is 54% of the 2022 worldwide market for SUVs priced between $45K-$70K. They might need to close Fremont if demand for the Y falls further.
Indeed, but what is the spin going to be for so much idling (by time) and across multiple factories...
I don't think there's any way to "spin" lower demand and they know that, which is why they continue to cut prices to keep the factories running. At some point, it won't work and they'll have to face the music.
Material costs are mainly lithium and nickel, as discussed in the report. It's impossible to know what Tesla's average cost of lithium is as their suppliers are in long-term fixed contracts. Many are being reset to current spot prices this year and next. They were made pre-2022 spike in lithium prices, so could lead to higher costs. But whatever they source in the open market is cheaper than 2022 now. Nickel prices continue to rise, so that's a cost headwind.
In Q1, the new factories in Austin & Germany hit 85% capacity utilization in the last week of the quarter, while Fremont was at 100% & China was at 85%. As they need to keep the new plants above 85%, this will lead to lower rates at Fremont & China, as they simply have too much capacity given the current demand. That's why they'll continue to cut prices.
China is a huge risk as 40% of its output was exported to the EU, which now can source cars from the German factory. So it's going to become an increasingly tough year for Tesla.
Thank you for your article. I got question regarding your P&L modelling: I have not seen anywhere the R&D line, do you include the figure into the variable cost?
I put R&D into SG&A, where Tesla books it. I estimate it will be 17% higher at $3.6bn this year due to the roll-out of the Cybertruck in Q4.
Thank you for pointing out the obvious for me:-). I should have spotted that by myself, just by looking at their 10K report.
Either way, you have made my weekend miserable. I was hoping (not good investment strategy indeed), that the 20%+ price cut and lower volume of S/X would make bigger hole into the Q1 P&L.
I'm sure I could quibble some of these points, but I don't think you are too wrong on some of the details. What's mainly wrong is the points you're NOT making, the ones you're leaving out. For starters you're getting hung up on the financials but Tesla was never a financial company first and foremost it's about the mission. In the near term money is completely inconsequential as long as they are positive cash flow to continue growing and funding the great ambitions laid out over the years and most recently in Master Plan 3.
Even if your dour prediction of 1.7 million comes true, that will be due to the Biden recession which has really killed all automakers. Tesla has fared by far the best through these trying times.
The other thing is you ONLY talk about cars. Tesla has so many areas with higher TAMs than cars. Energy is a huge industry and Tesla is growing extremely rapidly there see the new China news. With X company growing Tesla may become more and more one entity with SpaceX, which is competing in what will someday be a MASSIVE market. And most importantly of course our kids and grandkids may mainly know Tesla as a humanoid company, Optimus is essentially competing with the largest market: the labor market.
Brad I really appreciate the effort and time you put it in getting into some details of car selling, but with Tesla that's like trying to look at a forest with your eyes a couple inches from a solitary trunk. Take a step back. I highly advise starting with the MP3 white paper.
Money is very consequential when you don't have it.
I'd write more about Megapacks if Tesla actually disclosed more data. How can anyone analyze/forecast the Megapack business with the limited numbers Tesla discloses? There were only 3 mentions on the last earnings call and hardly any detail on it on IR Day.
In terms of the "mission", that has zero relevance to anyone who buys or shorts Tesla, so I have no interest in covering it. And with regards to Master Plan 3, it's another "pie in the sky" outlook of Elon Musk which can't be forecast and will probably turn out as accurate as his other missed forecasts in Master Plan 1 & 2.
If you don't mind wasting your time, another "layman" question: do you have any idea, how is the 2nd hand Tesla cars market going? Meaning, do people really buying used Teslas? I am pretty much in that market myself, for private use, I buy 3-4 years old, used ICE car, because I don't really care that much about "status symbol" and find these cars to be better value, especially if the previous owner was picky and polish the car more than did actual driving.
Anyways, i just wonder, how this market works in case of EVs (ie Tesla) , I would be really scare to do so, because such car is half way trough the warranty and an problem with the battery (which I see very likely between 8-10 year) means the end of the car, despite the fact that there would still be relatively high residual value on the car.
Do people really buy them or does Tesla stores them somewhere out of the sight?
Used Tesla prices are dropping by 20%-30% depending on age. In the UK, 1yr old Model 3/Ys are dropping by 25% vs their prices last September (link below).
Since the battery packs only have a lifetime of around 7yrs, it's not worth buying used EVs in my opinion, unless they have very little mileage used.
https://www.fleetnews.co.uk/news/manufacturer-news/2023/03/07/carmakers-rule-out-reductions-after-tesla-price-cut-shocks-the-market#:~:text=The%20used%20value%20for%20a,models%20were%20strong%20through%202022.
This is the $100B question in your write up:
"How will Tesla book subsidies from America’s new Inflation Reduction Act (IRA) for its battery packs? Given that it’s a subsidy or “credit”, it should be booked along with regulatory credits that Tesla earns."
Bingo! That's a question that I toiled with for a couple of weeks before writing the report.
But given the fact that Zach committed to "above 20%" Auto gross margins (ex-leases & ex-credits), I figured there was no way that they wouldn't book it anywhere else but Auto Revenues.
If they did, they'd risk missing that target. And it's unclear whether Zach guided that for only Q1 or the full year, as they slashed prices more since that commitment was made on Jan-25th.
1. it would be somewhat scammy but I can totally believe it would happen. The situation is much more different heading into this ER . After april price cuts, EM won't be able to get away with comments like "demand is 2X production".
2. I also think that China price cuts are coming shortly, probably after the earnings
3. I think the fact that M-Y price had to be dropped again in US says it all. This is supposedly the strongest market for this model.
4. Also, lower sales of M-X and M-S as well as huge price cuts in this segment will drag the profitability down big time (deliveries dropped from 17K in Q4 to <11K units in Q1, this alone shall be a drag of $500M+)
5. Kimball selling $20M happened right before the april price cut. He has a good timing when it comes to selling local top
6. EM responded to SMR thread on tesla stock with something like "Buy when others panic, sell when they’re irrationally exuberant". If you can read b/w the lines, this is very telling. EM expecting stock to get another beating
https://twitter.com/elonmusk/status/1646360875736109058