Tech Brew Ride Home - (Bonus) Elon Check-in With The Tesla Daily Podcast

Episode Date: February 22, 2020

Well, we mentioned it a couple weeks ago, but Tesla has had quite the month. Maybe one of the banner months of its entire life as a company. No better time to check in on the world of Elon Musk with Rob Mauer of the always excellent Tesla Daily podcast. Why did Tesla’s stock shoot to the moon, come back down a bit, and then inch back up toward the moon this month? What are the fundamentals behind that excellent earnings report? Is this it? Have the Tesla bulls won? Such a fascinating company… Sponsors: Tinycapital.com Podcorn.com (promocode "ride" at checkout) Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to another weekend bonus episode of the Tech Meme Right Home. I'm Brian McCullough. Well, I mentioned it a couple weeks ago, but Tesla has had quite the month. Maybe one of the banner months of its entire life as a company.

So no better time than now to check in on the world of Elon Musk and to do so with Rob Mauer of the always excellent Tesla Daily podcast. Why did Tesla stock shoot to the moon earlier this month? Why did it come back down a bit and then inch back towards the moon later on this month? What are the fundamentals behind that excellent earnings report? And is this it? Have the Tesla Bulls finally won? Such a fascinating, fascinating company.

For contingency purposes, I'm going to say up front that we're recording the afternoon of February 14th, Valentine's Day. Happy Valentine's Day, Rob. Yeah, you as well. Well, listen, I'm trying to come up with some Valentine's joke analogy or something about what we're about to talk about. But you know what? I feel like every time we talk, it's mainly just me being like, okay, Rob, what the heck just happened? Before we get to the stock price and everything that happened this month, we should probably, I'd like you to walk me through as best you can. the earnings call and specifically, not the earnings call, but the earnings report, specifically,

like, what were the key drivers? What did people hear that everyone thought was so good that I need to understand about what happened? Sure. Yeah. And I think for that, it's probably best to go back kind of two earnings reports to go. I don't think we've spoken since then, but that's really, that's really when the stock started to take off was after the Q3 delivery and production report, and then the earnings

report after that. basically what Tesla has demonstrated in the last, you know, six months or so is proof of concept of the business. And that's been the big reason that the stock has appreciated in my mind. So this year, they delivered, you know, 367,000 vehicles. They turned profitable in the second half of the year. So both in Q3 and Q4, they showed strong profits. That's always been, you know, the knock on Tesla is they've grown revenue significantly over time, vehicle deliveries significantly over time.

But they haven't been able to be profit. because of the high growth rate that they've had, but that's been a knock on them. So this year, the Model 3 in volume was happening throughout the course of the year. And with that happening, they finally, you know, cover their fixed costs and things like that and flipped the switch into profitability, demonstrating that they can be, you know, a volume producer of electric vehicles and that that is a sustainable business model. So Wall Street obviously likes that. It removes a lot of risk when that is demonstrated.

And it allows people to start to get excited about, you know, what the future may hold for Tesla. So I think that's the big thing that came through, you know, in the last couple of earnings reports. And specifically, you know, Tesla has surprised on the gross margin line. I think a lot of people were expecting, even Tesla Bulls, for example, were expecting, you know, slower growth in margins. And in Q3, they definitely jumped up. And that was allowed Tesla to deliver that surprise profit that then continued it. on through Q4. Do we know what the reason is for that, like, why margins are holding up?

I think it's just that they're getting to the stage now where the Model 3 production is, you know, at like $7,000, $8,000 per week. And because they're at that high of volume, you know, historically the last 18, 24 months or so, they've been ramping up from anywhere to 100 a week to, you know, 1,000 a week, 5,000 per week. And now at this level, they're finally able to, you know, get enough margin per vehicle at that high of volume. where it's starting to cover those fixed costs.

Well, and that's the other thing. I mean, I feel like at least one of the times we talked about before, it was, we spoke together. It was around the time where it's like, can we get these cars out the door like we promise? And so, like, is that also just completely off the table now? Like, the production is what was promised and what was hoped for all this time? Yeah, I wouldn't say it's necessarily quite to what was promised.

I mean, Elon sort of famously back in, I think, 2017 said that they would have, you know, he pretty much guaranteed they'd get to 10,000 Model 3s produced per week, I think sometime in, you know, 2019 or so. And as I said, we're around 7,000, 8,000 per week now. So they're not quite what Elon had hoped for back then. But there are good reasons for that. They've basically adjusted their strategy a little bit in terms of where they wanted to produce the Model 3. So the opportunity opened up in Shanghai to do 100% wholly owned factory there. which is a first for any foreign automaker in the country. So what that means is historically people have had to go in and do joint ventures

where a Chinese company would own 50% of the company, the foreign automaker would own 50% of the company. Shanghai actually opened it up where Tesla and changed their regulations to allow Tesla to be 100% wholly owned. So with that on the table, they decided to take advantage of that and accelerate their plans to build a factory in China. So over the last, you know, 13, 14 months they've been working on that. And they actually went from breaking ground in China in like January 7th of 2019 to producing vehicles in the exact same year.

So going from nothing to actually production in less than a year, which is really unprecedented at, you know, with this sort of a product and with this sort of manufacturing. So with that, they decided to instead of investing more capital expense into production in the U.S. in Fremont, California, where they have their fact. They decided to just maximize the output that they could get out of what they've already spent there and shift some of that investment into China. So that pushed back that $10,000 per week go a little bit, but they should get there within the next few months now. What about the lineup mix, the product mix? I think, again, one time we spoke, it's about, like, okay, the Model 3 is coming through, the plan working out that, you know, a mid-range car, will really pull the levers and has that been working out? Is there something that I'm not aware of in terms of like, oh, yeah, this, you know, the, the,

the entire portfolio is hitting all the marks that we expected there? I would say definitely on the Model 3 line. I think, you know, production has been really solid is maybe not what Elon once said, but it's still ahead of, you know, what Wall Street expected. So last quarter. I'm asking more, I'm asking more about sales, though. And like, because were you just talking about production? Yeah, sorry.

Yeah, yeah, yeah. A lot of times I think of it in terms of production because Tesla, you know, pretty much is able to sell everything that they make, especially for the case of the Model 3. When we last spoke, the one of the things that was hurting Tesla at the time was Model S and X demand had fallen a little bit. And so around Q1, for example, they delivered only 12,000 of those vehicles compared to 27,000 the quarter before.

So a really sharp drop-off. and that was one of the reasons the stock took such a hit, you know, earlier on in 2019. But that has rebounded. So in Q4, for example, on Model S and X, they sold 20,000. So demand has risen there again as they've made some updates to the vehicles. And then with Model 3, yeah, demand is super strong there. They still have, you know, six to eight week delivery wait times in the U.S. right now for new orders. And very little inventory.

Their inventory levels are actually the lowest that they've been in about four years. So on the demand side, things are looking as strong as ever, too, which is another reason, yeah, the stock is reacting strongly. Well, yeah, let's not put it off any further. Look, what a crazy concept. A company that is demonstrating profitability, not just path to profitability or profitability someday or theoretical. And you pointed out that Tesla's stock had been on a tear before that. I think, like, what was it, like October? It was still under 300.

bucks or whatever. And so that even in January before the earnings, it had been, I don't know, tripling or something. But yeah, I mean, back in June, the stock was $177 a share. So in nine months or so, you know, we've quadrupled essentially, even slightly more. Right. I think it's around 800 right now as we're talking. I mean, even that's a long way from the, you know, 420 funding secured level, you know. Right. Now, I think I actually haven't had a chance to listen to your show recently, but I saw on the show notes, and I heard some things also, too, in this run-up, this is a two-fold question. Because, you know, from someone not paying attention every day, you're like, well, this is a classic short squeeze. But then I also was seeing some things on Twitter about, like, and I think even one of your show notes hinted at, like, yeah, there's some really odd behavior, especially as we were, like, cresting.

$945 or something like that. So tell me what you can about, and we're not finance professionals or whatever, but like the stock's performance and what we think we know about what's going on there. Sure. I would say that short interest definitely plays into it. So just like a quick brief on that. Basically what short selling is is people will borrow shares from people that actually own shares and then they'll resell them in the market and hope to buy them back later for a lower price, profiting on that difference. So basically a bet that the stock is going to go down. And historically, Tesla has had really high short interest, meaning a lot of people

betting against it. And what that does, it creates extra shares into the market, which has the same effect as dilution, essentially, because there are extra shares out there that need to be purchased and basic supply and demand that causes the price to be a little bit lower. So what we've seen over the last six months or so is short interest has fallen pretty significantly, not to the level that I would necessarily call it a short squeeze. like we saw years ago with Volkswagen and Porsche kind of when that whole merger thing sort of happened. The stock shut up, I don't know, like 300% in a couple days.

It's not really to that level, but the short interest has definitely fallen. So we're at about 22.5 million shares sold short right now versus, you know, six, nine months ago, it was in the 40 million range. So that essentially takes, you know, 20 million shares out of the market, which can definitely have a positive impact on the stock again for that same supply and demand. And then I think the other thing you're talking about is just potentially a little bit of, you know, manipulation that can happen in the stock market, I think. Probably don't want to get necessarily too much into that because that's more day-to-day type of stuff and more speculative. Yeah.

Yeah. But now, just this week, a new secondary stock offering. First of all, again, breezing through your show notes, give me the pros and cons of this for investors. because, again, just, you know, gliding by at a glance, it's like, well, anytime you do a secondary offering, it's dilutive to existing shareholders. So what's your take on, first of all, if you're a Tesla shareholder, are you happy about this? So I think there are a couple things to consider. On the Q4 earnings call, Elon and their CFOs at Kirkhorn essentially said that we have no need to raise capital. we're spending capital as quickly as we can.

So wait, wait, wait, wait, wait. Literally in the earnings call that just happened this week, they said they probably weren't going to raise more capital, and then they immediately raise more capital. Yep, so two weeks ago now at this point, and some circumstances have changed. I mean, the stock is 33% higher now than it was at that time. So, you know, that's a pretty significant difference

that can cause you to reconsider. And Tesla moves quickly. Things can change, even with their own projections and things like that and their own goals and, you know, CAPEX plans and all that. So things definitely change quickly. But I would also say the best time to raise capital is when you don't need to, because that's when your share price is going to be the highest.

That's when you can get the best terms. So what they've done is they've issued 3 million, roughly new shares, into the market. They have about 181 million shares outstanding before. This will bring it up to 184 million. So it's only about 1.7% dilution on the company. And they're raising about $2.3 billion from that sale in cash. which should put their cash balance up to about $8.5 billion. And as they said, going forward, they should be free cash flow positive.

In 2019, they were free cash flow positive, generating a billion dollars in free cash flow. So from here on out, they should continue to grow that cash balance pending, you know, if they have any more aggressive sort of spending plans. So they said they just are using it for general balance sheet purposes to strengthen the financial, you know, standing of the company, which does make sense, I think, because they can get better credit ratings, better debt terms and things like that, and reduce risk if there's a recession. So there are a lot of benefits to that, especially at this time where we're at all-time highs

where Tesla's got $140 billion market cap, the second most valuable automaker, things like that. I'm sure you've seen this take, but this was my take as soon as I saw that there was going to be a secondary offering. Why only two, what did you say, 2.3? 2.3, yeah. Well, because, all right, you know, if we're assuming that it's not a short squeeze, all we know right now is people want to buy Tesla stock. So give it to them. Why only 2.3, like it seems like you could do 5 or 10 or something crazy?

Yeah, I'm sure there would be, you know, demand for that sort of an offering in the market right now. I think the thing for Tesla is they're trying to dilute as little as possible over time. and historically, you know, they've had, they have added shares as they've needed to raise capital, and that's been one of the criticisms on the share prices. You know, the share price is never actually going to grow because they're just going to keep diluting and adding capital. But now that they are free cash flow positive, they don't need as much capital, and they can also, you know, access more capital through debt as their financial position has grown stronger. So they don't really have, as they said on the call, they don't really have that much of a need to raise more than what they have here.

And even this is, I think, more of an opportunistic type of a raise than some. something that they really actually needed to do. How about this take and stop me if you've heard this? You know, Matt Levine, he has a newsletter in Bloomberg opinion. If you haven't heard it, let me read it to you a little bit. Sure. He's like, you know, if I were running Tesla and this is part of why I'm not, he's like, I'd probably announce a stock buyback program today also because why not.

But he wants to go bigger. He's like, sell 10 billion of stock today. Use 8 billion of it to build cars and stuff. But then set aside 2 billion and use it on stock buybacks if the stock dips below, you know, $500 or whatever. Because he's like, you know, Musk has said before we're subject to wild swings in our stock price. That can be a major distraction for everyone working at Tesla. So why not make these wild swings work for you? Why not?

when the stock is too high, sell more stock, when the stock is too low, buy it back. Then all of a sudden you wouldn't have to worry about the crazy back and forth. It's insane to think about Tesla doing stock buybacks right now, but again, make haywell the sun shines. Yeah, I think with that sort of strategy, I understand the logic behind it, but I don't think the brokerages and the underwriters of those sort of deals would look too fondly on Tesla. month selling a bunch of shares into the market and then, you know, the next month coming back and buying those shares back cheaper. I don't think they would be very appreciative of that. And it would also just be weird to sort of be, you know, you know, trading your own company like that.

Yeah, but everybody trades their own company right now. Actually, that's a larger point in his newsletter that day. It's like that, you know, essentially, most big public companies now use the stock market as a way to return capital to investors. Sure. So, in a way, And listen, again, neither of us do this for a living, so we don't know what we're talking about. But I don't know that it would be that insane to the bankers because that's what everybody else does. I think a lot of times that's one direction, though. Either you're selling shares and raising capital or you're buying shares back and returning capital. Like Apple, for example, they've had huge share buybacks, you know, hundreds of billions of dollars over the last few years.

And that's definitely helped their stock price. But they're not then, you know, one month going back and selling more shares just because the stock, went up. So I think it's generally one direction and I think the multi-direction trading aspect. Maybe there are companies that are doing it, not any that I'm aware of, but I think that would probably be frowned upon. And, you know, Tesla's already under enough financial scrutiny that I don't think they need to add that. That is true. One thing I will say on that point, though, they do offer convertible debt and they do have sort of call options to hedge against that convertible debt, where if the stock price is high when that debt needs to be converted,

Tesla is hedged against that. So they are doing a little bit of that. that more as a hedge than to minimize solution than actual like trading, but they are, you know, taking advantage of some of those financial instruments. Is this vindication or early vindication or complete vindication for Tesla bulls like you? I assume you would consider yourself a Tesla bull, right? Yes, yes, yes. And I should mention I am a stockholder as well. Yes, yes, yes.

So, like, have you? you have you all been just you know clicking your heels celebrating yeah champagne yeah um frankly to me this seems long overdue and i know the stock price doubling or tripling in three months seems crazy and it feels like you know a short squeeze something like that but if you look at the numbers tesla back in 2014 so six years ago they had a share price of 280 dollars per share so we've only you know tripled from that level over six years which is nothing crazy and tesla's revenue in, the share price was $280 per share was $3.2 billion in 2014. And in 2020, they'll do $32 billion or more. So they've 10xed revenue over that period of time, and the share price

is only tripled. So with dilution, the market cap has gone up a little bit more than that. But the point is, just because it's compressed into this one small period of time doesn't mean that Tesla's necessarily overvalued. I mean, you can definitely make arguments for that. I don't buy into those arguments. But are you worried that, though, maybe because it's only natural even if you even if you're a total bull the stock can get ahead of itself sure i mean and i'm and i'm saying i i'm hearing you say that long term you still think there's plenty of room to go but for right now maybe it's gone too far and we saw it go up and come back a bit although it's creeping back up again now and that's the tricky thing like it

you know you always want to try and time things if you're you know trading in and out for me most of my investment is, you know, 10-year plus time horizon just because I think the potential Tesla has to become a trillion-dollar market cap company is very high. So for me, I'm not interested in sort of like selling out my position here just because I think there's a chance that, you know, things might stagnate or dip back because it doesn't really matter too much. Yeah, maybe I could buy them back cheaper a little bit later. But on the other hand, what if I can't? What if something, you know, what if some good news happens and the stock goes up to, you know, $1,300 a share? And then I just lost 30% of my shares or something like that.

So you could take that risk. It's just not something that I'm personally interested in because even at this valuation, I still think Tesla is undervalued for the time, for the five, 10 year time horizon. Real quick, is there any coronavirus risk with supply chain with the factory in China? Any reporting on that? Yeah, definitely. So there is some downtime. They had about a week and a half or a week to a week and a half of downtime.

at the factory unplanned due to coronavirus. And there's some risk in the supply chain too, of course, as, you know, that sort of impacts all businesses there. So there's definitely a risk. And I think that, you know, maybe as a factor in why they chose to raise capital is maybe just hedging against some of that risk a little bit in case it stays out there for a more long period of time. So there's going to be an impact.

That being said, the production out of Gigacatory Shanghai right now, which is their, you know, Shanghai facility is much lower than it is a more lower than it is a more. in Fremont. So I think the bigger risk is actually within that supply chain. If they produce no vehicles out of Gig factory Shanghai this quarter, it's not going to be a huge hit for the company. Yeah, they would have liked to have had that production, but it's not something that's going to, you know, cause a huge swing financially. Last question, and this is going to be an odd one, and it's almost like a personal one. But I've been talking on the show recently about, like, I'm sure you're aware of the whole

like Tesla Q crowd and the Tesla Bears. Yeah. Yes. And, And I've been mentioning that in the context of, I feel like that's sort of everywhere now where, like, you see it in crypto where there are people that are Bitcoin maximalists, people that are XRP stands, and they fight all the time. And it's this back and forth battle that can get very heated. It's like everything's partisan now, right? And so it's a weird thing where, like, in this space and in the crypto space and in other spaces, I can still dip my toe in and I have no beef on either side. So I'm just curious,

and this is where it's almost personal, and I don't even know if I'm asking a question here, really. But when you're, because, you know, you're doing this daily. This is your livelihood now, like giving this information to people. When you're involved in a space like this, and it's so vitriolic and there's, it's not, but people are so invested in your, you know, being right or wrong. How does that affect you on a daily basis? And then do you, are you, is that, are you gloating against the Tesla Q's right now? You know what I mean?

I'm just curious what it's like to be in it. And I'm not being pejorative at all. I'm not saying it's bad to be in it. But I just, I want to know what it's like. Yeah, no, it's a really interesting question. I'm just trying to think of how to respond to it. I mean, for me, I've never been one that has been, like, I think, Kind of like yourself, I try to be as open-minded as I can, and I'm not one that's out there, you know, poking Tesla Q people on Twitter or anything like that.

Like, I pretty much just, you know, do my research, report on what I see, you know, rely on my own analysis. I'm not out there, you know, trying to start arguments or go find to people and tell them that they're wrong. I'm really just trying to spread the information that I believe is accurate. That's really what I'm about. So I'm not as heavily involved, definitely aware of Tesla Q. and they're definitely an interesting community. The thing that I would say about them is it's just something to be careful about because they do a lot of filtering.

They're sort of famous now for having this block list on Twitter where if you make any sort of positive comment at all about Tesla, even if it's not related to, like, it directly to them. You know what? Let me interrupt you because I'm aware of that too. Like there's famously VC Twitter. Like, if you're not, people always accuse VCs of, and thankfully, I'm not one of these people that get blocked. But if you're insufficiently enthused about how tech is changing the world, then you get blocked.

So, again, this is sort of the phenomenon that I'm curious about. So let me ask it this way. Like, the Tesla Q people, do you, like, 100% you think you're. you're right. But do you, because when I, okay, again, I'm an outsider. I've listened to podcast episodes with Tesla Bears and they've made a case and, you know, it can go all the way to Elon Musk as a fraud and a huckster to, but I've listened to episodes where I'm like, okay, that makes sense to me. The case you just made me think, yeah, Tesla is in trouble. And then I listen to your show and I'm like, no, listen, man, we're only at the early days of this sort of

stuff. So I'm curious about, is it, when you look at the world just from your perch in Tesla, if I'm not committed, if I can still look at both sides, I'm not asking you if you think the Tesla Q people are delusional, but do, can you see, it's almost like the political question, can you still be a moderate? Or, yeah. I absolutely try to. I try to see the other points of view and I try to approach things with an open mind and, you know, explore the idea that, you know, maybe I'm not right. That's definitely a possibility. You know, there are no guarantees in this. And investing in any single company is high risk. So it's definitely considered. Yeah, take your time and I'll completely edit this. And again, this is a difficult one because

I don't even know what I'm asking. I just want to know. I'm not. I'm not. I'm I'm not so committed to anything. And I'm not saying you're like a zealot or anything. I just. And also you're winning. Right. So I find that curious too. Like what's it like to be on the side that's winning at the moment, you know?

Yeah. I think for me, it's somewhat validating. But at the same time, it's not surprising. I think, you know, this is, I've been following Tesla literally hours every single day since 2013. So seven years now. and, you know, I have a lot of conviction in the company and what they're building and the inability of the entrenched automakers to be able to compete with them. And, you know, some hiccups along the way. But thus far, things have pretty much played out as, you know, we expected back in, you know, those early days. And if you look at sort of how Elon Musk has laid out the plan for the company early on, he said, you know, secret master plan number one, we're going to build,

an expensive low-volume car. We're going to use the profits from that to build a slightly less expensive, you know, slightly more volume car, and then profits from that to build a high-volume mass-market car. And that's what they've done, step-by-step-by-step. And it's just been extremely clear. And they've achieved that, again, you know, not maybe without some flaws along the way, but largely they've accomplished what they set out to do. And other people just have not been able to compete with that because of, you know, they have entrenched dealerships. They have investment into internal combustion engines. They have organizational structures that are not set up to be able to build something from the ground up anymore because the supply chain is so, you know, heavily parted out

and things like that where it's more of a package deal. You're sort of packaging things together versus creating things on your own where Tesla's all vertically integrated. There's all these list of things about why Tesla should be successful. And really the only counter argument has been, you know, Tesla's not profitable or Tesla's a fraud. And Tesla is now answering those questions and showing that they can be profitable and that the demand is there for these vehicles. So as those questions get answered, that's why we're seeing the stock price increase because people are starting to realize that the position that Tesla is in is just extremely

strong and the position that other people are in is tenable at best. So I don't know that that necessarily answers your question. No, it does. It does. Because there's not really an answer there. It's more I just want to understand the psychology. And, you know, it's a weird thing. It occurs to me that, you know, as opposed to politics or other spaces where everything is so, you know, arguing about whether the new Star Wars movie was good or not.

Like, there's no way to prove. But then for things like stocks or like, like, like, you know, like, you. like numbers, the only other analogy is sports. Like if you pick a team and your team wins the Super Bowl and you've been saying for 20 years we're the greatest team in the world, well, it's provable because they won the Super Bowl, you know? Yeah. So it's interesting that the math will prove or disprove or whatever eventually.

Yeah, absolutely. That's kind of why I said at the beginning is just like I'm really just about reporting on things and looking at the data and analyzing it as best I can. ultimately, you know, I feel like that's going to end up somewhere. And if it doesn't, like, there's probably something that's along the way going to show that I'm wrong. And then, you know, I'll adjust my point of view. But it's just sort of that day-to-day reevaluation. So that's why I think I'm not out there, you know, gloating or anything like that. I'm more just focused on like, all right, where are we at today? What's new? What's different? You know, is our thing's still on track?

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