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CCM Blog For The Week Ended June 29, 2018

|Includes: Tesla, Inc. (TSLA)
Summary

Weekly Observations.

Aswath Domodoran's Tesla Commentary and Valuation.

CCM's Expectations on Q2 results.

From Ben Johnson of Morningstar - follow Ben @MstarETFUS “Oversold: ETFs' liquidity. Undersold: ETFs' flexibility. Go long, sell them short, buy them on margin, buy/sell options on them, lend them to others for a fee, and more…"

Aswath Domodoran’s @AswathDamodaran Take on Tesla (TSLA).

Twists and Turns in the Tesla Story: A Boring, Boneheaded Update!

Wall Street’s current revenue estimate for Q2 is $3.944B and EPS loss of $2.68.

On Estimize www.estimize.com, membership required for some features and viewing, the revenue estimate is a more bullish $4.125B and EPS loss of $2.75. Estimize generally has a reputation of being more accurate than Wall Street. In this case, I agree that top line expectations could be surpassed by sacrificing profitability. The layoffs, overtime, tent production line, and changes on the line and supply chain due to recent output struggles lead me to believe this quarter could see a “bath” of charges. Elon and Co were out there turning wrenches until 2 AM given the pressure they are under to meet the 5,000 Model 3 units promised, racking up extra production hours, while dealing with changes and downtime from reconfiguration, adding manual processes. I wouldn’t want my $60,000+ car to be one of the ones coming off the line now - there could be quality issues given production changes and the rush to meet the goal.

Tesla believes gross margin on the Model 3 will reach 25% once stabilized at 5,000 weekly units. Even if they achieved the almighty 5,000 Model 3s produced, Tesla was nowhere near this if measured on the one-week basis. Musk will reiterate the 25% gross margin commitment - how else could a $350 stock price be justified if not for big margins in the future.

Lastly, there isn’t incentive right now for Tesla to tout Model 3 signups as they will have way in excess of production. But touting of deposits on the semi-tractors will likely be mentioned per Tesla’s recurring pattern of talking about the next thing before achieving the first. Talk about SolarCity and the non-automobile parts of Tesla will also be overlooked by analysts.

With these types of incentives, creative accounting, and Tesla’s stock seemingly driven off of Musk and self-promotion rather than fundamentals, I think there will be three things Musk must deliver or promise to prevent the stock from a major decline. 1) 5,000 weekly Model 3s were produced, even if it was working 168 hours straight, 2) There will be no equity capital raise - another round of creative financing such as a sale lease-back or more factoring could occur, but I wouldn’t expect that to be announced on the Q2 call, and 3) the “true” cash burn has to be less than $1.0B. Remember, management’s annual CAPEX plan is $3.0B.

Many reputable sites and prognosticators have a weekly maximum production achieved to be closer to 3k units. A huge jump, but well short of expectations and what would be needed to limit the cash burn. We Set Out to Crack Tesla's Biggest Mystery: How Many Model 3s It's Making Other sites also do this, many by tracking VINs issued. I’m not going to make a specific prediction, but do think that one of the three achievements/promises will come up short.

Thanks for reading. Carlos Sava, CFA, CPA

Disclosure: I am/we are short TSLA.