Comment by chollida1 | Hacker News Reader

Comment by chollida1 | Hacker News Reader

Pre:

- Will they give guidance on Model 3, Geographic breakdown(most other peers do)?

- how many sales are high end cars vs low end?

- TSLA down 11% on year vs market up 5ish

- convertable debt issue, we're now in the 20 day average window, option implied vols show market doesn't think they'll make it

- Elon commented that they could pay bond w cash and didn't seem concerned, cash balance is up, though so are short term liabilities

Car Notes:

- current lowest price car sold is Model 3 $44,000

- reported to sustain 7,000 per week, a pretty big miss from the 10,000 that elon claimed they'd be at by mid 2018 but expected

- Est. 2019 delivered 360,000 to 400,000

- Est. Q1 delivers expected to be down vs 2018

- Est. Q1 deliveries expected to be down in North America

- still no funding secured for China plant

Solar:

- why even track anymore, installations fell, yawn

Numbers:

- cash balance is 3.7B

- cash flow positive again!!, beat last quarter, though capital spending fell alot( down to $300ish million)

- 4Q Adj EPS $1.93, Est. $2.14 (Big misses, what happend here?)

- layoffs could cut $400M annually from budget

- Customer Deposits $792.6M vs $908.5M in 3Q

- Bonds unmoved, yield still 8%

- Elon expects to be profitable each quarter in 2019

Misc:

Lots of analysts congratualting Tesla saying they've got the supply side sovled.

Shrinking sales on the high end indicate taht their next challenge will be on the demand side, especially on the high end that allowed them to survive for so long

Can they be profitable with $1000 in margin per car instead of 5,000-10,000?

Interesting note by Bloomberg

> Services reported a loss of almost $500M

"So basically, Tesla is taking a $500 million hit just to save customers from the dealership experience."

Nice summary! I was under the impression that the services loss was from the free electricity they gave out at superchargers to some owners. Their boosting of the prices there was a response to converting that line into a something at least revenue neutral. Also no details on how they proceed with their power swap arrangements.

Personally I expect them to use the Google hack where they create a wholly owned subsidiary that is a registered power company so that they can negotiate at grid rates for power rather than with various power providing entities where the super chargers are located.

The amount of money lost in services is way too big to be free electricity.

You could estimate this in a couple different approaches, here's one.

Tesla Model 3: 26 kwhr / 100 mi Model S: 33 kwhr / 100 mi Model X: 39 kwhr / 100 mi

Hard to say where the balance of supercharging comes from (more expensive models more likely to have it free, but maybe less likely to use?) so let's be generous and call it 30 kwhr/100mi

I pay 24 cents per kwhr but I hope their average price is more like 10 cents (not even counting the solar...)

So each 100 miles charged would cost $3.

So 100 million dollars spent giving out electricity would generate 3.3 billion miles charged.

Back in september there were 20 million telsa miles driven per day, but a year long projection would be hard given the fast growth of model 3. let's just say 20M per day. That's about half of the year's miles driven covered with 100M.

I can't imagine that even 1/2 of the total miles driven are charged by superchargers. So I am inclined to agree with you; the free-supercharging-electricity costs are probably a small piece of the total 500M.

I am getting familiar with your summaries like this which I really appreciate. I am interested if you are writing these up or obtaining them through a script or other service?

Thanks again!

He works for a hedge fund in Toronto (or used to?). Pretty sure these are all his own words. And you’re right they’re great. Whenever there’s earnings reports from the big tech companies - his are the first comments I look for.

For me the next couple of years are going to make or break Tesla.

You have pretty much every car manufacturer releasing flagship electric cars in 2019/2020. And most of them are either cheaper than Tesla or offer far more value i.e. premium branding and better interiors. And whilst they have their Supercharger network I suspect that pretty soon we will governments intervening to regulate standards and build out infrastructure.

So they better get ready quickly before the onslaught comes and like you said be profitable if margins drop.

Electrify America has an order of magnitude more money to spend on charging than Tesla used to build their supercharger network. That said, they seem to be using it to buy charging networks but so far the experience isn't improving. Conventional EV roadtrip charging is years behind Tesla.

I'm not sure "premium branding" for the competition matters vs Tesla, as I don't think the latter has a downmarket reputation. Interior/existing brand relationships I can see helping the conventional players. Range doesn't seem to be there even on the models supposedly coming out this year. It seems like we keep hearing the Tesla killer is coming Real Soon Like Now.

Still, I ultimately agree they need to sustain through the onslaught, it just seems like it's taking longer than expected.

I have a feeling Tesla didn’t capitalize enough on their first mover advantage and now it’s going to be tough as proper competitors move into the market.

Audi is matching the Model X with the E-Tron, but without Tesla build quality: https://www.audiusa.com/models/audi-e-tron

Volvo Drive-E, Jaguar I-Pace, new Nissan Leaf; similar stories.

As I most recently pointed out in https://news.ycombinator.com/item?id=18712442, there is good reason to believe that all the other car manufacturers are going to learn the hard way that their interests do not align with their dealers. Which means that consumers will learn that they shouldn't go to existing car companies to buy electric cars. Which does not bode well for the future of existing car companies.

(This is a prediction that I've been aware of for around 20 years now. And the form of the problem - that existing tech manufacturer's wind up hamstrung by their existing supply and sales networks, is a common one for companies that get destroyed by disruptive innovation.)

This is a bizarre argument to me, and I remember thinking that the last time you "pointed it out".

You're essentially saying that tens of thousands of dealers and hundreds of billions of dollars worth of car companies are going to go out of business because they can't find a mutually beneficial incentive structure.

It's not going to be all roses, but Tesla shunning dealers hasn't exactly been either, from a service quality and cost structure perspective.

Porsche doesn't seem to have any trouble shifting Taycans, doubling their production from an initial 20k to 40k units a year (simultaneous to Tesla cutting their X/S production from 100k to maybe 80k).

Here's my prediction: legacy auto manufacturers will continue to be years behind Tesla, but if and when the space matures that'll stop mattering. At that point, Tesla better stop acting like a startup and have their shit figured out, lest they become the Myspace of EVs.

You're essentially saying that tens of thousands of dealers and hundreds of billions of dollars worth of car companies are going to go out of business because they can't find a mutually beneficial incentive structure.

It would be far from the first time. One of the biggest problems is for a company whose internal incentives and business model are based around one set of market assumptions to rethink it all and do something else instead.

Both The Innovator's Dilemma and The Innovator's Solution touch on this. The latter one in particular walks through how internal structures and incentives have caused company after company to fail to figure out how to sell products that they know consumers are buying.

The two most common problems being that it is very hard to cut your own margins to match a low margin competitor, and it is even harder to convince a third party sales distributor to cut their margins.

Anyways this is something that I've been aware of for close to 20 years. In another 10 years you'll be able to decide whether I was wrong.

Yeah, I've read them too. But you're not saying that it's a challenge the industry will face, you're saying the death is a fait accompli, and the entire traditional auto industry is not real competition to Tesla (your words from your linked post).

I don't need to wait ten years to decide that you're wrong; even if your prediction turns out to be correct (which it might), assigning a 100% probability to this outcome is absurd, and if you could reliably do this you'd be a trillionaire.

Since we're reading the tea leaves via business school curriculum, what about a little Prisoner's Dilemma?

Let's assume that consumer demand exists for EVs (which Tesla has basically created single handedly), and EVs aren't profitable when slotted in to the cost structure of a traditional dealership due to the lack of maintenance. Dealers try every trick in the book to steer customers away from EVs.

Why wouldn't a percentage of dealerships defect, rebrand and focus exclusively on EVs? They'll enjoy abnormally high sales, and be profitable on the margins from new car sales alone. Dealerships that insist on only selling ICE vehicles will stick around for a while, but nobody will start one, and the number will be reduced by attrition. The total number of dealerships fall and the EV transition is completed over a few decades.

So to be clear: you assign a zero percent probability to this happening?

The probability is not 100%, but I believe it to be very high.

As for your hypothetical, the reason is that the dealers that try to do that won't make a sufficient profit to their business model unless they sell EVs at a very significant premium to published list price. And it will be very hard to sell consumers on letting them do that.

Even if you could get consumers to accept those prices, the industry would then face the problem that the margins on EVs from traditional car manufacturers have much higher margins than the EVs from startups like Tesla. Which will make them uncompetitive in the marketplace. This gets us back to the classic problem that it is hard to get organizations to significantly cut their margins. And even harder to convince your business partners to do so for your benefit.

You are assuming that Tesla and future competition can operate their own dealerships more efficiently.

They don't get their physical presence for free, and the cost is baked in to the sales price just the same way.

Maybe Tesla can pull that off but there's no reason to expect other EV manufacturers will until they hit massive scale.

Let's say there are 2 grocery shops. All their costs and expenses are the same but one grocery shop sells twice as many products per square foot / unit of time.

As someone interested in more profit, which store would you rather own?

The argument you're responding to wasn't "Tesla's stores are dramatically more efficient".

The argument is that Tesla stores sell Tesla's EV cars effectively (because that's the only thing they sell) and traditional dealership anti-sell EV cars because they make more money on selling ICE cars.

This is not a conjecture. In addition to plenty of anecdotal evidence, there were qualitative studies both in US and Europe where researches sent "mystery shoppers" pretending to be interested in buying EV cars.

The results were dismal. Many dealerships didn't know much about EVs themselves and in the worst case, they would literally lie about how bad EVs are.

That will be a problem for GM, Ford, and others when they finally have good EV cars to sell.

And there's no obvious solution to that. Car makers and dealerships are frenemies so it's not like GM can dictate terms to their dealers or that they can force dealers to do a good job selling EVs.

The obvious solution (heavily subsidize dealers with bigger discounts) is bad for profit margins. Investors like profit margins and it'll look doubly bad because when they finally have EV cars to sell, they'll go through the same "loss due to low volume / production ramp" that Tesla went through in first half of 2018 and will be competing with Tesla's 2021 heavily cost optimized production.

In fact parent was making claims about the extra markup required for a traditional dealership to make a profit on EVs. This expense doesn't magically disappear on a Tesla, unless their dealerships are more efficient.

Feel free to argue with my prisoner's dilemma point earlier in the thread if you want, which is in my view how this will play out. I've already agreed that what you're describing is an issue (and am at a loss why you took the time to write it out), I'm merely asserting that it's not going to spell the end of a quarter trillion dollars worth of wealth.

This expense doesn't magically disappear on a Tesla, unless their dealerships are more efficient.

Walk into a regular dealership and then Tesla's version and you tell me which is more efficient.

For just one example of the differences, consider the typical haggling over price where multiple sales people and managers interact with you for an extended period of time to try to get you to spend top dollar. Compare with the Tesla version where you're pointed at a computer open to their website where you can order and configure the car that you want.

I've already agreed that what you're describing is an issue (and am at a loss why you took the time to write it out), I'm merely asserting that it's not going to spell the end of a quarter trillion dollars worth of wealth.

On what principles will it not do so? Merely because it seems absurd? Or is there some logic that applies?

I've greatly enjoyed this thread, thanks to you and parents for taking the time to write it out. Just wanted to add, putting the "250 billion dollars of wealth destroyed" into perspective, that is more or less what Apple's loss of market cap during the last 6 months represents.

Granted, that's to a large degree a speculative reduction in wealth. A similar re-valuation of the global car industry's future prospects would cause more mayhem due to well-established investments in supporting industries. It's fascinating how 250 billion dollars in reduced marked cap means "meh, it was overvalued" in Apple's case, whereas it would be a nasty surprise of historic proportions if it happened to the car industry.

> For me the next couple of years are going to make or break Tesla.

Maybe, but haven't people been saying that about Tesla for 15 years now?

That's what happens when you aggressively scale a business. They could have throttled back and been a profitable niche manufacturer with the Roadster, and again (albeit a bigger niche) with the Model S, and again now with the Model 3. But that's not their goal, so they're continuing to expand as fast as possible, and that carries risks.

Sure. But they never really had serious competition until now.

Companies like Mercedes, Audi, Jaguar own the mainstream, premium car market and they've only just joined the game.

> offer far more value i.e. premium branding and better interiors

This can't happen soon enough. Ever since driving a Tesla, I'm completely disappointed by the interior/control panels of most (all?) other cars. Buttons, seriously? A 9-inch screen?!

Seriously? Tesla interiors have a high tech feel, but they are pretty spartan and lack luxury I expect in a $100k car. You can get into a 3 series BMW and it's got a higher quality interior than any Tesla.

> Buttons, seriously?

Buttons allow a driver to not take his/her eyes off the road while changing the radio station or adjusting the AC. Totally eliminating dashboard buttons is dumb, but fortunately some car-makers have started realizing this and have started to re-introduce some of those buttons.

Yeah, I'm not opposed to a few buttons - like +- temperature, all blinkers, etc. But in most cars, the number of buttons is just overwhelming, so you probably need to take your eyes off the road just to find the button you're looking for!

I could type on my old Nokias etc without ever looking at the message. It was flawless. If one wanted to do it whilst driving (not that anyone ever would, of course) it could be done without ever looking away from the road. That's the power of actual physical feedback.

I'm sure there's someone somewhere who can prove me wrong and touch-type flawlessly on their touch screen phone. But in most cases you're relying heavily on auto-correct to make a parseable sentence. Which means you'll need to look at the screen a lot.

The radio/Cassette player in my car is all buttons. I can change stations, volume, switch to tape etc without looking much at all. Some buttons I might no remember their place - but here's the crucial thing. I don't have to keep looking until I make contact. I glance, see where the button is, and then feel for it.

A touch screen simply doesn't give you that, you either need to see yourself making contact or wait for the software to do something you may (or may not) have wanted. If it's wrong, you're now trying to fix that and try again.

I do not believe that touch screens reduce risk in interacting with car functionality, indeed I'm pretty sure they increase it.

Siri works well enough for me that I can perfectly dictate a text message without taking my eyes off the road. That's just one data point and I know others have diverging experiences, but it seems likely that voice control with improve enough that this could soon be a feasible way of controlling a car's secondary systems too.

Additionally, buttons and knobs allow critical systems like HVAC to be operational and affordably serviced when the infotainment system inevitably dies. This was the primary reason I got rid of my 2015 Ford Fusion. The SYNC system in it became a generation behind and even when it was the latest generation it was nearly impossible to get it serviced at the dealer for software updated.

The tentative release for many of these new electric cars are in 2019/2010. There's probably going to be a good chance that they are delayed with the technical difficulty of manufacturing electric cars at scale.

Also I wouldn't count out Tesla's major advantage in sourcing the best batteries at wholesale prices.

Tesla also just lost another CFO. Deepak Ahuja announced he’s leaving. Again.

https://www.cnbc.com/2019/01/30/musk-says-tesla-cfo-deepak-a...

And this much turmoil in an accounting department is never good. In the last year, they've lost 5 finance VPs, their CFO, and a CAO that they hired and left a month into his tenure. That would be shocking for any other $50 billion market cap company.

Oh absolutely. That much unplanned churn in the financial sector of a Girl Guides troop would be shocking! In a $50 billion market cap company it’s downright alarming. I really don’t know exactly what to make of it, but it factored into my decision to leave the stock the hell alone.

That is if they have something to hide, but since they are public and have to go through Audit. I wonder why are al these Financial people leaving.

Yes, they are public and have to go through audit and that's why all these people want to spend more time with their families... Probably the departing interim CFO won't be signing the 10-K filing, and apparently they weren't able to find anyone better than Zach willing to do so.

Elon: "And we thought long and hard about who the right person is to take over from Deepak, and that's Zach. And Zach has been with Tesla now for nine years... [...] So Zach, you had management and technology at Wharton undergrad and then worked at Tesla and then spent a couple of years at Harvard Business School, which I actually don't think was necessary, by the way."

Jesus. It’s hard not to worry about this particular combination of events. Is there a benign explanation?

Comparing it to the history of other companies, it might seem like a less likely explanation, but I'll give it a shot: Deepak Ahuja came out of retirement after the departure or Jason Wheeler, during a critical part of the company's history.

Cash flow was critical during this period, so it made sense to choose a CFO who both has a long history with the company and was able to take over on short notice. Now that Ahuja returns to retirement, Tesla figures it's better to hire an insider than get someone with external experience, given how many external executives they're losing after a short time.

In this scenario, the executive departures are taken at face value, namely that Tesla is such a chaotic and stressful environment that it's a bad match for many executives who thrive in other companies.

All good points. I would reply with, “Why Zach?” Are the current and future financials so exceptional that they can afford someone with no record of performance at this level as the CFO? On the other hand, if Mr. Ahuja signs the 10-K on the way out that would allay my fears that Zach is just the guy lining up on a future chopping block.

"Services and Other" from the consolidated statement of ops shows:

Q4 Services and Other Revenue: $531 MM

Q4 Services and Other Cost Of Revenue: $668 MM

Which would suggest a loss on services of $137 MM.

Is this the same 'Services' that Bloomberg is referring to? I cannot find any other mention of Services in the letter.

Services number is YoY in the columns beside where you are probably looking

$1,880,354,000 costs - $1,391,041,000 revenues is $(489,313,000) in losses

Of course, thanks.

You mention solar is a big nothing burger. I remember when the acquisition happened there was quite an outcry about Tesla basically bailing out Musk's other company. Do they have a liability here or is it just going to disappear into the ether?

Why would it be a liability? Shareholders voted and accepted the purchase of SolarCity.

I agree its sketchy, but Musk doesn't technically control the company. He has a large share of the voting pool, but the shareholders in general were willing to bail out SolarCity. Its kinda "Democracy in action".

I think it was a stupid move for the shareholders to do, but its fully within their rights to do so.

To nitpick, it's literally plutocracy, not democracy.

Fair enough. The Stock Market is a pay-to-play game for sure.

Didn't also Musk abstain from voting before the SolarCity acquisition? That's what I remember, anyway.

Yes. Musk abstained from voting. Musk made his opinion known, but otherwise "fairly" let the shareholders vote on the issue. At least technically fair. It was 85% in favor of merging.

I say "technically", because Musk also went around trying to convince people that they should allow SCTY to be acquired by TSLA. But hey, shareholders trust Musk and were willing to follow his opinion on the matter. So I guess its fair overall.

A stupid move, but fair.

They also did the fake shingle demo and pushed numbers around to report a quarterly profit.

> A stupid move, but fair.

Are you're saying this from a short-term financial perspective?

I personally think it's too early to tell if it was a stupid move. Elon Musk had a plan, and his plans do seem to work out for the most part given some time.

It's my understanding that they recently cut a major sales channel, so it's perhaps not surprising that the number of installations have fallen.

> Are you're saying this from a short-term financial perspective?

Absolutely. Tesla's risk isn't long-term at all. Its all about the short-term risk.

Just think about Tesla's debt schedue.

* CUSIP 83416TAA8 -- $188,058,000 of Solar City Debt on November 2018.

* CUSIP 88160RAB7 -- $920,000,000 of Tesla Debt on March 2019. (Not part of SolarCity, but it has to be part of the calculus).

* CUSIP 83416TAC4 -- $566,000,000 of Solar City Debt, on November 2019.

Imagine how much easier 2019 would have been if Tesla didn't have to worry about $740 Million of Solar City debt coming due.

As a result, Tesla's CapEx spending (ie: building factories, buying factory equipment money) has dropped dramatically.

That doesn't even get into the stock-dillution issue either. Millions of shares were issued, reducing Tesla shareholder voting power, and your representation of the company. Solar City investors joined with Tesla investors as a freebie, part of the deal.

---------

So now that we've talked about the costs of merging the companies. What exactly has SolarCity done for Tesla? Absolutely nothing. Tesla has been given hundreds-of-millions of dollars in debt, and millions of shares worth of dillution... with nearly nothing in return.

SolarCity employees and contractors were fired or laid off for the most part. SolarCity's deal with HomeDepot has evaporated. And finally the Gigafactory 2 is barely operational. The Solar Roof is years late and sales / revenue of SolarCity are completely ignorable.

Oh, and future Solar City debt will come due. There's also a 2020 bond due (I can't figure out how much it costs though). Its not like Tesla is close to paying off all that old debt yet.

We're looking at a ton of downsides with almost no visible upsides. Even after a year of waiting, all the touted "potential upsides" (Solar Roof, etc. etc.) are basically dead.

> We're looking at a ton of downsides with almost no visible upsides.

Now that's not quite true. We've maintained the idealized (idolized?) Musk as an infallible visionary an engineer.

(I say this as a huge Musk fan - I think his image/public perception play a big role in keeping Tesla afloat in hard times.. even when those hard times are caused by less-than-stellar tweets)

> Are you're saying this from a short-term financial perspective?

I'd argue it was a stupid move from a short-term, long-term, and even medium-term financial perspective. Not only did TSLA subsume all of SCTY's debt, they diluted their shares doing so, and most analysts of TSLA value the solar/energy business at a 0 despite the $2.6 billion acquisition. How many other businesses can make multi-billion dollar acquisitions that people think are goose eggs two years later without that being considered a bone headed move.

> It's my understanding that they recently cut a major sales channel, so it's perhaps not surprising that the number of installations have fallen.

And why did they have to do that? Because Tesla had been negative free cash flow for so long that they had to stop spending any additional money on Capex. Had they been in a better financial situation, like, for instance, like they would be if they didn't do this acquisition they might have been able to invest in future growth and wouldn't have done two series of layoffs in the last 6 months.

I mean a literal liability - they've currently got an asset on their balance sheet that at some point they're going to have to re-evaluate the business and at some point there'll be a write-down associated with it.

They still have “Solar energy systems, leased and to be leased” for $6.3bn, plus $350mn in goodwill, in their balance sheet. We’ll see a nice write-off someday.

Edit: for context, total assets are $29.7bn and liabilities are $23.0bn.

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