Beijing time on the afternoon of March 5, according tomedia reports, in the past four months, Tesla’s share price has nearly tripled. The move followed quarterly earnings that doubled Wall Street’s expectations. But some of Tesla’s critics say the profits are the result of misleading accounting. They claim that Tesla is exaggerating its profits by artificially reducing its “warranty payments”. The warranty is a payment set aside by Tesla for future repairs to cars covered by the warranty.
In the most recent quarter, for example, Tesla’s warranty per vehicle was 6% lower than in the previous quarter. This cut alone added nearly $10 million to the company’s fourth-quarter profit, according to Fortune.
Tesla did not respond to multiple requests for comment on its accounting changes. PwC, the accounting firm that reviews Tesla’s financial reports, said it could not comment.
Tesla needs a reasonable explanation for the reduction in warranty. For example, it may have been decided that newer cars require less long-term maintenance.
The Securities and Exchange Commission, on the other hand, did not challenge Tesla’s car warranty. In September, the agency did ask for information about how Tesla divides the cost of repair rental vehicles. Tesla responded that its lease maintenance grants were in line with accounting standards. The SEC completed its review without taking further action.
But Tesla’s critics, mainly small investors organized on Twitter, have only partial support from institutional analysts, say there are problems with Tesla’s guarantee accounting from a broader perspective. Some of these critics are short-sellers, that is, when companies fall in stock prices, they profit, prompting them to dig for bad news or, in some cases, to question reasonable accounting.
Lawrence J. Fossi, a retired family fund manager and business lawyer, writes an analysis of Tesla’s name as a Montana skeptic. “By underestimating the warranty, you underestimate the cost of selling goods, ” he says. That would push up (Tesla’s) gross margins and their profits. If you’re in growth mode, this is a serious distortion. “
Has Tesla pulled down its future warranty obligations?
Most new cars sold in developed countries have a warranty period – manufacturers promise to repair them within a certain period of time or mileage. To meet this commitment, automakers set aside a percentage of the proceeds from each sale to cover future service costs.
This “warranty” is considered a cost that results in a proportional reduction in the profitability of each vehicle in proportion to the expected amount required for future warranty services. Tesla has an eight-year warranty, or 100,000 to 150,000 miles, which means most of the cars it sells, as well as some used cars that have been sold more than once, are still under warranty.
Because the data provided by Tesla lacks detail and includes some unrelated costs, it is complex to have a clear understanding of the total cost. Most importantly, in Tesla’s growing business, the cost of repairing rental cars is not included in the warranty, but is presented quarterly under a different program.
Some of Tesla’s warranty covers non-automotive products, such as solar panels and batteries used to store electricity for buildings. Similar to Tesla’s automotive business, some of its energy products are sold under warranty, while others are leased and therefore not under warranty.
As a result, it’s hard to know how much Tesla’s energy business contributes to the overall warranty reserve. However, energy accounts for only 6 per cent of the company’s current revenue. As a result, it is unlikely to bring about significant changes in the level of warranty.
In addition, Tesla’s adjustments to its warranty may also be affected by foreign exchange fluctuations or other unknown factors.
Under the influence of these unknown factors, Fortune magazine’s calculation of the rental car’s adjustment shows a clear trend. In the fourth quarter of 2018, Tesla gave a budget of $2007 per vehicle. By the fourth quarter of 2019, that proportion had fallen by nearly 27 percent to $1,467 per vehicle.
These changes in Tesla’s warranty accounting have had a significant impact on the profits it reports. If the company provisions for each vehicle delivered in the fourth quarter of 2019 is the same as in the same period in 2018, the cost of its warranty funds is estimated at $207 million instead of the $151.3 million actually contributed.
That means $56 million in savings will account for more than half of Tesla’s $105 million in fourth-quarter net profit.
Many analysts and investors’ projections for Tesla’s future are based on the profit margin per vehicle, the so-called “gross margin” that includes warranty costs. Higher gross margins will make the carmaker look more profitable, pushing investors to raise its share price.
The accuracy of Tesla’s warranty may one day have a specific impact on investors. Increasing warranty repair costs may drain current reserves. If this happens, the company will have to significantly increase its warranty contributions, reducing profits. Tesla, in its filing with regulators, included a model statement on the risk, saying, “Our current and future warranties may not be sufficient to cover future warranty claims, which may have a negative impact on our financial performance.” “
For now, Tesla’s warranty accounts don’t matter at all to many investors. “Growth is the most important thing,” says Albert Meyer, founder of Bastiat Capital. Maybe there should be another $5 million, or another $10 million, but does it really matter? For Tesla, that’s less than a mention. (Iyi)