Back in February I did something rare (for me) and wrote about an individual stock, Tesla. I essentially pointed out the absurdity of the valuation based on Tesla’s revenues, earnings, margins and vehicle sales in the context of the industry.

That was written on February 4th upon which Tesla ticked a high price of 968.99. Over the next two months Tesla’s stock price proceeded to decline over 60% to $350. The stock has since rallied to over $800 as I write this. What a ride.

Last night, Tesla reported Q1 earnings. As usual, there are some inconsistencies and concerns in their financials so let’s take another look to see if the $800 per share price is justified.

Earnings Summary

Tesla reported a $16 million profit in Q1 on revenue of $5.99 billion upon delivering 88,400 vehicles.

To eke out that tiny profit, Tesla sold $354 million of regulatory credits. In other words, Tesla lost $338 million from their actual business activities. $354 million of regulatory credits represent a 166% increase over the previous quarter. They’re pulling out all the stops…another capital raise coming soon?

Tesla bled almost $900 million of cash in Q1. An inability to deliver vehicles at the end of the quarter due to COVID-related lockdowns would certainly impact cash flow through no fault of their own.

Lockdowns impacted Tesla in Q1, however, the Fremont factory was closed only for the last week of Q1 while it will be closed for at least all of April if not longer in Q2. In other words, Q2 earnings are likely to be worse than Q1.

Valuation Perspective

Tesla’s market cap is back to $160 billion. Let’s put that in perspective.

The combined market cap of Ford, GM, BMW, Mercedes and Honda is about $170 billion roughly equaling Tesla.

Revenues for those five companies combined in 2019 was about $750 billion! Tesla’s 2019 revenue, on the other hand, was just $25 billion. So, Tesla shares the same market cap with just 1/30th the revenue!

The combined earnings for those five companies in 2019 was about $21 billion. Meanwhile, Tesla lost almost a billion dollars in 2019.

Those five companies produced over 23 million vehicles in 2019 while Tesla produced about 370,000, or about 1/60th!

Here’s a great chart I came across last week. After all, a picture is worth a thousand words, right?

Many folks will try to justify the extremely high valuations by saying Tesla is a high growth company to they cannot be compared to traditional, stagnant auto manufacturers. While that’s true in theory, is Tesla still the high growth manufacturer they once were?

Here’s a chart of Tesla’s revenues for the last eight quarters. Where’s the exponential growth one would think is a necessary prerequisite for these absurd valuations?

In other words, even if we accept Tesla’s financial reporting at face value, the stock price is absolutely absurd.

…but should we even be accepting Tesla’s financials at face value?

Red Flags

Accounts Receivable
Accounts receivable has consistently been running at over a billion dollars. How does a car company, who obviously receives payment when/before delivering a vehicle, have such massive receivables? Most automobile manufacturers may only carry a couple days’ worth of receivables. Tesla’s, on the other hand, are a huge portion of quarterly sales (about 20%).

This question has been posed to Tesla previously by many different people, and the answers have been both varying and unsatisfactory.

One answer at one point was that the third quarter of 2018 ended on a weekend (banks closed) and, therefore, receivables skyrocketed that quarter because so many vehicles were sold at quarter-end. However, this cannot be true as A/R has remained at those elevated levels each quarter since even in quarters that did not end on a weekend and even in quarters where revenues dropped from that level!

This first quarter of 2020 was no exception as accounts receivable barely budged from 2019 year-end.

I trust someday we’ll find out the real answer.

Gross Margins
There are inconsistencies in gross margins being reported. Gross margins barely budged from the previous quarter even though there were factors that should have exerted quite an impact. I’ll let famed money manager, David Einhorn, do the talking here. In a note published on Twitter this morning addressed to Elon Musk, Mr. Einhorn asks,

“This quarter your production was lower and split over two factories [instead of one], affecting cost absorption particularly in Fremont. Your average selling price was lower. Your mix had fewer high margin Models S/X. You ramped up Model Y. Both factories were interrupted driving up costs. And, though you didn’t discuss it, currency should have hit your margin by 2-3% compared to last quarter. All of these factors appear to be headwinds to your auto gross margin (excluding Regulatory credit sales) – which barely budged. Can you or Zack [Tesla CFO] explain? Otherwise, I will continue to be left wondering if not only your accounts receivable are suspect, but your income statement as well.”

Warranty Reserves
A reserve is money an automobile manufacturer sets aside for future warranty repairs based on their best estimates. Warranty expenses are a cost of producing the vehicle.

Why is it important to address warranty reserves here? Because these reserves directly impact profits and automobile gross margins in the present. Under-reserving could be used to inflate automotive margins and net income.

For purposes of brevity and to avoid recreating the wheel, I urge you to read this article that goes into detail on various concerns about Tesla’s warranty reserve and expense practices.

Additionally, we see that in Q1 Tesla’s warranty costs incurred increased by 60% even with less service in the quarter AND likely misclassification of warranty expense (as pointed out in article linked in sentence above). Yet, even with that increase Tesla thought it appropriate to materially REDUCE the warranty reserve per vehicle thereby increasing automotive gross margins and net income for the quarter. See image below from the 10-Q.

As I pointed out in the February commentary, Tesla’s Capital Expenditures continue to run BELOW depreciation and amortization.

Why is this important?

The manufacturing of automobiles is a very capital intensive endeavor. The average automobile manufacturer has roughly a 2:1 CapEx / D&A ratio while Tesla is running below 1:1. In other words, Tesla’s CapEx isn’t even sufficient to maintain current assets let alone money for building new factories and new tooling for new models. A high growth automobile manufacturer with many new models promised building new factories should logically have higher CapEx then their more stagnant, low-growth peers.

Also, Tesla built an entirely new factory in China last year yet CapEx was actually in lower in 2019 than 2018, 2017, 2016, and 2015.

Above I mentioned the new factory in China. That new factory was online and producing vehicles in the first quarter taking automotive manufacturing from one factory (Fremont, CA) to two for Tesla.

Yet, even with that new factory, utilities, labor, etc… Tesla’s operating expense actually declined from the previous quarter! In fact, Q1 operating expense looks to be about the same as it’s been for at least the last 10 quarters!

Failed Promises
Last year, Tesla raised capital on the promise of having 1 million robotaxis on the road by the end of 2020. The promise was that your Tesla could make money for you while you sleep with each car making $30,000 a year. Obviously, that’s not going to happen and is likely many, many years off. It was a blatant lie likely in a successful attempt to raise capital.

In 2017, Tesla started accepting deposits for its Semi for which it promised production in 2019. That has now been walked back again to at least 2021.

The hyped 2nd-Gen Roadster is nowhere in sight even as deposits have been accepted for that vehicle since 2017 as well.

Fullly-autonomous Teslas are still many years off even with many big promises made on that technology over the years.

Tesla seems to have a history of making huge promises to raise cash via customer deposits and investor capital, which they subsequently fail to deliver on.

As an investor, I can’t help but shake the notion these promises are a exercise in constant can-kicking to delay a day of reckoning. What happens when capital dries up for Tesla who is unable to achieve sustained profitability and heavily-dependent on tax credits and subsidies from around the world along with new investor capital?

Even if the financial reporting is legitimate, the valuations are still absurd and, in my opinion, unsustainable.

I own put options on Tesla and will likely be buying more. Therefore, I have a vested interest in the stock price going down. I’ve established that position in part because of the concerns expressed in this commentary along with other concerns not mentioned here for sake of brevity.

This commentary is not intended as investment advice but simply to note my observations and as education.

Past performance is no guarantee of future results. There is a significant risk of total loss in taking either side of the Tesla stock trade.

Third-party data is deemed to be reliable but accuracy cannot be guaranteed.

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