Tesla reports non-GAAP Net Income of $16 millions ($0.12 per share)

Will missing analysts predictions make the bubble surrounding the stock pop?

Like always, the financial statements of Tesla Motors are quite complicated to analyse, since they use a lot of Non-GAAP calculations, because of the lease accounting which delays revenues and cost of goods sold in the period in which the revenue is actually earned, along the leasing period.

While the actual loss on a GAAP basis increased from $30.5 millions to $38.5 millions in Q2, on a non-GAAP basis the actual net income reported decreased from $26 millions in Q2 to $16 millions in Q3. Like mentioned previously, the lease accounting explains most of the discrepancy between the GAAP and non-GAAP numbers, and if we judge that the people with the leases are unlikely to default on their loans, then the difference doesn't really matters from a shareholder point of view.


Now why did net income decrease even on a non-GAAP basis? Well a few factors explain this:

  • The stock surging from $107 on June 30th to $180-ish on September 30th, it is very likely that a lot of employees with stock-based compensation executed their call options to profit from the surge in the stock price. As long as the stock will get as much momentum and be valued at really high P/E, we will see this kind of stock-based compensation be really high and affect in a significant manner the income statement.
  • Increase in selling and administrative expenses, explained in the first point by the stock-based compensation increase, are also affected by the capital investments in property, plant and equipment, which increased in value on the balance sheet from $595 millions in Q2 to $654 millions in Q4. The expansion of the Supercharger network directly affects this sub-category.
  • Research and development expenses increased $4 millions from Q2 to Q3, as the company pushes the new Model X development.

While the stock plunged by 10% during after hours trading because of a miss of the estimates in car deliveries of 5,850 by analysts, if we look at the "Q3 Outlook" section of the filing for Q2, the company clearly indicated that they expected slightly over 5,000 deliveries. They delivered 5,500 cars.

Car manufacturers face slow growth and in general low profit margins, and in the long run, Tesla might very well be faced with those issues.

Analysts clearly need to be a bit more conservative with the company, as this is an auto manufacturer not a technology stock like you usually see on the NASDAQ. This is a very exciting company, and the future is very bright, particularly when we see how other companies fail to make products that rival in quality and ride-enjoyment, because they lack the patents necessary to stack the battery directly underneath the whole car and use it as a platform. This is the special ingredient that might keep Tesla in business for the years ahead. On the other hand, let's never forget what industry Tesla is really operating in, and the averages of this industry. Car manufacturers face slow growth and in general low profit margins, and in the long run, Tesla might very well be faced with those issues.

One aspect that I find particularly alarming is the desire to expand overseas and in foreign markets so quickly. If demand really exceeds supply, why do we focus investment on increasing the number of service points and superchargers in other countries, instead of investing in the production facility? Are we seeing a saturation in the demand in the North American market, forcing the company to look for potential buyers overseas?