One of the most satisfying aspects of analyzing equities is the necessity to dispassionately analyze reported figures. With certain stocks, though, that type of analysis goes out the window in favor of chest-thumping by bulls and bears. Tesla (TSLA) is one such name. TSLA supporters are convinced that Elon Musk and Co. are going to change the world and that the company's massive cash burn is just a hiccup in the way to world domination. Similarly, Tesla bears give the company no credit for creating a luxury automotive brand from nothing and hastening the evolution of electrified powertrains.
I'm in the bear camp on Tesla, and have stated that position in numerous Real Money columns. My bearishness stems purely from Tesla's massive losses -- the numbers really are scary -- not any innate opinion of the company.
The market did not like Tesla's fourth quarter report on Wednesday night, sending the shares down 8.6% in Thursday's trading, more than double the decline of the Nasdaq. Adherents on both sides of the Tesla trade took what they wanted from Tesla's report, but I find it more informative to look at the numbers themselves than the market's reaction. So, here are the key figures for Tesla:
- Automotive gross margin (AGM). Tesla's AGM was 13.8% for the fourth quarter, versus a figure of 18.7% in the third quarter and 22.2% in the fourth quarter of last year. I use the AGM figure that excludes tax credits. Musk has thrown out a target figure of 25% for AGM in the past, but at just over half that rate, Tesla cannot possibly be profitable. Tesla's gross profit of $438 million in the quarter was less than half of its combined R&D and SG&A spend of $1.04 billion, and a company that produces that much red ink is not sustainable. Tesla has not yet filed its 10-K for 2017, but if I were working for TSLA's auditing firm, I would argue for use of the "going concern" language in the auditor's statement.
- Model S shipments. 15,200 in the fourth quarter versus 14,065 in the third quarter and 15,800 in the third quarter of 2016. Only an eye-closed Tesla bear would fail to concede that the Model S is the most important new automotive model of the 21st Century. Tesla shipped fewer Model S's in the fourth quarter of 2017 than it did in the third quarter of 2016 (I use 3Q16 as a comparable since 4Q16 was a period of production problems for TSLA). That model's age, small number of buildable combinations and high price point give it an attractive margin profile, but it is being sacrificed, it would seem, for Musk's goal of entering the mass market with the Model 3.
- Long-term debt and capital leases: $9.46 billion at December 31, 2017 versus $5.97 billion at December 31, 2016. Tesla has leveraged its balance sheet in order to finance the expansion of its model line, but that leverage is happening against the backdrop of negative cash flows. Thar is a terrible combination to a credit analyst, and Tesla's bonds also fell sharply in Thursday's trading, touching a low of 93.44 cents on the dollar at one point.
- Cash burn rate: $915.2 million in the fourth quarter versus $1.251 billion in the third quarter and $461.4 million in the fourth quarter of 2016. Ignore Tesla's reported "cash from operations" figures as those are simply obfuscation. The purest way to measure cash flows at an industrial company is simply to subtract capital expenditures from EBITDA. That's the burn rate, and Tesla's is frighteningly large. Again, I am not an auditor, but if I were I would have serious concerns about whether a company burning this much cash qualifies as a viable enterprise.