Tesla After Q4: Running Out Of Excuses

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About: Tesla, Inc. (TSLA)
by: John Engle
Summary

Tesla reported Q4 2017 earnings.

The results show continuing financial and competitive erosion.

Bullish analysts were largely unfazed.

This article addresses the efforts of bull analysts to put a positive spin on a dismal story.

Tesla's (TSLA) Q4 2017 earnings call was full of the usual drama and hype. Several contributors on Seeking Alpha have already done excellent work on analyzing the financials and Model 3 delivery performance. In particular, I recommend the analysis from Montana Skeptic and Bill Maurer, which, as ever, deliver sharp doses of reality to the Tesla fairy tale.

The financials, delivery numbers, demand projections, etc. have been picked over in detail. This article aims to do something a bit different. Specifically, we will look at the reactions from Tesla cheerleaders in the analyst community. Bullish analysts continue to put on a brave face, but even they are finding it difficult to ignore what I believe to be the deteriorating situation. While analysts hate to change a thesis, especially when they have been vocal and public cheerleaders, reality inevitably bends them in its direction.

Let's take a look at the bull analysts' reaction to Tesla's latest earnings and see if what they said (and didn't say) can provide insights for investors.

Cash Burn Smoke and Mirrors

Bullish analysts floated the notion that better-than-expected cash burn numbers were a positive sign. Nomura's Romit Shah described the results as "encouraging" while Morgan Stanley's Adam Jonas declared that, "Working capital may remain a factor underestimated by the market that will help cash consumption materially through 1H18."

This conclusion is, frankly, bizarre. A serious reduction in cash burn is usually a good sign, but not always. In the case of Tesla, we know that the improvements to working capital were in large part one-off and are not repeatable. Tesla's Deepak Ahuja admitted as much:

"Some of those are not repeatable. We significantly reduced the finished goods inventory of S and X in Q4, which will not repeat itself going forward. And that was a huge impact on working capital. Customer deposits may not be as well, as you've pointed out."

With Tesla itself warning that its working capital and cash numbers represent an idiosyncratic situation, it is quite strange to see analysts touting it as a win. It represents a temporary reprieve based on accounting, not anything fundamental.

Magical Margin Expansion

Removing sales from electric vehicle credits, Tesla posted gross margins of 13.2%. That is short of analysts' already-lowered expectation of 14.5%. Bernstein's Toni Sacconaghi was worried by that result: "GMs for Model S and X were weak in the quarter and do not appear to reflect ongoing operating and manufacturing efficiencies that Tesla asserts it is capturing." Yet that skepticism has, somehow, failed to dissuade the Bernstein analyst from a modestly bullish thesis.

Taking a step out of the realm of fantasy, we can see a growing problem with margins. Despite analysts' projections that margins will expand massively over the course of 2018, there is no evidence to support that notion. And, as Model S and Model X production and sales peak, we can expect further overall margin compression.

Autonomous Vehicles and Other Vaporware

Evidently, most bullish analysts were willing to take Tesla's word for it that it remains a leader in the autonomous vehicle space. Despite reportedly failing to conduct road tests in California during 2017, Musk continues to promise radical improvements. He reiterated his intention to conduct a coast-to-coast drive, though a date has yet to be set. Loup Ventures' Gene Munster is convinced:

"This is important given that if Tesla is successful in using its vision suite instead of LiDAR, every Tesla produced today will be upgradeable to full autonomy with a software update, which would catapult the company into the lead position in the race to autonomy."

The big problem is the "if" in the above sentence. Thus far to me, Tesla looks like it is way behind on autonomous driving technology. Even promises such as a coast-to-coast drive cannot dispel that conclusion, since a drive on the Interstate is radically simpler than navigating city traffic. It is starting to look a lot like Elon Musk-patented hype over substance. So, while Musk may get his headline-grabbing drive, it will do little to shift the fundamental technological gulf between Tesla and the real leaders in autonomous driving.

If Only It Were SpaceX

Interestingly, Tesla did not seem to be at the top of many analysts' minds during parts of the post-earnings Q&A session. One after another, analysts congratulated CEO Elon Musk for the successful launch of the Falcon Heavy rocket. It was far from surprising, since analysts have long conflated Musk's various enterprises with one another. But it is important to realize that, even though they share a CEO and do some collaboration work, SpaceX is a completely different enterprise. Of course, some analysts, especially Adam Jonas, appear to be hoping for a merger between Tesla and SpaceX. Such a move, as I have explained in some detail, would be utterly disastrous for the private spaceflight company. It, after all, may be able to reach profitability. Tesla, on the other hand, remains a yawning money-pit that shows no sign of closing.

Investor's-Eye View

As much as the bull analysts wanted to highlight kernels of good news, Tesla's outlook continues to darken. Production delays, worse-than-expected margins, massive cash burn, and ever increasing competitive pressures cannot be explained away forever. They are harsh realities for the company. It may take the bullish analysts a while to come to terms with it. For the time being, they can continue to slash their near-term forecasts while looking out to some far horizon of future glory. For those of us looking at the company without rose-tinted glasses, it looks more like near-term delays followed by long-term failure.

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.