Tesla Stock: The SEC Has Lifted the Veil Off TSLA

Advertisement

If you were never quite clear on how well Tesla Motors Inc (NASDAQ:TSLA) did in any given quarter before its recently completed Q3 numbers were posted, don’t worry — you weren’t alone. A bunch of other owners of Tesla stock struggled to pinpoint where the line between real dollars and non-GAAP dollars was drawn.

Start Valuing Tesla Stock Like Other Growth Names (TSLA)

The SEC didn’t fully understand it either. And the regulator’s view of Tesla’s results was further muddied by so-called “individually tailored” metrics that don’t mean much for any other company, and arguably shouldn’t mean much to owners of TSLA stock.

Well, good news for the befuddled: Tesla Motors is likely to keep making the changes it started to put in place as of last quarter. And that should bring clarity to a situation that desperately needs it.

Say What?

Mostly unbeknownst to Tesla stock holders, the Securities and Exchange Commission has been arguing with Tesla Motors via the U.S. Postal Service since late August, when the notion of uniting the electric carmaker with SolarCity Corp (NASDAQ:SCTY) was first unveiled.

The SEC’s beef? Initially, it was about using accounting metrics that would only mean something to Tesla, but posing them as if they were a standard measure of any company’s health. More specifically, the company was touting non-GAAP revenue to TSLA shareholders more so than it was clarifying actual GAAP revenue without ever clarifying exactly why a non-GAAP number should be seen as the more meaningful of the two.

As time went on, though, the regulator continually failed to get affirmation from the company it was actually making the necessary changes. Then the SEC pushed back even harder. A Sept. 16 letter from the SEC plainly said:

“Please clearly state that you have not generated positive operating cash flows in the past two fiscal years and when you anticipate that you will generate positive operating cash flows, if at all.”

To its credit, TSLA already implemented some of the requested changes to how it presents its accounting statements. Then again, that was going to happen anyway. Much of the confusion stemmed from the company’s guaranteed-buyback program, which has since been cancelled.

The latest word is that Tesla intends to fully comply with all the requests the SEC made. Yet, while its charming defiance may be a hit with owners of Tesla stock, the company certainly didn’t win any friends with the SEC.

Now’s the Time

Whether it was fortuitous timing or simple design remains to be seen, but the changes the Securities and Exchange Commission wanted come at a time when clarity is critical.

Calling a spade a spade, Tesla Motors was given leniency by the market for its relatively undetailed accounting statements because it was a growth story; TSLA shareholders knew getting the ball rolling was going to be an expensive (and mostly unprofitable) venture. The details just didn’t matter.

Now though, with Tesla’s annual output set to ramp up from this year’s roughly 85,000 cars to 500,000 cars by 2018, the stakes are higher. More money is on the line. Investors are going to demand more certainty.

At the same time (and once again, calling a spade a spade), the pairing with SolarCity has not been a wildly popular idea with all owners of Tesla stock. Not only is the solar power outfit a cash-burning liability, but the very nature of its business model — leasing of solar panel systems — makes it uncomfortably difficult for an investor to truly assess the stock’s value.

Now those fuzzy books are going to be entwined with Tesla’s. Tesla Motors will have to provide complete, meaningful clarity if it’s to keep shareholders on board.

New regulatory standards bolster the need for such a shift in how its results are presented.

In May of this year, the SEC enacted sweeping changes to what it expects from publicly traded companies’ quarterly reports. Tailored accounting measures (and not just Tesla’s) have become a bit too common again, making it difficult to make what should be uniform “apples to apples” comparisons of any reporting company. The new rules will reel in the more meaningless metrics, restoring that uniformity.

It remains to be seen to what extent Tesla was relying on its custom-built accounting measures. But one can assume if TSLA was doing it, it was doing it for a reason.

Bottom Line for Tesla Stock

A reason to dump TSLA stock? No, not quite. It’s certainly not a reason to jump into a position, though, despite the fact that certainty is bound to grow; investors love certainty. The potential risk is that the market will start to see through the fog, and not like what they see.

Then again, they may love what they see.

While its history is still fuzzy, Tesla swung to a solid GAAP profit last quarter on the heels of a huge scale-up. If that’s the shape of things to come, then Tesla stock doesn’t need obscured non-GAAP to sell its story.

But that’s an “if” that won’t be addressed for another two months.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/11/tesla-stock-sec-tsla/.

©2024 InvestorPlace Media, LLC