Market Musings - March 2, 2018

We continue our blog series: Market Musings, Volume 2, Edition 12, giving our (hopefully not too random) thoughts on recent goings-on in the markets. Today, we present "Instant Analysis - Tesla 2017 Form 10-K Filing".

Last Friday Tesla (TSLA) filed its 2017 Form 10-K filing. This blog will perform an instant analysis the risk factors section of the document (each excerpt is redlined against the respective text from the 2016 10-K).

EXCERPT 1

Instant Analysis: Tesla admits that its Model 3 production is still not fully automated as of the date the 10-K was filed, i.e., February 23, 2018 (see reference to "semi-automated manufacturing lines"). This appears to refer to the press reports that some aspects of the Model 3 production were being performed by hand (see here, for example). So "Production Hell" in Fremont appears to be continuing.

EXCERPT 2

Instant Analysis: Tesla here expands on the issues regarding "Production Hell" at the Gigafactory. The main issue holding up Model 3 production appears to be issues with Panasonic and its battery pack production lines. Note that Tesla states that Panasonic has never previously attempted such an ambitious production ramp in the U.S. The statement that Tesla expects to "continue to experience challenges" indicates that the Model 3 production problems are ongoing and apparently difficult to solve.

EXCERPT 3

Instant Analysis: Note the reference at the end regarding "cost and volume targets" being in jeopardy. Tesla seems to be admitting that its previously stated gross margin goals for the Model 3 are potentially no longer feasible, at least in the near to mid-term.

EXCERPT 4

Instant Analysis: Mainly word-smithing here, but note added references to battery production (in addition to solar) being impacted by increased competition.

EXCERPT 5

Instant Analysis: Tesla states that the recent Trump tax cuts will likely reduce the tax efficiency of their solar products, thus negatively impacting the company's ability to receive financing for solar systems from tax equity investors.

EXCERPT 6

Instant Analysis: Tesla hints that some of the tooling installed in its factories (especially, presumably, the Gigafactory) may be written down and/or obsolete. It is not clear whether this specifically relates to "Production Hell", but it is reasonable to assume that the rush to get Model 3 production underway may have resulted in ill-advised / sloppy procurement of equipment, necessitating the referenced accelerated depreciation.

BONUS EXCERPT

Instant Analysis: Tesla states that Musk has acquired some of his TSLA shares on margin, increasing the risk that he may make short-term oriented decisions to support the stock price (at the risk of long-term company success). To see an example of how this type of stock pledging can produce bad outcomes, see the saga of Mike Pearson's margin call on his Valeant (VRX) shares.

DISCLOSURE: Short TSLA.