Tesla: Are Profits Really Coming?

Summary

• Elon Musk doubles down on conference call craziness.
• How have past cash flow and profit statements fared?
• Let's take a look at street estimates moving forward.

This week, a lot of headlines were made after Tesla (NASDAQ:TSLA) reported Q1 results, as Elon Musk led a bizarre conference call where he cut off multiple analysts. Management continues to try to paint a rosy picture of the company's situation, where things are not going well, by again hoping for profits and positive cash flow in the second half of this year. Unfortunately, the history of this company shows us why this likely won't happen, and it is clear the street doesn't think profits are coming anytime soon.

GAAP profits and positive cash flow:

There was a lot of excitement from Tesla bulls last month when Elon Musk talked about profits and positive cash flow in the second half of this year. As a result of this, he said there's no reason for the company to raise money through debt or equity, but there are many who are quite skeptical of this. Over the years, I've compiled a list of Tesla's many guidance failures, so here are just a few examples of similar statements that turned out quite badly:

2014 Q1 letter:

20. Expect to be slightly free cash flow negative for a year before considering equity required for leasing (yearly free cash flow was negative $1.03 billion).

2014 Q4 letter (includes full-year guidance):

26. Expect a significantly higher level of non-GAAP profitability (actually lost $2.30 per share).

2015 Q4 letter (includes full-year guidance):

33. Expect to generate positive net cash flow (actual was negative $1.4 billion).

34. Expect to achieve non-GAAP profitability for year (actual was a $2.87 per share loss).

Those are just the main points I've detailed regarding cash flow and profitability. My list compiled above also includes dozens of related items, like failures to meet gross margin targets, operating expense levels, etc. With all of this being said, I wanted to take a look at what the street thinks about this year's statements for profitability.

Analysts say no way:

In the following image, I've blown up the estimate page for Tesla on CNBC detailing quarterly street averages, and remember, these are on a non-GAAP basis, and was from the day after earnings were reported. We are likely to see many revisions in the coming days, especially after Tesla has pushed back its 25% margin target on the Model 3 by a couple of quarters.

(Source: cnbc.com Tesla earnings page)

At this point, the street doesn't even see Tesla becoming non-GAAP profitable until Q2 of 2019, well after Elon Musk thinks it will occur. In fact, if I go all the way back to December 18th, 2017, the street was still expecting a more than 80 cent loss in Q3 of this year. So nearly five months ago, weeks before Tesla pushed back its Model 3 target to 2,500 units in Q1 2018 (which it failed to meet), the street didn't even think a profit in Q3 was possible.

Of course, the numbers above ignore a giant elephant in the room, and that's stock based compensation. Tesla takes this out for its non-GAAP EPS, something that many large-cap, world leading tech names (bulls claim Tesla is a tech company) don't do. From Q1 2015 to Q1 2018, stock-based compensation went from $43 million to nearly $142 million. Below, I've detailed how that works out on a per share basis.

(Source: Tesla quarterly investor letters)

By the time we get to Q3 2018, it's possible that stock-based compensation will be at nearly $1 per share. So even if Tesla gets to a non-GAAP profit, it still could be losing well over $100 million on a GAAP basis. In just the past three years, stock-based compensation has been $1.1 billion, resulting in a tremendous difference between GAAP and non-GAAP results.

Final thoughts:

On Friday morning, Elon Musk took to Twitter to explain what happened on the conference call. With management's past failures regarding cash flow and profitability, many are skeptical that Tesla will hit its targets for the second half of the year. Wall Street certainly doesn't think so, and in fact didn't even believe it was possible in late 2017, before multiple more Model 3 delays.

Analyst’s 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.

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