When Tesla Inc. (TSLA, Financial) reported blowout earnings for the third quarter, it left many analysts scratching their heads. But, as they parsed the numbers and finally got a look at the 10-Q, it became increasingly obvious what had happened: Tesla engineered an artificial one-off profit to boost the stock and give the illusion of turning the corner financially.
The aim was clearly to get the negative press and analyst attention off its back, at least for a while, and to allow it to gear up for a capital raise. Yes, CEO Elon Musk has consistently promised that internally generated cash flow would be sufficient to drive growth and cover debt repayments, but not even the most bullish analyst takes that notion seriously.
Tesla continues to struggle and it has stretched payables, crippled its service arm and stopped investing in the future, all in order to show off a profit. It will have to pay for its decision eventually.
As good as it gets
Tesla engineered a one-off profit that it may have to pay for sooner than it would like. Indeed, David Einhorn (Trades, Portfolio), a longtime Tesla bear, weighed in on Tesla’s third-quarter profit in comments on Nov. 5:
“We believe this will be as good as it gets for the company. We believe they’ve exhausted most of the demand from customers who can afford the highest-priced versions of the Model 3. Tesla is contending with a litany of competitive, regulatory, human-resources, vehicle-quality and capital-structure issues.”
These are well-known issues afflicting Tesla. But the third quarter in particular was designed to be juiced. With extra inventory coming up from the second quarter, in addition to prioritizing the highest-margin variants of its Model 3 sedan, Tesla was able to give the impression of high gross margins and a real profit. At the same time, it stretched its massive Accounts Payable bill even further, while stiffing owners on service and repairs.
Unfortunately for Tesla, these decisions have already started to bite.
The hangover sets in
The fourth quarter has not started well for Tesla. Estimated October deliveries fell short of September, which was not unexpected given the company had pulled out all the stops at the end of the quarter in a frantic push to move volume. What is more surprising is that deliveries also fell short of August. That is a worrisome sign for demand in itself.
Worse still is the gradual downward trajectory of the average sale price of vehicles, which will eat into Tesla’s precious margins quite quickly. At the same time, production has slowed. All of these bode ominously for the company's bottom line.
Verdict
Tesla has built its whole narrative around exponential growth. Musk has promised that all quarters going forward will be cash flow positive and profitable. Yet, without energy credits, even this best-ever quarter may not have been profitable at all. Tesla relied on accounting gimmickry and one-off tricks to juice its numbers, combined with a blowout sale of credits. It will likely not be able to replicate that feat.
At the same time, the average selling prices are falling on its cars, so profit per car is dropping. If production volume does not make up the difference, Tesla may even report lower sequential revenue. It has to play catch-up now if it hopes the fourth quarter will not turn out to be a disaster.
The exponential growth narrative can last for a long time. But now that Tesla has played its hand and shown what it can deliver at the very best time under the very best circumstances, there is little case to justify the belief it can sustain its current revenues, let alone grow them substantially without massive amounts of capital investment it cannot presently afford.
Disclosure: Short TSLA via long-dated put options.
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