This article appeared Monday, Aug. 18 on RealMoney.
SAN DIEGO (RealMoney) -- After the market closed Friday, Tesla (TSLA) CEO Elon Musk posted an item on the company's blog announcing an "infinite mile warranty" on the Model-S' drive train to match the warranty on the car battery. It was classic Musk, going where no car company has ever gone.
Then, at the bottom of the post, he added:
"To investors in Tesla, I must acknowledge that this will have a moderately negative effect on Tesla earnings in the short term, as our warranty reserves will necessarily have to increase above current levels."
Wall Street is likely to roll its eyes, but it really shouldn't.
What he's really doing is putting a positive spin on his disclosure that warranty reserves were too low.
In May of last year I wrote a piece about Tesla's sketchy earnings quality.
I made two points.
One, as with most growth companies, flying red flags over the earnings quality of cult stocks is foolhardy.
Two, ignoring the earnings quality in cult stocks is just as foolhardy.
This was just after Tesla was crowing about having had its first profitable quarter ever. Forensic accountant Donn Vickrey, then of Gradient Research, wasn't impressed. He had given the company's earnings quality an F based on all sorts of levers it had pulled to give the illusion of profitability.
There were so many that he zeroed in on one: warranty reserves.