Tesla's (NASDAQ:TSLA) long track record of innovation has enabled it to become the market leader in financial shenanigans. From non-GAAP revenue to non-GAAP net income, the company has come up with a variety of "adjusted" performance numbers to mislead and confuse the ignorant investment herd into buying its grossly overvalued stock. The latest non-GAAP invention, however, takes things to a whole new level of absurdity.
In its recent letter to shareholders, Tesla introduced a new metric called "core operational cash flow," or COCF for short. Don't be fooled by the familiar-sounding name. COCF isn't the cash flow metric we're used to seeing. Such free cash flow (or FCF) is traditionally computed as operating cash flow minus CapEx. The measure Tesla invented is defined as operating cash flow plus cash from collateralized borrowings.
Collateralized borrowing, for those unfamiliar with it, is similar to factoring: it allows financially struggling companies like Tesla to accelerate their cash collection process. The fact that Tesla includes this as part of its cash flow isn't the problem here. What is the problem is that COCF treats CapEx as if it doesn't even exist.
CapEx represents the cash Tesla must spend to increase production capacity, develop the Model 3, complete the Gigafactory construction, and expand its sales, services, and Supercharger infrastructure. Funding all of those long-term ambitions means CapEx will be a recurring and growing burden. As such, it must be subtracted from COCF so that investors can get a clearer picture of Tesla's true cash flow generation.
And it doesn't look good. As shown in the table below, COCF grossly overstates Tesla's true cash generating ability. In the most recent quarter, for example, COCF was positive $179 million, but FCF (or COCF less CapEx) was negative $232 million! For those mathematically challenged, that's a difference of $411 million between what was reported and reality.
COCF Overstates Tesla's Cash Flow Generation
Note: COCF is equal to the sum of operating cash flow and cash from collateralized borrowings. The FCF metric presented here is defined as COCF minus CapEx.
Source: A North Investments, Tesla's quarterly and annual reports and shareholder letters
Positive COCF or not, the fact is Q4 2015 was among the worst cash-burning quarters in Tesla's history, and it's unlikely that things will improve going forward. With only $1.2 billion of cash on hand, and a 2016 CapEx budget that will likely exceed $1.5 billion, funding future growth will inevitably force the company to do another equity raise and/or pile on even more debt to an already over-leveraged balance sheet. Failure to raise sufficient funds could result in bankruptcy.
But Tesla doesn't want you to know that. The company has successfully masked its deteriorating cash flow situation by simply no longer disclosing FCF in its quarterly shareholder letters. All we now get is the useless COCF metric, which doesn't subtract out CapEx.
Source: A North Investments, Tesla's shareholder letters
Then there's the other little trick Tesla employs to give the illusion that it's doing better than it actually is: it emphasizes non-GAAP (or "adjusted") results over GAAP ones. The SEC has rules against this. For instance, when a company announces GAAP and non-GAAP numbers, the GAAP ones should be reported first. But Tesla does the exact opposite. Here're a couple of examples from the recent shareholder letter as proof:
- For full year 2015, our revenue totaled $5.29 billion on a non-GAAP basis, up 47% from 2014, and $4.05 billion on a GAAP basis.
- For full year 2015, our net loss was $2.30 per share on a non-GAAP basis and a loss of $6.93 per share on a GAAP basis, both based on 128 million basic shares.
The issue here isn't that Tesla doesn't know that it shouldn't lead with non-GAAP, it's that it does know and chooses to do it anyway. And why not? The downside is a light slap on the wrist by the SEC; the upside is Tesla gets to advertise its performance in such a way as to lure more investors into feeding its perpetual cash bonfire.
All of this raises a very important question: What other shenanigans are going on at Tesla? Financial reporting problems tend to be like cockroaches - if you spot one, there's probably many more that you can't see (yet). And it's not like Tesla hasn't run into trouble before. A while back, the company had to restate its cash flow numbers for 2011 and 2012. More recently, a significant accounting error led to a $172 million overvaluation of its Supercharger network. What's next?
The point here isn't that Tesla is a fraud. The point is that the company seems to care little about proper accounting and disclosure practices, which could be a serious problem for the unprofitable electric-car maker, which currently sports a $33 billion market cap and trades for more than 8x trailing revenue. If Tesla keeps going down the same road it's on now, it will end in disaster for both the company and its shareholders.
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: I am short TSLA via put options.