Tesla Motors (TSLA) reported Q3 earnings on Tuesday, posting revenues of $936 million. It also made an impressive leap forward with total car production of 13,091 for the quarter.
It’s no wonder, then, that TSLA Stock earned investors’ praise, rallying in after-hours trade and soaring 10% higher on Wednesday.
Yet investors, often dazzled by momentous growth, tend to ignore the bigger picture. And by the time they do see it, those cheers can quickly turns to jeers. Then no one wants to own the stock.
That moment, of course, would be the exact time to buy TSLA Stock.
TSLA Stock: Analyzing Costs
A quick glimpse at TSLA Stock revenues vs. gross margin shows a rather cheerful picture. Tesla’s gross margin, albeit lower than last quarter, is at 24%. Daimler (DDAIF), by comparison, has a 21% gross margin, so those numbers are a good sign for Tesla.
The problem for TSLA Stock starts when we begin to move lower down the income statement. Sales and administrative costs are a staggering, $236 million — 25% of the total revenue! And R&D remains high at $179M, which is 19% of revenue.
Those figures raise some very worrisome questions.
Namely, why then are the administrative and sales costs so high? Even after neutralizing $56 million in stock compensation, those costs are surprisingly high for a company like Tesla. With multiple states banning direct sales from Tesla, an large portion of sales come from online buyers. What reason could Tesla possibly have for spending that much on SG&A?
Don’t expect Musk to tell you.
Risks Going Forward
Tesla Motors’ earnings call was interesting, with a rather upbeat outlook for both this year and the next. And, in an effort to calm frayed nerves, Tesla executives provided some clues as to when the company expects to be profitable.
Elon Musk said he hopes cash flow will be positive in Q1 2016. Moreover, Tesla executives have stated that their significant investments in tooling will improve margins in Q4. They expect capital spending will be significantly lower during 2016, hinting that costs could be curbed next year.
But Tesla’s manufacturing costs haven’t been the problem. The real problem — administrative and sales expenses — weren’t even discussed on the call. Musk and the other Tesla execs really need to explain why the company is spending a quarter of its revenues on SG&A when companies like Daimler’s sales and administrative expenses account for merely 11.5% of revenues.
Those costs have vastly outpacing revenues — SG&A for the past nine months increased 55% year-over-year, compared to a 25% gain in sales. So, until Tesla management gives us better clarity on why they’re spending so much on sales and administrative costs, the growth in spending remains a huge concern.
TSLA Stock: Buy It When No One Else Does
Of course, this high cost structure will continue to weigh on TSLA Stock net income. The company will either have continual losses or only very moderate profits. The longer Tesla loses money, the more indebted it will become. Eventually, TSLA Stock will come under pressure. That means Tesla management will have to reduce costs significantly.
When that happens, TSLA Stock will get hammered and trade substantially lower than where it does today. That’s the time to buy TSLA stock — when everyone hates TSLA Stock. If you buy any sooner, you’ll just be fueling the inevitable drop.
As of this writing, Lior Alkalay did not hold a position in any of the aforementioned securities.
