Tesla (TSLA) is to report its earnings on November 5, 2013. Despite the recent pullback, the stock is up nearly 400% this year alone. The bears are out in full force, combing through Tesla's financially history, attempting to prove that this stock is vastly overvalued and ready for a fall. Tesla is often compared to older car companies such as General Motors (GM) and Ford (F) showing all sorts of ratios are out of whack whether it's price-to-sales ratios or price-to-earnings ratios. Admittedly Tesla is overvalued based on historic metrics. Bulls point out that the past financial metrics of this very young company can not be used value the company going forward, especially if and when the financial metrics change much more positively. I believe the bulls have it right, and Tesla will shock the street when earnings are reported.
Clue #1: Cash flow positive forecast.
In Tesla's previous earnings release, it didn't put much emphasis on it, but it stated:
Going forward, we expect to be non-GAAP profitable and generate positive cash flow from operations every quarter this year excluding any benefit from ZEV credits.
Okay, so it will finally tip over into positive territory. "So what," say the bears.
Clue #2 Level of cash flow positive.
In its conference call that accompanied the same earnings release, Tesla didn't go into detail about its positive cash flow forecast in any of its prepared remarks. Deep in the Q&A section, however, its CFO stated:
As we said in the shareholder letter that we clearly intend to cash flow from operations. And you are right in pointing out that some of that will be offset by our capital expenditures and we want to be very careful about burning cash. We want to be sure we are close as possible to a free cash flow position, but that's something that we don't want to necessarily guide to how we are going to manage it, but we are going to be still judicious and spend the CapEx where we need to in order to make sure that we are growing at the right pace.
This suggests it will not only be cash-flow positive from operations, but it will be so cash-flow positive it will cover its capital expenditures as well. This is a state of total free cash flow which is a whole new ball game compared to just cash flow positive from operations. Tesla had $40.5 million in cash paid for capital expenditures last quarter, so should we expect the cash coming in to cover just a similar amount? No.
Clue #3: Capital Expenditures are expected to be $150 million 2nd half of 2013.
Again from Tesla's earnings release:
We expect to spend about $150 million in the second half of this year on capital expenditures, including the recent purchase of 31 acres of land adjacent to our factory for future expansion.
This means the cash flow from operations in the 2nd half of the year must be over $150 million based on Tesla forecasts in order to cover the capital expenditures. But forecasts are just forecasts and maybe Tesla is being overoptimistic and just guessing, right? Wrong.
Clue #4: Visibility
Tesla isn't like General Motors or Ford that guess about the future. Every car Tesla makes currently is already sold before production even begins. This means any forecasts it makes about the future are purely its internal analysis on production and costs. Its CEO Elon Musk stated in the conference call:
And, it's important to note that we have visibility into these numbers more than ahead of time. So, the things that affect the gross margin, in order for them to, the fourth quarter really needs to be in place, we are essentially in place about a month before the fourth quarter, otherwise the parts that go into the car will not contain the [cost savings] that are necessary.
Unless he's outright lying or something out of left field hits Tesla in the immediate future, both of which I doubt, then Tesla's forecasts are very educated and based visible data it has access to. This makes its predictions a quarter rather easy and should be taken seriously. I doubt the street is expecting $150 million and possibly much more in cash flow from operations.
Clue #5: Bearish sentiment.
It seems like every day there's a new bearish article against Tesla. The street loves to doubt Tesla. Generally the more a stock or company is hated, the stronger the rally when there's good news as shorts rush to cover and longs pull their sell orders. Tesla has around 21 million shares short or around 27% of the float. With around 106% of the float owned by institutions, there aren't a ton of free-trading shares to go around. A positive report could easily trigger a short squeeze, causing shorts to rush to cover with buy orders that add more fuel to the fire.
In addition to these five clues, the market is red hot. Take Google (GOOG) and Chipotle Mexican Grill (CMG) as prime examples. Google did beat estimates by $100 million in sales and .40/share on earnings. Impressive, but that $100 million beat in sales translated into an increased market cap of over $45 billion or 450 times the beat. The EPS beat of .40 translated so far into a $137 price rise or 342 times the beat. Similarly, Chipotle Mexican Grill had a great report, but it actually missed estimates. Its forward-looking guidance raise was enough for the street as it sent the stock up $80 per share higher, adding $13 billion to its market cap mostly due to its same-store sales outlook being raised a couple of percentage points higher. Tesla, like Google and Chipotle, is a name vast Wall Street numbers of participants are watching every day. Any good news, such as $150 million or higher in positive cash flow from operations (2nd half 2013), could shock the street and give it a Google-Chipotle-like move.