Forget The Hype -- Here's Why Wall Street's Tesla Shorts Still Aren't Convinced After Yesterday's Earnings Beat

Last night, during Tesla’s earnings call, Elon Musk had a parade. This morning, though the company beat Q2 earnings expectations, Wall Street’s shorts still want to rain on it.
Tesla reported Q2 profit of $US0.20 per share, on revenue of $US405 million.

This beat expectations for a loss of $US0.19 per share, on revenue of $US387.9 million. As a result, the stock shot up 14% in after hours trading.

But if you’re a Tesla bear, those numbers aren’t going to satisfy you.

First, you’re thinking that Tesla’s earnings beat didn’t include lease accounting, certain non-cash items, and one-time charges of $US16 million associated with the payoff of the company’s DoE loan nine years early (if it had, the company would’ve reported a net loss of $US31 million, or $US0.26 a share).

More importantly, if you’re a Tesla bear, you’re looking at how the company is growing and burning cash.

Musk said on the earnings call that he was “aspiring” to make improvements to their cash position quarter over quarter but wouldn’t give any specifics on how that would be managed.

And then there’s this, from Tesla’s letter to shareholders:

Q2 revenues were $US551 million on a non-GAAP basis and $US405 million on a GAAP basis. While deliveries

increased by 5% from Q1, overall revenues were flat due to an expected drop in ZEV credit revenue. ZEV credit Tesla Supercharger revenue fell to $US51 million this quarter from $US68 million last quarter.

Think about that: Deliveries increased, but revenue was flat due to ZEV (zero emission vehicle credits). Those are payments the state of California requires other car companies to pay Tesla to make up for their lack of an electric car model.

As other companies catch up to Tesla and try to enter that market, ZEV revenue will continue to decline. Tesla noted that it would make an impact on their Q3 gross margin at the end of their letter. The question is whether the company can increase deliveries quickly enough to catch up with that loss of revenue, especially given admitted bottle necks in its supply chain.

On the call, Tesla’s CFO Deepak Ahuja disclosed additional regulatory credits of about $US18 million.

And there’s more, namely Tesla’s ambitious plans for growth in Europe and Asia; its expansion of stores, charging stations and its own factory; and its multi-product strategy which forces the company to pour cash into research and development.

In short — cost.

This is what Bank of America analyst John Lovallo focused on when he took the floor during Tesla’s earnings call. First he asked what the company expected for R&D and SG&A in the second half of the year.

Ahuja responded that R&D expenditure would be higher in the coming quarter “than you’ve seen in the last couple of quarters,” but didn’t get specific. On the SG&A front, he said that the company was improving infrastructure globally “on a variety of fronts.” That was all.

Then Lovallo really dug in:

“If we think about cash flow for a minute… free cash flow was a use of about $US79 million in the quarter, and I think if you make the adjustments you guys were talking about… $US11 million for the DOE payment, a $US67 million increase in receivables that may not occur. That looks like the use of about a million dollars. Now, you have cap ex ramping up in the back half of the year so how are you thinking about free cash flow generation through the remainder of the year into 2014?”

Ahuja responded that in the shareholder letter he and Musk wrote that they intended to generate cash flow from operations, but that Lovallo was right in pointing out that it would be offset by capital expenditures.

“We want to be very careful about burning cash,” said Ahuja. “We want to stay as close as we can to a free cash flow position… but that’s not something we necessarily want to guide to. We’re going to manage it… and spend the cap ex where we need to to ensure we’re growing at the right pace.”

Lastly, Lovallo suggested that generally, when it comes to a new vehicle’s ramp curve after it launches, volumes tend to peak 7-8 quarters out.

Musk broke in saying simply, “I don’t think that’s going to be the case for the Model S.”

“The traditional model doesn’t apply here,” added Ahuja.

And that very well may be true, Tesla faithful, but doubts surrounding that are enough to keep the bears out of their caves.

Don’t shoot the messenger.

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