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Tesla uses very unconventional accounting to arrive at that gross margin. Specifically they don't subtract R&D costs from their margins. When you correct for th

by gizmo 10y ago

Tesla uses very unconventional accounting to arrive at that gross margin. Specifically they don't subtract R&D costs from their margins. When you correct for this Tesla's gross margin is within a few percent of the median for the automotive industry. > In 2015, Tesla spent over $700 million on research and development while selling about 50,000 vehicles. If Tesla reported gross margins like other automakers, gross margin would have been reduced by $14,000 PER VEHICLE. Tesla also has huge sales expenses that they don't subtract from their margins. Take that into account, and Tesla isn't making any profit per car anymore. To make matters worse, they also need to raise an enormous amount of money in order to manufacture the model 3 at scale. It's questionable if they'll be able to do that. Tesla is operated very much like a silicon valley startup. They're growing rapidly in the hope of becoming profitable when they reach scale. But they sure as heck aren't profitable right now. Source: http://seekingalpha.com/article/3994655-teslas-gross-margins-mean-think-mean http://seekingalpha.com/article/3994655-teslas-gross-margins...

NickM 10y ago
> Tesla is operated very much like a silicon valley startup. They're growing rapidly in the hope of becoming profitable when they reach scale. But they sure as heck aren't profitable right now. They have already reached scale, and are already profitable. They're just pouring their profits back into further growth. Yes, they're spending a lot on R&D, but that's not sending money into a vacuum, that's investing in the future expansion of the company. The article you link even admits this: "Would it be fair to include the billion-plus dollars spent to bring the Model 3 to fruition in a few tens of thousands of Model X and Model S gross margins? Probably not." Incidentally, I would take anything from Seeking Alpha with a huge grain of salt. Anyone can post an article on there, and people often try to use that site to skew investor perceptions in their own favor. In fact, the author of the very article you link openly confesses at the bottom that he "may initiate a short position in TSLA over the next 72 hours." Conflict of interest, anyone? If you want to see how profitable Tesla is, I would recommend the GAAP numbers from their last quarterly report, rather than some Seeking Alpha author's selective reinterpretation of the facts.
- forgetsusername 10y ago
  >They have already reached scale Compared to the rest of the car industry? They are a fraction of a percent of the market. >and are already profitable. They cashed in all their ZEV credits to achieve one quarter of profitability. How did they do with those backed out? I mean, they could be profitable, but going by last quarter is deceiving. >They're just pouring their profits back into further growth. You assume that the car industry isn't capital intensive, and that the other manufacturers are not also spending heavily on R&D. But they are. >Conflict of interest, anyone? Uh, no. It's an investing site. If you have a negative view of a stock why wouldn't you possibly short it? Or do you believe that these small-time Seeking Alpha authors are moving the market?
  - EdHominem 10y ago
    > Or do you believe that these small-time Seeking Alpha authors are moving the market? Attempting to, yes. > It's an investing site. If you have a negative view of a stock why wouldn't you possibly short it? Oh yes, of course. But if you write an article about it first, to try to cause the effect you're warning about, you might just be a scammer.
- JumpCrisscross 10y ago
  > They're just pouring their profits back into further growth This justifies adding back R&D per unit, but not sales expenses.
- gizmo 10y ago
  Tesla is neither at scale nor profitable. They're selling barely 15,000 cars per quarter, compared to Toyota's 2.5 million. They're growing by taking on debt, diluting shareholders, subsidies, and other creative tricks (Model 3 preorders). They've been "profitable" for a single quarter by selling Teslas at a steep discount. Last quarter's report has been widely derided for the financial engineering therein. We'll have to wait and see what the sales numbers will be this quarter, but I'm pretty pessimistic. Seeking Alpha is a mixed bag, but the authors are no more biased than the average wall street analyst. People who comment here also have their own agendas. Bias should be expected everywhere. As for your claim that anybody can write an article on there, that's not strictly true. They have a real name policy and failing to disclose properly can and will get you in trouble with the SEC. By the way, having a short position and writing about why you are short (or the inverse) isn't a conflict of interest by any stretch of the imagination. The seeking alpha model is adversarial (like the justice system). People at opposing sides make their case and clearly state on which side their financial interest resides. Poor arguments get pilloried in the comments section. I think this model works remarkably well in practice. In order to figure out what's really going on forensic investigation is necessary, and that goes way beyond the plain GAAP figures.
deleted 10y ago
[deleted]
ericb 10y ago
> Specifically they don't subtract R&D costs from their margins. R&D costs should not be subtracted in order to calculate gross margin. They are a part of net margin only. Payroll is not part of gross margin either. Here's a source: http://www.investopedia.com/ask/answers/122314/what-difference-between-gross-margin-and-net-margin.asp http://www.investopedia.com/ask/answers/122314/what-differen...
- mikeyouse 10y ago
  In most industries you're right but the autos have always included R&D in COGS instead of OpEx. Tesla is the only auto manufacturer who does it the other way.
- gizmo 10y ago
  Tesla likes to quote their gross margins because they look incredible at face value. However Tesla doesn't use a dealership model, so they have expenses for the sales process that other car manufacturers don't have. To get an apples-to-apples comparison with the margins of other car manufacturers you have to make adjustments like the ones I described earlier.
dkfmn 10y ago
R&D costs are, by definition, operating expenses and thus should NOT be subtracted from gross margins. The opinion piece you link states: "Gross margin is generally considered the incremental profit margin delivered by the sale of a product" This is not remotely correct. The author is confusing Gross Margin with marginal profit, sometimes referred to as variable margin.

by gizmo 10y ago

NickM 10y ago

> Tesla is operated very much like a silicon valley startup. They're growing rapidly in the hope of becoming profitable when they reach scale. But they sure as heck aren't profitable right now. They have already reached scale, and are already profitable. They're just pouring their profits back into further growth. Yes, they're spending a lot on R&D, but that's not sending money into a vacuum, that's investing in the future expansion of the company. The article you link even admits this: "Would it be fair to include the billion-plus dollars spent to bring the Model 3 to fruition in a few tens of thousands of Model X and Model S gross margins? Probably not." Incidentally, I would take anything from Seeking Alpha with a huge grain of salt. Anyone can post an article on there, and people often try to use that site to skew investor perceptions in their own favor. In fact, the author of the very article you link openly confesses at the bottom that he "may initiate a short position in TSLA over the next 72 hours." Conflict of interest, anyone? If you want to see how profitable Tesla is, I would recommend the GAAP numbers from their last quarterly report, rather than some Seeking Alpha author's selective reinterpretation of the facts.

forgetsusername 10y ago
>They have already reached scale Compared to the rest of the car industry? They are a fraction of a percent of the market. >and are already profitable. They cashed in all their ZEV credits to achieve one quarter of profitability. How did they do with those backed out? I mean, they could be profitable, but going by last quarter is deceiving. >They're just pouring their profits back into further growth. You assume that the car industry isn't capital intensive, and that the other manufacturers are not also spending heavily on R&D. But they are. >Conflict of interest, anyone? Uh, no. It's an investing site. If you have a negative view of a stock why wouldn't you possibly short it? Or do you believe that these small-time Seeking Alpha authors are moving the market?
- EdHominem 10y ago
  > Or do you believe that these small-time Seeking Alpha authors are moving the market? Attempting to, yes. > It's an investing site. If you have a negative view of a stock why wouldn't you possibly short it? Oh yes, of course. But if you write an article about it first, to try to cause the effect you're warning about, you might just be a scammer.
JumpCrisscross 10y ago
> They're just pouring their profits back into further growth This justifies adding back R&D per unit, but not sales expenses.
gizmo 10y ago
Tesla is neither at scale nor profitable. They're selling barely 15,000 cars per quarter, compared to Toyota's 2.5 million. They're growing by taking on debt, diluting shareholders, subsidies, and other creative tricks (Model 3 preorders). They've been "profitable" for a single quarter by selling Teslas at a steep discount. Last quarter's report has been widely derided for the financial engineering therein. We'll have to wait and see what the sales numbers will be this quarter, but I'm pretty pessimistic. Seeking Alpha is a mixed bag, but the authors are no more biased than the average wall street analyst. People who comment here also have their own agendas. Bias should be expected everywhere. As for your claim that anybody can write an article on there, that's not strictly true. They have a real name policy and failing to disclose properly can and will get you in trouble with the SEC. By the way, having a short position and writing about why you are short (or the inverse) isn't a conflict of interest by any stretch of the imagination. The seeking alpha model is adversarial (like the justice system). People at opposing sides make their case and clearly state on which side their financial interest resides. Poor arguments get pilloried in the comments section. I think this model works remarkably well in practice. In order to figure out what's really going on forensic investigation is necessary, and that goes way beyond the plain GAAP figures.

deleted 10y ago

[deleted]

ericb 10y ago

> Specifically they don't subtract R&D costs from their margins. R&D costs should not be subtracted in order to calculate gross margin. They are a part of net margin only. Payroll is not part of gross margin either. Here's a source: http://www.investopedia.com/ask/answers/122314/what-difference-between-gross-margin-and-net-margin.asp http://www.investopedia.com/ask/answers/122314/what-differen...

mikeyouse 10y ago
In most industries you're right but the autos have always included R&D in COGS instead of OpEx. Tesla is the only auto manufacturer who does it the other way.
gizmo 10y ago
Tesla likes to quote their gross margins because they look incredible at face value. However Tesla doesn't use a dealership model, so they have expenses for the sales process that other car manufacturers don't have. To get an apples-to-apples comparison with the margins of other car manufacturers you have to make adjustments like the ones I described earlier.

dkfmn 10y ago

R&D costs are, by definition, operating expenses and thus should NOT be subtracted from gross margins. The opinion piece you link states: "Gross margin is generally considered the incremental profit margin delivered by the sale of a product" This is not remotely correct. The author is confusing Gross Margin with marginal profit, sometimes referred to as variable margin.