Montana Skeptic left Twitter this week after Elon Musk called the family office where he worked in the hope of speaking to his boss, then threatened to sue. After this drew attention as the sort of thing leaders of well run companies do all the time, Tesla's Dave Arnold gave reporters a statement which was in no-way vindictive and designed to further annoy a publicity shy employer:
[Montana Skeptic's] employer, is a longtime Tesla supporter and was one of the first to purchase a Model S. When executives at [his place of employment] became aware of [Montana Skeptic's] actions, [Montana Skeptic] volunteered to stop and did.“ Here’s the number for [his employer's] office if you’d like to confirm: [redacted].
Who knew purchasing a car gives the manufacturer permission to identify the buyer in its public relations efforts? Guess we should read the small print.
We already looked at the broader context for Musk, whose erratic behaviour is starting to make his position at the company he co-founded look untenable.
Lets dwell instead on the analysis of Montana Skeptic, as contributors to Seeking Alpha cannot delete their posts in the same way they can shut down a Twitter account.
In March there was ”Just Say 'No' To Tesla's Misleading Margin Metric". The post looked at gross margin, a metric which Tesla tends to focus on in its financial reporting.
Simply the difference between the selling price of a product, and the cost of making it, the profit margin is not directly comparable to that of other automakers, because Tesla does not sell its cars at a discount to a network of independent dealers:
The greatest trick Tesla management ever performed was to enchant the firm’s analysts into focusing on two meaningless metrics: Deliveries and gross margin. The deliveries metric is useless because the more cars Tesla delivers, the more money it loses. In fact, lately, the more cars it delivers, the more money it loses per car . Vincent Wolters recently wrote a fine analysis showing that the greatest driver of Tesla’s losses are its costs under the heading of Sales, General & Administrative (commonly, SG&A). For years, Tesla investors have expected the firm’s losses to shrink as its deliveries increase. In actual fact, the opposite has happened and, as the Wolters details, the opposite is likely to continue to happen.
On gross margins, carmakers typically discount their cars when selling to dealers, so their revenues and gross margins are lower than if they used Tesla's integrated approach:
Let's do the math. Imagine Ford (NYSE:F) has automotive revenue (let’s call it AutoRev) of $3 billion and costs of goods sold (COGS) of $2.5 billion. Our formula is: Gross Margin = (AutoRev – COGS) / AutoRev Thus, Ford would have a gross margin of 16.67% ($3.0 billion minus $2.5 billion is $0.5 billion, which divided by $3.0 billion and expressed as a percentage is 16.67%). (In actual fact, Ford’s gross margin last year – 15.34% – was pretty close to that number.) Now, imagine Ford owned its dealerships. In that case, of course, Ford would not discount its cars to the dealership network, and its automotive revenue would be $3.3 billion. Its gross margin would rise to 24.24%. Well, you ask, does it not all work out the same in the end? Yes, it does, but not for gross margin purposes. Tesla pays the extra 10% in operating its own distributor and service network, but it allocates that cost to SG&A rather than COGS. So, the cost implicit in Ford’s gross margin calculation is excluded from Tesla’s gross margin calculation
He also points out Tesla doesn't include research and development expenses in the cost of goods sold, as other US automakers do. Ford, for instance accounted for $8bn of engineering, research, and development expenses in its cost of sales last year. In Europe, VW capitalises some R&D expenses, but those not capitalised are also included in the cost of sales line. CAD designs for the wheel arch are not an airy-fairy operating cost.
He also made a good point about supercharger costs, which undercuts a little our idea that a rival automaker would not let Tesla go bust. Commitments to free supercharging are an open ended liability.
Tesla allocates about half its Supercharger costs to SG&A on the theory that those costs are in the nature of a marketing expense. This practice is, at best, questionable. Many Tesla cars were sold with free supercharging... Moreover, if Tesla were to shut down its sales operation tomorrow, it still would need to maintain the Supercharger network for so long as there are Tesla cars on the road.
We should mention we don't know the exact allocation of Supercharger costs, all we could find is a line in the 2016 financial year's 10-K :
We allocate Supercharger related expenses to cost of total automotive revenues and selling, general, and administrative expenses. These costs were immaterial for all periods presented.
Montana Skeptic then updated those figures in a later post, having been challenged on some points including the size of the discount at which dealers buy cars from automakers, so moved to use a more realistic 3.5 per cent rather than a 10 per cent. The result was still a substantially more conservative assessment than that of Tesla:
On gross margin in general, the point is really this is not a good metric for a company losing money overall on every delivery, each one of which creates fresh servicing, warranty and potential autopilot litigation related liabilities.
The breakdown of analyst recommendations, according to Bloomberg, is just 10 buys, 11 holds and 11 sells. The consensus forecast for the second quarter is a gross margin of 15.1 per cent, net losses of $640m, and net debt of $8.8bn, an increase of $0.8bn in three months.
Ahead of Tesla's release of those figures Wednesday (when we'll have a special Market's Live session running), we'll take a look at the other arguments of Montana Skeptic in a series Streisand Effect posts. Feel free to drop us a line to enlarge upon or challenge the analysis in them, or do so in the comments below.
We'll update this post as well if Tesla has comments on Montana Skeptic's work.
Update - we've added details of Montana Skeptic's response, and the change to assumptions on dealer discounts.
Related links: Streisand Effect – Wiki What's the Chinese for Streisand Effect? - FTAlphaville