I recently made a video explaining that Tesla can still double profits even if they drop prices by
perhaps 10 to 15%, if they are able to double production. I say production not deliveries,
as in this scenario the prices have been lowered so the demand should be sufficient enough for
them to sell every car they make. I am not even suggesting that Tesla even need to drop prices.
And probably not even likely to where the prices were before when Tesla started raising them.
Like Tesla's Shanghai Model Y is still at a higher price now than it was last year,
and Tesla have reduce the cost of production since then.
REQUIRED Anyway,
this actually made me very bullish. The fact that there is so much operating leverage and economies
of scale still to come from this company, as production numbers are relatively low for a major
auto manufacturer. Tesla just need to keep making enough cars. By the time we get to a production
level of around 750,000 a quarter I think we will see a big difference in operating margins.
NEW FACTORIES It all comes down to
these two new factories. We are probably at around 450,000 a quarter from just Fremont and Shanghai
by about the end of this year, so we still need another 300,000 a quarter to reach this level.
The main thing that is confusing people right now, is that they don't realize how good margins really
are. They seem to think inflation has kicked in too much, demand is down, prices are being
lowered, the dollar is adding to cost, and we are losing our once fantastic margins. Except last
quarter we still had 28% margin, and that was with a relatively low regulatory credit quarter too.
On top of that Tesla had to pay for the line upgrades in Shanghai for two factories, and
those costs went into cost of goods sold. Which would have affected margins further, along with
the downtime too. But people aren't interested in specifics, they just want to take the good with
the bad and accept that we are losing here, and capitulate, and cope with their losses.
But a 28% margin, still isn't that bad, and yes I understand this was
with the old Shanghai prices, but those price changes affect overall margins at
less than half a percent. I might work that out sometime though. Although the
ramp up could have possibly reduced costs enough to match the price drops anyway.
However the main drag on the margins were the new massive factories. Profit margins there may
still be low. They are huge facilities, with capacities that we really can only
speculate on. But a million Model Ys is surely believable when we hear that's pretty much
possible just from Shanghai Model Y factory. So they really are hurting margins the most.
Anyway, we need 300,000 additional units a quarter, which is quite a lot still required,
I can't see that happening until late next year,
if things go reasonably well. So perhaps we look at this differently, as right now I think people
want to know when a shorter term recovery might occur. When the stock might be back
to $250 or so. Wow who would have thought we'd be happy to see Tesla trading at $250.
What we need is for the new factories to stop killing margins then. I would say
that once we are volume production with these factories, at around
65,000 each per quarter then we should see margins back up. But lets say 150,000
combined, taking total quarterly run rate to 600,000. Now Elon says that Berlin will be
at this rate early next year, and the way Texas is going it might be the end of Q1.
So how about for arguments sake, we just say that for Q2 Tesla are able to produce 600,000 units.
Bear in mind Elon said at the end of this year we are at 525,000 a quarter run rate, so we are only
talking about 12.5% increase in production by then. I don't think that is too extreme.
At volume production, I would say there is a high probability that these new factories
are at around a margin of 30%, quite possibly higher, but 30% will make a huge difference.
But no one is in the mood for hope right now, so I will keep it easier for you to believe,
and give all the factories an overall margin of 30% including regulatory credits.
Then if we use an ASP the same as last quarter, even though the dollar has weakened a bit since
then and the ramping up would all be from new Model Ys that have a higher ASP, we will use
what is likely the lower ASP again keeping this easy to believe. Then lets run some quick numbers.
Well this means that revenue becomes $32 billion, up from $17 billion in Q3.
That's not far off double. Because we have almost twice as many deliveries. 600,000
compared 343,000. Which isn't really telling us much, as we used the same ASPs.
But now we are taking a 30% margin instead of 27.9%. Alright now it gets a bit more exciting
we have nearly double gross profit, $5.2 billion compared to $9.8 billion. We are excluding tax
credits and subsidies here too. Keeping it easy to believe with as few hopes and dreams as possible.
We will add in the other sides of the business too, last quarter Tesla profited $170 million,
I would hope that would be approaching close to a billion by this time with the
energy business coming into effect, but lets just say $300 million.
Then the OPEX, now this is what I am trying to refer to from the previous video. This
is what makes the difference. This is where it gets really exciting people. At least I hope,
or else I've just built up your hopes. We will raise OPEX 20% from Q3,
and subtract that from our total gross profit.
Giving us slightly over $8 billion in operating profit for a 600,000
delivery quarter. Compared to $3.7 billion before. Operating profits up 118% from last
quarter. Yet deliveries only increased 74%. Deliveries up 74%, profits up 118%.
This is due to two things, margins increasing slightly and opex per vehicle reducing.
Yes tax does come into play, and Tesla will have a higher
rate of tax with higher earnings as the depreciation becomes relatively less.
I think the gross margin should really be closer to 32% if Tesla are at this level of production.
I also think the ASPs will be higher due to the cars that Tesla are ramping have a higher
price =, they also have a higher margin. Then we have subsidies and tax credits on top of this.
But I tried to make this believable, as to when you think Tesla can increase their rate
of production by about 12.5%, this is basically the financial situation we might expect. After
tax it's about $6.9 billion, or around 28 billion annualized, which is currently 1/18 of the market
cap. So ask yourself when you think Tesla can hit this run rate, or just over volume production for
the new factories. My guess is sometime in Q2. Personally I think the stock should be a
lot higher once this is achieved. I don't think macros will be punishing Tesla to this degree.
Look I don't want to tell you this is going make the stock shoot back up to $400 or something.
But I think this might be that lifeline that can take us back to a more tolerable $250.
It would mean that Tesla would be trading at 28 times the annualized earnings that
this rate. Also it's likely that Elon has calmed down with Twitter,
and it is no longer hurting Tesla's stock price and its starting to recover from that.
If the economy is really that bad that the stock is still sub-200, then the market
is being seriously punished, I hope that's not the case, but it is very unpredictable.
For about 150,000 4680 Model Ys, if its only 4680 and no 2170 cells, or LFP cells, we need about 10
GWh a quarter run rate to achieve that. Or a 40 GWh a year annual rate. But this isn't for
probably another 6 to 7 months, and at this stage it does look possible. It might also show more
confidence in the market that Tesla can produce 4680 cells, albeit a lot slower than we were told.
SUMMARY Yes, there are
plenty of exciting Tesla events to come, but the market really doesn't care any more. Hey, a lot of
you don't care any more, you just want to recover your losses. You planned this future in your head,
you hoped to buy a larger house, travel the world, buy a business, invest in some property,
help some people in need, subsidize your child out with their first house, or buy a Tesla. Your
reality has changed, and you are adjusting to your new future. The exciting one seems much
harder to believe right now, but I don't think these numbers are too far fetched, and even if
it doesn't happen until Q3, a $250 stock price is still a lot more easy to cope with than $170.
It's always much harder to believe the magic in a down market. But its going
to be numbers that will move the stock, solid tangible numbers like these. Even
if Elon announced FSD is now safer than a human, the stock is not going to budge much,
even if he said by an order of magnitude, its too much like the boy who cried wolf. He has lost
his credibility when it comes to FSD timelines unfortunately. You have to judge for yourself.
But as you know I focus more on batteries, as that is the tangible side of the growth of the
business. I have learned as much as I can about batteries and cells, and the entire production
process. Q4 should hopefully be a lot better than everyone is expecting too, but at this stage I
feel its even going to struggle to hit $200 with 450,000 deliveries. After Tesla hits this 40 GWh
run rate for 4680, then all the ramping that we see from there will be highly profitable
and will start to move the stock again. We just need to wait for the financials to catch up.