Tesla (TSLA) is the rare company that can consistently pull off the "overpromise and underdeliver" technique, which was on full display when it reported earnings Wednesday after the bell.
Sure, the company delivered revenue of $3.41 billion, beating the $3.22 billion that Wall Street anticipated. Of course, I'm not sure Wall Street anticipated that deferred revenue would drop by $500 million. Without it, Tesla would have missed on analyst expectations, which begs the question: "Was that real, or was it just done to facilitate a beat?
Earnings per share -- or should I say losses per share -- came in at -$3.35, which "beat" estimates of -$3.54. Putting it that way sounds a lot better than saying the company lost more than a cool half-billion dollars in a single quarter. And from a GAAP standpoint, that number balloons to over $700 million.
But if you listen to the company, everything is going great. Well, everything is going great if you assume that what management promises will come to fruition someday.
Ignore items like the fact that interest expenses grew 50% over the last year to $150 million per quarter. Instead, assume the company will expand Model 3 production from the current run rate of 2,000+ cars over the past three weeks to 5,000 cars a week within two months, and then 10,000 cars per week shortly thereafter. This is supposed to happen despite production changes that TSLA is making away from automation techniques that had almost reached 5,000 cars per week.
Ignore as well the $1 billion in negative free cash flow for the quarter. Capex at $656 million won't be repeated, but that money is spent and the nearly $400 million in negative operating cash flow is nearly six times higher than it was in the same period last year.
Instead of looking at all of that, management wants you to focus on the fact that Tesla will have positive cash flow in 2018's third and fourth quarters ... if the Model 3 has "highly positive" gross margins.
But where does Tesla expect gross margins to be in the second quarter? Flat. And where were they in the first quarter? Slightly negative.
There's a trend here in Tesla's business that's quite different from the mindset of Tesla shareholders. In my view, TSLA would trade at one-third of its current price (about $301) if it weren't a "cult stock."
The company wants to tout its $2.7 billion cash balance. But with $10.8 billion of debt, does it matter much?
And yes, Tesla talks of lowering capex to under $3 billion, which is a step in the right direction. But when operating cash flow is negative, interest is eating up $150 million-plus per quarter and you're relying on production numbers and margins that you've never even come close to achieving, you're making a lot of big promises. Tesla's cash stood at $3.4 billion and debt at $10.3 billion just last quarter, but both of these have moved in the wrong direction since then.
Yes, service is growing fast at 37%, but it's still losing money. And again, Tesla promises it'll get better, but there's no indication that it's doing so. And yes, solar revenue skyrocketed 92%, but gross margins dropped from 29.1% to a tiny 8.5%.
Is there growth at Tesla? Sure -- but there are plenty of places where you can find growth in the stock market. Tesla's revenues grew 26% year over year and that's not bad ... unless you compare it to the promises of yesterday and the valuation of today.
The company won't admit that it needs cash, but $10 billion of debt is going to come calling sooner rather than later. The current cash won't last the year unless Tesla overdelivers. Unfortunately, that's never been the company's m.o. -- and I don't expect that to change now.