It is: GAAP expenses are artificially elevated in growth companies.
The best way to visualize it is through the "Amazon story":
Amazon's annual "Net Income" GAAP profits were well below 1 billion dollars in most years during the first 20 years, and then Amazon became a trillion dollar company.
The cumulative GAAP income during the first 20 years was less than 10 billion dollars - yet how did did Amazon become a 1,000 billion dollars company, 100 times the value of the GAAP profits generated?
What mattered to growth and what was key to reach 1 trillion dollars valuation was not GAAP income but cash generated by operations.
There's several reasons why GAAP expenses are artificially elevated for Tesla (and other growth companies), which means that GAAP profits are artificially lower:
- Stock-based compensation: this is mostly new TSLA shares issued to employees for stock options, ESPP plans, awards and incentives, etc. - in 2018 this was an over -$800m GAAP expense. Since growth of the company is much higher this is not a problem to shareholders.
- Depreciation and amortization: Tesla's mostly new equipment gets amortized and depreciated not because it's in danger of being obsolete, but because this is how capex gets recognized in the GAAP space. In 2018 alone this was a -$1.9b GAAP expense (!) - while the real "maintenance capex" that is required to maintain the lifetime of equipment indefinitely is likely around ~$450m. I.e. the GAAP D&A expense is a factor 4 higher than it would be if Tesla wasn't growing so rapidly and there was an extra -$1,450m D&A expense in 2018.
- Interest expense: while this is a real cash expense, Tesla's debt financed growth model is an artifact of fast expansion as well. In 2018 alone interest payments were around -$675m.
- R&D investments: this too is a real cash expense, it's not a running cost of the business, but an expense invested into future growth products: Autopilot, AI, FSD chip, Tesla Semi, etc. In 2018 alone R&D expenses were -$1,460m.
- Higher than optimal cost of goods and SG&A expenses: a rapidly growing company is not executing as optimally as a company that is in steady-state. It's hard to estimate how much of a factor this is, but with a YoY growth rate in the dozens of percentage point, it could easily be as high as 10-20% of CoGs+SG&A. (!) I'm not putting a specific figure to this effect though.
In 2018 GAAP income of Tesla was -$976m, and that was the year that carried most of the costs of the delayed Model 3 expansion. But even in 2018 if we sum up the factors above, there were -$4,385m of GAAP expenses due to Tesla's (self selected) hyper-growth model.
Tesla's underlying business model was
wildly profitable, even in 2018, despite the delayed Model 3 ramp-up, and the reported "GAAP loss" was mostly an artifact of very rapid growth.
This is why anti-Tesla pundits try to cast doubt on the growth story, on demand, and try to exaggerate the importance of GAAP profits.
