I think the discussion about how profitable Tesla actually is when you exclude capex is very interesting. On the bullish side I often hear people here saying that if Tesla just stopped investing so heavily in future growth then they would be very profitable and the bears obviously sing a different tune, which I have come to agree more with after looking the numbers through, but perhaps I am mistaken. I would like to hear some of the bulls chime in on exactly how they can come to the conclusion that Tesla is profitable on an operational basis today. I think that a good starting point, when trying to estimate a company's profitability, is looking at how the equity is moving as that is really a summary of all the assets minus the liabilities. So when Tesla invests money into supercharges or the gigafactory that same amount should show up on the balance sheet as an asset and therefore not influence the accuracy of using equity as a measure of operational profitability.
Financial Statements for Tesla Motors Inc - Google Finance
As you can see Tesla lost around $90M of equity in each of the first 2 quarters of the year. In the third quarter equity got a boost from the $740M raised, if you cancel that out you end up with around the same quarterly equity loss as the first 2 quarters, $95M. So on an operational basis Tesla did lose $7.3k per vehicle sold in the last quarter (based on 13000 produced). Now you can argue that R&D spend on the X is muddying up the balance sheet analysis as that intangible value doesn't show up as an asset and that does make sense so that takes us to a forward looking estimate that is ofcourse more important than hindsight.
Say Tesla sells 20k cars per quarter next year at an ASP of $100k, that is $2B in revenue per quarter, at a gross profit margin of 28% (up 3%points from this quarter due to efficiency gains). That is $560M in gross profits per quarter. R&D spend has been around $180M for the last 2 quarters, going forward they will obviously have less cost associated with the X, but now they will start working on the 3 to get it ready as soon as possible (can't have the same launch slippage as the X here), and I think R&D cost associated with battery storage will go up too so I am going to assume a slight uptick to $200M/quarter for 2016.
SG&A has ballooned to a whopping 25% last quarter, I assume there has been some cost associated with the X launch, on average over 2015 SG&A have been 22.4% of revenue (GAAP). Last year the number was 18.9%. Lets assume 18% for 2016 due to efficiency gains as sales does ramp up very significantly. I do think though that SG&A will always be high for Tesla when compared to the industry due to the nature of their business. Tesla owns all its "dealerships" themselves which adds some SG&A cost but lets them sell at a higher profit margin. Tesla also needs to expand and maintain their supercharger network which is a necessary expense that doesn't show up in COGS, not sure if it's in SG&A or somewhere else. Anyhow that 18% in SG&A cost comes to a quarterly expense of $360M. In total $360M+$200M = $560M in operational expenses for 2016 which happens to line up with the $560M in gross profits. So if my numbers hold up Tesla will be break even on an operation basis next year with 80k S/X sold. Sure if Tesla can manage to cut cost very significantly then they will be profitable but I just don't find this likely with the expansion plans they have in mind and the nature of Tesla's cost structure, I think it's more likely that any profitability will come from an increase in profit margin beyond the 28% I assumed, but that doesn't seem very likely either as the S still hasn't gotten above 25% after being in the market for this long.
So clearly I'm not very bullish on Tesla's profitability in the near term, but I still believe they will be in the long run. The auto industry is just incredibly capital intensive and demands economies of scale to be competetive. Even breaking into to the industry and growing this fast is a great accomplishment which is one of the reasons why I still believe Tesla has what it takes to achieve that economies of scale in time, I just think it will take a lot of capital injections to get there (which unfortunately means more dilution), especially when you consider Tesla Energy too on top of the capex requirements for the auto expansion.
Financial Statements for Tesla Motors Inc - Google Finance
As you can see Tesla lost around $90M of equity in each of the first 2 quarters of the year. In the third quarter equity got a boost from the $740M raised, if you cancel that out you end up with around the same quarterly equity loss as the first 2 quarters, $95M. So on an operational basis Tesla did lose $7.3k per vehicle sold in the last quarter (based on 13000 produced). Now you can argue that R&D spend on the X is muddying up the balance sheet analysis as that intangible value doesn't show up as an asset and that does make sense so that takes us to a forward looking estimate that is ofcourse more important than hindsight.
Say Tesla sells 20k cars per quarter next year at an ASP of $100k, that is $2B in revenue per quarter, at a gross profit margin of 28% (up 3%points from this quarter due to efficiency gains). That is $560M in gross profits per quarter. R&D spend has been around $180M for the last 2 quarters, going forward they will obviously have less cost associated with the X, but now they will start working on the 3 to get it ready as soon as possible (can't have the same launch slippage as the X here), and I think R&D cost associated with battery storage will go up too so I am going to assume a slight uptick to $200M/quarter for 2016.
SG&A has ballooned to a whopping 25% last quarter, I assume there has been some cost associated with the X launch, on average over 2015 SG&A have been 22.4% of revenue (GAAP). Last year the number was 18.9%. Lets assume 18% for 2016 due to efficiency gains as sales does ramp up very significantly. I do think though that SG&A will always be high for Tesla when compared to the industry due to the nature of their business. Tesla owns all its "dealerships" themselves which adds some SG&A cost but lets them sell at a higher profit margin. Tesla also needs to expand and maintain their supercharger network which is a necessary expense that doesn't show up in COGS, not sure if it's in SG&A or somewhere else. Anyhow that 18% in SG&A cost comes to a quarterly expense of $360M. In total $360M+$200M = $560M in operational expenses for 2016 which happens to line up with the $560M in gross profits. So if my numbers hold up Tesla will be break even on an operation basis next year with 80k S/X sold. Sure if Tesla can manage to cut cost very significantly then they will be profitable but I just don't find this likely with the expansion plans they have in mind and the nature of Tesla's cost structure, I think it's more likely that any profitability will come from an increase in profit margin beyond the 28% I assumed, but that doesn't seem very likely either as the S still hasn't gotten above 25% after being in the market for this long.
So clearly I'm not very bullish on Tesla's profitability in the near term, but I still believe they will be in the long run. The auto industry is just incredibly capital intensive and demands economies of scale to be competetive. Even breaking into to the industry and growing this fast is a great accomplishment which is one of the reasons why I still believe Tesla has what it takes to achieve that economies of scale in time, I just think it will take a lot of capital injections to get there (which unfortunately means more dilution), especially when you consider Tesla Energy too on top of the capex requirements for the auto expansion.
