Tesla Inc (NASDAQ:TSLA) continues to stand up as one of the most interesting examples of quantitative analysis gone wrong. The company has found a way to trample its skeptics in a manner that we think is particularly dangerous for bears precisely because it runs contrary to a simplistic analysis of the math underlying the company’s most basic inputs. In a sense, it’s a scary prospect for shorts because it would appear the company has a team and a founder able to make it work.
In the company’s most recent update (on Friday), management specified its Cap-Ex guidance view in its 10-Q filing: “We are continuing to work to increase Model 3 production to ~10,000 units per week in the most optimal manner from both a timing and capital expenditures perspective. At the Fremont Factory, we expect to continue to increase our Model 3 production rate to ~7,000 units per week with only limited additional capital expenditures, and we believe we can increase that rate to beyond 7,000 units per week with incremental capital expenditures.”
Tesla Inc (NASDAQ:TSLA) has been able to ramp the Model 3 up beyond expectations and do it while moving into profitability, which is the most notable development from its Q3 earnings.
It’s a Trap!
As we noted in our last piece, there are some very visible and vocal shorts in the stock. And the company’s evolution to apparently beat the odds and ramp production efficiently is likely the worst case scenario for such individuals because the same math that brought them into their bearish bets remains in place.
It has to be a bit like betting – in a coin flipping series of 10 flips – that at least 3 of the flips would come up heads. And then seeing 10 tails in a row. Do you take that bet again for the next ten flips? You’d have to.
But, what if the coin is weighted and you don’t figure that out until you have already doubled down 15 times?
Exceptional execution is often hard to work into old school business analysis, especially for bears like Chanos or Einhorn, who have both tended to view the world from a skeptic’s perspective, trying to see past the show of a cult of personality to the hard facts underneath.
But, again, given Musk’s erratic behavior and showy personality, if he just happens to also be able to pull off this level of execution consistently, the trap for the bears gets more and more dangerous and could threaten to become truly existential for some high-profile money management careers unless these guys are able to maintain discipline and give up soon enough – ie, before they get pushed too far up the hill and the blood gets in the water the market corners them out in a spectacular blow-off (if this type of execution turns out to be sustainable for the company).
The 10-Q Cap-Ex discussion on Friday went on to note that: “Considering the pipeline of new products planned at this point, and consistent with our current strategy of using a partner to manufacture cells, as well as considering all other infrastructure growth and expansion of Gigafactories 1, 2 and 3, we currently estimate that capital expenditures will be between $2.5 to $3.0 billion annually for the next two fiscal years [from slightly below $2.5 billion in 2018]. Moreover, we expect that the cash we generate from our core operations will generally be sufficient to cover our future capital expenditures and to pay down our near-term debt obligations, although we may choose to seek alternative financing sources. For example, we expect that much of our investment in Gigafactory 3 will be funded through indebtedness arranged through local financial institutions in China. As always, we continually evaluate our capital expenditure needs and may decide it is best to raise additional capital to fund the rapid growth of our business.”