There seems to be almost universal misinterpretation regarding the portion of the deposit amount appearing on Tesla's (NASDAQ:TSLA) balance sheet at June 30 that most likely relates to customer deposits for the upcoming Model 3 (M3), the "affordable" $35,000 sedan Tesla plans to begin delivering to customers in the second half of 2017. As a result, many have incorrectly concluded that Tesla must have seen a large cancellation rate of refundable reservations since the figure of 373,000 deposits was released in early May. Many further believe Tesla is refusing to release an updated M3 deposit count to hide this fact. I believe that interpretation is totally wrong and that most likely deposits are holding relatively steady, possibly even increasing slightly recently.
Unfortunately, Tesla doesn't break out the customer deposits on its balance sheet by model; it just shows a grand total of the dollar amount of deposits for the Model S (MS), Model X (MX) and M3 combined. Furthermore, it doesn't show the number of cars these deposits relate to, so we have to make some educated assumptions as to which models these deposits are for.
First, I believe it's reasonable to assume that combined deposits for the MS's and MX's have stayed roughly the same since Dec. 31, 2015 and therefore the entire increase at June 30 is related to M3 deposits. Although we don't know exactly how accurate this assumption is, I think it is a reasonable one, although without more detailed information from Tesla, it is impossible to know for sure. One complicating factor is that initial deposits are of varying amounts depending upon the car model. Furthermore as the delivery date approaches, customers usually make supplemental deposits, so for MS's and MX's, it is impossible to relate a particular deposit amount to a specific number of cars for which deposits have been placed, and vice versa. For Model 3's, it is much easier, however, since we know all deposits are roughly $1000, (varying modestly depending upon the currency in which they were placed). Until early this year, very few MX deposits were removed due to deliveries. As deliveries increased due to production getting up to speed, and the backlog of Model X's decreased, we would expect these deposits to actually be going down. The MS backlog may have decreased as well. On the other hand, if you read Tesla's definition of "deposit," it includes the trade-in value of an older car, and there were likely an increased number of them in the mix at June 30. Of course, the simple fact that a higher than normal number of cars were in transit at June 30, would also potentially inflate the deposit balance amount.
Secondly, we know that there were no M3 deposits on Dec. 31, 2015, so the entire deposit amount of $283 million at that date related to MS and MX deposits. At June 30, the total deposit amount was $680 million, an increase of $397 million. If that entire amount was due to M3 deposits, then it would represent almost 400,000 deposits at June 30. Even if my assumption that MX and MS deposits remained constant is incorrect and they increased by as much as $24 million over the past six months, we would still have reservations for 373,000 M3's on June 30.
Now let's go back and look at the figure on March 31; it was almost $392 million, an increase of $108 million from the December 31 figure. We all know this is the day that Tesla began taking in person deposits in the morning and then on-line deposits late in the evening. We also know that when Musk took the stage on the evening of March 31, he disclosed they had 115,000 reservations. We don't know what time Tesla closed their books on March 31, whether it was 5 pm PST or midnight (or some other time), but it is reasonably safe to assume that reservations counted in the books were in excess of 100,000. This is absolutely consistent with the increase of $108 million in deposits at that date compared to December 31. It is this $108 million increase that many seem to have missed.
I've also noticed in some comments that there seems to be confusion regarding the accounting at March 31 for these deposits, since we have been told the credit card deposits take a few days to clear. Some have assumed the deposits wouldn't be recorded on the books at March 31 as a result. This is incorrect. They were recorded in accordance with standard "double entry" bookkeeping. They were recorded as a deposit on the liability side of the balance sheet (b/s) and as a receivable on the asset side. A few days later, when the cash came in, the receivable would have been converted to cash on the b/s. There would have been no subsequent change to the deposit liability.
Now why would Tesla not want to disclose the M3 number if it is not bad? If they did, they would probably need to release the number of MS and MX deposits as well and the trend for these numbers is most likely not good. I base this conclusion on the analysis provided by Montana Skeptic in some of his recent articles and reports of minimal delays between the order date for one of these cars and when it typically goes into production.
I also think that the specific MS and MX deposit numbers, in particular the number of reservation/orders the deposits relate to, are much more important from an analytical point of view than the M3 deposit figures. There could be lots of reasonable theories for future changes in the deposit amounts for the M3. There could be slow attrition prior to production and then a surge in orders then, for example. We also have no idea what the actual conversion rate will be from the current deposits; there is so much potential "noise" in the numbers, they are hard to interpret. There could be multiple reasonable competing theories about demand as a result of the current and future deposit trends.
On the other hand, interpretation of changes in backlog for the cars currently in production, the MS and MX, would be subject to little ambiguity; an increasing backlog would be good and a decreasing backlog would be bad. This is the information that is behind the curtain few are paying attention to since most of us seem to be distracted by the M3 deposit question, although we are not being allowed to open that curtain anyway.
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 have a modest short position, mainly by writing OTM calls.