I Mean we are going to talk about Tesla today because today Tesla went and announced some major major huge price cuts and the whole world is discussing them. Everyone's wondering, does this mean that demand for Tesla is down and the dumps is Tesla about to go and become bankrupt overnight I don't know what whatever everyone's saying um I did some maths earlier and um Tesla is uh is now actually in my second uh, fast moving towards becoming my third biggest position in my portfolio. Not because I've been investing in other things mainly because of the way that the price action has been going. but it is a company that I think is pretty interesting in terms of what's happening in the market today and I did some math and despite the huge price drops, my mass I'm going to share it with you I'm going to go through the whole thing and talk you through the numbers, explain some of the logic, explain some of the thinking.

It's not the kind of fanboyish mass that I think maybe you would expect, maybe from a kind of Tesla kind of video. So I'm sorry, it's not going to be kind of. Hey, you know their costs are going to plummet by 50 this year because they're amazing or something like that, but there's a few things that I think people are missing on when they're discussing what the um, what the margins for Tesla are and we're gonna go and walk through them just so that for everyone who hasn't seen them already, let me just stick my face over here. um, this morning or overnight or last night, depending on where you were.

Tesla Announced massive price because here's the price: Cuts in the United States and you can see that in the United States Model 3 got price cuts that were pretty big over here Six point, four percent, fourteen point three percent on the two models and the model Y got huge price Cuts minus 20 minus 19 in the United States and then had exactly the same thing happen across Europe across everywhere else you can see in Norway The prices got slashed in other parts of the world. the cars didn't get slashed anywhere near as much as they did in the US even in Norway which is huge like they didn't get cut as much. And then European markets where demand is generally a bit higher, the wait times are a bit higher. Um, the prices didn't seem to come down anywhere near as much Anecdotal data in Australia New Zealand where there's still longer wait times, the prices have hardly moved down at all in comparison to what we're seeing in some of these other countries, but it is still very, very significant.

So how is it possible? How is it possible that despite these huge price? Cuts How is it possible that Tesla may still be making really robust profit? So um, you can see. let me let me go and start walking through the numbers. We're going to jump to some of these other tabs and I'm going to explain some of the thinking behind it. Uh, please go and share your opinions.

in the comments. Tell me how exceptionally wrong I am I Just spent the last hour or they're about an hour and a half putting this together, just reading stuff and trying to think out loud. There might be mistakes in this because I have not spent the last three weeks building a comprehensive model. This is just a sort of a line of thinking that I've gonna walk through.

So I went and looked at Q3 numbers Q3 just from their profitability over here and I took some of the numbers I took what the Q3 Auto Sales number is and the Q3 auto leasing number is and all I did is I Just went to their report I went and scrolled down to the bottom which is where these numbers are and you can see in the profit and loss statement. Over here they have. Let me just zoom in. they have Automotive Sales they have Automotive Leasing and I'm ignoring the regulatory credits because it's an irrelevant number.

So I've got these two numbers and then I've done the same thing for the sales and the leasing on the cost of revenues and I've just gone and shoved them into here. just copied and paste it. So Q3 Auto Revenues without credits is 17.1 billion and Q3 Auto cost of Revenue 13.5 billion. So the gross profit over here is 3.7 billion dollars, which is a 21.5 gross margin on cars.

We're ignoring everything else. we're just talking about cars today because, well, that's what the news is about. That's what we're trying to understand in more details. Then we went and go and look at the delivery numbers which is in the same report.

You go and scroll up to the top the second table and here the Tesla delivered 343 830 cars in Q3 I'm just using the latest available data. that's why it's in here and all I did is I went and said okay, what's the average revenue per car including leases So okay, excuse me, it doesn't really matter I'm just I'm just doing basic simple things over here. All right. So average revenue per car in that quarter? 49 920 Then I went and did a few assumptions.

Now all of this is based on the fact that let's presume that for the next few quarters Tesla's distribution of the cars that they manufacture is going to be roughly the same, which is the vast majority of cars are going to be the Model 3 and the Model Y. with the SKU roughly in the same place. and this whatever proportion occurring manufacturing the Model S and the model X, they'll sell the same. So I'm not saying it's going to shift in any which direction or the Cyber truck is going to do something.

No, if this happens, probably will do interesting things, but that's not what we're talking about today. So then I have a few assumptions. The things in Orange here are assumptions so you can go and challenge. Then things in green are numbers that have taken from their report.

Generally, this is how I run things in Blue uh, calculations and things in orange or teal or whatever. this number is beige their assumptions anyway. So FSD take 15. This is if you go and listen to interviews.

If you listen to some of the these calls roughly speaking globally, the average number that seems to come up as around 15. It's higher in the US. It's maybe more like 20 in the US because in the US you can actually get it. which is why people have been paying more for it.

but in other countries people still pay for it because then they want to go and lock in the price at a at a much lower price than what they because the price keeps increasing and the price at the moment for FSD is fifteen thousand dollars. Then we have the enhanced autopilot take and I'm guessing this one I don't really know I don't have very much data on exactly what the take on this is I'm guessing it's slightly higher than FSD because it's substantially cheaper and it's something that everyone can actually have in their car and use. So I'm presuming those two factors combined means it's slightly higher. So I'll put 20 percent and the price at the moment in the US is six thousand dollars.

Then we have FSD and enhanced Autopilot gross margin and I've assumed that it's 70. I'm assuming there's maybe some cost to it. Maybe some people will say it should be higher. It doesn't really matter, just for the sake of argument for some of the numbers further down.

So this means that FSD dollars per car, which is just multiplying these two things together is two thousand, Two Hundred and Fifty dollars. An enhanced autopilot per car is one thousand Two hundred dollars. So this is the take: the proportion of people that actually buy the thing times the amount that is being charged. The total Digital Services Revenue per car in dollars is three thousand Four hundred fifty dollars.

Hopefully this is pretty straightforward. It's going to get slightly more complicated, but I'll do my best to explain it. Okay, so FSD Revenue can only be fully realized once the product is fully delivered to customers and there are many different data points. Elon Musk said things in certain interviews said things in certain interviews Zach refer to this in some of the conversations on earnings calls there.

Maybe maybe I'm wrong on this one. Please do correct me if I am I don't know I'm just I'm just basing based on what I've heard and what I've seen. But apparently Tesla realized about 50 of the FSD Revenue when the money is paid because some of the features are available, some of the services are available blah blah whatever and then what that happens with the rest is they Bank it and they wait until they can fully realize it. So what that means is the money is being paid over to Tesla by the customers.

but it doesn't come through as company Revenue as company profit because they're not allowed to take that profit and take that money until the service has been delivered to the customer. Um, and so to April when you go and look at data. So um, this is not the right tweet, but to about April or May about a hundred thousand customers Over a hundred thousand customers somewhat over like 110 120 000 I don't know whether that number is had access to FSD beta because they were expanding it through the back end of 2021 and then through early 2022 and there were several Publications several news articles that came out that was about 100 120 000 and then in December at the end of December December uh numbers came in and this is the tweet: I think over here December 29th Tesla went and said blah blah blah blah blah and FSD has reached 285 000 cars and the reason this happened is because Tesla went and released Fsdb to to everyone who has paid for it in the United States and that's how that number jumps so quickly at the back end of last year. but this release happened during Q4 towards the end of Q4.

So what that means is the numbers in Q3 do not include all of these people who are buying FSD getting FSD on their cars. All right. So percentage of FSD Revenue Realize this is the thing that I just described. Let's set that to 50 then Digital Services per car.

Realize so if we exclude half of the FSD cost per car, the half that you can't realize as Revenue that means that the digital services that are realized per car are 2 325 dollars, then assuming that 70 gross margin on these I'm gonna go and assume that Digital Services gross profit is sixteen hundred dollars and blah blah. These numbers don't really make any difference. Further on, so I'm not gonna I'm not gonna get too much detail. Anyway, proportion of FSD sales in uh, us as a proportion of total.

Now this thing over here. This this tweet over here said that uh, just a few days ago. uh, there is 285 000 cars uh with the FSD in the US and this the assumption that we had over here remember was that 15 uh of all cars sold um are sold with uh with with FSD uh one way or another. And because there's the total number of cars I don't know what it is.

What is it at the moment? Three and a half million pushing four million something like that I don't know I don't know what the number is I'm gonna go with a sort of conservative assumption and say that 67 of the FSD sales um, globally are in the US I Think that number might be actually on the conservative side. It's probably a bit better, but it doesn't really matter. Let's let's assume it's 67. so two thirds, two-thirds are in the US one-third everywhere else.

And then I'm saying the Q4 onwards. The benefit to Global gross margin from Full realization of FSD just within the United States is going to be five percent because from the moment at the end of Q4 when people start buying FSD at that point, the full amount of money is realized. The way it works is if you go and buy a Tesla and you pay the fifteen thousand dollars back in Q3 which is the latest numbers that we have until the 25th of January. By the way, I'm going to be doing a live stream, so please make sure you join and that's going to be a fun live stream I Think so.

make sure you go and listen to that. but if you pay fifteen thousand dollars, then only seven and a half thousand. Using these assumptions, seven and a half thousand dollars of that gets actually realized and comes up in the p l you actually go and see that money turn up. However, from the first from the end of December January from whenever people buying FSD Now when they pay fifteen thousand dollars, the full fifteen thousand dollars is going to be realized.

and you're gonna be seeing that in the revenue numbers. That's what this is referring to. So let's work out what these price cuts that just happened did. So remember from previous calculations up here, the average price of a car including lease uh in Q3 in Q3 was 49 920.

The digital service component in Q3 that was realized was 2325.. So the average cost um of the car to the customer the the stuff they're paying for the actual car not for any of the Digital Services was forty seven thousand, five hundred ninety five dollars. So in Q3 the gross margin was 21.5 percent in Q3 the gross profit total uh was 10. uh, seven thousand uh dollars and the Digital Services gross profit was 1728.

So the car gross profit was nine thousand dollars if you exclude FSD and the enhanced Autopilot. Therefore, if we use all of these numbers, then the cost to manufacture the car is 38 and a half thousand dollars in Q3. But average global discounts in January 23 happened and suddenly now the cars are going to cost a lot less money. So I've gone and said okay, well what's the average discount I don't know I've put 18 now in the US Model 3s are only discounted by Point by six and fourteen.

but these model wise, which is what you know is becoming super popular, these are 20 and 18.6 in Europe and other places the discounts are nowhere near 18 on average. But let's go and say it's 18 just for the sake of argument. You know you can go and do your own math with lower numbers. It doesn't really matter.

That means that the new cost of the car without Digital Services So if we take the cost of the car over here and apply that 18 discount is now 39 000. But if we then add the Digital Services after us FSD is realized which is now higher because you can now Bank the whole amount you add the three thousand dollars, the total Car revenue is 42.1 000. You might look and go. Okay, well that's pretty bad because now look the cost to manufacturer the car is 38 and a half the total Car revenue is 42.1 and we're still missing that 30 percent this 30 um, cost of the FSD and autopilot which isn't in these numbers.

so the margins are pretty thin, right? The difference between 42.1 and 38.5 So it looks like from just this really basic analysis here that hey, the margins are going to be compressed. The interesting thing is, before accounting for absolutely anything else, before accounting for the fact that you know if Tesla's going to cement the leadership position, they're going to get more customers. uh, to buy Teslas which will enhance future sales of Tesla's enhanced features, sales of software. Um, before accounting for the fact that more volume will be generated, more volume in factories means that the fixed operating cost of those factories are divided between more cars and therefore the cost of manufacturing cars.

Even before anything else reduces, material costs are coming down. All the commodity is going down, so that should enhance that even further. But before that, even before counting that, you're still seeing that there is going to be a profit margin. The profit margin looks like whatever.

whatever that is. Six percent, seven I Don't know. I'm not going to do the math, but it's slow. But it's still positive.

which is incredible because at this price point, Tesla is now competing with pretty much every other manufacturer in the cars become incredibly compelling because these price Cuts put the model Y within the 55 000 uh price cap. And that means that U.S customers buying a model why are eligible for that seven and a half thousand dollar tax credit. So if if if I if if what people are saying is right, that probably means that people are going to be queuing up in their drives to buy Teslas Now that is a huge discount because after the discount with the tax credit, you're talking some insane 22, 26, 31, 18.6 discounts on these cars. That is pretty astonishing, but let's go a bit further in.

Q3 We saw a very, very early stages of Berlin and Austin Rams. They were only started ramping towards the end of the first quarter and then they started Manufacturing in April May whenever it was. So we had a lot of costs, but we had relatively little in the way of Revenue coming out of those in the last quarter before Berlin and Austin started work in Q4 2021. If you go and look at the numbers over here here the same numbers the Automotive Sales Automotive Leasing and Automotive Sales and Marketing Leasing on cost.

you see that the gross margin for automotive was 30.58 So during this point they were incurring some costs because those factors were being constructed, but a large part of that cost was being booked as capital expenditure, so it wasn't coming through. in the P L, it was coming through, the money was leaving the bank account, but it wasn't coming through in the cost. So that's why that gross margin was considerably higher. So if Tesla was to move back to just that margin at some point, because those Berlin and Austin factories are going to ramp, so their production is going to increase, so you would expect potentially newer factories with more Modern Machinery with better production lines to probably at least match what the older Manufacturing company factories were able to do on the gross margin.

If we assume that all the other benefits do a little bit better as well. so there's less Transportation costs. you don't have to ship every European car over from Shanghai. You don't have to pay the five percent or ten percent depending on which country Duty in the EU When you're selling cars that are manufactured outside the EU all these different benefits they they add up.

So let's say that the new go-to margin because of all of these goes from 30.5 to 32. That seems pretty reasonable. Remember this margin has much lower FSD cost and much lower FSD penetration because this margin is 30.58 margin is from Q4 2021 from before we had any ramping of the first factories and at that point the cost of FSD was lower, The number of people buying FSD was lower, The number of people who had access to FSD was lower, but without taking that into account without pushing the margins even further. just assuming that the total cost of the car with digital services using the Q3 numbers using that gross margin would drop down to 32 365..

So to recap, there are two two factors playing here: One, the fact that FSD is now going to be fully realized when people buy those cars, and two the fact that when we've been seeing numbers through the majority of last year, we were seeing numbers where Berlin and Austin factories were incurring a huge amount of cost, a huge amount of fixed overhead. All of that, but manufacturing no cars result, and the automotive gross margin for Tesla plunged because of that factor. When those factories are ramping back to the same sort of tip levels as what the first two factories are doing and they're there. They're both posted recently that they've broken through the 3 000 cars a week, so I'm expecting we're probably going to be reaching four or five and so on a thousand cars a week.

In the coming weeks, they were ramping pretty fast at the back end of last year. But Total Car Revenue Forty Two thousand, One Hundred and Seven dollars. From the calculations up here, the cost of manufacturing the car, If they just returned to that 32 margin which all the numbers are indicating, they will, uh, because of the factors that I just outlined. Cost of: Digital Services 924 that's a 30 that I baked in as the gross cost.

So the gross profit per car Eight thousand, eight hundred, and eighteen dollars. And if you work out what the margin on that is, it's 20.9 and it's pretty incredible because it kind of screws your brain when I started trying to think about it earlier today. I was looking at it going hang on. So so how how bad is this going to look? But actually the pretty pretty crazy thing is that the gross margins don't seem to be affected very much at all.

Now they're not going to be the 30 32 of these prices, but that's pretty hefty. That is the same gross margin as what Tesla was having in Q3 which was, by the way, a massive record-breaking quarter that was. You know, pretty healthy financially. and it's pretty interesting because all of this is not even including the real Sucker Punch that these prices are delivering.

which is to every other car manufacturer, not just EV manufacturer because you go and look at a Ford Mustang Ford Mustang are currently being sold in relatively low numbers and reportedly Ford is still losing money on every single one and they sell Same goes for the lightning, But look at all the other car manufacturers. you can now go and buy all of these cars at prices sorry 43 990. But after the tax credit, it becomes 36 and a half thousand dollars for the standard Range model three, the Performance model three, Forty six thousand, five hundred dollars. And when you begin comparing that to just the prices of a relatively average normal cars because remember Ice Vehicles do not get these tax credits.

So what Elon Musk has done is he's going to say okay, well what if we squeeze all of our cars under this tax credit because then we are going to be able to take adoption to a whole new level? The big question for me is going to be are they going to be able to manufacture cars at the rates required to actually meet the demand Because I'm expecting, if anything, if we have. If you heard what happened in China in the last few days, China sales went through the roof. If Tesla has the same sort of demand issue in the US I don't know how long these prices will be able to last because we may see wait times begin being a thing again in the future. But the thing is with these prices, Tesla is now beginning to compete very, very favorably with Ice Vehicles because let alone all the servicing costs down the line of ownership cost of having these cars and all of these different things.

Forty five thousand dollars for a model Y long range, which is probably the one that most people want, it's the one that is cheaper but has the long more miles that you can drive in it. Um, this is suddenly incredibly competitive with other alternative smaller sized SUVs that have you know the capacity for having seven seats, etc. etc. So you go and look at it, you go.

This is going to be pretty interesting because everyone's talking about margins. I Don't think that there is a substantial issue with margins because this year the ramp that we're going to be seeing in Berlin and Austin plus the fact that they can now realize FSD fully within the US which is where most of them are sold anyway, should make up a huge chunk of those margins if they didn't do these price cuts, the only thing that would happen is their gross margins would go and go bananas this year. So they said hey, let's go and take a cut and on a recent um Twitter spaces call Eloma said that he would rather sell Teslas at no margin but increase volume and the reason is is brand. Affinity It is adoption.

People go and buy a Tesla They like the car, they enjoy driving it. They get all the benefits of driving this fully electric vehicle that can do all these features and a lot better than many other cars and they go and buy another one afterwards because that's how people operate. This indicates that they still have a very long way to go on being able to move their price because their price elasticity is insane, because of the margins that they're able to generate in the manufacturing, and because of the margins are able to generate from the Digital Services And yeah, that's pretty much it. Um I think it's pretty incredible I Think it's very interesting.

Please tell me your thoughts. Please tell me if you think that I am completely wildly out and some of these assumptions are completely missed something. But thank you very much. Uh, for joining me I Really appreciate it.

Hopefully you found this useful and I'll see you guys later.