Tesla: Oh No You Didn’t
Tesla Disappoints With Skimpy Fourth Quarter "Profit" and Weaker Than Expected 2021 Guidance. Why leverage is more like 6x, or worse. And what's it doing with all that cash?
And They Said It Couldn’t Be Done
Tesla (TSLA) stock dropped in after-hours trading when it missed market expectations for the fourth quarter with just $270 million in net income (up 157%) on slightly better revenue of $10.7 billion, up 46% versus $7.4 billion last year.
For those playing at home, that’s not just a paltry margin at 2.5%, it’s a much smaller profit versus the $331 million reported in the third quarter on $8.7 billion in revenue—$2 billion less.
And as I expected, all of reported net income came from energy credit sales which masked a loss of at least $131 million, as has happened with each and every profit Tesla has reported since Q319 (as I discussed again on Monday in Tesla: The Sky's The Limit...Until). I expect to see additional boosts to revenue and profits Tesla typically adds like accounting maneuvers such as conveniently timed reserves adjustments and other unusual and nonoperating contributions when the 10-K is filed.
It seems even more consequential this quarter, with its market cap at more than $800 billion following another $5 billion sale of stock and the addition of its stock to the S&P 500 Index, that Tesla’s core operations still can’t generate unvarnished profit even on $10.7 billion in revenue.
If we strip out just the energy credit sales—$401 million in the fourth quarter, $397 million in the third quarter, and $133 million in the fourth quarter last year—Tesla actually lost 1.5x as much as those two quarters actually lost combined despite generating billions more in revenue than each.
Profitability is going the wrong way.
That can happen when the prevailing strategy involves multiple rounds of price cuts and expensive incentives every quarter to ignite faltering sales versus still problematic and inconsistent manufacturing which produces cars with troubling quality and reliability issues which are expensive to repair (especially when they are recalled and recalled and recalled and…). This quarter Tesla admitted its average selling price (ASP) dropped 11%.
Reported EBITDA was just $1.85 billion (17.2% margin, up 130 bps)—far below market estimates of $2.2 billion (21.4% margin) and even my below-consensus $2 billon (20% margin) even with substantial boosts from $401 million in energy credit sales plus a whopping $633 million in stock-based compensation Tesla dubiously adds back to the calculation. These boosts contributed 56% of reported EBITDA before any other juicing we don’t yet know about.
When we strip out energy credit sales and stock-based compensation, EBITDA was just $816 million (7.9% margin) versus similarly adjusted $867 million (10.4% margin) in the third quarter and $761 million (10.5% margin) for the fourth quarter last year. This also indicates leverage at 6x or higher versus 3x on Tesla’s plumped up calculation—far worse, as I warned, versus the near-investment grade credit quality rating of “BB” helpfully anointed by S&P Global the day before adding Tesla to its S&P 500 Index (see Tesla: The Sky's The Limit...Until).
Some 73% of reported cash from operations at $3 billion came from the $1 billion in energy credits + SBC named above plus $230 million in undefined nonoperating income plus $1.2 billion generated from working capital mostly owing to a stunning $1.1 billion jump in accounts payable. Depreciation accounted for another $620 million. Missing of course was red meat like core operating profit.
By the way, this increase in accounts payable also was the highest quarterly jump in three years at 60% y/y (bigger versus the 46% increase in revenue) and followed the $1.32 billion jump (43%) in payables in the third quarter. During these two quarters as Tesla greatly extended payables by $2.42 billion to now $6.1 billion it also collected $10.2 billion of the $12.7 billion it sold in stock and equity equivalents for the year—but paid off only $2 billion in debt.
Meanwhile, reported capex was less than expected at $1.15 billion leaving reported free cash flow at $1.9 billion—though it likely was closer to $1.6 billion considering capex from all sources, including capex funded by leases. This left the increase in cash at $4.85 billion, with a hefty $19.4 billion in cash and equivalents reported at year-end.
Of course that included $750 million in customer deposits and roughly $4 billion held overseas (mostly China) and greatly restricted by terms on billions in overseas loans (China) so Tesla’s effectively usable cash was still ample at $14.6 billion.
It’s Going To Need Every Penny
With now nearly $15 billion in cash it actually can spend, why, one might wonder, is Tesla still hoarding cash by paying bills late or not at all, mysteriously growing accounts receivables as fast or faster than revenue when it runs a mostly cash-for-cars business, borrowing via debt and leases every quarter, and funding even part of capex with leases?
Its core operations still are not profitable and not generating cash, and it’s lost early mover opportunities to stabilize and grab margin. Indeed, it’s still redesigning and rebuilding on the fly.
Some $1-2 billion in debt comes due over the next two years, and could be expensive to refinance if Tesla continues to report disappointing operating results (which may also drive away its cult followers willing to buy its stock at any price).
Threats from Tesla’s many and growing conflicts and legal entanglements are expensive to defend; fines and settlements could run into hundreds of millions of dollars.
Tesla is rapidly losing share in all its markets as major rivals ramp up to full scale competition with scores of new models on the way.
Sales of Models 3, S, and X remain in serious decline in the US. Model 3 is rapidly being overtaken by stiff local competition in Europe and China. Model Y already outsells Model 3 in the US and now is challenging in Europe and China. We may know in another 2-3 quarters if Model Y will stall out as it approaches its first full year of sales (more on this in my upcoming report see Tesla: Don’t Drive Angry).
There’s a good chance that the knee-jerk refresh Tesla is implementing for its aging Models S, X, and, yes, Models 3 and Y may not be enough to regain vigorous momentum in sales versus prohibitively appealing rivals already off and running.
Nevertheless, Tesla plans to spend up to $6 billion on capex in each of the next two years, 2021-2022, to build new plants and expand capacity even as global markets approach capacity saturation in EVs. Tesla is at 49% utilization now after increasing capacity by another 25% in the fourth quarter.
All this would seem to explain why Tesla needs to hang on to its cash, and also why Tesla suddenly tamped down its extravagant outlook, albeit in a weird, muddy water kind of way:
We are planning to grow our manufacturing capacity as quickly as possible. Over a multi-year horizon, we expect to achieve 50% average annual growth in vehicle deliveries. In some years we may grow faster, which we expect to be the case in 2021. The rate of growth will depend on our equipment capacity, operational efficiency and capacity and stability of the supply chain.
Tesla Q4 and FY 2020 update.
Alrighty then. Apparently this means Tesla expects only 750,000 or better in deliveries for 2021, dramatically lower versus CEO Elon Musk’s projection in the Q3 2020 earnings call that 840,000 to 1 million “was in the vicinity.”
Such a dramatic downward revision in deliveries likely shocked the market more than the missed “profit” Tesla reported.
I was less surprised, given my 760,000 estimate for 2021 (which I probably will revisit now), not to mention Musk’s track record of missed targets and bigly misrepresentations of results and goals.
So many years gone by and still no FSD Autopilot or Robotaxis, which likely won’t happen for several more years—if at all—even though Musk promoted both again today.
And Tesla still hasn’t hit 500,000 annual deliveries, coming in short at 499,550 for 2020 after promising some number “comfortably” above that goal most of the year. Musk had promised in 2016 Tesla would hit 500,000 by 2018 and 1 million cars by 2020.
It looks like Tesla’s 17-year run as an unchallenged startup prodigy finally has come to an end. Oh well.
Tesla's 5.3% senior notes due 2025 are little changed since my last report at 104.1 (2.4% ytw; 209 bps), offering no credible upside versus potentially significant downside. The bonds remain excessively valued with yield tighter by 129 bps versus the BoA High Yield general index even though Tesla is a weak B3/BB- issuer. Pricing also indicates a meager 70 bps per turn of leverage on my estimated 2020 reported EBITDA and an appallingly low 35 bps per turn of leverage on core operating—unvarnished—EBITDA. Maintain "Underperform."
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