Tesla Inc (TSLA) USD0.001
HL comment (24 October 2019)
Tesla reported a decline in both revenues and profits in the third quarter, down 8% and 34% respectively. However, profits of $342m were well ahead of market expectations, and the group generated $371m of free cash.
The shares rose 20.2% in aftermarket trading.
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 $45.6bn (prior to third quarter results), compared to $36.75bn for Ford, despite producing around 17 times fewer cars last year.
That starts to look daunting when you consider that Tesla is yet to sustain profitability. A couple of quarters in the back at the end of 2018 gave way to a pretty ugly start to 2019, and the group raised another $2.4bn from the market to keep things ticking over. Investors will hope the most recent quarter's profits will be the new norm, but we're going to wait for a few repeat performances before we turn more upbeat.
For now, we actually think the positive, and not insubstantial free-cash flow is perhaps more important. It means Tesla could be self-funding, which would be a big relief for investors, as Tesla's breakneck speed of expansion means there's big demands on the cash pile. If the group's able to generate enough cash to fund its own growth, rather than relying on the market, it's a big step in the right direction.
The other good news is that operating performance is looking better. The ramp up of Tesla's 'affordable' Model 3 has resulted total deliveries up 16% year-on-year for the third quarter. Worries that demand could flag when a US subsidy for electric vehicles was scrapped last year seem to have been unfounded.
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, until we see actual results, we suggest investors remain focused on the more tangible automotive manufacturing.
Third Quarter Results - 23 October 2019
Total revenue was $6.3bn, with the decrease reflecting a rise in leased vehicles - where only a portion of revenue is recognised up front. Revenue was also impacted by a decline in the average selling price of Model 3 cars.
Profit surprised the market by coming in at $342m, reflecting lower costs and stronger margins. Automotive margins improved 3.93 percentage points to 22.8%.
Tesla generated positive free cash flow in the quarter of $371m. As a result, Tesla finished the quarter with cash and cash equivalents of $5.3bn, 8% more than last quarter. The group now expects to be mostly self-funding going forwards, underpinned by positive quarterly cash flows.
The Shanghai Gigafactory is progressing ahead of schedule, and the Model Y is now due to launch next summer.
The group is "highly confident of exceeding 360,000 deliveries this year", which is slightly lower than previous guidance of 360,000 to 400,000.
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