I planned to write my usual straightforward analysis forecasting Tesla’s Q4 financials. Then this headline caught my attention: “Tesla Short David Einhorn Says Last Quarter Was ‘As Good As It Gets.’”
Mr. Einhorn has been short Tesla stock for a few years. The stock has caused him quite a bit of grief. I thought it would be interesting to have a small bet with Mr. Einhorn. I even made it public on Twitter. It’s reposted below.
I doubt Mr. Einhorn will respond. I imagine he never even saw the bet. He’s not a frequent Twitter user. If we did have a bet and I did win, I would donate to charity:water. If the bet ever becomes real, you can bet there will be an article here on CleanTechnica. Onwards and upwards!
In my last article, I discussed Tesla’s Lemonade versus Ford’s Popsicles. In this piece, I will extrapolate Tesla’s lemonade business to the October–December time frame (known by the financial cognoscenti as Q4).
Here’s a quick recap of what I put for Tesla’s Q3 numbers:
|Metric||My Jul–Sep 2018 Estimates||Actual Jul–Sep 2018 Numbers|
|Lemonade Sold ($)||6,953||6,824|
|Profit! Or Loss! Per Owner ($)||0.12||2.90|
|Glasses of Lemonade Sold||83,181||83,500|
Below is what I predict for the Q4 time frame. The current Estimize estimates are on the right-hand side. For those of you new to this series, Estimize is a site that tracks user guesses for all kinds of stocks and economic indicators. Estimize tracks Revenue, Earnings Per Share, and total Deliveries for Tesla.
|Metric||My Oct–Dec 2018 Estimates||Estimize Estimates|
|Lemonade Sold ($)||7,672||7,142|
|Profit! Or Loss! Per Owner ($)||3.40||2.19|
|Glasses of Lemonade Sold||96,721||89,682|
Originally, I was going to use the Estimize charts, and I will discuss the Estimize numbers later on, but I decided to stick with the lemonade theme for the charts. After some negotiations with my daughters, we settled on a revised color scheme. Turns out they wanted teal and red. Both were happy with the results.
Previously, there were a few comments that I did not include all prior quarters for Tesla, so this time around I backfilled from the time Tesla started the Model 3 ramp.
“Paying your older sibling to help” is analogous to Selling, General, and Administrative expenses. “Finding the best corner” involves research, and is similar to Research and Development expenses. The two combined make Operating Expenditures.
As you can see, Tesla has been very disciplined with its Operating Expenditures while growing sales. I expect that to continue.
A comment might be necessary here. How can I predict earnings will almost double when number of vehicles is only going up around 15%? The answer is called operating leverage. If you look back at the charts, Revenue and Cost of Goods Sold are strongly increasing, but Operating Expenditures is staying fairly flat. For each vehicle Tesla sells, much of it flows through to the bottom line.
Looking at the next chart, note that Earnings Per Share is on a diluted share basis.
The Tips in this case are all the other items used to calculate Operating Cash Flow, excluding profits. They are the something extra added to your bank account, above and beyond profits.
Financial Analysts use Capital Expenditures instead of Investing Cash Flow to calculate Free Cash Flow.
That’s the correct way to do it. The “Cost of Lemonade Stand” represents Investing Cash Flow, used primarily for purchasing plant, property, and equipment.
My good friend Paul asked me how the bank account can go up more than profit. The simple answer is depreciation plus stock-based compensation is higher than capital investment. The difference is added back to our profits to show the increase in the cash balance. I estimate Tesla will have more cash this quarter than at any point in the last one and a half years.
By popular request, I have added Gross Margin. The easiest way to think of this is how much money you have left from your lemonade sales after subtracting the cost of lemonade. Rather than a dollar amount, it is expressed in percentage format.
I should note that US sales are artificially boosted by the rush to get the $7,500 credit. There’s less of an artificial rush to get 6 months free Supercharging with a referral. The tax credit may pull in some US sales from what would be the January–March time frame. Thus, it makes sense for Tesla to begin European and Chinese sales at this time.
It would not surprise me at all if “Tesla Profit! Or Loss! Per Owner” was closer to $4.55. One thing that led to my estimate being low is the traders at Wall and Broad added back stock-based compensation to Tesla’s earnings. This is called adjusted earnings. My original estimate was based on Generally Accepted Accounting Principles (GAAP), or what Tesla reports on its financial statements. Last quarter, Tesla earned $2.90 on an adjusted basis. The Estimize Q4 average is currently $2.19 on an adjusted basis, lower than what they earned in Q3. That doesn’t make sense to me, with my expectation Tesla will deliver more cars with higher margins for this quarter. The tariffs will impact the margins for the S, X, and Energy areas. This is offset, however, by Tesla reducing Model 3 costs and improving the margin for this segment.
Paying Off March Debt
Bloomberg wrote this week that Tesla offered to pay off the $930 million it owes in March convertible debt with a combination of 50% cash / 50% stock. As of the close on Friday, December 7, Tesla is slightly above the $359.88 conversion price. Convertible debt allows bond holders to receive equity in the company if certain conditions are met. Having to pay the full $930 million in cash would have strained Tesla’s cash balances. It shows Tesla is positive about replacing the cash and is comfortable making a profit going forward.
As we recall, there was much ado about nothing regarding how Tesla would pay back the November and March debt. Having a profit and a large increase in your cash balance tends to quiet the most vehement of critics.
There was talk after the Q3 numbers came out that Tesla had a large amount of revenue from regulatory credits that boosted the bottom line. Two points: First, who cares? And Tesla would have been profitable without the credits anyway. Second, Tesla earned those credits and can use them whenever it can sell them. Tesla’s numbers will continue to grow as more vehicles are produced and gross margin increases. Any regulatory credit sales are cherries on top.
We reported on October 25 that Tesla was worth $49.22 billion. As of the close on December 7, Tesla is worth $62.26 billion and has passed Daimler in market cap. A nice gain after a volatile year.
I have not mentioned any of my assumptions here. I am happy to discuss them in the comments for readers wanting a deeper dive.
The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
I am currently long Tesla shares. I do not plan to make any investment or divestment related to Tesla in the next 48 hours from the publish date of this article. If I did, they may be shares or options.
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