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Why Tesla's Beat on Profits in Q2 Isn’t Enough

In this Market Foolery segment, host Chris Hill and Motley Fool One's Bill Mann discuss the current state of affairs at the disruptive electric-car company, which exceeded expectations in its second-quarter report, but which has set an extremely high bar for its future performance. Mann -- who owns a Tesla (NASDAQ: TSLA) and loves it -- is a bit concerned about the report. Among other things, deposits for the Model X and Model S are down, and it's possible the company will need to sell more shares soon. But he gives his critiques with a huge grain of salt.

A full transcript follows the video.

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Chris Hill: Let's start with Tesla. Second-quarter profits, higher than expected. The stock is up about 7% this morning. Where do you want to start with this? Eventually I want to talk about the conference call and Elon Musk and some of the comments he made. But I think for anyone who's watching Tesla and is thinking, how are they doing on production, they at least seem to be moving in the right direction.

Bill Mann: I think I need to give my standard disclaimer about Tesla. One, I'm an owner of the car and I think it's the greatest thing since sliced bread. So I love with they're doing. Two, as a stock analyst, I doubt that there's a company that I have ever been so consistently wrong about as Tesla. So whatever it is that I'm saying, if you want to play the opposite game, I will not take it personally at all.

Hill: Duly noted.

Mann: At some point, you just have to say, that guy ... it's not even that he doesn't know what he's talking about. He knows what he's talking about, but what he's talking about is the exact wrong thing.

Hill: OK, duly noted.

Mann: I'm a little concerned about a lot of things from the Tesla earnings report. For example, the deposits that they have on the X and the S, which are $5,000 deposits versus the $1,000 for the Model 3, were down more than 60%. Now some of that obviously is the clearing of the backlog. When you deliver a car, that's minus one in terms of deposits. But for a growth company, having those products, which are still very important products for them, to have those numbers be that much lower is kind of concerning to me, particularly since, when you look at the Model 3, which is not in production yet, there was plenty of growth there, but those deposits were $1,000 a piece. So in total, they went from $660 million in customer deposits to a little over $600 million. And that's cash that they use; it's float. So yes, there are lots of things to like about the Tesla earnings report, but it's very clear to me that they're going to need to sell equity sometime soon. So maybe it's absolutely fabulous that the stock is up, because when you sell equity, you would like it to be high.

Hill: You just went to my first question, which is, they have this float, but they clearly need to raise money. And one of the things Elon Musk said on the call was, no, we're not going to do another equity raise, which suggests that maybe they're going to do a bond or something like that. But I think as you said, that's one of the concerns, where it's like, we've done the math; you guys need more money. And they know that.

Mann: They know it. They've increased their credit line substantially. That gives them the cash cushion that they need. But as we're going to learn when we talked about Teva in a few minutes, debt has a real risk to it. So yeah, I think long-term, the thing that you need to realize is that equity is, generally speaking, especially when you feel like you can sell your stock at a pretty high price, cheaper than debt. Equity is the thing if you need cash. And I just don't see how they don't need substantial amounts of cash based on what their assumptions are for how they'll grow, and for the actual cash dynamics of their business right now.

Hill: There are other companies over the last 25 years that have left very experienced investors scratching their heads in terms of the valuation. Amazon is certainly one of them. In the case, though, of Tesla, I think part of what is head-scratching, for lack of a better term, is that Elon Musk -- unlike, by the way, Jeff Bezos, just to keep that analogy going -- does not appear to be someone who believes in the old motto of under-promise and over-deliver. He's very, very direct about the promises that he's making in terms of the production targets they're going to hit, whether it's "We're going to hit 500,000 vehicles a year," and most recently in this call it's 10,000 vehicles a week by the end of 2018. At some point, doesn't that have to come back to haunt him if he doesn't hit it?

Mann: No, because he's tended not to hit them all along. The Model 3, which, I think, if you want to be excited about something, the reviews that are coming out on the Model 3 in terms of the usability of the car are absolutely fabulous. They're fantastic. To me, the success of the Model 3 -- now, I'm completely ignoring the question you actually asked me -- I'll circle back around to it. They've been able to gin enough excitement up by really delivering on the products themselves. The products, even when they're hyped up, tend to over-deliver. I think people keep giving them the ramp that they need to get there. So even though he says, and I think those very public, very audacious targets, he's setting because he wants to keep pressure on his people. I really think that's what it's about. So I hope there aren't too many investors out there at this point who say, "He said X; therefore, if he doesn't say X, he's failed." Because I think he goes out there and pretends that the audacious is the expectation.

Bill Mann has no position in any stocks mentioned. Chris Hill owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Tesla. The Motley Fool has a disclosure policy.