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Guess Which This Company This Is?

|About: Tesla, Inc. (TSLA)
Summary

One famous company just reported negative growth on a year-over-year basis, September 2019 quarter vs September 2018.

Revenue was down 6%, gross profit down 22%, operating income down 37%, and net income attributable to shareholders down 54%.

You would think this was Blockbuster video rental or a funeral home losing business to cremations, right?

You would be wrong.  It’s Tesla.

And because the margin expectations were even lower, the immediate stock reaction was up 20%.  But that does set the bar so much higher for Q4 and Q1.

NOTE: This article was first published on Oct. 23, 2019, on my Seeking Alpha Marketplace site.

One publicly traded company just reported a set of September 2019 quarter financials that were down on all relevant metrics, compared to one year prior (September 2018):

Revenue: Down 6%

Gross Profit: Down 22%

Operating Income: Down 37%

Net income: Down 54%

(That’s net income attributable to stockholders, the most bottom of lines)

So, on every conceivable metric, this company is shrinking revenue and profits. Whatever it is, it’s not a growth company. Can you imagine the reaction to any other company with these year-over-year declines?

These negative growth rates up and down the income statement are perhaps what you would expect from Blockbuster video rentals or a funeral home in a world in which more and more people are cremated.

Adding insult to injury, of the $143 million in net profit, $107 million were government subsidies (“Regulatory Credits”). Talk about having almost all of your tiny and shrinking profit being dependent on politicians taxing your fellow man in order to pick winners and losers!

Yet, when these catastrophic year-over-year financials were reported, the immediate reaction of the stock was to rise 20%. The company in question is of course Tesla (TSLA) and the financials can be found printed onto the company’s income statement filed at Investors Overview | Tesla, Inc.

So how come a 6% revenue decline and net income decline of 54% resulted in an immediate 20% stock jump? Shouldn’t it have been the other way around?

No, not in this case. In this particular case, a rise in stock price was exactly what should have been expected for these results. Why?

Because the Wall Street expectations were even lower, that’s why. In particular, below the revenue line. The 6% revenue decline was approximately in-line with consensus. The $143 million profit was not. The Street was expecting a loss. Flipping a modest loss to a tiny $143 million profit, in part helped by a $107 million government subsidy (“regulatory credit”) changed the whole game, at least in the short term, as far as the stock was concerned.

We will surely obtain more details in the coming days, from the 10-Q filing with the SEC, precisely how Tesla accomplished these better-than-expected gross and net margin numbers. In the meantime, I have condensed the income statement from the very busy pages in the quarterly press release, to the two relevant time periods: September 2019 and September 2018, and added the changes and comments:

Tesla Q3

2019

2018

change

Automotive revenue

5,132

5,878

-13%

Automotive leasing

221

221

0%

Total automotive

5,353

6,099

-12%

Energy / storage

402

399

1%

Service / other

548

327

68%

Total revenue

6,303

6,825

-8%

TOP LINE DOWN 6%

COGS

Automotive sales

4,014

4,406

-9%

Automotive leasing

117

119

-2%

Total auto COGS

4,131

4,525

-9%

Energy / storage

314

330

-5%

Service / other

667

445

50%

Total COGS

5,112

5,300

-4%

COGS DOWN 4%

GROSS PROFIT

1,191

1,525

-22%

GROSS PROFIT DOWN 22%

OPEX

R&D

334

351

-5%

SG&A

596

730

-18%

Restructuring / other

0

27

-100%

Total Opex

930

1,108

-16%

EXPENSES DOWN 16%

Income from Ops

261

417

-37%

OP INCOME DOWN 37%

Interest income

15

7

114%

Interest expense

-185

-175

6%

Other income

85

23

270%

Result before tax

176

272

-35%

INCOME DOWN 35%

Taxes

26

17

53%

Net Income

150

255

-41%

NET INCOME DOWN 41%

Noncontrolling interests

7

-57

-112%

Net to stockholders

143

312

-54%

NET NET DOWN 54%

Regulatory credits

107

104

3%

As you can see in the table above, there are no meaningful positive trends almost anywhere in the income statement. Yes, other income was up, and the opex lines came down more than revenue, but that didn’t help the net results below the line.

Implications for the next two quarters

The positive reaction to the Q3 numbers sets the bar higher for Q4 and Q1. Investors will soon see in the 10-Q filing some of the methods by which the margins weren’t as bad as the street consensus had indicated. Especially without a return to growth in Q4, if that is what happens, it will be all that much more difficult to repeat this immediate stock reaction next quarter, as well as the one after that.

Disclosure: I am/we are short TSLA.

Additional disclosure: At the time of submitting this article for publication, the author was short TSLA. However, positions can change at any time. The author regularly attends press conferences, new vehicle launches and equivalent, hosted by most major automakers.