Tesla’s growth mode story in its income statement

Tesla (TSLA) is growing rapidly and becoming closer to profitable.

Tesla’s financial statements show the company’s rapid growth

The above income statement is from Tesla’s first quarter 2014 filing.  As we can see from the above chart, Tesla’s revenue increased 11% to $618 million in the first quarter of 2014 compared to the first quarter of 2013. This is due to deliveries of the Model S. Below revenue is where it gets interesting. Tesla has a 25% gross profit margin. This margin is almost twice that of GM, which had a 13% gross profit margin in 2013. Moving down the income statement to operating income, Tesla has an operating loss. This operating loss is due to continued investment in future models and technologies and expanding the sales and service network and charging network. Tesla pays little in taxes due to tax losses from its initial operating losses in the start-up phase. The bottom line on the income statement is that Tesla remains a start-up or newer business that’s not generating earnings from its sales. We can see this in the cash flow statement.

Tesla’s financial statements show the company’s rapid growth

Lessons from the cash flow statement

The summary statement above is from management’s letter to shareholders for the first quarter of 2014. As you can see, Tesla generated operating cash flow in the first quarter. However, free cash flow—operating cash flow less capital expenditures—is negative for the quarter. It’s worth noting the expansion of capital expenditures from $89 million in fourth quarter 2013 to $141 million in first quarter 2014. This is to be expected for a company that’s expanding its sales, service, charging stations, and production capacity.

Thoughts on value

At this point, we’ve seen that Tesla remains unprofitable and doesn’t generate cash. The current valuations supporting the $25 billion market capitalization are based on future expectations. While Tesla’s product is beautiful and the company is a technological pioneer, Tesla remains a speculative stock. The story holds water only with projections of profitability and volumes well in excess of Tesla’s current 35,000 vehicles per year.

The leaders in the industry—Toyota (TM), General Motors (GM), Volkswagen (VOW), and Ford (F)—have billions of free cash flow, thousands of established sales and service sites, and a long history of generating value for shareholders. You can invest in this space with the exchange-traded fund CARZ or through the Fidelity Select Automotive Portfolio mutual fund.

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