Late last week, I read fellow SA contributor Montana Skeptic’s article talking about another massive loss for Tesla (TSLA) in Q4 2017. The article did a good job of showing why CoverDrive believes the automaker could lose even more money in Q4 than it did in Q3. By adding just a few tweaks to the forecast, I could actually make the argument that things could be even worse, with Tesla potentially losing $1 billion during the three month period. Now that could blow your mind out of your head and into another galaxy, unlike the Tesla Semi event that basically served as a modified capital raise.
Tesla management has guided to “about 100,000” deliveries of the Model S and X for the year, and it is just under 73,000 through Q3. That would imply 27,000 total units for Q4, up about 1,000 or so from what was seen during Q3. During October, sales in the US and Europe were down 737 units according to current estimates by TMC and InsideEvs. How many times though have we seen Tesla come up short at the end of the year, due to a laundry list of excuses?
CoverDrive is expecting 26,300 total units sold in Q4, including 1,000 to 1,500 of the Model 3. However, should that October shortfall continue through the next two months, it would put Tesla under 24,000 for the S/X in Q4, without accounting for any changes in Asian markets or new markets like UAE / South Korea. If Tesla only matches Q3’s total sales volume, but that includes several hundred or even a thousand or two Model 3s, overall automotive revenues could decline thanks to a lower average selling price. Don’t forget, Tesla expects to further decrease Model S/X inventory in Q4, so those are going to be less than full price sales you would expect.
Tesla Energy is supposed to ramp up a little more in Q4, although this segment continues to be a massive money loser. Since we are talking about a worst-case scenario here, I’m assuming no revenues from the massive South Australia contract, the one that has to be completed in 100 days or it is free. Because the 100-day deadline doesn’t appear to be until a week into January, it is possible that these revenues might not be recognized until Q1. With a seasonal decline in solar, it’s possible that total energy revenues may not jump as much as they did sequentially from Q2 to Q3.
In the Q3 investor letter, management said that it expects non-automotive gross margins to fall to about 15% in Q4 thanks to the Model 3 mix added in. However, if Model S/X sales fall short of expectations as I detailed above, what if there also are no ZEV credit sales and we see more discounting? For every 100 basis points (1 percentage point) of gross margin, at this projected $2.32 billion revenue level for automotive, you are talking about $23.2 million in gross profit. Additionally, could the solar business be under margin pressure from the surge in polysilicon prices? Management was already expecting Energy margins to decline thanks to a greater percentage of revenues coming from the storage business that is deeply in the red.
In Q3, Tesla was well above where it had guided to for operating expenses, and spending could be even more in Q4 as the supercharger network is built out, more sales/service centers are opened, and the mobile service fleet is built out. Plus, we now have a full quarter of interest from the August debt deal, LIBOR rates are rising which impacts some of Tesla’s variable rate debt, and the dollar could rise if the Fed does hike in December. Tesla’s interest and tax expense value hit a peak of $160 million in Q2, so couldn’t it easily rise to $175 million in Q4?
Before I tell you how this all plays out, let’s just recap where we stand with income statement items under this current projection:
- Total revenues of $3 billion, up slightly from Q3.
- Automotive gross margins of 14.01%; non-automotive of 1.99% compared to non-automotive of 2.75% in Q3.
- Operating expenses of $1 billion, up from $985 million in Q3.
- Other items of negative $175 million, up from negative $135 million in Q3 which included a negative tax rate.
Throwing this all together, I get a net loss for Tesla of $837 million, before subtracting out losses from non-controlling interests. When I subtract out those of about $50 million like we saw in Q3, plus take out $0.75 in EPS for stock-based compensation, Tesla loses $3.91 per share non-GAAP. You might think that’s crazy, but that wouldn’t even be the worst estimate on the street right now. Thus, while the situation I proposed looks quite terrible, there is someone who thinks it will be even worse.
Of course, I’m trying to put together a worst-case scenario, but knowing Tesla’s history, going from an $837 million loss to a billion-dollar one, doesn’t take a lot more critical thinking. Just lower revenues a tiny bit, take another couple of points off gross margins, etc. Maybe even Tesla has more “one-time” expenses in Q4, or something like inventory write-downs or losses on the SolarCity acquisition. Those could easily push you closer to the $1 billion mark. With at least one analyst already calling for a $4 plus loss even on a non-GAAP basis, at least one expert on the street is getting close to thinking this is possible. Before you say it isn’t possible, just remember that as late as August 2016, no single analyst on the street thought Tesla would do worse than a $100 million non-GAAP PROFIT this year, and the company has actually lost $924 million just in the first three quarters of 2017.