Yoni Hessler of BGR gets so much wrong today in an article trying to argue that Tesla is not losing money on their cars that the sheer audacity of the claim the Model S is profitable is astounding.
Let's start with the assertion that the Model S has margins that are "some of the best across the entire auto industry." Gross margins, what is left over after your manufacturing costs are deducted, are only a piece of the puzzle.
Let's start with the assertion that the Model S has margins that are "some of the best across the entire auto industry." Gross margins, what is left over after your manufacturing costs are deducted, are only a piece of the puzzle.
Tesla's margins are not high enough to support their corporate and selling structure. For instance, Tesla spends 18.8% of every dollar in revenue on SG&A (Selling, General, and Administration) vs GM who spends 7.5%. Why? Scale. GM is able to spread their fixed costs over an exponentially larger volume. For a low volume startup like Tesla, they need gross margins to be almost double what they are to be self sustaining. They are not even close to where they need to be.
It's a good thing I wasn't sitting at my favorite Subway sandwich shop enjoying a coke with a footlong sub when I read this next part because my uncontrollable burst of laughter could have been painful.
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...the authors of the story simply looked at all of Tesla’s operating expenditures, including development costs, and spread it out across the volume of cars Tesla happened to sell during the quarter. In effect, the authors were examining the profitability of each Tesla through the prism of the company’s full gamut of operational expenditures.
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Yoni accuses the authors of the original article of performing some kind of odd contortion to skew the data against Tesla. Nothing could be further from the truth. In manufacturing accounting, we always measure costs and expenditures in terms of the related volume. Everybody does it to account for volume variances. For example, let's say that your shipping costs were down 10% compared to the previous quarter. Great right? Well, what if your units shipped were down 20%. Not so great since you actually had higher shipping costs per unit. The original authors of that Reuters article didn't do any kind of voodoo math to make Tesla look bad. Tesla looks bad by commonly accepted accounting principles, and there's no hiding it.
Next, Yoni copies a comment from someone at Reddit who knows nothing about generally accepted accounting principles.
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An astute comment on the topic from Reddit reads:
There is a big difference between losing money for every car sold and spending more money than you make. Considering the profit margin on the Model S is over 25%, Tesla is actually in the latter category. Making the Model S is profitable. Rapidly expanding into a major car manufacturer while making the Model S is not.
*Edit: look at it this way. You want to open a McDonalds. It will cost you $500,000, which you borrow from a bank. The first year you bring in a million dollars in revenue, and make $100,000 profit from sales. However, you borrowed and spent $500,000 opening the store, which means you sort of lost $400,000 that first year.
Would Reuters say you lose $2.00 for every Big Mac sold? I guess so.
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In the example cited above, if you borrowed and invested $500,000 to open a McDonalds this would have been capitalized and not hit the income statement. Reuters correctly leaves this out. Accounting principles mandate that you only match the expenses incurred to produce the units sold on the income statement. That's why the whole concept of capitalization exists. To prevent a situation like the example that Yoni cites above.
It is often a problem for new companies that are quickly expanding to have a negative cash flow because they are always in the position of buying more materials than they are selling. That's how you end up with new businesses that report a profit begging for loans or suddenly going bankrupt. Tesla is not even at this lesser level of trouble, they are simply outright bleeding cash AND unprofitable.
Any way you slice it, Tesla is a dead man walking. I wouldn't touch that company with a ten foot pole. I could go on and on with their problems and perhaps I will sometime in the future.
It's a good thing I wasn't sitting at my favorite Subway sandwich shop enjoying a coke with a footlong sub when I read this next part because my uncontrollable burst of laughter could have been painful.
*************************************************************************************
...the authors of the story simply looked at all of Tesla’s operating expenditures, including development costs, and spread it out across the volume of cars Tesla happened to sell during the quarter. In effect, the authors were examining the profitability of each Tesla through the prism of the company’s full gamut of operational expenditures.
*************************************************************************************
Yoni accuses the authors of the original article of performing some kind of odd contortion to skew the data against Tesla. Nothing could be further from the truth. In manufacturing accounting, we always measure costs and expenditures in terms of the related volume. Everybody does it to account for volume variances. For example, let's say that your shipping costs were down 10% compared to the previous quarter. Great right? Well, what if your units shipped were down 20%. Not so great since you actually had higher shipping costs per unit. The original authors of that Reuters article didn't do any kind of voodoo math to make Tesla look bad. Tesla looks bad by commonly accepted accounting principles, and there's no hiding it.
Next, Yoni copies a comment from someone at Reddit who knows nothing about generally accepted accounting principles.
*************************************************************************************
An astute comment on the topic from Reddit reads:
There is a big difference between losing money for every car sold and spending more money than you make. Considering the profit margin on the Model S is over 25%, Tesla is actually in the latter category. Making the Model S is profitable. Rapidly expanding into a major car manufacturer while making the Model S is not.
*Edit: look at it this way. You want to open a McDonalds. It will cost you $500,000, which you borrow from a bank. The first year you bring in a million dollars in revenue, and make $100,000 profit from sales. However, you borrowed and spent $500,000 opening the store, which means you sort of lost $400,000 that first year.
Would Reuters say you lose $2.00 for every Big Mac sold? I guess so.
*************************************************************************************
In the example cited above, if you borrowed and invested $500,000 to open a McDonalds this would have been capitalized and not hit the income statement. Reuters correctly leaves this out. Accounting principles mandate that you only match the expenses incurred to produce the units sold on the income statement. That's why the whole concept of capitalization exists. To prevent a situation like the example that Yoni cites above.
It is often a problem for new companies that are quickly expanding to have a negative cash flow because they are always in the position of buying more materials than they are selling. That's how you end up with new businesses that report a profit begging for loans or suddenly going bankrupt. Tesla is not even at this lesser level of trouble, they are simply outright bleeding cash AND unprofitable.
Any way you slice it, Tesla is a dead man walking. I wouldn't touch that company with a ten foot pole. I could go on and on with their problems and perhaps I will sometime in the future.
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