Bernstein: Tesla's Auto, Services Gross Margins Don't Add Up

Tesla Inc TSLA’s “services and other” gross margins have dropped from positive 5 percent in late 2016 to negative 45 percent early this year.

One analyst said the numbers and narrative don’t add up.

The Rating

Bernstein analyst Toni Sacconaghi Jr. maintained a Market-Perform rating on Tesla with a $265 price target.

The Thesis

The plunge has been primarily attributable to “services and maintenance,” which fell to a negative 500 percent between the third quarters of 2016 and 2017.

By Bernstein’s assessment, the math makes little sense.

“We struggle to find evidence as to why the cost of goods sold of services and maintenance have increased exponentially (up $266 million in fiscal 2017 vs. up $66 million in fiscal 2016), with no commensurate increase in revenues,” Sacconaghi Jr. said in a note.

Tesla points to costly construction in services infrastructure, but Bernstein’s books can’t back it.

“The worry/key question, of course, is whether COGs that should be (or historically have been) booked in the automotive segment are now being booked in the ‘services and other’ reporting segment, given that investors focus nearly exclusively on automotive GMs & generally disregard ‘services and other’ GMs,” Sacconaghi Jr. said. 

If automotive COGS are being miscategorized, then segment gross margins may be misstated. Bernstein suggested that, if costs dubiously incurred by services were allocated to autos, auto gross margins may drop 150 to 300 basis points.

Notably, though, Tesla's overall gross margins would remain the same even if the breakdown is found to be imprecise.

Price Action

Tesla shares were trading down 0.24 percent at $346.68 off the open Friday. 

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Photo courtesy of Tesla.