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hey everybody rob maurer here and today we are going to be talking about whether or not tesla should do a share buyback this has been proposed by tesla's third largest shareholder so we'll discuss the merit of that suggestion we've also got the release notes on fsd beta 10.12 and a couple of renderings of what that is looking like as it now has been released to employees internally then we've got a new nitsa investigation an analyst update news on supercharging and a couple of their items well we can fly right through the stock today not a lot of change tesla down five one hundredths of a percent and nasdaq down at one quarter of a percent so not much action but at least a slight over performance from tesla all right so today i want to start off with the question of a tesla stock buyback this was proposed by leo kogawan who is the third largest individual shareholder of tesla cnbc picked up on that today and it's been a pretty hot topic of discussion so i thought i would share my thoughts so first just how a share buyback functions it would be tesla taking cash off of their balance sheet and buying back stock and then removing that stock from the outstanding share count so what's the point of doing that well when you reduce the number of outstanding shares the earnings that the company makes get divided between fewer shares that means each of their remaining shares is entitled to a greater proportion of those earnings and that makes each share more valuable so super quick example i know most you probably know this but let's say a company trades at ten dollars per share there are ten outstanding shares of that company and the company earns ten dollars total or earnings per share of one dollar if the company then goes and buys back half the shares the company is still earning that same ten dollars total there are now only five outstanding shares though so earnings per share all of a sudden doubles to two dollars per share the same price earnings ratio would mean that the remaining five shares are each worth twenty dollars per share so their value doubled just from the simple action of a share buyback now it's not that simple in reality because you have to consider that when you buy back shares the company has less cash and therefore is worth a little bit less because they spent that cash but that is the basic idea it's a way of returning capital to shareholders of course there are other ways to do that like a dividend a dividend just gives a cash payment to each share there is an omnipresent debate about which of those is preferable it really depends on the circumstances and in my personal opinion if the company views the current share price as undervalued in that circumstance a buyback is preferable for many of the same reasons that any individual buying a stock had an undervalued share price would be the way that i kind of think about it is that if a company buys back shares during a period of time where the company's stock is undervalued they're effectively getting a discount on the amount of value they are creating for the remaining shares that doesn't happen with a dividend though you could argue that a dividend can then just be reinvested and the investors themselves can get a discount on those shares while they're undervalued those are the kind of things that can make this a little bit of a circular argument at times then you get taxes involved and all these other things come into play generally though my preference is for buybacks probably not too surprising coming from a growth investor but what about for tesla and more specifically for tesla right now well elon in the past has been pretty clear that he doesn't view dividends as a very good use of investor capital basically a company should only pay them in his view if they can't find a better use of that capital and with the way elon thinks the scope and the scale i think he views that getting a better return on that capital as a pretty low bar to be able to cross now that being said those comments were about dividends i don't recall him really ever talking about buybacks specifically so while some of that logic may still apply to an extent it might be a little bit different for elon when he considers buybacks on sort of the other side of the returning capital argument elon has made comments at times that tesla is not capital constrained implying that tesla does not see at that period of time a way to spend more capital to speed up growth i would be pretty cautious about over interpreting that though because those circumstances whatever current constraint tesla has at that point in time those things can change very quickly that sort of leads us into the bitcoin acquisition a lot of criticism against tesla for that bitcoin acquisition saying if you're going to spend a billion and a half dollars on bitcoin why not just return that capital to shareholders do a buyback pay dividend whatever versus quote-unquote forcing tesla investors to also then invest alongside tesla in bitcoin it's a valid question tesla's answer to that question was they wanted to have the ability to easily access that capital keep it very liquid which is something it ceases to be if they give it away with a dividend or even with a buyback because yes eventually tesla could sell shares and get that money back but there's no certainty at that time that the share price would be the same or higher now does bitcoin have that certainty no but tesla was taking the chance that they could get some appreciation off of their cash while keeping it liquid in an asset that isn't their own stock so while you may not necessarily fully agree with that i think the logic is at least understandable so with that being said the comments about not being capital constrained and the acquisition of bitcoin those things at least put the conversation of whether or not a buyback makes sense on the table because it shows that tesla is not necessarily desperate for every single dollar coming in if you've been paying attention you've noticed that over the last year tesla has paid down 5 billion dollars of debt and that payment has come just directly out of their free cash flow for the year and that's been while tesla has been investing in both giga berlin and gigatexas so tesla is starting to be this cash generating juggernaut and because they just this last quarter reduced their outstanding debt to basically nothing now is actually starting to be a pretty good time to at least broach this topic so remember free cash flow is tesla's cash flow after accounting for capital expenditures so things like building factories this is cash that remains after tesla spends money on that their capex guidance has basically been that capex is going to stay flat for the most part for the next couple of years but operating cash flow and therefore free cash flow is going to continue to rise dramatically over the last 12 months that's already been six and a half billion dollars in the coming quarters that's going to be three billion dollars plus per quarter so tesla either needs to figure out a way to spend that keep it on their balance sheet and just grow their cash balance or start returning it to investors so what should tesla do they've got 20 billion dollars in cash on hand basically they're gonna add three billion per quarter to that going forward leo's suggestion was just to use that new free cash flow for buybacks not to touch the current balance sheet at all which i agree is something that i wouldn't touch and it seems like tesla is pretty happy with that level of cash on hand since that is basically what they have maintained for a little over a year now there are plenty of good reasons to keep that cash balance high and potentially even continue to grow it with the primary reason being risk reduction yes tesla could spend some money in buyback stock but at a 700 billion dollar valuation putting a few billion here or there doesn't really reduce the outstanding share count all that much maybe right now you could do about one percent versus having an extra seven billion dollars on your balance sheet that amount of cash buys you a lot of extra time if things get worse continue to go bad whatever the case may be there is extreme value in that especially in the midst of a possible recession taking that logic a step further it's not even just about staying alive during a downturn it's also about continuing to be able to invest in the way that tesla wants to invest to continue their growth trajectory and not having to take their foot off the accelerator even just for a second to manage around temporary free cash flow issues like for example if one of their factories one of their suppliers factories gets shut down for a long period of time without their control having a nice cash balance on hand means that tesla doesn't have to worry about stuff like that they can continue to spend even if money isn't coming in at that exact second a couple of other reasons to keep cash high it gives tesla leverage regardless of the market circumstances cash gives tesla the strength to be able to talk to a supplier and say hey you know if you're not going to do what we want we'll either just buy you or we'll just start doing this ourselves like we have so many other times having the cash to do that supports that leverage and then finally it gives them tremendous flexibility even if there are periods of time where tesla says hey we're not capital constrained right now opportunities can pop up at any time and highly liquid cash gives tesla the ability to take advantage of those just a couple that are on the horizon we've heard tesla on quite a few occasions allude to getting into mining we've seen some instances where tesla is managing their own energy storage projects that is capital intensive upfront tesla could have plans to do a lot more of those type of things especially as battery production ramps up and then of course on the horizon you have robo taxis and maybe tesla wants to build and manage and operate their own robot taxis versus selling those cars to customers that's very capital intensive so maybe save some cash for that there are a lot of good reasons on both sides i think and probably just to wrap this up it ultimately comes down to how tesla wants to manage risk i do think that they could afford to do a stock buyback i do think the shares are quite undervalued right now and i think tesla stock is liquid enough that if tesla did a small buy back now and just kind of showed support to the stock through that process it's pretty likely that in the future if and when they need more cash let's say for robo taxis or whatever else i think the stock price would be quite a bit higher at that point and they could sell stock raise cash and come out multiple billion dollars ahead so i think it's a viable strategy that said i don't really care if tesla supports the share price right now i'm a long-term investor any buyback that tesla does is going to be a very very small percent of the outstanding shares almost immaterial so i think it would be a little bit more for sentiment than anything else which clearly elon isn't too bothered with and i'm not someone that feels like he necessarily should be so i do think there's some merit to it i think this downturn and thus lower prices in the shares are happening a little bit early to really aggressively advocate for it if this were q4 something in tesla just printed a four billion dollar free cash flow quarter and tesla sitting on more like 30 billion then things look a little bit different i'm more than content to let tesla de-risk get themselves to that point make sure everything is all good with shanghai with berlin and texas being ramped up 4680s being in volume production the future is looking great but there are still things that tesla needs to execute on all right well that took a lot longer than i thought it was going to take so sorry for that if it was laborious but let's move on probably the other biggest news is the release notes popping up for fsd beta 10.12 as we talked about yesterday that is now being tested internally by a broader group of employees that's usually the last step before a public release and there are a lot of release notes here elon saying on twitter quote this is a big one expect some two steps forward one step back situations these will be great iron and point releases hence about 10.12.2 or 10.13 for wider beta release unquote for the sake of time we won't go through every single bullet points on this release i'll highlight a couple here and then i'll put all of them down in the description if you want an easy way to read them but there's a lot of things on turning here and the auto labeler and just general awareness of lanes the first bullet is interesting they say upgraded decision making framework for unprotected left turns with better modeling of object's response to ego's actions by adding more features that shape the go slash no-go decision this increases robustness to noisy measurements while being more sticky to decisions within a safety margin the framework also leverages median safe regions when necessary to maneuver across large turns and accelerating harder through maneuvers when required to safely exit the intersection and quote so great to see some new behavior there with the medians and then just some more aggression when necessary i'm happy to see that because most of my interventions are just pressing the accelerator getting it to go where it's actually wanting to go but obviously the bias is towards inaction just out of abundance of caution it's a little bit safer the other point i'll highlight here is tesla saying that they have improved the recall and geometric accuracy of all lane predictions by adding 180 000 video clips to the training set i always love seeing tesla talk about the sheer number of video clips they're using in training so i'm definitely excited for this one to come out we'll probably have to take a drive when it does it's been a while since i've taken you guys along on uh one of those milwaukee drives a couple other cool things tesla does now have a visualization for doors opening omar's is also saying that blinkers are now also being displayed on the visualization and we do have a very short clip here that was shared on twitter shows that the models for vehicles have been updated as well all right next up we've got a quick analyst update web bush's dan ives has lowered his price target on tesla today from fourteen hundred dollars per share now to one thousand he called the lockdowns in shanghai an epic disaster and for some reason because of that is expecting a slower growth trajectory in china in the second half of this year and then also talked about the twitter acquisition being a circus show and a black eye for tesla from my perspective that seems very focused on short-term things all right next we've got a quick supercharger network update throwback to the early days of the podcast the detroit free press is reporting that the mayor of barstow california has disclosed that tesla is building a 100 charger supercharging station in barstow which will be the biggest in the us always nice to hear about those new giant locations next we have news that nitza has opened another investigation into a tesla vehicle accident this time relating to a model s crash in newport beach california last week where from reports a model s traveling on a 40 mile per hour speed limit road the actual speed of travel was not indicated it occurred greened into a construction site and unfortunately the three occupants in the tesla did not survive that's really all we know at this point in time no indication of whether or not autopilot was on but in any case neta taking a look at it alright last couple of quick things for today first just a really quick update on twitter they did have an all hands meeting today and executives told employees that they are not open to renegotiating the purchase price with elon which is of course what they would want to say regardless and they also said that they do not view the deal as being on hold so i guess that's where we're at and we'll see what happens next lastly then just an update on the bill gates shorting tesla story that we have talked about a couple of times bill gates did have an ask me anything on reddit today he was actually quite responsive to a couple of controversial questions and although you may remember that clip where bill gates was asked about shorting tesla and he said yeah he doesn't talk about his investments well he was certainly willing to talk about it in this he said that he does not own any bitcoin and he said he has never been long or short gamestop but of course he opted not to respond to any of the questions regarding tesla obviously we know now that he at least was very recently short but still will not talk about it alright i think that's where we'll wrap it up for today then as always thank you for listening make sure you're subscribed and signed up for notifications and find me on twitter at teslapodcast and we'll see you tomorrow for the friday may 20th episode of tesla daily thank you you
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