5 Charts That Show Where Tesla Is Relative to Ford, Toyota, Based on the 10-Q

Friday evening

Tesla

(ticker: TSLA) filed its quarterly report, on a form 10-Q. It includes added details about warranties and other items that can give investors a better sense of how the company is performing and if there are problems brewing below the surface.

Tesla spent about $300 million on warranty claims in the second quarter, or about 1.4% of automotive sales, but that isn’t the expense in accounting terms. Warranty expenses are estimated and recognized when a car is sold. The expense recognized in the second quarter amounted to about $608 million, or 2.9% of sales.

The expense, therefore, was higher than the claims, as it should be for a growing company. Tesla is selling more cars quarter by quarter, so the cost of claims will rise regardless of the cost per vehicle. In the second quarter, the cost per car amounted to about $1,300, a number that should fluctuate depending on the mix of vehicles sold and the rate of inflation.

Accruing 3% of sales for warranties is typical.

Ford Motor

(F) accrues about the same amount, but its warranty spending and accounting expenses are close to each other. That makes sense because sales volume at Ford isn’t rising the way it is at Tesla.

Changes in warranty expenses matter because they affect reported profit margins. A dip in the warranty estimate, for instance, would push margins higher.

That hasn’t happened at Tesla. Its profit margins are falling because the company cut prices aggressively in January, though it is still more profitable than

Toyota Motor

(TM), the second-most valuable auto maker behind Tesla.

Tesla’s operating-profit margin in the second quarter came in at just under 10%. Toyota hasn’t reported numbers for the second quarter yet, but its first-quarter margin was about 7.3%.

Two other factors that affect profit margins are selling, general, and administration expenses and outlays for research and development.

Both of those numbers are rising as a percentage of sales at Tesla. That makes some sense too. If prices are lower and the same amount of people, or more, are on the payroll, the cost of staff rises relative to total sales. More unit sales could offset that effect, but pricing typically has a bigger impact on margins than volume.

In absolute terms, Tesla spent $943 million on R&D in the second quarter, up from an average of about $745 million over the prior four quarters. SG&A spending, net of stock-based compensation, has been running at about $410 million for the past few quarters.

Tesla’s price cuts have been the dominant factor affecting its financial results so far in 2023, boosting demand and reducing profitability, but they might not have been a surprise to careful readers of its securities filings. Inventories relative to sales had been rising for a few quarters, but that trend reversed in the second quarter, another bit of evidence that Tesla’s price cuts have helped it to sell more cars.

Everything in the 10-Q looks just about as it should for Tesla. That may have helped Tesla shrug off the latest Wall Street downgrade of the stock. UBS analyst Patrick Hummel lowered his rating to Hold from Buy, marking the fifth downgrade in the past few weeks.

Shares were up 0.2% in early trading Monday while the

S&P 500
and

Nasdaq Composite
had risen 0.4% and 0.2%, respectively.

Analysts have been, essentially, suggesting investors take some profits given that Tesla stock has risen 42% since the end of May. Behind those gains were blowout quarterly results from

Nvidia

(NVDA), reported May 24, and deals opening up the Tesla supercharging network to non-Tesla EVs.

The impact of supercharging is easy to understand. That’s more revenue for Tesla, provided by non-Tesla drivers.

The Nvidia news benefited Tesla because both companies have become AI stocks. Nvidia makes the chips needed to power AI and Telsa uses AI to train its autonomous driving features.

Write to Al Root at [email protected]