Tesla Motors, (NASDAQ:TSLA), and its stock have been attracting attention at an accelerating rate this year. There's something of a charge in the air going into Wednesday's earnings release and conference call.
Investors are contemplating several pretty big potential ripples in Tesla's valuation this week. There is talk of a short squeeze as well as a potential large "sell on the news" pullback from the roughly 60% run the stock has had year to date, nearly all of it in the past six weeks. Longs are hopeful of blowout earnings and an indication (or at least hint) of increased production guidance (for the big earnings case you may want to read this Seeking Alpha article by Southwest Michigan Trader). Perhaps at the center of all this charge is the open-ended possibility of thought provoking and material information that may come out of Elon Musk as he speaks for about an hour in real time. Skillful and persistent analysts posing questions only add to Elon's tendency to be detailed and transparent. I doubt you would believe how interesting a corporate earnings call could be if you didn't listen to one of Tesla's for yourself.
The longs don't get all the fun with this. There's another reason for the air of intensity going into the call. The potential for some kind of gaffe. It could either be a real issue of concern about Tesla surfacing, or some minor immaterial piece of information that may be either misunderstood, or distorted to direct some fabricated fear, uncertainty and doubt (FUD) towards Tesla and its stock.
My intent in this article is to anticipate what is the most probable piece of information from Tesla that may become fodder for FUD. That is, something more noise than material that might become repackaged into a bearish mantra by some of the stock's detractors. We have seen this happen before with Tesla as I will give examples of at the end of the article. There's a second purpose to the examples, to show that with the perspective of good information, gibberish can be responded to with good humor rather than fright. In effect, we may anticipate and preemptively vaporize the highest probability FUD to surface after Wednesday's earnings release.
So what information do I see as a potential seed of booing and hissing? It is highly unlikely the most basic metrics, earnings and revenues, will offer a target. Given the momentum in Tesla's execution (500 cars/week production rate), anticipated announcements in coming weeks (one on Superchargers, another about a surprise under Model S owner's noses) and recently announced improvements to the product's appeal (the new service and lease offerings), it would take a rather severe miss on earnings or revenues to offer an opportunity to really startle investors with some spook. We already know the year over year comparisons will be stunningly positive, i.e. 1000% revenue growth territory.
Where else to raise some doubts for longs? The balance sheet? That will be quite a challenge. Tesla will either be cash flow positive or on the verge of being so with the trend obviously in the right direction. There will be $200 million or so in cash on the books as there was last quarter. There was a time when cash on hand was a valid concern about Tesla, but barring an extraordinary event, that time has passed.
The time has also long passed to say "they'll never build 100s of cars a week", or "they'll never build a quality product."
What about taking a shot at the battery's reliability? So much tougher now that Elon Musk has announced the warranty is a no fault one. Tesla really hampered the old "$40,000 to replace the battery" ghost when they came out with the pre-paid battery replacement program at $10,000 to $12,000 depending on pack size.
So, where to stir some nonsense into fear? I don't think there will be much competition. I think the molehill to attempt to spin into a mountain of doubt will be new reservations.
If Tesla does not disclose new reservations, the gibberish crowd will cry "What are they hiding?" Please don't misunderstand me. If Tesla does not reveal these numbers I want the analysts to press them on this, and at least seek some kind of reasonable explanation as to why they are discontinuing this practice. I would want Tesla to provide some kind of alternative information that provides guidance about demand and whether it is on track with future financial guidance. I'm not interested in being a blind long. What I would consider gibberish would be a drumbeat of insinuation that there must be a fatal skeleton in the closet if Tesla does not share all the same information they have in the past.
If Tesla does release new reservations, I think these orders will be down 50-70% from the prior quarter. Boo! (I guess that is kind of fun to do). But it is not actually a scary bit of data. It's actually just noise from Tesla's price increase and a couple smaller factors I will walk through below.
In Q4 2012 Tesla had "over 6,000" reservations as indicated in their letter to shareholders. On November 29, 2012 Tesla announced a $2,500 price increase for all new reservations beginning January 1, 2013.
Up until this past February, it was very easy to see the pace of new reservations on the Tesla Motors Club message board. A very substantial share of new reservation holders would post their reservation number and the date they ordered (which was, but now is not, sequential). Every day or two a thread was updated with the highest reservation number as of that day. I kept a list of these numbers from early December through the end of the year.
Here is the FUD vaporizing … the December 18th reservation tally was 17,892. On December 31st, the total had zipped up to 20,102. This means there were 2,210 new reservations for the final 13 days of 2012, or 170 per day. Over a third of the quarter's reservations came in the final 13 days of the year. Some simple arithmetic very strongly points to the conclusion that at least 1,500 of these orders in the final two weeks of 2012 were orders that were moved from Q1 2013 into Q4 2012 as customers rushed to get their reservations in ahead of the price increase.
Here is the math to get to this 1,500 order shift: take the "over 6,000 orders" in Q4 mentioned in the call as 6,000 (one slightly aggressive assumption I'll more than offset with a very conservative assumption below). The first 78 days of the quarter would then have had 3,790 orders (6,000 - 2,210), an average of 49/day. If there had been no price increase deadline looming, and orders for the final 13 days of 2012 had continued at the quarter's 49/day rate, total Q4 new orders would have been 4,427 (3,790 + 13*49), a nice rise from 2,900 in Q3.
So adjusting the last 13 days of 2012 to match the rest of the quarter, Q4 orders come down 1,573. Next, I will make a couple of conservative assumptions. First, we can round the 1,573 down to 1,500 orders. Second, I'll ignore any additional orders that may have shifted out of Q1 '13 from the time the price increase was officially announced on November 29 up until December 17th. Very conservative to ignore these reservations as they may have totaled 500, implying a 2,000 order shift (the last 13 days of the year orders came in at a pace of 120 orders/day above the balance of quarter average. It is very possible the nineteen days from 11/29-12/17 averaged 25 reservations/day above the balance of quarter average).
Now we can see how a 50% sequential decrease in new orders would not be a bit frightening. A 50% decrease in Q1 from the prior quarter 6,000 new reservations would mean 3,000 new orders in Q1 '13. If 1,500 orders were shifted from that quarter back into Q4 '12, the two quarters would have both included 4,500 orders… orders would be steady, not down 50%!
I expect new orders (if reported) to be somewhere between 2,200 and 3,200 for this past quarter. Adjusting back in the 1,500 orders from the price increase shift effect, this range would adjust to between 3,700 and 4,700 reservations, an 18% decline on the low end and a 4% increase on the high end. If there was such a decline in the 20% range it would probably be due to some combination of a) the shift actually being more than 1,500 (again it's reasonable to think it was 2,000), b) price sensitivity of new potential customers to the price increase after January 1st (as opposed to those who were already weighing a purchase in 2012 and could rushed to place their order ahead of the price increase), c) perhaps a cooling off of the positive impact of the Model S's unanimous selection as Motor Trend's Car of the Year in early November, and d) the "Broder" effect. Though Broder was ultimately found by the New York Times Public Editor to have been imprecise and to have used poor judgment, that February tiff and its coverage in the media likely had a dampening effect on consumer interest in Tesla and its car (in contrast to the very likely catalytic effect on consumer interest that is likely going on presently with Tesla and its stock's recent attention for their runs of success).
So the FUD crowd may ignore all this. We may read articles that rant about new reservations being down 50% or even 70%. We might even see the recent Coda and Fisker tailspins used in an to attempt to frame Tesla as the next "Green Flop" on its way down the drain. (If you think this an exaggeration, have a look at some of the past gibberish at the end of this piece). Detractors definitely will not mention the shift of orders due to the price increase. In case you run into some of their bluster trying to raise fears about reservations, I'll mention a few other key points that make it easier to remain mindful that the nonsense we run into is a comedy not a horror show.
First, as of the 2/20/12 conference call, 75% of Model S reservations were from North America. Musk stated in that call his expectation is that in the future the breakdown will be 36% North America, 36% Asia, and 28% EU. The growth of reservations in Asia and the EU driving this projected change in geographical mix will more than double new orders, even if the North America rate were to stay flat. It will take time, but stores are being opened in the EU and Asia this year, and the availability of test drive cars will increase "dramatically" from the two cars in all of Europe as of the 2/20/13 call. Secondly, as visibility (cars on the road) and talk about the cars and the Superchargers expand Tesla grows what George Blankenship has described as its best marketing tool, word of mouth. Third, if time continues to pass with reliable miles driven piling up in these cars, wider segments of the population will recognize the Model S is a safe, dependable car worth consideration as a purchase. Fourth, recent financing offerings and changes in the service arrangement make the car affordable to a wider segment (Elon expressed his aspiration that the car is going from a "1%" product to a "10%" product. In case you've been doused with some "rich toy" nonsense… in the same breath Elon repeated his determination to get the next car in development and production as quickly as possible so Tesla has a car in the market at a price middle class families can afford). Finally, there's a point about demand I learned of only today. I think it's pretty awesome news. The June issue of Consumer Reports has a teaser for the next issue. It's a cover with a picture and heading about their coming report on "The Best Vehicle We've Ever Tested: Tesla Model S Electric Car." That will do well for new reservations indeed.
All right, now for the fun part. Where will the FUD come from next?
First a bit of a disclaimer: I put these here and the links just to show how funny some of the content of this tactic can be, not to make fun of anyone.
So where will we get our next helping of gibberish?
Will Cory Johnson at Bloomberg have an offering for us? If you're going to click on any of these links, this is the one. The funny starts right about 1:15 into the piece. Shame on Elon making commitments he keeps. Steve Colbert could learn a lot here.
What about John Shinal of Market Watch? Apparently Tesla is among Silicon Valley's top candidates for a 2013 stock market collapse. This article was written in late December 2012 when the production ramp up was near complete. Note how the article includes cash balance as of 9/30/12, conveniently leaving out the $200 million raised the following month while going on to bash the same capital raise in part II of this series a couple of days later.
Or, maybe we'll hear from Bill O'Reilly. Last month not only did he look backwards at losses rather than mentioning profitability in the quarter just ended, he looked backwards at losses from 2011.
Perhaps we'll hear from the Washington Times. It basically insinuated that a probe into Tesla consisted of one government agency saying to another: "We saw something we weren't sure was in keeping with your regulations, do you need to look into this?", to which Agency 2 replied, "No." This story got picked up by other publications.
Disclosure: I am long TSLA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. If Tesla's shares fall after this earnings call I may add to my long position.