The term "useful idiots" often is attributed to Soviet era stalwarts Lenin and Stalin, and while the etymology may be unclear, its use was never more justified than in last night's Tesla Inc. (TSLA) conference call.
I just re-read the conference call transcript for the third time and I am amazed at the questions that were not asked. Apparently the groveling apologies of CEO Elon Musk to analysts Toni Sacconaghi and Joseph Spak were enough to get them to avoid asking the most relevant question.
I wrote an entire Real Money piece on the need for the market to understand the conversion process for Model 3 reservations (which are no longer being taken) into production orders. Spak tried to ask that question on the March call, but strangely, chose not to last night.
So, after the call, we know as much about the Model 3 order book as we did before. Nothing. Musk addressed the Model 3 conversion issue on his August 2017 call with analysts but did not last night, I would assume because he wasn't asked.
The question is so relevant because of Tesla's extraordinary working capital deficit. At the end of the second quarter, Tesla had a working capital deficit (current assets minus current liabilities) of $2.8 billion. That figure was $2.3 billion at the end of the first quarter and $1.1 billion at the end of 2017. Basic financial analysis would indicate the deficit needs to be financed, and indeed, Tesla's balance of debt and capital leases stood at an alarming $11.6 billion at the end of June. That is up from $10.75 billion at the end of March and $10.3 billion at the end of 2017.
The strain is so apparent in analyzing Tesla's payables and receivables. At June 30, Tesla had $3.03 billion of payables and only $570 million of receivables on its balance sheet. That 5.3x ratio is a huge increase over the second quarter's 4.0x ratio, which actually had been an improvement over the first quarter's 4.6x ratio.
On the call, analyst Pierre Ferragu seemed to take Tesla's working capital balance as some kind of wondrous, business-supporting unicorn. However, in truth, every auto company on the planet gets paid before they pay their suppliers. Indeed, the existence of a dealer network actually enhances that process and may be the only reason dealers still exist.
Instead of being useful idiots, though, analysts are supposed to drill down into ratios. For instance, Tesla's 5.3x payables-to-receivables ratio at June 30 compares to General Motors Co.'s (GM) ratio of about 2.7x, excluding intercompany transactions. Is that sustainable? The question wasn't asked, and hence couldn't be answered.
Also, while Tesla trumpeted its ability to make the Model 3 with a "positive gross margin" in the second quarter, its overall automotive gross margin of 20.6% was actually 730 basis points lower than the year-ago figure.
Did any analyst actually check on the competition? Ferrari's gross margin (excluding research-and-development costs, which also is how Tesla reports it) was a not-so-pedestrian 52.3% in the second quarter. Perhaps analysts should be looking to Maranello, where Ferrari is headquartered, to see a company that produces only luxury cars with strong competition as the benchmark for Tesla, which still is only producing entry- to mid-level luxury cars (given the absence of the perhaps mythical $35,000 version of the Model 3) and has almost zero competition.
So, I'll let the useful idiots jawbone Tesla stock higher today. I'll keep focusing on the fundamentals.