Gordon Johnson: Tesla Will Post A $231 Million Non-GAAP "Vaporware-Assisted" Profit In Q3

Tesla is going to deliver 140,000 cars and post a $231 million Non-GAAP profit in the third quarter, Gordon Johnson of GLJ Research predicts in his latest note to clients.

He is maintaining a $19 post-split price target on Tesla shares. 

Johnson says he expects the Q3 report to be another "rabbit out of the hat" and he expects "consensus to be bedazzled by the magic show". Johnson has modeled the following estimates for Q3:

  1. 3Q20E deliveries of 139.961K cars

  2. 4Q20E deliveries of 173.787K cars

  3. 2020E deliveries of 494.848K

  4. 2021E deliveries of 533.4K cars (TSLA will face unprecedented EV competition in 2021)

He writes: "With the market implying TSLA is slated to become nearly 100% of all global auto sales, we feel we must give the company credit for nearly 100% of its full-year 2020 guidance. Furthermore, when considering TSLA is guiding 2020 (100% gross margin) credit sales to roughly double vs. 2019 and also considering TSLA recognized $782mn in credit sales in 1H20, leaving $406mn in credits sales for 2H20, we are modeling TSLA credit sales of $203mn in both 3Q20 and 4Q20."

Johnson also took exception with the company recognizing revenue from its "vaporware" Full Self Driving product that, years after the company began taking deposits for it, still doesn't exist.

"TSLA also said it expects to recognize $876mn in 100% (non-cash) gross margin FSD revenue over the next twelve months which we model at 75% recognition in 2H20, with the balance being recognized in 1Q21. When also factoring in our assumptions for auto gross margins (incl. credit sales) of 22.2% in 3Q20 and 18.8% in 4Q20, as well as our Energy Generation & Storage and Services & Other segment forecasts, we arrive at 3Q20 rev/EPS of $8.6bn/$0.22 (Street $8.1bn/$0.34) and 4Q20 rev/EPS of $9.8bn/$0.12 (Street $9.5bn/$0.56)."

He continued: "While we see the ability for TSLA to shift these numbers around as it sees fit (as it did in 1H20 where credit sales jumped to $782mn vs. $267mn in 2H19) - making modeling the company's earnings more an 'art' than science - even assuming 100% recognition of 12 months 100% (non-cash) gross margin FSD revenue in 2H20, we still see ~50% downside to Consensus' 4Q20 EPS est. of $0.56/ shr."

Excluding FSD and credit sales paints another picture, Johnson notes.

"...excluding all FSD and credit sales in 2020, we see TSLA losing ~$200mn in both 3Q20 and 4Q20 (the core business is still a perpetual loss maker). For 2021, due to a normalization in both credit sales and FSD revenue, we see a return to structural losses as fated (Ex. 5) - as detailed in Ex. 6-7 below, using Troy Teslike's tracker, while the FSD price hike in Nov. 2019 hurt take rates, the FSD price hike in July 2020 seems to have destroyed take rates. Consequently, we model 2021 rev/ EPS of $28.8bn/-$0.74 (Street $42.3bn/$2.41)."

"Should the FTC ever decide to step in here and do its job (as Germany recently did and S. Korea is considering)," Johnson says of Full Self Driving, "this could also prove a sizeable risk to TSLA profitability."

Johnson also tries to address the wild moves in Tesla's share price, attributing them to "structurally broken" U.S. markets - a sentiment we can't say we necessarily disagree with.

"In fact, despite all the "cheerleading" in the financial news media, currently US markets are 'structurally broken; that is, what's going on isn't fundamental, but rather a bubble building in markets that are not properly functioning (how the US Fed can say what's going today is normal, yet question 'normal' selling in the face of awful news in March  = markets not working)," Johnson wrote.

Johnson also noted that the $30 trillion stock market is "being moved by a few billion in options activity daily."

He points out that Tesla's stock "usually gaps up to start every day (as do most large 'tech' stocks), with the performance at 9:30am considerably better than the rest of the day."

He attributes this to Asian buyers, stating: "a few buyers have cornered the largest technology stocks in the US market; more specifically, we feel Asian buyers who want exposure to 'Big US tech' are buying options via principal protected notes, nightly, composed of way out of the money puts and less way out the money calls (meaning the stock underlying the straddle has to trade down considerably to lose a lot of money)."

The mechanics then play out on the underlying equities, Johnson says: "This, in turn, forces dealers to buy stocks in order to write the call portion of the straddle trade, which in turn forces index futures to 'hedge'. This, then, widens the spread between the bid/ask because this is a massive one-sided option market, and therefore the VIX and VVIX spike (again, underpinning a structurally broken nature of today's "market", and heightened danger for those unaware of the "risks")."

He also attributes the buying to passive funds and index buying. 

"When does it end? We don't know; but what we do know is that TSLA's fundamentals are worsening by the day, and when this ends TSLA will trade down to fair value," Johnson argues. "Thus, despite all the, quite frankly, BS analysis (lacking of any actual numbers) we see out there, we are sticking with our fundamental view."