Published on November 11th, 2018 | by Frugal Moogal0
Tesla [TSLA] FUD: Accounts Receivable 10-Q Mystery
November 11th, 2018 by Frugal Moogal
The goal of this series is to examine current topics being written about Tesla [TSLA] that appear to be stirring up “Fear, Uncertainty and Doubt” (or FUD). The plan is to try to provide reasonable analysis about the validity of the claims. I generally do not link to the articles that “inspire” me to write this, as I do not wish to reward analysis I feel is poor with increased traffic. However, I will freely admit that my analysis may contain incorrect assumptions, and will do my best to acknowledge them in future articles.
This is the first of what I hope to be a semi-regular series here on CleanTechnica that examines current Tesla bear arguments and their validity. I find myself dissecting these arguments on a regular basis for myself, and I figure that it’s worth sharing my results here. I can’t promise I’ll always be bullish on the company, or that I won’t agree with certain FUD articles from time to time, but I also understand that pretty much every company has some level of FUD to them, and a company that is trying to do as much as Tesla is should attract an outsized amount of scrutiny.
In the grand scheme of things, it’s been a pretty slow news cycle since Tesla reported its Q3 earnings and smashed analysts’ predictions. And that makes sense — those who are bullish on the company are happy to sit back and smugly claim they were right, while those who are bearish have to re-calibrate their arguments now that the earnings were published.
In the past week or so, it seems like a new narrative has started to emerge via Seeking Alpha in particular, essentially that Q3 numbers were “gimmicked” up to look better than they were. The main concern seems to be with the “Accounts Receivable” line, which increased massively from Q2 to Q3, potentially hiding something.
Before I go on, if you haven’t read my previous article explaining the issue of there being so much noise made about Tesla that it is tough to figure out what is really worth listening to, I’d suggest you check it out here.
Secondly, I remain a Tesla shareholder with a whopping 8 shares, with no intention to add to or sell that stake. I do think that Tesla remains a risky investment for a plethora of reasons that I won’t get into right now, but also one that has the potential to increase astronomically in the future, which is why I decided to purchase and hold a very limited number of shares. I would not suggest anyone use the following article as their sole data point to decide to invest nor sell shares in Tesla.
Having said all of that…
Tesla’s Accounts Receivable shot up to $1.16 billion in Q3 compared to a hair under $570 million in Q2. Considering that Tesla stated 2018 Q3 net earnings at $311 million, the doubling of this line item could, by itself, potentially make a losing quarter into a winning one. The significant increase in accounts receivable does deserve a bit more scrutiny.
Before going on, let’s note that accounting is a funny thing. Depending on what a company decides to do, it can push profits or losses from quarter to quarter pretty easily using a number of legal accounting tricks. Pushed items, though, do not disappear, just show up in a different quarter.
An easy way to illustrate how this works is to pretend that you have a credit card that you pay $1,000 every month. If your due date for the credit card is the 15th and you usually pay it then, all that you need to have a month where you owe it nothing is to pay your monthly cost before the end of the month. In that case, you might end up paying $2,000 on your credit card in November, but owe nothing in December. It doesn’t change the fact that, ultimately, you will still be paying the same amount over time.
Businesses have a number of things like this they can use to show either greater earnings or fewer earnings in a quarter, and one of those things they can play with is their Accounts Receivable line. This makes the scrutiny of it warranted as analysts attempt to determine if Tesla is sustainably profitable.
In this case, we have a big clue because Tesla CFO Deepak Ahuja addressed it during the earnings call:
“Yeah, we reduced our inventory in Q3, which helped. And then, although we had higher payables because — sorry, higher receivables — because the quarter end, the weekend, we won’t have that in Q4, so all of this should continue to help us in Q4 and beyond, the working capital again.”
The narrative being pushed by bears right now is that previous quarters that ended on weekends didn’t have a big spike, and so it seems that this may be a red flag showing that the profits Tesla showed in Q3 are not sustainable.
My analysis? At the end of the quarter, Tesla did make a serious push to get vehicles into the hands of customers. In fact, I’m sure some people reading this spent part of their weekend volunteering at their local Tesla stores to help with deliveries.
If we look at the increase in accounts receivable and not the total, we really only need to justify the ~$590 million increase. If Tesla delivered 10,000 cars that final weekend at an average of $59,000 apiece, we have just discovered where that number comes from.
The potentially bearish news here is that Tesla shouldn’t have been in a situation where they were delivering more than 10 percent of their cars for the quarter in a single weekend. This argument, however, can be countered by knowing that Tesla has been hitting run rates of 7,000 vehicles in a week, meaning that the push was in reality only about a half week more than a week of production.
If we add to this that Tesla is pushing to lower the amount of time from when a car is manufactured to the point that it is delivered (which, as an aside, is a potential incredible savings that they discussed on the conference call that seems to have gone overlooked by nearly everyone), at some point this compression of deliveries had to occur. Having it occur at the end of a quarter, when there is an incredible incentive to get the cars into the hands of owners, makes sense.
Who Owes Tesla Money?
Along with the above, in its Q3 2018 10-Q statement, Tesla noted that a single entity represented more than 10% of the accounts receivable. There was immediately a flurry of theories about what this could be, written in articles and sent about via Twitter, with either a non-sustainable supplier rebate or a significant sale of vehicles to a fleet being the “leading” ideas.
To me, this one seems about as much of a mystery as when my three-year-old “disappears” when he is hiding from me under the table. If accounts receivable was at $1.16 billion, it follows that a significant portion of that money would have been financed. I’m not sure who Tesla uses to underwrite its auto loans, but if it uses mainly one institution, it follows that one institution would owe them a lot of money.
Which, for the record, is exactly what Tesla said about it when asked.
Looking at the above, I see nothing in the Accounts Receivable side of the business that feels like anything more than a one-time occurrence due to the end-of-quarter push falling when it did. In fact, based on what we know about deliveries around that time, it would be more concerning to me if we didn’t see this number rise significantly.
And being honest here, I feel like if Tesla is going to use any accounting tricks to help them make their earnings look better than they really are, I expect we would see that in Q4. Tesla has a $920 convertible debt loan that comes due in March. If the stock price for Tesla is above $359.80, however, Tesla can convert the debt into stock instead of paying it back in cash. While it was extremely important to show profitability in Q3, Q4 will have a larger impact on stock price at that time, and having a poor quarter follow Q3 could result in Tesla’s share value falling and therefore putting the debt conversion into question.
I also assume that this loan is why Elon has targeted the Model Y to be unveiled on…
— Elon Musk (@elonmusk) May 24, 2018