Tesla Inc (TSLA) USD0.001
HL comment (22 October 2020)
Tesla's group revenues rose 39% year-on-year to $8.8bn, beating market expectations. That was driven by rising car sales, partially offset by lower prices and a shift towards lower priced vehicles.
Net income of $874m rose 156% year-on-year, coming in way ahead of market expectations and reflecting significant margin improvements.
While the full year production and delivery target of 500,000 vehicles remains unchanged- that goal has "become more difficult" given the economic environment and social distancing restrictions.
Tesla shares rose 3.2% in after-market trading.
Tesla's rapid increase in output has improved operating efficiency - driving more vehicles and therefore more revenues through Tesla's relatively fixed cost factories.
That's more than made up for a switch to lower prices on some products and general shift towards the lower priced Model 3. Operating margins have improved as a result and profits have accelerated.
The group has also been able to deliver a healthy amount of cash flow in recent quarters. That's crucial if Tesla isn't going to rely on further cash injections from investors to fund its ambitious growth plans in future.
There are some concerns about the important role regulatory credits have played in Tesla's rapid expansion and increased profitability.
Credits accounted for 5.2% of automotive revenues in the third quarter. Tesla earns these credits in recognition of its zero-emission vehicles and sells them to other manufacturers who need to offset their emissions. Broadly speaking, as more Teslas hit the road the group earns more credits.
However, as rivals increase their electric vehicle output those credits will become less valuable. Credits revenues are essentially all profit and provide a valuable cash boost now. That will likely continue in the near term, but they're not a long term lever for the business. Investors need to focus on the core automotive manufacturing business.
That's makes Tesla's huge factory building programme important, with new factories popping up on an annual basis. However, Tesla's "if we build it, they will come" approach is a concern for us.
The group's current "installed capacity" is 840,000, but the group's running at just 69% of that. Together with recent price cuts that suggests demand for Teslas might not be growing quite as fast as the group would like.
This cuts to our core concern with Tesla. The group's valuation, which at $394bn and a PE ratio of 141.2 makes it the most valuable automotive company in the world, predicated on massive growth. But the economic outlook is gloomy and with even the 'affordable' Model 3 priced at a fairly hefty £40,000+ it's hardly an ideal time to be asking drivers to reach for their credit cards. Meanwhile rivals are pouring billions into closing the technological gap (VW alone had been looking to spend $60bn on electric cars over 5 years).
Tesla's answer is to reduce cost via increased vertical integration - including manufacturing its own battery components - with the aim of ultimately manufacturing a profitable $25,000 car. The group is also banking on its self-driving technology - installing "Full Self-Driving" into cars in October, with "hundreds of thousands" of its cars able to drive themselves this year. Both do have the potential to change the competitive calculus for Tesla, but the company has made big claims before that took far longer than anticipated to deliver.
Tesla has enjoyed a period of technological superiority, with a great brand and perhaps most importantly a great investment story. However, as the group's valuation has got higher, expectations have become even more formidable. Meeting those expectations will be no easy feat - and the market would likely punish the shares harshly for failure.
Tesla key facts
- Price/Earnings ratio: 141.2
- 5 year average Price/Earnings ratio: 75.6
- Prospective dividend yield (next 12 months): 0%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Third Quarter Results
Revenue growth was driven by a 44% increase in vehicle deliveries, partly offset by changing product price/mix (as 56% growth in lower priced Model 3 and Model Y vehicles offset a 13% fall in Model S and X deliveries). The smaller energy generation and storage business saw revenues rise 44% to $579m.
Gross margins in the automotive business improved from 22.8% last year to 27.7% this quarter - befitting from a 196% increase in regulatory credits. Operating margins in the quarter came in at 9.2% - more than double the level achieved last year.
Tesla reported free cash flow in the quarter of $1.4bn, up from $371m a year ago. Together with a $5.0bn share issue during the quarter that saw the group finish the quarter with a net cash position of $846m, up from $5.5bn net debt three months ago.
The group believes it has sufficient liquidity to fund its current development plans, which include building Model Y capacity and the launch of Tesla Semi.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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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