Investor's Corner

Tesla’s (TSLA) Q3 warranty adjustments alarm Wall St: Here’s why they should not

Tesla exhibits its electric cars and energy products at the 2018 LA Auto Show. [Credit: Christian Prenzler/Teslarati]

Tesla stock (NASDAQ:TSLA) has taken a hit as Wall Street reacted to the release of the company’s 10-Q form. Craig Irwin of Roth Capital, for example, downgraded Tesla from a “Neutral” to a “Sell” in the middle of Tuesday’s trading day partly due to concerns about the warranty adjustments listed in the company’s SEC form. There’s only one small issue: Tesla’s warranty figures are not unusual for the auto industry. 

The electric car maker’s 10-Q form indicated that the company’s warranty expense fell in the third quarter. Barron’s noted that this was a sign that Tesla’s accounting for the third quarter might be aggressive, but a look at the car industry, in general, shows that the electric car maker is not an outlier at all when it comes to warranties. 

Several factors come into play when estimating a warranty expense, including the overall quality of a vehicle and the extensiveness of the warranty. Factors such as repair costs and product recalls are also taken into consideration. Tesla’s warranty expense in the third quarter equaled about 2.7% of its automotive sales. This may seem high until one compares it to the industry average of 2.5%, as per data aggregated by Barron’s.  

Granted, Barron’s calculations are only a rough estimate considering that different carmakers adopt varying rules when it comes to warranty expenses. Some automakers, for example, separate recalls from warranty expenses, while others consider the two as a group. Other carmakers also adopt US accounting standards, while other companies use international standards. Nevertheless, the finance firm’s aggregated data does give a glimpse as to how Tesla compares to the rest of the industry.

That being said, Tesla’s warranty expenses in the third quarter might ultimately play a marginal role in the grand scheme of things for the electric car maker, especially in the future. At this point in Tesla’s history, its primary goal is to ensure that its products are well-made and well-received by the market. It must ensure that it can produce its lineup of vehicles and energy products in a way that is efficient and cost-effective. With this in mind, accounting will likely play a relatively small role the older Tesla becomes. 

Tesla is wading into the fourth quarter with a number of upcoming key projects, including the start of official Model 3 production in Gigafactory 3 Shanghai, as well as the launch of the Tesla Pickup Truck, fondly dubbed by CEO Elon Musk as the “Cybertruck.” The vehicle is yet to receive a formal release date, though its November estimate appears to be a direct reference to Blade Runner, a classic sci-fi movie that Tesla CEO Elon Musk is particularly fond of.

As of writing, Tesla stock is trading -1.11% at $312.71 per share.

Disclosure: I have no ownership in shares of TSLA and have no plans to initiate any positions within 72 hours.

Tesla’s (TSLA) Q3 warranty adjustments alarm Wall St: Here’s why they should not
To Top