Tech Brew Ride Home - (Bonus) Taking Elon's Temperature With Tesla Daily

Episode Date: August 24, 2019

About a year ago, Elon Musk was doing so much crazy stuff, I was desperate for someone to tell me what was going on. So, I reached out to Rob Maurer from the Tesla Daily podcast to be a sort of Elon whisperer for me. Rob was great and gracious, and actually, that was the beginning of the weekend bonus episode idea in a way. Well, a year on… let’s take Elon’s temperature… and Tesla’s. Great conversation with Rob about where Tesla is at, and also, congrats to the Tesla Daily podcast on turning 2 years old! Subscribe now! Tesla Daily! Sponsors: Capterra.com/ride 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. About a year ago, Elon Musk was doing so much crazy stuff. I was desperate for someone to tell me what was going on. So I reached out to Rob Mauer from the Tesla Daily podcast to be a sort of Elon whisperer for me.

Rob was great and gracious. And actually, that was the beginning of the weekend bonus episode. idea in a way. So a year on, let's take Elon's temperature again and Tesla's. Great conversation today with Rob about where Tesla is at. And also, congrats to Rob and the Tesla Daily podcast for turning two years old. If you don't know the show, it's a daily show like ours. Would compliment ours if you're into Tesla and EVs and cars and stuff. Subscribe now, Tesla Daily. It was over a year ago Skype tells me, but I thought it was less than that. But when we spoke a year ago, it was right in the midst of, I don't know what you would call it, Elon's Rumspringer or whatever it was. That was the best description of it that I've definitely heard.

Well, all right. But let's, so it's a year on now. It seems to have calmed down. Yeah, I think so. Not to ask you to get all gossipy National Inquirer about it, but do we have a read on what was going on at this point last year? Was it a bad breakup? Was it just too much stress? What do you think was going on? Yeah, I think probably a combination of a lot of things. I don't want to speculate too much on that because obviously it's a personal thing for Elon. But I think everybody has kind of tough periods of time, especially when you're the CEO of three at this point, I guess, billion-dollar companies. So I think it's pretty understandable, but obviously I think there were some missteps along the way at sometimes last year. But to your point, I think it's, you know, things have

normalized and steadied out a little bit. And last year, you know, definitely, as I said, missteps, but I also think that a lot of that got amplified a little bit by the media, which, you know, isn't too unusual. Do we have a sense that maybe there's been some sort of a, PR change? Like, have they reined him in to some degree? Yeah, I don't know that he'll ever be fully reined in. Of course. Of course. Yeah, I don't think people would necessarily want that. That's, you know, part of the whole Elon brand. But so definitely some changes have been made. So, I mean, last year, just to catch people up, there was the whole, you know, funding secured saga of Elon trying to take Tesla private. Then the SEC kind of took issue with that tweet. Filed a lawsuit basically saying that Musk, had misled shareholders. So that kind of played out, Musk and Tesla and the SEC reached a settlement agreement.

Basically, the terms of that required him to step down as the chairman of Tesla's board of directors for three years. Also pay like a $20 million fine. I think Tesla and Elon both had to pay those fines. And then they also put a stipulation in there that Elon would receive approval for all future written communications that could basically be a forecast or something like that. affect the stock maybe. Yeah, something that would be of importance

to investors basically. So they kind of settled on that. Elon never admitted to fault in that agreement. So I think given his way, he would have continued to see that play out in court. But at the time, I think Tesla and Elon both felt that it would be better for shareholders

to just kind of settle and move on and they felt comfortable with those terms. So that's kind of how that ended up. And then so Tesla now has a new board, chairman or chairperson. So Robin Denholm is was a board member at the time. She's also the CFO and CEOO at Telstra, coincidentally enough, which is Australia's largest telecommunications company. So she's stepped down in that role or is in the process of stepping down in that role and is now the chair of the board full time. So there has been some a little bit of the governance changes there

since that whole thing kind of played out. Yeah. And this is largely what this conversation is about is sort of like a year on, like taking the temperature. Again, with the caveats that like I, while we cover Tesla now and again, it's not something that I'm paying attention to every day. So in eight of that, one of the things that I did cover earlier in the year was one day I did a big segment about record deliveries, stock way up, and then seemingly a couple weeks later, a horrible earnings report. And, And stockway down. Stock way down, yep.

It's a roller coaster, for sure. Well, which, okay, whatever. That's the nature of this company in general. What happened there? And now I think we're maybe another quarter on from that. What happened and what is the situation in terms of where are sales and where are we? Yeah, for sure. It's a great question.

Always top of mind. So we are now in Q3, about halfway through Q3. So the quarter you're referring to is Q2. So that's the last report that we would have got. So at the beginning of July, we got the delivery numbers to your point. So Q2 deliveries were an all-time high, slightly above 95,000 total vehicles. So that's over 77,000 Model 3. And then between Model S and Model X, the more premium larger vehicles, about 17,000 of those, a little bit over.

So that was a tremendous progress from Q2 2018. Last year, deliveries were like 40,000. So they were actually up like 135% year over. year, which is just really incredible growth. We haven't really seen growth like that. Really in 100 years since Ford and the Model T kind of started this all out. So really, really happy with the growth there. I think that's where you saw the Stock React.

They definitely exceeded expectations on deliveries and production. So then we got to the earnings report. Things weren't quite as strong in those regards or not quite up to the expectations that those record deliveries set for the market. So revenue was still strong. so up 60% quarter or year over year. And a lot of things improved, but they did still show a $400 million loss

in terms of gap profitability. So there's a lot that kind of goes into that. Profitability is an accounting metric. It's definitely an important metric, but there are a lot of things. Profitability is kind of a little bit important. No offense, but a little bit. I agree, 100% agree.

But there are other things that are important to look at to. And when you're a rapidly growing company, like I said, you know, deliveries up 134% year over year. That causes a lot of impacts to the financials that don't become apparent necessarily when you're looking at one quarter individually. So I did a whole episode on this. If people want to like dive into that a little bit more, it's the July 25th episode of Tesla Daily. It's called Why Wasn't Tesla profitable? I just spend kind of 15 minutes going through all of the reasons that it is difficult to be profitable when you're growing that rapidly.

So I can just kind of hit on the high notes here. So again, like a $400 million loss, a lot of that was from interest expenses. So I think I don't have the numbers in front of me, but I think that was around $175 million or so. So if you think about that, Tesla could choose if they wanted to to further dilute shareholders, take on less debt and raise money more through equity than what they've done in the past. That would eliminate that, you know, eliminate or reduce that interest expense and then they would look more profitable. But that would be at the expense of shareholders because shareholders would further be diluted then. So not the path that Tesla necessarily wants to take, though it would show better metrics.

They also have significant depreciation expenses in terms of the profitability because Tesla does a lot of straight line depreciation. Not everything. Some of it is units of production method, but some is straight line. And what that means is that as you produce more units with the production equipment, things that you have, the depreciation per unit falls steeply as that production ramps up. So over time, as Tesla continues and continues to increase production as rapidly as they have, they have the equipment to do that and they're depreciating it on a smaller unit base. So as unit deliveries come increasing, become increasing, the depreciation per unit is going to fall significantly. So like next year, you know, if Tesla is up another 100%, they might have similar levels of depreciation to what they have now, but they might be able to, you know, have, again, 50% more revenue, 50% more operating profit.

So that's a big impact. And then they also had like a $115 million one-time charge. So when you kind of put all those things in perspective, there's definitely a clear path for Tesla to have been profitable if they were a slower growing company. And I think that's what gets lost a lot of times when people are critical of Tesla's profitability. Some things are fair, but a lot of people aren't really thinking about how difficult it is actually to achieve an accounting profit when you're kind of in those fast-growing circumstances. You mentioned the choice of an equity raise versus a debt raise because that was also a concern around this time last year. Like, do they have a cash runway? Am I right? They did successfully do a debt raise?

They did. So in Q2, they raised about $2.4 billion, $2.2 billion after all the fees and things. So that was kind of split between equity and debt. They did about $800 million of that in equity and then about $1.4 billion in debt. So kind of a mix. But yeah, they did raise capital. So they're right now sitting on around $5 billion in cash on hand, which is. is an all-time high for them. So that's great. And the other thing I would say, just on the earnings, Tesla over the last 12 months has actually been free cash flow positive. And that's, you know, profitability is important,

but free cash flow is definitely one of the main metrics to look at too. Because as long as Tesla can be free cash flow positive, then they don't necessarily have to go back to the markets because they can sustain, you know, they have the cash there to continue growing. Right. Tell Jeff Bezos about cash flow. Right, exactly. And that's a great comparison because Amazon, you know, for a long time, kind of operated at that, you know, free cash flow neutral, free cash flow slightly positive level. And then they continue to just reinvest and reinvest in, you know, the massive growth that they were seeing over time. And Amazon's profitability, like they had many quarters, many years of slightly negative profitability. And then, you know, over time as they achieve scale, those things balanced out. And they started to show profit. So that's really the long. term path for Tesla. Tesla's profitability has been worse, but at the same time, Tesla has much more quickly than Amazon has. I think I looked at this a while ago. If you compare

the amount of time that it took Amazon to go from $200 million in revenue to about $20 billion in revenue, it took Amazon like nine years. Tesla was able to do that in about five. So they're growing almost twice as quickly as Amazon at this stage in their respective lives. So when you do that, that's going to, again, put a lot of pressure on profitability. And I think a lot of Tesla investors are okay with that because, you know, Tesla's mission is to advance the acceleration of sustainable energy. And the best way to do that is to, you know, invest in growing as quickly as possible. It's not to sit there and say like, okay, we could grow faster, but, you know, that would

cause some more pressure on profitability. Investors support that because, you know, it's a huge market. There's a lot of opportunity there. And it also advances the mission. All right, so they're not going to run out of money, at least in the near term. In my view, no. And so. Oh, on that, on that point, too, so they actually just got an upgrade from Moody's on one of their aspects of debt.

Yeah. So Moody's apparently, you know, maybe not fully agrees with me, but they're seeing signs of progress there too. All right. Well, then one of the other things, you know, from the beginning, the whole, like, master plan from Elon was the, the, The Model 3 being this mass market vehicle, Model 3 is out. There were production issues about being able to meet demand and things like that. At this point, is it working out to plan? Is the Model 3 doing what people were hoping it would always do?

Yeah, I think so. I think it's kind of mixed. But in terms of the Model 3 as a product, by all accounts, it's been phenomenally well-received. It's actually the best-selling car by revenue in the United States, which I think is underappreciated. a lot of times things get mired in Tesla's own internal targets that, you know, they communicate very openly with investors. So Tesla always set super aggressive targets. A lot of times they end up unfortunately missing those targets.

And then that kind of spins the narrative of Tesla not being successful. But then if you back away and you look at the things like, you know, the growth that they've seen over time and just reviews of the product and how much demand there really is, All of those things are incredibly strong. But at this point, you know, two years ago, Tesla was communicating that they expected Model 3 production at this point to be, you know, 10,000 units per week. And at this point, we're, you know, sitting somewhere in between around 6,000 or 7,000 per week. So from that perspective, Tesla's missed their targets. And, you know, that can cause a negative narrative and cause investors to not be as happy as maybe they possibly could have been had they achieved those.

So it's kind of a tale of two stories. I mean, there are a lot of reasons that go into that. One was Tesla kind of revisiting sort of their automation strategies. Some of that proved to be a little bit not quite as cost effective as they had anticipated. And then the other big thing is, I think, just with, you know, the whole macro environment, Tesla has sort of revised their strategy in terms of location of production. So originally, Tesla produces all their vehicles right now from, Fremont, California, so really isolated to the United States.

And originally they had, you know, targeted to get that 10,000 per week, Model 3 production out of Fremont. But I think with the whole macro environment and kind of like all of the trade war and certainty that we're seeing, Tesla has wisely adjusted those plans and now they've scaled back their targets a little bit from Fremont and have made the decision to invest in their third gigafactory, So Gigafactory Shanghai, which is where they plan to produce batteries and vehicles directly in China. So they've made really tremendous progress on that. In less than a year, they expect to go from breaking ground to actually having production from that building,

which is just incredibly quick. Like that's unprecedented. So they expect to get that production at Gigafactory 3, Shanghai for Model 3 to be up to around 3,000 per week. Um, sometime, you know, they're targeting kind of like the end of the year, but a realistic estimate would be probably sometime midpoint of next year. So I'm going to break in here because, uh, this is very timely. Um, to what degree is the whole trade war thing with China going to affect them? Because that's another thing that I remember from last year was that like, you know, sales in China might fall off a cliff and things like that. So is, is that an issue for Tesla going forward? I think it would be if Tesla had gone forward with trying to maximize production out of Fremont

and hadn't made as good of progress in terms of the Gigafactory 3 Shanghai. So in essence, the Shanghai factory is producing cars for the Chinese market. Exactly, which is timing couldn't really be better. So they should have that production up and running. And then once they do, that'll get them to the 10,000 unit target. It'll just be a little bit split from kind of their original plan. So I think wisely they adjusted those plans and that's caused things to be slightly delayed. But in terms of the actual progress they've made, it's really incredible.

And the other thing, too, is China has been extremely supportive. You know, they've been, it would be extremely difficult to make the progress that Tesla has in the amount of time that they have in China without support from the government. And the government has been very supportive. They actually have allowed Tesla to be the first automaker to have a 100% wholly owned operation in China. Normally, they require automakers to come in and do a joint venture, 50-50 split with a Chinese company. So because China feels the need for electric vehicles and to make progress on their emissions and things like that, which are really bad in some cases in China,

they've been extremely supportive of Tesla and offered them a lot of benefits because of that. All right. One more thing because we are time constrained, but I want to make sure to squeeze this in. Yeah. The whole, because I remember doing a segment on this as well this year, you're going to be able to rent out your Tesla as an autonomous taxi. And so you'd be an idiot to buy any other car because you can actually make money off this if you buy it. Like, it'll be remunitative. I can never say that word. It'll make you money.

And other people, even, you know, people that I've interviewed on this show that are in self-driving, you know, I'm kind of skeptical. of all self-driving tech, but they seem to be especially skeptical of Tesla's version of it. And we could get into the whole LiDAR versus whatever. What do you think? Like, would I be able to rent out my Tesla a year or two from now? Or is this just one of those typical Elon things where it's probably true, but it's maybe not true on the timeline that he is promoting? Yes, I would, I definitely fall in kind of that last camp there. I don't think the progress will happen as quickly as Elon is expecting it to.

I think we've already seen some of that happen over the last year or so in terms of like slight delays here and there. So I do think Tesla has a great strategy. I think they're the only ones with the fleet out there collecting the data that's going to be needed to create a robust full self-driving system. And that's where their strategy has really deviated from other companies. and I think they're uniquely positioned. But at the same time,

I think progress is going to continue to take a while. Elon says, you know, Robo taxis are going to be a thing kind of in 2020. That's not my expectation. You know, certainly I'm not an expert there. Elon would have way better insight to that. But just based on how things have progressed, I think it will happen at some point.

Wynn is a huge question mark to everybody. but my own personal expectation, I don't know, maybe like three years. But I think as we progress, like the feature set continues to become more and more robust and features continue to get added over time. And the value proposition of those features to customers continues to improve. And as all those things happen, that's going to continue to benefit Tesla's profitability and market share and things like that. Because again, I think they are leading on that path.

and definitely the only one's really offering any value from, you know, full self-driving sort of features today. There are a couple others out there, but largely it's Tesla. Right, because, again, if Elon's right about this, the idea would be you wouldn't have to do anything. It would just be a software update, and then you would just flip a switch, and the car that you already have could do this. It's not a matter of, oh, come back into the shop, add on this, you know, $15,000 do-hicky, And then, like, in theory, it is just the car you have could already be upgraded to do this. Yeah. Yeah.

So, I mean, that's the really crazy and exciting part is Tesla over time, they do over their software updates. And, you know, every couple of months, autopilot will improve. And people are already seeing the benefits of that, you know, as they get new features and things like that. It's as simple as Tesla pushing that software update out because they feel like they have the hardware installed on all the vehicles that they've been. producing for the last couple of years, that's going to be able to be capable of full self-driving once that software development comes along. Finally, Rob, in prep for this, I was listening to most recent episodes. You just celebrated two years of the Tesla Daily podcast and what was it, 400 episodes?

Yeah, two years and 400 episodes also happened on the same episode, which is a nice coincidence. Yeah, that's awesome. Well, listen, congratulations as someone that does this every day. as well. That's an amazing, amazing feat. And I've said before, there's one podcast that I go to for catching me up in the crypto space and one podcast to catch me up on the Tesla space, and Tesla Daily is that. Thank you. I appreciate that a lot. I think it's a fantastic show, and long may it last. Congratulations. Let's hope so. Thanks.