Tesla Breaks Records But Doesn’t Break Even

(Bloomberg Opinion) -- Tesla Inc.’s earnings calls have lately taken on the trappings of office going-away parties.

Just before the Q&A portion of Wednesday evening’s second-quarter call, CEO Elon Musk announced that JB Straubel, the company’s veteran chief technology officer, would step down to become a senior advisor. This was at least said up front, as opposed to the by-the-way announcement of the CFO’s departure at the very end of an earnings call in January. Still, news that the man second only to Musk in his identification with Tesla is stepping back now, and after a string of other departures, is even more jarring. Tesla’s stock, down 11% after hours already, dipped further on this news. 

It was a disconcerting postscript to some disconcerting numbers. 

Tesla entered Wednesday evening’s call priced at 109 times 2020 GAAP earnings. The company’s record number of vehicle deliveries, reported earlier this month, added fuel to a partial rebound from a stock-price slide that began in late December. In the bull’s pricing formula, more metal being moved equals more growth to come, which equals a big multiple.

The hole in this equation concerns profits.

Tesla met its second-quarter guidance in the sense that its first quarter net loss of $668 million was almost halved to $389 million ($272 million if you strip out restructuring charges). But the fact that Tesla delivered 50% more vehicles in the second quarter compared to the first, yet still lost money, means the problem that spooked investors back in April remains: Selling a lot more vehicles isn’t translating into profits.

The problem starts at the top line, because Tesla is selling more lower-priced Model 3s versus the premium Model S and X vehicles. This is fine so long as Tesla is selling enough cars and at enough of a margin to realize a bigger profit overall. But it isn’t.

Focusing only on vehicles sold (rather than leased) and stripping out the sale of regulatory credits allows me to calculate implied figures for average revenue (or selling price) per vehicle as well as gross profit. Tesla reported its highest quarterly net income ever in the third quarter of 2018 at $343 million. Deliveries in the quarter just gone were 14% higher, but the shift to lower-priced vehicles is why the bottom line is very different.

Tesla says Model 3s sold for about $50,000 apiece in the second quarter – which, by my math, implies Models S and X went for about $73,000 each. That looks low, suggesting Tesla discounted pricing to get them out the door, especially with the Model 3 presenting a less luxurious, but newer and cheaper alternative. Indeed, Tesla said in Wednesday’s announcement it continues to “prioritize inventory reduction” when it comes to the S and the X. Inventory on the balance sheet also fell by a hefty $455 million versus the end of March.

This all erodes that vital growth narrative: Revenue in the second quarter was $6.35 billion, lower than in either of the third or fourth quarters last year, despite higher vehicle deliveries.

Tesla’s spending also calls the growth story into question. Selling, general and administrative expenses were the lowest since the same quarter in 2017, when Tesla delivered only a quarter as many vehicles. Meanwhile, capital expenditure was less than half of depreciation, and Tesla cut the annual budget by roughly a fifth. Even so, at about $250 million, Tesla still underspent the implied quarterly run-rate of $407 million, and that’s assuming the low end of the guidance range (the company cites improved efficiencies and deferrals).

That is not only jarring for a growth stock, it also puts Tesla’s boast of ending June with just less than $5 billion of cash on the balance sheet in perspective. Of the $2.8 billion increase versus the end of March, $2.2 billion relates to Tesla issuing new debt and equity. The remaining $560 million is more than matched by the $188 million of underspending at the capex line and that $455 million run-down in inventory.

Tesla points to growth drivers to come, such as the new factory in China and the Model Y. Even so, there was notable hedging in the guidance:

Additionally, we expect positive quarterly free cash flow, with possible temporary exceptions, particularly around the launch and ramp of new products. We believe our business has grown to the point of being self-funding. We continue to aim for positive GAAP net income in Q3 and the following quarters, although continuous volume growth, capacity expansion and cash generation will remain the main focus. [Emphasis mine.]

Prior to disclosing Straubel’s new job status, Musk called attention to Tesla’s cumulative deliveries, characterizing it in typical language as “the cleanest exponential I’ve ever seen.” He instructed those listening to “extrapolate that curve.” A pithy and familiar pitch, yes, but the disconnect between that curve and the bottom line is ever harder to ignore.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.

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