The U.S. dollar has depreciated significantly in the year-to-date period, and the rate of depreciation has recently accelerated. Because the majority of Tesla’s (NASDAQ:TSLA) costs are incurred in USD and the company exports thousands of cars each quarter, I expect a significant favorable currency to impact its bottom line in 3Q17.
USD Has Depreciated Significantly
Since the beginning of the year, the U.S. dollar has lost more than 11%:
Before we move on, please note the following two observations:
- USD has depreciated by ~2% in 1Q17, ~4% in 2Q17, and ~5% so far in 3Q17; and
- Quarter-over-quarter (“QoQ”) depreciation in the average value of USD, which is important for accounting reasons as I will discuss below, was not as pronounced in 2Q17, and accelerated significantly in 3Q17. My rough estimate by looking at the above graph is that the average value of USD declined by ~2-3% in 2Q17 and by ~5% so far in 3Q17, or nearly double the decline in the previous quarter.
Why Is This Important?
Significant changes in the value of the U.S. Dollar is important to the bottom line of U.S.-based companies that export their products, like Tesla. More specifically, most of Tesla’s costs are denominated in USD at its Gigafactory in Nevada and Fremont assembly factory in California, and a significant and increasing portion of the company’s revenues are denominated in other currencies as it sells thousands of cars each quarter in other countries. As a result, any significant depreciation in the average value of USD would in effect increase the value of its revenues in that quarter when translated to USD for reporting purposes. Readers can find detailed information on this complex subject in this Journal of Accountancy article.
Readers also should note that, rather than the ending value of USD, it is the average value of USD that matters for accounting purposes for companies that export products throughout the quarter, like Tesla.
There are three primary reasons why it’s practically impossible to accurately estimate the exact impact of currency fluctuations for a given company:
- Multinational companies usually have varying exposures to several currencies, and the weightings change even throughout a given quarter;
- One would have to know the specific dates of each sale to accurately calculate the exact currency translation adjustment, and even the insiders at a multinational company do this through mostly automated systems; and
- Most multinational companies hedge their currency exposures to varying degrees and regulatory filings do not normally include the necessary detail.
We can, however, directionally estimate a company’s currency exposure for informed investment decisions.
What is Tesla’s Exposure?
The following table, included in the company’s latest quarterly SEC filing, presents the company’s revenues by geographic area:
Readers should note that approximately 55% of the company’s revenues were generated in the United States in 2Q17, and international revenues were increasing at a higher rate than domestic revenues. It is, therefore, reasonable to estimate that slightly less than half of the company’s revenues in 3Q17 will be generated in countries other than the United States.
Analysts currently estimate that Tesla will generate $2.9 billion of revenues in 3Q17. Therefore, we can estimate that international revenues will approximate $1.4 billion. Assuming that the average value of USD depreciated by ~5% QoQ so far in 3Q17, it is reasonable to estimate that Tesla will record a favorable $50 to $100 million foreign currency exchange gain in 3Q17.
As a net exporter, Tesla will benefit from the significant depreciation in USD that has accelerated in 3Q17. Although a more accurate estimate of the company’s exact foreign currency exchange gain would require a more detailed analysis of the company’s transactions, its multiple currency exchange exposures, as well as a more detailed analysis of its currency hedges, we can reasonably estimate that the company will record a significant favorable foreign currency exchange gain of $50 to $100 million in 3Q17.
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