TSLA uploaded its 10-Q yesterday and the report contains interesting stuffs. If you are not tired of me talking about accounting stuffs, follow me in a lesson I will call “Profit creation for dummies”…
Increase profits by manufacturing sales:
In the first quarter of 2019 (i.e. six quarters ago), Tesla and Fiat Chrysler struck a deal on regulatory credits. In the 2019 10Q filing, there appeared this note. $140 million of deferred revenue to be recognized “over the next 2 to 3 years”. In layman terms, it means they received cash from Fiat Chrysler in 2019 but did not recognize it yet as revenue because they did not provide the service yet (but in the case of regulatory credits, what exactly is the service provided, and more importantly, how long does it take to provide it?).
In the second quarter of 2019, Tesla recognized none of this revenue, but the guidance language was changed to “over the next 1 to 3 years”.
And so on for three quarters, not any of these deferred revenue was recognized:
In the most recent quarter, suddenly and all at once, Tesla recognized THE FULL $140 MILLION. This revenue is widely believed to be pure margin. In other words, this one decision accounts for ~132% of Tesla’s claimed profits for the quarter. (page 12 of the last 10-Q)
And that, ladies and gentlemen, is how you fake a profit to trick the S&P 500 into including your stock in their index.
This accounting trick is known as “dipping in the cookie jar”. On one hand, you can say it is clever that they put aside some backup for planned rough time. On the other hand, it does not really fit into the narrative of a company drowning in demand…
But that’s not all!
Understate your true cost
On page 43 of the report, the company says:
Due to pricing adjustments we made to our vehicle offerings in the six months ended June 30, 2019, we estimated that there was a greater likelihood that customers would exercise their buyback options and if customers elect to exercise the buyback option, we expect to be able to subsequently resell the returned vehicles, which resulted in a reduction of cost of automotive sales revenue of $458 million. During the six months ended June 30, 2020, we made further pricing adjustments that similarly resulted in a reduction of cost of automotive sales revenue of $37 million.
In other words, Tesla does not indicate its true cost of building cars, but what it would be if maybe customers would exercise their buyback option in the future. Nobody has any clue what the true costs are.
The growth story in one chart
Page 35, TSLA gives a breakdown of its sales by region:
In other words, except China, the rest of the world was not really eager to buy their cars. So much for incredible demand.
That’s it for today.
Given the expectations implied by the stock price, these reports contain more red flags than a Christmas tree and there is no way i would ever risk my money in it. But the narrative can still last a long time!
And I don’t think it will go bankrupt any time soon. As long as the price stays at stratospheric levels, Musk can still raise new equity to keep the company afloat, as he did in Feb 2020 when Tesla raised around $2 billion.