I don't understand why Tesla's losses keep increasing; now they're losing $33M a month, up from $20M a month a year ago and roughtly the same as last quarter. That with $50M in revenue this quarter and actual shipping product. Can someone explain? Are they still purchasing capital equipment? Are their overheads that high?
That said, $30M a month is not that many cars. If they can sell them, and losses don't increase as a function of sales, which seems to be the case now, they will eventually be in good shape.
EDIT: TL;DR: This quarter they lost the same amount as last quarter but sold 25 million more in cars. That means for every additional dollar in car they sold over last quarter, they lost that dollar. Not exactly scalable but hopefully temporary.
"The third quarter was a fundamental turning point for Tesla as we successfully transitioned to a mass production car company, growing from manufacturing 5 cars per week at the beginning of the quarter to 100 cars per week by the end. That rate has doubled since last month and is now at over 200 cars per week or 10,000 cars per year, which is at the critical threshold needed for Tesla to generate positive operating cash flow. One month from now, we expect Tesla to double production again and achieve the target rate of 400 cars per week or 20,000 per year. Despite many short term costs associated with the ramp, Tesla nonetheless expects to get approximately halfway to the 25% gross margin target by end of year."
edit: until they are not producing at least 200 cars / week, the operating cost of their manufacturing line is actually larger than the money they make from those cars produced. So, based on that logic Tesla should be losing money but less than in the past. However, in this quarter they went from manufacturing 5 cars/week to 100, which is something you can probably only do by revamping your operations (e.g. acquire new machinery, hire new people, etc.) Therefore, you have to incur a cost now in order to get the benefits in the future.
Right now they are building the Signature series cars. These are the first 1000 cars. The reservations for these cars involved a $40k payment up front, in some cases up to 3 years ago. General production cars only required a $5k payment up front. As a result, they are only capturing ~$50k per car, versus ~$85k once GP cars start rolling off the line.
In addition, they've been ramping up production (they're roughly halfway to their target 400/wk goal), and that involves overhead like training new staff and building out an operations team. They should get to full production capacity at the end of the month, but they've already hired those extra workers and they're going to burn through cash while they get up to speed.
> As a result, they are only capturing ~$50k per car, versus ~$85k once GP cars start rolling off the line.
That is not how GAAP accounting works. You record revenue when you finish building the car and it leaves the factory gate, not when you accept a deposit.
If you're scaling up production this is common. You invest a lot in the ability to produce something you can sell. It makes sense to have a loss while you ramp up. It's an investment.
There's this idea floating around that governments shouldn't support businesses. I guess there is nuance in that some might say: government should support business sectors, but not specifics businesses over others.
Anyway it's an odd argument when we look at the history of the country where governments and specific companies often worked hand in hand and continue to do so in so many areas.
Many argue that the American government ought to be more aggressive about being pro-business, as our friends abroad are. E.g. if the Taiwanese, Israelis, Chinese, etc have very strong government-private partnerships (e.g. subsidies for engineering jobs, or green-lighting through regulatory processes, or access to cheap capital) then the US competitors have trouble competing. What I find so odd is the same camp that often says the US needs to be more pro-business, is often, as you describe, against government support of American business!
Just because other countries are corruptly sponsoring businesses to line the pockets of politicians doesn't mean we should be doing that in America. There needs to be an ideological line drawn that says we will _not_ pick winners in a market, and we will _not_ protect failing businesses. That means large and small companies get the same levels of "support" from the government, none. Once you stop doing that you end up with a fascist co-mingling of government and industry ( kinda like we have now )
Yes! We should do things based on ideology! Not results! Not empiricism! Instead: principles and handwaving.
Singapore proved that heavy government subsidization of research can pay enormous dividends in economic growth. Other countries are having tremendous success doing the same.
So what do you say when the government doesn't decide to support your start up, but instead picks your competitor and runs you out of business because they happen to be related to a senator ? The ends don't always justify the means.
Leaving aside the silliness of deciding macroeconomic policy on hypothetical edge cases for a moment... How often does that happen? The US government is utterly paranoid about nepotism, to the extent that we waste a huge amount of money in the bidding process for government contracts because we don't want to seem as if we're favoring anyone, even if that favor is the result of something like having done good work in the past. It's an imagined problem.
This isn't an edge case. In fact the NYT just did an expose on how this effects China[1]. You will also find this kind of corruption in every other country where the government is allowed to openly partner in private ventures. Heck we did it in America with Boeing under the pretense of security and managed to mothball our entire aviation industry.
For now its an edge case. Thats partially the case because we put such stringent restrictions on the kinds of assistance we can offer, but even in America there are claims of corruption with giving out government assistance.
Nepotism is a live and well at the local and state level. If anything it works just fine at the national level, the difference is that today's politicians have become very adept at keeping you from finding out. Better yet, when you do find out and they get caught they rarely suffer any consequences for it.
Yes, there is a problem, we just can't see it! Sigh.
Every federal government contract that has even a hint of favoritism is litigated to all hell, where lawyers comb through everyone's emails going back years to dig up any dirt they can find. If it was a big problem, we'd know about it.
Nepotism is alive and well at the state and local level. This is partly because state and local governments are far less sophisticated than the federal government in terms of process and people, and also because there is not a strong culture of litigating contracts.
There is structural favoritism, if not nepotism, in the federal system. The byzantine bidding process, requirements, etc. mean only either very large companies or very specialized companies tend to go for direct government contracts. Plus, even in cases where they are initially assigned fairly, they become a prime contractor and can be gatekeepers on every other aspect of the system. Even if their decisions are then not made on profit motives, they're not made on "best interest of the customer", either -- it's about reducing risk (of all kinds) vs. delivering the best expected product to the customer.
I used to work for a smallish company that works on DOD contracts. It's really not that bad. We did most of it in-house. I doubt it's worse appreciably worse than dealing with any big faceless organization (try contracting with Wal-Mart or Boeing).
Big organizations have transaction costs associated with them. That's kind of inevitable. But the question is whether eliminating a few billion here and there in transaction costs is worth forgoing potentially huge benefits from public/private partnerships.
It really depends on the type of contract. (I also did defense contracting, both bootstrapping my own and working for a larger (25-50 person) company)
I'd say overall it is beyond what an early stage startup can do (non-dod-focused), without a great partner. Selling products is a lot easier than selling ongoing services, but the profit is all in services. A lot of the difficulty was due to it being a classified contract (the work itself wasn't, but the work locations and interoperability were). It's probably feasible for a successful small business with a full time person, particularly if the business is set up to go after government from the beginning.
Big companies aren't cost-free as clients, but there's less "if you do X wrong, you could go to jail" (which essentially never happens absent willful fraud, but still). The citizenship requirements also make it really hard for tech companies.
From experience: it's harder to contract for the DoD (former company) than it is to contract for Fortune 100 companies (current company). Substantially harder.
Okay, let me put it another way. While they may not get the contract, friends and relatives of the same politicians suddenly do find themselves beneficiaries of those who do win the contracts.
Remember the fun with Countrywide and the sweet heart loans? How some politicians or their friends do so well in the stock market or get into IPOs at a level not afforded to the public. If not family is it not worse when those who support your campaigns are the ones more likely rewarded with the contracts?
So yes, while direct attempts may be protected against nothing stops the train of indirect benefits.
...we will _not_ pick winners in a market, and we will _not_ protect failing businesses.
Then let's start by getting rid of chapter 11, which allows businesses to go bankrupt, then go back into existence again. Most countries do not have anything like it, and its existence has been horrible for some sectors, for instance the airline industry.
Hmm. My impression has always been that industrial policy did a whole lot to set the stage for the East Asian Tigers to come up like they did. The government and companies involved certainly think so. (Then again, they would, wouldn't they?)
At the very least, it seems that governments proactively favoring companies whose profitability lies in investing for high productivity work instead of labor intensity or natural resources tends to pretty compatible with decent outcomes.
Maybe it's also worth noting that many Americans are threatened by the success of Tesla, and they happen to reside in swing states.
Ultimately Tesla, if it really does continue to grow, will need to build factories in the traditional manufacturing states if it wants to gain the political traction the automotive sector enjoys.
I loaded few hundred shares of TSLA in my portfolio only because I love the innovation this company has to offer. I would normally not invest in a company that has high uncertainty like Tesla but something about the company and Elon Musk made me own a piece of it. I am not sure if it was a good investment, but I am happy to be a part of it.
It's not often that us investing plebs can get in and bet on people like Musk fairly early on.
I did the same thing about a year ago and I'm still happy that I did, despite the stock not moving over the past year. I do believe Tesla can become a major car manufacturer during the transition to electric cars, since this period will likely be fatal to some of the weaker legacy companies.
I also realized that I may have purchased a ticket to Mars. If Musk's plans for both Tesla and SpaceX pan out, my Telsa shares will hopefully be worth as much as a trip to Mars in 30-35 years :)
I agree... and I'd be happy to see Tesla really bring innovation in automobile industry not just in electric car segment. But I also fear it being acquired by behemoths like GM or Toyota, that would just kill all the innovation.
You will not regret, if you analyze her companies you will see that he transform every market he worked. Paypal is still (my opinion) the best online payment system, space x is the first private company to explore the space and already has a lot of success, tesla is only starting but i think everyone will need and want a eletric car with free charges all over the US.
Yes, I agree that Elon would likely take the company to profitability but it will be interesting to see if there is any money to be made by stock owners of today when Tesla hits profitability tomorrow.
Hopefully their financials continue to be, if not strong, at least good enough to support the business. They seem to have good leadership and great ideas about how car transportation and the industry needs to change.
Well it was up almost 9% yesterday. Today's down is probably just a calming down of the large increase yesterday (but I don't know, I'm just making that up).
I used to invest back in the day. Anyway, there are many investing strategies. They all have names such as Value, Growth, Event Driven, etc. I won't list them all. The investing strategy that attempts to exploit movements in stock price after an event (e.g. the type that you are asking about for the earnings announcement in the Tesla example) is called "Event Driven" investing. Another example of an "event" would be after an acquisition is announced to the public. Typically the target (one being acquired) stock will go up and the acquiror (one acquiring) will go down. Investors often try to take advantage of this trend. What is the relationship that investors are betting on if the target price always (usually) goes up, and the acquirer going down? Closing risk. At any point the acquisition, despite being publicly announced, could fall apart because of due diligence issues, etc.
Relating all that back to your question about Tesla: the fundamental value or true value of a company may or may not be reflected in a company's stock price. Think of the stock market as a manifestation of what people (investors) might believe the value is, but the reality is that the fundamentals might be vastly different. The reversion back to norm is something that happens as the market (investors who are imperfect--trust me--think AIG, Bear Stearns, Lehman) attempts to settle on true value.
Side note: Volatility in the stock price could also be attributed to a small float (not that many shares outstanding which leads to a small number of investors causing spikes in the price), but I'd have to look at Tesla's stock info to be certain.
That said, $30M a month is not that many cars. If they can sell them, and losses don't increase as a function of sales, which seems to be the case now, they will eventually be in good shape.
EDIT: TL;DR: This quarter they lost the same amount as last quarter but sold 25 million more in cars. That means for every additional dollar in car they sold over last quarter, they lost that dollar. Not exactly scalable but hopefully temporary.