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Tesla - Losses rack up, but still upbeat about the year

Nicholas Hyett | 25 April 2019 | A A A
Tesla - Losses rack up, but still upbeat about the year

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Tesla Inc USD0.001

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Tesla reported a net loss of $702m in the first quarter, versus the slight profit it had hoped for at the end of last year. The worse than expected result was driven by lower vehicle volumes and reduced margins.

The company expects to report further losses in the second quarter, albeit more modest, before returning to profit in the third.

The shares rose 1.1% in after-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 $45bn, around 18% larger than Ford, despite producing around 17 times fewer cars last year.

That valuation starts to look particularly daunting when you consider that Tesla has yet to deliver sustainable profits. A couple of quarters in the black at the end of 2018, has given way to a pretty ugly start to 2019 and investors look set to be asked to stump up extra cash to fund further expansion.

The ramp up in production of Tesla's 'affordable' Model 3, has caused some teething problems. Not least is a substantial increase in inventory, as 10,000 cars are in limbo between Tesla's factory doors and international clients. That's increased the demands on Tesla's shrinking cash pile, but should be a one-off cost.

More concerning are a series of price cuts that sparked fears that demand may be flagging, and a dramatic slowdown in higher-end vehicle deliveries will have done nothing to ease those fears.

Tesla say the fall is a short term blip - caused by the end of electric vehicle subsidies in the US - but it's been terrible for margins. Moreover, if lower-priced Model 3s cannibalise more premium Model S and X sales then the group needs to dramatically increase production to offset the lost margin - Model 3 production in Q1 barely improved on Q4.

While Elon Musk remains locked in battle with the SEC over potential contempt of court allegations. Tesla's founder has been directing investor attention at the next big technology initiative in the pipeline - autonomous vehicles, and ultimately a fleet of robo-taxis.

Tesla's got hugely ambitious targets for its new technologies, with talk of a 1 million-strong taxi fleet as early as 2020, but at the moment we suggest investors remain focused on the more tangible automotive business. While first quarter numbers we undeniably disappointing, there's still a recovery pencilled in for later in the year. It's just been pushed a little further over the horizon.

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First Quarter Results

Tesla posted first quarter revenues of $4.5bn, 37% lower than the previous quarter, as sales of premium Model S and X vehicles declined and Model 3 production increased only marginally.

Changing mix and lower prices mean average automotive margins fell from 24.3% last quarter to 20.2% this quarter - although improving volumes next quarter is expected to see Model S and X margins recover. The company continues to target a 25% margin.

Guidance for total deliveries in 2019 remains unchanged, and production could reach 500,000 if the Shanghai Gigafactory develops as hoped. Total capital expenditure in the year is expected to be between $2bn and $2.5bn.

The company finished the quarter with cash of $2.2bn - down $1.5bn on the end of 2018 - largely because of a $920m bond repayment and increases to the number of vehicles in transit. Free cash is expected to turn positive again in the second quarter.

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This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.