Tesla Motors: Tax Credits & Accounting Gimmickry

Company Summary

Tesla Motors (TSLA, Financial) is a full electric car manufacturer that also manufactures electric powertrain components. The company sells its batteriess to other car manufacturers to use in their electric cars or hybrids. In 2009, the company received $500 million in a grant from the U.S. government and in 2012 received a $10 million grant from the California Energy Commission. Telsa has paid back its loan from the the federal government in full, but this is good on the surface only since the company was only able to payback the government through the sell of tax credits not its cars. The company announced plans to build a battery factory. Nevada went to great pains to give Tesla lots of tax rebates and tax credits to the company to built its $5 billion factory in its state. The company has been a massive consumer of government subsidiaries as it lobbies state government to allow Tesla to sell its cars directly to consumers.

Since 2011 the company stock has been on a roll as its share price has been appreciating for shareholders and speculators who believe the firm will grow into its over $22 billion market cap valuation. Maybe the company will grow rapidly, and there will be a massive migration from gas cars to Tesla electric cars the next five to ten years. The simple fact is no one knows what cars the consumers will want or if they will be electric, gas, natural gas or some other fuel that no one has heard of yet in the next five to ten years. What I do know is the financials and statistics of Tesla show a company that is way overvalued selling for a multiple that its larger competitors aren't selling at even though they all selling at least 50x to 100x more cars then Tesla does. Currently the company will sell 20,000 models this year and believes it can double that in 2015 to 40,000 next year.

Tax credit use

In 2009, the firm received about $500 million guarantee loan from the federal government., which was supplemented in 2012 with $10 million grant from California Energy Commission. The government at the federal and state are underwriting the engineering and manufacturing, and also giving subsidiaries to purchase Tesla products. U.S. buyers of a Tesla car qualify for a $7,520 federal tax credit, and states like Colorado throw in up to $6,000 more in state income-tax credit. Taxpayers are paying first so Tesla can produce the cars and then again so wealthy people can purchase these cars.

The company's biggest windfall comes for cash payments of sell zero emission credits to its competitors. In 2012, Tesla made $40.5 million on these credits and also made about $250 million in 2013 of theses same credits. In the first quarter of 2013, the company made $85 million off this credits and if you take away those credits, Tesla in the first quarter of 2013 lost $3 million, or $10,000 per car sold.

This clearly shows that the firm hasn't made a single cent of profit off its electric cars. The company profits have been company from the sell of zero emission credits, and other tax credits and subsidiaries that its receiving from government state and federal.

Accounting gimmickry with leasing program

The company's new leasing program is becoming a larger part of the company's sales. Tesla plays a bit of accounting gimmickry in reporting lease revenues. When a lease is made at the car cost of $90,000, the bank sends Tesla a check for the full purchase. Then Tesla makes a guarantee at the end of the three-year lease period to purchase the car for $46,000. Customers who take a lease pay the balance to the bank over the three-year rental period. After the lease is over, Tesla must take back the car after all expenses and resell it for $46,000 to pay back the bank. Any amount less than $46,000 has to come out of Tesla's pocket to make the bank whole. The problem with this is Tesla against GAAP accounting rules are booking that $46,000 as immediate revenues when its should book it as debt on the balance sheet. According to GAAP accounting standards the $46,000 should not be recognized as revenues until such time that Tesla repays the loan to the bank. The company is choosing to report this as non-GAAP method which is radically inflating revenues.

New lease option

Tesla has announced a new lease option which will be provided by U.S. Bank in October of 2014, when monthly lease payments will be 25% lower. Also the company is offering a happiness cause; if the buyers don't like it, theycan return the car in the first 90 days, and the remaining lease payments will be canceled.

Musk explain the unusual incentive on Tesla's Blog:

If you don't like our car for any reason in the first three months, you can just return it and your remaining lease obligation is waived. The only catch is that you can't then immediately lease another Model S. Upgrading early is no problem if you want to do that, but there is a pass-through fee to cover the new vs. used value difference.

Auto sales

Tesla car deliveries in the first nine months of 2014 have declined 27% from last year. The company sale from January to September are down 26% based on a study done by WardsAuto.com, even though production was up 10% during the quarter.

(click to enlarge)

(click to enlarge)

The new lease option will replace the company's previous loan lease program. The prior program was a 72-month loan with a guaranteed buyback from Tesla. But it doesn't look like the new lease option will change the company's non-GAAP and GAAP accounting. Just like the other program it will book revenues when its should book it as debt.

Tesla Non-GAAP and GAAP Revenues and Earnings

Source: ZeroHedge

Source: ZeroHedge

Valuation compared to other car manufacturer

Currently shareholders and speculators valuing every car Tesla produces at $1.1 million per car, even though its prices are around $80,000-$110,000. While investors who are buying shares in BMW are valuing its cars at $28.53 thousand per car, Daimler AG of Mercedes Benz $43.4 thousand per vehicle and investors are valuing$5,430 thousand per car GM sells. Tesla sells for 115x its earnings and has a forward p/e of 88x while its industry average is 11x. Tesla average competitor sells over 1.5 million cars while the company sells about 20,000 valued at 1.1 million per car. Even with the company raising prices on a lot of car options.

Add-ons car options

• Glass panoramic roof raised from $1,500 to $2,500.
• XM satellite bumped up to from $950 to $2,500.
• New aerodynamics wheels raised to $2,500.
• Rear heated seats raised to $750.

And the list goes on and on; they are to doing this to increase gross margins to 25% partly from raising car option prices and through manufacturing efficiencies. Achieving a gross margin of 25% while in a highly competitive market where is competition like BMW and Daimler has average gross margins of 12 and 16 percents. While Ford has maintained gross margins between 15 and 16 percent. Over time Tesla will reverse to where its competitors are and the company has a price-to-sale ratio of at least 8.8. Where BMW and Daimler have price-to-sale ratios of .70 and .55, they aren't even a close to Tesla.

Short Tesla With Put Option

Option Chain for Tesla Motors, Inc.

Read more: http://www.nasdaq.com/symbol/tsla/option-chain#ixzz3K7UC4bJg

Tesla is clearly overvalued, and its use of tax credits and subsidiaries have allowed the company to report profits which clearly no investor or speculators have look at the footnotes of Tesla's quarterly and annual reports. But shorting Tesla comes with massive risk because the company is the favor of the month its a growth stock darling. Where any short seller is more likely to have a short squeeze and have massive losses then make profits. The best way to short Tesla is to buy put option on Tesla, these means all you can loss is what you payed for the option, instead of having the potential for unlimited loss if your wrong or have bad timing. Buying put options against Tesla is the best way to short Tesla.