Hey everybody, Rob Maurer here and today we are fortunate to be joined by the remarkably insightful Pierre Fergu as Elon Musk would put it.

Pierre and team released a note last week to just walk through some of Tesla's return on investments, how they're generating operating leverage over time.

And I thought, Pierre, we could just start by going through a little bit of that note and maybe just why this is such a complicated topic for Tesla.

Why do people have so much difficulty getting to the core of this operating leverage concept for Tesla and digging through all the difficult numbers here?

Yeah, thanks Rob and thanks for the kind comments and for echoing the very kind comments of Elon Musk's week that made probably made by week, I have to admit.

Yeah, so profitability is always a very, actually a very much more complex topic than you would think at first.

So we think we have the good accounting and financial tools to look at the profitability of a business with notions of free cash flow, notions of profit and loss statement.

And things like that, but the reality is that these tools are always very, very, very partial and as time goes, they are getting less and less fit to really understand the business.

So if you look at the case of Tesla, so Tesla is spending a lot of money to build out a factory.

So if you look at free cash flow, the free cash flow is going to be massively impacted by building a factory that other car manufacturers have built maybe 50 years ago, that's one thing.

And then you could say, okay, then let's look at the panel, but even in the panel, your factory is being depreciated through like a variety of rules, but roughly what it means is the overall cost of the factories, let's split over five or 10 year period.

But when you get started, your factory is actually producing a very small number of cars. So the cost of the factory per car becomes fairly, fairly significant.

And then you have a more intricate movements like, you know, how to reflect stock base compensation. So the fact that Tesla gives shares to employees or to Elon, how did you reflect that on the panel and there is no good way to do it.

It's not like that the guys who decided the rule are morons. It's just that there is no good way to do it. It's a very like if you give a share to, to an employee is at worst, the value of the share today, the value of the share to more is actually worth nothing because

your equity is going to grow that much over the next years before this employee can get the share effectively. So there is no good way to do it. And there is one accounting way to do it and you have to deal with it. So it's always very complicated.

And in today's world things are accelerating.

So you see, let's take another example, then that's why you take Uber.

So Uber is not a business in which you invest in graphics because that's not a business owning significant tangible assets.

So Uber to be successful, they have actually to ramp up in any given market in any city, very, very fast to make sure that they are number one in the race that is going to end into one number one surviving and one number two surviving and all other players is appearing.

And the only way you can accelerate that expansion is through spending a lot of money attracting drivers, attracting writers, getting people to download your app, etc.

All these costs are going through the piano.

But the reality is that there are investments into building a number one position, which is something that barely existed in the past is the new type of impangible capital, accounting, doesn't even capture.

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