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Tesla - Shares fall on profit stall

Nicholas Hyett | 25 July 2019 | A A A
Tesla - Shares fall on profit stall

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Tesla Inc USD0.001

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Tesla reported total revenues of $6.3bn in the second quarter, a fraction behind expectations. However, price cuts to the Model S and Model X, and the decline in electric vehicle incentives, meant that automotive gross margins deteriorated. As a result Tesla reported an operating loss for the quarter of $167m.

The shares fell 10% in aftermarket trading.

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Our view

Tesla's 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 $46.8bn, 13.6% higher than Ford, despite producing around 17 times fewer cars last year.

That starts to look daunting when you consider that Tesla has yet to deliver sustainable profits. A couple of quarters in the black at the end of 2018 gave way to a pretty ugly start to 2019 and the group raised another $2.4bn from investors to keep things ticking over earlier this year.

The good news is that operating performance is looking more positive. The ramp up of Tesla's 'affordable' Model 3 has resulted in record production in the second quarter. Worries that demand could flag when a US subsidy for electric vehicles was scrapped last year seem to have been unfounded.

Importantly the most recent set of production numbers show demand for Tesla's premium Model S/X hasn't been undercut by the introduction of the Model 3. Although a price cut has dented margins this quarter, being able to sell premium models is vital longer term. Margins should also get a helping hand from the increased efficiency stemming from higher volumes.

Having settled his most recent spat with regulators, Tesla's founder, Elon Musk, 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 manufacturing.

With the shares down from $310 at the start of the year, the valuation, while still high, is certainly better. Throw in an operating plan that seems to be delivering results and it's tempting to turn positive on Tesla. However, given the up and down nature of recent quarters we remain cautious for now.

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Second Quarter Results

Year-on-year revenue growth of 58.7% was driven by record vehicle deliveries in the quarter. Total Automotive revenues hit $5.4bn, with Energy Generation and Storage down slightly on the same quarter last year at $368m. Service revenues increased considerably to $605m following an increase in used car sales.

Automotive margins in the second quarter were 1.25 percentage points lower than in the first three months of the year at 18.9%. Had the reduction in electric vehicles not taken place, margins would have improved despite lower prices.

Capital expenditure for the whole of 2019 is now expected to be between $1.5bn and $2bn, lower than previously guided. That's despite plans to open the Shanghai Gigafactory before the end of the year and preparations for production of the Model Y.

Free cash flow of $614m is a significant improvement on the previous quarter, driven by reduced losses and improvements in working capital, particularly inventory. Having raised $2.4bn from investors Tesla finished the quarter with cash on hand of $5bn.

Tesla provided very minimal guidance, although confirmed deliveries are expected to be between 360,000 and 400,000 for the year as a whole, with positive net income next 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.