This analysis deals only with income streams from the sale of automobiles. No other potential sources of revenue are factored in. For starting sales numbers and quarterly sales projections, I have used Tesla's non-GAAP pro forma accounting which does not book quasi-lease repurchase obligations as liabilities on the balance sheet, but rather treats them as completed sales.
This analysis posits various assumptions about revenues, costs, growth rates and numerous other unknowns. I have put the assumptions which I made in four spreadsheets which are presented in pictures below as screen captures. I have also combined the four spreadsheets into one four-tab Excel spreadsheet, using my assumptions for growth rates. etc. The four tabs are all linked to each other and draw data from each other automatically. The key rates and starting numbers can be changed by a single keystroke and all dependent numbers across all the four tabs will automatically update.
At least I hope so. If one set of numbers does not update, you can let me know and I will fix it.
I have uploaded the spreadsheets here.
You can download it and play with the numbers and rates yourself and do your own evaluation. The results you will get are highly sensitive to a few key assumptions: sales growth rate; the rate at which the sales growth rate increase or decreases over times; and the net profit margin Tesla will achieve on those sales.
Meanwhile, here are the assumptions I made for this article. Please feel free to disagree with some or all of them. I had to start somewhere and I picked these.
1. The Average selling price of a Tesla vehicle is $96,070. This represents a Tesla 85 kWh configured this way:
(click to enlarge)
This is a number consistent with my calculations which put the range of the ASP of Tesla vehicles at between $93,000 and $108,000 for last quarter. The option prices are calculated right on the Tesla website so you won't need a spreadsheet to recalculate your own. It's included in the upload for you anyway.
2. On the lease repurchase guarantee of 50% of the base price and 43% of the option prices, the repurchase blended average repurchase price for this vehicle is 48.84%. or $46,922.
I tacked on re-marketing costs of for a total of repurchase cost to Tesla of $64,264. This number can be replaced with your own estimate on the spreadsheet and the numbers will all update across the spreadsheet.
3. I estimated the resale price as a percentage of the original cost using data from Kelly's Blue Book for a loaded three year old Prius with 45,000 miles because the Prius has a reasonably high resale value. I used the price for buying a certified used car from a dealer and came up with 50.89% of the original cost of the Prius. You can change the estimated percentage of the sales price which will be recovered.
Using that 50.89% of original cost as an estimate of what Tesla will get when it sells the car, I get $48,893 resale price for a loss to Tesla of $15,371, or 32.76% of the total repurchase price. This is factored into the spreadsheet Re-marketing Costs above.
4. I then projected Tesla's sales out 24 quarters using an assumed capitalized annual growth rate of 40% for the first year and slowing it down little by little to flat in the sixth year. This is the main spreadsheet tab on the down-loadable spreadsheet and it is quite large and a little bit complicated. I picked these rates to illustrate the potential impact of the lease repurchase obligations, not to project Tesla's sales. They are configurable in the spreadsheet so you can change them. Key numbers or rates you might want to change are highlighted in yellow.
There are two key configurable rates in this spreadsheet, expressed as percentages. One is the rate at which sales grows in each quarter over the previous quarter. It can be changed to suit your own estimate; held flat by entering a 0; or made into decreasing revenues by entering a negative percentage.
The other is the rate by which that sales growth decelerates each quarter, expressed as a percentage that the first rate slows each quarter. Normally, the super high growth of disruptive technology companies have slower growth rates as they mature. One reason is that they start to run out of first-adopters for whom price is not significant; competitors start copying their technology; etc. I know some of you think that Tesla's growth rate is going to accelerate over the future. You can change this rate into a negative percentage, and the growth rate will then increase by that amount quarter by quarter. If you are good at spreadsheets, you can also change these rates for any quarter or set of quarters.
I used a sales quarter-over-quarter sales growth starting rate of 35% decelerating it by 8% for the first quarter and increasing the deceleration slightly by 1.03 each quarter. These rates represent a 191% growth rate in sales for the second year over the first year, decelerating gradually quarter by quarter to a 108.5% growth rate for the sixth year over the fifth year.
There is a third key rate in this Sales Projection tab. It is Tesla's net profit margin on sales, expressed as a percentage. As with the other rates, it can be changed with a single keystroke and all numbers will automatically update. Or it can be changed quarter-by-quarter for those of you who work well with spreadsheets and don't mind the tedium. I used a 15% net profit margin for this illustration.
I assumed that leases will average 35% of sales going forward, which is consistent with last quarter's results and what the Company has said about next quarter. This is also configurable with a single keystroke.
I then assumed that each Tesla lessee will turn his vehicle in at the end of the three year lease.
I then projected an analytical set of Tesla financial results for the next 24 quarters, or six years. I had to do that in order to project the estimated losses to Tesla from repurchases in each of the 13th through 24th quarters, or the last three years. The vehicles do not become eligible to be turned back until after the first three years and then that quarterly liability grows by one quarter's worth each quarter for the next three years, so I had to go six years out to get "normalized" numbers.
The result is a very large spreadsheet. It's too large to post here, so I hid some columns and left the annual results only showing.
(click to enlarge)
The spreadsheet is too large for me to fit it all here, so I shrunk it by hiding a bunch of the 25 columns. You can download the full spreadsheet in Excel here.
I then calculated what each of those losses would represent as a percentage of the total Tesla projected sales for the quarter. I computed what percentage of Tesla's sales would be wiped out by those losses in each quarter on an ongoing basis and came up with amount raging from 1.69% to 3.63% for the fourth through sixth years using the above assumptions. This is not as insignificant number as it might first appear to be. This is a percentage of sales which comes right out of net income. The lower the gross margin and the higher the deceleration in sales growth, the more significant the impact on earnings will be. At a 15% net margin, for example, it would represent 24.2% of net income at the end of the sixth year on quarterly sales growth starting at 35% and decelerating by 12% each quarter (putting the next quarter's growth rate, for example, at 30.8%). Also, at these rates for sales growth and sales growth deceleration, the impact of the lease repurchase losses on net income gradually increases over time.
The starting assumptions I factored in produce a projected EPS for Tesla in the sixth year of $9.36 on a flat 200 million shares outstanding. Without the impact of projected losses from lease repurchases, that EPS would have been $12.07, 22.5% higher. And that is without removing the future lease payments previously booked as sales, which now turn out not to be sales at all but liabilities. Factor that in, and the impact is even more significant.
These projections represent a good argument why GAAP accounting should be used for booking the lease purchase obligations as liabilities on the balance sheet, rather than ignoring those liabilities and treating them as sales as the Company does in its pro forma earnings report.
The net income, EPS, and impact percentage of quasi-lease losses are, however, highly sensitive to the key rates as indicated above.
For example, if you change the quarterly growth rate for sales to 25%; the quarterly rate of deceleration to 15%; and the predicted net profit margin to 13%, Tesla's EPS in the sixth year, after deducting losses attributable to repurchases of quasi-lease vehicles, is only $3.42. Without the lease repurchase losses, it would have been $5.05, 32% higher. Again, this takes no account of the consequences of having booked as sales future lease payments that are not now going to come in.
If you go the other way and change the quarterly growth rate for sales to 40%; the quarterly rate of deceleration to 6%; and the predicted net profit margin to 20%, Tesla's EPS in the sixth year projects out to $34.02. Without the lease repurchase losses, it would have been $38.58, about 12% higher. As you can see, the higher the sales growth rate, the lower the deceleration rate, and the higher the net profit margin, the less significant the potential losses from lease repurchases becomes. But even at these assumptions, it is not insignificant.
I note that the use of an single estimated net profit margin in this article to project net income is highly simplistic. We do not yet have enough known data or history to project fixed costs, variable costs, lease repurchase resale values, and other variables necessary to do a credible job of projecting net income or earnings.
But the purpose of this article was not to project Tesla's sales, net income, or earnings potential. It was rather to demonstrate that the potential impact of lease repurchase obligations on Tesla's future financial performance is potentially significant at reasonable ranges for those numbers. Of course, if nobody ever turns in a vehicle for repurchase, or if Tesla can resell the vehicles at a break-even price, the impact will be minimal to non-existent.
For myself, I am going to monitor resale values of model S vehicles as they come onto the used car market and try to predict resale values three years and three months from the sales date. If those resale values are higher than I assumed, then to the degree that they are higher this potential problem can pale to insignificance or just plain disappear, because no one is turning in their quasi-leased vehicles. But if they are about where I assumed them to be, or even lower, this problem has serious negative implications for Tesla's future financial performance.
Your mileage will no doubt vary. Mine does. I look forward to hearing the board's take on the assumptions I used. I also look forward to the board's members downloading the spreadsheet, inputting their own assumption, and posting the results for the rest of us. That way we'll be sharing the work and the benefits of that work.
I'm also looking forward to hearing about the logic or calculation mistakes I made. I'm sure I made some. I always do.
On another note...
In each of the above examples, the major factor holding sales down is the deceleration rate, which reduces sales growth each quarter. For example, by the sixth year, a 10% deceleration rate reduces quarter-over-quarter growth from 40% to 13%, still not shabby but much lower.
This usually happens in super-high growth situations early on. But "early on" can be six years later instead of one quarter later. So what happens if we let sales grow at a higher rate for the whole six years? What if sales keep growing at 100% annually for six years? What if sales growth accelerates over time as new geographic areas are brought into the available market? I'm working on those scenarios now. They require some different logical assumptions in the spreadsheet. For example, the number of outstanding shares will have to be increased each quarter to take account of Tesla's need for massive amounts of capital to expand production and to take account of employee stock option grants and exercises if the company is successful. I should have it done in a day or two and I will send it in for publication then.
Disclaimer: At this time I do not have any actionable view on Tesla's stock. I am still engaged in a rather long process of research and analysis to try to arrive at one.