Tesla Goes To Record Extremes To Create Q1 "Profit"
Tesla needed a whopping 46% increase in energy credit sales *and* sizable gains from selling recently bought Bitcoin to produce Q1 "profit"—and an $11 billion payday for CEO Elon Musk
Tesla (TSLA) doesn’t want you to worry that it needed a record $518 million in energy credit sales plus a surprising $101 million in Bitcoin (BTC) investment gains to generate the record net “profit” of $438 million it reported for the first quarter versus the similarly enhanced $16 million reported last year.
Otherwise you might notice that core operations actually lost nearly $200 million despite a 109% increase in deliveries to a record 184,877 versus last year. This loss was little better, and revenue was lower, versus Tesla’s disappointing fourth quarter results as I discussed in Tesla: Oh No You Didn’t on 1/28/21. First quarter revenue slumped sequentially despite higher deliveries as profitability plunged on rising operating costs plus further severe price cuts still necessary to encourage sales.
While Tesla had reason to worry since most of the total deliveries reported didn’t materialize until the final weeks of the quarter, it’s also easy to surmise that Tesla used its creative profit-making strategy to make sure CEO Elon Musk could snag another $11 billion in vested stock options.
It’s all about priorities.
If They Needed Help, Why Sell Bitcoin?
CFO Zachary Kirkhorn explained in the earnings call on Monday that Tesla decided in March to sell 10% of its Bitcoin stake, purchased only a month earlier for $1.5 billion—nearly as much as the $1.6 billion it netted selling energy subsidies in 2020 (see Tesla Is Falling and It Can't Get Up on 2/27/21).
Kirkhorn said “Elon and I were looking for a place to store cash that wasn’t being immediately used, trying to get some level of return on this but also preserve liquidity.”
“Being able to access that cash very quickly is super important to us right now,” he said.
It’s weird that Tesla decided to sell Bitcoin to come up with $272 million it apparently needed rather than tap some of its $17 billion in cash on hand.
It seems more likely that Tesla was worried it couldn’t produce a net profit even after selling energy credit subsidies worth a whopping $518 million, the highest ever in any quarter and a 46% jump versus last year. If so, the urgency was that the clock was running out for the quarter and Tesla needed to “very quickly” net a sizable gain of $101 million by selling Bitcoin to juice first quarter results.
This quarter should have been an easy comp versus last year when Covid-19 hit just as Model Y was launched and the Shanghai plant was just opening. But by early March, only 40% or so had materialized of total deliveries ultimately reported for the quarter.
This included 62% of Model Y deliveries, which accounted for 33% of total deliveries overall, and nearly 80% of total deliveries in Europe where sales contributed 17% of the final count. More than half of China deliveries, which ultimately contributed 37% of total deliveries, also came during March.
It didn’t help that Made-In-China (MIC) Model 3 deliveries have begun to slow as I projected versus the torrid pace of the hot China EV market, the largest in the world, which is bursting with strong competition (see more discussion in Tesla Reports Solid Beat With Strong Q121 Deliveries, But... on 4/4/21 and Tesla: Don’t Drive Angry on 2/8/21 and What’s Going On With Tesla’s Demand? on 10/27/20).
Monthly China EV sales jumped 244% y/y in March compared with MIC Model 3 sales up 149% versus last year when it was just beginning to scale. MIC Model 3 deliveries also fell 10% versus the peak fourth quarter, likely hurt by increasing popularity of the recently launched MIC Model Y as I expected.
Also on the line were hurdles Tesla had to top, $35 billion in TTM revenue and $6 billion in TTM EBITDA, so that Elon Musk could collect deeply discounted vested options, now worth $11 billion, that let him buy Tesla stock for $70 per share—a 90% discount to the $704.74 price where the stock closed today. Which is nice.
Enter $619 million in freshly created nonoperating boosts, just enough to nudge reported trailing revenue and EBITDA over the finish line for Elon’s pay day. Huzzah.
Unless one is concerned that an 18-year old company with a market cap higher than most of its largest competitors combined still can’t generate even breakeven unvarnished results no matter how many thousands of cars or solar panels it sells or how many billions in revenue it generates, and which still has to borrow and/or sell stock every quarter to fund its operations.
How the Numbers Played Out
Reported consolidated revenue was up 74% to $10.4 billion, with $1.84 billion in EBITDA (up 94%, 17.7% margin), and $438 million in net income versus $16 million last year.
The results compared reasonably well to my estimates for $10-10.5 billion in revenue (up 67-76%), with reported EBITDA at $1.79 billion (16.9% margin) and $200 million in reported net income (2% margin)—all boosted by roughly $400 million in energy credit sales and other unusual/nonoperating items (see Tesla Reports Solid Beat With Strong Q121 Deliveries, But... on 4/4/21).
Revenue was driven mostly by the 78% jump in Automotive Sales of $8.7 billion (84% of total revenue), which trailed my nearly $9 billion estimate. Excluding the $518 million netted from energy credit sales, consolidated revenue was up 65% on an 83% increase in Auto Sales versus similarly adjusted results last year.
Revenue quality weakened significantly. Mix was impacted by the 83% drop in sales of pricey Models S & X to just 2,020 (1% of total deliveries), but multiple rounds of severe price cuts hit the hardest. The average revenue per car sold fell 13%, marking 13 straight quarters of mostly double-digit declines.
We know results were enhanced by energy credit sales; we’ll have to wait for the 10-Q filing to learn about any other potential contributions like deferred revenue recognized from previous periods, etc.
Energy Generation revenue was up 67% versus a weak comp, with Services & Other revenue up 59%. Both remained solidly unprofitable but as comparatively nominal segments with $1.4 billion in combined revenue versus the Auto Sales and Leasing ($9 billion in total revenue) they barely moved the needle even on consolidated gross profit.
Reported Auto segment gross profit* was $2.39 billion (up 82%), with the margin an impressive 26.5% (up 100 bps). However, stripping out the energy credit boost reveals core gross profit at $1.87 billion (up 108%) and the margin much lower at 22% (up 300 bps).
*It’s important to remember that Tesla’s reported Auto segment gross profit margin is not comparable to other major automakers because it elects to classify costs like Research & Development as general operating expenses. Moreover, it has notably underspent in R&D for years despite is long and much delayed pipeline. When I standardize Tesla’s adjusted gross profit (excluding energy credits) similar to industry reporting, gross margin is cut nearly in half.
Unvarnished gross profit was mostly offset by sharply higher operating expenses, with SG&A was up 68% and Research & Development up 106%. This is where the $101 million gain from the Bitcoin sale came in handy, but not by enough to eke out profit.
Excluding the $518 million in energy credits and the $101 million Bitcoin gain converts the reported $438 million net profit into a core net loss of $181 million, in line with my projected $200 million adjusted net loss. This was little better versus the similarly adjusted $217 million loss in the fourth quarter but much improved versus the $400 million net loss last year.
Strange Magic, ELO
So how did Tesla come up with $1.84 billion in EBITDA?
Stripping out $518 million in energy credits + $101 million in Bitcoin investment gains + $614 million added back in stock-based compensation (a disingenuous practice designed to embellish income) reveals core EBITDA at just $608 million (6.8% margin on adjusted revenue), which was more than accounted for by $621 million in depreciation & amortization. EBITDA last year as similarly adjusted was just $307 million (5.5% margin).
Tesla’s maneuvers inflated EBITDA by 203% this year and 209% last year. And trailing unvarnished revenue was $33.9 billion with $2.5 billion in EBITDA—both well short of targets prescribed in Elon Musk’s compensation package.
Leverage was substantially understated 1.9x on reported EBITDA as a result, versus the still uncomfortably high 5.1x on core EBITDA (see attached model).
Continuing this theme, Tesla actually consumed $540 million in operations excluding the boosts named above and considering capex from all sources, instead of generating $293 million in cash as reported.
This plus the cash spent on Bitcoin, net of gains, plus a net $700-800 potentially paid down in debt and leases accounted for the $2.24 billion reduction in available cash versus year-end to $17.1 billion. Excluding $745 million in customer deposits plus at least $7 billion in cash held overseas, mostly in China and heavily restricted by Tesla’s China bank agreements, leaves roughly $9.6 billion in freely spendable cash versus $11.9 billion as similarly adjusted as of December 31st.
Compare that to roughly $2 billion in current debt and lease liabilities potentially due in each of the next two years plus a projected $4.5-6 billion in capex spending this year and next and it’s easy to see that Tesla really needs to start generating actual cash instead of relying on energy credit sales, borrowing, and selling stock—or Bitcoin—to fund its operations.
Meanwhile, Tesla should refinance its bonds
Tesla has never been keen to actually pay off debt, or even pay its bills on time. And I have projected that this year could prove to be its most challenging yet as it struggles with pricing pressure and increasingly strained demand versus rising costs (see attached forecast). Its waning edge over serious competitors, helped for now by their comparatively greater disruption from industry-wide chip shortages, will likely fade in the second half as conditions improve.
It makes sense, then, for Tesla to refinance its $1.8 billion outstanding in 5.3% senior notes due in 2025 while it’s still a market darling and interest rates are profoundly low.
The bonds are callable now at 103.98, which drops to 102.65 in August. If second quarter results prove similar to the first quarter, as I have projected, Tesla probably has a favorable window into the summer to refinance them before turning in an even more disappointing second half which could diminish market sentiment and increase financing costs.
If it doesn’t wait too long, Tesla can push out maturity another 10 years and still likely net an appallingly low coupon like 4% or better, which would reflect the market’s persistent understatement of Tesla’s much higher credit quality risk on weaker core profitability and credit metrics versus reported. In the meantime, the existing notes trade near the call price at 103.8 which indicates 1.5% ytw, 150 bps spread.
One thing Tesla does really well is exploit favorable markets. That said, the new bonds at such low yields would still be a terrible value that bondholders should avoid.
Tesla's 5.3% senior notes due 2025 are little changed since my last report at 103.75 (1.5% ytw; 150 bps). This offers no credible upside, particularly given good odds that the bonds get refinanced soon, and perhaps 5 points or more in downside risk if that doesn’t happen and Tesla’s operations & financial condition deteriorate as I expect. The bonds remain excessively valued versus, for example, the BoA High Yield general index yield of 4.19% even though Tesla is a weak B3/BB- issuer. Pricing indicates a meager 75 bps per turn of leverage on my estimated 2021 reported EBITDA and an appallingly low 29 bps per turn of leverage on core operating—unvarnished—EBITDA. Maintain "Underperform."
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