What's All The Hype About Tesla?

2017/01/05

Consumers and investors alike are raving about Tesla Motors, and why not? CEO Elon Musk is undeniably a charismatic man, visionary and ambitious. The media frequently compare him to the late Steve Jobs. Tesla Model S is the highest evaluated car by Consumer Reports and has the highest consumer satisfaction rating last year.

The product might be excellent; however, a great product is not synonymous with a great investment. Let’s dig some financials to see if Tesla makes any money:

Is Tesla Profitable?

Tesla (TTM) GM (TTM) Ford (TTM)
Revenue
100%
100%
100%
COGS (%)
76.69
86.86
84.46
Gross Margin (%)
23.31
13.14
15.54
SG&A (%)
21.33
7.04
10.01
R&D (%)
13.13
-
-
Operating Margin (%)
-11.15
6.1
5.53
Free Cash Flow (Mil)
-876
1,567
12,336
  • TTM: Trailing Twelve Months

(source: Morningstar.com)

Tesla’s gross margins are very high comparatively to GM and Ford (23% compared to 13% and 15% respectively). Selling, General and Administration (SG&A) expenses (21%) are also higher than GM (7%) and Ford (10%). Why is that?

The reason is that GM, Ford and every other auto maker company sell their cars to independent dealers, these dealers bear the costs of selling the products to the consumers. Since Tesla has a direct to consumer model, these costs are shifted from Costs Of Goods Sold (COGS) account to SG&A account!! If we take the average expense of SG&A of GM and Ford (8.5%) and allocate that amount to Tesla’s COGS, the gross margins will be 14.8%. Similar to a regular auto maker.

This is how Tesla accounts for SG&A expenses:

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses consist primarily of personnel and facilities costs related to our Tesla retail and service stores, marketing, sales, executive, finance, human resources, information technology and legal organizations, settlements and fees for professional and contract services supporting these functions.

(source: Tesla 2015 annual report)

According to GAAP (Generally Accepted Accounting Principles), if you incur any costs related to manufacturing, fixing or repairing a product, these costs should be accounted for in COGS. Tesla has these costs separated under the account Research and Development (13% of sales).

From the 2015 annual report:

Research and Development Expenses

Research and development (R&D) expenses consist primarily of personnel costs for our teams in engineering and research, supply chain, quality, manufacturing engineering and manufacturing test organizations, prototyping expense, contract and professional services and amortized equipment expense.

If we shift the R&D costs to COGS, Tesla has a negative gross margin.

Tesla is not profitable by any measure; a negative operating margin, negative free cash flow and the high cash burn are causing the company to raise more debt and issue more equity. Management keep stating that the company is in no need for any new funding. Yet:

On May 8th 2013: Elon Musk stated that: “We don’t have any plans right now to raise funding, we have spent no time on that at all”. A week later, Tesla announced an offering on $2.7 million shares plus a $450 million of convertible senior notes.

On August 5th 2015: Tesla CFO replied to a comment on the conference call stating that Tesla is “comfortable with the cash-flow levels“. Few days later, Tesla announced a $500 million equity offering.

Valuation:

“Investors” buying Tesla shares can value the company on many different metrics, I selected below 3 simple ones:

 

 

 

 

    

 

Tesla (TTM) GM (TTM) Ford (TTM)
Cars Production
150,000 Since Inspection
150,000 in 3 Days
150,000 in 2 Weeks
Market Cap Per Car Sold In A Year
720,000
5,755
16,260
Price To Sales
6.13
0.35
0.34
Price To Earnings
3.47
6.46
6.27

Tesla’s market cap of $36.6 Billion is irrational! This means an “investor” is buying a small share of this company that loses $876 million a year (with no sign of recovery any time soon), turns its inventory a mere 3 times a year compared to 9 and 13 for GM and Ford respectively and has some questionable accounting practices! Add to that management’s bullish projections that fall short most of the time.

As of the merger of Tesla and SolarCity, Jim Chanos (the renowned short seller) summarized it best “To burden your own balance sheet and cash flow statement to, in effect, bail out shareholders at SolarCity strikes us as just the height of folly” he added “Yet they’re going to buy the equity at a premium. Again, this is puzzling to any student of corporate governance.”

Disclosure: We’re not holding nor plan to hold any position in Tesla under these valuations.

Sid El Mehdi Lembirik

Managing Partner,

Lembirik Group Investments

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