November 27, 2019
Much has been written about Tesla’s financial state over the past couple of years and the company has done a remarkable job under excessive pressure to produce its Model 3 sedan.
Tesla’s CEO, Elon Musk admitted in a June 1, 2019 deposition that the company was very close to bankruptcy while ramping up production for the Model 3, but then, about the same time that information became publicly available, the company reported a profit of $143MM or $0.80/share (GAAP) which surprised many.
Plenty has been written about the inconsistencies within that surprise earnings report, but so far the market has been quite receptive, pushing shares up from $255 to $331 currently, or about 30% higher.
A few key points brought up to date include:
- The inclusion of revenue for Autopilot and Full Self Driving features days before the earnings release. The feature isn’t completely working, may face regulatory scrutiny and the boost it offered is not sustainable.
- Capital expenditures that are lower than depreciation has been highlighted as spending typically needs to be higher than depreciation, particularly in a growth company, so this is another unsustainable boost to earnings.
- The inclusion of regulatory credits worth $134MM
- Revenue showed a sharp decline year over year (from $5.9B in 2018 to $5.1B in 2019, a decline of almost 12%), despite a significant increase in cars sold and yet margins remain robust (23.4% in 2018 vs. 20.8% in 2019, excluding regulatory credits).
Tesla’s ability to service vehicles has been a topic of interest for some time with a few horror stories circulating in the press. Service revenues have increased year over year (YoY) but declined sequentially. What may not be well known is that the company includes used car sales in it’s service revenue.
There is no way to know how many used cars are being sold by Tesla, but a couple of data points from the most recent 10Q are available to help understand this revenue item.
- In Q3 2019, the company had $548MM in service revenue, which is about 8.7% of total revenue. For the first nine months of the year it was $1.646 billion.
- In the first first nine months of the year the company had a $104MM reduction in gross profit due to customers electing the buyback option.
Over the first nine months of the year, the company has sold 267,300 vehicles generating $14.45 billion in revenue and the average selling price is then $54,070.
If we assume a 20% profit margin on the cars, then they make $10,814 per car in profit. If they had a $104MM reduction in gross profit approximately 9,600 cars would have been returned (or about 3.5%).
The more interesting point is that Tesla would have sold about 10,000 off-lease or refurbished cars through the first nine months of the year. In Q3, they generated $548MM in services revenue which will have included some of those cars, and all of them would be encompassed by the $1.65 billion in service revenue year-to-date. If they sold each car at cost, and assuming that 10,000 is the right number, then they would have $430MM of revenue, essentially counted twice.
It is difficult to make meaningful assessments from the limited data in the quarterly filing, but it is clear that a significant number of vehicles were returned in the first nine months of the year, and the revenue for those cars is counted twice. While it is clear that they have lost $104MM in the first nine months processing those returns, the impact on margins is not obvious without knowing specific selling prices, the car count and how they handle the transactions.