I got to drive "ludicrous speed" Tesla Model S!

[mustang_sallad]

 

No. They issued a total of $1B in debt and equity last year and only spent $717M cash outlay on R&D.

 

Also worth noting, their losses, in GAAP terms, are increasing significantly ($882M last year, $75M in 2013)

 

Spend some time with their 10K. You're smart enough to suss it out. It's not good.

 

http://files.shareholder.com/downloads/ABEA-4CW8X0/1740147920x0xS1564590-16-13195/1318605/filing.pdf

 

 

I'm new at this kind of stuff, so you may need to hold my hand. But there's a handy section in there called "Cost of Revenues and Gross Profit" where they specifically tally up:

direct parts, material and labor costs, manufacturing overhead, including amortized tooling costs, shipping and logistic costs, vehicle internet connectivity costs, allocations of electricity and infrastructure costs related to our Supercharger network, and reserves for estimated warranty expenses.

 

Those sound like the kinds of costs I would take into account in assessing the success of the product, and isolate the Model S from the fact that it's part of a company that is trying to grow at a rate that we haven't seen from any automaker ever (building factories, stores - not all of which would be included in your $717M R&D number).

 

2015 Revenue: $3.74B

2015 Cost of Revenue: $2.82B

2015 Gross Margin: 22.8%

 

Please tell me how i'm doing this wrong and which other costs should be included in determining whether the Model S deserves recognition as a revolutionary product.

[akirby]

You don't stop R&D spending - it goes up as you add more and more models. You have to make enough gross profit to cover all that stuff including factory expansions and other one time expenses.

[RichardJensen]

 

 

I'm new at this kind of stuff, so you may need to hold my hand. But there's a handy section in there called "Cost of Revenues and Gross Profit" where they specifically tally up:

direct parts, material and labor costs, manufacturing overhead, including amortized tooling costs, shipping and logistic costs, vehicle internet connectivity costs, allocations of electricity and infrastructure costs related to our Supercharger network, and reserves for estimated warranty expenses.

 

Those sound like the kinds of costs I would take into account in assessing the success of the product, and isolate the Model S from the fact that it's part of a company that is trying to grow at a rate that we haven't seen from any automaker ever (building factories, stores - not all of which would be included in your $717M R&D number).

 

2015 Revenue: $3.74B

2015 Cost of Revenue: $2.82B

2015 Gross Margin: 22.8%

 

Please tell me how i'm doing this wrong and which other costs should be included in determining whether the Model S deserves recognition as a revolutionary product.

 

The first, biggest, most important bit of advice I can give you is to discount everything that comes before the mandatory disclosures of income, cash flow and balance sheet.

 

The second piece of advice is to compare the tables that Tesla provides with Ford's or GM's.

 

Ford's annual report is here: http://corporate.ford.com/content/dam/corporate/en/investors/reports-and-filings/Annual%20Reports/2015-Annual-Report.pdf

GM's 10K is here:https://www.gm.com/content/dam/gm/en_us/english/Group4/InvestorsPDFDocuments/10-K.pdf

 

Start by comparing p. 107 of the Ford report with p. 49 of the Tesla report. GM's is on page 55

 

The first major red flag with the Tesla report is that the way they handle expenses.

 

They have a line item "Gross Profit" that you do not see in either the Ford or the GM reports.

 

Tesla arbitrarily divides their expenses into items that they want you to pay attention to (an odd amalgam of COGS and SG&A) that they call "Cost of Revenue" (which again, is not a term you see in either Ford or GM income statements), and other expenses that they introduce later.

 

Ford & GM subdivide expenses/income into a standard form:

 

Business income (loss) (Ford doesn't provide a total here, but it can be calculated. GM does provide a total as 'operating income')

Interest income (loss)

Equity income (loss)

 

Tesla uses this form:

 

Revenue minus some COGS, some SG&A

More operating expenses

Interest expenses

What they do is provide a series of totals, of which only the final one is useful ("Loss before income taxes"), given the high and growing interest expense at Tesla.

 

That's your first indication that Tesla is playing games: They're not reporting expenses and income in a manner that conforms to established companies.

 

Now, I can hear you say, "But Tesla's different."

 

No. They're not. Their business is substantially identical to that of Ford and GM. They purchase materials, build cars and sell those cars. COGS and SG&A are likely to be almost identical in form. Tesla's SG&A construction is likely to be a bit more complex on analysis (because of their self-owned distributorship network), but then their revenue per unit should be higher as they're not wholesaling their product.

 

---

 

Your next indicator that there are problems at Tesla is on the cash flow side (p.52).

 

They were able to borrow $569M against their lease portfolio, but that's only about a third of its apparent value; that's far less than what a more creditworthy company could obtain from its portfolio and, I would assume, the interest costs of that loan are not optimal either.

 

Now how this matters is that Tesla loves to talk about sales; well, sales of leased vehicles are not cash. Cash is the $569M they borrowed against their lease portfolio.

 

Critically, what this means is that the actual immediate cash value to Tesla from the lease of a Model S could be as little as ~35% of the purchase price.

 

When you consider that they have to front all of the costs, and that their lease revenue is spread out over 36-48 months, you can get a picture of why their cash flow is so awful.

 

And, more to the point, it will continue to be awful as long as Tesla's credit stinks and as long as they're leasing something like 43% of their sales.

 

This is another area where Tesla's "we're going to do it all ourselves" attitude is actively harming the company. Rather than have a bank handle their financing operation, which would provide them with a discounted upfront payment for a lease, they're bent on handling it themselves--except they're still having to go to banks for money.

 

---

 

Now I realize these items don't pertain directly to the Model S, but that's because Tesla (like all manufacturers) doesn't want you to be able to discern whether the Model S is really profitable once all the other factors are put in place.

 

However, if you assume that SG&A is attributable almost entirely to the Model S, and that SG&A + Automotive Expenses alone exceeds revenue, it's pretty easy to conclude that the Model S isn't profitable on a standalone basis, because you haven't factored in ongoing R&D, interest expense from borrowings related directly to the development of the Model S & the purchase of related PP&E (Property, Plant and Equipment), etc.

 

---

 

When you have a company that raises $1B in debt and equity, reports revenue of $3.7B from sales of vehicles, and still manages to lose almost $900M, you've got major problems.

 

You can't say "Well, they lost money because they're spending so much getting ready to build the Model X"

 

That's now how accounting works.

 

If I sell $1B in stock, and then use that money to buy $1B worth of PP&E, That's not a loss.

 

I added $1B in shareholder equity and $1B in cash (an asset). I then used that asset (cash) to buy other assets (PP&E). The only loss would come from stuff that has to be expensed, not stuff that is depreciated over time.

Edited March 23, 2016 by RichardJensen

[RichardJensen]

This is the picture that Tesla's annual report paints:

 

They had to borrow $569M against their lease portfolio (an increase of a whopping $566M over the earlier year).

 

They had to negotiate a $250M increase to a $1B secured revolver, that carries a whopping $1.43B in assets as collateral.

 

They had less than $1.2B cash on hand at the end of a year in which they spent $2.4B, net.

[mustang_sallad]

This is the picture that Tesla's annual report paints:

 

They had to borrow $569M against their lease portfolio (an increase of a whopping $566M over the earlier year).

 

They had to negotiate a $250M increase to a $1B secured revolver, that carries a whopping $1.43B in assets as collateral.

 

They had less than $1.2B cash on hand at the end of a year in which they spent $2.4B, net.

 

 

Thanks for breaking this all down. So clearly, they're struggling to pay the bills, but is that because the Model S is a bad product? We got into this because you said the Model S isn't revolutionary, because anybody could build an awesome car and outsell their competition if they're willing to sell it at a loss. The numbers we're looking at seem to suggest that Tesla makes a healthy gross margin on each Model S sold based on how much it costs to build it (parts, labour, logistics, etc - see list in my previous post). I think it's silly to say Tesla isn't different from Ford and GM. Tesla's US sales have gone from 2500 in 2012 to 25,000 in 2015 - GM and Ford are operating at steady state, relatively speaking. Tesla is growing at an insane pace and therefore needs to spend considerably more compared to the number of cars they sell.

[akirby]

 

The numbers we're looking at seem to suggest that Tesla makes a healthy gross margin on each Model S

 

Did you completely miss what Richard said about that line item?

[RichardJensen]

 

 

The numbers we're looking at seem to suggest that Tesla makes a healthy gross margin on each Model S sold based on how much it costs to build it (parts, labour, logistics, etc - see list in my previous post).

 

"gross margin" is NOT an acceptable accounting term. Their expense breakdown is NOT an acceptable accounting for expenses.

 

They are very clearly excluding expenses attributable to vehicle sales IN ORDER TO MAKE THEIR VEHICLE SALES LOOK PROFITABLE.

 

I cannot possibly over-emphasize this.

 

---

 

I think it's silly to say Tesla isn't different from Ford and GM.

 

 

And you would be wrong.

 

Tesla's business works much like Ford's and GM's--except that Tesla has rather foolishly (IMO) assumed 100% liability for aspects of their business that Ford and GM have off-loaded to suppliers and dealers.

 

All three companies purchase raw materials and subassemblies and build vehicles from them. All three have sales, market and research and development units.

 

Granted, Tesla merits a certain amount of leeway given that they have significant expansion costs.

 

But you are very, very, very much mistaken if you believe that Tesla's business is neither subject to the same economic realities as Ford and GM, nor structured in the same basic way.

 

Therefore, any deviation from accepted accounting practices---especially with such a transparent attempt to hide the true expenses of the automotive operation---should be viewed with extreme suspicion.

Edited March 25, 2016 by RichardJensen

[RichardJensen]

Let me illustrate for you just how reckless their accounting practices are.

 

Let's say that you're looking at a mortgage payment of $1500 a month.

 

Let's say that your income is $3000 a month.

 

Let's say that your groceries and other household expenses are $2000

 

Suppose you rationalize the mortgage by excluding food (say, $800/month), because "it's not directly tied to my housing expense. Therefore, my gross profit after accounting for the cost of housing is $500/month"

[97svtgoin05gt]

 

Has nothing to do with engineering and everything to do with cost and durability. Ford doesn't sell $124K sedans.

Wow, a $125k car works a little better than a $35k car. Who'd have thought!!???

[RichardJensen]

Here is where your thinking needs to change:

 

A reasonable person with no prior biases and a basic understanding of business principles, on examining the income statements of other auto makers would immediately ask why Tesla treats SG&A differently than they treat materials costs.

 

If you ask me, the only plausibly forthright reason Tesla would have for drawing so much attention to gross profit is to set up the company for sale.

 

Essentially, they're saying "Look at how much we clear net of depreciation and COGS on the Tesla Model S!" With the idea being that a company with a broader manufacturing base, a less expensive sales & administrative operation (per unit), and the ability to dramatically ramp up Model S volume (or use Model S components on much more products) should be able to make a nice profit on the Model S.

 

But no, Tesla is almost certainly not booking a profit on the Tesla Model S.

 

To provide a different illustration. Tesla's "gross profit" figure would be sort of like Ford making a big deal about how much money the F150 makes if the only expenses you book against it are materials, assembly plant fixed costs, depreciation and labor--and ignore the R&D budgeting and the balanced share of SG&A attributable to that product line.

Edited March 25, 2016 by RichardJensen

[mustang_sallad]

 

To provide a different illustration. Tesla's "gross profit" figure would be sort of like Ford making a big deal about how much money the F150 makes if the only expenses you book against it are materials, assembly plant fixed costs, depreciation and labor--and ignore the R&D budgeting and the balanced share of SG&A attributable to that product line.

 

 

You're right that the F150 better be able to support it's share of R&D costs on an ongoing basis, because there's no fathomable way for the next generation F150's sales to be an order of magnitude greater than the previous generation. This is why I'm saying Tesla's situation is a little different.

[RichardJensen]

 

 

You're right that the F150 better be able to support it's share of R&D costs on an ongoing basis, because there's no fathomable way for the next generation F150's sales to be an order of magnitude greater than the previous generation. This is why I'm saying Tesla's situation is a little different.

 

At this point I can't tell if you're deliberately missing the point or if I still haven't made the point clear.

 

First, 'order of magnitude' = "x 10"; the next Model S is not going to sell ~ 500k copies per year. It just isn't. Cars in that price range don't.

 

Secondly, if the Model S can be the best selling full size luxury car in the United States--which it apparently is (not sure if that includes the DTS)--and still not recover its R&D costs, there's a very real question of whether it will ever be able to recover its R&D costs without radically altering the business model (e.g. dramatically lowering the price, no longer positioning it as a 'performance car', etc.)

 

Finally, even if some future Tesla Model S is able to turn a profit, this Model S is almost certainly not profitable. And that was the whole original point.

 

--

 

I am also a bit concerned that you persist in this notion that Tesla is going to continue to grow by leaps and bounds. They don't have the production facilities to grow by leaps and bounds. They don't have the access to capital required to grow by leaps and bounds. A brand new factory would require a cash outlay of over one billion dollars, or more than 25% of their booked revenue from last year.

 

There's also the very real question of where their volume is going to come from. By continuing a quixotic campaign against dealer franchise laws, they've locked themselves out of a business model that would enable them to dramatically grow their distribution channel with minimal outlay (and yes, they would sacrifice some revenue short term as well)--and for what? Atomcat's Tesla trained/Tesla employed sales rep thought that the Tesla had four motors in it.

 

You can talk about how Tesla is 'different', but the economics are exactly the same. Tesla can be 'different' (that is, incredibly unprofitable) only so long as people are willing to lend them money or buy their stock. The moment people realize that the company probably needs to spend $6 billion on facilities and sell at least 1M cars to be anything other than a novelty act, they will stop spending.

[RichardJensen]

Again, and I cannot put this any more bluntly:

 

Tesla is not different than Ford or GM.

 

They have revenue, they have costs, and to the extent that their costs exceed their revenue they need cash, investors or lenders.

 

It is absolutely, positively, unequivocally that simple.

 

The minute investors and lenders stop believing in Tesla, you will find out just how similar that company is to every other company that ran out of money before it ran out of ideas.

[RichardJensen]

And yes, it's about belief. It's about confidence. And right now, I cannot imagine any reasonable person having confidence in Tesla's long term prospects, given that their immediate short term prospects are 'we don't have enough money to last the year'

[jpd80]

How many sales does Tesla need to cover its R & D costs without continually floating more stock?

Tesla cannot grow sales big enough to stay in front of those costs without hurting those premium prices.

 

Once investors realize that Tesla has hit a glass ceiling and their stock price falters, they will dump it and go.

Without those investors buying more stock, Tesla has lost its regular source of funding immediate bills.

If Tesla cannot fund its immediate bills, that raises questions regarding solvency........

Edited March 25, 2016 by jpd80

[RichardJensen]

How many sales does Tesla need to cover its R & D costs without continually floating more stock?

Tesla cannot grow sales big enough to stay in front of those costs without hurting those premium prices.

 

Once investors realize that Tesla has hit a glass ceiling and their stock price falters, they will dump it and go.

Without those investors buying more stock, Tesla has lost its regular source of funding immediate bills.

If Tesla cannot fund its immediate bills, that raises questions regarding solvency........

 

If I had to SWAG it, MB could turn a profit with an all electric lineup like what Tesla is trying to do. I don't think you could go any smaller.

[Copperhorse]

Nice 0-60, one day... one day...

[atomcat68]

Ok. Now how does it drive? I'm glad somebody asked...

 

First of all the battery packs give the car a low center of gravity. Despite it being a largish sedan, it actually conducts itself much like a sporty car. The suspension is an air spring suspension that takes up the same room as a four wheel Macphearson strut suspension. It is totally adjustable but I chose sporty with the most road feel. I was amazed that this setting felt like your hands on the wheel were almost touching the ground and feeling the bumps and road imperfections. Although I have experienced this on many cars, it seemed more tactile on this one. I think if I owned this car, I'd choose a more sedate mode as this mode would seem too bumpy and I felt that I didn't really need to know the location of every pebble and sand grain I ran over.

 

The brakes took some getting used to. I set it to total regenerative braking mode to experience "full on EV mode". Any time you took your foot of the gas-less gas pedal, it automatically applied a small amount of brake pressure, slowing the car down. I found this a little unsettling at first, but got used to it. When I decided I wanted to stop fast... Wow it did! None of that Prius brake weirdness appeared in that instance. The regenerative braking did feel somewhat "grindy" like a hybrid cars brakes. I feel many would shut this feature off even though it is claimed to extend the driving range by six miles.

 

Of course there's the acceleration... Nothing prepares you for this unless you are a fighter pilot or frequent amusement parks with all the roller coasters and free fall rides. Before stomping the pedal, the Tesla rep made sure I had my head against the headrest and all objects in the car were secured... He was correct! This car is that fast! The heart races, and your adrenal glands pump! I felt any faster would cause a loss of consciousness! I would never tire of this. No tire squeal! It just moves! The best way to describe this is that I was driving Zeus's lightning bolt the second he threw it!

 

I enjoyed this car! Exclamation points!!!!!! period.

 

Now for four more pages on how Tesla doesn't make a profit or how the touch screen will explode into shards of glass...

[Anthony]

Sounds awesome!

[bzcat]

duplicate post

Edited March 31, 2016 by bzcat

[bzcat]

Ok. Now how does it drive? I'm glad somebody asked...

 

 

I have pretty much the same experience after driving a Model S. It is a fantastic car. Most importantly, a fantastic American car.

[bzcat]

And yes, it's about belief. It's about confidence. And right now, I cannot imagine any reasonable person having confidence in Tesla's long term prospects, given that their immediate short term prospects are 'we don't have enough money to last the year'

 

But Elon has people lined up with $1,000 deposit today to help him keep the lights on until the end of the year

 

BTW: Richard has been pretty on point about Tesla's financials. I'm a CPA so I can appreciate all the finer points he brought up. But if you want to have it explained in mostly plain english, take a look at this report done by a couple of college students: http://www.economist.com/sites/default/files/tesla_motors.pdf

 

And for the record, despite being in agreement that Tesla's outlook is troubled at best, I still think Model S is a kick ass car. It's pretty incredible car actually.

Edited March 31, 2016 by bzcat

[aneekr]

 

I have pretty much the same experience after driving a Model S. It is a fantastic car. Most importantly, a fantastic American car.

 

+1

Aside from below average reliability ratings (unfortunately, something that's not uncommon with American cars), Model S demonstrates that Americans can design and engineer a large sedan that competes well with the world's best.

[RichardJensen]

 

take a look at this report done by a couple of college students: http://www.economist.com/sites/default/files/tesla_motors.pdf

 

From a link in that report...

 

http://www.thestreet.com/story/13044208/3/tesla-motors-tsla-earnings-report-q4-2014-conference-call-transcript.html

 

[Deepak] Whereas in some other auto companies, the moment they sell the car to a dealership, we understand, they recognize the revenue even though a financing entity might lease that car and so they don't have the cash flows

 

[Musk] What Deepak just is a very good point. What the other companies will do is they will sell their cars to the dealer groups, but then they will then turn around and refinance those same cars. So they are sending it to the laundromat, is basically what they are doing. In our case, since we are not sending it to a laundromat, it is actually more correct. Because if we do a lease, it's all internal and we're not trying to send it through some third party where actually the risk is still assumed by the parent car company

 

 

Does Deepak not realize that manufacturers receive a credit [= 'cash'] from either the dealership itself, or from the dealership's financing agency when they ship a vehicle to a dealership? If Ford Credit is floorplanning a dealership, and Ford sends that dealership an F150, they take payment for that F150 from Ford Credit.

 

Also, does Musk not realize the value that a captive finance arm provides? The opportunity to obtain additional profit from the sale of the company's products? Criminy. Ford wouldn't keep Ford Credit around if it wasn't a significant source of profit.

 

And, like Deepak, it appears that he has no clue about when and how Ford receives payment for their vehicles. Both of them seem to think that Ford, for instance, doesn't receive payment when they book revenue from a sale to a dealer!! Geez. Of course they get paid. How else would they pay their bills? By issuing tons of stock and bonds?

 

From those remarks and others like them, it almost seems as though Musk and Deepak are suggesting that conventional manufacturers play games with revenue recognition.

 

This is why I have such a dim view of Tesla. I don't think their CFO even understands how this industry works. And I'm sure Musk doesn't.

Edited April 1, 2016 by RichardJensen

[atomcat68]

The ongoing problem with this thread is not that I think Richard and others are wrong. They're absolutely right for raising questions about Tesla's longterm prospects.

 

My issue is that the problems have been hashed over and beaten to death. I wanted to review the car by itself out of the shadow of it's maker. As if its logos were covered up and it is possible that Lincoln, or Cadillac or Lexus made it.

 

Maybe it is impossible to separate both.

 

My opinion of Tesla the company is that they know the car company by itself won't survive and like Lotus they want to be an engineering company. They want to make money on the engineering by getting the technology for the cars and the infrastructure patented and sold to other companies. Making the cars themselves is to show what can be done.