Thread by @BradMunchen

1) Just had a great talk w/ a $TSLA analyst who says that some bulls & bears on the buyside are seeing the upcoming Shanghai GF3 ramp-up as a "swing trade" opportunity (i.e. "buy the story"). I laughed, but listened to the portrayal of the view.

2) Apparently, these investors--both bulls & bears--see @elonmusk holding a special event (probably hiring local Chinese) to cheer the roll-out of 100s of Model 3s in order to show that the launch in China is "game on, at full speed". These M3s will be shipped in from Fremont.

3) We both agreed that, if Fremont underwent the "production hell" that still reverberates w/ bad quality issues today, GF3 will be much worse. Most of the GF3 workers have probably never driven a car, let alone assembled one.

4) Me: "Don't these investors realize that $TSLA won't make any money at GF3?"

Analyst: "It doesn't matter. @elonmusk will pump the event & give grandiose projections of exponential demand. He may even hire flash mobs."

Me: "Really? Sounds like a selling opportunity".

5) There were a few points that this $TSLA analyst agreed the "GF3 Swing Traders" weren't factoring in:

#1: If the Chinese have had 6 months already to buy the imported M3 at $51K & $TSLA only sold 3.4K/month on avg, how can they sell more w/out lowering the price drastically?

6) Then there's currency exposure.

#2) ~60% of parts will be sourced from Fremont. Every 1% change in the USD/CNY will impact gross margin by 100bps. China's CNY is arguably overvalued. $TSLA analysts have never had to factor in currency risks, as 64% of sales are in the US.

7) Then there's nationalism:

#3) Many Chinese started swapping in their iPhones for Huawei smart phones once Huawei made phones comparable in quality to the iPhone. The Chinese will do the same once either BYD, BAIC, NIO, etc. come out w/ their own "up-to-snuff" EVs.

8) It appears like none of these "GF3 Swing Traders" have modeled out GF3 earnings potential. My most optimistic estimate at the moment is $300m in gross profit, *IF* $TSLA can actually produce 150K/year. The bottom line will be net losses. So GF3 should be an earnings headwind.

9) Also, what happens to US sales (64% of 1H auto revenues) while GF3 ramps up? Apparently few investors are taking a serious look at the Models S/X being 8/5 yrs old in 2020 & that the M3 has saturated CA. Even if GF3 is profitable, US profit declines will be much larger in 2020

10) GF3 is a serious earnings risk. The proof is that few Chinese have bought the M3 since March. After @elonmusk has his "flash mob" GF3 launch, the M3 price will be cut to $30K-$35K in order to run GF3 at 100% capacity. They have no choice. Start-up costs will be staggering.