Potential Tesla earnings surprises
A long thread for Tesla

The usual Tesla earnings wildcards include:
Regulatory Credits
FSD Revenue
Forex Impacts
Restructuring Costs

... but 2 more unexpected wildcards could make a big impact on $TSLA Q2 earnings...

I’m calling these “wildcards” because they move independently of delivery volume, making it very challenging to accurately forecast Tesla earnings.

Regulatory credit sales will depend on other automakers not selling enough EVs to comply with applicable law.

In Q2 2020:
global auto sales tanked due to coronavirus
... so I don’t expect as much demand for regulatory credits as there was in Q1

I am forecasting regulatory credit sales to decline from the Q1 all-time record of $354M to only $118M.

I would have forecast it even lower, except for Fiat Chrysler’s purchase agreement that went into effect at the beginning of 2020.

For Full Self-Driving revenue, I expect modest growth because:

more of the initial FSD sale price is now being declared revenue initially
more deferred revenue is being claimed as additional features such as traffic light recognition roll out

Q3 & Q4 FSD revenue should climb to record highs

Foreign Currency Translation Adjustment (exchange impacts) can be favorable or unfavorable, depending on:
what the exchange rates were when Tesla converted money
in which direction
how much
There’s no impact when spending yuan earned in China or euros earned in Europe

I don’t expect material Restructuring expense in Q2 because the Fremont shutdown did not force any layoffs (to my knowledge). I also don’t foresee layoff expense in future quarters, but I could be wrong about that: it’s a wildcard because it’s difficult to forecast accurately.

But 2 other wildcards could potentially have a *greater* impact on Tesla‘s 2020 earnings than the 4 mentioned above:

Loss carryover benefit
Elon’s bonus expense

As any self-respecting Tesla short seller will happily tell you, Tesla has lost money on a GAAP basis every year since inception.

Under GAAP accounting rules and U.S. tax code, those losses can be “saved up” and rolled forward to reduce federal corporate income tax liability in the future by netting past losses against future taxable income...

(when and if auditors agree that it’s more likely than not that the company will one day produce enough profits to use *the entire benefit*)

Until that happy day arrives, the rollover is held on the balance sheet as “Deferred Tax Valuation Allowance”, a tax asset.

It’s difficult to guess which quarter this benefit will be recognized (removed from the balance sheet and flowed through the P&L as contra expense on the “Provision/(Benefit) for Income Taxes” line), but when it hits, it will likely be a jaw-dropping $1-2 billion benefit.

The amount reserved on the balance sheet is about $2 billion, but GAAP rules limit the year 1 benefit to a max of 80%.

I am forecasting a $1.5 billion benefit in Q3 2020, but that’s just an educated guess and it could hit as early as Q2 or later than Q3.

If Tesla reports a surprise >$1 billion Q2 GAAP profit this afternoon, my first and only guess would be that they convinced PWC that Q2 was the right time to move that tax asset off the balance sheet and flow it through the P&L.

Our final wildcard today is the 2018 CEO Performance Award...

Elon Musk
who is paid *no salary or guaranteed income of any kind*

... will be awarded stock options only if Tesla achieves aggressive, predetermined operational targets for Revenue and EBITDA growth...

... *in addition to* very aggressive stock price appreciation (market capitalization) growth goals.

Under GAAP accounting guidelines, the value of those options was determined at the time Elon agreed to be compensated according to this plan (March 2018) as $2.283B.

That is the *maximum amount* of CEO compensation expense Tesla can declare over the 10 years covered by the 2018 agreement.

This amount is never “trued-up” to market value.

Expense cannot be declared until the milestones are deemed probable of achievement, and the expense is spread from inception (2018) to the expected future date upon which each tranche of options will vest, requiring achievement of a market cap goal and an operational milestone.

Catch-up expense must be declared as each milestone is deemed probable (to make up for all the quarters elapsed since agreement origination up to the quarter when that milestone was deemed probable).

The recent sustained Tesla stock rally has accelerated the achievement of the 2nd market cap milestone and, conceivably, all the remaining market cap milestones.

It’s also possible that Tesla’s internal forecasts for near term Revenue and EBITDA are newly and significantly higher, based on the successful ramp of Model Y at Fremont and Model 3 in Shanghai, which could soon cause more operational milestones to be declared likely.

Because catch-up expense would be large under these circumstances, Tesla may declare:

>$1B...
(of the remaining ~$1.7B of Elon’s compensation possible thru 2027)
... over just the next 6 quarters
(beginning with Q2 2020)

I have low confidence in how much expense will be declared in each of those 6 quarters because timing is left almost entirely to the discretion of the CFO (and the auditors).

One possibility is that the lion’s share of Elon’s bonus compensation expense could be declared in the same quarter as the tax rollover benefit, in which case the two unusual items would mostly offset each other.

An underappreciated characteristic of Elon’s stock-based compensation plan is that *if Elon achieves all 12 tranches* and exercises them:

He’ll pay Tesla ~$7B cash for them
(which Tesla can use to invest in capital, pay down debt, whatever)...

...and

Elon can’t sell them for 5 years

but...

Elon’s shares would have a market value of ~$70B
(even if the market cap doesn’t appreciate past the 12th tranche’s requirement)

... even though...

Tesla would only declare compensation expense of $2.283B

That’s a much better deal for shareholders than if Tesla had to pay Elon enough cash to purchase those shares.

Not much longer to wait now, to see what cards the dealer turns over

Better get your popcorn ready

If you’re curious, here are my latest earnings expectations:
https://twitter.com/icannot_enough/status/1278813740796870656?s=21 https://twitter.com/icannot_enough/status/1278813740796870656

Now you may understand why I proposed question 1 (below) to Say.

These variables are so unpredictable, it makes forecasting Tesla painful.

I don’t know when Say cuts off the voting, so you may still have time to go upvote them:
https://twitter.com/icannot_enough/status/1283551483808620549?s=21 https://twitter.com/icannot_enough/status/1283551483808620549