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Warning: 4 Red Flags in Tesla Motors Inc (TSLA)’s Results

One time gains

Much of Tesla’s profit can be contribution to one-off accounting gains from the acceleration of Tesla’s Department of Energy loan.

When Tesla Motors Inc (NASDAQ:TSLA) amended the terms of its loan in March, the acceleration of its payment schedule reduced the estimated value of the DOE’s warrant resulting in a non-cash $11 million gain.

Without this one time change, there would be no first quarter GAAP profit.

Unsustainable sales

Much of Tesla’s sales during the past two quarters were due to pent-up demand.

It’s important to note that Tesla only recognizes revenue after the vehicle has been delivered. Tesla has been taking deposits from customers for years which accounts for much of the sales pop.

It’s still unclear if these sales are sustainable.

Warning: 4 Red Flags in Tesla Motors Inc (TSLA)'s Results

A final concern is the company’s lease program.

In April, Tesla announced that it would guarantee the residual value of leased vehicles. That can create a problem because the future residual value for new vehicles is completely unpredictable.

Do you know what a Model S will be worth in two or three years?

If Tesla Motors Inc (NASDAQ:TSLA) is guaranteeing a high residual value to make its cars more affordable, it could be stuck with a lot of vehicles that are worth less than expected.

This should cause migraines for investors because it exaggerates short-term unit sales and could result in unexpected losses.

Foolish bottom line

So should investors be worried about Tesla based on these problems? Probably not.

These types of red flags have been spotted in other fast growing names like Netflix, Inc. (NASDAQ:NFLX) and, inc. (NYSE:CRM) and the bears were run over after raising similar issues. At this stage in the growth cycle, investors want to see accelerating sales growth and that’s what Tesla offers.

But at some point earnings quality will become important. If these issues aren’t resolved they could become a problem down the road.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM), and Tesla Motors (NASDAQ:TSLA) . The Motley Fool owns shares of Ford and Tesla Motors.

The article Warning: 4 Red Flags in Tesla’s Results originally appeared on

Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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