Tesla (NASDAQ:TSLA) has for years worked hard to focus its shareholders and financial firm analysts on two metrics:
(1) deliveries (of new cars), and
(2) gross margin.
It certainly appears Tesla has succeeded. During conference calls, the analysts seem hypnotized by delivery guidance and mesmerized by gross margin promises.
A delivery "beat" (even when the guidance was modest) seems to juice the stock price, whereas announcing massive operating losses scarcely moves the needle.
(Yes, it's a Jaguar F-Pace. It's coming to eat Model X's lunch.)
And, it's clear that when deliveries and gross margin clash, then deliveries trump even gross margin.
Why the determined focus on deliveries? Because Tesla's stratospheric market cap is premised on the promise of continuing rapid growth. Without ever-increasing deliveries, this crucial Growth Narrative collapses.
Consequently, Tesla will sacrifice almost anything to achieve deliveries. That certainly includes profits. Or rather, as Tesla has no profits, revenues.
(Details on the mugs at the end of this article...)
Tesla demonstrated its willingness to endure greater losses in exchange for deliveries with its recent reinstatement of the Model S $1,000 rebate.
It demonstrated it even more dramatically with the price cut implicit in offering the Model S60 for $66,000.
But what about those wonderful profitability promises?
Wait, you ask, how can I overlook Tesla's recent and emphatic promises that it will focus first and foremost on cash and profits, not deliveries?
For instance, in its May 6, 2015 Shareholder Letter, Tesla pledged to "optimize efficiency" by using rail rather than truck to ship cars in the U.S. and Canada.
And, only four months ago, during the Q1 conference call, we heard this beautiful duet sung by CFO Jason Wheeler and CEO Elon Musk:
Jason Wheeler - Chief Financial Officer
I'll just close by saying my mandate from Elon is clear. Cash is king. And there's some real steps that we're taking as a company to get ourselves to net cash flow positive for the year.
Elon Reeve Musk - Chairman & Chief Executive Officer
Jason Wheeler - Chief Financial Officer
My, that was gorgeous! The tenor sang, "Cash." And then the baritone belted out, "Profitability!" And the tenor picked it up, an octave higher, "Profitability!"
It was indeed a stirring bit of bel canto, but the singers have exited stage left and the tune has faded away. In its place, we have a new opera, The Flying Dane.
Out of Denmark comes the news that Tesla is flying in - yes, transporting via airplane - some 15 Model X cars to Denmark for arrival before July 1.
While it is in some sense admirable that Tesla is taking this extraordinary step so that 15 or so Danish Model X customers can escape higher taxes [hey, won't that exacerbate income inequality?], one wonders why Tesla could not have planned these deliveries earlier so the cars could travel via boat rather than air.
How much margin will remain on those cars after the Great Danish Airlift? We would surmise precious little. It may make for some splashy publicity, but it will be murderous on the bottom line.
So much for optimizing efficiency. And so much for "Cash is king" right alongside "profitability."
It's yet more evidence, if any were needed, that Tesla will do anything to achieve more deliveries, even if it means taking an ever bigger bath on operating losses.
In early July, you should expect news that Tesla has met or exceeded its 17,000 Q2 delivery guidance number. And, in August, you should expect financial results bathed in red ink.
Mark my words: 2016 will be a record year for operating losses. Worse, even, than the $889 million lost in 2015.
The Unraveling Growth Narrative
As I've reported, Tesla's Growth Narrative is increasingly imperiled. Model S deliveries in Q1 were much lower than Q4 2015. The Q2 Model S deliveries also will fall far short of last year's Q4.
Excluding Q4, with its massive discounting of inventory cars, Model S demand has flat-lined over the past year. Q2 will confirm this trend.
So far, the re-introduction of the lower-priced Model S60 isn't helping matters. While preliminary data shows the lower-priced car is attracting about 40% of the new Model S orders, it's attracting them mostly from sales of the higher-priced versions.
The Model S order rate appears stuck exactly where it's been for the past two months - at about 900 per week. At this early juncture, it appears all Tesla has accomplished with its Model S price cut is to disrupt sales of higher margin cars.
And, as we've noted, Model X demand is on life support.
But those are problems for Q3 and Q4. For now, the crucial thing is to Keep Hope Alive by meeting Q2 delivery guidance.
And in the service of Keeping Hope Alive, Cash is not King. Cash is not even Rook or Bishop. Cash is Pawn.
Fortunately, for Tesla, it's swimming in Cash (at least for the next several months) from the recently completed capital raise. No doubt the subscribers to the recent follow-on offering will be thrilled to know their capital infusion has bought first class air fare for some Danish Model Xs.
Tesla's emphasis on Deliveries creates accounting opacity about Trade-Ins.
Tesla's emphasis on deliveries results in Tesla hiding financial data that would illuminate the extent to which Tesla is willing to sacrifice profits at the altar of deliveries.
Tesla purchases used cars to facilitate new car sales. How much does Tesla pay for the trade-ins? It's impossible to know. Tesla lumps their cost into the larger category of "Finished Goods" on the Balance Sheet.
Does Tesla overpay for trade-ins in order to obtain higher prices on new cars? At first glance, such a strategy would seem pointless, as the loss on the used car would wash out any extra profit on the new car.
Well, surely the Income Statement reveals how Tesla fares on its sale of used cars, right?
Wrong. Tesla lumps used car sale receipts into the larger category of "services and other revenue." Besides used car revenues, that category includes (among other things) revenues from service centers and Tesla Energy.
Until recently, Tesla filled this information gap by disclosing in its Shareholder Letters both (1) the portion of "services and other revenue" attributable to used car sales and (2) whether Tesla was selling more used cars than it was taking in as trade-ins.
However, as Paulo Santos has detailed, Tesla stopped reporting this information after Q3 2015.
Paulo speculates Tesla ceased the reporting because the data was no longer favorable. Obviously, we don't know whether that's true, but having seen Tesla do precisely the same with Model X deposits, we understand his cynicism.
Is Tesla warehousing used cars to pump up "deliveries"?
Does Tesla's focus on deliveries tempt Tesla to hang on to used cars for longer than it should?
Several months ago, I pointed to indications that during the early part of this year, Tesla held CPOs off the market in hopes of firming up new car demand. Even now, the CPOs on the EV-CPO Consolidator are mostly older, lower-priced S60 models.
Here is what I believe may be happening:
- to obtain a higher price for new cars, Tesla is overpaying for used cars,
- to support its new cars "deliveries" number, Tesla is holding CPO cars off the market, and
- to disguise both these strategies, Tesla has made it impossible to determine the size of its used car inventory and the financial results of its used car sales.
Some readers, no doubt, will accuse me of undue cynicism.
Perhaps they're right. I invite Tesla to embarrass me by disclosing what it pays for used cars, how many it has on hand, and what margins it achieves on its sale of those cars.
Does Tesla make extravagant promises to its "leasing partners" to achieve higher deliveries?
Leasing is another area where Tesla's emphasis on deliveries may have created incentives to make financial reporting less transparent.
Beginning in late 2014, Tesla began offering its "leasing partner" banks a residual value guarantee (RVG) whereby, at the end of the lease period (typically, 36 to 48 months), the banks can require Tesla to buy back the cars for a percentage of the sales price.
Because these bank-financed leasing transactions are increasing in both absolute numbers and as a percentage of Tesla's deliveries, they are becoming ever more material, as is the potential liability they pose.
When Tesla first began its "leasing partner" program, Seeking Alpha Contributor Paulo Santos wrote an article detailing evidence that Tesla was offering one of its leasing partners, U.S. Bank (NYSE:USB), a high residual percentage.
There is no way to know whether Paulo is correct. Tesla's financial statements fail to disclose the following material information about the RVG transactions:
- the prices at which Tesla sells cars to the banks,
- the number and duration of the lease contracts, and
- the residual percentages Tesla has guaranteed to the banks.
Without this information, investors have no way of knowing Tesla's potential RVG liability.
Let me emphasize that the RVG liabilities are only potential. A strong argument can be made that when it comes to RVGs, the GAAP accounting rules are unduly conservative.
Indeed, that argument has been ably put forth by Seeking Alpha Contributor Bryce_in_Texas (what Bryce writes about the resale value guarantee in sales transactions applies with equal force to the RVG in leasing transactions).
There is evidence, however, that some part of the potential liability may become real. Tesla used car prices are now under downward price pressure. There are certainly indications that the used car market as a whole is about to see a flood of new inventory as cars come off leases.
The residual percentages Tesla offers its leasing partners are highly material, and Tesla should disclose them.
The Great Coffee Mug Competition
Most of you will recall that in the most recent article, I invited commenters to make their own forecasts for Q2 deliveries.
I said I would award Montana Skeptic coffee mugs to the winners: one mug for first place, and two for second.
I've compiled our entrants in alphabetical order (see below). If you entered, but don't find your name on the list, send me a private message (you can do that from my "Profile") and let me know.
On reading my instructions, I see I made a total botch of it. I neglected to note that, to break a tie, each entrant should list both Model S and Model S totals.
So, I have altered the deal. I will award mugs as follows:
- 1st place total deliveries:1 mug
- 2nd place total deliveries:2 mugs
- Closest Model S:1 mug
- Closest Model X:1 mug
Someone inquired whether shipping was included. Yes, indeed, shipping is on your Skeptic, from Bozeman MT to wherever you live. One of our entrants lives in the Czech Republic, and one or more live in Scandinavia, so this could get pricey.
But, hey, when it comes to Montana Skeptic mugs, Delivery is King, and I'll sacrifice Cash if I have to.
I'll announce winners a few days after Tesla announces its Q2 deliveries.
In Case You Missed It…
… there are some recent articles by Seeking Alpha contributors about matters Teslarian:
- Anton Wahlman contends Jaguar has more compelling growth and value narratives than does Tesla.
- Randy Carlson explains why he believes Tesla has achieved a crucial cost and efficiency breakthrough using dynamic battery balancing.
- Paulo Santos pours cold water on the idea that Tesla will be profitable with scale, or will be saved by an acquiring white knight.
And, at his own blog site, the inestimable Peter M. De Lorenzo unloads an epic rant about Tesla's response to reports of Model S suspension failures.
The Montana Skeptic mug entries:
|A Plate Full Of Waffles||10,050||m_soegaard||12,176|
|… and out come the wolves||11,400||robiniv||xxx|
|Cloister Research||11,489||Special Value||12,800|
A Note About My Contributors
Bonaire and temagami (at the Yahoo message board for Tesla) supplied me with delivery data.
Bryce_in_Texas kept me honest about accounting (and, where I veer off the straight and narrow, it's not his fault).
investor.gator here and n0m0renancy at the Yahoo board offered ideas and guidance.
I take full credit for all mistakes.
Disclosure: I am/we are short TSLA VIA LONG-DATED PUTS.
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.