A Closer Look At Tesla’s Q2 Earnings

A Closer Look At Tesla’s Q2 Earnings

Tesla Q2 earnings a closer look especially at ZEV credits – By Brad and Andrew Cornell

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Tesla reported Q2 earnings after the bell Wednesday and shares rose 20 points following what was widely described in the press as an earnings “beat” on both revenue, 2.8 billion compared to an expected 2.5, and a loss per share of -1.33 compared to an expected -1.82. In their letter to shareholders Tesla claimed an increase in vehicle deliveries of 53% compared to the same quarter last year. Tesla CEO Elon Musk reiterated the production schedule for the Model 3 and expected that Model 3 margins would up 25% at the end of next year.

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Closer analysis of Tesla's quarterly earnings, however, reveals the quarter may not have been as significant of a “beat” as the headlines indicated. A large portion of quarterly earnings and revenue can be attributed to a $100 million of ZEV credits. Because Tesla only makes electric vehicles, they accumulate a surplus of ZEV credits which can be sold to other auto makers. ZEV credits are government subsidy that costs Tesla nothing. Consequently, the sale of credits contributes $100 million to both quarterly revenue and profit. Without the sale of those credits, Tesla would have lost an additional 61 cents a share for quarter which would put quarterly losses at almost exactly what analysts estimated.

Tesla’s claim of a 53% increase in deliveries for the quarter doesn’t look nearly as good when comparing to recent quarters. In last year’s Q2 delivery report Tesla claimed a "steep production ramp up" resulted in high production during the last few weeks of the quarter so that many vehicles “in transit" and would be delivered and counted in the third quarter. Consequently, Q2 2016 deliveries totaled 14,370 compared to Q3 at 24,500 when both Model X and S production lines were working at full capacity. Had Tesla compared sales to Q3, the 53% increase becomes a 10% drop in deliveries. Comparing deliveries to the most recent previous quarter gives Tesla a drop of 12%. It appears Tesla is taking advantage of a weak 2016 second quarter to make their latest quarter look comparatively better.

Following the July 3rd release of their 2017 Q2 delivery and production count, Tesla’s shares dropped from 375 to 310. Several days later in press release, and Tesla once again highlighted vehicles in transit as an explanation for the lower than expected delivery numbers. The company stated that vehicles “in transit”, 3,500 in total for Q2, would be counted in the 3rd quarter delivery numbers. Adding 3500 cars to Q2 turns a disappointing 22,000 deliveries into a new quarterly record of 25,500. What Tesla didn’t tell investors in the press release was that having vehicles in transit wasn’t unique to the second quarter. The 3,500 vehicles in transit being applied to Q3 were more than offset by 4,650 vehicles in transit from Q1 that were counted in Q2. The details are shown in the graphs below which show Tesla's reported deliveries by quarter and deliveries by quarter when vehicles in transit are added to the current quarter.



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Bradford Cornell is an emeritus Professor of Financial Economics at the Anderson School of Management at UCLA. Prof. Cornell has taught courses on Applied Corporate Finance, Investment Banking, and Corporate Valuation. He is currently developing a new course on Climate Change, Energy and Finance. Professor Cornell has published more than 125 articles and four books on a wide variety of topics in applied finance. Professor Cornell is also a managing director at BRG where he heads the practice on Climate Change, Energy and Finance. In addition, he is a senior advisor to the Cornell Capital Group and to Rayliant Global Advisors. In both capacities, he provides advice on fundamental investment valuation.
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