Tesla Shares Slide After Document Reveals Profits Boosted By Warranty Adjustments

Oct 29
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Tesla smashed earnings estimated when it delivered its Q3 results last week. As a result, its share price surged by 20% the next day and by the end of the next day shares of $TSLA were up an impressive 29%. The 20% pop that Tesla enjoyed the day after earnings were good for its best-ever day on the stock market since its IPO.

Musk and Co's pretax profit for Q3 was a reported $176 million, which translates to impressive earnings per share of $1.86 versus an expected loss of 44 cents.

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Now the automaker has released its 10-Q form which includes a greater level of detail in terms of how Tesla reported its numbers and nearly $50 million worth of earnings came from a new way that Tesla recognizes warranty costs on its books.

Warranty expenses must be accrued by carmakers in order to give investors a better sense of the true profitability of vehicle manufacturing. Tesla recognized $153 million in warranty expenses in the second quarter of 2019 or about 2.9% of its revenue from car sales. However, in the third quarter Tesla reduced this down to 2.7%, and then accountants at the company applied that cost reduction for previously existing warranties - meaning Tesla just cut down its expected cost of warranty repairs.

Many (including this writer) figured the better-than-expected $176 million profit was a result of increasing margins and car shipments, but nearly a third of that profit was the result of clever accounting techniques.

Investors were put off by the discovery and a minor sell-off occurred with Tesla dipping 3% (NASDAQ:TSLA) on a day the DOW was up. Obviously this isn't some type of scandal, and it could be Tesla honestly adjusting (just rather silently) its cost accounting based on new warranty data.

We should note that CEO Elon Musk has a famous disdain for Tesla bears (those that are bet short against Tesla and stand to gain money if its stock price drops dramatically).

Tesla has not responded to requests for comment.

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