The 10-Q’s Hidden Bombshell: Tesla Has Not Yet Ordered Crucial Model three Production Equipment – Tesla Motors (NASDAQ:TSLA)

I’ve lastly had a chance to evaluation Tesla’s (NASDAQ:TSLA) 10-Q submitting. It gives way more element than the Update Letter, with a extra full image of Tesla’s Q3 monetary outcomes in addition to administration’s evaluation of the agency’s prospects and perils.

But probably the most attention-grabbing stuff is usually not what the present 10-Q states. The most attention-grabbing stuff is what the final 10-Q said, however the present one omits.

So, I’m at all times to see what has modified: which disclosures or claims have been added or supplemented, and which have been attenuated or have disappeared altogether.

The Bombshell Revelation: Tesla Hid the Ball About Model three Costs

What Tesla Said Three Months Ago…

In its 10-Q for Q2, Tesla wrote:

[W]e count on to attain a charge of 5,000 Model three autos per week by the top of 2017. We count on to additional ramp to a charge of 10,000 Model three autos per week, and an annual Tesla car manufacturing charge in extra of 500,000, sooner or later in 2018.

Tesla additionally wrote:

In July 2017, we accomplished our engineering, manufacturing and provide chain efforts on Model three product growth, and commenced manufacturing of Model three on schedule. We are persevering with preparations at our manufacturing amenities and proceed to work carefully with all Model three suppliers as we ramp to quantity manufacturing.

Reading these two statements in conjunction, it’s evident Tesla was making 4 necessary claims:

  1. Tesla anticipated to attain a weekly Model three manufacturing charge of 5,000 this yr;
  2. Tesla anticipated to attain a weekly Model three manufacturing charge of 10,000 in 2018;
  3. Tesla anticipated to attain general manufacturing in 2018 of 500,000 automobiles (Models S, X, and three mixed); and, most crucially
  4. Tesla had accomplished all essential manufacturing and provide chain efforts to attain these objectives.

…Is Quite Different from What Tesla Says Now.

Now, let’s have a look at what the newest 10-Q says:

In order to optimize the incremental enchancment of our automation processes and the effectivity of our capital expenditures, we’ll implement the capability to additional ramp manufacturing to 10,000 items per week solely after we’ve achieved a 5,000 items per week run charge.

Gone, as has been broadly mentioned, is the declare Tesla will obtain a weekly Model three manufacturing charge of 5,000 this yr. Also gone is any time interval for reaching the weekly manufacturing charge of 10,000 Model three automobiles.

To me, although, these will not be probably the most beautiful options of the 10-Q. After all, the sooner 10-Q spoke by way of the manufacturing charges Tesla then “expected,” and each time Tesla speaks by way of what it “expects,” buyers by now comprehend it’s sensible to imagine they’re coping with a transferring goal.

Rather, probably the most beautiful function is Tesla’s implicit admission that it has held off on committing the capital required to attain the weekly manufacturing charge of 10,000 Model three automobiles. As we now be taught, something above 5,000 automobiles per week would require extra capital, and Tesla just isn’t ready to decide to spend it till after it achieves the 5,000 charge.

In different phrases, it’s not merely that Tesla has not spent the cash required to get to 10,000. It has not even but dedicated to spend the cash:

We will implement the capability to additional ramp manufacturing to 10,000 items per week solely after we’ve achieved a 5,000 items per week run charge.

Tesla’s badertion solely three months in the past that “[I]n July 2017, we accomplished our engineering, manufacturing and provide chain efforts on Model three product growth,” was to place it gently, extremely deceptive. While stating it anticipated to attain a weekly manufacturing charge of 10,000 automobiles, Tesla gave completely no clue that it had not but put in movement all of the tools orders essential to attain something greater than 5,000 automobiles.

Tesla Needs More Capital To Do What It Earlier Said Was Already Done

Between capital spending and working losses, Tesla will burn via at the very least one other $1.5 billion this quarter. And, between capital expenditures and working losses, it very doubtless will burn one other $1 billion in Q1 2018. And that’s baduming Tesla, with its staggering accounts payable steadiness, can proceed to string out its distributors.

If something, these estimates are conservative. Tesla’s accounts payable are already about as excessive as they will go. They should now begin to shrink, as one can stretch out distributors solely thus far.

So, it appears clear that, absent one other capital increase, Tesla will lack the funds required to buy the capital tools and amenities required to attain the 10,000 per week manufacturing charge.

The Disappeared Language

Tesla has now quietly disappeared this earlier-quoted language, which appeared within the Q2 10-Q:

In July 2017, we accomplished our engineering, manufacturing and provide chain efforts on Model three product growth, and commenced manufacturing of Model three on schedule. We are persevering with preparations at our manufacturing amenities and proceed to work carefully with all Model three suppliers as we ramp to quantity manufacturing.

Why has this language disappeared? Again, its disappearance is an oblique admission that Tesla has decidedly not accomplished its manufacturing and provide chain efforts on the Model three. Certainly not for the 10,000 per week that was promised.

To any buyers paying consideration, Tesla’s want for tons extra capital to attain the 10,000 per week run charge is an immense and ugly shock. It is, in my opinion, the largest story of Tesla’s Q3 reporting.

More 10-Q Discussion to Come, and Some Q3 Numbers Wrap-Up

There are too many attention-grabbing additions and omissions within the latest 10-Q to cowl in a single article. I’ll have extra to say quickly (although I see Bill Maurer has simply achieved a splendid job of highlighting among the intriguing 10-Q options right here.)

Meanwhile, I’ve put up a weblog put up summarizing how CoverDrive’s forecasts in contrast with precise outcomes. I invite all to cease by, have a look, and add your ideas to feedback.

(Making hay whereas the Montana solar shines.)

The Dangers of Shorting Tesla

In latest days, a number of commenters have taken subject with my cautions about shorting Tesla. One of them flat out known as it “bad advice.” Why? Because the bear case for Tesla is now so evident. I responded at size, and need to increase a bit on the theme.

I’ve written for greater than a yr now that Tesla is a harmful quick. I at all times really feel a bit odd urging such restraint. After all, Seeking Alpha seeks articles with “actionable” funding recommendation, and urging readers to take a seat nonetheless and twiddle their thumbs just isn’t precisely actionable.

And, what sort of “skeptic” retains speaking about how horrible Tesla’s fundamentals are, but in addition inveighs in opposition to making an attempt to quick the inventory?

The form of skeptic who acknowledges the truth worth can stay irrational longer than you’ll be able to stay solvent. Since I started warning in opposition to shorting Tesla, the share worth has gone from $193 or so to $389, after which again down once more, with immense volatility.

And what nice issues occurred for Tesla throughout that yr?

  • Did the basics enhance? No, they deteriorated.
  • Did Tesla arrest shareholder dilution? No, it accelerated dilution.
  • Did Tesla shed debt? No, it added debt.
  • Did Tesla fulfill guarantees about SolarMetropolis synergies, Solar Roofs, Full Self-Driving? No, it broke or, at greatest, deferred, all these guarantees.
  • Did Tesla obtain the 100,000 to 200,000 2017 Model three deliveries it was promising a yr in the past? Not by an extended measure.
  • Did Musk’s “zero concern” about producing 10,000 Model three automobiles per week in 2018 survive? No, it gave method to diminished steering.

Enter the Genie

Imagine this: a genie on December 31, 2014, granted you a want, and confirmed you, and solely you, precisely what Tesla’s monetary efficiency can be in 2015, 2016, and 2017.

What would you could have achieved?

Foreseeing such a prepare wreck, wholly at variance with each badysts’ forecasts (at that time, a few of them noticed revenue beginning in 2015, and all of them noticed revenue from 2016 ahead), you’ll fairly confidently have shorted the hell out of Tesla. And, inform me, how would which have labored out for you?

And so, given all this, how do we all know at what second it’s protected to quick Tesla?

No one can ever inform you that with certainty. Anyone who pretends to is doing simply that: pretending.

Sure, there are skilled choices merchants and richly capitalized hedge funds that frequently become profitable buying and selling TSLA and TSLA choices, typically lengthy, typically quick. I’ve inspired readers to comply with together with Seeking Alpha member NYer1, an skilled Wall Street dealer, as he shares in his feedback his TSLA choices trades.

Also, there are a number of methods to quick Tesla, with necessary variations. Shorting the inventory is sort of completely different from buying and selling choices. And, in fact, there are quite a few types of choices methods together with spreads, straddles, collars, strangles, and the like. (Here’s a touch: there are many choices merchants on the market who perceive these methods much better than you do.)

In Retrospect, Everyone Knew Everything

Sure, there can be a proper time to quick Tesla. You will look again and say, “I knew I should have done it. I could kick myself for not doing it.” (All the whereas, in fact, forgetting all of the occasions your places expired nugatory.)

Some merchants undoubtedly will make a killing when the basics lastly deliver the share worth again to earth. Those few can be prescient, or extremely disciplined, or fortunate, or some mixture.

But tons extra merchants – particularly retail buyers like most of us – will get burned making an attempt to quick Tesla.

So, what I say is that this: threat solely a tiny a part of your portfolio. Have in place a transparent technique for limiting your threat. If you select choices, as I do, make sure you could have an affordable understanding of ideas resembling decay and implied volatility, and that recognize most choices expire nugatory.

Right now, Tesla doesn’t fall till (1) a number of giant institutional buyers throws within the towel and decides to e-book the income so far and considerably scale back its publicity, and/or (2) Tesla discovers the capital markets are now not open to it, and that it could possibly now not increase extra capital at something shut to the current share worth.

Perhaps we’re getting nearer. Yields on the $1.8B bonds have deteriorated within the wake of the newest Quarterly Update and Conference Call.

And, it seems T. Rowe Price has had sufficient. More establishments might now be scaling again publicity. But we have not but seen any large-scale try to exit.

Me Against the World

Me? You know me. I imagine Tesla cannot produce 400,000 Model 3s a yr. It can scarcely produce 200,000 with out spending billions extra in CapEx. And, no matter what number of it could possibly produce, it should nonetheless be dropping cash.

But that’s simply me. In the bigger world, the Model three story – which is Tesla’s most necessary story – nonetheless lives. There stay many individuals on the market who communicate confidently of 500,000 “reservations” or “pre-orders.” People who’re completely sure the Model three can be worthwhile. Not simply worthwhile, however revolutionary.

And people who find themselves satisfied Elon Musk is nice disruptor and visionary of our occasions.

(Don’t overlook: that is how most individuals nonetheless view Elon Musk.)

Do you imagine Tesla is now unable to boost $2 billion or $three billion in further fairness proceeds? How badured are you about this?

Did you see the Tencent (OTCPK:TCEHY) story coming? What occurs if there’s one other such story ready within the wings? Has Elon Musk ever failed to tug a rabbit out of the hat on the opportune second?

And, too, beware the quick squeeze. They have been engineered earlier than.

I’ll do my greatest to be trustworthy concerning the fundamentals. But I can by no means faux to say with confidence when the proper time to quick is.

As I’ve mentioned earlier than, the one factor extra dangerous than being quick Tesla is being lengthy Tesla.

Disclosure: I’m/we’re quick TSLA.

I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Seeking Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.

Additional disclosure: I’m quick TSLA through long-dated choices. Don’t do that at dwelling.


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