Tesla Q4 Earnings Preview (what’s in store?)


Hey, I’m Steven and this is Solving The
Money Problem. If you’re new, welcome. If you’re not,
welcome back. Tesla reports Q4 earnings on the 29th January
and many of you have been asking for my thoughts. Will Tesla post a profit or not? What will the stock do after earnings? Should I buy the stock before earnings or
sell? I can’t see into the future but I do have
a brain and an internet connection so, while I can’t say what WILL happen, I can look
at some clues about what MIGHT happen. With sentiment on Wall St shifting dramatically
in recent weeks from “Tesla sucks” to “Hmm, maybe Tesla doesn’t suck”, the stock
has been on a tear. I expected this shift in sentiment as analysts
began to wake up. In fact, I predicted it in December in my
video “Waiting For Tesla Stock To Dip? (good luck). In it, I confidently laid out the reasons
why I believed Tesla stock was likely to trend up over time. Many of those reasons have come to pass and
the stock is up more than $200 since I posted the video. With commentary like this, is it any wonder? [He is the new face of an auto executive.
With just–that your car becomes an exciting place to be. I love sitting in a Tesla. My
daughter loves the flatulence seat. She kept sitting on it, pressing the button–I mean,
I know it’s a little odd–but the Tesla is the place, it’s the third place to be.
People love to be in it. And they’ve got autonomous driving–oh my it’s so exciting] [You–just put numbers around it. Let’s
call today 360-370,000 in terms of units. China could be an incremental 150-200k. That’s
why the bull thesis, Chinas worth another $300 per share. That’s how you get to that
sort of uber-bull thesis on Tesla] [Mr Deiss a very, very interesting time for
the auto industry. If you take a look at Tesla’s market value surging past VOlkswagen. I mean,
how do you explain why investors are putting money in a company like Tesla which is uh,
not making money yet. Compared to a company like Volkswagen. I mean, Tesla’s burning
cash. You’re making money] [Ya. You know, the market evaluation tells
you something about the future–you know–future expectations. And Tesla is–is having a product
which basically describes the future of the auto industry. Now fully connected, electric
car and so into–there’s a lot of evaluation about the future car and I think Tesla is
paving the way there. It’s–it’s uh, modelling something new for the industry. I think we
are close to follow, ya. And um, so, uh we are quite optimistic that we still can keep
the pace with Tesla and uh, also, at some stage,probably overtake] Today, all eyes are Tesla. Automakers are
watching. Wall St is watching. Investors are watching. Is the stock getting ahead of itself? Is it overvalued now? What will Q4 bring? In my opinion, this may be Tesla’s most
important quarter ever in terms of Wall St sentiment. If Tesla knocks it out of the park, it may
add enough momentum to widely shift perceptions from “Tesla is doomed” to “Tesla might
win this”. Let’s dive in. Records Record deliveries and production have already
been confirmed. This was painfully obvious leading in to the end of 2019 yet most of
Wall St missed it. What’s also obvious is that record deliveries
and record production are VERY GOOD THINGS. Profitability & Product Mix Unless there’s an extraordinary, unexpected
event–or I’m way dumber than I think–it’s all but certain Tesla will post a net profit. For one, Tesla has continually found new efficiencies
and steadily increased automotive margins on like-for-like vehicles. The exact same Model 3 being sold today is
more profitable than the same Model 3 being sold a year ago. Or 6 months ago. Or 3 months ago. This is why Q3 surprised most of Wall St. Yes, the product mix has changed. Q4 2018 saw many more performance Models 3s
sold, and higher numbers of S & X which have much higher margins. But Tesla’s continuous optimization means
margins on low-spec version are growing. Tesla delivered 90,996 vehicles in Q4 2018
and 112,000 in Q4 2019 – 23% increase. Admittedly, these are lower margin vehicles
but 23% more of them is HUGE. Bonus Vehicles Tesla delivered 7,109 more vehicles than it
produced in Q4. Why does that matter? At $50,000 a pop, that’s an extra $350,000,000
in revenue, many of whose costs have already been accounted for in previous quarters. These revenue on these 7,000 vehicles will
effectively be VERY high margin. I think this alone may compensate for the
lower-spec mix of vehicles sold. Cash On Hand Tesla ended last quarter with over $5 billion
in the bank. No doubt some of it has made its way into
Gigafactory Shanghai, some into new supercharging infrastructure and other areas of the business
but I expect Tesla to remain flush with cash moving forward as they’re becoming exceptionally
resourceful with capital expenditure. FSD Revenue Tesla has around half a billion dollars in
“deferred revenue” from the sale of full self-driving. As new features are rolled out,
more of this revenue is recognised. How much will fall in Q4 is anyone’s guess
but it will be more than $0 and because it’s pure margin, it will go straight to the bottom
line. Performance Upgrades In late December, Tesla announced a $2,000
“acceleration upgrade” for Long-range all-wheel-drive Model 3 owners. How many owners opted for this over-the-air
upgrade in the final days of 2019 is unknown but what I do know is that every one of those
upgrades is almost pure profit for Tesla. Imagine 10,000 owners upgraded. That would be an extra $20,000,000 to the
bottom line. Premium Connectivity Also in December, Tesla announced a $9.99
monthly premium connectivity service to enable features like live traffic, netflix and YouTube. While I don’t believe any of this revenue
will fall into Q4 due to the billing cycle, Tesla is likely to share details of the take
rate on this service and that could have a positive impact on the stock price as it will
give us clues about what’s in store next quarter and beyond. ZEV Credits It’s a low chance but we may see surprise
revenue from the sale of Zero Emission Vehicle credits. As we know, Fiat-Chrysler has an agreement
to purchase more than $2 billion in ZEV credit from Tesla between now and 2021, with about
80% of those expected to be in 2020. Whether or not any credits were purchased
in Q4 is unknown but in either case it’s good news. Either Tesla had a bunch of unexpected net
income in Q4 2019 OR that income rolls into Q1 and beyond. $2 billion is a staggering sum of free money–enough
to build a Gigafactory–and a huge boon for the bottom line. China I’m turning into a broken record. Gigafactory Shanghai was built absurdly fast–in
record time. Muddy field to production vehicles in less
than a year. In Q3 Tesla confirmed that the Model 3 lines
in China were built for 65% less capex per unit of capacity than the US model 3 lines. This matters. Moreover, production ramped so fast that even
Tesla bulls were surprised. Expect Tesla to share more info on China. We may hear about current and future production
rates, planned expansion, order numbers and most importantly, I suspect Tesla will announce
their plans to begin manufacturing Model Y almost immediately. Germany I’ll be surprised if we see the Berlin Gigafactory
completed before year-end but we’ll probably hear a bit more on Tesla’s European plans
during the Q4 call. Anything other than “we have been delayed” will be good news. Model Y Rumors are swirling that US Model Y deliveries
will commence any day. I’ll be shocked if Tesla doesn’t announce
this on the call by sharing an expected timeline for first Model Y deliveries. We may also hear the first insights around
demand. Model Y is way, WAY ahead of schedule. No one was expecting this. Most of Wall St still have no f***king idea
that the Y is about to begin deliveries. If you can’t read between the lines, too
bad. As I’ve said elsewhere, the Model Y will
make tesla billions. The global SUV market is about 30,000,000. The Y is poised to take a nice slice of this. Battery and Powertrain Investor Day I’ll also be surprised if Tesla doesn’t
announce a date for their upcoming Battery and Powertrain Investor Day and drop a few
hints as to what’s in store. I actually think–from an investor’s point
of view–this event will be one of the most important in the history of Tesla. We know Tesla’s current battery and powertrain
technology is absurdly far ahead of everyone else. It truly is embarrassing. Of course, Tesla isn’t standing still. Their acquisitions of Maxwell Technology and
Hibar Systems shows that they’re taking the necessary steps to remain in the lead
and more importantly, to scale annual battery output to multiple terawatt hours. Tesla will tell us how they plan to do this
at the investor day. My guess? They’re going to licence/sell their battery
and powertrain technology to other automakers. They may also partner with them to build gigafactories
together or licence the gigafactory design to other automakers. Any clues we hear about this will be good
news. Solar Deployments In early December, the following email from
Elon Musk starting Tesla’s top priorities was leaked: “The first is making sure all cars are delivered
to their customers before end of year,”. “The second, just as important, is that we
immediately increase the rate of solar deployments by a significant degree.” We know Tesla hit the first priority out of
the park. What about solar deployments? We’ll have to wait and see but that’s
the point. We already know Tesla’s automotive business
nailed Q4. Any growth in solar deployments will be good
news, and help the bottom line. Battery Deployments Tesla’s battery business is by far it’s
lumpiest, in part due to its relatively small size and in part due to the nature of its
batteries which range in use from powering single homes to powering entire islands. Tesla’s grid-scale Megapack was announced
in mid 2019 and it wasn’t long before we heard about its planned use in a number of
new projects including the replacement of some fossil-fuel peaker plants. Big batteries=big revenue. Convertible Debt [So one of the theses for the bears is the
balance sheet but when we look more closely at the balance sheet they’ve got 3 tranches
of convertible debt that have actually started to really trade up very sharply since the
stock has moved so much. The reason is because these bonds convert into equity. And so, you
have $4 billion of three different tranches of convertible bonds. One converts net year–that’s
$1.4 billion, then $1.8, then another $1 billion. So it’s $4 billion that will convert if
the stock is about $350 or higher over these various points of the next 4 years. So when you think about the balance sheet,
that’s $4 billion of debt that won’t be there anymore. Now there will be $4 billion
of–we don’t know exactly how much [equity] of equity–but equity. It’s as if they’re
selling stock at the various strike prices of these converts so if one of the bear’s
thesis of–you know, “we’ve got a real balance sheet issue” isn’t there anymore,
it seems to be that the target value, when you look at the upside, downside and bear
case, you’ve gotta think that it’s higher now. Now at $460, I don’t know there’d be a
buyer but I think the risk of the balance sheet really being a problem has gone down
significantly.] Many analysts seem to be overlooking this. It’s unlikely to be a focal point of the
earnings call but if it comes up, expect many investors who have no idea about the convertible
debt to grow more bullish. It looks pretty likely that $4 billion of
debt Tesla is carrying will effectively vanish in the coming years. That’s helpful. There’s STILL Hasn’t Been A Short Squeeze Despite enjoying a stellar run recently, short
interest in Tesla stock still remains extraordinarily high. At some point, a chain reaction is bound to
happen as short are forced to cover their positions in quick succession. I’m not suggesting this WILL happen after
Q4 results. But, it is a possibility I have to acknowledge. Let’s sum it up. First, I have no idea what numbers Tesla will
report or what questions will be asked. There’s too many variables to have any certainty. BUT. Looking at the available evidence, it seems
to me that Tesla will be reporting a tsunami of very good news, loads of records and very
strong financial results. Tesla has reached a tipping point. They’ve shown profitability in 3 of the
last 5 quarters and I suspect Q4 will make it 4 of the last 6. Wall St sentiment is shifting but some analysts
are slower than others, as are many retail investors who are STILL blind to what’s
happening. So. If I believe Tesla will report loads of records,
very strong earnings and lots of good news, does that mean the stock will go up? No. I could be wrong, and even if I’m right,
the stock could do anything. Tesla is the most volatile stock I own. It was just 8 months ago that I was buying
the stock in the $180s. As I record, it’s over $560. The same thing COULD happen in reverse. But if we’re being reasonable, and thinking
about probability. AND, if my assumptions of good news are correct,
I think it’s more likely that we’ll see a positive reaction to Q4 earnings than a
negative one–even if the news takes time to sink in. Don’t buy or sell the stock because some
clown on YouTube made a video about it. Use your own brain, weigh up the evidence
and act accordingly. Take responsibility, reason effectively and
go from there. If you’re not confident enough to do anything
but still want to learn, why not do a paper trade around earnings so you can see what
would have happened without putting money on the line? I recommend the WeBull app. There’s a link
in the description. If you’re a nerd, love numbers and data, you’ll love it. Either way, I’m just sharing MY thinking,
MY reasoning and MY investing process. Don’t be a sheep. Think and act for yourself. 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. What are your Q4 predictions for Tesla? Will they show a profit or loss? Do you agree or disagree with any points? And of course, if you have any ideas for future
videos, let me know. I read ALL your comments. p.s. If you’re still watching, you’re
AWESOME. This channel has kind of blown up since it
launched and I’m working on making the best possible content for you guys, but it takes
time. Consider supporting the channel at http://patreon.com/solvingthemoneyproblem
so I can continue creating content for you guys. There’s a link in the description. Either way, the best form of support is you
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