### Summary

- Model 3 could potentially increase revenues by 200% in 2018
- Its likely that TSLA trades at price of $300-600 based on 2.5x – 5x P/S

- Musk not likely to let the company make money in the near future unless he cuts R&D expenditure altogether or changes the product mix
- Even if Model 3 ‘fails’, its more likely to be just delayed
- Given that TSLA doesn’t trade on earnings potential this is irrelevant

- If Model 3 is a success, TSLA trades in range $300-600,
**assume likely upside is $450** **Delays, poor sales the stock falls to around $225**- Timeframe is 6-9months, no immediate action but we’ll keep this on the watchlist

### Strategy

**Why is shorting TSLA risky right now if the company doesn’t make money?**

Shorting TSLA is a pain trade that even Einhorn is feeling. Potentially explosive upside for the stock if Model 3 is a success:

- Tesla pulls in $2.3b in revenue per quarter from Model S and Model X sales which are currently growing at approx 50% per year
- Model 3 is due to launch with a price tag around $40k
- 400,000 deposits of $1000 have been taken for Model 3
- Musk targeting production of 1500 Model 3s by Q3, and 5k per week by Q4 2017
- This equates to $2.6b in revenue per quarter if they can sell them all
- Which means that current revenue will double

- Full capacity is 10k Model 3s per week or $5.2b in rev/q (200% increase)
- After Model 3 is the Semi-Truck
- Assuming Model 3 is a success and revenue swells to $5-10b per quarter, Semi-Truck likely to be a smaller percentage increase in revenue
**So explosive potential for TSLA stock all depends on Model 3 success**

**How much profit or cash flow will Model 3 result it?**

- TSLA produces Model S and Model X at 25% gross profit margin
- Operating expenses have historically been 25% of revenue leaving no room for profit
- R&D expenses have historically been approx 15% of revenue
- Best case scenario is probably a 5% profit margin if they cut costs (with the current product mix)
- 5% net profit margin means that P/S ratio = 5% x P/E ratio
- If Model 3 is a success, revenue grows to at least $5b/qtr, $20b/yr
- If TSLA growing at 50% per year then prob trades at P/E ratio of 50
- P/E ratio of 50 = P/S ratio of 2.5
- Market cap = $50b
**which equates to approx $300 per share**

**But will Musk ever let cash just flow to shareholders?**

- Never ending list of global problems that need solving
- After cashing out of Paypal reinvested everything in SpaceX and Tesla
**Highly unlikely that Musk will be content with providing a decent earnings yield vs investing in more solutions to global problems**

**The game with TSLA therefore is probably predicting when most of the early investors start cashing out.** But as long as there’s substantial growth prospects around the corner, its less likely these guys will cash out.

**So is there a trade to be made?**

**Potentially buy new highs**anticipating stock price rally on Model 3 success- Revenue likely to be 20-25b/yr (if successful)
- P/S ratio likely fall as its likely less future growth will be priced in (Semi-Truck vs Model 3)
- P/S ratio therefore 2.5x – 5x
**Share price $300-$600**- Even if Model 3 ‘fails’, its more likely that production is just delayed

**Go short?**- Could TSLA go bankrupt?
- Company has $3b of cash on hand (enough for 1 more year)

- Convertible bonds currently only dilute equity by about 5%
- Are insiders likely to sell?
- Most of the remaining convertible debt has strike price above $500
- No reason for these guys to sell at current levels

- Does every mum and dad already own the stock?
- Doesn’t seem obvious, most institutional money won’t touch it

**It only makes sense to short at a price that insiders would be interested in cashing out**

- Could TSLA go bankrupt?

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