Yesterday after market close, Tesla released a Form 8-k to clarify Elon Musk’s comments the day prior regarding needing to move equipment from Germany to reach production ramp goals.

Tesla, Inc. is clarifying the following statement made by Elon Musk, Tesla’s Chief Executive Officer, during Tesla’s fourth quarter and full year 2017 financial results conference call held on February 7, 2018:

“[We] expect the new automated lines to arrive next month in March. And then it’s already working in Germany so that’s going to be disassembled, brought out to the Gigafactory and reassembled and then go into operation at the Gigafactory. It’s not a question whether it works or not. It’s just a question of disassembly, transport and reassembly. So we expect to alleviate that constraint. With alleviating that constraint, that’s what gets us to the roughly 2,000 to 2,500 unit per week production rate.”

The “2,000 to 2,500” units per week cited in this comment refers solely to the capacity of the additional automated battery module manufacturing equipment that is currently located in Germany, and not to Tesla’s total Model 3 production run rate or to the capacity of the automated battery module equipment that is already present at Gigafactory 1.  Tesla’s ability to meet its target of 2,500 per week by end of Q1 2018 is not dependent on the additional equipment that is currently located in Germany, as that equipment is expected to start ramping production during Q2 2018.  With respect to battery module production, Tesla’s ability to meet its target of 2,500 per week by end of Q1 2018 is dependent only on the equipment that is already present at Gigafactory 1, as well as the incremental capacity that is currently being added through the semi-automated lines that were also discussed during the conference call.

As stated in Tesla’s Fourth Quarter and Full Year 2017 Update Letter:

“We continue to target weekly Model 3 production rates of 2,500 by the end of Q1 and 5,000 by the end of Q2. It is important to note that while these are the levels we are focused on hitting and we have plans in place to achieve them, our prior experience on the Model 3 ramp has demonstrated the difficulty of accurately forecasting specific production rates at specific points in time. What we can say with confidence is that we are taking many actions to systematically address bottlenecks and add capacity in places like the battery module line where we have experienced constraints, and these actions should result in our production rate significantly increasing during the rest of Q1 and through Q2.”

Tesla claims that they don’t need the new automated line equipment from Germany to reach their 2,500 Model 3 cars/week production rate by end of Q1 2018.  However, at this point, Tesla has lost much of their credibility regarding Model 3 production ramp guidance.

In order for Tesla to regain investor confidence, they need to do what they say they’re going to do.  This means, they need to reach 2,500 cars/week by end of Q1.  I, personally, think this is going to be difficult to achieve.

In the Q1 earnings call, Elon mentioned that having to make a new automated battery module assembly line costed them 6-9 months of time.  So, if they original goal was 5000 cars/week by end of Q4 2017, then that goal is pushed off by a minimum of 6 months.  So it appears that Tesla is aiming for end of Q2 2018 as to when they can reach 2,500 cars/week.  But this is likely an aspirational goal, and perhaps not realistic.  But we will see in less than 2 months.  Tesla will release their Q1 delivery (and production) numbers at the beginning of April.  If Tesla does manage to reach 2,500 Model 3 cars/week by that period, they will dispel all doubt and disappointment regarding the Model 3 production ramp.

A friend asked me this morning why TSLA is down so much compared to the rest of the market (ie., just 2 days ago TSLA was at $355 in afterhours and today it hit $295).

The answer is somewhat complicated so I thought I would write my thoughts and just tell my friend to read this post.

First, TSLA is a volatile stock with one of the largest short interests on the market.  And it has one of the largest short interests in the market because it’s a controversial company.  Some people think TSLA is going to the moon, and others think it’s overvalued and headed to bankruptcy.  Sure, there are people in the middle but for the most part people buying and selling TSLA have extreme views of the company.

Because there’s such a large short interest, this exacerbates market moves in times of uncertainty.  In other words, there is more volume of stock available (since shares are taken out short as well) and this increases the ups and downs of the stock.

Second, on a fundamental basis much of TSLA’s value is based on what Tesla will accomplish in the future.  Thus, any change of predicted plans can make a big difference on how people perceive TSLA’s value today.

Third, TSLA (like other highly volatile stocks) tends to go as high as it can until it hits a road block and then goes as low as it can until it can hit a road block.  It’s similar to a huge fire that keeps going in one direction until it can’t any more, and then goes the other direction.

On top of this, people are able to take on margin to buy and sell TSLA stock.  So, when the stock price drops suddenly then people who bought TSLA on margin often get margin calls, and they are forced to sell the stock, thus causing the stock to drop more.  Sometimes this happens until the price is low enough where it’s very attractive to large buyers who come in to scoop up bargains.

Another reason for the dramatic moves in TSLA stock is high-frequency trading (algo trading) and traders jumping on trends in stock prices.  When a stock drops, there’s tremendous force, not just from people selling the stock, but also from computerized trading and other traders that jumps on board automatically to profit in the trend.  But, this also works in the other direction as well.  When TSLA rises dramatically it can be exacerbated from traders (both computerized and humans) who jump on board.

In terms of yesterday’s and today’s drop (from $345 to $295, a drop of $50) it appears that investors were somewhat disappointed with TSLA’s Q4 2017 earnings reported on Wednesday.  While Elon Musk affirmed Tesla’s goals of reaching 2500 Model 3 cars/week by end of Q1 and 5000 Model 3 cars/week by end of Q2, in the conference call Elon sounded like those goals were stretch goals and not likely to be reached.  For one, Tesla needs to ship equipment from Germany which arrives in March to boost their production to 2000-2500 Model 3 cars/week, but it appears it might take longer than that to get to 2500 Model 3 cars/week.  Some analysts, like Adam Jonas of Morgan Stanley, is predicting that Tesla won’t reach 5000 Model 3 cars/week in 2018.  Update: Tesla claims automated lines from Germany not required to reach 2,500 week Model 3 production goal in Q1 2018

In some ways, I think the volatility in TSLA stock isn’t helpful to Tesla or to individual investors.  Many individual investors get freaked out by a sudden 15-20% drop, or overly enthused when the stock jumps up suddenly 15-20%.  It’s an emotional roller-coaster for many.

Personally, I look at the daily stock price as an emotional tug-of-war between emotional investors on both sides of the market.  While the short-term price is determined by many factors beyond Tesla’s control, the long-term trajectory and ultimate price of the stock will be determined by Tesla’s long-term execution and performance over time.

6 Takeaways from TSLA’s Q4 2017 earnings report

The best way to understand and digest yesterday’s TSLA Q4 2017 earnings report is stop reading all the articles in the media about it, and just go directly to the source.  Oftentimes, reporters and journalists miss the most important parts of the report, and people who rely on them are left with shallow headlines that don’t promote understanding but just promote the reporter’s biased view on the company.  It’s tough to be a great investor if one relies on headlines from the media.  Rather, if you go directly to the source and actually read company’s earning reports and actually listen to their conference calls (or at least the transcripts) you’ll be ahead of 99% retail investors out there.

So before we go on here’s two prerequisite source materials that are a must-read:
1. TSLA Q4 Earnings Shareholder Letter
2. TSLA Q4 Earnings conference call transcript

As long as you read those two links, you’ll be better off than 99% of the people out there who are relying on bait-click headlines and shallow reporting.

As for my thoughts on the earnings report, here’s my take.

1. Overall, I think the earnings report was a positive.  I’d give it a 7 out of 10.  The reason being is because anything not very negative is actual positive to Tesla at this point.  They are at a crucial juncture of ramping Model 3 and the absence of bad news means things are going well.

2. Cash balance going into Q1 2018 was $3.4 billion, which is very healthy and rather surprising.  They also raised $500M+ is a lease securitization deal in Q1.  So it looks like Tesla is not in need of an urgent capital raise.  However, I wouldn’t rule out a capital raise in the next several months as Tesla might opt to increase their cash cushion.

3. The Model 3 ramp is slow.  While on their shareholder letter, Tesla said they’re still “targeting” 2500/week by end of Q2 and 5000/week by end of Q3, in the conference call it seemed like those goals might be difficult to reach.  Elon shared that the need to ship battery module production equipment from Germany that will arrive some time in March, and that equipment will be necessary to go to 2000-2500 cars/week.  Since it might take a few weeks to set up the equipment, I’m not expecting Tesla to hit their goal of 2500 cars/week by end of Q1.  Rather, I think Q1 average production rate will likely be around 1000 cars/week.  In order to hit 5000 cars/week, Elon said they need to work on “parts conveyance” which is automation to move parts in the factory line.  It’s unclear if when this will be complete.

Update: On Feb 9 after market close, Tesla released a Form 8-k (Tesla claims automated lines from Germany not required to reach 2,500 week Model 3 production goal in Q1 2018)

4. Elon re-affirmed that the long-term competitive advantage of Tesla will be their factories and not their cars.  This is a key point to understand about Tesla.  By massively improving manufacturing efficiencies via engineering, AI, 3d printing, and robots, Tesla will be able to drive down costs faster than any other auto manufacturer, thus giving it a long-term sustained competitive advantage.

5. Elon mentioned they might be able to sell 1 million Model Y cars/year, and they can do it at half the capital expenditure cost than what they spent per car for the Model X.

6. Jon McNeil, VP of sales and service, has left the company and has joined Lyft as their COO.

Overall, Tesla’s Q4 earnings showed that systems are all go for Tesla to continue their path of ruthless innovation and ridiculous ambition.