For better or for worse, there's a very unique feeling when everything goes completely according to plan yet nobody seems to care or notice. Such is the case with our favorite company of the moment, Tesla Motors. For those unaware, TSLA has rocketed upwards since its Q1 earnings release, mostly the result of the auto industry's biggest short squeeze since the VW/Porsche debacle, and currently sits at about $90 and a $10+ billion valuation. While I wish I could spend all night listing the million and one reasons why nothing has changed with this company except for its obscene price tag, I have no incentive to really do so, but my investors know and can be assured that everything we have predicted for this company has been 100% spot on. So, for their benefit, I will recap and add to the observations that have kept this business from ever really accomplishing anything close to worthy of its current valuation.
With the latest earnings, Tesla seemingly fulfilled its promise that it would achieve "full profitability," whatever that was supposed to mean, when it reported an approximately $11M net income on the wings of $6M in foreign exchange gains and a $10M non-cash reversal of the liability they were carrying associated with the DOE's future right to buy shares of the company. Tesla said they delivered approximately 4900 cars in the quarter, which net of credits, put their average price tag in the mid $90K range... still significantly higher than the base price on the higher-capacity battery Model S offering. Tesla said in their news release that they earned about $68M in 100%-margin regulatory credits sold to other car companies, and came away with a total gross margin in the 17% area.
In the end, by just about anyone's accounting standards, Tesla (and to their credit, they did admit it) had an operating loss of about $6M, but was able to record a profit on the back end with the $17M total in other one-time income. It's truly wild that they wouldn't have the visibility to inform their investors that their profitability would be contingent on these two things - the warrant reversal and unexplained foreign exchange gains that haven't shown up in previous quarters - but Tesla is not very big on transparency.
Speaking of transparency, the one thing we were certain of what Tesla's cessation of disclosing its reservation numbers (the equivalent of a backlog, and the only way to gauge the demand in the marketplace for Tesla's Model S) and cancellations, which management cited as no longer being important metrics to track. Not only would it be beyond comprehension that Tesla doesn't track them anymore, there's serious questions that need to be raised whenever a company stops reporting a number. Normally this is done because it is no longer good... so we have to ask, if demand is so great then why wouldn't they at least provide us with whatever newer metric they are using to gauge Model S popularity? And how do you know how many cars you're going to need to match supply to demand now? These answers should be obvious for management, and for our purposes it's fairly clear why they would stop reporting it. They've been working through their backlog much faster than it's been getting rebuilt. Beating their internal expectations of 4500 cars in Q1 is truly irrelevant, as all that they needed to do was make as many cars as they could and they could sell them given this is the first time their customers can actually get the car. We will see in the next few quarters whether or not that will continue to be the case. My guess is it won't.
Tesla also quietly lowered their guidance and tipped us on weak North American demand when CEO Elon Musk referred to the importance of pushing cars out to Europe to penetrate international markets. Now my question to you is, what car companies are ignoring demand in the US to focus on Europe right now?! Probably one who doesn't have much going on in the way of demand right now. Q2's delivery target is 4500 (when will they be on pace for their 20,000... or now 21,000 with recent revision upward?) and management qualifies this lower number by explaining that a chunk of Model S production will be shipped to Europe rather than delivered and recognized in Q2. This is beyond odd and gods unnoticed amid the glaring optimism we're seeing in the market right now, especially for Tesla.
Another observation: Tesla continues to misrepresent themselves in ways that are very strange for any honest management team. Tesla claimed $68M in regulatory credits in the first quarter and continued to hammer home that those ZEV (zero emission vehicles) credits will not be counted in their 25% gross margin guide for the end of 2013. They continue to mention these credits and how they will expect to decline, yet the $68M routinely referenced is a fairly significant understatement. Buried in the quarterly filing is a line nothing that "other credits" totaled $17.1M for the quarter, giving us a true total credits revenue of $85M. While analysts and investors were likely excited to see the Model S finally gross profitable on a per car basis (coming in at ~5% ex-ZEV credits), the truth of the matter was that backing out the full $85M in credits as we should still puts the Model S slightly in the red on a per car sales basis. Put simply, this car company still cannot make money by selling its cars, and that's something that hasn't even shown much of a sign of improvement at all. We continue to wait, but all signs point the way we've been looking lately.
To keep it short, the fact of the matter is that no fundamental change in this business has occurred, and if it has, then it certainly was a negative fundamental change. The only issue betting against a business like this is properly monetizing it. Fortunately for us, as we mentioned before, using a long-dated options approach that removes the short-term volatility and ridiculous short interest/cost of borrow, we are able to sit back and enjoy the ride for another 2 years and see how long the government-funded charade can continue. Who knows, maybe some day we will see an actual update on the business that shows legitimate progress. I have a hard time believing it, but I'm always open to changing my thesis... unfortunately for Tesla in this situation, it certainly has done nothing to change my mind.
I'll follow up with more in the next day or two. Stay tuned.