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Wait. Wasn’t Tesla was already profitable?

24 January, 2015 by Matthew O'Brien, Ph.D. in Commentary

If you want a good reason why the mainstream financial press is generally unreliable, consider the unacknowledged about-face in recent reporting about Tesla.  I’ve posted critically about Tesla before (see here and here), arguing that the company’s stock is as bad an investment as its cars are an enviable status symbol among the “champagne socialist” set.  (I should say that I don’t have anything against the cars.  On the contrary, I’d like to have one; if you have the money to spare, one of the cars is a much better investment than the stock.)

In 2013 Tesla could do no wrong, and the press took habitually to publishing stories that were virtual press releases from the company’s PR department.  When Tesla took in a windfall income from selling state of California carbon credits to other automakers, its chronic loss-making business of selling luxury electric cars was momentarily turned “profitable” — but not according to generally accepted accounting principles (GAAP), of course.  The press nevertheless reported the event as the company having turned the corner from shaky start-up to profitable business, which led the stock price to surge.  Consider the headline and lead from Bloomberg:

Bloomberg News (May 9, 2013): “Tesla Surges After Posting Profit; Value Exceeds Fiat’s”

Tesla Motors Inc. (TSLA), the maker of electric cars run by billionaire Elon Musk, surged 24 percent after posting a first profit, beating estimates and earning a top evaluation for its Model S sedan from Consumer Reports.

Tesla reached $69.40 at the close in New York. Its market capitalization totaled $8 billion, exceeding the $7.8 billion for Turin, Italy-based Fiat SpA (F), the majority owner of Chrysler Group LLC.

In the video piece that accompanies the Bloomberg article, reporter Betty Liu asserted at the time,

Musk has finally delivered on his promise to make the automaker profitable, and the company’s stock has been soaring in the pre-market, it’s been hitting records.  Tesla said first quarter net income was just over $11 million, a sharp turnaround from the $90 million loss the company reported in the same period just last year.  Tesla’s growth has been fueled by a surge in orders for its luxury model sedans….

In reality, the “surge” in orders was an increase from a low base of a few thousand to a few more thousand, and the “profit” was a one-time benefit derived from government subsidies, but none of these qualifications was mentioned by Liu.

Fast forward to today.  Tesla’s stock has dropped about 14% over the past three months, and for whatever reason, the fickle press seems less inclined to cheer for Musk and Tesla.  Last week the press decided to report Musk’s unvarnished remarks on the company’s losses, which finally squelched the optimistic predictions of so many of the broker analysts who rate the company a “buy” and see genuine profitability a few quarters away.  Although Bloomberg was already calling Tesla profitable back in 2013, here’s what they wrote last week:

Bloomberg News (January 14, 2015): Musk Says Tesla’s China Sales Fell, No Profit Until 2020

Elon Musk, the chief executive officer of electric-car maker Tesla Motors Inc. (TSLA), said the company might become profitable by 2020 when annual sales reach 500,000 and added that business slowed in China on charging concerns.  Tesla shares tumbled 7.7 percent….

Although in 2013 Bloomberg was saying that Musk had already “delivered on his promise to make the automaker profitable,” last week the news service was portraying Tesla’s loss-making as the consequence of prudent reinvestment and delayed gratification:

He also elaborated on the idea that he isn’t chasing profitability in the short term. He said the company is investing in growth and new models and probably won’t make money on a net basis until sales reach 500,000 cars a year after this decade.

The lesson is, of course, the familiar one that you shouldn’t make investment decisions based on news articles, let alone headlines.

In light of my earlier negative posting about Tesla, I was asked whether I thought it was a promising short-sell: definitely not.  Short-selling, which is selling borrowed shares with the hope of buying them back at a lower price after a fixed period, is tricky business.  (Right now a whopping 26.70% of Tesla’s stock float is being sold short by speculators betting on Tesla’s fall.)  Ben has posted on the subject here before.  With a sensational momentum stock like Tesla, it’s better just to stay out of the way.