Tesla Smoke & Mirrors

Tesla is the ultimate representative of this current environment. It consistently loses money, misses expectations, and maintains its status as an exciting growth company. Businesses with strong fundamentals are few and far between. Today I saw a stat that said the FANG (Facebook, Google, Netflix, Amazon) stock performance makes up 90% of the S&P 500’s gains since 2014. Those stocks are driven by momentum, not profit growth as their valuations are excessive. While Tesla stock hasn’t done well in the past few years, the belief in Elon Musk’s ability to reach mass scale with the Model 3 is still high among his followers.

The believers in Tesla claim bears are simply pessimistic people who want Tesla to fail. My response is Tesla will fail regardless of whether I want it to do well or not. Of course these types of arguments are brought about when there aren’t any facts on their side. The recent quarterly report made for an exciting headline, but didn’t have any meat to it. The conference call was unprofessional in my opinion.

While I wasn’t following Enron at the time, one of the famous signs that the business was going south was when there was cursing on the conference call. I’m not saying Elon Musk cursing on the conference call means it is going to collapse like Enron, but hearing him state that what his suppliers say about autonomous driving and Tesla’s autopilot is “bullshit” makes me question what’s is going through Elon’s head. There is never a reason to curse on the conference call. Insulting suppliers is a mistake because even if Tesla cuts ties with the ones Elon curses at, it ruins the firm’s reputation.

Another weird part of the conference call is when Elon attempted to explain what the definition of 50% is. This was in reference to the tax credits Tesla takes. Elon was making the point that Tesla takes 50% of the tax credits’ value while other auto firms take 100% of them. The reason Elon tried to explain what 50% is, is because he is frustrated with critics claiming Tesla is too reliant on them. The reality is Tesla would have lost money this quarter without them. This is something analysts understand even though Elon may feel he needs to give them a math lesson.

Pointing out the bizarre statements in this conference call is very easy because every time Elon opens his mouth something confusing is stated. He mentioned that Solar City may be cash positive, that Tesla may be GAAP profitable including stock based compensation in Q4, and that Tesla doesn’t need to raise capital to produce the Model 3. He hedges all these claims by saying he doesn’t want investors to hold him to these statements because they are just guesses. This is a battle between Elon wanting to make ridiculous claims and him recognizing that he can be held liable for making such claims. The worst part was the capital raise answer because he essentially said Tesla doesn’t need to raise capital, but it would make sense to do so to be safe. This parsing what the definition of the word “need” is, not an explanation of whether Tesla will actually raise capital. Investment banks have a consensus Tesla will have to raise capital in the next few quarters. I trust them over Elon’s mindless speculation.

The most ironic portion of the call was when an analyst worried about whether Solar City would hurt Tesla, but he accidentally said it was a cash cow. Elon corrected him by saying he meant to say cash vacuum. This is ironic because Elon believes in Solar City’s future. This is blind optimism. His blindness temporarily saw reality.

The final weak point Elon Musk made on the conference call was him making the point that Tesla doesn’t really want new Model 3 pre-orders because it wants to make sales on its existing products and because the first year of Model 3 production has been sold out. This point makes me feel Elon is unconfident in the ability for Tesla to scale Model 3 production or that Tesla is seeing the number of pre-orders drop. This is impossible know for sure because Tesla hasn’t updated us on the number of pre-orders which have been canceled. The number of customer deposits was $690 million, so maybe Tesla doesn’t want to update us because the number is stagnant.

The reason why I say Tesla’s earnings report was smoke and mirrors is because Tesla was only profitable because of the increase in tax credits sales which were hoarded up until this point, meaning this sale is a one time event. Without the ZEV tax credits Tesla would have lost $117 million instead of having $22 million in operating income. Another problem with Tesla’s report was the increase in accounts payable. Tesla avoiding paying what it owes is unsustainable. Accounts payable increased $627 million to $2.3 billion.

Tesla’s Capex was also confusing because you would expect it to start increasing leading up to the ramp in production of the Model 3. The low $248 million in CapEx is partially due to it not increasing the number of Service Centers and Superchargers fast enough. It only added 10 new Service Centers this year which is leading to increasing wait times. Finally, Tesla missed its deliveries guidance for the year. It guided to deliver 80,000 to 90,000 cars, but its current guidance implies 79,200 cars this year, making this the third year in a row Tesla has missed deliveries guidance.