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1) Apparently there's some kind of nonsensical paper floating around claiming $TSLA's warranty reserve is *conservative* relative to claims. Here's some VERY back-of-the-envelope math explaining why I believe that's nonsense....
2) Including 30,000 cars from Q3 that might've been on the road long enough to be eligible for warranty claims, Tesla has delivered around 670,000 cars since inception. If we assume 90% were sold (not leased, for which warranty work is expensed not reserved), it delivered 603,000
3) Of those 603,000 let's assume 95% haven't been totaled, meaning $TSLA had 573,000 cars actively using warranty repairs when it set its Q3 reserve. And remember, these cars get an 8-yr battery/motor warranty so EVERY car sold (except the rare Roadster) is still under warranty.
4) Q3 $TSLA warranty cost= $59M. Let's say 95% of that was for cars (not solar)= $56M. As we *know* it calls a lot of warranty work "goodwill" to avoid incurring the cost, let's say that was $2M in Q3 so actual costs incurred were $58M for 573,000 cars= $101/car
5) $101/car x 32 quarters of warranty= $3232 of lifetime expense. Facing $3232 of typical lifetime warranty expense, $TSLA instead provisioned $138M. Let's say 95% of that was for cars (not solar) = $131M for 88,100 non-leased cars = $1487/car.
6) So $TSLA provisioned $1487/car= $131M for lifetime warranty expense when- based on this analysis- it *should* have provisioned 88,100 x $3232= $285M, thus falsely adding $154M to Q3 "earnings." Additionally, it removed $37M from PREVIOUS provisions, adding THAT to "earnings."
7) I fully admit this is VERY back-of-the-envelope stuff (and feel free to poke meaningful holes in it!), but it's clear that grotesque warranty under-reserve significantly falsifies $TSLA's gross margin and earnings EVERY QUARTER.
8) I see one VERY minor flaw: if we assume 5% of the cars sold are off the road (totaled, stolen, etc), $TSLA gets to keep the unused part of their warranty provision. Let's say that's 30,000 cars x 1/2 (on average) a $1500 provision= a $23M "bonus" since it started selling cars.
I just spotted another minor mistake. Assuming 30,000 cars sold in Q3 used warranty services, collective $TSLA deliveries= around 722,000 cars not 670,000. Using all the same math, that's 617,000 not 573,000= $94/car Q3 expense= $3008 lifetime not $3232. So Q3 under-reserve=$134M
