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Tesla - Robust fourth quarter, but some troubles ahead

Nicholas Hyett | 31 January 2019 | A A A
Tesla - Robust fourth quarter, but some troubles ahead

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Tesla Inc USD0.001

Sell: 778.60 | Buy: 778.80 | Change -21.11 (-2.64%)
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Fourth quarter operating profits were broadly in line with those achieved in Q3, with a slight deterioration in margin. More importantly, free cash flow improved quarter-on-quarter to $910m, as capital expenditure declined.

The guidance for next year is pretty upbeat. The number of cars delivered is expected to increase by 45%-65%, and all quarters except Q1 are set to be cash positive. Although the group flagged some near term headwinds.

Tesla also announced that CFO Deepak Ahuja will be stepping down.

The shares fell 4.6% in pre-market trading.

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Our view

Elon Musk's Tesla has a fantastic brand and, by all accounts, a fantastic product as well.

Its early push into high performance, high quality electric cars has upended the rules in the automotive industry, where traditionally scale is what counts. In turn, that's given the group a market value of $53bn, some 51% larger than Ford, despite the fact it produces around 17 times fewer cars.

That premium is all the more impressive when you consider that, until now, Tesla has never delivered sustainable profits. A year ago it was burning through nearly a billion dollars of investors' money a quarter.

A steadily increasing market share in the US means the brand seems to be delivering results. But the challenge for Musk in the second half of 2018 was to prove Tesla could survive without a financial lifeline from its investors. In other words that it could be profitable and cash positive.

The company met the challenge and then some in Q4, with margin improvements coming in ahead of even Tesla's lofty expectations. That put it firmly in the black and delivering formidable cash flows.

But for all the good news, Tesla's current size still doesn't come close to justifying its current market cap. The share price rests on massive growth over the years to come.

That sort of growth doesn't come cheap. And we worry Tesla doesn't have the distribution network, fuelling infrastructure or sufficient manufacturing facilities to grow at the pace its lofty valuation requires.

Added to that is a nagging worry that we may be approaching the end of an economic cycle, not an ideal time to be selling premium cars. A cut in electric vehicle tax credits in the US doesn't bode well, and won't be doing margins any favours as Tesla's had to slash prices to support demand.

Elon Musk has been able to overcome similar hurdles in the past, and has assured investors he will do so again without asking them for more cash. But as the hurdles get higher, and the demands on management get bigger, Tesla's reliance on its founder could become more of a curse than a blessing.

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Full Year Results

Tesla's vehicle sales more than doubled in 2018 to $17.6bn, while the smaller Energy Generation & Storage and Services business both delivered healthy growth. Total revenue rose 82% to $21.5bn.

The group posted a loss of the year of $1.1bn, despite making $464m of profit in the second half of the year.

The company finished the year with cash balances of $4.3bn (2017: $4bn), although this was supported by a slight increase in debt. Free cash flow was positive in both the third and fourth quarters.

Tesla expects to achieving 7,000 Model 3s a week by the end of 2019, rising to 10,000 once the Shanghai Gigafactory comes on line. In total the group expected to deliver between 360,000 and 400,000 vehicles in 2019. Despite that growth, operating expenses are expected to grow by less than 10%.

Expansion to customers in Europe and China will increase the amount of inventory on hand and slightly reduce deliveries in the first quarter of 2019. This will make it the only non-cash negative quarter in 2019.

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