Tesla Stock Is Poised For Declines

Summary

While the number of vehicles sold in Q3 increased, YoY revenues actually fell 12%, gross profit fell 22% and EPS fell 56%.

TSLA “adjusts” net income and EPS in “interesting” ways that do not reflect the true sustainable profitability of the company.

Reported cash flows include a significant share-based compensation component that is greater than the GAAP profit.

The company borrows money not only from its customers but also from its existing shareholders.

If you exclude regulatory credits of $134M, in Q3 the company made virtually no money.

I have solar panels and drove over 15K miles in last 12 months on electricity, most of it using adaptive cruise control. I am bullish on electric vehicles and self-driving. With that out of the way, I will explain to you why I am bearish on Tesla (TSLA) and how Elon Musk runs the company on money borrowed not only via debt, but also from its customers and even from its existing shareholders, while making virtually no money in the process.

Some Background

Tesla bulls base their thesis on equating electric vehicles, solar power and self-driving to Tesla. They project significant growth in those areas for Tesla as if they assume that competitors will merely concede the market to Tesla. Further, they assume Tesla has a technological lead in all of those areas. This is simply not the case. For a long time, Tesla and Solar City relied on Panasonic for solar panel and battery technology. I personally have a SunPower solar system, because it has a higher efficiency coefficient. While Panasonic panels are not far behind, they are also available from independent installers for a lower installed cost.

As for self-driving, GM and Google have the lead at this point. Finally, on the electric vehicle front, there will be an onslaught of competition from established players, especially starting in 2020, due to regulatory changes in Europe. For people like me, who won’t accept shoddy quality and cost-cutting masquerading as modern design, EVs from established players will fit the bill nicely.

To give Tesla and Musk credit, they have excellent electric motor tech, groundbreaking over the air software updates, the “coolness” factor, low advertising costs via random Tweets, can borrow money from its customers and existing shareholders. Unfortunately, the latter is something that helped build the company yet distorts the financial numbers that some people accept at face value. Let’s look at those numbers, in particular at the Q3 results that for some reason people see as positive.

Q3 Numbers

While we wait for the Form 10-Q to be filed, we have the TSLA Form 8-K to get the numbers from. We need to compare numbers YoY, to the Q3 2018 since there is seasonality to sales. Below you can see that sales of more lucrative models S and X are falling while Model 3 increased. Solar installs are falling too.

Source: TLSA Form 8-K

If we look at financials, the picture is troubling. Sales, margins and profits are all down significantly YoY. The only consolation is the numbers are better than the horrible Q1 and mediocre Q2. Also note, almost the entirety of net income is made by regulatory credits. In other words, without them the company made virtually no money.

Source: TLSA Form 8-K

In fact, this is the story of Tesla business model so far. Regulatory credits that contribute to both top and bottom lines as well as tax incentives that encourage people to pay more for Tesla’s products, since they will be getting some of the money back via tax credits. Now that the latter is being scaled down, Tesla has to absorb the difference.

Invisible Borrowing

While it is widely known that Tesla issued bonds, what is less understood is that they borrowed money from their own customers and event existing shareholders. The borrowing from customers is relatively straightforward: you can pay for vaguely-defined functionality that will be delivered later (if at all). The borrowing from existing shareholder is less obvious and is being spun as a positive by Tesla adding it back into its “Adjusted EPS” as well as into FCF.

In one of his speeches, published in “Poor Charlie’s Almanac”, Charlie Munger presented a hypothetical company that switched some of their employee compensation from cash to stock. Share-based compensation is not free, especially if it is as impactful as at Tesla. In Q3, the SBC was $199M. For comparison, it was more than the net profit of the company. It is obvious that SBC is not “free”, it dilutes existing shareholders. In other words, it is logically no different than if Tesla issued additional shares, sold them and then used the proceeds for the actual cash compensation, in-kind. You can see the dilution, some of which is due to SBC:

Source: TLSA Form 8-K

You can see the dilution in the areas I highlighted. About 4% a year might not sound like much, but it adds up over time. Holding the same number of shares, over time you own smaller and smaller part of the company. Yet TSLA takes that money that they effectively borrowing from their own existing shareholders and pretend it was “free” while calculating “Adjusted EPS”.

Adjusted Net Income and EPS

While the Q3 GAAP net profit was $143M and diluted EPS was $0.78, the “adjusted net income” was provided as $342M and “adjusted EPS” was given as $1.91. This is just pure fiction. Usually, when companies provide “adjusted” net income and EPS, they exclude non-recurring items that do not reflect the true profitability of the company. They take GAAP numbers, then remove restructuring or similar costs, after tax. I have never seen companies add back SBC, until now.

As I demonstrated above, SBC has a real cost. If Tesla actually issued stock, sold it, and then used the proceeds to compensate its people instead of SBC, it would have to pay actual money. Assuming that money is $199M, the Q3 “adjusted” net income and EPS should be the same as GAAP numbers.

Free Cash Flow

Similarly to the “adjusted” net income and EPS, FCF has SBC added back, which is correct since SBC was not nominally a cash cost. However, because the SBC at Tesla is so large in relation to FCF, it negates the benefit their FCF exhibits from the significant difference between the D&A and CapEx. For the 9 months, the D&A approximately matches CapEx plus SBC. SBC serves as a financial activity of borrowing from the existing shareholders.

Source: TLSA Form 8-K

CapEx

To be fair, Tesla’s CapEx includes a “growth” component and therefore the sustaining, or “maintenance” CapEx is likely lower. However, car manufacturers are generally CapEx-heavy. Still, the Tesla’s “normalized” FCF would be greater than GAAP net income, even if you take SBC into account. Therefore Tesla is indeed more profitable than what GAAP net income and EPS imply. The question is by how much and to what extent will this headwind is being compensated by regulatory credits, that are also large.

Historical Performance

Let's not forget that the company keeps losing money on TTM or FY basis. See the highlighted area below.

Source: TLSA Form 8-K

The FCF if you adjust it for SBC is sharply negative as well. For trailing 9 months it would have been 980-915-617= negative $552M. 

The numbers only look decent if you ignore SBC. In effect, existing shareholders give money to the company (via dilution) and then are positively surprised when that money appears in "adjusted EPS" and FCF numbers.

Bottom Line

Musk is a genius and Tesla has been a disruptor in many areas. In the current state, despite impressive “adjusted” numbers, in reality Tesla barely makes money. While I hope Tesla continues to be successful in contributing to electric vehicle and solar sales, I believe the current share prices are not justified by reasonable expectations. It remains to be seen if Tesla can achieve “escape velocity” at all, especially if there is a recession in near term. I am presently neither long nor short, but it will be interesting how the picture develops in 2020 when there is more competition and Tesla Model Y is released.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in TSLA over the next 72 hours.

OhmConnect - Saving the Environment and Making Money In Process

Sadly I only discovered OhmConnect in May. And it turns out a couple of coworkers were using it for a while. I wish I knew about it sooner.

OhmConnect pays you not to use your electricity once in a while. I was skeptical at first, but got over $100 in July and on track to make even more in August. And for context, my electric bill in July was $85. So by not using electricity for 1-2 hours 2 times a week in July, not only did I offset my entire electric bill for the month, but was $15 ahead.

And I expect to make more in August. For example, I made $55 for two events (they call them Ohm Hour) in one week.

Check it out here: Ohm Connect (get $10 to start). You will get $10 also to get started.

Inaccurate Trip Computer in 2018 Honda Clarity Plug-In

While Honda got many things right with the 2018 Honda Clarity Plug-In, there are a few glaring mistakes. The first one is the trip computer (and the MPG display).

It seems it doesn't take into account the electricity use, so when I run on electricity alone, I get 199MPG displayed. And if the HV mode is used or the gas engine turns itself on, the MPG goes down but not nearly enough. It still shows numbers like 146 mpg. Only if you use the "trip" mpg readout and make sure to reset your trip meter (e.g. "trip A") one the engine fires up, do youget somewhat reasonable numbers, such as 40-50 MPG driving at steady 70 mph.

And the "distance to empty", which has the EV and HV part has a definitely wrong HV number. It should account only for gas and with the 7-gallon gas tank I expect to see a maximum of 7 gal x 60 mpg = 420 miles at the most optimistic estimate. But mine shows 716 miles right now, which would mean I would be getting 100 MPG running purely on gas. Madness.

Honda needs to fix this. It is completely unacceptable and is not rocket science.

Selecting a Trunk Liner for 2018 Honda Clarity Plug-In

A month ago I bought a 2018 Honda Clarity Plug-In Touring. Whenever I buy a car, I immediately buy a trunk liner to avoid grocery and other spills from becoming stains and smells.

There just was one problem this time. The factory/OEM trunk liner is expensive, at $100+, which is expected and not really a problem. But unlike the previous Honda liners I bought for a couple of different Accords, the trunk liner for Clarity is the same for all three variants: Hydrogen Fuel Cell model, Electric (BEV) and the Plug-in. And because the former two have bigger humps in the forward portion of the trunk (to hold the hydrogen tank or extra battery) than my plug-in, the liner is too small for my use. It covers only the rearmost portion of the trunk.

In order to cover the entire floor of the trunk, including the raised front portion, I needed a properly-sized liner. And seems nobody makes Clarity-specific liners. I checked the usual suspects, including WeatherTech. And in the end, I decided to get a universal liner and trim it as needed.

WeatherTech universal liner listed as fitting Clarity on their web site would have been too small. And it is pricey. So I got another liner from Amazon, which only required trimming the two corners with scissors, It is thick enough to be sturdy yet thin enough to protect the walls of the trunk a little. And it has spikes on the bottom to prevent the liner from sliding around. Here is the liner (click on it to view it on Amazon):

It did smell like oil for a few days, but now the smell has faded. Very happy overall. It doesn't slide and the cost was much lower than what I expected or was prepared to pay.

Honda Accord or Mazda6?

We already have a 2014 Honda Accord EX-L and now need to get another vehicle to replace a 2006 Honda Accord VP. But there is a problem.

After doing much research and soul-searching, it got even worse. Note: we need memory seats, so I am comparing 2016 Honda Accord EX-L and Mazda 6 Grand Touring here. Lower trims have no memory seats.

The Mazda6 looks better, has slightly better fuel economy and acceleration, handles better and its 6-speed automatic transmission requires no maintenance and should be more reliable than the CVT. It is more fun to drive, the seats more comfortable and the interior looks nicer. The expected reliability is better. And it has blind spot monitoring and rear cross-traffic alert.

But Honda is cheaper, the visibility and rearview mirrors are better, the insurance rates are lower. The ride is better, there is less noise. The spark plugs need not replacement in 105K miles, whereas in Mazda it is 85K. And the oil change interval is flexible and has been close to 9K miles in our experience, whereas in Mazda it seems to be 7.5K.

Where it gets worse is in terms of safety, which is an area I find extremely important, as the last two Accords we had were totaled in accidents through other drivers' faults.

Mazda has a wide-angle rearview camera and blind spot monitoring with rear cross-traffic alert. Sounds nice, until you realize that the guidlines on the camera are fixed. Honda's wide angle rearview camera has dynamic guidelines, which simplify parking and other maneuvers substantially. And while there is no blind spot monitoring, it has LaneWatch: a camera in the right outside rear view mirror that shows you the whole blind spot when you have your right turn signal on. How useful is it? It sound superfluous at first blush, but since it has distance markings, I can clearly see if there is enough space for the car in the next lane and whether the car there is letting me in or being a jerk.

Crash test results are similar. And although in Mazda you can get autobrake feature that can stop the car as a part of the package that also includes iLoop energy recovery system and grille shutters, etc. for a couple thou, Honda has Honda Sensing that includes both low and high speed autobrake as well as dynamic adaptive cruise control for less than 1K.

So at the end of the day, I am afraid it will be the Accord. I hoped it would be Mazda. I like the way it looks, drives and the seat and overall ergonomics. And adaptive LED headlights are cool as is other tech, But the price is high and depreciation is worse as are the insurance rates. And the lack of dynamic guidelines in the rear view monitor is a deal-breaker.

Microsoft Lumia 640 Is a Major Improvement

After using the Nokia Lumia 520/521 and then Lumia 635, I got the Microsoft Lumia 640. It is a major improvement in many areas and I am shocked to see how good it is at a price several times lower than an iPhone or Samsung S6.

For starters, it supports LTE, came with T-Mobile's WiFi calling, supports VoLTE, has an excellent battery life, full 720p 5-inch screen, has both the front and the rear cameras, a flash for the main camera (8-Megapixel resolution), has a 4-core processor and 1 GB of RAM.

The phone has 8 GB of storage and supports MicroSD of any size ( I got the 32GB MicroSD). And all of this costs less than $100 now. Wow.

My T-Mobile phone came with Windows 8.1 Denim and Microsoft stated this phone would be among the first to get Windows 10. It feels solid and convenient in your hand despite its large 5-inch screen size.

It even came with 1 year of free Office 365 online, which is normally $70. Not that I am using the actual office part of it, but it gives you 1TB of cloud storage.

In Use

I have had the phone for about 4 months now and it has been super-stable and responsive. And although there is a lack of second-tier apps and some of the apps it has are unpolished comparing to the iOS/iPhone counterparts and although the Waze app for Windows Phone is no longer supported and keeps crashing, the Lumia 640 is still inexpensive and awesome.

Durability

I have dropped the phone several times and so did my wife. In each case, the phone developed small dents that do not affect the functionality. In a few instances the case opened and the battery fell out, but I put it all back together and all still works. Try this with your fragile iPhone!

Battery Life

The battery life is simply amazing. Easily enough for a full day of heavy use.

iHealth Align - Gluco-Monitoring System BG1 - junk

What a cool concept: use a small device that plugs into an iPhone and uses iPhone and a dedicated app to show you the results of your blood glucose tests, plot graphs over time, etc. Right?

So I thought when I got it to see how my blood glucose levels behave. The test strips for this device are cheaper than those of the OneTouch Ultra I was using prior.

Although the concept for this device is cool and the app for iOS is slick, there is a major problem with it. Namely, it just doesn't work.

Yes, the device is relatively easy to use and should be economical too, since strips are much cheaper than those of the OneTouch Ultra meters. And the app shows you all kinds of trends over time. And the lancing device is excellent and painless to use. But the results cannot be trusted.

I used the supplied strips and scanned the cap of the container with my iPhone. On the first (fasting) reading, the app said my glucose was 61. Odd and very low. On the post-meal test, it said my glucose was 75. I immediately retested with reliable OneTouch Ultra 2 and the real reading was 104, not 75. So either the iHealth Align or the strips for it are defective. Either way, it is inexcusable.

After 2 days, the customer support has not returned my emails. Then they did (on the 3rd day), asking for all kinds of information and serial numbers. After I supplied all the info they asked for, nothing. I inquired again. No response. Then, almost 2 months later, I got an email from them stating that the device and strips are in good working order and I might be using an incorrect testing site or maybe need to have my iPhone sleep for a while. What?

I tested one more time, just for fun, and got a reading of 36. Which means I am in coma now. Or their device is pure garbage. Speaking of garbage, this is where I deposited it and its strips.

A side note: how can they know the device and strips are in good working order?

Bottom Line

Do not rely on readings from this device, unless you test it first with the test solution (not supplied with the device). The only possible use I could see for this device is to check for trends and that is assuming it is accurate in terms of trending, e.g. under-reports glucose by certain percentage consistently. But it is not even accurate to that extent as my last reading of 36 shows. 

Do not spend money on this garbage. Get something that actually works.