Did Tesla Have A Disaster Quarter?

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 |  About: Tesla Motors (TSLA)
by: Jacob Steinberg

On November 5th, Tesla (NASDAQ:TSLA) announced its earnings for the third quarter of 2013. The results were mostly in line with the company's earlier projections; however, some of these results were not as good as what investors were looking for, since a lot of investors were actually looking for Tesla to beat its own estimate by a large margin. Because Tesla is mostly about hype and very little about fundamentals at the moment, the results led to a sell-off in the after-hours. Let's take a look at Tesla's third quarter and see if the sell-off was justified.

This was another non-profitable quarter for Tesla (even though the company focuses mostly on non-GAAP measures and considers itself profitable). The company posted a loss of 32 cents per share on revenues of $430 million for the quarter. Keep in mind that this number excludes Tesla's unrealized revenues, such as the revenues attached to the company's leasing program. Tesla's gross profit in the quarter was 23.70% (21% excluding ZEV credits, up from 14% in the last quarter), which shows that the company is making progress in reaching its target gross margin of 25% excluding ZEV credits. Compared to the last quarter, Tesla's research and development spending increased from $52 million to $56 million, and the company's selling, general and administrative costs jumped from $60 million to $77 million. As a result, while Tesla's gross profit only rose by $2 million (from $100 million to $102 million) the company's operating costs rose by $21 million (from $112 million to $133 million).

During the quarter, Tesla was cash flow-positive despite increased capital expenditures. During the quarter, Tesla increased its cash position from $746 million to $795 million, after spending $76 million in capital expenditures. This indicates a free cash flow of $49 million and roughly half of this number came from financing activities. Currently Tesla is building a large number of chargers across the US and it is investing in increasing its production rate and it is impressive that it was able to remain cash flow positive for the quarter.

If we look at non-GAAP figures, Tesla generated $602 million in revenues and earned 13 cents per share. This indicates a quarter-to-quarter revenue growth of 9.25%. The problem with non-GAAP figures is the difficulty in accurately valuing a company with these metrics. Tesla's leasing model basically includes selling people cars with buyback guarantees in 3 years if the buyers are not happy with their car. In GAAP figures, Tesla doesn't include the revenue generated from these vehicles; however, the non-GAAP figures include these figures. The problem is that Tesla might not realize a big portion of this money if a number of "leasers" decide to sell their car back to the company. This can be especially harmful if these cars depreciate more in value than how much Tesla thinks they will depreciate. Honestly, no one knows how much these cars will lose in value in 3 years since they haven't really been on the road for that long and there is nothing to compare against. This is why it makes more sense for Tesla to report that portion of the revenue when it's actually realized.

During the quarter, Tesla delivered 5,500 new cars including 1,000 deliveries in Europe (mostly Norway). This is in line with the company's past guidance; however, many analysts and investors were hoping to see a much bigger number. Recently, VIN assignments indicated that the number of Model S deliveries in the quarter could be as much as 7,000 (which invalidates the method of looking at VIN assignments in order to predict the number of deliveries). Currently, the company is able to build 550 cars per week, which means that it will be able to produce at least 6,000 cars in the fourth quarter (based on 11 weeks instead of the regular 12 weeks since this quarter includes holidays such as Thanksgiving and Christmas). The actual number might be even higher than this because Tesla will continue to ramp up its production capacity in the coming weeks and months.

During the quarter, Tesla achieved some other notable milestones, such as taking the first Chinese order (will be delivered early next year), increasing the number of superchargers in the US to 31, adding 6 superchargers in Norway, delivering 4 million "supercharged miles" and saving consumers from buying 200,000 gallons of gas. These are some of the things Elon Musk and his team can be proud of and this is only the beginning of their success story.

In the fourth quarter, Tesla expects to deliver 6,000 cars and reach the total of 21,500 for the full-year. The company expects to make more progress in its 25% non-GAAP and non-ZEV credit gross margin goal in the fourth quarter and it sees itself maybe even passing this goal if people continue to order cars full of expensive options as they have been doing recently. As the company prepares itself to launch Model X and make improvements in Model S, it expects to spend 25% more on research and development than it did during the last quarter. The company expects another quarter of non-GAAP profitability and it expects its cash flow to be near breakeven levels as it will also ramp up its spending on infrastructure upgrades such as building new service centers and more supercharger locations.

The company didn't talk about the current demand or a backlog; however, the earnings report mentioned a new deal with Panasonic to deliver 1.8 billion cells of batteries in the next 4 years, which speaks volumes about the ongoing as well as the projected demand.

At the end of the day, Tesla's quarter wasn't that bad and it was in line with the company's previous guidance. The problem stands with the fact that many investors were getting ahead of themselves and expecting the company to beat its estimate by a large margin. Because Tesla is "very generously" valued, a lot of future growth is already baked in the share price. This is why there is very little room for error and Tesla must execute all its plans perfectly, just to justify today's share price, let alone future price appreciations. In conclusion, Tesla's quarter and future guidance didn't carry any big surprises, which isn't always appreciated in hyped-up stocks.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I'm long calls and puts of TSLA simultaneously.