Published on October 29th, 2019 | by Frugal Moogal
October 29th, 2019 by Frugal Moogal
I published an article in my TSLA FUD series on October 23rd about what I was hoping to see from the Tesla 3rd quarter shareholder call. I stated before any earnings were released that I was far less concerned about the actual per-share earnings and much more interested in a set of bullet points regarding where Tesla was with various upcoming projects. Later that day, Tesla reported earnings and they were widely regarded as a home run by analysts.
I don’t necessarily consider myself a stock analyst, but I found myself in a bit of an odd position, and that is to say that I simply wasn’t really sure what to think of the earnings. The numbers definitely looked good, but there were other things that I wasn’t so sure about. I’ve since listened to the earnings call three times, read through the transcript, listened to the solar roof V3 details, read a bunch of FUD and bull statements, and figured that if I waited much longer to write this article, no one would care, so here I am.
While I’m going to go reply to my original article point by point in a moment, I’ll jump to the conclusion quickly first: This was one heck of a quarter for Tesla.
Despite that easy conclusion, it might be worth reading the rest, because I came to realize that the reason it took me so long to fully form that opinion was that a number of things I expected didn’t happen, and a number of things I didn’t expect happened instead. I had to take a deeper look at what I was looking at, and figure out how they balanced in my head.
As usual, I think it’s important that I mention that I own 15 shares of stock in the company, and while I’m open to increasing that position, I don’t intend to do so at current prices for a bit longer. Oh, and if you’re taking stock analysis from only a single voice on the internet, you’re not doing it right, so definitely don’t buy shares based on just this article. Without further ado, let’s go.[embedded content]
To try to organize this as best as possible, I’m going to go point by point using the same topics that I discussed in my original article before earnings were reported, but I’m going to start with what the part of the earnings report that I felt mattered the least to me — the actual earnings.
Tesla reported profits of $1.91 per share, whereas the Wall Street consensus was expecting a loss of $0.15 per share. I personally don’t put too much into a single earnings report, as earnings may be moved and shifted to make a single quarter look better or worse — followed by the next quarter suffering the rebound of that and looking worse, there are a number of things here that I found worth highlighting that I don’t feel have been overly reported on already:
- With the release of Smart Summon, Zachary Kirkhorn (Tesla’s CFO) noted on the earnings call that they were able to recognize $30 million of deferred revenue thanks to the release of that feature, compared to the $500 million of deferred revenue that Tesla noted was tied to Autopilot and Full Self Driving in their earnings letter. Those revenue figures are fascinating, and only recognizing $30 million bodes well for this to be a recurring revenue stream toward profits.
- Along with the above, deferred revenue had a massive jump, from $884 million at the end of Q2 2019 to $1.045 billion at the end of Q3. Including the recognized earnings above, this indicates a $191 million increase that otherwise would have been put into this account. The previous increases were $121 million from Q1 2019 to Q2 2019 and a $131 million increase from Q4 2018 to Q1 2019. Even more interesting, since Model Y deposits would also be in this number, is that it means that Tesla recognized significantly more money in deferred revenue this quarter than it did after the Model Y unveiling. To put it mildly, I find this number particularly stunning.
- Operating expenses went down significantly, from $1.088 billion in each Q1 2019 and Q2 2019 to $930 million this quarter, a decrease of 15%. I highlight this not to make any particular point about it, but simply because this line is of extreme interest to me next quarter to see how Tesla can manage expenses here.
- Automotive revenues from regulatory credits were $134 million. This is interesting to me, as while it bounces around a lot, it is lower than the $152.75 million average over the prior four quarters. Even more interesting, Q2 2019, which is in that average, recorded only $111 million in credits. This was mentioned in the call, that they don’t manage for them and they are purely incidental, but it seems like there is definitely more upside here to future credit sales than downside.
All in all, the earnings were extremely surprising, and none of it seemed to be pointing to particulars that can’t be repeated. In fact, perhaps the most stunning thing about the earnings to me is that it almost seemed like Tesla was being conservative this quarter on a number of fronts.
Having said all of that, I’ll really be watching this in Q4 2019. If Tesla can keep this going, the company will be on extremely solid footing.
What I Was Looking For
Now that topics I wasn’t really focused on are out of the way, let’s look at what I was looking for. I’m going to do these as bullet points for each, with brief commentary:
- Gigafactory 3 Update — I was surprised Musk noted that Gigafactory 3 is currently only doing trial production, and that they are hoping to hit volume production in a few months. It seems they are managing expectations better than before, and I would expect there will be no issues reaching volume production before the next earnings call.
- Solar Business — I was surprised to see that solar deployments only climbed to 43 MW from 29 MW last quarter, as that means their Q1 2019 deployments were still larger. Compared to 93 MW of deployment in Q3 2018, this is still a significant drop-off. Having said that, I was equally surprised to hear about their plans to ramp the solar roof to 1,000 roofs per week. Assuming the average solar roof would provide about the same as the mid-range Tesla Solar Panel system (7.6 kW), if Tesla reaches that capacity, that would mean an additional 98.8 MW of solar deployed each quarter. This still wouldn’t reach SolarCity’s largest quarters of deployment, but would be a huge boost in deployment, and my rough back-of-the-napkin math shows an increase in revenue of nearly $400 million per quarter (assuming the average roof would be a $30,000 install price) for Tesla. In short, this was a surprise disappointment in the earnings for me, followed by a potentially huge positive for the future.
- Insurance Business — I found the short exchange between Musk and Kirkhorn on the insurance product to be particularly interesting. It seems to me like Tesla is using the insurance product as less of a profit center and more of a consumer benefit to people who own Tesla vehicles. From some quick and dirty research, it seems that insurance companies spend about 3–5% of their revenue on advertising, and they seem to gross around 5–7% in profits. Without this overhead, Tesla operates at a significant advantage, and legacy insurance would need to potentially keep rates high — losing high-value customers with extremely safe vehicles — or accept much lower profit margins on Tesla cars, with those companies having to spread those costs to other cars. Fascinating plan.
- Battery Production — I was surprised that almost nothing addressed battery production, beyond that the second facility being built current at Gigafactory 3 is for battery production.
- Model Y Production — I was not surprised that Tesla moved up the anticipated start of Model Y production, and I was pleasantly surprised that they seemed to really hedge their bets on the statements about Model Y margin. I expect that Model Y margins could be significantly higher than Model 3 margins when they incorporate all of the things they learned from that production.
- Tesla Semi — Almost nothing was said about the Semi other than a note that they intend to start limited production in 2020. It was a disappointment to not hear more about this, as I think the publicity it will get will be absolutely massive.
- Grid-Based Battery Backup — We only got tiny pieces, but the pieces we got I thought were huge. Storage deployed was up to 477 MWh, a 15% increase from Q2 and nearly doubling the capacity addition from one year ago. Musk and Kirkhorn noted that the rolling blackouts in California are going to make the Powerwalls significantly more in demand, and the letter noted that Megapack 3 MWh batteries will start to be delivered next quarter. Revenue from Tesla Energy is lumped in with solar, so it’s hard to know just how much additional revenue can be made here, but if they manage to continue to have massive storage increases each quarter, this truly could be another huge stream of money.
- Tesla Truck Timeline — I wasn’t overly surprised to hear that nothing was really revealed here, other than that Musk is now referring to it as the Cyber Truck. I’m interested in the reveal, and I hope that they are looking at production sooner than later.
Like I said at the beginning, it took me a while to really figure out what my full feelings here were. The earnings themselves blew away everyone’s expectations, but the letter and call were filled with fascinating details that updated and answered many of the questions about Tesla’s future, filling in so much more of the story.
I was originally put off by what I felt was a lack of meaningful growth in the solar business, the Tesla insurance strategy, the lack of information on Tesla moving battery production in-house, no Tesla Semi updates, and no timelines for the Tesla Truck.
The Friday launch (or re-launch?) of the Solar Roof product and my rethinking of the Tesla insurance strategy helped to answer questions that I kept coming back to on those topics. Thinking about battery production further, I can understand why Tesla wouldn’t want to say too much until it is ready to roll, as angering Panasonic at this point could be a huge issue. And, as mentioned, the lack of Tesla Truck information didn’t surprise me.
Which really means, at the end of the day, everything on this earnings call to me was a home run with the exception of the Tesla Semi. And, while I think that the Tesla Semi will be a critical product for the future of sustainable transport (a topic that could be deserving of its own article one day), I get that it’s not a product that analysts are looking at right now.
Ultimately, as I’ve taken more time to let this all set in, an article that started with me typing about how much I was surprised we didn’t get information on has evolved into me being far more impressed with this quarterly earnings report today than I was when I first heard it four days ago. If execution remains strong, I anticipate this is the beginning of another huge period of growth for Tesla in the next few years. And I’m extremely excited to be along for the ride as a shareholder.
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