Thursday, May 8, 2014

* Tesla Motors (TSLA) - Earnings Postmortem: 8 Things You Need to Know; How the Option Market Was Right & Wrong.

TSLA closed trading today at $178.59, down 11.3% with IV30™ down 30.2%. The Symbol Summary is included below.

Provided by Livevol

This is an earnings postmortem report.  If you don't care about the option stuff at all, scroll to the bottom for the actual results. But one thing to note from an LA Times article written by Jerry Hirsch (cited at the end) is pretty interesting and seemed to be little discussed:

Tesla's revenue from sales of California environmental credits dropped to zero in the first quarter. In the same quarter a year earlier, $68 million in credit sales helped power the company to its first quarterly profit of $11.2 million, setting off a flurry of investments on Wall Street.

OK, first, a quick glance back to the pre-earnings report from 5-5-2014:

Tesla Motors (TSLA) - Earnings Preview: Is the Downside Risk Priced too High, or Can TSLA Implode?

  • The question of course is simply, will TSLA move a lot on this earnings release?
  • The option market does not reflect two-tail risk in TSLA, rather it reflects greater downside stock move probability than upside. So far that skew shape has proven correct for the MOMOs.
  • The option market prices a range of [$192.50,$237.50] for TSLA stock by the end of trading on May 9th.

Well, there you have it.  The option market did price greater risk in the downside than upside, and that was correct.  However, the price of risk (volatility) was in fact too low.

The Options Tab is included below.

Provided by Livevol

That range was based on the $215 strike straddle.

It was worth: $22.50
It is now worth: $36.50

The volatility was priced too low; quite substantially so.

I drew a faux line in the sand that $170 ("Can TSLA go down $45 from here? Yeah, definitely... it can go down much more than that. Do I think it will go down that much? Not really..."). By tomorrow, that line may be crossed.

And now, the results:

  1. The company beat on earnings and missed on revenue, and expects to be "marginally profitable" in Q2.
  2. It now expects to be free-cash-flow negative in 2014 as it spends on expansion ($650 million to $850 million for increased production capacity.)
  3. Revenue rose 10% to $620.5 million (short of the $683.5 million estimate)
  4. Net income of 12 cents a share beat analysts' estimate of 8 cents a share.
  5. Leases are only expected to account for approximately 200 deliveries out of 7,500 for Q1 due to lead times.
  6. Revenue from selling environmental credits is falling.
  7. The Model X will have production delays.
  8. Sales in the first four months of 2014 of Model S are just 19 more than the same period last year.

Source #1: BUSINESS INSIDER Tesla Is Getting Crushed
Source #2: Why Tesla Motors (TSLA) Stock Is Down Today,written by Andrew Meola.

As an aside, the competition from BMW (and others) is taking an effect on the stock.  They are not perfect substitutes, but they are competition nonetheless. Most notably of late is this (I tweeted this yesterday):

This article from the LA Times was well done:
The Palo Alto automaker reported Wednesday that research and development expenses are rising, revenue from selling environmental credits is falling and its next model, the Model X sport-utility vehicle, is delayed.

Meanwhile, Tesla's revenue from sales of California environmental credits dropped to zero in the first quarter. In the same quarter a year earlier, $68 million in credit sales helped power the company to its first quarterly profit of $11.2 million, setting off a flurry of investments on Wall Street.

What’s up with the Gigafactory?
Tesla's battery supply, however, will be more crucial to sustaining the business in the long term.

The automaker plans to build a massive battery factory that it says will drive down the cost of the cells that go into its cars about 30%. It needs both an adequate supply and lower cost to improve the profit margins on its luxury Model S sedan and its pending Model X sport-utility vehicle.


Tesla’s sales have leveled out in the U.S. Through the first four months of this year, the company has sold 6,100 of its Model S sedans, just 19 more than it did during the same period a year earlier.

Source: LA Times: Tesla earnings spark questions about model delays, battery factory, written by Jerry Hirsch.

This is trade analysis, not a recommendation.

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