How does the old saying go? The higher they fly, the farther they fall?
It’s a cliche that owners of Tesla Motors (TSLA) will be reminded of Thursday, with shares of an overextended Tesla stock set to open quite a bit lower after a quarterly update that was less than satisfactory.
It wasn’t just a disappointing earnings report that upended TSLA, however. It was the harsh reality that too many investors must now at least acknowledge is possible: Tesla stock may have been hyped up on assumptions that simply weren’t realistic.
If this is indeed the case and traders start to accept it, the pullback following the Tesla earnings report might be just the beginning.
Tesla Earnings
In most regards, Tesla Motors did well last quarter. Revenue of $1.2 billion topped estimates of $1.18 billion, growing 40% on a year-over-year basis after the carmaker sold 11,532 of its electric vehicles and produced a total of 12,807 cars.
The company still booked a loss of 48 cents per share, or a total of $184.2 million, though the loss came as no surprise from the still-growing company. The pros were actually planning on red ink of 60 cents per share of Tesla stock. Still, the actual loss suffered in the second quarter of 2015 was roughly three times the $61.9 million loss taken in the year-ago quarter.
Perhaps of even more concern at this point is the company’s cash flow, or lack thereof. The company burned through, on a net basis, $564 million as it invested in capacity and equipment. Net cash fell from $1.5 billion to $1.15 billion, as some fundraising done during the quarter offset $218 million worth of that cash consumption.
It’s a detail that matters to owners of Tesla stock more than it might for other companies, as CEO Elon Musk made a point of saying — in passing — he sees some value in raising funds in the foreseeable future if for no other reason than the “risk reduction.”
Red Flags
All things considered, the Tesla earnings update posted Wednesday seems benign … even good. There were some red flags, however, that could understandably leave investors wondering whether there’s proverbial trouble in paradise.
First and foremost, Tesla dialed back its projected deliveries for 2015 from a relatively confident 55,000 to a range of something between 50,000 and 55,000 units.
Musk explained the diminished output would most likely be caused by switching from production of the Model S to production of the Model X, which he says may well be the most difficult car in the world to build. That difficulty was clear months ago, however, or at least should have been.
Chief Financial Officer Deepak Ahuja also pushed back the company’s time frame to reach positive cash flow from late this year to early next year. Had the company not patted itself on the back in the past for achieving positive cash flow — only to find something else expensive to spend money on shortly afterwards — the postponed swing to positive cash flow wouldn’t be so troubling this time around.
Bottom Line for Tesla Stock
In its defense, like any other company, Tesla has to spend money to make money. Also like too many other companies, however, Tesla Motors rarely thinks twice about taking on new, expensive projects that not only may not pay off for years — if ever — but put the company in a cash bind in the meantime.
Be that as it may, what should spook owners of Tesla stock more than anything else in the wake of Q2’s report is the fact that not only is the organization not seeing wider operational margins as greater production scale is achieved … it’s seeing those margins narrow.
Last quarter, the company’s gross margins fell from 29% in the same quarter a year earlier (and 29% from a quarter earlier) to only 24%. Operating expenses grew nearly 6% on a sequential basis while revenue was up less than 2%. Compared to year-ago levels, revenue only expanded 24%, but operational expenses were up 58% on a year-over-year basis.
Maybe it was just one bad quarter. On the other hand, current TSLA shareholders might not want to take the chance that the company’s math just doesn’t make sense, and that the company is constantly relying on “the next big thing” to mask that possibility.
All of a sudden, that technical floor back at $181 looks like it might become a factor again after all.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
