Tesla: My Take On Earnings

| About: Tesla Motors (TSLA)

Summary

Tesla loses more money per car though less per share, but more overall.

The cash flow statement stinks of unsustainable cash generation.

Overall impact? No surprises! Tesla still isn't worth what they're trading at, but instead closer to $100 per share.

As per usual around Tesla earnings, there come a flood of articles either calling for the company's imminent demise, or telling us that NEXT quarter, or the quarter after that, or the one after that, is the one where the company really takes off!

I think hyperbole on one side or the other doesn't do anyone any good, so I'll try and avoid that in my take on their earnings. Besides, for any company, one quarter isn't often that important in the longer run.

Earnings Overview

Revenue was up (no surprise), but not by anything huge (again not a surprise). Gross margin ticked down, and if we exclude the extra almost 1 cent per share in higher interest income, and calculate it on a same share basis, the company lost more money this quarter on higher sales. Loss per car hit a record. Yada yada yada.

So margins are down everywhere. Meh, whatever. What matters more is cash anyways.

The company's cash flow statement shows positive cash from operations of $150 million which interests me. They had accounts receivable expand Q/Q, they had inventory expand $300 million Q/Q, so it seems to me this entire cash inflow was from an increase in liabilities (due to the Model 3 probably), and not a small one. That's not actually a source of sustainable cash, so I'm not overly impressed.

What Tesla also did was cut capex to the sub $300 million mark, which was significantly less than they had promised. Why this is the case, I don't know, but I think it shows the internal dilemma that Tesla must be aware of: they have finite resources, and limited time to burn cash, but they've promised the moon. The good thing for them about capex is that it's a little more hidden on the cash flow statement.

Notably absent from the letter: comments on the battery business, more color on Musk's grand plan (save SolarCity), or discussion of orders of the Model 3, which are arguably the company's second most important source of cash (after massive equity and debt financing).

Outlook wise, looks like they plan to meet the low end of their guidance. I'm not sure I buy that cost reductions in the Model S and Model X are going to really affect margins because I think more people will be buying the lower priced Model X and Model S after the recent price cut. Tesla probably can afford that price cut due to the lowered production costs, so I don't see any margin expansions.

Tesla also sees higher opex going forward, which is fairly unsurprising, although 30% increase in opex means 30% higher cash burn as I'd imagine most of that opex is going to be cash expenses.

Overall, Tesla reported a WAY higher loss than expected, defrayed by a higher share count, and muddled (if you chose to look at Tesla's Non-Gaap numbers) by their usual accounting gimmicks.

Some Context

The most interesting number to me that Tesla reported was their plan to get to 500,000 cars in 2018. If we circle back to capex, we can see that Tesla is already significantly behind its guidance for the year, and to me, that signals there may be delays in getting their production up and running. A quarter doesn't mean much, but how they plan to get to scale in 2018, I don't entirely no.

But here's the best part: it doesn't matter. When I valued Tesla , I got to $100 per share based on 10% EBIT margins and 500k cars IN 2017! A year early. Being generous (or insanely optimistic) for the sake of simplicity, lets say that Tesla earns 10% EBIT margins on each Model 3. That translates into roughly a 7% free cash flow margin on each Model 3. So each 500,000 Model 3's at an ASP of $43,000 means the delay of $1.5 billion of free cash flow. At a WACC of 13%, that means a loss of about $175 million in present value just due to time value of money. Anyways, these are just interesting tidbits.

The key takeaway for me is that I valued Tesla at $100 per share based on generous assumptions, including the Model 3 production coming a year sooner than expected, so, again, nothing Tesla said in their earnings report phases, excites, or disappoints me in the least. The company is proceeding as I expected, and the fact remains that their course doesn't justify their valuation.

The complicating factors are Tesla's grand plans.

But I don't think those matter too much either! The cash needs of the business expansion Musk has planned are simply too great to reach escape velocity, to use a term from rocket science. I don't see them happening anytime soon, and I believe that SolarCity actually detracts from the probability his vision is realized because of the severity of SCTY's cash burn. I also think the signal the deal sends to investors about Tesla's corporate governance is a risk to Tesla because it alienates potential providers of capital.

And that's where Tesla falls down for me: it is ENTIRELY reliant on financing, and will be for YEARS. If the capital markets ever get tired, or god forbid we go through a long term correction, crash etc. then Tesla is dead. If the capital markets close, the company can't survive.

I'll continue watching with interest!

Disclosure: I/we 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.