On October 11, I noted that “…I have booked all of my Tesla (TSLAQ – USA) Jan 2019 250/175 put spreads after owning them for almost a year, at a reference price of $255 compared to a reference price of $320 when I first wrote about them. While I am certain that Tesla collapses in the near future, all evidence seems to show that they’ve used every trick from every financial fraud over the past 100 years to put lipstick on the Q3 financial results.” Modern day Ivar Kreuger has not disappointed.
Over the years, I have purposefully kept accounting and numbers to a minimum on this site—they’re “boring.” Besides, if you must use a fancy spreadsheet to prove a point, then your thesis isn’t very good to begin with. The numbers should fit onto a bar napkin after a full night of drinking. Unless, of course, you suspect fraud—in that case, numbers and financial ratios are everything. With that out of the way, let’s delve into the Q3 Tesla numbers.
Big picture, from Q2 to Q3, there was a sequential improvement in operating income of $1.038 billion, and they delivered 43,007 incremental cars. That’s $24,140 per incremental vehicle on a car that is retailing for as little as $49,000. No other auto OEM even comes close to that. Something simply doesn’t add up—so I went looking for it.
I get that when revenue grows, you get operating leverage. This can be seen where SG&A as a percentage of revenue declined for 4 sequential quarters (green). This is normal. You would expect with a huge increase in Q3 revenue, that there would be more operating leverage. Would you expect that SG&A drops 2.8% sequentially on a 70.5% increase in revenue (red)? That’s not how manufacturing companies work. The expense is obviously still there, we just don’t know where they hid it…
Let’s move to the balance sheet. Accounts receivable is usually where frauds hide the questionable transactions. If you give me enough beers, I can dream up a list of one-off reasons that a car may be sold without payment having occurred, but I will struggle to give you $585 million reasons (red). On the conference call, they noted that accounts receivable increased due to their last day of sales occurring on a Sunday. Sounds logical and all, except Q4/2017 also ended on a Sunday and accounts receivable showed a 15.2% sequential decline. Back then, energy generation, services and other (the things that normally have accounts receivable) were 17.8% of sales, today they are 10.6% of sales. Have you ever driven a car off the lot and not paid for it first? Something simply makes no sense here.
The real glaring issue is found in depreciation. They depreciate their tooling on a per car basis—hence, more cars sold, more depreciation. It should be linear as each car should use almost the same amount of tooling. I know there’s energy/services/other that gets depreciated, so it will bounce around a bit, but since automotive is 80-90% of total sales, the automotive depreciation should stay roughly constant. Look below; which quarter is not like any other quarter? Which quarter sees depreciation per vehicle drop by almost half?
I can keep pointing to inconsistencies. What’s the point? Something is rotten with these numbers. There is plenty of anecdotal evidence to show that some people are waiting months for cars, people are receiving cars with the wrong VINs or owned by other people, cars are piling up in funny places, etc. While it’s easy to blame “delivery hell” also known as “incompetence,” I suspect that there is a more nefarious reason for these issues. Somehow or another, Tesla is gaming the working capital and depreciation numbers, ultimately flowing into COGS and profits. They are focused on an epic blow-out quarter so that they can raise additional capital and keep their scheme alive into 2019. Besides, why else have they lost their entire accounting department (CAO twice) this year? Accountants don’t usually leave a business when it’s about to have a blow-out quarter—unless they want to avoid prison.
Q3 will be the high-water mark. They have now almost fully worked through their backlog of high-margin cars, the model 3 is a certifiable lemon, demand is evaporating and when sales comp negative, the working capital build will go in the other direction. In the interim, they have two sizable maturities between now and March 2019. If they cannot pop a financing very soon, the game is over.
I’m glad I booked my 2019 put spread—they gamed the quarter just like I suspected they would. I still have my 2020 put spread. I don’t know if Tesla rolls over immediately or takes a few weeks. It depends on how fast people analyze Q3 numbers and start asking the sorts of questions that I am asking. Let’s just say that I have dozens of other questions and the 10-Q hasn’t even been released. I’m on high alert to add to my bearish position using some combination of options. I will probably do it too early—that’s OK. 2019 is the year when Tesla implodes.
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Disclosure: Funds that I manage are long Tesla 2020 put spreads