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Tesla's gross margin and net profit

Discussion in 'TSLA Investor Discussions' started by Perfectlogic, Nov 5, 2015.

  1. Perfectlogic

    Perfectlogic Member

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    I think the discussion about how profitable Tesla actually is when you exclude capex is very interesting. On the bullish side I often hear people here saying that if Tesla just stopped investing so heavily in future growth then they would be very profitable and the bears obviously sing a different tune, which I have come to agree more with after looking the numbers through, but perhaps I am mistaken. I would like to hear some of the bulls chime in on exactly how they can come to the conclusion that Tesla is profitable on an operational basis today. I think that a good starting point, when trying to estimate a company's profitability, is looking at how the equity is moving as that is really a summary of all the assets minus the liabilities. So when Tesla invests money into supercharges or the gigafactory that same amount should show up on the balance sheet as an asset and therefore not influence the accuracy of using equity as a measure of operational profitability.
    Financial Statements for Tesla Motors Inc - Google Finance

    As you can see Tesla lost around $90M of equity in each of the first 2 quarters of the year. In the third quarter equity got a boost from the $740M raised, if you cancel that out you end up with around the same quarterly equity loss as the first 2 quarters, $95M. So on an operational basis Tesla did lose $7.3k per vehicle sold in the last quarter (based on 13000 produced). Now you can argue that R&D spend on the X is muddying up the balance sheet analysis as that intangible value doesn't show up as an asset and that does make sense so that takes us to a forward looking estimate that is ofcourse more important than hindsight.

    Say Tesla sells 20k cars per quarter next year at an ASP of $100k, that is $2B in revenue per quarter, at a gross profit margin of 28% (up 3%points from this quarter due to efficiency gains). That is $560M in gross profits per quarter. R&D spend has been around $180M for the last 2 quarters, going forward they will obviously have less cost associated with the X, but now they will start working on the 3 to get it ready as soon as possible (can't have the same launch slippage as the X here), and I think R&D cost associated with battery storage will go up too so I am going to assume a slight uptick to $200M/quarter for 2016.

    SG&A has ballooned to a whopping 25% last quarter, I assume there has been some cost associated with the X launch, on average over 2015 SG&A have been 22.4% of revenue (GAAP). Last year the number was 18.9%. Lets assume 18% for 2016 due to efficiency gains as sales does ramp up very significantly. I do think though that SG&A will always be high for Tesla when compared to the industry due to the nature of their business. Tesla owns all its "dealerships" themselves which adds some SG&A cost but lets them sell at a higher profit margin. Tesla also needs to expand and maintain their supercharger network which is a necessary expense that doesn't show up in COGS, not sure if it's in SG&A or somewhere else. Anyhow that 18% in SG&A cost comes to a quarterly expense of $360M. In total $360M+$200M = $560M in operational expenses for 2016 which happens to line up with the $560M in gross profits. So if my numbers hold up Tesla will be break even on an operation basis next year with 80k S/X sold. Sure if Tesla can manage to cut cost very significantly then they will be profitable but I just don't find this likely with the expansion plans they have in mind and the nature of Tesla's cost structure, I think it's more likely that any profitability will come from an increase in profit margin beyond the 28% I assumed, but that doesn't seem very likely either as the S still hasn't gotten above 25% after being in the market for this long.

    So clearly I'm not very bullish on Tesla's profitability in the near term, but I still believe they will be in the long run. The auto industry is just incredibly capital intensive and demands economies of scale to be competetive. Even breaking into to the industry and growing this fast is a great accomplishment which is one of the reasons why I still believe Tesla has what it takes to achieve that economies of scale in time, I just think it will take a lot of capital injections to get there (which unfortunately means more dilution), especially when you consider Tesla Energy too on top of the capex requirements for the auto expansion.
     
  2. Svetlin

    Svetlin Member

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    I think most of your numbers make sense. And you don't have to expect anything more than break even for another year or so to be bullish about Tesla. It's a longer game. In addition to R&D, a lot of SG&A expenses are preparing for Model 3, and it makes sense if Model S/X sales don't fully pay for that. They need their sales and service network to be in place before Model 3 hits in large volume.

    But you do need to add revenue from Tesla Energy. They previously said they expect $1B in 2016, and they recently said they accelerated their plans by moving to the gigafactory earlier.
     
  3. Perfectlogic

    Perfectlogic Member

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    Elon mentioned he expects 15% gross margin for storage products next year so I don't expect any cash flow from that business just yet. I agree that you can still be bullish on Tesla even if they break even next year, but the analysts are expecting $2 EPS so it might influence medium term SP, I can just imagine the headlines "Will Tesla ever be profitable?" "3 capital raises in 2 years, when will it stop?". Also Elon has been saying that they want to be profitable by '16 Q1, so this might add to the fire if they don't manage to get there "Tesla wants to be profitable, but is it even possible?.
     
  4. Lesifass

    Lesifass Member

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    Thanks for your thoughts. I was wondering, where are costs for DU replacements / fixes "hidden" in the financial statements? Is that part of SG&A?
     
  5. Svetlin

    Svetlin Member

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    Fair enough, but if you are going to ignore storage, then also ignore it in the R&D projection: "I think R&D cost associated with battery storage will go up too so I am going to assume a slight uptick to $200M/quarter for 2016". Anyway, probably not a material difference either way, but $2 EPS is actually just around ~$70m per quarter above break even. They could do that with ZEV credits alone :)

    I agree stock price movement might be just as wild in 2016 as it has been in the past two years. I just hope I catch one of the swings at the right time to roll '17 options into less leveraged '18s.
     
  6. EarlyAdopter

    EarlyAdopter Active Member

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    It comes out of warranty reserves, which is funded by a hold-back on every car sold, which impacts gross margin. The reserves continue to increase, and the amount hold-back descreased over the last two years, so it would appear drivetrain costs are not material.
     
  7. Bgarret

    Bgarret Model S ownin' Michigan scofflaw

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    I think any response to someone who's moniker is "Perfect Logic" is fraught with danger, as to my knowledge, there is nothing Perfect, so I hope there is some self-deprecating humor involved in your TMC name. I don't agree with your assumptions or your math. Making an assumption that Tesla's investment in a new BIW line and Paint Shop are irrelevant to their SG&A and slapping a blanket 18% as a cost number is premature. I would be a little more patient and wait for Q1 2016 numbers to get a better feel for both SG&A and R&D in a non-Model X ramp quarter. I'm also not sure that TSLA as a stock is dependent on a fixed net profit to get price appreciation from Wall Street - but in the event they are, here are some thoughts on how they could get there in 2016....analyst estimates are for $2.04 on average with a high of $4.00 and low of $.90.

    Revenue: $8.8 Billion (85k cars - (1650/wk x 52 weeks at an ASP of $100k) is $8.5 Billion)(24% Margin); $150 million of CPO (@10%), $500 Million of Energy (@15%) and $100 million of ZEV (similar to 2015)(at 100%).

    Gross Profit: $2.19 Billion

    2015 SG&A and R&D - 9 months: $1.16 Billion - Average of $386 Million/Quarter

    2016 Assumption - $400 million/Qtr, increasing by 10%/qtr: $1.8 Billion

    Net Profit: $386 Million

    Shares Outstanding: avg of 140 Million - 2016 EPS= $2.75/share

    I think anyone could manipulate the numbers to come out at $0 - $4.00/share....time will tell.
     
  8. Perfectlogic

    Perfectlogic Member

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    Is my confidence in the strength of my logic important to you?
     
  9. ItsNotAboutTheMoney

    ItsNotAboutTheMoney Active Member

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    I believe that's actually cash-flow-positive in 2016 Q1. Being profitable is a different thing entirely and would be a bad thing for Tesla to seek at this point given that by 2020 the goal is to be 10 times the sales.
     
  10. Perfectlogic

    Perfectlogic Member

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    What I mean when I am talking about profitability is on an operational basis excluding capex. This figure should roughly equate to the movement in equity. For most companies, including Tesla, I believe this is a good measure of real profitability.
     
  11. Bgarret

    Bgarret Model S ownin' Michigan scofflaw

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    Only in inverse proportion to how seriously I take your posts.
     
  12. electracity

    electracity Active Member

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    It seems clear that Musk is establishing a pattern to send a message: Touch on cash flow positive to refute "bleeding cash", get a lot of backorders, get more capital and build more capacity. Rinse and repeat.
    The markets emphasis on tracking car sales, as opposed to profitability, seems to indicate that he is successful in his approach. The truly huge risk is the future unknown demand for Tesla EVs. The battery biz is probably safer as it can be shift between the uncorrelated markets of cars and storage.
     
  13. jesselivenomore

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    #13 jesselivenomore, Nov 6, 2015
    Last edited: Nov 6, 2015
    Lots of imperfect logic.

    If you want to figure out Tesla's profitability on an operating basis you cannot only exclude capex. R&D spending also needs to be excluded since it only contributes to future revenues, none on an operating basis. Otherwise you cannot parrot the "losses per car" non-logic.

    For long term profitability, Tesla's R&D spending is currently 20% of revenues compared to less than 5% by traditional car companies. I expect Tesla's R&D will always be a larger share than average which will keep them on the cutting edge, but long term they will not need to come up with a new model every 2 years. Coming up with the model 3 and iterations from there will keep them busy and supply constrained for years to come. So expect proportion of R&D to fall over the long run. Also look for service revenues to increase over time as warranties expire, while SG&A growth lags.
     
  14. Ugliest1

    Ugliest1 S85: "Sparky"

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    I'm hoping each TMC name doesn't have to be completely truthful.
     
  15. Bgarret

    Bgarret Model S ownin' Michigan scofflaw

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    And by your tone, I can see that TMC names don't have to be literal, even if, as with me, the beauty lives mostly on the inside. :tongue:
     
  16. Perfectlogic

    Perfectlogic Member

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    You can't completely exclude R&D, if you do then Tesla will start losing market share, I don't see how that is a relevant scenario. The R&D spend on the X will go down though, I agree on that and even mentioned it in my OP, but this spend will just shift to the Model 3 as it is due in just 2 years. The thread was primarily about 2016 (like all my estimates), but I agree that net margin will improve over time.
     
  17. jesselivenomore

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    #17 jesselivenomore, Nov 7, 2015
    Last edited: Nov 7, 2015
    What exactly are you trying to prove? That they are losing money? Well, we all know that, they are spending money on expansion. So by taking out capex, you are trying to determine their profitability on an operating basis, isn't that the point? How is r&d of future products relevant to their profitability on an ongoing, day to day operational basis?

    Think logically. If you are going to repeat the bear argument of () losses per car, how can you count r&d for future products in the costs for current products?

    - - - Updated - - -

    Again, what I take issue with is the () losses per car argument which makes no sense on an operating basis. As for strictly 2016 profitability, and further potential capital raises, let me break it to you: it won't matter.

    Take a look at how analyst estimates have trended for the current quarter, down from 0.80 EPS to currently 0.12 EPS. That's a 85% reduction in the past 3 months. Has it mattered? Marginally. The stock trended down slightly on fear of missing full year production targets, and now trending up a bit on possibly meeting those targets. Does anyone really care what next quarters EPS comes out as? As far as capital raises, the next time the stock goes down on a capital raise will be the first. Raising money for capital expenditures that increase future productivity and production is accretive, not dilutive. And the stock has treated it as such.

    So, as for what WILL matter. Ramping production on the X is first and foremost, but that looks to be on its way. What will matter most in the medium term is: Is the Model X a GOOD car?

    That is the most pressing question to be answered, and will have by far the biggest impact on the stock for the next 6 months. Far more than EPS, far more than any capital raise. And it will be in the form of word of mouth from customers, CR and reviews from other publications etc. This will impact not the initial ramp of the X, which is just an inevitability, but the end DEMAND of the X, which is yet to be determined, and of utter importance to the share price.
     
  18. Perfectlogic

    Perfectlogic Member

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    My thread was about the profitability of 2016 (if it wasn't clear enough from all the calculations specifically for 2016 in my OP), if you don't think that matters then then fine by me, but I happen to do believe that profits matter for WS, and I don't think I am the only one on this board who cares about short and medium term SP fluctuations. Other relevant developements for TSLA are discussed in other threads.
     
  19. jesselivenomore

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    #19 jesselivenomore, Nov 7, 2015
    Last edited: Nov 7, 2015
    Don't try to tell me what your thread is about after the fact when we all can read for ourselves.


    In no part of your opening paragraph do you talk about 2016. You are stating that the bull argument is if Tesla stopped investing in future growth they would be very profitable, which you disagree with.

    Spending mass amounts of money to develop model X which they have currently sold 6 of is the definition of investing in future growth. Spending mass amounts of money to develop model 3 which they have taken $0 deposits of is the definition of investing in future growth.

    If Tesla today stopped all spending on model 3 development, that would have 0 impact on model S sales. Meanwhile, you are counting all those costs towards the cost to run their business day to day, to come up with Tesla losing $7.3k per vehicle.

    No, they don't. That is the highest level of ILLOGIC and pinnacle of irony.

    Just because you tack on a "now you can argue ()" at the end does not make the argument that follows moot. In fact, you already disproved your entire OP yourself.
     
  20. Perfectlogic

    Perfectlogic Member

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    There is no reason to be upset, calm down friend, there is nothing wrong with us seeing things differently. Most of my post was about modelling 2016 profitability. Yes I touched the fact that a lot here seems to think that we would be very profitable today if not for spending in growth but I still don't agree with that, R&D spend would have to be cut in half just to break even, and as I said they can't go without R&D at all. So judging by the numbers it does look like Tesla would have to raise prices in order to be significantly profitable today, which is in stark contrast to what many believe here.
     

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