Why Tesla's Quarterly Earnings Matter Less Than You Think

Electric-car maker Tesla Motors (NASDAQ: TSLA  ) shocked investors yesterday when it reported earnings, which sped past analyst estimates. Shares of Tesla were trading down ahead of the earnings call, only to surge as much as 15%, to $155.85, on the news in after-hours trading. At a glance, the results can be confusing. That's because Tesla included both GAAP and non-GAAP figures as a way to show sales under the company's new leasing program.

The California-based automaker posted a profit of $0.05 a share on a non-GAAP basis with lease accounting, versus Wall Street's expectations for a $0.17 loss. However, profit jumped to $0.20 a share in the quarter when you exclude the leasing effect. This lease financing, which Tesla only recently introduced, accounted for 30% of Model S deliveries in the period. This is a good indication that the financing program is working to increase demand.

Additionally, revenue climbed to $405 million on a GAAP basis, up from $26.6 million in the year-ago quarter. That's a sizable improvement over analysts' estimates for second-quarter revenue of $386.9 million. Strength in the quarter was fueled by a 25% increase in production, and better-than-expected gross margin of 22%. Tesla delivered 5,150 all-electric cars in the quarter, surpassing its earlier target of 4,500 deliveries.

The gross margin was especially attractive in the second quarter considering Tesla received 25% less revenue from the sale of ZEV credits in the quarter compared to Q1. Specifically, the company earned $51 million selling pollution credits in the quarter ended June 30, from $68 million last quarter. From record Model S sales, to significant cost improvements, Tesla continues to charge ahead. Tesla's stock is up more than 300% on the year.

However, near-term earnings don't matter nearly as much for Tesla as they do for traditional automakers. Most Tesla shareholders, myself included, are betting on results that are at least seven to 10 years out. Mike Ramsey with the Wall Street Journal touched on this phenomenon recently writing, "Tesla Motors Inc. Chief Executive Elon Musk doesn't run his Silicon Valley electric car maker by traditional auto industry rules, and investors are so far rewarding him by putting a value on the company that defies easy comparisons."

Tesla's stock price of around $156 almost seems fair when looking to the next decade, particularly if you believe Musk's claim that Tesla can reach 500,000 deliveries a year, and a market cap of $43 billion by 2022. This ambitious goal, of course, takes into account future Tesla EVs, including the Model X and mass market Gen III. On yesterday's call Tesla CEO Elon Musk said the Gen III should cost around $35,000, assuming the absence of tax incentives, and coming with a battery capable of at least a 200-mile range.

That's impressive when compared to competing electric vehicles on the roads today. For example, Ford's (NYSE: F  ) Focus EV costs $35,200 and only offers a range of 76 miles, while the Nissan Leaf sells for $28,800 with a range of just 73 miles. The Toyota (NYSE: TM  ) all-electric Rav4 is currently the closest with an EPA range of 103 miles and priced at $49,800. It's also important to remember that Tesla has kept up lucrative partnerships with some of these more established automakers, including Toyota.

In fact, in the most recent quarter, Tesla generated revenue of almost $4 million from selling full electric powertrains to Toyota for its Rav4 EV, as well as various deliverables sold to Daimler for its Mercedes Benz B-Class EV. Tesla is a disruptive force in the auto industry, which helps explain why it trades more as a tech stock than an auto name.

The takeaway
Tesla's quarterly earnings help investors track the company's progress. However, the specific figures, whether reported on a GAAP or non-GAAP basis, isn't what's driving the stock today. Rather, Tesla investors are focused on the future promise this company holds as it continues to demonstrate flawless execution. That's why I plan to hold my stake in the EV maker for many more years to come, despite what results might lie ahead in future quarters.

If Tesla's stock is too risky for you at its current valuation, don't worry. In this free report from The Motley Fool, you'll discover two automakers that are profiting from a surging Chinese market, and rewarding investors like you along the way.

China is already the world's largest auto market -- and it's set to grow even bigger in coming years. A recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names two global giants poised to reap big gains that could drive big rewards for investors. You can read this report right now for free -- just click here for instant access.

Read/Post Comments (8) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 08, 2013, at 5:50 PM, speculawyer wrote:

    I love the cognitive dissonance. You think Tesla will build a $35K car with a 100 mile range that will be much better than Toyota's $50K RAV4 with a 104 mile range . . . except that Tesla built the drivetrain for that Toyota RAV4! Are you saying they ripping Toyota off? Or they will magically more than double the range quickly even though Tesla does not build battery cells?

  • Report this Comment On August 08, 2013, at 5:51 PM, speculawyer wrote:

    $35K car with a *200* mile range that is.

  • Report this Comment On August 08, 2013, at 5:58 PM, ckgod wrote:

    @speculawer Did you try to compare the efficient design of Model S to the after thought RAV4 which is just an ICE car with engine and gas tank replaced by the battery and electric motor? Besides the $35K car Tesla is going to build is still 4~5 years away with new generation batteries that are still in development. I know it may be a little hard to believe but I believe Elon would not make such a prediction unless he sees a clear path of how to get there.

  • Report this Comment On August 08, 2013, at 7:08 PM, RussellL wrote:

    In 2014 Tesla is going to come out with an SUV called the Model X that is priced comparable to a similarly equipped Model S.

    And then in 2016 or 2017, they are planning to have a smaller sedan that will cost half the price of the Model S.

  • Report this Comment On August 08, 2013, at 7:56 PM, TeslaMark wrote:

    What have you been sniffing? TESLA is so over valued right now. The speculation that they will produce 200,000 units per year is what the stock is based on and they are at least 3 years away from that ability. SELL now, take your profits and buy more when it drops like a rock. Just saying.

  • Report this Comment On August 08, 2013, at 9:11 PM, vipertom wrote:

    Tesla is catching a lot of investors imagination, sort of like Apple did awhile back. This momentum can continue far longer than the fundamentals warrant, until it doesn't, of course. Hard to predict. Just look at Amazon...

  • Report this Comment On August 09, 2013, at 8:46 AM, mikecart1 wrote:

    Let's party like its 19...99! That's what it feels like when I hear of TSLA, FB, 3-D Printing, Solar Panels, and everything in between.

    In the end historically, it is the needs that come out on top - materials, banks, things everyone uses in high amounts for high $$$. 10 years from now will we all be driving Teslas while using our personal 3-D printers to print out tools and magic wands?

    Or will we still be doing construction with real materials and going to the bank and depositing real money?


  • Report this Comment On August 09, 2013, at 10:42 AM, falu17 wrote:

    Although I have a lot of faith in the future for these kinds of cars, and it seems Tesla is doing a great job, the USD 17.8 billion market cap (based on Aug 9th at 10:35am) is just too much for me right now. Even if they get to 200,000 cars per year in 2016 and onwards (management indicated in the quarterly shareholders letter that they HOPE demand might reach 40,000 in 2014 IF demand in Asia is as high as in the US and Europe, so selling 200,000 in 2016 sounds like a stretch to me), then still this would lead to financial ratio's far far above the traditional auto industry. And Tesla might be different from the rest of the industry, at least for now, but I think shareholders will in the end want similar returns (effective market thinking and all that). So for me, at this moment it is overvalued and not worth the risk of buying. Maybe if it loses some of its value, I will reconsider...

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2587177, ~/Articles/ArticleHandler.aspx, 9/28/2016 4:52:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,339.24 110.94 0.61%
S&P 500 2,171.37 11.44 0.53%
NASD 5,318.55 12.84 0.24%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/28/2016 4:00 PM
TSLA $206.27 Up +0.46 +0.22%
Tesla Motors CAPS Rating: **
F $12.09 Up +0.11 +0.92%
Ford CAPS Rating: ****
TM $117.63 Down -0.69 -0.58%
Toyota Motor CAPS Rating: ***