Hey, I’m Steven and this is Solving The Money Problem.
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Tesla knocked it out of the park in Q4 2019.
I’m not surprised, but Wall St was and the stock reacted strongly, moving up around 12%--or
$70--in after-hours trading following the results.
Tesla’s financial health continues to grow and the company is now far, FAR beyond the
point of needing to prove its products are amazing and it’s business, viable.
Tesla is leading the EV industry by miles, and it’s here to stay. They’re banking
billions of cash annually, raking in revenue, scaling production, executing ahead of schedule,
approaching industry-leading margins, embarrassing their supposed “competition” and just
winning at everything. What else is there to say?
Q4 2019 marks a tipping point for Wall St sentiment. Even the most arden detractors
now face the choice:
Should I remove my head from my ass, look at the facts and capitulate, accepting that
Tesla is in a dominant position and poised to retain a huge slice of the burgeoning EV
market as the world transitions to sustainable transport?
Or
Do I try--in sad desperation--to cling on to my absurd bearish view in the face of a
torrent of contradictory evidence?
I don’t say this lightly but you pretty much need to be on the wrong end of the intelligence
bell curve to doubt Tesla’s long term viability now.
I’m not trying to be rude, I’m just telling it like it is.
So, in this video we’re looking under the hood to see why I have the gall to say that
anyone who doubts Tesla today is either missing information, the ability to reason, or both.
Another Billion In The Bank
Tesla produced a billion dollars operating cashflow (less capex) and added another $930
million in cash. They've now got a $6.3 billion warchest, capable of seeing them through unexpected
catastrophes, a global financial crisis and in more likely scenarios, continued global
expansion without the need to raise capital.
Elon Musk has said one of Tesla's biggest challenges going forward will be finding ways
to spend money effectively. This sounds kind of crazy but it makes sense. There's only
so many incredible engineers to hire and there’s only so many factories to build when you’re
battery constrained.
Tesla will be producing enough cash to build multiple gigafactories PER YEAR moving forward,
should they choose to.
This matters.
Fat Profits
Tesla produced $359M GAAP operating income in Q4, making it 4 profitable quarters of
the last 6. This, despite aggressive growth, including the construction of Gigafactory
Shanghai.
One of the most popular bear theses on Tesla was that they'd never make a profit. Admittedly,
these comments came mostly from extremely ignorant analysts who were incapable of grasping
the idea of investing in scale for future profitability, and who ignored the declining
cost curves Tesla was riding, along with the world's inevitable transition to sustainable
energy. That's fine. Most of them didn't get Amazon until recently either.
Tesla expects to see quarterly profits going forward with possible exceptions around product
ramps/factory builds.
The "profitability" argument is dead.
This matters.
Model Y
The Model Y will make Tesla billions, remember?
The Model Y production ramp started in January 2020--almost a year ahead of its original
schedule and just 10 months after the prototype reveal.
This shows how far Tesla has come and how ludicrously fast they're able to bring new
products to market. First deliveries are expected in Q1 2020 AND Tesla says the Model Y has
better margins than the Model 3.
Let that sink in.
Like I said, Model Y will make Tesla billions.
On top of this, Tesla also announced they've increased the Model Y EPA range to 315 miles
up from 280, apparently from battery and powertrain improvements. Model Y was already going to
run circles around other vehicles in its category. This is icing on the cake.
Records. Everywhere.
As I predicted, Tesla announced a slew of records, including record production, record
deliveries and record storage deployment.
Do I even need to say anything else?
Fat Automotive Magins
The single most impressive number in Tesla's Q4 earnings was its automotive margin, at
22.5% vs 22.8% over the previous quarter.
At first glance, this looks flat but if we account for the fact that Tesla built a freaking
factory and began ramping production in the quarter, we realise the underlying margins
have improved substantially enough to not be dragged down by Gigafactory Shanghai.
Tesla's automotive margins are marching steadily towards 30%. Economies of scale combined with
declining battery and technology costs make this all but inevitable.
Fat margins = fat profits.
This matters.
Operating Expenses
Tesla’s operating expenses were flat at $1.032 billion vs $1.029 billion in Q4 2018,
yet production and deliveries grew substantially.
This shows how efficient Tesla is becoming with its use of capital and there’s no reason
to expect they won’t continue to optimize the business further.
Capacity Expansion
Planned production capacity is a useful proxy for future revenue.
Tesla tells us Fremont will reach combined 3 & Y capacity of 500,000 by mid 2020 and
it’s already at 90,000 S & X annually. Let’s call it about 600,000 total.
Tesla also aims to increase Model 3 capacity in Shanghai beyond 150,000 a year AND it’s
already broken ground on the next stage of the Shanghai factory which will produce the
same or higher numbers of Model Y.
Let’s call it 300,000 combined 3/Y capacity in China.
The China Model Y ramp may take about a year or so. When ramped, Tesla’s global production
will be around 900,000 per year.
Then there’s Gigafactory Berlin, whose initial stage is expected to produce 250,000 vehicles
a year (with later expansions to 500,000 and beyond).
The first made-in-Europe Tesla’s are expected in 2021.
Tesla has a very clear, short term plan to reach global production capacity of about
1.15 million units a year.
This matters.
Bigtime.
This is almost exactly a TRIPLING of what Tesla delivered in 2019.
Tesla has guided that they’ll comfortably deliver in excess of 500,000 units in 2020.
I expect this will fall closer to 600,000, unless there’s multiple disasters.
Energy
Elon Musk believes Tesla’s energy business could grow larger than its automotive business.
We’re seeing signs of progress in that direction already.
In 2019, Tesla deployed 1.65 GWh of energy storage which is more than they did in
all prior years combined. This is largely due to the release of its grid-scale MegaPack.
We also got a huge clue about Tesla’s Solarglass roof plans. You don’t hire hundreds of employees
for your solar factory if you’re not planning on selling many thousands of solarglass roofs.
If you’re thinking to yourself “Who cares about Tesla solar? It’s a tiny part of their
business”, let me point something out.
A solarglass roof is roughly the same price as a base Model 3.
This matters.
The Outlook
Let’s look at what Tesla guided for 2020, in their own words.
Volume - For full year 2020, vehicle deliveries should comfortably exceed 500,000 units. Due
to ramp of Model 3 in Shanghai and Model Y in Fremont, production will likely outpace
deliveries this year. Both solar and storage deployments should grow at least 50% in 2020.
Cash Flow - We expect positive quarterly free cash flow going forward, with possible temporary
exceptions, particularly around the launch and ramp of new products. We continue to believe
our business has grown to the point of being self-funding.
Profitability - We expect positive GAAP net income going forward, with possible temporary
exceptions, particularly around the launch and ramp of new products. Continuous volume
growth, capacity expansion, and cash generation remain the main focus.
Product - Production ramp of Model Y in Fremont has begun, ahead of schedule. Model 3 production
in Shanghai is continuing to ramp while Model Y production in Shanghai will begin in 2021.
We are planning to produce limited volumes of Tesla Semi this year.
If you take Tesla at their word, 2020 is going to be a MASSIVE year.
Wall St is starting to realise this. Analysts are tripping over themselves to upgrade the
stock. Some to save face, others because they finally get it.
Now that we’ve run through the numbers, we’ll listen to some highlights from the
earnings call, starting with my absolute favourite.
Elon talking about us. Kinda.
[I do think that a lot of the retail investors actually have deeper and more accurate insights
than many of the big institutional investors and uh and uh certainly better insights than
many of the analysts. Uh, you know, it’s, it seems like, if people really looked at
some of the smart retail investor uh, analysts, uh, and, you know, what some of the smart
smaller retail investors predicted about the future of Tesla, you’d probably get the
highest accuracy and remarkable insight from some of those predictions.]
Allow me connect the dots. Elon is talking about Tesla YouTubers. And he’s saying that
the smartest among us know more than Wall St. It’s true. He’s right. But you already
knew that or you wouldn’t be learning about Tesla from a retail investor on YouTube.
And here’s Elon talking about the Maxwell acquisition.
[It’s an important piece of the puzzle, yes. I mean like, some of this, the, sort
of retail investors have managed to put together several pieces of the puzzle. They seem to
have the most insight.]
Let’s move on to the Cybertruck.
[We wanted it to look like something that just came out of a sci-fi movie set from the
future. And uh, the demand has been incredible. We’ve never see, actually such, a level
of, a level of demand at this...we’ve never seen anything like it, basically. I think
we will make about as many as we can sell for...many years. You know. We’ll sell as
many as we can make. It’s gonna be… pretty nuts.]
[Can you remind me how many you think you can make and any thoughts on the cost of production
um, for making those Cybertrucks?]
[I, I, you know, I think, we don’t want to comment on those detailed numbers except..
Demand is just far more than we could reasonably make in the space of you know, I dunno, 3
of 4 years--something like that.]
Did you catch that? Tesla will need YEARS to produce enough Cybertrucks to meet existing
demand. We must be talking well, WELL in excess of half a million reservations.
Elon was coy on the manufacturing costs of Cybertruck but Sandy Munro--who knows manufacturing
better than most--recently ran through his estimates on the Autoline Network (I’ll
put a link in the description) and as I said in my Cybertruck Is Engineering Genius video,
the cost, space and time needed to produce Cybertucks is astonishing low compared to
a conventional vehicle.
Speaking of capital efficiency.
[In 2019, we managed to generate more than a billion dollars free cashflow while building
a factory in Shanghai in record time AND while building parts of Model Y production. So I
think, first to have this level of free cashflow WHILE making massive investments in capacity
while developing new products while improving the core engineering is, uh, a testament to
the I think, incredible performance of the Tesla team and I’m just so proud to work
with such a great team]
Here’s more on spending.
[We, we’re actually spending money as quickly as we can spend it uh, sensibly. So, if there’s
any sensible way to spend money, we are spending it. There’s no artificial uh, holdback on,
on expenditures. Um, anything that I see that is, uh, looks like, it’s, it’s got good
value for money, the answer is “YES”, immediately. Uh, so we’re spending money
I think efficiently and we’re not artificially limiting our progress. Um and then despite
all that, we are still generating positive uh, cash.]
And now some clues about Tesla’s financial outlook for 2020.
[We will produce approximately 1000 times more cars in 2020 than we produced in 2010.
A THOUSAND.]
[However OPEX growth should increase at a lower rate than top line revenue. Overall,
we believe this will set us up for our strongest annual financial performance yet with sufficient
forecasted cashflows to support investments related to our growth and further strengthening
of our balance sheet.]
Any talk of news products? YES.
[Yeah, will, will it make sense for us to do sort of a mini van or you know, a sort
of a ‘Sprinter’-like van at some point? Probably. But like I said, we’ve gotta solve
this battery--we’ve got to scale battery production to CRAZY levels that people cannot
even fathom today. That’s the real problem.]
So, a Tesla van?
Yes.
Well, probably.
Asked about the Plaid powertrain, Elon said this:
[Coming out later this year. End of the year, probably. That’s our goal. Have Plaid powertrain
out end of the year. And then it’s going to be like…”This is alien technology”.
It’s insane.]
[It’s all about--]
[I didn’t even think we could do, yeah, I mean honestly I thought there was no way.
This kick ass engineering team. It’s Tesla.. Tesla’s all about hardcore engineering.]
And now, some comments about Tesla’s core technology -- its batteries.
[Tentatively sort of in the April timeframe, we’ll do-do a battery day and kinda like
go through what the um challenges are, you know, how do you, how do you get from here
to, I dunno, a couple of thousands gigawatt hours a year or something. I mean, we are
super deep on cell. Super deep. And cell--cell through battery. So: cell, module, battery.
I mean, Drew, is there anything you want to add to that?]
[You said it, you said it all.]
[We are super deep.]
[Yeah.]
[Haha. I mean--]
[It’s its--]
[That rabbit hole. That rabbit hole goes down pretty far.]
[7 days a--]
[Yeah we’re doing 7 days a week battery production.]
[Um, man do we know a lot about batteries. Geeze. Haha.]
[I think I can--]
[haha]
[The only thing I’d add is--the only thing I would add is you know, we do have, a decade
plus of experience of not just like what a cell should be but how to integrate it into
the product and that’s really--]
[Yeah--absolutely. And how to manage the cell module and battery, through weather conditions
and different environmental and different charge regimes and WOW, we really, we really
know a lot about batteries. Yeah. It’s next level. Like I said, we’re gonna talk about
this in battery day which is probably April and then a lot of these questions will be
answered. I think it’s gonna be a very compelling story that we have to present. Uh, I think
it’s actually gonna blow people’s minds. Uh, it blows my mind and I am clo-you know,
I know it. Uh, haha. So it’s gonna be pretty cool.]
If this doesn’t whet your appetite for the battery investor day, rewind and listen again.
And finally, this gem from Elon:
[A few years ago I said I--I think--i dunnot when it was but a few years ago I-I said my
estimate was, is that Tesla would um grow at an average--compound annual rate--of--average
rate of in excess of 50%. I-I still hold to that belief.]
That is a BIG statement.
To sum things up, 2019 was a breakout year for Tesla. In addition to expanding into China
and making early moves into Europe, Tesla has proven its products and its business are
healthy, viable and scaling fast.
They’ve got billions in the bank, growing demand, no competition, a huge lead on software,
batteries & powertrain technology, an army of fanatical supporters spreading the word,
highly profitable products and very few headwinds.
Tesla’s ability to execute is no longer in question, nor are there any concerns about
its financial health.
The only question I have is, who’s gonna end up in second place?
I’m Steven Mark Ryan, this is Solving The Money Problem and I love you all.
Thanks so much for watching.
Let me know your thoughts in the comments below.
What did you think about Tesla’s Q4 and full year results?
What surprised you?
What are your predictions for Tesla in 2020?
And of course, if you have any ideas for future videos, let me know.
I read ALL your comments.
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