Numbers Don't Support The Q3 Story At Tesla

Summary

• Quick review of the financial information provided shows Tesla's numbers are terrible.
• Revenue is down, sales are weakening and problems lie ahead.
• Slow-paying suppliers is not real cash flow.

This is a quick take written just a few minutes after getting the numbers in Tesla's Third Quarter Update, but basically these numbers are terrible. The stock has traded up more than 10% after hours on the "news" of an earnings beat, but a little bit of digging shows that these results don't bear out reaction.

Tesla claimed it earned $143 million and built cash flow of $371 million. We can show that these numbers are unrepresentative of what's really going on at Tesla. I expect Tesla stock to move back down below $250 within a week as these understanding takes root and for Tesla stock to decline even further when the 10Q comes out.

1. Deliveries

Starting on page 6 of the release, the first thing to note is that Model S and X deliveries were down quarter-over-quarter from 17,722 to 17,483. On its own, this might not be a problem, but lease deliveries are up 42% from 1820 to 2588. Leases are a very weak move for an OEM because it shows they have to provide more generous financing in order to get people to buy cars. Moreover, lease accounting is subject to estimation so there's a high likelihood that losses (or at least a reduction in profits) may show up in the future.

Model 3 deliveries were up from 77,634 to 79,703 which would normally be a good result, but once again, almost the entire increase was due to leasing which increased from 4,322 to 6,498. For a company that's supposed to be growing, to have all the growth come from lowering prices and leasing cars is a problem.

2. Income Statement

The income statement on page 23 presents some significant issues. Note first of all that Total automotive sales revenues actually decreased quarter-over-quarter actually decreased by $25 million despite unit sales increasing. This means Tesla has to cut prices in order to sell more cars. "Services and Other" revenues decreased even more, which bears looking into.

The most impactful numbers on this income statement should be change in "Total automotive cost of revenues" which reportedly fell from $4,360 million to $4,130. Before going under the hood to see how I think they achieved that number, let's just take a second to think about what that means. Tesla is in effect claiming that it produced 10% more cars at cost that was 5% lower. That is to say that it cost 13% less to make a car this quarter than last quarter. The cost of a battery (produced by Panasonic) can be up to half the price of an electric car, so that implies that the portion of costs cut by Tesla would be closer to 20% of what they can control. That kind of change just isn't believable. Did they find a way to fire 20% of employees and make the same number of cars? Did they use 20% less material? The answer lies somewhere else, which will be addressed in topic 3.

Tesla also reported an improvement of $158 million in operating expenses. $117 million comes from not taking a restructuring charge this quarter, which is a good thing.

3. Balance Sheet

The first thing I want to point on the balance sheet is to reproduce five quarters worth of accounts payable, exactly as the company showed them:

3,597 3,405 3,249 3,134 3,468

Notice two changes. First, payables went down for four quarters in a row, and then spiked. Second, the difference between this quarter's A/p of $3468 and last quarter's number is $334 million. That's awfully close to the change in cash and (from 4,955 to 5,338) and the free cash build described above. So in a very meaningful sense, despite the fact that Tesla is claiming to have produced cash last quarter, the entire difference in cash comes from not paying suppliers.

4. Conclusion

More will come to light over the next couple of days as people consider the information provided here. Then, much more will come to light in the following weeks as the 10Q comes out with explanatory notes. Even if you "took the company's word for it" on the salience of all of the numbers described in this release, Tesla earned $1.91 per share. On an annualized basis, let's round that up to $8.00. To justify current prices, you'd have to give the company a P/e of 37.5 to justify a price of $300 per share. Because I think that would be too high by a factor of two, and because I don't think these numbers tell the whole story, I am short.

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.