Table of contents
Tesla, probably the most discussed company in the world, has presented its quarterly figures and as usual there were again accusations of fraud and a lot of criticism. I can refute much of this below, although I must also add one or two critical words. Especially with regard to demand and cash flow. In addition, I share with you the most important insights and statements of Elon Musk from the earnings call.
Please also have a look at my detailed video (GERMAN):
Expectations missed
Tesla was not quite able to live up to its usual high expectations this time, which was reflected in an after-hours drop of around 6 % in the share price.
In terms of sales, $21.45 billion was achieved instead of the $22.52 billion expected by analysts. An increase of 55.92 % compared to the same quarter last year (YoY). Earnings per share grew by 69% and came in at $1.05, higher than the expected $1.01. It should be noted here, however, that these are the non-GAAP numbers, which is an adjusted profit where Tesla adjusts for components that the company believes do not belong in the profit calculation. For Tesla, these are the Stock-Based Compensations (share-based payment). On a GAAP basis, i.e. figures in line with accounting standards, a profit of $0.95 was generated, which is $98% more than in the prior-year quarter. So the positive trend is quite obviously still in tact. It should also never be forgotten here that Tesla is ultimately an industrial company and many thought such growth rates were impossible, especially in this industry.
I am notoriously reluctant to use Gross Margin as a basis for judging Tesla's operating strength, as it is not comparable to other automakers due to the different sales models, but on Operating Margin, Tesla is again very strong compared to the competition at 17.2%.
SG&A Margin Fraud Allegations
Once again, Tesla's most persistent critics pounced on SG&A costs. How could it be that Tesla's costs, in the midst of an inflationary environment, just increased by 8% from Q3-2020 to Q3-2022, while shipments increased by 145%.
That's something that doesn't seem logically justifiable at first. However, my position on such matters is always to look at the filings to see whether there were any special effects that could explain this discrepancy, and once again I have to say: Yes, there were this time, too. Due to the Performance Award, Elon Musk compensation agreement, there was a special effect of 282 million. So de facto, one third of the SG&A costs of the quarter Q3-2020 was due to this special effect. If this aspect is taken into account, the jump no longer appears to be quite as critical and can certainly be attributed to Tesla's operating leverage.
However, even the exact same SG&A costs comparing Q2-2022 and Q3-2022 seemed inexplicable to many, as many more cars were shipped last quarter. Here came the corrective hint of a Twitter user that Tesla in Q3 delivered very many Layoffs in areas which are allocated to SG&A costs. It is therefore quite understandable that costs did not increase here despite inflation.
I, too, find it inconceivable what kind of operating leverage Tesla has here, but whenever I check the past quarters and their circumstances, I come to the conclusion that the figures are consistent, and that is precisely what is usually criticized: apparent inconsistencies. So far, this could always be refuted on the basis of the filings.
Delivery figures Guidance
Tesla's delivery figures were already known in advance. A total of 366,000 cars were produced and 344,000 delivered. An increase of 43% in deliveries year-on-year. For Q4, Musk unsurprisingly holds out the prospect of a new delivery record. Demand, he says, continues unabated and CFO Kirkhorn continues to expect 50% increase in deliveries in the coming years. If he is right, this would make Tesla's success story even more unique. For the current year, however, slightly fewer than 50% deliveries are expected.
According to Kirkhorn, the delta between delivery and production can be explained by the fact that Tesla did not have enough free logistics capacity at the end of the quarter. Tesla is known to tend toward batch production and bundled delivery at the end of each quarter. This is now to be increasingly adjusted.
Dwindling demand?
Even if Musk did not want to see dwindling demand, there are definitely signs that dark clouds are appearing in the sky here. The Twitter user "Troy-Teslike", who is, mind you, a supporter of Tesla, makes forecasts every quarter that are usually very accurate and are even taken as a basis by financial analysts in the meantime. Based on his calculations, the backlog in China in particular has decreased significantly and the total backlog now amounts to only 299,000 cars, which is significantly below the peak from Q1 of 476,000.
This is in line with the delivery times in China currently displayed on the Tesla website, which have dropped considerably. However, there is also another indication that there will be a slump in demand, at least in the short term. Customer deposits, i.e. the item in the balance sheet in which customer down payments are collected, recorded a decline of a good 100 million dollars for the first time in a long time.
In principle, there are also good reasons to assume that the backlog in China has decreased. Tesla increased prices in November & December 2021 and in March 2022. Thereupon, the backlog stagnated and fell according to Troy Teslike's observation. It remains to be seen if this will actually translate into worse than expected delivery numbers. However, Troy's method is convincing and he achieves better results than all financial analysts.
Also from my point of view, there is another aspect that speaks for dwindling demand for Tesla's existing car models. As of December 1, the long-awaited Tesla truck, the SEMI, is actually to be delivered to the first customer, Pepsico. According to Musk, 50,000 SEMIs will be delivered to customers in 2024.
Whenever I criticized the long delays with the SEMI in the past, Tesla cops always gave me the argument, which is quite difficult to refute, that Tesla does not have enough battery cells for the production of the SEMI, because they install every cell in the cars and therefore artificially delay the delivery. Everyone can decide for themselves how strong this argument is. Overall, however, there is more than one indication of weaker than expected demand.
If Tesla really does miss its ambitious targets, I think that would be fatal for the share price. In fact, I believe that the high expectations for delivery figures are the main reason for Tesla's still high valuation, and not FSD, Robot, etc.
Calculation of free cash flow
A word in advance. Tesla investors always tend to react somewhat allergically when you try to 'take away' something from their free cash flow. However, I handle this in the same way for all shares, especially for my own shares. However, I design the calculation in such a way that you can put the individual 'components' back together as you wish.
Tesla itself reports free cash flow of $3.3 billion and deducts operating cash flow and CapEx (capital expenditures). You can be happy with that, but the investors in particular should be more critical.
What you should at least deduct are the Stock-Based Compensations, as they reduce your share of the FCFs. I had covered the whole issue in great detail in a Article 1.2 billion. In addition, the shifts in working capital amounting to 231 million. The reason for this is simply that the shifts are usually short-lived and then usually reverse in the next quarter. In order to provide the clearest possible view of the 'normalized' cash flows, I advise deducting the shifts or adding them to the cash flow. From the operating cash flow calculated in this way, you then subtract the CapEx of 1.8 billion and arrive at an adjusted FCF of 2.7 billion dollars.
Other components are the principal payments on finance leases, which are virtually hidden capital expenditures. The amount of these can unfortunately only be seen in the 10-Q filing, which Tesla unfortunately always publishes late. In the first 6 months, the payments were 251 million, so I would conservatively estimate 100 million for Q3.
In addition, Tesla is still benefiting from regulatory credits, which CFO Kirkhorn also says will not last much longer, as evidenced by the falling level. These are not offset by any costs. Adjusted for taxes, these also have a positive effect on FCF.
Tesla's tax rate would also be an issue, as the special arrangement with the Chinese authorities only runs until 2023. Since the field is currently too difficult to survey due to other political programs in various countries, I calculate with the current effective tax rate of 8.39%. Keep in mind that this could also rise to a level of 15-20 % very soon if there is no new agreement with the Chinese authorities.
Including the above components, the 'sustainable' FCF is 1.72 billion, and I emphasize again that I treat Tesla here the same way I treat my own companies. In the end, you decide for yourselves which figure is relevant for you.
Even if we take Tesla's FCF calculation of 3.3 billion as a basis and annualize it, I still feel that 13 billion FCF in relation to the enterprise value of just under 700 billion is highly exaggerated. In my own calculation, the picture is of course even more extreme.
Balance sheet remains clean - cash position significantly increased
A look at Tesla's balance sheet should let investors breathe a sigh of relief. The company is far removed from the insolvency worries of the past. Once again, cash on hand increased significantly by 2.2 billion. Current assets alone are still larger than all the company's liabilities. Nevertheless, there was again criticism and allegations of fraud in the Payable and Inventory accounts.
Among other things, it was assumed that Tesla would leave scrap in production on the balance sheet at its original inventory value and not write it off, otherwise it would impact reported earnings.
I was frankly also surprised by the level of inventory, as it had already increased significantly in the last quarter, which I had attributed to the factory closure. The high proportion of raw materials in the inventory confirmed this. The fact that the inventory increased again by 2 billion did not seem comprehensible to me at first. However, the cars still in transit could well account for a high share, because according to Tesla's form of revenue recognition, revenue is not recognized until the car has been delivered to the customer.
As long as the car has not yet been delivered to the customer, it remains in the inventory under "Finished Goods" with the 'production costs', not with the sales to be generated. So according to my calculation, the impact on inventory should be 820 million and therefore cannot fully explain the increase. However, it doesn't have to. This discussion is frankly very tedious again. Tesla wants to produce significantly more cars in Q4 than in Q3 and therefore it is quite understandable that inventory levels are driven up. For a fast-growing company like Tesla, I don't consider rising inventory in and of itself to be a warning signal.
Now for the evergreen: Accounts Payable. Tesla only generates FCF because they don't pay their suppliers. That is the accusation. That's not even factually wrong, but there's nothing fundamentally wrong with it. In Q2, I was critical of this because the Days Payable Outstanding ((Accounts Payable * Number of Days) / COGS) had increased to 80 days, which indicated that Tesla was paying its suppliers much more slowly, but they have now decreased again to 72 days. As long as they stay at this level and Tesla continues to grow strongly, I don't see much of a problem here. Investors should still keep an eye on this, as much of Tesla's cash generation is actually due to the delta between old and new inventory in "Accounts Payable".
Share buyback program under discussion
What then caught my attention was that Elon Musk said in the call that the Tesla board was convinced that it would make sense to carry out a share buyback program in view of the high cash balance. As an order of magnitude, he mentioned an amount of 5 to 10 billion dollars. After approval by the board, this could then be carried out next year.
At the current valuation, this seems insane to me, but as we all know, opinions differ when it comes to valuation. The only question I have is whether the cash can be used sensibly for operational purposes, since Musk wants to build 20 million cars a year by 2030. I do not have a final opinion on this. In any case, anything is better than leaving the cash untouched on the balance sheet.
Energy division - light and shadow
The energy division continues to lead a rather niche existence. Contrary to Musk's earlier announcements, solar installations are not making any headway. After a small ray of hope in the last quarter, installations have now declined again.
On the other hand, it was pleasing to see that battery storage made a huge leap upwards to 2,100 MWh.
The only irritating thing for me was that this was not reflected more strongly in sales. Despite the 85% increase in installations, QoQ only increased by 29%. Possibly a larger number of large projects were the reason here. Therefore, we can discuss how qualitative this growth in installations is. This is then also reflected in the gross profit, which increased only slightly despite the strong growth in sales. The margin therefore decreased.
Overall, I still don't see sustainable success in this area, but the focus is on the automotive sector anyway.
The most important points from the earnings call
Full Self-Driving
Let's start with our favorite topic: autonomous driving. Analyst Colin Langan wanted to know from Musk whether he still stood by his original statement that FSD would still be achieved by the end of the year and what this would mean in concrete terms. Would one be at L4 or L5 by then? Are there regulatory hurdles?
Musk responded that the FSD software would be available by the end of the year to anyone who booked the package. After that, there would still be regulatory hurdles. Langan then asked again whether it would then be L4 or L5, if only regulatory hurdles still stood in the way.
Musk's response, brace yourselves..... It depends on how many system failures one accepts. I'll translate that for you: It's neither L4 nor L5, the so-called interventions continue to occur. Musk said himself that there still has to be someone behind the wheel. Then it is just 'not' autonomous driving and he should say that openly by now after all these years. "Next year", however, driving without a driver behind the wheel should then be possible. I don't believe in that anymore.
Twitter (opinion)
Regarding Twitter, an analyst wanted to know if Musk was planning to bring all his companies under one roof, similar to Alphabet. According to Musk, he is not planning anything of the sort, but then referred to the Twitter deal again. He himself said that it was obvious that he and other investors were currently paying significantly too much for Twitter, but that the long-term potential was enormous. With that, he talks about the elephant in the room: the Twitter deal is probably one of the worst the stock market has ever seen. And again, I see this as the reason for what I've faulted before. Musk's fragile ego. This becomes clear when we look at Musk's chat history with Twitter's CEO.
We can argue about the interpretation, but I recognize the usual behavior pattern here again. Musk is acting like the axe in the forest, the CEO of Twitter is reacting just too mildly, and Musk is rejecting the offered hand and would rather demonstrate his power and set the big wheels in motion. I can't invest in a company with such an erratic personality.
Statements about the valuation of Tesla
I think hardly any CEO is as obsessed with the valuation of his company as Elon Musk. In this call, he again made a comparison that left me shaking my head. According to Musk, Tesla could be worth more than Apple and Saudi Aramco, which together have a market capitalization of over 4 trillion. In my opinion, this has no qualitative significance today and could no longer have any quantitative significance tomorrow. What should an investor take from such a statement? That he can buy the stock without hesitation? Could Musk briefly explain in a simple valuation model how he arrived at this valuation? I am now certain that he could not. These are numbers that he quotes without hesitation in order to demonstrate strength.
One could think that it might have been a slip of the tongue and that he said it out of the heat of the moment, but no, he followed up later. The rating he called up was without the inclusion of the robot Optimus, mind you. I leave that uncommented at this point. Everyone can form his own opinion about the robot.
Book recommendation for beginners*:
4680 cell
There was also an update on the 4680 cell and questions from investors and analysts. According to Musk, production has been greatly increased and the cell is now also to be visibly installed. Skepticism is called for here, as both Musk and Drew Baglion, the VP Powertrain and Energy Engineering, still spoke of scaling problems in the Q2 call, which Baglino said have not been overcome even now. However, he said the cell is increasingly being installed in the Model Y at the Texas factory.
Conclusion
Tesla's history and performance remains unique in my view. To still grow so strongly from such a high level is truly impressive. Nevertheless, for the first time, I see credible signs that demand for Tesla's cars could decline. If the expectations really cannot be met and a medium- to long-term demand problem arises, I think that would hit the share price very hard. Moreover, the current valuation offers no safety cushion to the downside.
The Tesla share is therefore still not a buy for me.
My book recommendations* for stock valuation
For beginners:
For advanced users:
For advanced users:
For very far (!) advanced users:
Disclaimer: The author assumes no liability for the topicality, correctness, completeness or quality of the information provided. Liability claims against the author, which refer to material or immaterial nature caused by use or disuse of the information or the use of incorrect or incomplete information are excluded, unless the author is not intentional or grossly negligent fault. The author expressly reserves the right to change, supplement or delete parts of the pages or the entire offer without prior notice or to temporarily or permanently cease publication. The investment products and securities discussed in blog entries or other online publications are for illustrative purposes/opinion only and do not constitute investment recommendations. No liability is assumed for any losses.
Kommentar verfassen
The debts of the car manufacturers - Why VW, BMW & Mercedes are 'not' over-indebted
The massive over-indebtedness of classic car manufacturers is a myth that has now bravely persisted for years. Unfortunately, the differences to other companies are all too often forgotten.
Stock-Based Compensation - Why stock-based compensation also reduces free cash flow
Looking at companies' quarterly and annual figures, one gets the impression that share-based compensation for employees has no impact on free cash flow. At first glance, this seems to be the case, but a second look reveals a different picture. You can find out exactly what that is in this article.
English 
German 
Stay connected