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.



Yesterday SpaceX made history again with a successful launch of the Falcon Heavy, which is basically three Falcon 9 rockets strapped together.mmIf you haven’t seen the launch, it’s a must-watch and I’ve included it at the end of this post.  Here’s what SpaceX had to say about the launch and what it means:

[Falcon Heavy is] the most powerful operational rocket in the world by a factor of two. With the ability to lift into orbit nearly 64 metric tons (141,000 lb)—a mass greater than a 737 jetliner loaded with passengers, crew, luggage and fuel–Falcon Heavy can lift more than twice the payload of the next closest operational vehicle, the Delta IV Heavy, at one-third the cost. Falcon Heavy draws upon the proven heritage and reliability of Falcon 9. Its first stage is composed of three Falcon 9 nine-engine cores whose 27 Merlin engines together generate more than 5 million pounds of thrust at liftoff, equal to approximately eighteen 747 aircraft. Only the Saturn V moon rocket, last flown in 1973, delivered more payload to orbit. Falcon Heavy was designed from the outset to carry humans into space and restores the possibility of flying missions with crew to the Moon or Mars.

Roughly two years ago SpaceX made history with the first landing of a orbital’s first stage on land.  This was the key piece to SpaceX’s ultimate mission to make humans a multi-planetary species.  What yesterday’s successful launch of Falcon Heavy showed was that SpaceX is on an inevitable path to send people to Mars.  Now more than ever it’s clear that SpaceX is on a roll and that momentum will lead to amazing space ventures that many thought was only for the imagination.

What makes SpaceX special is the combination of a ridiculously ambitious goal (making humans multi-planetary) and the practical means and methods to achieve that goal.  SpaceX believes that if they harness the intelligence of the brightest engineers and commit to ruthless iteration and constant improvement, then the end result will be achieving what many people think is impossible.

In the same way, Tesla shares the SpaceX ethos.  Tesla has set a ridiculously ambitious goal of transitioning the world to sustainable transport and energy, and they’ve committed to making that happen by bringing together the best engineers they can find and working ruthless toward constant iteration and improvement.

Sometimes this constant iteration and improvement isn’t linear because there are step changes with new projects.  For example, while engineers are constantly working and iterating improvements, SpaceX experienced step changes in technology with Falcon 1, Falcon 9, ability to land and reuse boosters, and now with Falcon Heavy.

In a similar way, Tesla has experienced massive step changes with the original Roadster, the Model S, and now the Model 3.

With Tesla it appears that every 5 years or so they are able to achieve a true step change in technology and product.  And the Model 3 is so far Tesla’s greatest achievement, yet it is only the beginning.  In another 5 years, Tesla is bound to have made massive progress in manufacturing, battery technology, design, and other fields; and all of that put together will allow them to make another product that they just weren’t able to do right now.

I think in 5 years or so, Tesla will be able to release a generation 4 vehicle that addresses an even larger market than the Model 3.  The Gen4 vehicle will be cheaper than the Model S and will target the economy class of vehicles.  It simply will be a vehicle that is more affordable than the Model 3 and is the best economy car, ever.

Later today Tesla will announce their Q4 earnings.  And while Tesla will give important updates as to how the Model 3 production ramp is going, how much cash balance they have, and their goals for this year, in many ways I think what’s more important is that Tesla has already made a stellar car in the Model 3 and they are trekking toward their next goals and are not staying still.  Sure, Tesla has their work cut out for them in terms of ramping Model 3 production.  But in my opinion this is a solved problem.  In other words, ramping production has been done by every major auto manufacturer on the planet, and Tesla will be able to do it as well.  It might take a bit longer than expected, but they’ll get there.

But for some reason many investors and analysts are so short-term focused, so all eyes will be on what Tesla will be doing over the next quarter or two.

The bigger picture is Tesla is marching on toward their ridiculously ambitious goals.  The bulk of their engineering team has long moved on to other projects like the Model Y, Tesla Semi, and new Roadster.  And after those projects, they will move on to the Tesla pickup truck and to other mind-blowing vehicles and projects.

What the Falcon Heavy launched yesterday showed us is a glimpse into the power of the ethos behind SpaceX, and also Tesla.  And it’s no coincidence they’re run by the same person, Elon.