As I write this, shares of Tesla Motors Inc. (NASDAQ:TSLA) are on a tear. Up over 20% on news of its first quarter results, the market is doing what the market does–go crazy.
I spent all of about 60 seconds looking at Tesla’s 2012 year end financial statements and its first quarter 2013 results. That’s all it took to know that the market will eventually feel some pain from Tesla stock. Tesla is a perfect example of the difference between a great company and a great investment. Here’s why.
When evaluating any company, the first place I go is to the balance sheet. Yes, the income statement gets all the news, but it’s the balance sheet that keeps score. For Tesla, I don’t like what I see.
Its 2012 balance sheet reports that its current liabilities (debt due within 12 months) actually exceed its current assets (ones that will be converted to cash within 12 months). As of December 31, 2012, the company reported about $525 million in current assets, compared to nearly $540 in current liabilities. That gives Tesla a Current Ratio (current assets / current liabilities) of less than 1. Ideally, I look for a current ratio of at least 2.
In a CNN article, Peter Valdes-Dapena reported that Tesla is “financially healthy thanks to good sales of the Model S plus deals it’s reached to supply components to major automakers like Toyota and Daimler as well as sales of electric car credits, earned under California regulations, to other automakers that sell fewer electric cars.” While these deals may prove profitable, I’m not ready to declare the company “financially healthy” just yet.
First Quarter 2013 Results
In a letter to shareholders disclosed yesterday, Tesla Chairman & CEO Elan Musk and CFO Deepak Ahuja cheered the company’s results:
Tesla reached profitability in the first quarter of 2013 for the first time in our ten year history. We exceeded our own targets for deliveries, significantly expanded gross margin, and improved execution throughout the company. Excluding non-cash warrant and stock option items, we generated a profit of $15 million. Including those factors, our GAAP profit was $11 million. Importantly, we achieved profitability despite the benefit of a one-time accounting gain related to the DOE warrant.
More than anything, this description of the company’s results concerns me. Here’s what the above doesn’t tell you (you have to dig into the letter to get these details):
- Tesla actually lost money last quarter from operations. $5.5 million to be exact.
- While it’s true that the company did turn a profit even without the gain related to the DOE warrant, they didn’t turn a profit if you also exclude the “$6.4 million favorable foreign currency exchange impact.”
- Finally, I wonder how much of its net income benefited from deferred tax assets resulting from past losses.
Tesla had a good quarter as compared to prior period results. But it still lost money from operations, and I would have preferred management to have acknowledged this up front. Such candor would have given me more confidence in management.
While I’ve not performed a detailed analysis, I’m concerned about the stock options and stock-based compensation the company is issuing. When a company treats its stock as a piggy bank for employees, public shareholders suffer as their ownership stake gets diluted. I’m not suggesting Tesla has gone overboard, but it did have this to say in its 2012 Form 10-K:
A majority of our total outstanding shares are held by insiders and may be sold in the near future. The large number of shares eligible for public sale or subject to rights requiring us to register them for public sale could depress the market price of our common stock.
It reported 25 million options as of December 31, 2012. If these were to be exercised, the impact on share price would be significant.
It’s Worth How Much?
Tesla reported net worth as of March 31, 2013 of about $168 million. If you exclude property and equipment, the company’s net worth is wiped out and then some. Yet at current prices, Tesla is valued at more than $7 billion (yes, billion with a ‘b’).
We’ve seen this story before, and it doesn’t end well for investors.