July 24 2020 - Tesla May Be Using Questionable Accounting Policies To Show Profitability

d1b33897.jpg Summary

Two questionable accounts recognition practices cast doubt on Tesla's profitability during the just announced quarter.

Tesla has muddled the previously outstanding accounts receivables issue with yet another new answer which again sounds questionable.

We do not find Tesla financials to be believable.

This idea was discussed in more depth with members of my private investing community, Beyond The Hype. Get started today »

Tesla (TSLAfinancials and commentary, as always continue to be highly questionable. The stock continues to be unresponsive to reality and as such, this is not an investment thesis in Tesla.

The profitability, in addition to the usual shenanigans, as we show below, was a completely manufactured affair. The biggest driver was a 8M windfall from regulatory credit sales.

Tesla had about 0M of regulatory credit in 2019 and is guiding for about twice that amount for 2020. However, Tesla has already recorded about 0M in credit sales – this is on no increase in unit sales. Considering that Tesla’s sales to China are now an increasing percentage of the mix and these sales do not generate regulatory credits (at least not meaningful or comparable to what the company gets in the US and Europe). Math suggests that it is not possible for Tesla to have earned these credits in the current quarter. It seems highly likely that these are credits from a future period, and it would not be surprising if it's a related party transaction.

How is this possible?

Tesla’s disclosure on the subject sheds some light. It says:

"We recognize revenue on the sale of automotive regulatory credits at the time control of the regulatory credits is transferred to the purchasing party as automotive revenue in the consolidated statement of operations."

The language is vague and permits the sale of credits that have not yet been realized. It appears that Tesla is likely selling regulatory credits from the future and presenting them as revenues in the current quarter. If so, this would not be an acceptable accounting policy.

In addition to this 8M, Tesla claimed that it recognized M of deferred revenue for FSD, or Full Self Driving, with the release of stoplight and stop sign recognition and response. However, this too is highly questionable. Tesla has not delivered any technology that can be meaningfully considered “Full Self Driving.” In fact, the company emphasizes every time there is a Tesla Autopilot crash that the driver is fully responsible for the operation of the car. The company claims the impact of this recognition on the P&L is less than half of the M due to costs associated with FSD computer retrofits in the field. Let’s call it M.

Just between these two questionable accounting items, we are at 0M in profitability. That is far above the 4M GAAP profitability and about the entirety of the claimed 1M non-GAAP profitability.

Now, let us revisit Tesla’s Accounts Receivables issue for which the company has so far provided varied and changing responses - none of which have stood the test of time. This quarter, the company provided yet another new explanation.

The company now claims that less than 30% of its receivables are associated with new car sales. The company says 40% of the balance is attributable to payment terms on regulatory credit sales and statutory EV incentive programs. And finally, the remaining 30% of accounts receivables the company claims is due to payment terms associated with financing and enterprise customers and settlement timelines for certain methods of cash payments and geographic mix of its deliveries. The company claims that the associated receivables are impacted by how many cars are delivered in the final weeks and days of the quarter (gone is the quarter closed on a weekend explanation).

We find each one of these explanations questionable.

  1. The 30% AR with new car sales is high given that Tesla makes customers prepay prior to delivery.
  2. The 40% AR for regulatory credits means that about 4M of AR is from regulatory credits. But this quarter’s regulatory credits are 8M. Does this mean that about 8M of credits have remained unpaid from last quarter? Why is that?
  3. The remaining 30% also raises concerns. Are 30% of Tesla sales to financing and enterprise customers? Highly unlikely. It appears that much of the remaining 30% could be bulk sales or channel stuffing.

The bottom line is that the company’s accounts receivable narrative continues to be not believable and raises more questions than it answers.

Between the questionable revenue recognition tactics and ongoing accounts receivable questions, we find Tesla’s financial narrative to be not an accurate representation of the company’s affairs.

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