In a recent Seeking Alpha article, contributor Logical Thought, a hedge fund manager with a large short position in Tesla Motors (NASDAQ:TSLA), claims that Tesla's gross margin is deceptive. He adjusted it to show that it isn't really high when compared to competitors such as Porsche.
Logical Thought moved Tesla's R&D spending from Operating Expenses (OpEx) to Cost of Goods Sold (COGS) and moved the estimated costs of Tesla's stores and service centers to the Cost of Goods Sold from Operating Expenses. Since gross profit is revenue minus COGS, the newly-calculated gross margin was 5.1% compared to Tesla's stated 22.6% gross margin in Q3 2014. Logical Thought made these adjustments to make Tesla more comparable to Porsche on a gross margin basis. However, these adjustments mislead investors.
Where Do Research And Development Costs Belong?
Traditionally, R&D has always been part of OpEx and is accounted that way by most companies outside the automobile manufacturing industry. COGS, however, doesn't traditionally include R&D expenses because it is supposed to represent how profitable the actual product is (i.e., revenue minus costs to manufacture the product). However, the automobile manufacturing industry reports R&D as COGS because it can amortize model specific R&D costs over the lifetime of the model it is developing. This means that these companies can report higher net incomes due to the reduction of R&D costs, but smaller gross margins.
Logical Thought decided to move Tesla's R&D costs, which totaled $135.873 million in Q3 2014, to COGS to be comparable to Porsche. This brings Tesla's gross margin to 12.9%, compared to Porsche's 29.2%. However, the number Logical Thought moved up to COGS was $74.051 million (he wrote $75 million) because he amortized 52% (this is the same ratio as Porsche, which is arguably inapplicable to Tesla) of Tesla's R&D expenses over eight years and added them to the remaining 48%. However, it is worth noting that Tesla
