Did Tesla Have a Good Quarter or Was it Smoke and Mirrors? | 7investing
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Did Tesla Have a Good Quarter or Was it Smoke and Mirrors?

April 30, 2021

Take a quick look at Tesla‘s (NASDAQ: TSLA) first-quarter earning and the numbers look great. Dive in a little deeper, however, and you see that their profits were actually generated by regulatory credits and the sale of some of its Bitcoin holdings. Nobody can fault the company for using government largesse to grow its business, but it’s reasonable to question whether the company can use those benefits to grow its way to sustainable profits.

Steve Symington joined Dan Kline on the April 28 edition of “7investing Now” to break down Tesla’s earnings and look at the company’s long-term prospects.

A full transcript follows the video.

 

Dan Kline: Let’s kick the show off with something that always gets me in trouble because I am. I call myself a Tesla owl. I can’t bring myself to buy it. I know it’s a good company. But I just don’t like Elon Musk. I’m one of those people. I don’t want to see him host Saturday Night Live. It’s a pandering move, but their numbers were good-ish. Steve, why don’t you explain some of the top-line numbers here?

Steve Symington: They were good question mark? Tesla was really interesting. In that it wasn’t sort of this blowout quarter that everybody had kind of hoped for, right? We saw quarterly revenue up 75% year over year to about $9 billion. And they produced a gap profit, in the process about 4 to 38 million. I think their net income on an adjusted basis, excluding stock-based compensation was like 1.1 billion. But there’s some caveats to that.

Dan Kline: And we’ll get to those a little bit later

Steve Symington: We’ll touch on those. But it was an all right quarter, I guess nothing crazy, but it was a very busy quarter. And both from an operational and just a numbers cluttering things up standpoint.

Dan Kline: Their vehicle delivery number was really strong. But Steve, their forecasts are incredibly strong. Do you believe them?

Steve Symington: Yes, I guess longer term. I think I would take some of their forecasts with a grain of salt but they’re looking at more than 50% vehicle delivery growth in 2021. Overall, based on their guidance, that means minimum deliveries around 750,000 vehicles this year. So people always kind of take these numbers with a grain of salt because Tesla has a long history of over-promising and under-delivering, but that you could also arguably say, that’s part of the reason why they’ve been able to achieve what they’ve been able to achieve is setting lofty goals. And nobody’s particularly shocked when they fall short of these exorbitant numbers that they hope they would achieve. So we’ll call that a line in the sand and just see if they cross it when the time comes.

Dan Kline: I don’t actually think these numbers are exorbitant, so they’re predicting 50% vehicle growth, they’ll have the revamped Model S, they’ll have the Model X online, they’ll have more production capability, they’ll also have a world coming out of a pandemic, I gotta admit, I am shocked that people are buying Tesla’s during a pandemic, that seems to me like an incredibly indulgent thing to do in a time of uncertainty. But as that uncertainty goes away, Steve, I’m actually pretty confident that 50% I actually think, is them setting the bar a little bit low. Am I wrong?

Steve Symington:  No, you’re not. And I guess longer term when we look at these numbers Elon Musk said, hey, there’s a chance the Model Y in 2022, could be the world’s best selling vehicle. Oh, okay. You know, maybe that’s quite possible. But the thing that I think we need to keep in mind is that the growth that they just achieve, the 75% year over year was on vehicle deliveries more than doubling year over year. So we saw average selling prices decline a little bit, but that’s largely due to the fact that growth was achieved without the help of Model S and Model X sales, which were down like 83%, because Tesla essentially pause them because they’re going through design refresh for those two very popular models.

So the Model S and Model X are much more expensive than your model 3’s and Y’s. The Y is the lower cost SUV that they have high hopes for. And they’re also working on new plants in Texas and Berlin and they need to roll out. So there’s a lot of focus on I think the Berlin plant was the end of this year, they hope to ramp it up. But the model Y sale should kind of ramp as well in May. So there’s a lot of work being done and a lot has to go right for them to meet all those goals. But I think they do have a history of effectively ramping production in that sense. And demand is definitely not the issue. So that’s what I’m really kind of impressed by.

I wouldn’t say shocking that people are still buying Tesla’s but look at vehicle sales overall. You have Lithia accelerating acquisition efforts because vehicle sales are through the roof. And that’s part of the reason we have chip shortages and etc. But yeah, vehicle sales are strong, people are buying Tesla’s.

Dan Kline: So this is one of those, let’s call it red flags. We’ll get to the caveats in a second. But they grew vehicle sales by 100% in the past year, but they only grew their service ability by 28%. This is a company with incredible brand loyalty. But when our very own Anirban Mahanti dropped off his Tesla to get it serviced. It didn’t actually take that long, but it was possible it was going to take weeks. Now they did loan him a Tesla while he was in service. This does seem to be like one of those scenarios where if they get backed up in service, they really run the risk of sort of bleeding off some of that loyalty.

Steve Symington: Mhm. Yes. And no. I think there’s a couple things to note here. Yes we did have this significant ramp in vehicle deliveries and sales, and less significant ramp in service centers. So you think, okay, what’s the delta here, but one thing that is really important to notice is test loyalty that I think is a lot stronger than most people realize.

It’s sort of that adage that, for example the more you love someone, the more you’re willing to put up with their crap. It feels weird to say that in that sense, but it definitely applies to Tesla where people love the brand so much that they’re willing to say I understand that there’s a little delay here, because you guys are in growth mode, etc. So people can handle that.

But at the same time you look at Tesla included just a little paragraph in their investor deck that talks about that they use Tesla’s business this growing and volume and improving financially and kind of as a function of increased new car deliveries, but they’re also focused on expanding their global service capacity. So I think that’s something you’re going to see them sort of pay more attention to as they grow, so it should improve their customer wait times and operational efficiency.

Dan Kline: I do worry about this because Steve for about six months, I decided I’d be a BMW guy. I usually drive like the cheapest car that’s functional I can get. But I bought a used, a very used BMW, and it needed some servicing. And I brought it to the service center. And the service center basically has a Starbucks inside it.

There’s all sorts of opportunities and things to do while you’re waiting if you’re just getting like your oil changed or something. And when it turned out, I needed something that they had to get a part, they sent me home in a car nicer, by a lot than the one.  I didn’t want them to finish my repair because I was in a much nicer car.

The standard when you get to the price you’re paying for a Tesla is pretty high. And I do think they will have to get there. And I’ll give the example my aunt and uncle live in Vero Beach. That’s over an hour from here and they had to drive to West Palm to get their car serviced. We are going to get to your questions and comments. So if you want to talk about Tesla, you got another couple of minutes to get your questions and comments in.

But Steve, let’s talk about those red flags or the caveats because they’re very Sears-like. Sears in the past decade had one or two quarters when they reported a profit. And they were all excited at the time. Oh, we had a profitable quarter. We’ve turned it around. No, they sold diehard batteries. And that was a one-time sale.

And sometimes it happened with real estate sales and other things where not from operations, they were profitable. So here’s what happened with Tesla. They still had $518 million in revenue. More than their profit amount from sales of regulatory credits during the period. They also recorded $101 million from, let’s call it manipulating Bitcoin because that’s clearly what Elon Musk has been doing.

Now, I’ll give the argument our own Maxx Chatsko made in our slack. He basically said this is shrewd taking advantage of using the government to pay for your growth. But when these regulatory credits go away, is Tesla profitable on 50% more sales? This has been a company that said it’s profitable for I think it’s now six straight quarters. It really isn’t. As a shareholder as a shareholder do you think they can achieve actual profitability?

Steve Symington: Yes. Don’t even need to pause there. To Maxx’s point. And actually Anirban our colleague wrote maybe one of the best Tesla takes I’ve ever read on this quarter and his longer-term model. Checkout 7Investing.com, his advisor updates, called would Dr. Box approve of my model? That’s a reference to a statistician, right? But check out the Tesla Model article that Anirban wrote. So to Maxx’s point, yes, these these credits are transitory in nature, right? But it’s also non-dilutive capital that’s available to Tesla to use however it sees fit andwhy not take advantage of that.

The other thing to note is this quarter also included if we’re gonna count positive catalysts for net income, we also need to include some of the negative catalysts. So we also had 299 million in stock-based compensation to Elon Musk alone, due to achieving market capitalization and operational milestones. So they would have actually excluding Elon Musk’s stock based compensation expense this quarter, which will kind of be a one-off for next several quarters, so we’re gonna have those, but they will go away eventually. But it’s sort of like without that as well, they would have been profitable even without regulatory credits.

Once these things sort of level out, and Tesla is actually enjoying operational leverage at scale. Right now, as they continue to grow. I think they are solidly profitable. And there are other things we can talk about the minute that can help juice that profitability further. So yes.

Dan Kline: After a couple more questions to Steve, we’re going to take a comment from Max Lucas, the first comment from Zulfiqar and a comment from Gregory. That’s sort of an in house programming note so I can let Sam know what we’re doing. So let me go through a couple of final questions. Are you a little bit worried about the volatility of the fact that Tesla’s sitting on $2.5 billion in Bitcoin?

Steve Symington: No, no, I’m not. I mean, you look at their cash equivalents. I think they had a $2.2 billion decline in cash equivalents this quarter. But they bought 1.5 billion in Bitcoin, which is now worth 2.5 billion, I think they sold 101 million in Bitcoin sales that they sort of sold, but you’re also talking about a company that has like 17 billion in cash equivalents on their balance sheet. Still, this is a small fraction of what they have. I’m not worried about volatility from a bit Bitcoin standpoint. And I think neither are they for good reason.

Dan Kline: Tesla has done a really good job with its balance sheet. So my question a year ago, was basically like, is Tesla gonna run out of money? Are they going to keep having to raise money? Now, the reality is, if I was a shareholder, I’d actually encouraged them to raise money, I actually think they should be sitting on more cash at a time where their stock is so high.

The problem there is you do have a CEO, who is paid entirely in stock-based compensation. So he actually has a lot of incentive to not do things that lower the stock price, which is partially why I prefer to see a mix of how CEOs get paid, I don’t want short term stock price and short-term numbers to be the driving factor. But Tesla has always been a this quarter’s numbers and if we don’t make it Oh, it’s next quarter that matters.

So we’re gonna take a bunch of your questions. We’ll start with Max Lucas. And Steve, if you wouldn’t mind, I’ll read this one, actually. “What do you think will be the largest part of Tesla’s business in 10 years?” Steve, I’m going to go with flame throwers and boxer shorts. No, I’m kidding. What do you actually think it’ll be cars, right? It’s not gonna be solar power.

Steve Symington: It’ll be vehicle sales. And actually, I like this part of Anirban’s take on the quarter, when He kind of looks forward, he was kind of assuming maybe 10 to 20% might be energy. At that point going forward, I don’t think energy is going to over time, you know, Musk says he’d like energy to kind of rival the size of their automotive business. But in the next 10 years, as Max suggests, I think it’s going to be still automotive, like vehicle sales.

Dan Kline: Solar Power is also a commodity. And I understand that Tesla has been very, very innovative with batteries and other things. But I tried to do a solar roof on our other house, we weren’t allowed to our HOA just doesn’t allow it, which is idiotic, because we don’t live there. So we would be making money by just generating power, it would be good for the community.

That being said, in most markets in Florida, where you have a roof, solar is just a commodity, and you don’t really have a choice, like you either find a company that’s willing to finance it for you at 0%. Or your electric company will finance it for you. And you don’t get to pick who does it. So it’s whoever’s partnered with it, or you can do it yourself, which I can’t, but some people could, you know, and you hire an electrician to do the last piece of it.

So I don’t think anybody’s gonna make a lot of money in solar, I think it might be an interesting customer loyalty tool for Tesla. I think the idea of being able to power your Tesla, by plugging into your own solar grid is really, really interesting. But I don’t think that’s going to be a material part of the business. Let’s take the first comment from Zulfiqar. Sam, if you could, “Another would be interesting to see is will Tesla be a leader in producing the cheapest electric cars? My question is will the profits keep increase based on volume?” Steve, I don’t think Tesla wants to sell the cheapest car. Am I reading that wrong?

Steve Symington: No, I don’t know. They want to sell a car that pressures traditional automakers, right? I wouldn’t be surprised if we eventually see maybe a model two right? Years from now coming out. They’ve talked about wanting to produce a $25,000 electric vehicle. And I think that’ll happen. Will it be the cheapest car, I don’t particularly care. I care as long as it’s affordable relative to a comparatively priced sedan, in the internal combustion engine realm,

Dan Kline: Right, I think they’re gonna hit Buick 300 prices or a loaded Toyota Corolla prices. But I think you’re gonna see Nissan and Ford and who knows whoever with $17,000 electric cars, I think you’re already seeing short-range ones, you can pick up a Nissan LEAF, a used one, you can pick one up for four grand like we’ve thought about it, because it’s a great short-range vehicle, the only negative is I don’t own where I live. So installing 220 to charge it quickly, is not super-efficient. And when you only have an 80-mile range, and the regular charge gives you five miles per hour of charge. It’s not a great delta in terms of my son going back and forth to school.

But there’s going to be innovations there. I think Tesla will get cheaper, it will get affordable to the point that someone like me who considered the model three, and then one I didn’t have an outlet to plug it into and two the model three wasn’t really $35,000 it was closer to $45,000. So 35,000 was a lot to spend for a car but with the resale ability and the used market, it’s an asset more than most cars. I thought about it. At 25,000 I might do it. We’re gonna take Gregory’s comments, which might hit a little bit of areas we’ve already touched, “Discuss the future of Tesla’s Software as a Service If you want to hit on robotics or AI” they’re gonna make a lot of money selling you software but Steve talk about it.

Steve Symington: Right so um, so discuss future Tesla SaaS Software as a Service, energy storage, solar robotics AI. So let’s, let’s take them one by one, right. So solar deployments are actually kind of skyrocketing right now. I think I looked at megawatts of solar deployments, megawatt hours of energy storage solutions. They were up 76% and 163%, respectively, over the last quarter, so they’re kind of soaring even though Okay, commodity, right. But solar deployments will, I think they will be material to Tesla’s top line, and will sort of be part of this broader kind of broader ecosystem of Tesla products, right?

And they were talking about making the solar roof and their power pack kind of part of it, this is a combined deal no matter what. So they’re going to take advantage of the internal battery development program. So that’s gonna be a big deal. Battery development innovations are not only going to extend range for the cars, but also provide storage and power that you can return back to the grid maybe. And power for your house, software subscription is going to be a huge deal, right?

So at the moment, you can buy the full self-driving, add-on for like, 10 grand, and not everybody ops for that, you know, they’ll do sort of the standard self-driving package, but the full self-driving package, you’re gonna fork out a moderately priced use vehicle extra, on top of your new vehicle, Tesla price, right?

So they have talked about, in this quarters conference call, they talked about rolling out a full self-driving subscription service that might make it more accessible to everybody. And a lot more people might be interested in paying for things as a subscription, rather than forking out 10 grand upfront, and this is sort of the same thing you saw in the software world. You know, with Adobe, for example, you know, pay you paid $700 for Adobe, or do you pay $29 a month for their cloud program, you know, so, yes, that’s gonna be a big deal as well.

Dan Kline: And there’s so many interesting models they can do because they could do the Peloton model where you just pay monthly, they could also do the I don’t care about self-driving when I drive around town, but hey, I’m driving a 10-hour trip. Can you set up the self-driving and I pay it might cost me $300? or whatever it is. There’s a lot of optionalities there.

We’re gonna take one more question from Daniel Kern, and then we’re gonna close out with one last question from me. Thank you to everyone who’s been asking questions, we appreciate it. “I joined late and maybe missed it. But did you guys discuss China’s rub with Elon?” No, we didn’t actually talk about this. I don’t actually think this is that big a deal. But Steve, are you worried about China and Elon? Basically, the Chinese government isn’t ordering Tesla’s they’re ordering, you know, homegrown brands. I don’t think that’s that big a deal.

Steve Symington: So there were some allegations last month that, you know, is Tesla spying on us in China and and they were calling sort of Tesla an arrogant brand and they’re sort of favoring that. I’m not too concerned. I think people still, you know, kind of want Tesla we’ve seen similar concerns with China boycotting American brands elsewhere as well. Just because of broader geopolitical.

Dan Kline: Yeah we saw some pushback on Disney’s Mulan. Starbucks, this has popped up from time to time but here’s the reality. The emerging upper-middle class in China wants their Starbucks and they want their Tesla’s obviously, those are two very different price points. You could buy at least three frappuccinos for the price of a Tesla. So I hate when people make Starbucks is expensive joke.

So I can’t believe I just did that. Steve, one last question. And then we will take your questions on Pinterest, or anything else you might want to talk about. Are you worried about Elon Musk hosting Saturday Night Live?  I feel like he could go out there and go on like an anti vax, you know, right? Or he could like insult his workforce. Is it something that worries you?

Steve Symington: No I mean, it doesn’t worry me. I think there could be some fireworks. They’ve talked about several members of SNL cast sort of being annoyed that he’s going to host and they talked about how he shouldn’t do it because this was a blowout quarter. Why should Why should you do that? I don’t really particularly care.

Dan Kline: He’s a media personality. That’s gonna bring different eyeballs to Saturday Night Live.

Steve Symington: Everyone will watch that episode like that no matter what and I mean, whether a cast member decides to go rogue and check him like live or whether he decides to do something crazy live. I don’t know, I’m not particularly concerned about SNL.

Dan Kline: I think the reality is when they put a non-actor on, they tend to put the person in very safe situations. So I doubt he’s coming out and doing an eight-minute Chris Rock monologue like one of those monologues where he takes questions from the audience that are planned or there’s a song so they’re not going to expect Elon Musk to be an actor. Look, I worry about him on Twitter, I, he’s definitely done some things that could alienate large segments of the audience that I think would be the biggest Tesla concern, as a shareholder.

D wants to make sure that we talk to Anirban about Tesla. I’m actually gonna record something tonight with Anirban for a show probably next week. And that’s not our core topic. But I will make sure we do three or four minutes for a show next week with Anirban talking on Tesla, because it is his biggest position.