Tesla Inc (TSLA) USD0.001
HL comment (2 July 2020)
Tesla produced 82,272 vehicles in the second quarter, with 90,650 deliveries. That included Model S/X production of 6,326 with deliveries of 10,600, and Model 3/Y production of 75,946 with 80,050 deliveries.
Deliveries were well ahead of analyst expectations of a little over 70,000. Production was also ahead despite the Fremont factory being closed for a large chunk of the quarter due to coronavirus.
Tesla shares rose 9% in pre-market trading.
Tesla started 2020 with a bang. First quarter production and deliveries soared, and putting more cars through the machine boosted margins and meant the group turned in a profitable first quarter for the first time ever.
That comes after a massive 2019 in which the group delivered successive quarters of profit, and free cash was well into positive territory. The positive free cash flow was particularly impressive given the capital investment that's been going on. Tesla built an entirely new factory in Shanghai in just 10 months, and production of the Model Y crossover started ahead of schedule.
Unfortunately the group hasn't had time to consolidate that progress, and the coronavirus outbreak caused significant disruption at precisely the wrong time. Production was temporarily suspended and while deliveries and production fared better than expected the effect on margins is still unclear.
Shutting up factories will help to reduce on-going costs, we're not clear how much of the group's $1.8bn ish a month cash cost base can be put off through the shutdown. The group has the financial headroom to weather a short fallow period followed by a period of reduced demand, but it's hardly awash with cash.
Longer term we also worry about what an economic downturn could mean for Tesla demand. If the coronavirus sparks a global recession selling premium sedans is not a great business to be in. Even the 'affordable' Model 3 remains a relatively expensive product and while Tesla may have caught incumbents napping, the industry is pouring billions into catching up (VW had been looking to spend $60bn on electric cars over 5 years).
Slowing sales would be a particular problem because Tesla's recent success is all built on achieving scale and boosting profitability through operating leverage (essentially putting more sales through the same infrastructure). That might explain why Tesla is moving rapidly to expand the range - with the Model Y already in production, the Tesla-Semi due to start production this year and the Cybertruck waiting in the wings.
Despite a fantastic brand, formidable manufacturing capabilities and fabulous product, the group needs to rapidly expand its customer base if it's to deliver the volume and margin growth its eye-popping valuation implies. A PE ratio of almost 150 means valuation remains our main source of worry - especially when compared to the 13.7 times investors pay for rival Toyota from whom Tesla recently claimed the crown of most valuable automotive manufacture.
Delivering the growth implied by its valuation will be a tall order, even for Mr Musk.
Tesla key facts
- Forward P/E ratio: 146.6
- 10 year average forward P/E ratio: 56
- Prospective yield: 0.0%
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First Quarter Results (30 April 2020)
Tesla's first quarter revenues of $6.0bn were a little ahead of market expectations and up 31.8% year-on-year.
However, significantly lower costs resulted in a much improved gross margin and operating margin. As a result the group reported its first ever first quarter net profit of $16m, well ahead of analyst expectations for a $199m loss.
Given current disruption the group will not be giving guidance for the near term.
Lower costs reflect the benefits of scale, with vehicle production up 33% year-on-year and deliveries up 40%. Growth was driven by the cheaper Model 3, and helped overall automotive gross margins reach 25.5%, the highest in 18 months.
A 62.5% increase in capital expenditure together with negative operating cash flow meant free cash flow was negative in the quarter at -$895m and worse than analysts had expected. That was partly driven by increased inventories as deliveries slowed at the end of March. Increased capital expenditure came as the group invested in Model Y preparation in both Fremont and Shanghai.
Cash and cash equivalents rose to $8.1bn, boosted by a $2.3bn equity issue partially offset by negative free cash flow. Net debt at the end of the quarter stood at $5.8bn.
Model Y production continues to ramp up Fremont, with Shanghai Model 3 production also increasing. The group plans to produce its first cars in Germany in 2021.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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.
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