On Jan. 30, Tesla Inc. (TSLA, Financial) reported earnings for the fourth quarter of 2018. In a previous research note, we discussed some of the strange statements and announcements that transpired during the subsequent conference call with analysts.
While Tesla published a simplified account of the quarter along with its fourth-quarter press release, the company’s 10-K, filed Feb. 19, is the closest thing to a complete look under the hood that us outside investors can hope to get.
Tesla is known to sugar-coat its initial earnings release, so the 10-K has become essential reading for anyone hoping for a “warts and all” view of the company. This year’s filing did not disappoint. It is replete with red flags, as well as a few things that just do not add up no matter how we look at it.
Padding cash any way possible
Tesla has a reputation for playing games with its accounting. That is not illegal by any means, but it does mean it can be harder to get a fix on the company’s true financial health compared to other public companies. This year’s 10-K was no different.
Looking at the balance sheet, it looks like Tesla has managed to pad out its cash balance by nearly $500 million. This was apparently accomplished by holding off from paying state sales taxes, as well as choosing to change certain recognition standards to shift some items from Accounts Payable to “Other Current Liabilities.”
Tesla has been fighting to show it does not need external cash injections, despite virtually every analyst (even the bullish ones) saying they have to do so. These sorts of balance-sheet gimmicks can only get the company so far.
Mystery fund investor liabilities
Another strange point involves a certain class of investors. Specifically, Tesla has guaranteed a certain level of return on investment to a group of funds. In its 2017 10-K, Tesla stated that it had achieved the necessary return. The 2018 filing fails to make any such mention. As Luis Carruthers, a long-time Tesla watcher, has pointed out, lack of disclosure has created an unusual mystery liability:
“Tesla guarantees returns to certain fund investors but doesn't reserve or disclosure scope around guarantees. [In] 2017, Tesla claims investor achieved the specified rate of return. This year? No such claim. What's the exposure of the pendulum swinging?”
While it is unlikely to be a liability of great significance, the very fact that it exists is cause to ponder.
Regulatory questions in Shanghai
Tesla has been talking up its Shanghai factory for the past few months, promising repeatedly to begin production at scale by the end of 2019. We have already addressed how the proposed timeline makes no sense and defies all industry best practices, so that needs no repetition here. Yet, for all its posturing and grandstanding, it appears the factory plan has yet to receive regulatory approval:
“We broke ground in January 2019, and subject to a number of uncertainties, including regulatory approval, supply chain constraints, and the pace of installing production equipment and bringing the factory online, we expect to begin production of certain trims of Model 3 at Gigafactory Shanghai by the end of 2019.”
A groundbreaking is easy. Building a factory (and doing so at unprecedented speed) is not. Tesla has essentially admitted that it must still go through a regulatory approval process. This should have been obvious, if one observed the timelines of top-tier automakers’ factory developments. Tesla’s timeline was always fanciful, but this latest disclosure adds yet another potential roadblock.
Trouble counting cars
Tesla’s principal business is making and selling cars. It does not use dealerships, so all sales of new vehicles are handled internally. Thus, one might think that Tesla would have a clear handle on the number of cars it sold in 2018. Yet, a review of its 10-K reveals that the numbers do not add up.
The 10-K states that combined sales of the Model S and Model X fell by 3,240 units compared to 2017. In its 10-K for 2017, Tesla reported 101,420 combined deliveries of the Model S and X, as well as 1,764 of the new Model 3 sedans. Yet, if we look at the total reported vehicle deliveries and the number of Model 3s delivered in 2018, we end up with a different number for the Model S and X. Indeed, by simple subtraction, we find a sequential decline in deliveries of the Model S and X of just over 2,000 units.
This is no small thing. At a $100,000 average sale price, that is more than $100 million in potential revenue that has apparently dropped off the face of the earth.
Verdict
Tesla’s financial and operational stress will continue to mount in 2019. As the year plays out, the company will come under increasing pressure to disclose information it has thus far tried to keep close to the vest. The latest 10-K is revealing insofar as it demonstrates once again that Tesla tends to be slapdash in its reporting.
These latest red flags, both big and small, could end up causing operational, legal and financial headaches for the automaker even as it fights for survival and relevance in the face of both an increasingly competitive landscape and a harsher macroeconomic environment.
Disclosure: Short Tesla via long-dated put options.
