Tesla: The Bad News Just Keeps Getting Worse

| About: Tesla Motors (TSLA)

Summary

Tesla loses $20,357 per car sold - a new record. The bottom line keeps worsening with time.

Tesla no longer guides for the next 3 months - only 6 months. You all know what this means: The next 3 months will be catastrophic.

CEO Musk said Tesla would be profitable in 3Q and 4Q if it weren’t for Model 3 capital expenditures. I kid you not. Accounting 101, anyone?

Tesla Energy, aka, the stationary energy story? Removed like Trotsky in that picture from almost 100 years ago.

Considering the timing of the U.S. election on November 8, and Tesla perhaps reporting 3Q on November 9: Is this 2Q report just a hail-Mary pass?

I suppose we have all heard it before: Just give it some time. As Tesla (NASDAQ:TSLA) grows, the bottom line will improve.

Thing is, it hasn't and it didn't. As Tesla's revenue has grown, and time has passed, losses are growing too. This quarter - June 2016 - the loss ballooned even further, to $20,357 per car delivered. See this apocalyptic trendline:

GAAP loss

cars sold

GAAP loss per car

2Q 2016

$293,188,000

14402

$20,357

1Q 2016

$282,267,000

14810

$19,059

4Q 2015

$320,397,000

17478

$18,331

3Q 2015

$229,858,000

11603

$19,810

2Q 2015

$184,227,000

11532

$15,975

1Q 2015

$154,181,000

10045

$15,349

4Q 2014

$107,629,000

9834

$10,945

Click to enlarge

As you can see in the table above, the losses have essentially doubled over the last two years. This is the time when they should - if anything - have been turning to a profit, or at a minimum be cut in half. Not doubled.

What drove these losses? Was it gross margin, or was it overhead expenses? Well, that is at least in part a bit of a trick question, given that Tesla's overhead expenses behave more like cost of good sold (COGS), as many other authors have shown for multiple years already. Tesla puts all of its sales expenses and R&D not in COGS, but below the line.

That said, let's take a look at that gross margin, however generously defined it is:

GAAP revenue

GAAP gross profit

GAAP gross margin

2Q 2016

$1,181,852,000

$274,776,000

23.25%

1Q 2016

$1,147,048,000

$252,468,000

22.01%

4Q 2015

$1,214,379,000

$218,564,000

18.00%

3Q 2015

$936,789,000

$231,496,000

24.71%

2Q 2015

$954,976,000

$213,370,000

22.34%

1Q 2015

$939,880,000

$260,073,000

27.67%

4Q 2014

$956,661,000

$261,697,000

27.36%

Click to enlarge

As you can see in the table above, the gross margin did actually increase this quarter, from 22% to 23%. It's still lower than it was for most of the quarters a year prior, however. Then again, what did this slight one percentage point improvement in the self-defined gross margin percentage do for the company's bottom line?

GAAP revenue

GAAP losses

GAAP negative margin

2Q 2016

$1,181,852,000

$293,188,000

24.81%

1Q 2016

$1,147,048,000

$282,267,000

24.61%

4Q 2015

$1,214,379,000

$320,397,000

26.38%

3Q 2015

$936,789,000

$229,858,000

24.54%

2Q 2015

$954,976,000

$184,227,000

19.29%

1Q 2015

$939,880,000

$154,181,000

16.40%

4Q 2014

$956,661,000

$107,629,000

11.25%

Click to enlarge

As you can see in the table above, it stayed about the same as the previous quarter, which in turn is roughly where it has been for the last few quarters - since it more than doubled in 2015 from where it was in late 2014. What conclusion can we draw from this? Tesla is simply adding more "fixed" (overhead, whatever) expenses to support the revenue generation. In other words, "fixed" expenses are not fixed as all. They appear linear to the top line. Translation: No scale economies are being achieved, and if anything it's getting worse.

Turning to cash flow, let's first look at the table with the data:

negative cash flow

cars sold

negative cash flow per car

2Q 2016

$144,383,000

14402

$10,025

1Q 2016

$466,464,000

14810

$31,497

4Q 2015

$441,071,000

17478

$25,236

3Q 2015

$595,743,000

11603

$51,344

2Q 2015

$564,681,000

11532

$48,966

1Q 2015

$557,854,000

10045

$55,535

4Q 2014

$455,063,000

9834

$46,274

Click to enlarge

As you can see in the table above, there looks to have been a huge improvement! The cash flow deficit is now a pittance compared to where it was before! Actually, it's only approximately half of the net loss for the quarter! Did Tesla somehow have *negative* capital expenditures?

Um, no. Capex was $294,720,000, a number similar to recent quarters. It turns out that the big variance was customer deposits. Remember the Model 3 deposit mania which took place mostly at the very beginning of the second quarter?

Turns out, the incremental deposits received were $288,471,000, on a net basis. While there were surely tens of thousands of Model S and X cars going in and out of the overall deposit pool during the quarter, seeing as overall sales were about flat with 1Q, this $288 million number sure doesn't suggest 373,000 deposits. It's not impossible, but one would like to see a lot more proof for how that would have come about. Knowing nothing else, the burden of proof for suggesting that $288 million in incremental deposits support 373,000 units is on Tesla.

Of course, on the conference call, the company was unwilling to offer any update from its 373,000 unit number which it provided in May. It may be that it's still exactly 373,000, plus or minus some 1% or similar fluctuation. But if so, why not just provide the number?

If you add back the $288 million increase in customer deposits to free cash flow, it's a deficit of $432,854,000 - a number very similar to the last couple of quarters. Makes sense, given all the other similar circumstances. Surely, the loans given to Tesla by hopeful or otherwise speculative Model 3 interested parties, should not be considered to be "core cash flow."

Tesla has the deposit number, whether as of June 30 or today or for that matter any other day. Tesla has this number in real-time, down to a fraction of a second. But it chose not to provide an update from what it provided in May.

The other thing not mentioned: 3Q delivery guidance. Yes, it guided for 50,000 for the second half of 2016. In previous quarters, Tesla has guided for the current (NEXT) quarter. Not so this time.

The conclusion I draw from this is that 3Q looks exceptionally bad - at a minimum, from a sales (unit) perspective, and probably also from a bottom line perspective, as it will take a lot of discounting to swim against the tide. That tells me that the optimal time to short this stock in size may be at the end of September, just before the company reports 3Q unit deliveries in early October.

Another thing missing from the Tesla investor letter: Any mention of the "Energy" business. This is the stationary battery business. Remember how it was mentioned over the last year or so, going back all the way to May 2015, how it would be so huge, already in 2016? Now… crickets.

This goes to credibility. Look at the projections from 2015, as to the stationary battery sales for 2016. Now it can't guide to a single dollar for the second half of 2016?

Summary: An almost guaranteed miss for 3Q. And then again for 4Q.

The signs from the Tesla 2Q report and conference call are not difficult to read. Any company removing guidance for the current quarter, while instead giving 6-month guidance, does so for only one reason: The first 3 of those 6 months will be a disaster.

Tesla lost $20,357 per car in 2Q. For these reasons, despite presumably selling many more cars in 3Q than in 2Q, don't expect a major improvement in the loss per car number - and look for that number to be smaller than what will be needed in 4Q to come near 80,000 for the year.

Tesla can then come back in November with some incremental excuse yet again as to why 4Q won't be improving as much as was necessary to meet the financial and other guidance and targets. Some variant of this scenario happened in each of the two last years. This year, this is even more easy to predict than it was at the equivalent point in each of the last two years.

One certainly gets the sense that Tesla is hoping for some sort of political bailout or other new subsidy scheme to arrive on the horizon, and is papering things over to that point.

Conveniently, the U.S. elections are held on November 8. Tesla may just report 3Q on November 9. If things go the right way - from Tesla's perspective - on that November 8 day, maybe it can then set investor expectations at that point, that help is on the way, courtesy from the U.S. taxpayer.

And if things don't go the right way on November 8? Well, then it was going to have been a lost cause anyway. So better put everything on red for now, and hope for the best. That's what the Tesla 2Q report sounded like.

Disclosure: I am/we are short TSLA.

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: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted my most major automakers.